UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
For the Quarterly Period Ended September 30, 2011
or
For the Transition Period from to
Commission File Number 000-17781
Symantec Corporation
(Exact name of the registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. employer
Identification no.)
350 Ellis Street,
Mountain View, California
Registrant’s telephone number, including area code:
(650) 527-8000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Shares of Symantec common stock, $0.01 par value per share, outstanding as of October 28, 2011: 737,162,808 shares.
SYMANTEC CORPORATION
FORM 10-Q
Quarterly Period Ended September 30, 2011
TABLE OF CONTENTS
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2011 and April 1, 2011
Condensed Consolidated Statements of Income for the three and six months ended September 30, 2011 and October 1, 2010
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2011 and October 1, 2010
Notes to Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
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PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
Current assets:
Cash and cash equivalents
Short-term investments
Trade accounts receivable, net
Inventories
Deferred income taxes
Other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Investment in joint venture
Other long-term assets
Total assets
Current liabilities:
Accounts payable
Accrued compensation and benefits
Deferred revenue
Current portion of long-term debt
Income taxes payable
Other current liabilities
Total current liabilities
Long-term debt
Long-term deferred revenue
Long-term deferred tax liabilities
Long-term income taxes payable
Other long-term obligations
Total liabilities
Commitments and contingencies (Note 8)
Stockholders’ equity:
Symantec Corporation stockholders' equity:
Common stock
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total Symantec Corporation stockholders' equity
Noncontrolling interest in subsidiary
Total stockholders' equity
Total liabilities and stockholders' equity
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Net revenue:
Content, subscription, and maintenance
License
Total net revenue
Cost of revenue:
Amortization of acquired product rights
Total cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Amortization of other purchased intangible assets
Restructuring and transition
Impairment of assets held for sale
Total operating expenses
Operating income
Interest income
Interest expense
Other income (expense), net
Loss on early extinguishment of debt
Income before income taxes and loss from joint venture
Provision for income taxes
Loss from joint venture
Net income
Less: Loss attributable to noncontrolling interest
Net income attributable to Symantec Corporation stockholders
Net income per share attributable to Symantec Corporation stockholders — basic
Net income per share attributable to Symantec Corporation stockholders — diluted
Weighted-average shares outstanding attributable to Symantec Corporation stockholders — basic
Weighted-average shares outstanding attributable to Symantec Corporation stockholders — diluted
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of discount on debt
Stock-based compensation expense
Excess income tax benefit from the exercise of stock options
Other
Net change in assets and liabilities, excluding effects of acquisitions:
Other assets
Other liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES:
Purchase of property and equipment
Cash payments for acquisitions, net of cash acquired
Purchases of available-for-sale securities
Net cash used in investing activities
FINANCING ACTIVITIES:
Net proceeds from sales of common stock under employee stock benefit plans
Tax payments related to restricted stock issuance
Repurchase of common stock
Repayment of debt
Proceeds from debt issuance, net of discount
Proceeds from sale of bond hedge
Debt issuance costs
Repayment of other long-term obligations
Net cash (used in) provided by financing activities
Effect of exchange rate fluctuations on cash and cash equivalents
Change in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Symantec Corporation (“we,” “us,” “our,” and “the Company” refer to Symantec Corporation and all of its subsidiaries) as of September 30, 2011 and April 1, 2011, and for the three and six months ended September 30, 2011 and October 1, 2010, have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions on Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In accordance with those rules and regulations, we have omitted certain information and notes normally provided in our annual consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring items, except as otherwise noted, necessary for the fair presentation of our financial position and results of operations for the interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended April 1, 2011. The results of operations for the three and six months ended September 30, 2011 are not necessarily indicative of the results expected for the entire fiscal year. All intercompany accounts and transactions have been eliminated.
Significant Accounting Policies
Other than as noted below, there have been no changes in our significant accounting policies for the six months ended September 30, 2011 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended April 1, 2011.
In the first quarter of fiscal 2012, we adopted updated authoritative accounting guidance related to impairment testing of goodwill. The guidance modified Step 1 of the impairment test for reporting units with zero or negative carrying amounts whereby an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. We performed a Step 2 test on our Services reporting unit due to certain adverse qualitative factors within the reporting unit, which resulted in a goodwill impairment of $19 million. This impairment was recorded to opening Accumulated deficit as of April 2, 2011 as a cumulative-effect adjustment upon adoption. The impact of the cumulative-effect adjustment is as follows:
Beginning balance as of April 2, 2011
Cumulative effect adjustment
Beginning balance as adjusted
Recently Issued Authoritative Guidance
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04,“Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” (“ASU 2011-04”). ASU 2011-04 clarifies the application of existing fair value measurement requirements and results in common measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively for reporting periods beginning on or after December 15, 2011. We anticipate that the adoption of this standard will not materially impact our Condensed Consolidated Financial Statements.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all nonowner
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changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively for interim and annual periods beginning after December 15, 2011. We anticipate that the adoption of this standard will not materially impact our Condensed Consolidated Financial Statements.
In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment,” (“ASU 2011-08”). ASU 2011-08 gives entities the option to perform the two-step process only if they first perform a qualitative assessment to determine whether it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount and conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. We anticipate adopting this guidance in our fourth quarter of fiscal 2012 at the time we perform our annual goodwill test and do not expect that this standard will materially impact our Condensed Consolidated Financial Statements.
Note 2. Fair Value Measurements
For assets and liabilities measured at fair value such amounts are based on an expected exit price, representing the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Observable inputs that reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3: Unobservable inputs reflecting our own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
Assets Measured and Recorded at Fair Value on a Recurring Basis
There have been no transfers between fair value measurement levels during the three and six months ended September 30, 2011. The following table summarizes our assets measured at fair value on a recurring basis, by level, within the fair value hierarchy:
Cash Equivalents:
Money market funds (1)
Bank securities and deposits (2)
Short-term investments: (3)
Total
Money market funds are valued based on quoted market prices of the identical underlying security.
Bank securities and time deposits can be verified to quoted prices, recent trading activity for identical or similar instruments, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency.
Short-term investments primarily consist of debt securities and are classified as available-for-sale securities recognized at amortized cost which is the same as fair value at September 30, 2011. The debt securities are corporate bonds with maturities of twelve months or less. These securities are valued using quoted prices in active markets for identical assets. If quoted prices in active markets for identical assets are not available, we use quoted prices for similar assets that are observable either directly or indirectly.
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Assets and Liabilities Measured and Recorded at Fair Value on a Nonrecurring Basis
Goodwill. During the first half of fiscal 2012, we did not record any impairment loss on those assets required to be measured at fair value on a nonrecurring basis, other than the cumulative-effect adjustment recorded to the beginning balance of Accumulated deficit. The valuation technique used to estimate the implied fair value of the Services reporting unit goodwill relies on Level 3 inputs, including estimated future cash flows or profit streams. See Note 4 for further information.
Long-Term Debt. During the second quarter of fiscal 2011, we repurchased $500 million of aggregate principal amount of our 0.75% convertible senior notes, which had a net book value of $481 million. Concurrently with the repurchase, we sold a proportionate share of the initial note hedges back to the note hedge counterparties for approximately $13 million. These transactions resulted in a loss from extinguishment of debt of approximately $16 million, which represents the difference between book value of the notes net of the remaining unamortized discount prior to repurchase and the fair value of the liability component of the notes upon repurchase. The fair value of the liability component was calculated to be $497 million as of October 1, 2010 using Level 2 inputs based on market prices for similar convertible debt instruments and resulting yields.
Note 3. Acquisition
On June 24, 2011, we completed the acquisition of Clearwell Systems Inc. (“Clearwell”), a privately-held provider of eDiscovery solutions. In exchange for all of the voting equity interests of Clearwell, we transferred a total consideration of $392 million, which consists of $364 million in cash, net of $20 million cash acquired, and $8 million of assumed stock options. The objective of the acquisition is to enhance our eDiscovery, archiving and backup offerings to our customers. The results of operations of Clearwell are included since the date of acquisition as part of the Storage and Server Management segment. Supplemental pro forma information for Clearwell was not material to our financial results and therefore has not been included.
The following table presents the purchase price allocation included in our Condensed Consolidated Balance Sheets (in millions):
Net tangible assets (1)
Intangible assets (2)
Goodwill (3)
Net tax liabilities
Total purchase price
Net tangible assets included deferred revenue which was adjusted down from $13 million to $3 million, representing our estimate of the fair value of the contractual obligation assumed for support services.
Intangible assets included customer relationships, developed technology, and tradenames of $82 million, $60 million, and $12 million, respectively, which are amortized over their estimated useful lives of seven to nine years.
Goodwill is not tax deductible. The amount resulted primarily from our expectation of synergies from the integration of Clearwell product offerings with our product offerings.
Note 4. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill are as follows:
Balance as of April 1, 2011
Goodwill impairment (1)
Goodwill acquired through business combinations (2)
Goodwill adjustments (3)
Balance as of September 30, 2011
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Due to the adoption of new authoritative accounting guidance at the beginning of our fiscal year (see Note 1), we were required to perform a goodwill Step 2 impairment test for our Services reporting unit. As a result, we recognized an impairment loss of $19 million which reduced the carrying value of goodwill allocated to the Services reporting segment to zero. The valuation technique used to estimate the implied fair value of the Services reporting unit goodwill relies on Level 3 inputs, including estimated future cash flows or profit streams. This impairment was recorded to beginning Accumulated deficit as a cumulative-effect adjustment upon adoption.
Goodwill acquired through business combinations is related to the acquisition of Clearwell. See Note 3 for further information.
Adjustments made to goodwill reflect foreign currency exchange rate fluctuations.
We apply a fair value based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis in the fourth quarter of each fiscal year or earlier if indicators of impairment exist. As of September 30, 2011, no indicators of impairment were identified.
Customer relationships
Developed technology (1)
Finite-lived tradenames
Patents (1)
Indefinite-lived tradenames
Indefinite-lived IPR&D
Amortization related to developed technology and patents is classified as Amortization of acquired product rights in the Condensed Consolidated Statements of Income.
Total amortization expense for intangible assets that have finite lives was $96 million and $189 million for the three and six months ended September 30, 2011, respectively, and $90 million and $196 million for the three and six months ended October 1, 2010, respectively.
Total future amortization expense for intangible assets that have finite lives, based on our existing intangible assets and their current estimated useful lives as of September 30, 2011, is estimated as follows (in millions):
Remainder of fiscal 2012
2013
2014
2015
2016
Thereafter
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Note 5. Supplemental Financial Information
Property and Equipment, net
Computer hardware and software
Office furniture and equipment
Buildings
Leasehold improvements
Less: accumulated depreciation and amortization
Construction in progress
Land
Depreciation expense was $67 million and $134 million for the three and six months ended September 30, 2011, respectively, and $64 million and $123 million for the three and six months ended October 1, 2010, respectively.
Comprehensive Income
The components of comprehensive income, net of tax, are as follows:
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax:
Translation adjustments
Reclassification adjustments for losses included in net income
Net foreign currency translation adjustments, net of tax
Available-for-sale securities:
Unrealized gains
Reclassification adjustment for gains included in net income
Net adjustments for available-for-sale securities, net of tax
Other comprehensive income (loss)
Comprehensive income
Less: Comprehensive loss attributable to noncontrolling interest
Comprehensive income attributable to Symantec Corporation Stockholders
Note 6. Investment in Joint Venture
We account for our investment in the joint venture with Huawei Technologies Co., Limited (“Huawei”) under the equity method of accounting. As of September 30, 2011, the carrying amount of our equity investment in the joint venture was approximately zero. We have no commitments to provide financial support to the joint venture. If our proportionate share of the joint venture’s net loss reduces our equity investment below zero in future periods, we will suspend the equity method of accounting for our investment in the joint venture. We will resume applying the equity method if and when our share of the joint venture’s net income in future periods has exceeded the share of net losses not recognized during the periods in which the equity method was suspended.
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Note 7. Debt
In fiscal 2007, we issued $1.1 billion in principal amount of 0.75% convertible senior notes (“0.75% Notes”) due June 15, 2011 and $1.0 billion in principal amount of 1.00% convertible senior notes (“1.00% Notes”) due June 15, 2013. In the second quarter of fiscal 2011, we repurchased $500 million aggregate principal amount of our 0.75% Notes and sold a proportionate share of the initial note hedges back to the note hedge counterparties for approximately $13 million. On June 15, 2011, the remaining principal balance on our 0.75% Notes matured and was settled by a cash payment of $600 million. Concurrent with the maturity of the 0.75% Notes, the remaining related note hedges expired. No portion of the 0.75% Notes were converted into our common shares upon maturity.
Note 8. Restructuring and Transition
Our restructuring costs and liabilities consist primarily of severance, benefits, and facilities costs. Severance and benefits generally include severance payments, outplacement services, health insurance coverage, effects of foreign currency exchange, and legal costs. Facilities costs generally include rent expense and lease termination costs, less expected sublease income. Restructuring expenses are included in the Other segment.
Restructuring Plans
The following restructuring plans are substantially complete:
Fiscal 2011 Plan. In the first quarter of fiscal 2011, management approved and initiated a plan to expand our consulting partner sales and delivery capabilities. This action was initiated to expand our partner eco-system to better leverage their customer reach and operational scale, which resulted in a headcount reduction within our consulting services organization.
Fiscal 2010 Plan. In the fourth quarter of fiscal 2010, management approved and initiated a plan to reduce worldwide operating costs through a workforce realignment and to reduce operating costs through a facilities consolidation. These actions were initiated to appropriately allocate resources to our key strategic initiatives and streamline our operations to deliver better and more efficient support to our customers and employees. During fiscal 2011, we terminated operating leases and consolidated facilities in North America and Europe. Excess facility obligations are expected to be paid over the respective lease terms, the longest of which extends through fiscal 2018.
Other Exit and Disposal Costs
Largely as a result of business acquisitions, management may deem certain leased facilities to be in excess and make a plan to exit them either at the time of acquisition or after the acquisition in conjunction with our efforts to integrate and streamline our operations. As of September 30, 2011, liabilities for these excess facility obligations at several locations around the world are expected to be paid over the respective lease terms, the longest of which extends through fiscal 2017.
Restructuring and transition summary
Restructuring plans:
Severance
Facilities
Total restructuring plans
Other exit and disposal costs
Transition and other related costs (2)
Total restructuring and transition
Balance Sheet:
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Note 9. Commitments and Contingencies
Indemnification
As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is not limited; however, we have directors’ and officers’ insurance coverage that reduces our exposure and may enable us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.
We provide limited product warranties and the majority of our software license agreements contain provisions that indemnify licensees of our software from damages and costs resulting from claims alleging that our software infringes the intellectual property rights of a third party. Historically, payments made under these provisions have been immaterial. We monitor the conditions that are subject to indemnification to identify if a loss has occurred.
Litigation Contingencies
For a discussion of our pending tax litigation with the Internal Revenue Service relating to the 2000 and 2001 tax years of Veritas, see Note 13.
We are also involved in a number of other judicial and administrative proceedings that are incidental to our business. Although adverse decisions (or settlements) may occur in one or more of the cases, it is not possible to estimate the possible loss or losses from each of these cases. The final resolution of these lawsuits, individually or in the aggregate, is not expected to have a material adverse effect on our financial condition or results of operations.
Note 10. Stock Repurchases
The following table summarizes our stock repurchases:
Total number of shares repurchased attributable to Symantec Corporation
Dollar amount of shares repurchased attributable to Symantec Corporation
Average price paid per share
Range of price paid per share
We have had stock repurchase programs in the past and have repurchased shares on a quarterly basis since the fourth quarter of fiscal 2004 under new and existing programs. Our most recent program was authorized by our Board of Directors on January 25, 2011 to repurchase up to $1 billion of our common stock. This program does not have an expiration date and as of September 30, 2011, $404 million remained authorized for future repurchases.
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Note 11. Segment Information
As of September 30, 2011, our five reportable segments are the same as our operating segments and are as follows:
Consumer. Our Consumer segment focuses on delivering internet security for PC’s, tablets and mobile devices along with services such as online backup, online family protection and remote help to individual users and home offices.
Security and Compliance. Our Security and Compliance segment focuses on providing large, medium, and small-sized businesses with solutions for endpoint security and management, compliance, messaging management, data loss prevention, encryption, managed security services, and authentication services. These products allow our customers to secure, provision, and remotely manage their laptops, PCs, mobile devices, and servers. We also provide our customers with solutions delivered through our Software-as-a-Service (“SaaS”) security offerings.
Storage and Server Management. Our Storage and Server Management segment focuses on providing large, medium, and small-sized businesses with storage and server management, backup, archiving, eDiscovery, and data protection solutions across heterogeneous storage and server platforms, as well as solutions delivered through our SaaS offerings.
Services. Our Services segment provides customers with implementation services and solutions designed to assist them in maximizing the value of their Symantec software. Our offerings include consulting, business critical services, and education.
Other. Our Other segment is comprised of sunset products and products nearing the end of their life cycle. It also includes general and administrative expenses; amortization of acquired product rights, intangible assets, and other assets; goodwill and intangible asset impairment charges; charges such as stock-based compensation, restructuring and transition expenses; and certain indirect costs that are not charged to the other operating segments.
There were no intersegment sales for the three and six months ended September 30, 2011 or October 1, 2010. The following table summarizes the results of our operating segments:
Three months ended September 30, 2011:
Net revenue
Percentage of total net revenue
Operating income (loss)
Operating margin of segment
Three months ended October 1, 2010:
Six months ended September 30, 2011:
Six months ended October 1, 2010:
During the first quarter of fiscal 2012, we modified our segment reporting structure to more readily match our operating structure. The following modification was made to the segment reporting structure: managed security services revenue and expenses moved to the Security and Compliance segment from the Services segment. All historical periods have been adjusted to reflect this modified reporting structure.
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Note 12. Stock-based Compensation
The following table summarizes the total stock-based compensation expense recognized in our Condensed Consolidated Statements of Income:
Cost of revenue — Content, subscription, and maintenance
Cost of revenue — License
Total stock-based compensation expense
Tax benefit associated with stock-based compensation expense
Net stock-based compensation expense
Net stock-based compensation expense per share — basic
Net stock-based compensation expense per share — diluted
The following table summarizes additional information pertaining to our stock-based compensation:
Restricted stock units (“RSUs”)
Weighted-average fair value per grant
Fair value of RSUs granted
Total fair value of RSUs vested
Total unrecognized compensation expense
Weighted-average remaining vesting period
Stock options
Total intrinsic value of stock options exercised
During the first quarter of fiscal 2012, we granted 91,368 Restricted Stock Awards (“RSAs”) to members of our board of directors. Each RSA had a fair value of $19.70 and vested immediately upon grant. As a result, we recorded approximately $2 million of stock-based compensation expense for these RSAs during the first quarter of fiscal 2012.
Performance Based Awards
During the first quarter of fiscal 2012, we granted performance based restricted stock units (“PRUs”) to certain senior level employees under our 2004 Equity Incentive Plan. The PRU grants are in lieu of the stock option grants typically awarded as part of our annual compensation program. These PRUs can be earned depending upon the achievement of a company-specific performance condition and a market condition as follows: (1) our achievement of a specified company-specific performance target for fiscal 2012 and (2) our two and three year cumulative relative total shareholder return ranked against that of other companies that are included in the Standard & Poor’s 500 Index. These PRUs are also subject to a three year continued service vesting provision with earlier vesting permitted under certain conditions, such as upon a change of control of the company. The determination of the fair value of these awards takes into consideration the likelihood of achievement of the market condition, and the compensation expense for the PRUs is initially based on the probability of achieving the target level of the company-specific performance condition, and will be adjusted for subsequent changes in the estimated or actual outcome of this performance condition. The weighted average grant date fair value of the PRUs was $23.58 per share.
Assumed Clearwell stock options
In connection with our acquisition of Clearwell, we assumed all unexercised, outstanding options to purchase Clearwell common stock. Each unexercised, outstanding option assumed was converted into an option to purchase our common stock after applying the exchange ratio of 0.40906 shares of our common stock for each share of Clearwell common stock which resulted in an allocation of approximately 1 million shares of our common stock to the assumed options. As of September 30, 2011, total unrecognized compensation cost related to the assumed, unvested Clearwell stock options was $10 million, assuming no forfeitures.
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Furthermore, all shares obtained upon early exercise of unvested Clearwell options were converted into the right to receive a cash consideration of $7.65 per share upon vesting. The total value of the early exercised, unvested Clearwell shares on the date of acquisition was approximately $4 million, assuming no forfeitures. As of September 30, 2011, total unrecognized compensation cost related to early exercised, unvested Clearwell shares was approximately $3 million.
Note 13. Income Taxes
The effective tax rate was approximately 25% for both the three and six months ended September 30, 2011, and 24% and 12% for the three and six months ended October 1, 2010, respectively.
The tax expense was reduced by $5 million and $12 million primarily related to lapses of statutes of limitations for the three and six months ended September 30, 2011, respectively, as well as a $3 million in tax benefit during the three and six months ended September 30, 2011, for discrete events primarily related to tax settlements and adjustments of prior year items. The tax expense was reduced by a $39 million tax benefit arising from the Veritas v. Commissioner Tax Court decision (see further discussion below) for the six months ended October 1, 2010, as well as $4 million and $15 million tax benefits during the three months and six months ended October 1, 2010, respectively, for discrete events primarily related to tax settlements and lapses of statutes of limitations, and adjustments of prior year items.
The provision for the six-month periods ended September 30, 2011 and October 1, 2010 otherwise reflects a forecast tax rate of 29% and 28%, respectively (excluding the tax benefit from our joint venture with Huawei, defined in Note 6). We include the tax benefit associated with the loss from our joint venture with Huawei in income tax expense rather than netting the tax benefit against our joint venture loss with Huawei. However, the effective rate applied to our joint venture loss with Huawei for purposes of determining the tax benefit is based only on our joint venture loss and its tax impact. The forecast tax rates for both periods presented reflect the benefits of lower-taxed foreign earnings, domestic manufacturing incentives, and research and development credits ( the U.S. federal R&D tax credit is currently set to expire on December 31, 2011), partially offset by state income taxes. The jurisdictional mix of earnings and the effective tax rate on internationally-derived earnings are relatively consistent in both six-month periods presented. Substantially all of the foreign earnings were generated by subsidiaries in Ireland and Singapore.
On December 10, 2009, the U.S. Tax Court issued its opinion in Veritas v. Commissioner, finding that our transfer pricing methodology, with appropriate adjustments, was the best method for assessing the value of the transaction at issue between Veritas and its international subsidiary in the 2000 to 2001 tax years. The Tax Court judge provided guidance as to how adjustments would be made to correct the application of the method used by Veritas. In June 2010, we reached an agreement with the IRS concerning the amount of the adjustment related to the U.S. Tax Court decision. As a result of the agreement, we reduced our liability for unrecognized tax benefits, resulting in a $39 million tax benefit in the first quarter of fiscal 2011. This matter has now been closed and no further adjustments to the accrued liability are expected.
On December 2, 2009, we received a Revenue Agent’s Report from the IRS for the Veritas 2002 through 2005 tax years assessing additional taxes due. We have contested $80 million of the tax assessed and all penalties. The unresolved amounts concern a transfer pricing matter comparable to the one that was resolved in our favor in the Veritas v. Commissioner Tax Court decision. The matter is being addressed within the IRS Appeals process and remains outstanding with no scheduled date for completion.
The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Although potential resolution of uncertain tax positions involve multiple tax periods and jurisdictions, it is reasonably possible that a reduction of up to $100 million of the reserves for unrecognized tax benefits may occur within the next 12 months, some of which, depending on the nature of the settlement or expiration of statutes of limitations, may affect our income tax provision and therefore benefit the resulting effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements.
We continue to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected tolling of the statute of limitations in various taxing jurisdictions.
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Note 14. Earnings per Share
The components of earnings per share are as follows:
Net income per share attributable to Symantec Corporation stockholders — basic:
Net income per share attributable to Symantec Corporation stockholders — diluted:
Weighted average outstanding common shares attributable to Symantec Corporation stockholders — basic
Dilutive potential shares related to stock award plans
Total weighted-average shares outstanding attributable to Symantec Corporation stockholders — diluted
Anti-dilutive weighted-average stock options
Anti-dilutive weighted-average restricted stock
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Forward-Looking Statements and Factors That May Affect Future Results
The discussion below contains forward-looking statements, which are subject to safe harbors under the Securities Act of 1933, as amended, or the Securities Act, and the Exchange Act. Forward-looking statements include references to our ability to utilize our deferred tax assets, as well as statements including words such as “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” and similar expressions. In addition, statements that refer to projections of our future financial performance, anticipated growth and trends in our businesses and in our industries, the anticipated impacts of acquisitions, and other characterizations of future events or circumstances are forward-looking statements. These statements are only predictions, based on our current expectations about future events and may not prove to be accurate. We do not undertake any obligation to update these forward-looking statements to reflect events occurring or circumstances arising after the date of this report. These forward-looking statements involve risks and uncertainties, and our actual results, performance, or achievements could differ materially from those expressed or implied by the forward-looking statements on the basis of several factors, including those that we discuss in Risk Factors, set forth in Part I, Item 1A, of our annual report on Form 10-K for the fiscal year ended April 1, 2011. We encourage you to read that section carefully.
Fiscal Calendar
We have a 52/53-week fiscal accounting year ending on the Friday closest to March 31. The three months ended September 30, 2011 and October 1, 2010 both consisted of 13 weeks. The six months ended September 30, 2011 and October 1, 2010 both consisted of 26 weeks. Our 2012 fiscal year consists of 52 weeks and ends on March 30, 2012.
OVERVIEW
Our Business
Symantec is a global provider of security, storage, and systems management solutions that help businesses and consumers secure and manage their information. We provide customers worldwide with software and services that protect, manage and control information risks related to security, data protection, storage, compliance, and systems management. We help our customers manage cost, complexity, and compliance by protecting their IT infrastructure as they seek to maximize value from their IT investments.
Our Operating Segments
Our operating segments are significant strategic business units that offer different products and services, distinguished by customer needs. Since the fourth quarter of fiscal 2008, we have operated in five operating segments: Consumer, Security and Compliance, Storage and Server Management, Services, and Other. During the first quarter of fiscal year 2012, we modified our segment reporting structure to more readily match our operating structure. For further descriptions of our operating segments, see Note 11 of the Notes to Condensed Consolidated Financial Statements in this quarterly report. Our reportable segments are the same as our operating segments.
Financial Results and Trends
Revenue increased by $201 million and $421 million for the three and six months ended September 30, 2011 as compared to the same periods last year. As more fully described below in “Results of Operations”, we experienced growth across all segments except for the Services segment. We also experienced a favorable foreign exchange effect on our international revenue of approximately $63 million and $150 million for the three and six months ended September 30, 2011 as compared to the same periods last year.
Our Salaries and wages expense increased by $83 million and $182 million for the three and six months ended September 30, 2011 as compared to the same periods last year. The higher salaries and wages are primarily attributable to an increase in the number of employees from our acquisitions of the identity and authentication business of VeriSign, PGP Corporation, and GuardianEdge Technologies, Inc., collectively referred to as “fiscal 2011 acquisitions” and the Clearwell System, Inc. “Clearwell” acquisition in fiscal 2012. We also experienced an adverse foreign exchange effect on our expenses of approximately $30 million and $80 million for the three and six months ended September 30, 2011, respectively, as compared to the same periods last year. Our net income was $182 million and $373 million for the three and six months ended September 30, 2011, respectively.
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Critical Accounting Estimates
There have been no changes in the matters for which we make critical accounting estimates in the preparation of our Condensed Consolidated Financial Statements during the six months ended September 30, 2011 as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended April 1, 2011.
Recently Adopted Authoritative Guidance
Information with respect to Recently Adopted Authoritative Guidance is in Note 1 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q, which information is incorporated herein by reference.
RESULTS OF OPERATIONS
Total Net Revenue
Content, subscription, and maintenance revenue
License revenue
Content, subscription, and maintenance revenue increased for the three and six months ended September 30, 2011, as compared to the same periods last year, primarily as a result of our fiscal 2011 acquisitions which increased sales by approximately $69 million and $142 million, respectively. Favorable foreign currency exchange also had a positive effect on our international content, subscription and maintenance revenue in the amount of approximately $54 million and $128 million for the three and six months ended September 30, 2011, respectively, as compared to the same periods last year.
License revenue increased for the three and six months ended September 30, 2011, as compared to the same periods last year, primarily due to a favorable foreign currency exchange effect on our international license revenue of approximately $9 million and $22 million, respectively.
The changes in total net revenue for the three and six months ended September 30, 2011 are further described in the segment discussions that follow.
Net revenue and operating income by segment
Consumer segment
Consumer revenue
Consumer operating income
Percentage of Consumer revenue
Consumer segment revenues increased as a result of continued customer acceptance of our security products, particularly our premium security suite products. We also experienced favorable foreign currency exchange effects on our international revenue of approximately $20 million and $46 million for the three and six months ended September 30, 2011, respectively, as compared to the same periods last year.
Operating income for the Consumer segment increased due to increases in revenue discussed above, partially offset by increases in salaries and wages of $10 million and $22 million for the three and six months ended September 30, 2011, respectively as compared to the same periods last year. The increase in consumer revenue was also offset by changes in foreign currency exchange rates for the three and six months ended September 30, 2011, as compared to the same periods last year, which increased total expenses for the Consumer segment by $7 million and $19 million, respectively.
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Security and Compliance segment
Security and Compliance revenue
Security and Compliance operating income
Percentage of Security and Compliance revenue
We experienced growth in our Security and Compliance segment primarily as a result of increased revenue from sales of our authentication, endpoint security, and data loss prevention products. Integration of the VeriSign authentication business contributed $69 million and $142 million for the three and six months ended September 30, 2011, respectively. The favorable foreign currency exchange effect on our international revenue was approximately $18 million and $42 million for the three and six months ended September 30, 2011, respectively, as compared to the same periods last year.
Operating income for the Security and Compliance segment increased due to increases in revenue discussed above, partially offset by increases in salaries and wages of $30 million and $83 million related to employees that we hired as part of our fiscal 2011 acquisitions, and increases in cost of sales of $13 million and $35 million for the three and six months ended September 30, 2011, respectively, as compared to the same periods last year. The increase in operating income was also offset by changes in foreign currency exchange rates for the three and six months ended September 30, 2011, as compared to the same periods last year, which increased total expenses for the Security and Compliance segment by $8 million and $19 million, respectively.
Storage and Server Management segment
Storage and Server Management revenue
Storage and Server Management operating income
Percentage of Storage and Server Management revenue
Our Storage and Server Management segment experienced growth in our information management business, which was driven by sales of our backup solutions and integration of the eDiscovery products acquired in our Clearwell acquisition. We realized approximately $20 million in revenue from our Clearwell acquisition for the three and six months period ended September 30, 2011. We also experienced a favorable foreign currency exchange effect on our international revenue of approximately $23 million and $57 million for the three and six months ended September 30, 2011, respectively, as compared to the same periods last year.
Operating income for the Storage and Server Management segment was reduced by an increase in salaries and wages related to sales and marketing personnel of $26 million and employees related to our Clearwell acquisition of $13 million. In addition, cost of sales increased from the cost of our appliances sold of $7 million and technical support of $7 million. These increases in costs were partially offset by the increase in revenue discussed above for the three months ended September 30, 2011, as compared to the same period last year.
Operating income for the Storage and Server Management segment increased for the six months ended September 30, 2011, as compared to the same period last year, primarily due to an increase in revenues mentioned above offset by an increase in salaries and wages related to sales and marketing personnel of $44 million, employees related to our Clearwell acquisition of $13 million, and research and development expenses of $12 million. In addition, cost of sales increased by $11 million from the cost of our appliances sold and $10 million from technical support. The increase in revenue was also offset by changes in foreign currency exchange rates for the six months ended September 30, 2011, as compared to the same period last year, which increased total expenses for the Storage and Server Management segment by $6 million.
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Services segment
Services revenue
Services operating income
Percentage of Services revenue
Services revenue decreased for the three and six months ended September 30, 2011, as compared to the same periods last year, as we continue to support the transition to our partner led consulting program while we focus on our core software businesses.
Services operating income increased for the three and six months ended September 30, 2011, as compared to the same periods last year, as various cost control initiatives led to better margins.
Other segment
Other revenue
Other operating loss
Percentage of Other revenue
Revenue from our Other segment consists primarily of sunset products and products nearing the end of their life cycle. The operating loss of our Other segment includes general and administrative expenses; amortization of acquired product rights, other purchased intangible assets, and other assets; charges such as stock-based compensation and restructuring; and certain indirect costs that are not charged to the other operating segments.
Net revenue by geographic region
Americas (U.S., Canada and Latin America)
Consumer Segment
Security and Compliance Segment
Storage and Server Management Segment
Services Segment
Total Americas
EMEA (Europe, Middle East, Africa)
Total EMEA
Asia Pacific/Japan
Total Asia Pacific/ Japan
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Fluctuations in the U.S. dollar compared to foreign currencies favorably impacted our international revenue by $63 million and $150 million for the three and six months ended September 30, 2011, respectively, as compared to the same periods last year.
Our international sales are and will continue to be a significant portion of our net revenue. As a result, net revenue will continue to be affected by foreign currency exchange rates as compared to the U.S. dollar. We are unable to predict the extent to which revenue in future periods will be impacted by changes in foreign currency exchange rates. If international sales become a greater portion of our total sales in the future, changes in foreign currency exchange rates may have a potentially greater impact on our revenue and operating results.
Cost of Revenue
Cost of content, subscription, and Maintenance
Percentage of related revenue
Cost of license
Gross margin
Cost of content, subscription, and maintenance consists primarily of fee-based technical support costs, costs of billable services, and payments to OEMs under revenue-sharing agreements. Cost of content, subscription, and maintenance increased for the three and six months ended September 30, 2011, as compared to the same periods last year, primarily due to higher technical support costs.
Cost of license consists primarily of royalties paid to third parties under technology licensing agreements, manufacturing and direct material costs. Cost of license increased in the three and six months ended September 30, 2011, as compared to the same periods last year as a result of the increased cost of royalties.
Acquired product rights are comprised of developed technologies and patents from acquired companies. The decrease in amortization for the six months ended September 30, 2011, as compared to the same period last year is primarily due to certain acquired product rights from our various past acquisitions becoming fully amortized during the first quarter of fiscal 2011.
Operating Expenses
Operating expenses overview
Our operating expenses increased during the three and six months ended September 30, 2011, as compared to the same periods last year, due to higher salary and wages and the adverse impact of the change in foreign currency exchange rates, offset by cost savings generated from our restructuring plans discussed below.
Sales and marketing expense
Research and development expense
General and administrative expense
As a percentage of revenue, Sales and marketing, Research and development and General and administrative expenses remained consistent during the three and six months ended September 30, 2011.
Sales and marketing expenses increased during the three and six months ended September 30, 2011, as compared to the same periods last year, primarily as a result of increased salaries and wages of $38 million and $93 million, increased advertising costs of $17 million and $30 million and the adverse impact of the change in foreign currency exchange rates of $22 million and $61 million, respectively.
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Research and development expenses increased during the three and six months ended September 30, 2011, as compared to the same periods last year, primarily due to increased salaries and wages of $26 million and $57 million, and the adverse impact of the change in foreign currency exchange rates of $4 million and $10 million, respectively.
General and administrative expenses increased during the three and six months ended September 30, 2011, as compared to the same periods last year due to increased salaries and wages of $8 million and $22 million, respectively.
Other purchased intangible assets are comprised of customer relationships and tradenames. The increase in amortization of other purchased intangible assets for the three months ended September 30, 2011 compared to the same period last year was primarily due to the acquisition of Clearwell. The increase in amortization of other purchased intangible assets for the six months ended September 30, 2011 compared to the same period last year was primarily due to our fiscal 2011 acquisitions and Clearwell.
Transition and other related costs
The restructuring and transition charges for the three and six months ended September 30, 2011 and October 1, 2010, primarily consisted of severance and charges related to the 2011 Restructuring Plan (“2011 Plan”), the 2010 Restructuring Plan (“2010 Plan”), and transition and other costs. Transition charges are expected to continue in future quarters as we are at the initial stage of implementation of a new ERP system. For further information on restructuring, see Note 8 of the Notes to Condensed Consolidated Financial Statements.
During the six months ended October 1, 2010, we recognized an impairment of $1 million on certain land and buildings classified as held for sale. These impairments were recorded in accordance with the authoritative guidance that requires a long-lived asset classified as held for sale to be measured at the lower of its carrying amount or fair value, less cost to sell.
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Non-operating Income and Expense
Non-operating expense decreased for the three and six months ended September 30, 2011 as a result of lower interest expenses due to our repayment of the $1.1 billion convertible senior note that we issued in fiscal 2007. In the second quarter of fiscal 2011 and the first quarter of fiscal 2012, we made payments of $500 million and $600 million, respectively, to retire these notes.
Effective tax rate on earnings
The effective tax rate was approximately 25% for both of the three and six months ended September 30, 2011, and 24% and 12% for the three and six months ended October 1, 2010, respectively.
The provision for the six-month periods ended September 30, 2011 and October 1, 2010 otherwise reflects a forecast tax rate of 29% and 28%, respectively (excluding the tax benefit from our joint venture with Huawei (as defined below)). We include the tax benefit associated with the loss from our joint venture with Huawei in income tax expense rather than netting the tax benefit against our joint venture loss with Huawei. However, the effective rate applied to our joint venture loss with Huawei for purposes of determining the tax benefit is based only on our joint venture loss and its tax impact. The forecast tax rates for both periods presented reflect the benefits of lower-taxed international earnings, domestic manufacturing incentives, and research and development credits (the U.S. federal R&D tax credit is currently set to expire on December 31, 2011), partially offset by state income taxes. The jurisdictional mix of earnings and the effective tax rate on internationally-derived earnings are relatively consistent in both six-month periods presented. Substantially all of the international earnings were generated by subsidiaries in Ireland and Singapore.
On December 10, 2009, the U.S. Tax Court issued its opinion in Veritas v. Commissioner, finding that our transfer pricing methodology, with appropriate adjustments, was the best method for assessing the value of the transaction at issue between Veritas and its international subsidiary in the 2000 to 2001 tax years. The Tax Court judge provided guidance as to how adjustments would be made to correct the application of the method used by Veritas. In June 2010, we reached an agreement with the IRS concerning the amount of the adjustment related to the U.S. Tax Court decision. As a result of the agreement, we reduced our liability for unrecognized tax benefits, resulting in a $39 million tax benefit in the first quarter of fiscal 2011. This matter has now been closed and no further adjustments to the accrued liability are warranted.
On December 2, 2009, we received a Revenue Agent’s Report from the IRS for the Veritas 2002 through 2005 tax years assessing additional taxes due. We have contested $80 million of tax assessed and all penalties. The unresolved amounts concern a transfer pricing matter comparable to the one that was resolved in our favor in the Veritas v. Commissioner Tax Court decision. The matter is being addressed within the IRS Appeals process and remains outstanding with no scheduled date for completion.
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On February 5, 2008, Symantec formed Huawei-Symantec, Inc. (“joint venture”) with a subsidiary of Huawei Technologies Co., Ltd. (“Huawei”). The joint venture is domiciled in Hong Kong with principal operations in Chengdu, China. The joint venture develops, manufactures, markets, and supports security and storage appliances on behalf of global telecommunications carriers and enterprise customers. We record our proportionate share of the joint venture’s net income or loss one quarter in arrears.
For the three and six months ended September 30, 2011, we recorded a loss of approximately $14 million and $27 million related to our share of the joint venture’s net loss incurred for the period from January 1, 2011 to March 31, 2011 and the period from January 1, 2011 to June 30, 2011, respectively. For the three and six months ended October 1, 2010, we recorded a loss of approximately $4 million and $11 million related to our share of the joint venture’s net loss for the period from January 1, 2010 to March 31, 2010 and the period from January 1, 2010 to June 30, 2010, respectively.
Loss attributable to noncontrolling interest
In the second quarter of fiscal 2011, we completed the acquisition of the identity and authentication business of VeriSign, Inc. (“VeriSign”), including a controlling interest in its subsidiary, VeriSign Japan K.K. (“VeriSign Japan”), a publicly traded company on the Tokyo Stock Exchange. Given our majority ownership interest of approximately 54% in VeriSign Japan, the accounts of VeriSign Japan have been consolidated with our accounts, and a noncontrolling interest has been recorded for the noncontrolling investors’ interests in the equity and operations of VeriSign Japan. For the six months ended September 30, 2011, the loss attributable to the noncontrolling interest in VeriSign Japan was approximately $1 million. For the three and six months ended October 1, 2010, the loss attributable to the noncontrolling interest in VeriSign Japan was approximately $2 million.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash
We have historically relied on cash flow from operations, borrowings under a credit facility, and issuances of debt and equity securities for our liquidity needs. As of September 30, 2011, we had cash and cash equivalents of $2.2 billion resulting in a net liquidity position of approximately $3.2 billion, which is defined as cash and cash equivalents and unused availability of the credit facility.
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Senior Notes. In the second quarter of fiscal 2011, we issued $350 million in principal amount of 2.75% Notes due September 15, 2015 and $750 million in principal amount of 4.20% Notes due September 15, 2020, for an aggregate principal amount of $1.1 billion.
Revolving Credit Facility. In the second quarter of fiscal 2011, we also entered into a $1 billion senior unsecured revolving credit facility that expires in September 2014. Under the terms of this credit facility, we must comply with certain financial and non-financial covenants, including a covenant to maintain a specified ratio of debt to EBITDA (earnings before interest, taxes, depreciation and amortization). As of September 30, 2011, we were in compliance with all required covenants, and there was no outstanding balance on the credit facility.
We believe that our existing cash and investment balances, our borrowing capacity, our ability to issue new debt instruments, and cash generated from operations will be sufficient to meet our working capital and capital expenditures requirements for at least the next 12 months.
Uses of Cash
Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on our debt, and payments of taxes. Also, we may, from time to time, engage in the open market purchase of our convertible notes prior to their maturity. In addition, we regularly evaluate our ability to repurchase stock, pay debts and acquire other businesses.
Acquisition-Related. For the six months ended September 30, 2011, we acquired Clearwell System Inc. (“Clearwell”) for an aggregate payment of $364 million, net of cash acquired. For the six months ended October 1, 2010, we acquired PGP Corporation, GuardianEdge Technologies, Inc. and the identity and authentication business of VeriSign, Inc, for an aggregate amount of $1.5 billion, net of cash acquired.
Convertible Senior Notes. During the six months ended September 30, 2011, the remaining balance of our 0.75% Notes matured and we settled with the holders with a cash payment of $600 million. See Note 7 of the Notes to Condensed Consolidated Financial Statements in this quarterly report for further discussion. During the six months ended October 1, 2010, we repurchased $500 million of aggregate principal amount of our 0.75% Notes in privately negotiated transactions for approximately $510 million. Concurrently with the repurchase, we sold a proportionate share of the note hedges that we entered into at the time of the issuance of the convertible notes back to the note hedge counterparties for approximately $13 million. The net cost of the repurchase of the 0.75% Notes and the concurrent sale of the note hedges was $497 million in cash.
Stock Repurchases. For the six months ended September 30, 2011, we repurchased 26 million shares, or $473 million, of our common stock. For the six months ended October 1, 2010, we repurchased 31 million shares, or $425 million, of our common stock. As of September 30, 2011, we had $404 million remaining under the plan authorized for future repurchases.
U.S. tax. As of September 30, 2011, $1.6 billion of the $2.3 billion of cash, cash equivalents, and marketable securities were held by our foreign subsidiaries. We have provided U.S. deferred taxes on a portion of our undistributed foreign earnings sufficient to address the incremental U.S. tax that would be due if we needed these funds for our operations in U.S.
Cash Flows
The following table summarizes selected items in our Condensed Consolidated Statements of Cash Flows:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
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Operating Activities
Net cash provided by operating activities was $811 million for the six months ended September 30, 2011, which resulted from net income of $372 million adjusted for non-cash items, which largely included depreciation and amortization charges of $355 million, as well as increased collections of trade accounts receivable of $331 million. These amounts were partially offset by decreases in deferred revenue of $346 million and increases in accrued compensation of $130 million.
Net cash provided by operating activities was $645 million for the six months ended October 1, 2010, which resulted from net income of $295 million adjusted for non-cash items, which largely included depreciation and amortization charges of $377 million, as well as from increased collections of trade accounts receivable of $233 million. These amounts were partially offset by decreases in deferred revenue of $238 million.
Investing Activities
Net cash used in investing activities was $520 million for the six months ended September 30, 2011, which was due to payments for acquisitions, net of cash acquired, of $364 million, $124 million paid for capital expenditures, and $33 million for available-for-sale securities.
Net cash used in investing activities was $1.6 billion for the six months ended October 1, 2010, which was due to $1.5 billion of payments for acquisitions, net of cash acquired, and $116 million paid for capital expenditures.
Financing Activities
Net cash used in financing activities was $1,007 million for the six months ended September 30, 2011, which was due to the extinguishment of our outstanding 0.75% Notes of $600 million and repurchases of our common stock of $473 million.
Net cash provided by financing activities of $192 million for the six months ended October 1, 2010, which was due to proceeds from debt issuance, net of discount, of $1.1 billion, partially offset by repurchases of long-term debt of $510 million and repurchases of common stock of $425 million.
Contractual Obligations
There have been no significant changes during the six months ended September 30, 2011 to the contractual obligations disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended April 1, 2011, other than the extinguishment of our $600 million principal amount of 0.75% convertible senior notes. The table below sets forth these changes but does not update the other line items in the contractual obligations table that appears in the section of our Annual Report on Form 10-K described above:
Convertible senior notes (1)
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There have been no significant changes in our market risk exposures during the six months ended September 30, 2011 as compared to the market risk exposures disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7A, of our Annual Report on Form 10-K for the fiscal year ended April 1, 2011.
(a) Evaluation of Disclosure Controls and Procedures
The SEC defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our Chief Executive Officer and our Chief Financial Officer have concluded, based on an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act) by our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(c) Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.
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PART II. OTHER INFORMATION
Information with respect to this Item may be found in Note 9 of Notes to Condensed Consolidated Financial Statements in this Form 10-Q, which information is incorporated herein by reference.
A description of the risks associated with our business, financial condition, and results of operations is set forth in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended April 1, 2011. There have been no material changes in our risks from such description.
Stock repurchases during the three months ended September 30, 2011 were as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
July 2, 2011 to July 29, 2011
July 30, 2011 to August 26, 2011
August 27, 2011 to September 30, 2011
For information regarding our stock repurchase programs, see Note 10 of Notes to Condensed Consolidated Financial Statements, which information is incorporated herein by reference.
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EXHIBIT INDEX
Exhibit
Number
Exhibit Description
Form
File
Date
Filed with
this 10-Q
10.01*
31.01
31.02
32.01†
32.02†
101.INS††
101.SCH††
101.CAL††
101.LAB††
101.PRE††
101.DEF††
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant)
By:
/s/ Enrique Salem
President and Chief Executive Officer
/s/ James A. Beer
James A. Beer
Date: November 1, 2011
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Q2 FY12 Form 10-Q
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