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Symantec 10-Q 2009 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
For the Quarterly Period Ended October 2, 2009
or
For the Transition Period from to
Commission File Number 000-17781
Symantec Corporation
(Exact name of the registrant as specified in its charter)
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 þ No o
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
þ No o
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 o No þ
Shares of Symantec common stock, $0.01 par value per share, outstanding as of October 30,
2009: 810,560,473 shares.
SYMANTEC CORPORATION
FORM 10-Q Quarterly Period Ended October 2, 2009 TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
SYMANTEC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
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SYMANTEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
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SYMANTEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements of Symantec Corporation (“we,” “us,” and “our”
refer to Symantec Corporation and all of its subsidiaries) as of October 2, 2009 and April 3, 2009,
and for the three and six months ended October 2, 2009 and October 3, 2008, have been prepared in
accordance 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 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. The condensed consolidated balance sheet as of April 3, 2009, has been derived from our
annual consolidated financial statements as adjusted for the retrospective adoption of new
authoritative guidance on accounting for convertible debt instruments. These condensed
consolidated financial statements should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended
April 3, 2009. The results of operations for the three and six months ended October 2, 2009 are
not necessarily indicative of the results expected for the entire fiscal year. All significant
intercompany accounts and transactions have been eliminated.
Fiscal Year End
We have a 52/53-week fiscal accounting year ending on the Friday closest to March 31. The
three months ended October 2, 2009 and October 3, 2008 both consisted of 13 weeks. The six months
ended October 2, 2009 consisted of 26 weeks, whereas the six months ended October 3, 2008 consisted
of 27 weeks. Our 2010 fiscal year consists of 52 weeks and ends on April 2, 2010.
Significant Accounting Policies
There have been no changes in our significant accounting policies for the six months ended
October 2, 2009 as compared to the significant accounting policies described in our Annual Report
on Form 10-K for the fiscal year ended April 3, 2009.
As of April 4, 2009, we adopted new authoritative guidance on convertible debt instruments.
See Note 4 for further details.
Financial Instruments
For certain financial instruments, including cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and other current liabilities, the carrying
amounts approximate their fair value due to the relatively short maturity of these balances. The
following methods were used to estimate the fair value of each class of financial instruments for
which it is practicable to estimate that value:
Cash and Cash Equivalents. We consider all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents are recognized at fair
value. As of October 2, 2009, our cash equivalents consisted of $1.5 billion in money market funds
and $201 million in bank securities and deposits. As of April 3, 2009, our cash equivalents
consisted of $389 million in money market funds, $474 million in bank securities and deposits, and
$479 million in government securities.
Short-Term Investments. Short-term investments consist of marketable debt or equity
securities that are classified as available-for-sale and recognized at fair value. The
determination of fair value is further detailed in Note 2. Our portfolios consist of (1) debt
securities which include asset-backed securities, corporate securities and government securities,
and (2) marketable equity securities. As of October 2, 2009, our asset-backed securities
contractually mature after 10 years and corporate securities contractually mature within three
years. We regularly review our investment portfolio to identify and evaluate investments that have
indications of possible impairment. Factors considered in determining whether a loss is
other-than-temporary include: the length of time and extent to which the fair market value has been
lower than the cost basis, the financial condition and near-term prospects of the investee, credit
quality, likelihood of recovery, and our ability to hold the investment for a period of time
sufficient to allow for any anticipated recovery in fair market value.
Unrealized gains and losses, net of tax, are included in Accumulated other comprehensive
income. The amortization of premiums and discounts on the investments, realized gains and losses,
and declines in value judged to be other-than-temporary on available-for-sale debt securities are
included in Other income (expense), net. As such, other-than-temporary impairments are determined
to be
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either credit losses or losses due to other factors—credit losses are recognized in our
Condensed Consolidated Statements of Operations and other losses are included in Accumulated other
comprehensive income. We use the specific-identification method to determine cost in calculating
realized gains and losses upon sale of short-term investments.
Equity Investments. During the first quarter of our fiscal 2010, we made an equity investment
in a privately held company whose business is complementary to our business. This investment is
accounted for under the cost method of accounting, as we hold less than 20% of the voting stock
outstanding and do not exert significant influence over this company. The investment is included
in Other long-term assets. We assess the recoverability of this investment by reviewing various
indicators of impairment and by determining the fair value of this investment by performing a
discounted cash flow analysis of estimated future cash flows. If a decline in value is determined
to be other-than-temporary, an impairment would be recognized and included in Other income
(expense), net. As of October 2, 2009 and April 3, 2009, we held equity investments in
privately-held companies of $17 million and $3 million, respectively. Other-than-temporary
impairments related to these investments were not material for the periods presented.
Derivative Instruments. We transact business in various foreign currencies and have foreign
currency risks associated with monetary assets and liabilities denominated in foreign currencies.
We utilize foreign currency forward contracts to reduce the risks associated with changes in
foreign currency exchange rates. Our forward contracts generally have terms of one to six months.
We do not use forward contracts for trading purposes. The gains and losses on the contracts are
intended to offset the gains and losses on the underlying transactions. Both the changes in fair
value of outstanding forward contracts and realized foreign exchange gains and losses are included
in Other income (expense), net. Contract fair values are determined based on quoted prices for
similar assets or liabilities in active markets using inputs such as LIBOR, currency rates, forward
points, and commonly quoted credit risk data. For each fiscal period presented in this report,
outstanding derivative contracts and the related gains or losses were not material.
Convertible Senior Notes, Note Hedges and Revolving Credit Facility. Our convertible senior
notes are recorded at cost based upon par value at issuance less a discount for the estimated value
of the equity component of the notes, which is amortized through maturity as additional non-cash
interest expense. See Note 4 for further details. Debt issuance costs were recorded in Other
long-term assets and are being amortized to Interest expense using the effective interest method
over five years for the 0.75% Notes and seven years for the 1.00% Notes. In conjunction with the
issuance of the notes, we obtained hedges which would provide us with the option to purchase
additional common shares at a fixed price after conversion. The cost incurred in connection with
the note hedge transactions, net of the related tax benefit and the proceeds from the sale of
warrants, was included as a net reduction in Additional paid-in capital. Borrowings under our $1
billion senior unsecured revolving credit facility are recognized at cost plus accrued interest
based upon stated interest rates.
Property and Equipment
Property and equipment consisted of the following:
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Comprehensive Income
The components of comprehensive income, net of tax, are as follows:
Assets Held for Sale
As part of our ongoing review of our real estate holdings, we determined that certain
properties were underutilized. As a result, we have committed to sell properties with a total
estimated fair value less cost to sell of approximately $56 million included in Other current
assets and no associated liabilities. We expect the sale of the
properties to be completed by the end of fiscal 2010.
Subsequent Events Evaluation
Management has reviewed and evaluated material subsequent events from the balance sheet date
of October 2, 2009 through the financial statement issuance date of November 4, 2009.
Recently Issued Authoritative Guidance
In September 2009, the FASB issued new authoritative guidance that provides guidance on
determining multiple elements in an arrangement and how total consideration should be allocated
amongst the elements. It also expands disclosure requirements for multiple-element arrangements.
Concurrently, the FASB also issued new authoritative guidance for arrangements that include both
software and tangible products that excludes tangible products and certain related elements from
the scope of the revenue recognition authoritative guidance specific to software transactions. The
standards must both be adopted in the same period and can be applied on a prospective basis for
revenue arrangements entered into or materially modified in fiscal years beginning on or after June
15, 2010, with earlier application permitted, or they can be adopted on a retrospective basis. We
have not yet adopted the standards and are currently assessing their impact on our consolidated
financial statements.
In June 2009, the FASB issued new authoritative guidance that amends the consolidation
guidance applicable to variable interest entities (“VIEs”). The scope within the guidance now
includes qualifying special-purpose entities. The standard provides revised guidance on (1)
determining the primary beneficiary of the VIE, (2) how power is shared, (3) consideration for
kick-out, participating and protective rights, (4) reconsideration of the primary beneficiary, (5)
reconsideration of a VIE, (6) fees paid to decision makers or service providers, and (7)
presentation requirements. The statement is effective as of the first quarter of our fiscal 2011,
and early adoption is prohibited. We do not expect the adoption of this new authoritative guidance
to have a material impact on our consolidated financial statements.
As of April 4, 2009, we adopted new authoritative guidance on fair value measurements for all
non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis.
This adoption did not have a material impact on our consolidated financial statements.
Note 2. Fair Value Measurements
We measure assets and liabilities at fair value based on exit price as defined by the
authoritative guidance on fair value measurements, which represents 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
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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:
Assets Measured and Recorded at Fair Value on a Recurring Basis
The following table summarizes our assets that are measured at fair value on a recurring
basis, by level, within the fair value hierarchy:
Level 2 fixed income available-for-sale securities are priced using quoted market prices for
similar instruments, nonbinding market prices that are corroborated by observable market data, or
discounted cash flow techniques.
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The following table summarizes our non-financial assets measured at fair value during the six
months ended October 2, 2009, by level within the fair value hierarchy:
Assets held for sale were written down during the six months ended October 2, 2009 to reflect
fair value less estimated costs to sell. The fair value measurement was based upon recent offers
made by third parties to purchase the properties or by valuation appraisals. The total loss for
assets held for sale for the six months ended October 2, 2009 was $3 million.
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Note 3. Investments
The following summarizes our available-for-sale investments:
The following table provides the gross unrealized losses and the fair market value of our
investments with unrealized losses that are not deemed to be other-than-temporarily impaired,
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position:
Proceeds from sales, maturities and principal pay downs on available-for-sale securities
were $6 million primarily from corporate securities and $196 million primarily from asset-backed
securities for the three months ended October 2, 2009 and October 3, 2008, respectively. Proceeds
from available-for-sale securities were $189 million primarily from government securities and $668
million primarily from asset-backed securities for the six months ended October 2, 2009 and October
3, 2008, respectively. Gross realized losses on these sales were not material for the same periods.
Note 4. Accounting for Convertible Debt Instruments
As of April 4, 2009, we adopted new authoritative guidance on convertible debt instruments,
which requires issuers of certain types of convertible notes to separately account for the
liability and equity components of such convertible notes in a manner that reflects the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This
guidance applies to the 0.75% Convertible Senior Notes due June 15, 2011 and the 1.00% Convertible
Senior Notes due June 15, 2013, collectively referred to as the Senior Notes. Prior to the
adoption of this guidance, the liability of the Senior Notes was carried at its principal value and
only the contractual interest expense was recognized in our Condensed Consolidated Statements of
Operations. Because this guidance requires retrospective adoption, we were required to adjust all
periods for which the Senior Notes were outstanding before the date of adoption.
Upon adoption of the new authoritative guidance on convertible debt instruments and effective
as of the issuance date of the Senior Notes, we recorded $586 million of the principal amount to
equity, representing the debt discount for the difference between our estimated nonconvertible debt
borrowing rate of 6.78% at the time of issuance and the coupon rate of the Senior Notes. This debt
discount, recorded in additional paid-in capital, is amortized as additional non-cash interest
expense over the contractual terms of the Senior Notes using the effective interest method. In
addition, we allocated $9 million of the issuance costs to the equity component of the Senior Notes
and the remaining $24 million of the issuance costs to the debt component of the Senior Notes. The
issuance costs were allocated pro rata based on the relative carrying amounts of the debt and
equity components. The $24 million of debt issuance costs allocated to the debt component is
amortized as interest expense over the respective contractual terms of the Senior Notes using the
effective interest method. Each $1,000 of principal of the Senior Notes will initially be
convertible into 52.2951 shares of Symantec common stock, which is the equivalent of $19.12 per
share, subject to adjustment upon the occurrence of specified events. As of October 2, 2009, the
remaining weighted average amortization period of the discount and debt issuance costs is
approximately 3 years and the if-converted value of the Senior Notes does not exceed the principal
amount of the Senior Notes.
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The following table presents information regarding the equity and liability components of the
Senior Notes:
The effective interest rate, contractual interest expense and amortization of debt discount
for the Senior Notes for the three and six months ended October 2, 2009 and October 3, 2008 were as
follows:
The retrospective adoption of this guidance resulted in the following adjustments to our
Condensed Consolidated Balance Sheet as of April 3, 2009:
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The retrospective adoption of this guidance resulted in the following adjustments to our
Condensed Consolidated Statements of Operations for the three and six months ended October 3, 2008:
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The retrospective adoption of this guidance does not affect our balance of Cash and cash
equivalents and as a result did not change Net cash flows from operating, investing or financing
activities in our Condensed Consolidated Statement of Cash Flows for the six months ended October
3, 2008.
The retrospective adoption of this guidance resulted in the following adjustments to our
Condensed Consolidated Statements of Stockholders’ Equity:
Upon adoption of this guidance and effective as of the issuance date of the Senior Notes, we
recorded, as adjustments to additional paid-in capital, deferred taxes for the differences between
the carrying value and tax basis that resulted from allocating $586 million of the principal amount
of the Senior Notes and $9 million of the associated issuance costs to equity. In subsequent
periods, we recorded adjustments to deferred taxes to reflect the tax effect of the amortization of
the debt discount and debt issuance costs.
Note 5. Goodwill and Intangible Assets
Goodwill
We allocate goodwill to our reporting units, which are the same as our operating segments.
Goodwill is allocated by operating segment as follows:
We apply a fair value based impairment test to the net book value of goodwill and
indefinite-lived intangible assets on an annual basis on the first day of the fourth quarter of
each fiscal year or earlier if indicators of impairment exist. As of October 2, 2009, no
indicators of impairment were identified.
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Intangible assets, net
During the three months ended October 2, 2009 and October 3, 2008, total amortization expense
for intangible assets was $110 million and $143 million, respectively. During the six months ended
October 2, 2009 and October 3, 2008, total amortization expense for intangible assets was $270
million and $283 million, respectively.
Total future amortization expense for intangible assets that have definite lives, based on our
existing intangible assets and their current estimated useful lives as of October 2, 2009, is
estimated as follows (in millions):
Note 6. Restructuring
Our restructuring costs and liabilities consist of severance, benefits, facilities and other
costs. Severance and benefits generally include severance, stay-put or one-time bonuses,
outplacement services, health insurance coverage, effects of foreign currency exchange and legal
costs. Facilities’ costs generally include rent expense, less expected sublease income and lease
termination costs. Other costs generally include relocation, asset abandonment costs, the effects
of foreign currency exchange and consulting services. Also included in Restructuring in our
Condensed Consolidated Statements of Operations are transition and transformation fees, consulting
charges, and other costs related to the outsourcing of back office functions. Restructuring
expenses generally do not impact a particular reporting segment and are included in the Other
reporting segment.
Charges for restructuring costs were $15 million and $9 million for the three months and $37
million and $26 million for the six months ended October 2, 2009 and October 3, 2008, respectively.
Transition, transformation, and related other costs were $10 million and $22 million for the three
and six months ended October 2, 2009, respectively; such costs did not exist in the prior fiscal
period. Transition and transformation related activities are expected to be substantially complete
at the end of fiscal 2010. Total remaining costs for transition and transformation activities are
estimated to be approximately $25 million.
2009 Restructuring Plan (“2009 Plan”)
In the third quarter of fiscal 2009, management approved and initiated the following
restructuring events to:
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2008 Restructuring Plan (“2008 Plan”)
In the third quarter of fiscal 2008, management approved and initiated the following
restructuring events to:
Acquisition-Related Restructuring Plans
As a result of business acquisitions, management may deem certain job functions to be
redundant and facilities to be in excess either at the time of acquisition or for a period of time
after the acquisition in conjunction with our integration efforts. For acquisitions made prior to
fiscal 2010, such restructuring-related costs have generally been adjusted to goodwill to reflect
changes in the purchase price of the respective acquisition. With the adoption of new
authoritative guidance on business combinations, restructuring charges related to our business
acquisitions occurring beginning in fiscal 2010 will be expensed in our Condensed Consolidated
Statements of Operations. As of October 2, 2009, acquisition-related restructuring liabilities,
primarily related to excess facility obligations at several locations around the world, are
expected to be paid between fiscal 2010 and fiscal 2016 when their respective lease terms end.
Restructuring Summary
Note 7. Litigation
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 11.
On July 7, 2004, a purported class action complaint entitled Paul Kuck, et al. v. Veritas
Software Corporation, et al. was filed in the United States District Court for the District of
Delaware. The lawsuit alleges violations of federal securities laws in connection with Veritas’
announcement on July 6, 2004 that it expected results of operations for the fiscal quarter ended
June 30, 2004 to fall below earlier estimates. The complaint generally seeks an unspecified amount
of damages. Subsequently, additional purported class action complaints have been filed in Delaware
federal court, and, on March 3, 2005, the Court entered an order consolidating these actions and
appointing lead plaintiffs and counsel. A consolidated amended complaint (“CAC”), was filed on May
27, 2005, expanding the class period from April 23, 2004 through July 6, 2004. The CAC also named
another officer as a defendant and added allegations that Veritas and the named officers made false
or misleading statements in press releases and SEC filings regarding the company’s financial
results, which allegedly contained revenue recognized from contracts that were unsigned or lacked
essential terms.
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The defendants to this matter filed a motion to dismiss the CAC in July 2005; the
motion was denied in May 2006. In April 2008, the parties filed a stipulation of settlement. On
July 31, 2008, the Court held a final approval hearing and, on August 5, 2008, the Court entered an
order approving the settlement. An objector to the fees portion of the settlement has lodged an
appeal. In fiscal 2008, we recorded an accrual in the amount of $21.5 million for this matter and,
pursuant to the terms of the settlement, we established a settlement fund of $21.5 million on May
1, 2008.
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 8. Stock Repurchases
The following table summarizes our stock repurchases:
We have had stock repurchase programs in effect since fiscal 2001 and have repurchased shares
on a quarterly basis since the fourth quarter of fiscal 2004. Our current program was authorized by
our Board of Directors on June 14, 2007 to repurchase up to $2 billion of our common stock. This
program does not have an expiration date, and as of October 2, 2009, $57 million remained
authorized for future repurchases. As noted in Note 13, on October 28, 2009 we announced that our
Board of Directors approved a new share repurchase program.
Note 9. Segment Information
During the first quarter of fiscal 2010, we modified our segment reporting structure to more
readily match our operating structure. The following modifications were made to our segment
reporting structure: (i) Enterprise Vault products moved to the Storage and Server Management
segment from the Security and Compliance segment; and (ii) Software-as-a-Service (“SaaS”) offerings
moved to either the Security and Compliance segment or the Storage and Server Management segment
from the Services segment, based on the nature of the service delivered. There were no changes to
the Consumer or Other segments. The new reporting structure more directly aligns the operating
segments with our markets and customers, and we believe it will establish more direct lines of
reporting responsibilities, expedite decision making, and enhance the ability to pursue product
integration and strategic growth opportunities. Data shown from the prior periods has been
reclassified to match the current reporting structure. As of October 2, 2009, our five operating
segments are:
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Our reportable segments are the same as our operating segments. The accounting policies of the
segments are described in our Annual Report on Form 10-K for the fiscal year ended April 3, 2009
and have not changed as of October 2, 2009. There were no intersegment sales for the three and six
month periods ended October 2, 2009.
Segment information
The following table summarizes our operating segments:
Note 10. Stock-based Compensation
The following table sets forth the total stock-based compensation expense recognized in our
Condensed Consolidated Statements of Operations for the following periods:
As of October 2, 2009, total unrecognized compensation expense adjusted for estimated
forfeitures related to unvested stock options and Restricted Stock Units (“RSUs”), was $65 million
and $140 million, respectively, which is expected to be recognized over the remaining
weighted-average vesting periods of 2 years for stock options and 3 years for RSUs.
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The weighted-average fair value per stock option granted during the six months ended October
2, 2009 and October 3, 2008 was $5.15 and $5.30, respectively. The total intrinsic value of options
exercised during the six months ended October 2, 2009 and October 3, 2008, including assumed
options, was $30 million and $97 million, respectively.
The weighted-average fair value per RSUs granted during the six months ended October 2, 2009
and October 3, 2008 was $15.39 and $19.96, respectively. The fair value of RSUs granted for the six
months ended October 2, 2009 and October 3, 2008, was $150 million and $181 million, respectively.
The total fair value of RSUs that vested during the six months ended October 2, 2009 and October 3,
2008, including assumed RSUs, was $65 million and $49 million, respectively.
During the six months ended October 2, 2009, we granted 93,992 Restricted Stock Awards
(“RSAs”) to members of our board of directors. Each RSA had a fair value of $15.32 and vested
immediately upon grant. As a result, we recorded $1 million of stock-based compensation expense for
these RSAs during the six months ended October 2, 2009.
Note 11. Income Taxes
The effective tax rate was approximately 29% and 28% for the three months ended October 2,
2009 and October 3, 2008, respectively, and 31% and 30% for the six months ended October 2, 2009
and October 3, 2008, respectively. The effective tax rates for both periods reflect the benefits of
lower-taxed foreign earnings, domestic manufacturing tax incentives, and research and development
credits, offset by state income taxes and non-deductible stock-based compensation. We recognized a
$2 million tax benefit during the three months ended October 2, 2009 from favorable adjustments of
prior year items. As discussed further below, the tax expense for the six months ended October 2,
2009 also includes a $7 million tax expense recorded in the June 2009 quarter related to the U.S.
tax treatment of certain stock based compensation. During the three months ended October 3, 2008,
we recognized a $7 million tax benefit as a result of an agreement with the IRS on the treatment of
a 2005 dividend from a Veritas international subsidiary, and an additional $5 million tax benefit
from favorable prior year items, including the retroactive reinstatement of the U.S. federal
research and development credit. Further, the tax expense for the six months ended October 3, 2008
included a $5 million tax benefit related to a favorable Irish settlement that was recorded in the
June 2008 quarter. The effective tax rate for the three and six months ended October 2, 2009 is
otherwise lower than in the three and six months ended October 3, 2008 primarily due to higher
benefits from lower-taxed foreign earnings.
On May 27, 2009, the U.S. Court of Appeals for the Ninth Circuit overturned a 2005 U.S. Tax
Court ruling in Xilinx, Inc. v. Commissioner, holding that stock-based compensation related to
research and development (“R&D”) must be shared by the participants of a R&D cost sharing
arrangement. The Ninth Circuit held that related parties to such an arrangement must share stock
option costs, notwithstanding the U.S. Tax Court’s finding that unrelated parties in such an
arrangement would not share such costs. Symantec has a similar R&D cost sharing arrangement in
place. The Ninth Circuit’s reversal of the U.S. Tax Court’s decision changes our estimate of stock
option related tax benefits previously recognized under the authoritative guidance on income taxes.
As a result of the Ninth Circuit’s ruling, we increased our liability for unrecognized tax
benefits, recording a tax expense of approximately $7 million and a reduction of additional paid-in
capital of approximately $30 million in the six months ended October 2, 2009.
On March 29, 2006, we received a Notice of Deficiency from the IRS claiming that we owe $867
million of additional taxes, excluding interest and penalties, for the 2000 and 2001 tax years
based on an audit of Veritas. On June 26, 2006, we filed a petition with the U.S. Tax Court
protesting the IRS claim for such additional taxes. In the March 2007 quarter, we agreed to pay $7
million out of $35 million originally assessed by the IRS in connection with several of the lesser
issues covered in the assessment. The IRS agreed to waive the assessment of penalties. During July
2008, we completed the trial phase of the Tax Court case, which dealt with the remaining issue
covered in the assessment. At trial, the IRS changed its position with respect to this remaining
issue, which decreased the remaining amount at issue from $832 million to $545 million, excluding
interest. We filed our post-trial briefs in October 2008 and rebuttal briefs in November 2008 with
the U.S. Tax Court. There have been no further developments in this case as of October 2, 2009, as
we continue to await the decision of the U.S. Tax Court.
We continue to monitor the progress of ongoing tax controversies and the impact, if any, of
the expected tolling of the statue of limitations in various taxing jurisdictions. Considering
these facts, we do not currently believe that there is a reasonable possibility of any significant
change to our total unrecognized tax benefits within the next twelve months.
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Note 12. Earnings Per Share
The components of earnings per share are as follows:
We excluded 56 million and 47 million weighted-average stock options for the three months
ended October 2, 2009 and October 3, 2008, respectively, and 56 million and 49 million
weighted-average stock options for the six months ended October 2, 2009 and October 3, 2008,
respectively, because their effect would have been anti-dilutive. The effect of the warrants issued
and options purchased in connection with the convertible senior notes were also excluded for the
reasons discussed in Note 8 of Notes to Consolidated Financial Statements in our Annual Report on
Form 10-K for the fiscal year ended April 3, 2009.
Note 13. Subsequent Event
On October 28, 2009, we announced that our Board of Directors approved a $1 billion share
repurchase program. The repurchase program does not have a scheduled expiration date.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 3, 2009. We encourage
you to read that section carefully.
Fiscal Year End
We have a 52/53-week fiscal accounting year ending on the Friday closest to March 31. The
three months ended October 2, 2009 and October 3, 2008 both consisted of 13 weeks. The six months
ended October 2, 2009 consisted of 26 weeks, whereas the six months ended October 3, 2008 consisted
of 27 weeks. Our 2010 fiscal year consists of 52 weeks and ends on April 2, 2010.
OVERVIEW
Our Business
Symantec is a global leader in providing security, storage and systems management solutions to
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 March 2008 quarter, we have operated in
five operating segments: Consumer, Security and Compliance, Storage and Server Management,
Services, and Other. During the first quarter of fiscal 2010, we changed our reporting segments to
better align to our operating structure, resulting in the Enterprise Vault products that were
formerly included in the Security and Compliance segment being moved to the Storage and Server
Management segment. Also, Software as a Service (“SaaS”) offerings moved to either the Security
and Compliance segment or the Storage and Server Management segment from the Services segment,
based on the nature of the service delivered. Fiscal year 2009 Enterprise Vault revenue of $197
million and fiscal year 2009 SaaS revenue of $51 million was moved. The predominant amount of SaaS
revenue went to the Security and Compliance segment. We revised the segment information for the
prior year to conform to the new presentation. For further descriptions of our operating segments,
see Note 9 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 decreased for the three and six months ended October 2, 2009 as compared to the same
periods last year. Revenue increased in our Consumer segment and declined in our other segments for
the periods presented. The challenging economic environment meant that corporate IT budgets have
been reduced and consumer spending has slowed from previous levels. Geographically, the Asia
Pacific/Japan region was up 5%, while EMEA declined 5% and the Americas declined 4% for the three
months ended October 2, 2009, in each case as compared to the prior year period. Smaller IT
budgets have led some of our corporate customers to purchase smaller volumes of our products,
particularly in the Storage and Server Management segment. If the economic conditions affecting
global markets continue or IT spending remains tight, we may continue to experience slower or
negative revenue growth and our business and operating results might suffer. In light of these
economic conditions, we will continue to align our cost structure with our revenue expectations.
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Fluctuations in the U.S. dollar compared to foreign currencies negatively impacted our
international revenue by approximately $14 million and $89 million during the three and six months
ended October 2, 2009 respectively, as compared to the same period last year. We are unable to
predict the extent to which revenues in future periods will be impacted by changes in foreign
currency exchange rates. If our level of international sales and expenses increase in the future,
changes in foreign exchange rates may have a potentially greater impact on our revenues and
operating results.
As discussed above under “Fiscal Year End,” the six months ended October 3, 2008 consisted of
27 weeks, whereas the six months ended October 2, 2009 consisted of 26 weeks. The extra
14th week contributed additional revenue to the July 4, 2008 quarter when compared to
the July 3, 2009 quarter.
Our net income was $150 million for the three months ended October 2, 2009 as compared to our
net income of $126 million for the three months ended October 3, 2008. The higher net income for
the second quarter of fiscal 2010 as compared to the same period last year was primarily due to our
ongoing cost and expense discipline which more than offset our revenue decline.
Critical Accounting Estimates
There have been no changes in the matters for which we make critical accounting estimates in
the preparation of our consolidated financial statements during the six months ended October 2,
2009 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 3, 2009. While there have been no such changes, we have revised our description of the
critical accounting estimates made in the valuation of goodwill, intangible assets and long-lived
assets, as provided below.
Valuation of goodwill, intangible assets and long-lived assets
When we acquire businesses, we allocate the purchase price to tangible assets and liabilities
and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill.
The allocation of the purchase price requires management to make significant estimates in
determining the fair values of assets acquired and liabilities assumed, especially with respect to
intangible assets. These estimates are based on historical experience and information obtained from
the management of the acquired companies. These estimates can include, but are not limited to, the
cash flows that an asset is expected to generate in the future, the appropriate weighted-average
cost of capital, and the cost savings expected to be derived from acquiring an asset. These
estimates are inherently uncertain and unpredictable, and if different estimates were used the
purchase price for the acquisition could be allocated to the acquired assets differently from the
allocation that we have made. In addition, unanticipated events and circumstances may occur which
may affect the accuracy or validity of such estimates, and if such events occur we may be required
to record a charge against the value ascribed to an acquired asset.
Goodwill. We review goodwill for impairment on an annual basis on the first day of the
fourth quarter of each fiscal year, and on an interim basis whenever events or changes in
circumstances indicate that the carrying value may not be recoverable in accordance with our
accounting policy. Before performing the goodwill impairment test, we first assess the value of
long-lived assets in each reporting unit, including tangible and intangible assets. We then perform
a two-step impairment test on goodwill. In the first step, we compare the estimated fair value of
each reporting unit to its allocated carrying value (book value). If the carrying value of the
reporting unit exceeds the fair value of the equity assigned to that unit, there is an indicator of
impairment and we must perform the second step of the impairment test. This second step involves
determining the implied fair value of that reporting unit’s goodwill in a manner similar to the
purchase price allocation for an acquired business. If the carrying value of the reporting unit’s
goodwill exceeds its implied fair value, then we would record an impairment loss equal to the
excess. Our reporting units are consistent with our operating segments.
The process of estimating the fair value of our reporting units requires significant judgment
at many points during the analysis. Many assets and liabilities, such as accounts receivable and
property and equipment, are not specifically allocated to an individual reporting unit. In
determining the carrying value of the reporting units, we apply judgment to allocate the assets and
liabilities, and this allocation affects the carrying value of the respective reporting units.
Similarly, we use judgment to allocate goodwill to the reporting units based on relative fair
values. The use of relative fair values has been necessary for certain reporting units due to
changes in our operating structure in prior years.
To determine a reporting unit’s fair value, we use the income approach under which we
calculate the fair value of each reporting unit based on the estimated discounted future cash flows
of that unit. We evaluate the reasonableness of this approach with the market approach, which
involves a review of the carrying value of our assets relative to our market capitalization and to
the valuation of publicly traded companies operating in the same or similar lines of business.
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Applying the income approach requires that we make a number of important estimates and
assumptions. We estimate the future cash flows of each reporting unit based on historical and
forecasted revenues and operating costs. This, in turn, involves further estimates, such as
estimates of future growth rates and foreign exchange rates. In addition, we apply a discount rate
to the estimated future cash flows for the purpose of the valuation. This discount rate is based
on the estimated weighted-average cost of capital for each reporting unit and may change from year
to year. For example, in our valuation process in the fourth quarter of fiscal 2009 we used a
higher discount rate than in the prior year due to increased risk associated with the declining
global economic conditions. Changes in these key estimates and assumptions, or in other
assumptions used in this process, could materially affect our impairment analysis for a given year.
As of April 3, 2009, the last day of fiscal 2009, our goodwill balance was $4.6 billion.
Based on the impairment analysis performed on January 3, 2009, we determined that the fair value of
each of our reporting units exceeded the carrying value of the unit by not less than 20% of the
carrying value. While discount rates are only one of several important estimates used in the
analysis, we determined that an increase of one percentage point in the discount rate used for each
respective reporting unit would not have resulted in an impairment indicator for any unit in the
current quarter.
A number of factors, many of which we have no ability to control, could affect our financial
condition, operating results and business prospects and could cause actual results to differ from
the estimates and assumptions we employed. These factors include:
Intangible Assets. We assess the impairment of identifiable intangible assets whenever events
or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. In
addition, for intangible assets with indefinite lives, we review such assets for impairment on an
annual basis consistent with the timing of the annual evaluation for goodwill. An impairment loss
would be recognized when the sum of the undiscounted estimated future cash flows expected to result
from the use of the asset and its eventual disposition is less than its carrying amount. Such
impairment loss would be measured as the difference between the carrying amount of the asset and
its fair value. Our cash flow assumptions are based on historical and forecasted revenue, operating
costs, and other relevant factors. If management’s estimates of future operating results change, or
if there are changes to other assumptions, the estimate of the fair value of our acquired product
rights and other identifiable intangible assets could change significantly. Such change could
result in impairment charges in future periods, which could have a significant impact on our
operating results and financial condition.
We record impairment charges on developed technology or acquired product rights when we
determine that the net realizable value of the assets may not be recoverable. To determine the net
realizable value of the assets, we use the estimated future gross revenues from each product. Our
estimated future gross revenues of each product are based on company forecasts and are subject to
change.
Long-Lived Assets (including Assets Held for Sale). We record impairment charges on
long-lived assets to be held and used when we determine that the carrying value of the long-lived
assets may not be recoverable. Based upon the existence of one or more indicators of impairment, we
measure any impairment of long-lived assets based on a projected undiscounted cash flow method
using assumptions determined by our management to be commensurate with the risk inherent in our
current business model. Our estimates of cash flows require significant judgment based on our
historical results and anticipated results and are subject to many triggering factors which could
change and cause a material impact to our operating results or financial condition. We record
impairment charges on long-lived assets to be held for sale when we determine that the carrying
value of the long-lived assets may not be recoverable. In determining our fair value, we obtain
market value appraisal information from third-parties.
Recently Issued Accounting Pronouncements
Information with respect to Recently Issued Authoritative Guidance is in Note 1 of Notes to
Condensed Consolidated Financial Statements in this Form 10-Q, which information is incorporated
herein by reference.
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RESULTS OF OPERATIONS
Total Net Revenues
Net revenues decreased for the three months ended October 2, 2009, as compared to the same
period last year, due to a $117 million decrease in Licenses revenues partially offset by a $73
million increase in Content, subscriptions, and maintenance revenues. The net decrease was
primarily driven by the items discussed above under “Financial Results and Trends.”
Net revenues decreased for the six months ended October 2, 2009, as compared to the same
period last year, due to a $253 million decrease in Licenses revenues coupled with a $9 million
decrease in Content, subscriptions, and maintenance revenues. The net decrease was primarily driven
by the items discussed above under “Financial Results and Trends.”
The revenue decreases for the three and six months ended October 2, 2009 discussed above are
further described in the segment discussions that follow.
Content, subscriptions, and maintenance revenues
Content, subscriptions, and maintenance revenues increased for the three months ended October
2, 2009 as compared to the same period last year as a result of revenue from recent acquisitions
and the strength of our Consumer segment, partially offset by the reasons discussed above under
“Financial Results and Trends.”
Content, subscriptions, and maintenance revenues remained relatively flat for the six months
ended October 2, 2009 as compared to the same period last year.
Licenses revenues
Licenses revenues decreased for the three and six months ended October 2, 2009 as compared to
the same periods last year, primarily due to the global economic slowdown and customers emphasizing
purchases of smaller volumes of new licenses consistent with their near term needs during the
periods presented as well as for the reasons discussed above under “Financial Results and Trends.”
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Net revenue and operating income by segment
Consumer segment
Consumer revenues increased for the three months ended October 2, 2009 as compared to the same
period last year primarily due to increases in revenue from our core consumer products in the
electronic channel and from acquired security products. These increases were partially offset by
the factors discussed above under “Financial Results and Trends.”
Consumer revenues were relatively consistent for the six months ended October 2, 2009 as
compared to the same period last year since increases in revenue from our core consumer products in
the electronic channel and from acquired security products were fully
offset by the factors discussed above under “Financial Results and Trends.”
Our electronic channel sales are derived from OEMs, subscriptions, upgrades, online sales, and
renewals. For the three and six months ended October 2, 2009, electronic channel revenue increased
as compared to the same periods last year. Electronic sales constituted 81% and 80%, respectively,
of Consumer revenues for the three and six months ended October 2, 2009 as compared to 79% and 78%
for the same periods last year.
Operating income for the Consumer segment decreased for the three and six months ended October
2, 2009 as compared to the same period last year, as expense growth outpaced revenue growth. Total
expenses for the segment increased primarily as a result of the PC Tools acquisition and costs
associated with our development of our new proprietary eCommerce platform, offset in part by the
effects discussed above under “Financial Results and Trends.”
Security and Compliance segment
Security and Compliance revenues decreased for the three and six months ended October 2, 2009
as compared to the same periods last year for the reasons discussed above under “Financial Results
and Trends.” This decrease was partially offset by increased revenues from our acquisition of
MessageLabs during fiscal 2009.
Operating income for the Security and Compliance segment decreased for the three and six
months ended October 2, 2009 as compared to the same periods last year, as the revenue decrease
more than offset the expense decrease. Total expenses decreased for the reasons discussed above
under “Financial Results and Trends.”
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Storage and Server Management segment
Storage and Server Management revenues decreased for the three and six months ended October 2,
2009 as compared to the same periods last year for the reasons discussed above under “Financial
Results and Trends.” In addition, for each of the fiscal 2010 periods presented, some of our
customers bought smaller volumes of licenses appropriate to their immediate needs, particularly
with respect to our storage management products.
Operating income for the Storage and Server Management segment increased for the three and six
months ended October 2, 2009 as compared to the same period last year, as the decrease in expenses
more than offset the revenue decrease. Total expenses decreased for the reasons discussed above
under “Financial Results and Trends.”
Services segment
Services revenues were relatively consistent for the three months ended October 2, 2009 as
compared to the same period last year. Service revenues decreased for the six months ended October
2, 2009 as compared to the same period last year primarily due to a reduction in consulting
revenues associated with new license sales during the first two quarters of our fiscal 2010, in
addition to the reasons discussed above under “Financial Results and Trends.”
Operating income for the Services segment increased for the three and six months ended October
2, 2009 as compared to the same period last year, as the decrease in expenses more than offset the
revenue decrease. The decrease in Services expenses was the result of financial and operational
efficiencies aimed at driving profitability.
Other segment
Revenue from our Other segment is comprised primarily of sunset products and products nearing
the end of their life cycle. The operating loss of our Other segment also includes general and
administrative expenses; amortization of acquired product rights, other 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.
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Net revenues by geographic region
Revenues for three months ended October 2, 2009 as compared to the same period last year were
up 5% for the Asia Pacific/Japan region, while EMEA declined 5% and the Americas declined 4%
whereas revenue declined in all regions during the six months ended October 2, 2009 as compared to
the same period last year. The reasons for the changes during the periods above are discussed
under “Financial Results and Trends.”
Our international sales are and will continue to be a significant portion of our net revenues.
As a result, net revenues 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 revenues 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 revenues and operating results.
Cost of Revenues
Cost of revenues consists primarily of the amortization of acquired product rights, fee-based
technical support costs, the costs of billable services, payments to OEMs under revenue-sharing
arrangements, manufacturing and direct material costs, and royalties paid to third parties under
technology licensing agreements.
Cost of revenues decreased for the three and six months ended October 2, 2009 compared to the
same periods last year primarily due to a decrease in amortization of acquired product rights
related to our acquisition of Veritas.
Cost of content, subscriptions, and maintenance
Cost of content, subscriptions, 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, subscriptions, and maintenance as a percentage of related revenue remained
relatively consistent for the three and six months ended October 2, 2009 as compared to the same
periods last year. Decreases in services and distribution costs were partially offset by increases
in royalty and technical support costs.
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Cost of licenses
Cost of licenses consists primarily of royalties paid to third parties under technology
licensing agreements and manufacturing and direct material costs. Cost of licenses remained
relatively consistent as a percentage of the related revenue for the three and six months ended
October 2, 2009 as compared to the same periods last year.
Amortization of acquired product rights
Acquired product rights are comprised of developed technologies and patents from acquired
companies. The decrease in amortization for the three and six months ended October 2, 2009 as
compared to the same periods last year is primarily due to certain acquired product rights from our
acquisition of Veritas becoming fully amortized during the first quarter of our fiscal 2010. This
decrease was partially offset for the six months ended October 2, 2009 due to additional
amortization from newly acquired product rights that were acquired after the six months ended
October 3, 2008.
Operating Expenses
Operating expenses overview
As discussed above under “Financial Results and Trends,” our operating expenses for the six
months ended October 2, 2009 included 26 weeks of activity as compared to 27 weeks for the same
period last year, which had a favorable impact on our operating expenses for the six month year
over year periods. Our operating expenses during the three and six months ended October 2, 2009
were also favorably impacted by a stronger U.S. dollar as compared to the same periods last year
and by the 2009 restructuring plan discussed below. In addition, our ongoing cost and expense
discipline positively contributed to our operating margins for the three and six months ended
October 2, 2009.
Sales and marketing expenses
As a percentage of net revenues, sales and marketing expenses remained relatively consistent
for the three and six months ended October 2, 2009 as compared to the same periods last year,
largely a result of the items discussed above under “Operating expenses overview.”
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Research and development expenses
As a percentage of net revenues, research and development expenses remained relatively
consistent for the three and six months ended October 2, 2009 as compared to the same periods last
year, largely a result of the items discussed above under “Operating expenses overview.”
General and administrative expenses
As a percentage of net revenues, general and administrative expenses remained relatively
consistent for the three and six months ended October 2, 2009 as compared to the same periods last
year, largely a result of the items discussed above under “Operating expenses overview.”
Amortization of other purchased intangible assets
Other purchased intangible assets are comprised of customer bases and tradenames.
Amortization for the three and six months ended October 2, 2009 compared to the same periods last
year increased as a result of our fiscal 2009 acquisitions. As a percentage of net revenues,
amortization of other purchased intangible assets remained relatively consistent.
Restructuring
In connection with the restructuring plans, which we refer to as our 2009 Plan and our 2008
Plan, as described in Note 6 of the Notes to Condensed Consolidated Financial Statements,
restructuring charges were $25 million and $59 million for the three and six months ended October
2, 2009 compared to $9 million and $26 million for the three and six months ended October 3, 2008,
respectively. The restructuring charges for the three months ended October 2, 2009 primarily
consisted of severance charges of $9 million related to the 2008 Plan and business structure
changes and transition and transformation costs of $11 million related to the outsourcing of back
office functions. The restructuring charges for the three months ended October 3, 2008 primarily
consisted of severance charges of $5 million related to the 2008 Plan and $5 million in other costs related
to the 2008 Plan mainly consisting of legal fees which were expensed as incurred.
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Total remaining costs for the 2008 Plan are estimated to range from $15 to $40 million. Total
remaining costs for the transition and transformation activities associated with outsourcing back
office functions are estimated to be approximately $25 million. Total remaining costs for the 2009
Plan are not expected to be material.
Impairment of assets held for sale
During the three months ended October 3, 2008, we recognized an impairment of $26 million on
certain land and buildings classified as held for sale. The impairment was recorded in accordance
with 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.
Non-operating Income and Expense
The decrease in interest income during the three and six months ended October 2, 2009 as
compared to the same periods last year is primarily due to a lower average yield on our invested
cash and short-term investment balances.
Interest expense for the three and six months ended October 2, 2009 as compared to the same
periods last year remained relatively consistent.
Provision for income taxes
The effective tax rate was approximately 29% and 28% for the three month periods and 31% and
30% for the six months ended October 2, 2009 and October 3, 2008, respectively. The effective tax
rates for both periods reflect the benefits of lower-taxed foreign earnings, domestic manufacturing
tax incentives, and research and development credits, offset by state income taxes and
non-deductible stock-based compensation. We recognized a $2 million tax benefit in the September
2009 quarter from favorable adjustments of prior year items. As discussed further below, the tax
expense for the six months ended October 2, 2009 also includes a $7 million tax expense recorded in
the June 2009 quarter related to the U.S. tax treatment of certain stock based compensation. In the
September 2008 quarter, we recognized a $7 million tax benefit as a result of an agreement with the
IRS on the treatment of a 2005 dividend from a Veritas international subsidiary, and an additional
$5 million tax benefit from favorable prior year items, including the retroactive reinstatement of
the U.S. federal research and development credit. Further, the tax expense for the six months
ended October 3, 2008 included a $5 million tax benefit related to a favorable Irish settlement
that was recorded in the June 2008 quarter. The effective tax rate for the three and six months
ended October 2, 2009 is otherwise lower than in the three and six months ended October 3, 2008
primarily due to higher benefits from lower-taxed foreign earnings. The increase in the tax
expense for the three months ended October 2, 2009 is primarily attributable to higher pre-tax
earnings.
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On May 27, 2009, the U.S. Court of Appeals for the Ninth Circuit overturned a 2005 U.S. Tax
Court ruling in Xilinx, Inc. v. Commissioner, holding that stock-based compensation related to
research and development (“R&D”) must be shared by the participants of a R&D cost sharing
arrangement. The Ninth Circuit held that related parties to such an arrangement must share stock
option costs, notwithstanding the U.S. Tax Court’s finding that unrelated parties in such an
arrangement would not share such costs. Symantec has a similar R&D cost sharing arrangement in
place. The Ninth Circuit’s reversal of the U.S. Tax Court’s decision changes our estimate of stock
option related tax benefits previously recognized under the authoritative guidance on income taxes.
As a result of the Ninth Circuit’s ruling, we increased our liability for unrecognized tax
benefits, recording a tax expense of approximately $7 million and a reduction of additional paid-in
capital of approximately $30 million in the six months ended October 2, 2009.
On March 29, 2006, we received a Notice of Deficiency from the IRS claiming that we owe $867
million of additional taxes, excluding interest and penalties, for the 2000 and 2001 tax years
based on an audit of Veritas. On June 26, 2006, we filed a petition with the U.S. Tax Court
protesting the IRS claim for such additional taxes. In the March 2007 quarter, we agreed to pay $7
million out of $35 million originally assessed by the IRS in connection with several of the lesser
issues covered in the assessment. The IRS agreed to waive the assessment of penalties. During July
2008, we completed the trial phase of the Tax Court case, which dealt with the remaining issue
covered in the assessment. At trial, the IRS changed its position with respect to this remaining
issue, which decreased the remaining amount at issue from $832 million to $545 million, excluding
interest. We filed our post-trial briefs in October 2008 and rebuttal briefs in November 2008 with
the U.S. Tax Court. There have been no further developments in this case as of October 2, 2009, as
we continue to await the decision of the U.S. Tax Court.
We continue to monitor the progress of ongoing tax controversies and the impact, if any, of
the expected tolling of the statute of limitations in various taxing jurisdictions. Considering
these facts, we do not currently believe that there is a reasonable possibility of any significant
change to our total unrecognized tax benefits within the next twelve months.
Loss from joint venture
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 to global telecommunications carriers and enterprise
customers.
For the three and six months ended October 2, 2009, we recorded a loss of approximately $12
million and $25 million related to our share of the joint venture’s net loss incurred for the
period from April 1, 2009 to June 30, 2009, and the period from January 1, 2009 to June 30, 2009,
respectively. For the three and six months ended October 3, 2008, we recorded a loss of
approximately $11 million and $17 million related to our share of the joint venture’s net loss for
the period from April 1, 2008 to June 30, 2008, and February 5, 2008 to June 30, 2008,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash
We have historically relied on cash flow from operations, borrowings under a credit facility,
issuances of convertible notes and equity securities for our liquidity needs. Key sources of cash
include earnings from operations and existing cash, cash equivalents, and our revolving credit
facility.
In fiscal 2007, we entered into a five-year $1 billion senior unsecured revolving credit
facility that expires in July 2011. In order to be able to draw on the credit facility, we must
maintain certain covenants, including a specified ratio of debt to earnings (before interest,
taxes, depreciation, and amortization and impairments) as well as various other non-financial
covenants. As of October 2, 2009, we were in compliance with all required covenants, and there was
no outstanding balance on the credit facility.
As of October 2, 2009, we had cash and cash equivalents of $2.3 billion and short-term
investments of $18 million resulting in a net liquidity position, which is defined as unused
availability of the credit facility, cash and cash equivalents and short-term investments, of
approximately $3.3 billion.
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We believe that our existing cash balances, cash that we generate over time from operations
and our borrowing capacity will be sufficient to satisfy our anticipated cash needs for working
capital and capital expenditures 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. In addition, we regularly evaluate our
ability to repurchase stock, pay debts and acquire other businesses.
Line of Credit. There were no borrowings under our credit facility in the six months ended
October 2, 2009. In the six months ended October 3, 2008, we repaid the entire $200 million
principal amount, plus $3 million of accrued interest, that we borrowed during fiscal 2008 under
the credit facility.
Acquisition-Related. We did not acquire any businesses in the six months ended October 2,
2009. During the six months ended October 3, 2008, we acquired AppStream, SwapDrive and nSuite for
an aggregate payment of $187 million, net of cash acquired.
Convertible Senior Notes. In June 2006, we issued $1.1 billion principal amount of 0.75%
Convertible Senior Notes due June 15, 2011, and $1.0 billion principal amount of 1.00% Convertible
Senior Notes (collectively the “Senior Notes”) due June 15, 2013, to initial purchasers in a
private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A. During
fiscal years 2010 and 2009, we have not repaid any of this debt other than the related interest
costs.
Stock Repurchases. In the six months ended October 2, 2009, we repurchased 16 million shares,
or $243 million, of our common stock. In the six months ended October 3, 2008, we repurchased 19
million shares, or $400 million, of our common stock. As of October 2, 2009 we had $57 million
remaining under the plan authorized for future repurchases. In addition, subsequent to October 2,
2009 the Board of Directors approved an additional $1 billion for the repurchase of our common
stock.
Cash Flows
The following table summarizes, for the periods indicated, selected items in our Condensed
Consolidated Statements of Cash Flows:
Operating Activities
Net cash provided by operating activities was $597 million in the first six months of fiscal
2010, which resulted from net income of $223 million adjusted for non-cash items, including
depreciation and amortization charges of $446 million and stock-based compensation expense of $85
million, as well as from increased collections of trade accounts receivable of $171 million. These
amounts were partially offset by decreases in deferred revenue of $259 million and accrued
compensation and benefits of $79 million.
Net cash provided by operating activities was $661 million in the first six months of fiscal
2009, which resulted from net income of $298 million adjusted for non-cash items, including
depreciation and amortization charges of $458 million and stock-based compensation expense of $89
million, as well as from increased collection of trade accounts receivable of $100 million and net
receipt of litigation settlements of $58.5 million which are included in the change in other assets
and other liabilities. These amounts were partially offset by a decrease in accrued compensation
and benefits of $82 million due to the payment of commissions and a decrease in deferred revenue of
$229 million as deferred revenue amortization seasonally outpaced new deferrals.
Investing Activities
Net cash provided by investing activities of $69 million in the first six months of fiscal
2010 was due to net proceeds from the sale of available-for-sale securities of $187 million,
partially offset by $108 million paid for capital expenditures and $16 million paid for an equity
investment.
Net cash provided by investing activities of $223 million in the first six months of fiscal
2009 was due to net proceeds from the sale of available-for-sale securities of $495 million in
preparation for the acquisitions of MessageLabs and PC Tools which were completed in the third
quarter of fiscal 2009. These amounts were partially offset by $187 million paid for acquisitions
and $125 million paid for capital expenditures.
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Financing Activities
Net cash used in financing activities of $205 million in the first six months of fiscal 2010
was due to repurchases of common stock of $243 million, partially offset by net proceeds from sales
of common stock through employee stock plans of $54 million.
Net cash used in financing activities of $417 million in the first six months of fiscal 2009
was due to repurchases of common stock of $400 million and the repayment of short-term borrowing of
$200 million. These amounts were partially offset by net proceeds from sales of common stock
through employee stock plans of $186 million.
Contractual Obligations
There have been no significant changes in our contractual
obligations as of October 2, 2009, as compared 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 3, 2009.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes in our market risk exposures during the six months
ended October 2, 2009, as compared to the market risk exposures disclosed in
Part II,
Item 7A, of our Annual Report on Form 10-K for the fiscal year ended April 3, 2009.
Item 4. Controls and Procedures
(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 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 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 October 2, 2009 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to this Item may be found in Note 7 of Notes to Condensed
Consolidated Financial Statements in this Form 10-Q, which information is incorporated into this
Part II, Item 1 by reference.
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Item 1A. Risk Factors
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 3, 2009. There have been no material changes in our risks from such description.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Stock repurchases during the three months ended October 2, 2009 were as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
For information with regard to our stock repurchase programs, including programs in effect
during the period covered by this report, see Note 8 of Notes to Condensed Consolidated Financial
Statements, which information is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Stockholders on September 23, 2009. At the meeting, our
stockholders voted on the three proposals described below. All ten of our board nominees were
elected under Proposal 1, and Proposals 2 and 3 were also approved. Our stockholders casted their
votes as follows:
Proposal 1: To elect ten directors to our Board of Directors, each to hold office until the
next annual meeting of stockholders and until his or her successor is elected and qualified or
until his or her earlier resignation or removal:
Proposal 2: To ratify the selection of KPMG LLP as Symantec’s independent registered public
accounting firm for the 2010 fiscal year:
Proposal 3: A stockholder proposal regarding the right to call special stockholder meetings:
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Item 6. Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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