The results of Veritas are presented as discontinued operations in our Consolidated Statements of Operations and thus have been excludedIncome from continuing operations and segment results for all reported periods. Furthermore, Veritas' assetsdiluted income per share from continuing operations increased primarily as a result of the $653 million gain on the divestiture of our WSS and liabilitiesPKI solutions and a net tax benefit of $690 million primarily as a result of the Tax Cuts and Jobs Act (H.R.1) (the “Act”). Partially offsetting the increase in the diluted income per share from continuing operations was a higher diluted share count due to including the dilutive effect of potentially issuable common shares under our equity award programs and convertible debt. Such potentially issuable common shares were removedexcluded from our Consolidated Balance Sheet upon consummation of its sale on January 29, 2016, andnet loss per share computation in fiscal 2017 as they would have been classifiedanti-dilutive.
Cash, cash equivalents and short-term investments decreased primarily as discontinued operations on our Consolidated Balance Sheet as of April 3, 2015. Accordingly, the following discussion reflects our current segment reporting structure, which was reduced from three to two segments, and segment results for all reported periods have been adjusted to conform to the current segment structure. In addition, the following discussion relates to our continuing operations unless stated otherwise.
Our operating segments
Our operating segments are significant strategic business units that offer different products and services distinguished by customer needs. The two reporting segments, which are the same as our operating segments, are:
Consumer Security: Our Consumer Security segment focuses on making it simple for customers to be productive and protected at home and at work. Our Norton-branded services provide multi-layer security and identity protection on major desktop and mobile operating systems, to defend against increasingly complex online threats to individuals, families, and small businesses.
Enterprise Security: Our Enterprise Security segment protects organizations so they can securely conduct business while leveraging new platforms and data. Our Enterprise Security segment includes our threat protection products, information protection products, cyber security services, and website security offerings, previously named trust services.
For further descriptiona result of our $3.2 billion of debt repayments as part of our plan to deleverage our balance sheet and $401 million paid for acquisitions, partially offset by $933 million in net cash proceeds from the divestiture of our WSS and PKI solutions and cash flow from continuing operating segments see Note 8activities of the Notes to Consolidated Financial Statements in this annual report.$957 million.
Financial results and trends
The following table provides an overview of key financial metrics for each of the last three fiscal years: |
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In millions, except percentages) |
| Consolidated Statements of Operations Data: | | | | | |
| Net revenues | $ | 3,600 |
| | $ | 3,956 |
| | $ | 4,183 |
|
| Gross profit | 2,985 |
| | 3,229 |
| | 3,392 |
|
| Operating income | 457 |
| | 154 |
| | 144 |
|
| Operating margin percentage | 13 | % | | 4 | % | | 3 | % |
| Consolidated Cash Flow Data: | | | | | |
| Net cash provided by continuing operating activities | $ | 1,456 |
| | $ | 17 |
| | $ | 108 |
|
Net revenues decreased $356 million for fiscal 2016 as compared to fiscal 2015,Cash flow from continuing operating activities increased primarily due to unfavorable foreign currency fluctuations, declines in our consumer security revenue, andaone-time tax payment of $887 million related to the impact of the additional weekgain on sale from the 53-week fiscal 2015 year.
Gross margin increased to 83% for fiscal 2016 compared to 82% for fiscal 2015, primarily driven by decreases in OEM royalty fees and service related and content delivery expenses.
Operating income increased $303 million year over year as the reduction in our operating expenses was greater than the decline in our net revenues. The lower operating expenses were primarily due to a decrease in corporate charges previously allocated todivestiture of our information management business but not classified within discontinued operations. These corporate charges were included in cost of revenues and expenses from continuing operations and include legal, accounting, real estate, information technology services, treasury, human resources and other corporate infrastructure expenses ("unallocated corporate charges"(“Veritas”). See Note 8 of the Notes to Consolidated Financial Statements in this annual report for more information on unallocated corporate charges. We anticipate that we will not have unallocated corporate charges in fiscal 2017 and therefore our fiscal 2017 operating income will benefit from a reduction of unallocated corporate charges as compared to fiscal 2016. We expect our operating margins to fluctuatean increase in future periods as a result of a number of factors, including our operating results and the timing and amount of expenses incurred.deferred revenue.
Net cash provided by operating activities was $1.5 billion for fiscal 2016Deferred revenue increased $316 million, primarily due to increasesour shift in deferred income taxessales contracts to a higher mix of $1.1 billionsolutions subject to ratable versus point in time revenue recognition and income taxes payablelonger contract duration in our Enterprise Security segment, which resulted in lessin-period revenue recognized, and due to higher billings towards the end of $693 million.the fiscal year, reflecting seasonal sales cycles in that segment. These amountsfactors were partially offset by a loss from continuing operations, netdecrease of income taxes of $821$319 million including non-cash items depreciation and amortization charges of $304 million and stock-based compensation expense of $161 million.
Totalin deferred revenue decreased from $2.9 billion in fiscal 2015 to $2.6 billion in fiscal 2016 primarily driven byas a decline in salesresult of the divestiture of our WSS and the amortization of retained contracts associated with Veritas.PKI solutions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our Consolidated Financial Statements and related notes included in this annual report in accordance with generally accepted accounting principles in the U.S. (“GAAP”) requires us to make estimates, including judgments and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates on a regular basis and make changes accordingly. Historically, our criticalManagement believes that the accounting policiesestimates employed and estimates have not differed materially from actual results;the resulting amounts are reasonable; however, actual results may differ from these estimates. Making estimates under different conditions. If actual results differ fromand judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and other considerations used in estimating amounts reflected in our Consolidated Financial Statements included in this annual report, the resulting changesassumptions change or prove to have been incorrect, it could have a material adverse effect on our Consolidated Statements of Operations, and in certain situations, could have a material adverse effect on our liquidity and financial condition.
We believe that the estimates described below represent our critical accounting policies and estimates, as they have the greatest potential impact on our
Consolidated Financial Statements. See alsoresults of operations, financial position and cash flows.A summary of our significant accounting policies is included in Note 1 of the Notes to Consolidated Financial Statements included in this annual report.
Annual Report on Form10-K. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. Management believes the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of our Consolidated Financial Statements.Revenue recognition
We recognize revenue primarily pursuant to the requirements under the authoritative guidance on software revenue recognition, and any applicable amendments or modifications. Revenue recognition requirements in the software industry are very complex and require us to make estimates.estimates and assumptions.
For softwareWe enter into arrangements that can include multiplevarious combinations of software andnon-software elements. Where elements including perpetual software licensesare delivered over different periods of time, and maintenance or services, packaged products with content updates, and subscriptions, we allocate and deferwhen allowed under GAAP, revenue foris allocated to the undelivered itemsrespective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized as each element is delivered. We use a hierarchy to determine the fair value using vendor specificto be used for allocating revenue tonon-software elements: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence, and recognize(iii) estimated selling price (“ESP”). For software elements, we follow the difference between the total arrangement fee and the amount deferredindustry-specific software guidance which only allows for the undelivered items as revenue.use of VSOE in establishing fair value. VSOE of each element is based on the price for which the undelivered element is sold separately.separately by us. We determine fair value of the undelivered elements based on historical evidence of our stand-alone sales of these elements to third parties or from the stated renewal rate for the undelivered elements. When VSOE does not exist for serial undelivered items, the entire arrangement fee is recognized ratably over the performance period. When VSOE does not exist for a discrete undelivered item, consideration for the entire arrangement is deferred until that item is delivered. Our deferred revenue consists primarily of the unamortized balance of enterprise product maintenance, consumer product content updates, managed security services, subscriptions, and arrangements where VSOE does not exist. Changes to the elements in a software arrangement, the ability to identify VSOE for those elements, the fair value of the respective elements, and increasing flexibility in contractual arrangements could materially impact the amount recognized in the current period and deferred over time. ESPs fornon-software elements are established as best estimates of what the selling prices would be if the deliverables were sold regularly on a stand-alone basis. Our process for determining ESPs requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable.
Valuation of goodwill, intangible assets and long-lived assets
Business combinations. We allocate the purchase price of acquired businesses to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. Any residual purchase price is recorded as goodwill. Goodwill is allocated to reporting units expected to benefit from the business combination. The allocation of purchase price requires management to make significant estimates and assumptions in determining the fair values of the assets acquired and liabilities assumed especially with respect to intangible assets.
Critical estimates in valuing intangible assets include, but are not limited to, future expected cash flows from customer relationships, developed technology, trade names and acquired patents; and discount rates. Management estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
Income taxes
We are subject to tax in multiple U.S. and foreign tax jurisdictions. We are required to estimate the current tax exposure as well as assess the temporary differences between the accounting and tax treatment of assets and liabilities, including items such as accruals and allowances not currently deductible for tax purposes. We apply judgment in the recognition and measurement of current and deferred income taxes which includes the following critical accounting estimates.
We use atwo-step process to recognize liabilities for uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If we determine that the tax position will more likely than not be sustained on audit, the second step requires us to estimate and measure the tax benefit as the largest
amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various outcomes. Were-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.
As of March 30, 2018, we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and theone-time transition tax. These amounts may require further adjustments as a result of additional future guidance from the U.S. Department of the Treasury, changes in our assumptions, and the availability of further information and interpretations. In other cases, we have not been able to make a reasonable estimate and we continue to account for those items based on our existing accounting policies and the provisions of the tax laws that were in effect immediately prior to enactment. For the items for which we were able to determine a reasonable estimate, we recognized a provisional tax benefit of $659 million, which is included as a component of income tax expense from continuing operations. This includes an income tax benefit of $1.6 billion resulting from the application of the Act to existing deferred tax balances, including a reduction of the previously accrued deferred tax liability for foreign earnings by $1.4 billion. This was partially offset by $893 million of tax expense that was recorded for theone-time transition tax liability under the Act.
Stock-based compensation
Stock-based compensation expense is measured at the grant date based on the fair value of the award. We recognize stock-based compensation cost over the award’s requisite service period on a straight-line basis except for performance-based restricted stock units (“PRUs”) with graded vesting which we recognize on a graded basis. For awards with performance conditions, the amount of compensation cost we recognize over the requisite service period is based on the actual achievement of the performance condition or management’s best estimate of the achievement if not yet known. No compensation cost is ultimately recognized for forfeited awards in which employees do not render the requisite service. We estimate the number of stock-based awards that will be forfeited due to employee turnover. Our forfeiture assumption is primarily based on historical experience.
The fair value of each restricted stock unit (“RSU”) and PRU that does not contain a market condition is equal to the market value of our common stock on the date of grant. The fair value of each PRU that contains a market condition is estimated using the Monte Carlo simulation option pricing model. The fair values of RSUs and PRUs are not discounted by the dividend yield because our RSUs and PRUs are entitled to dividend equivalents to be paid in the form of cash upon vesting for each share of the underlying unit.
We use the Black-Scholes model to determine the fair value of unvested stock options assumed in acquisitions and the fair value of rights to acquire shares of common stock under our employee stock purchase plan (“ESPP”). The determination of the fair value of awards using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. If the acquired companies lack sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term, we estimate the expected life of assumed options using the “simplified method”. For vested options, this represents the midpoint between the valuation date and the contractual term. For unvested options, this represents the midpoint between the average vesting time and full contractual term. Expected volatility is based on the average of historical volatility over the most recent period commensurate with the expected life of the option and the implied volatility of traded options. The risk-free interest rate is equal to the U.S. Treasury rates for the period equal to the expected life. The options assumed are without dividend equivalents and their fair values are discounted by our dividend yield.
We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates which could materially impact our future stock-based compensation expense.
Loss contingencies
We are subject to contingencies that expose us to losses, including various legal and regulatory proceedings, asserted and potential claims that arise in the ordinary course of business. An estimated loss from such contingencies is recognized as a charge to income if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. We review the status of each significant matter quarterly and we may revise our estimates. Until the final resolution of such matters, there may be an exposure to loss in excess of the amount recorded, and such amounts could be material. Should any of our estimates and assumptions change or prove to have been incorrect, it could have a material impact on our consolidated financial statements for that reporting period.
RESULTS OF OPERATIONS
The following table sets forth our Consolidated Statements of Operations data as a percentage of net revenues for the periods indicated:
| | | | | | | | | | | | |
| | | Fiscal Year | |
| | | 2018 | | | 2017 | | | 2016 | |
Net revenues | | | 100 | % | | | 100 | % | | | 100 | % |
Cost of revenues | | | 21 | | | | 21 | | | | 17 | |
| | | | | | | | | | | | |
Gross profit | | | 79 | | | | 79 | | | | 83 | |
Operating expenses: | | | | | | | | | | | | |
Sales and marketing | | | 33 | | | | 36 | | | | 36 | |
Research and development | | | 20 | | | | 20 | | | | 21 | |
General and administrative | | | 12 | | | | 14 | | | | 8 | |
Amortization of intangible assets | | | 5 | | | | 4 | | | | 2 | |
Restructuring, transition and other costs | | | 8 | | | | 7 | | | | 4 | |
| | | | | | | | | | | | |
Total operating expenses | | | 78 | | | | 81 | | | | 70 | |
| | | | | | | | | | | | |
Operating income (loss) | | | 1 | | | | (2) | | | | 13 | |
Interest expense | | | (5) | | | | (5) | | | | (2) | |
Gain on divestiture | | | 14 | | | | - | | | | - | |
Other income (expense), net | | | (0) | | | | 1 | | | | 0 | |
| | | | | | | | | | | | |
Income (loss) from continuing operations before income taxes | | | 9 | | | | (7) | | | | 11 | |
Income tax expense (benefit) | | | (14) | | | | (1) | | | | 34 | |
| | | | | | | | | | | | |
Income (loss) from continuing operations | | | 23 | | | | (6) | | | | (23) | |
Income from discontinued operations, net of income taxes | | | 0 | | | | 3 | | | | 92 | |
| | | | | | | | | | | | |
Net income (loss) | | | 24 | % | | | (3) | % | | | 69 | % |
| | | | | | | | | | | | |
Note: The percentages may not add due to rounding.
Net revenues
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | Variance in % | |
| (In millions, except for percentages) | | 2018 | | | 2017 | | | 2016 | | | 2018 vs. 2017 | | | 2017 vs. 2016 | |
Net revenues | | $ | 4,834 | | | $ | 4,019 | | | $ | 3,600 | | | | 20 | % | | | 12 | % |
Fiscal 2018 compared to fiscal 2017
Net revenues increased $815 million, attributable to increases of $616 million from our Consumer Digital Safety segment and $199 million from our Enterprise Security segment, net of the impact of the divestiture of our WSS and PKI solutions. The increase in revenue from our Consumer Digital Safety segment was primarily a result of the inclusion of revenue from our identity and information protection products acquired at the end of fiscal 2017 for a full year.
Fiscal 2017 compared to fiscal 2016
Net revenues increased $419 million, primarily due to an increase of $425 million in revenue from our Enterprise Security segment as a result of the acquisition of Blue Coat during the second quarter of fiscal 2017.
Net revenues by geographical region
Percentage of revenue by geographic region as presented below is based on the billing location of the customer.
| | | | | | | | | | | | |
| | | Fiscal Year | |
| | | 2018 | | | 2017 | | | 2016 | |
Americas | | | 63 | % | | | 58 | % | | | 59 | % |
EMEA | | | 22 | % | | | 24 | % | | | 25 | % |
APJ | | | 16 | % | | | 18 | % | | | 16 | % |
Note: The Americas include U.S., Canada and Latin America; EMEA includes Europe, Middle East and Africa; APJ includes Asia Pacific and Japan. The percentages may not add up to 100% due to rounding.
Fiscal 2018 compared to fiscal 2017
Our percentage of revenue from the Americas increased, primarily as a result of the inclusion of revenue from our identity and information protection products acquired at the end of fiscal 2017 for a full year as sales of these products are generated entirely in the United States.
Fiscal 2017 compared to fiscal 2016
The geographical distribution of our revenue was relatively consistent in fiscal 2017 compared to fiscal 2016.
Cost of revenues
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | Variance in % | |
| (In millions, except for percentages) | | 2018 | | | 2017 | | | 2016 | | | 2018 vs. 2017 | | | 2017 vs. 2016 | |
Cost of revenues | | $ | 1,032 | | | $ | 853 | | | $ | 615 | | | | 21 | % | | | 39 | % |
Fiscal 2018 compared to fiscal 2017
Our cost of revenues increased $179 million primarily due to an increase related to our network and web security solutions and consumer identity and information protection products that were acquired in fiscal 2017, including $88 million of increased amortization of acquired intangible assets and $60 million of increased technical support costs primarily driven by the consumer identity and information protection products, and an increase of $30 million in royalty fees.
Fiscal 2017 compared to fiscal 2016
Our cost of revenues increased $238 million primarily due to $122 million of increased amortization of acquired intangible assets and increased other costs related to sales of our network and web security solutions and consumer identity and information protection products that were acquired in fiscal 2017, including an acquired product inventory fair valuewrite-up of $24 million. These increases in cost of revenues were partially offset by decreased costs related to Veritas of $22 million.
Operating expenses
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | Variance in % | |
| (In millions, except for percentages) | | 2018 | | | 2017 | | | 2016 | | | 2018 vs. 2017 | | | 2017 vs. 2016 | |
Sales and marketing | | $ | 1,593 | | | $ | 1,459 | | | $ | 1,292 | | | | 9 | % | | | 13 | % |
Research and development | | | 956 | | | | 823 | | | | 748 | | | | 16 | % | | | 10 | % |
General and administrative | | | 574 | | | | 564 | | | | 295 | | | | 2 | % | | | 91 | % |
Amortization of intangible assets | | | 220 | | | | 147 | | | | 57 | | | | 50 | % | | | 158 | % |
Restructuring, transition and other costs | | | 410 | | | | 273 | | | | 136 | | | | 50 | % | | | 101 | % |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 3,753 | | | $ | 3,266 | | | $ | 2,528 | | | | 15 | % | | | 29 | % |
| | | | | | | | | | | | | | | | | | | | |
Fiscal 2018 compared to fiscal 2017
Sales and marketing expense increased $134 million primarily due to increases of $148 million in advertising and promotional expense, largely related to promotion of our identity and information protection products, and $58 million in stock-based compensation expense. These increases were partially offset by the decreased expenses from our divested WSS and PKI solutions.
Research and development expense increased $133 million primarily due to increases of $90 million in stock-based compensation expense and $27 million in salary and benefits expense as a result of higher headcount.
General and administrative expense increased $10 million primarily due to a $35 million increase in salary and benefits expense as a result of higher headcount, a $15 million increase in stock-based compensation expense and increased cybersecurity and compliance costs, partially offset by a decrease of $41 million in acquisition-related and integration expenses due to a lower level of acquisition activities in fiscal 2018.
Stock-based compensation expense reported in operating expenses increased $163 million to $582 million in fiscal 2018 from $419 million in fiscal 2017, primarily due to the equity awards granted in connection with our fiscal 2018 and 2017 acquisitions.
Amortization of intangible assets increased $73 million primarily due to the intangible assets acquired in our fiscal 2017 acquisitions.
Restructuring, transition and other costs increased $137 million, primarily due to an increase of $178 million in transition costs, including increases of $90 million in costs primarily related to our enterprise resource planning and supporting systems and other transformation initiatives and $88 million in separation costs related to the sale of our WSS and PKI solutions.
Fiscal 2017 compared to fiscal 2016
Sales and marketing expense increased $167 million primarily as a result of our fiscal 2017 acquisitions and included increases of $54 million in stock-based compensation expense and
$24 million in integration expense. These increases were partially offset by a reduction of expenses from new and ongoing cost savings initiatives and decreased costs related to Veritas of $88 million.
Research and development expense increased $75 million primarily as a result of the acquisition of Blue Coat and included an increase of $54 million in stock-based compensation expense. This increase was partially offset by a reduction of expenses from new and ongoing cost savings initiatives and decreased costs related to Veritas of $44 million.
General and administrative expense increased $269 million primarily as a result of the acquisition of Blue Coat and included an increase of $160 million in stock-based compensation expense. In addition, we incurred higher acquisition-related and integration expenses of $79 million. These increases were partly offset by a reduction of expenses from new and ongoing cost savings initiatives and decreased costs related to Veritas of $32 million.
Our stock-based compensation in operating expenses increased $268 million to $419 million in fiscal 2018 from $151 million in fiscal 2017, primarily due to the equity awards granted in connection with the Blue Coat and LifeLock acquisitions, and the expected level of achievement for PRUs granted in fiscal 2017.
Amortization of intangible assets increased $90 million primarily due to the $2.9 billion of intangible assets acquired in the Blue Coat and LifeLock acquisitions.
Restructuring, transition and other costs increased $137 million, primarily due to increases of $60 million in advisory fees incurred in connection with restructuring events and facilities exit costs and $52 million in severance costs as we initiated a restructuring plan during fiscal 2017.
Non-operating income (expense), net
| | | | | | | | | | | | |
| | | Fiscal Year | |
| (In millions) | | 2018 | | | 2017 | | | 2016 | |
Interest expense | | $ | (256 | ) | | $ | (208 | ) | | $ | (75 | ) |
Gain on divestiture | | | 653 | | | | - | | | | - | |
Other income (expense), net | | | (9 | ) | | | 46 | | | | 10 | |
| | | | | | | | | | | | |
Total other income (expense), net | | $ | 388 | | | $ | (162 | ) | | $ | (65 | ) |
| | | | | | | | | | | | |
Fiscal 2018 compared to fiscal 2017
Non-operating income (expense), net, increased, primarily due to a $653 million gain as a result of the divestiture of our WSS and PKI solutions, partially offset by an increase of $48 million in interest expense primarily due to increased interest associated with the debt issued in fiscal 2017, an increase of $26 million in net foreign currency loss, and a $26 million loss from our equity method investment received in connection with the divestiture of our WSS and PKI solutions.
Fiscal 2017 compared to fiscal 2016
Non-operating expense, net, increased, primarily due to an increase of $133 million in interest expense, mainly related to our increased borrowings in fiscal 2017. This increase was partially offset by an increase of $14 million in income, net of direct costs, from transition services provided to Veritas.
Provision for income taxes
We are a U.S.-based multinational company subject to tax in multiple U.S. and international tax jurisdictions. A substantial portion of our international earnings were generated from subsidiaries
organized in Ireland and Singapore. Our results of operations would be adversely affected to the extent that our geographical mix of income becomes more weighted toward jurisdictions with higher tax rates and would be favorably affected to the extent the relative geographic mix shifts to lower tax jurisdictions. Any change in our mix of earnings is dependent upon many factors and is therefore difficult to predict.
| | | | | | | | | | | | |
| | | Fiscal Year | |
| (In millions, except for percentages) | | 2018 | | | 2017 | | | 2016 | |
Income (loss) from continuing operations before income taxes | | $ | 437 | | | $ | (262 | ) | | $ | 392 | |
Provision for (benefit from) income taxes | | $ | (690 | ) | | $ | (26 | ) | | $ | 1,213 | |
Effective tax rate on income from continuing operations | | | (158 | )% | | | 10 | % | | | 309 | % |
Fiscal 2018 compared to fiscal 2017
The decrease in our effective tax rate in fiscal 2018 as compared to fiscal 2017 was primarily due to a provisional tax benefit of $659 million, which is included as a component of income tax expense from continuing operations. This includes an income tax benefit of $1,552 million resulting from the application of the Act to existing deferred tax balances, including a reduction of the previously accrued deferred tax liability for foreign earnings by $1,420 million, partially offset by $893 million of tax expense that was recorded for theone-time transition tax liability under the Act.
Fiscal 2017 compared to fiscal 2016
The decrease in our effective tax rate in fiscal 2017 as compared to fiscal 2016 was primarily driven by tax expense of $1.1 billion in fiscal 2016 for providing U.S. taxes on certain undistributed foreign earnings, primarily those attributable to the sale of Veritas, partially offset by tax expense of $52 million in fiscal 2017 related to the loss of tax attributes as a result of restructuring activities.
See Note 10 to the Consolidated Financial Statements for more information.
Segment operating results
We do not allocate to our operating segments certain operating expenses that we manage separately at the corporate level and are not used in evaluating the results of, or in allocating resources to, our segments. These unallocated expenses primarily consist of unallocated corporate charges related to Veritas in fiscal 2016 and stock-based compensation expense, amortization of intangible assets, restructuring, transition and other costs, and acquisition-related costs in all periods presented. See Note 14 for more information.
Enterprise Security Segment
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | Variance in % | |
| (In millions, except for percentages) | | 2018 | | | 2017 | | | 2016 | | | 2018 vs. 2017 | | | 2017 vs. 2016 | |
Net revenues | | $ | 2,554 | | | $ | 2,355 | | | $ | 1,930 | | | | 8 | % | | | 22 | % |
Percentage of total net revenues | | | 53 | % | | | 59 | % | | | 54 | % | | | | | | | | |
Operating income | | $ | 473 | | | $ | 187 | | | $ | 102 | | | | 153 | % | | | 83 | % |
Operating margin | | | 19 | % | | | 8 | % | | | 5 | % | | | | | | | | |
Fiscal 2018 compared to fiscal 2017
Revenue increased $199 million, primarily due to increases of $331 million in revenue from sales of our network and web security solutions and $36 million from sales of endpoint and information
protection solutions, partially offset by a $184 million decrease in revenue as a result of the divestiture of our WSS and PKI solutions. Revenue during fiscal 2018 was also unfavorably affected by a shift in the mix of sales towards subscription and cloud-delivered solutions subject to ratable revenue recognition, which resulted in lessin-period recognized revenue and more revenue deferred to the balance sheet as compared to fiscal 2017. Operating income increased $286 million, primarily due to higher revenue discussed above, a $51 million decrease in sales and marketing expenses and a $38 million decrease in cost of revenues.
Fiscal 2017 compared to fiscal 2016
Revenue increased $425 million, primarily due to a $422 million increase from sales of our network and web security solutions, primarily as a result of our acquisition of Blue Coat. Operating income increased $85 million, primarily due to higher revenue and a reduction of expenses from cost savings initiatives. These increases were partially offset by expenses associated with the Blue Coat acquisition in the post-acquisition period, and the cost of revenues from acquired inventorywrite-ups related to the Blue Coat acquisition of $24 million.
Consumer Digital Safety Segment
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | Variance in % | |
| (In millions, except for percentages) | | 2018 | | | 2017 | | | 2016 | | | 2018 vs. 2017 | | | 2017 vs. 2016 | |
Net revenues | | $ | 2,280 | | | $ | 1,664 | | | $ | 1,670 | | | | 37 | % | | | - | % |
Percentage of total net revenues | | | 47 | % | | | 41 | % | | | 46 | % | | | | | | | | |
Operating income | | $ | 1,111 | | | $ | 839 | | | $ | 924 | | | | 32 | % | | | (9 | )% |
Operating margin | | | 49 | % | | | 50 | % | | | 55 | % | | | | | | | | |
Fiscal 2018 compared to fiscal 2017
Revenue increased $616 million due to a $639 million increase in revenue from sales of our identity and information protection products acquired at the end of fiscal 2017, offset by a $23 million decrease in revenue related to our consumer security products. Our revenue growth reflects the benefit of the shift to subscription-based contracts and bundling of our consumer products, which is helping to mitigate the trend of declining revenues from sales of stand-alone security products. Operating income increased $272 million, primarily due to sales of our identity and information protection products, partially offset by higher related cost of sales and operating expenses.
Fiscal 2017 compared to fiscal 2016
Revenue decreased $6 million due to a decline in revenue from sales of consumer security products of $83 million as the revenue generated from customer additions was not sufficient to replace revenue lost through customer attrition. This decline was mostly offset by a $77 million increase in revenue due to sales of our identity and information protection products acquired in the acquisition of LifeLock. Operating income decreased $85 million, primarily due to the consumer security revenue decline coupled with increased operating expenses as a result of the LifeLock acquisition.
LIQUIDITY, CAPITAL RESOURCES AND CASH REQUIREMENTS
Liquidity
We have historically relied on cash generated from operations, borrowings under credit facilities, issuances of debt, and proceeds from divestitures for our liquidity needs.
As of March 30, 2018, we had cash, cash equivalents and short-term investments of $2.2 billion, of which $1.3 billion was held by our foreign subsidiaries. Our cash, cash equivalents and short-term investments are managed with the objective to preserve principal, maintain liquidity, and generate investment returns. Under the transition tax of the Act, we have treated all previously untaxed foreign earnings as taxable in the U.S. and as a result we recorded a provisional liability for theone-time transition tax, payable over eight years, of $896 million in fiscal 2018. The move to a participation exemption system under the Act allows us to make distributions ofnon-U.S. earnings to the U.S. without incurring additional U.S. federal tax, however these distributions may be subject to applicable state ornon-U.S. taxes. We have not recognized deferred income taxes for local country income and withholding taxes that could be incurred on distributions of certainnon-U.S. earnings or for outside basis differences in our subsidiaries, because we plan to indefinitely reinvest such earnings and basis differences.
We also have an undrawn credit facility of $1.0 billion which expires in May 2021.
Our principal cash requirements are primarily to meet our working capital needs, supporton-going business activities, including the payment of taxes, fund capital expenditures, service existing debt, and invest in business acquisitions. As a part of our plan to deleverage our balance sheet, we may from time to time make optional repayments of our debt obligations, which may include repurchases of our outstanding debt, depending on various factors such as market conditions.
Our capital allocation strategy is to balance driving shareholder returns, managing financial risk, and preserving our flexibility to pursue strategic options, including acquisitions. Historically this has included a quarterly cash dividend, the repayment of debt and the repurchase of our common stock.
Cash flows
The following table summarizes our cash flow activities:
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Net cash provided by (used in): | | | | | | | | | | | | |
Continuing operating activities | | $ | 957 | | | $ | (145 | ) | | $ | 1,462 | |
Continuing investing activities | | $ | (21 | ) | | $ | (6,766 | ) | | $ | 7,236 | |
Continuing financing activities | | $ | (3,475 | ) | | $ | 5,280 | | | $ | (4,740 | ) |
Increase (decrease) in cash and cash equivalents | | $ | (2,473 | ) | | $ | (1,736 | ) | | $ | 3,109 | |
Cash from continuing operating activities
Our primary source of cash from operations has been from cash collections from our customers. Due to seasonality, our billings are generally higher in our third and fourth fiscal quarters and lower in our first and second fiscal quarters. Cash inflows are affected by fluctuations in our billings and timing of the related collections.
Our primary uses of cash include payments for operating expenses and income taxes, payments to our resellers and distribution partners, and otheron-going business activities.
Our cash flows from operations in fiscal 2018 were $957 million, compared to cash used of $145 million in fiscal 2017. Our cash flows for fiscal 2018 reflected net income of $1.1 billion adjusted bynon-cash amortization and depreciation of $640 million, stock-based compensation of $610 million, offset by a deferred tax benefit of $1.8 billion, primarily as a result of the enactment of the Act in December 2017, and a gain on divestiture of $653 million. Our cash flows for fiscal 2017 reflected a net loss of $106 million, adjusted bynon-cash amortization and depreciation of $492 million, stock-based compensation of $440 million, offset by a deferred tax provision of $168 million.
Changes in operating assets and liabilities consisted primarily of:
Accounts receivableincreased $170 million in fiscal 2018, compared to a decrease of $45 million in fiscal 2017, reflecting higher billings in the last month of fiscal 2018 and our shift in sales to solutions with ratable revenue recognition in our Enterprise Security segment.
Deferred revenueincreased $541 million in fiscal 2018, compared to an increase of $125 million in fiscal 2017, reflecting the factors discussed in the Overview.
Income taxes payable increased $880 million in fiscal 2018, compared to a decrease of $871 million in fiscal 2017. The increase in fiscal 2018 reflected theone-time transition tax of $896 million discussed above, while the decrease in fiscal 2017 was primarily the result of aone-time tax payment of $887 million related to the gain on sale from the divestiture of Veritas.
The decrease in cash flow from continuing operating activities in fiscal 2017 compared to fiscal 2016 was primarily due to net loss from continuing operation of $106 million in fiscal 2017, compared to net income of $2.5 billion in fiscal 2016, as well as a higher adjustment to net income for deferred taxes in fiscal 2016. In addition, income taxes payable decreased $871 million in fiscal 2017, reflecting the cash payment for taxes as a result of the gain on sale from the divestiture of Veritas, compared to an increase in tax payable of $742 million in fiscal 2016.
Cash from continuing investing activities
Our cash flows from continuing investing activities consisted primarily of proceeds from divestitures, payments for acquisitions, and net purchases of short-term investments. Our investing activities in fiscal 2018 included $933 million in net cash proceeds from the divestiture of our WSS and PKI solutions, partially offset by $401 million paid for acquisitions and net purchases of $387 million of short-term investments, while our investing activities in fiscal 2017 primarily included $6.7 billion paid for the Blue Coat and LifeLock acquisitions.
Our investing activities in fiscal 2016 primarily included proceeds from the divestiture of Veritas of $6.5 billion and net proceeds from short-term investments of $1.0 billion.
Cash from continuing financing activities
Our financing cash flows consist primarily of issuances and repayments of debt, payment of dividends and dividend equivalents to stockholders, stock repurchases, and tax payments related to shares withheld in the settlement of RSUs. Our financing activities in fiscal 2018 primarily consisted of debt repayments of $3.2 billion, while our financing activities in fiscal 2017 primarily consisted of net proceeds from borrowings of $6.1 billion.
Our financing activities in fiscal 2016 primarily consisted of payments of dividends and dividend equivalents of $3.0 billion and repurchases of common stock of $1.9 billion.
Cash requirements
Debt -As of March 30, 2018, our total outstanding principal amount of indebtedness was $5.1 billion, summarized as follows. Our Senior Term Loans arepre-payable, and we expect to continue to focus on repayment in fiscal 2019. See Note 7 to the Consolidated Financial Statements for further information on our debt.
| | | | |
| (In millions) | | March 30, 2018 | |
Senior Term Loans | | $ | 1,100 | |
Senior Notes | | | 2,250 | |
Convertible Senior Notes | | | 1,750 | |
| | | | |
Total debt | | $ | 5,100 | |
| | | | |
Dividends -On May 10, 2018, we announced a cash dividend of $0.075 per share of common stock to be paid in June 2018. On August 2, 2018, we announced a cash dividend of $0.075 per share of common stock to be paid in September 2018. Any future dividends will be subject to the approval of our Board of Directors. See Note 11 to the Consolidated Financial Statements for more information on our dividends and dividend equivalents.
Share repurchases - Under our stock repurchase programs, we may purchase shares of our outstanding common stock through open market and through accelerated stock repurchase transactions. As of March 30, 2018, the remaining balance of our share repurchase authorization is $800 million and does not have an expiration date. See Note 11 to the Consolidated Financial Statements for more information on our share repurchases.
Contractual obligations
The following is a schedule of our significant contractual obligations as of March 30, 2018:
| | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period | |
| (In millions) | | Total | | | Less than 1 Year | | | 1 - 3 Years | | | 3 - 5 Years | | | Over 5 Years | |
Debt (1) | | $ | 5,100 | | | $ | - | | | $ | 1,850 | | | $ | 2,150 | | | $ | 1,100 | |
Interest payments on debt(2) | | | 788 | | | | 180 | | | | 318 | | | | 153 | | | | 137 | |
Purchase obligations(3) (4) | | | 659 | | | | 496 | | | | 126 | | | | 31 | | | | 6 | |
Long-term income taxes payable(5) | | | 896 | | | | 72 | | | | 144 | | | | 144 | | | | 536 | |
Operating leases(6) | | | 253 | | | | 78 | | | | 92 | | | | 46 | | | | 37 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 7,696 | | | $ | 826 | | | $ | 2,530 | | | $ | 2,524 | | | $ | 1,816 | |
| | | | | | | | | | | | | | | | | | | | |
| (1) | See Note 7 to the Consolidated Financial Statements for further information on our debt. |
| (2) | Interest payments were calculated based on the contractual terms of the related Senior Notes, Convertible Senior Notes and Senior Term Facilities. Interest on variable rate debt was calculated using the interest rate in effect as of March 30, 2018. See Note 7 to the Consolidated Financial Statements for further information on the Senior Notes, Convertible Senior Notes and Senior Term Facilities. |
| (3) | These amounts are associated with agreements for purchases of goods or services generally including agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. The table above also includes agreements to purchase goods or services that have cancellation provisions requiring little or no payment. The amounts under such contracts are included in the table above because management believes that cancellation of these contracts is unlikely, and we expect to make future cash payments according to the contract terms or in similar amounts for similar materials. |
| (4) | Purchase obligations do not include future minimum contractual obligations related to a five-year purchase agreement with a service provider for a total contract value of $500 million that we entered into in September 2018. |
| (5) | These amounts represent the transition tax on previously untaxed foreign earnings of foreign subsidiaries under the Act which may be paid in installments over an eight-year period. See Note 10 to the Consolidated Financial Statements for further information on our income taxes and the impact from the recently enacted legislation. |
| (6) | We have entered into variousnon-cancelable operating lease agreements that expire on various dates through fiscal 2029. The amounts in the table above exclude expected sublease income. |
Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits and other long-term taxes as of March 30, 2018 we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, $302 million in long-term income taxes payable has been excluded from the contractual obligations table. See Note 10 to the Consolidated Financial Statements for further information.
Fiscal 2019 Restructuring Plan
On August 2, 2018, we announced a restructuring plan under which we will initiate targeted reductions of our global workforce of up to approximately 8%. We estimate that we will incur total costs in connection with the restructuring plan of approximately $50 million, primarily for severance and termination benefits. These actions are expected to be completed in fiscal 2019.
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, subsidiaries and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements or representations and warranties made by us. Refer to Note 15 to the Consolidated Financial Statements for further information on our indemnifications.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various market risks related to fluctuations in interest rates and foreign currency exchange rates. We may use derivative financial instruments to mitigate certain risks in accordance with our investment and foreign exchange policies. We do not use derivatives or other financial instruments for trading or speculative purposes.
Interest rate risk
Our short-term investments primarily consist of corporate bonds. An increase in interest could have an adverse impact on its market value. As of March 30, 2018, the fair value of our short-term investments was $388 million. A hypothetical increase in the corporate bonds’ yield curve of 50 basis points would not result in a significant reduction in fair value.
As of March 30, 2018, we had $4.0 billion in aggregate principal amount of fixed-rate Senior Notes and Convertible Senior Notes outstanding, with a carrying amount and a fair value of $3.9 billion, based on Level 2 inputs. Since these notes bear interest at fixed rates, they do not result in any financial statement risk associated with changes in interest rates. However, the fair value of these notes fluctuates when interest rates change.
As of March 30, 2018, we also had $1.1 billion outstanding debt with variable interest rates based on the London InterBank Offered Rate (“LIBOR”). A reasonably possible hypothetical adverse change of 50 basis points in LIBOR would not result in a significant increase in interest expense on an annualized basis.
In addition, we have a $1.0 billion revolving credit facility that if drawn bears interest at a variable rate based on LIBOR and would be subject to the same risks associated with adverse changes in LIBOR.
Foreign currency exchange rate risk
We conduct business in numerous currencies through our worldwide operations and, as such, we are exposed to foreign currency risk. Our entities conduct their businesses in the primary local currency in which they operate; however, they may also conduct business in other currencies. To the extent our entities hold monetary assets or liabilities, earn revenues or incur costs in currencies other than the entity’s functional currency, they are exposed to foreign exchange gains or losses and impacts to operating results as a result. As part of our foreign currency risk mitigation strategy, we have entered into foreign exchange forward contracts with up to six months in duration to help mitigate foreign exchange risk; however, we are not able to hedge our foreign currency exposure in a manner that entirely offsets the effects of the changes in foreign exchange rates. We have considered historical trends in exchange rates and determined that it is possible that adverse changes in exchange rates for any currency could occur. As of March 30, 2018 and March 31, 2017, we had open foreign currency forward contracts with notional amounts of $848 million and $696 million, respectively. A hypothetical ten percent depreciation of foreign currency would result in a reduction in fair value of $55 million and $29 million for fiscal 2018 and fiscal 2017, respectively. This analysis disregards the possibilities that the rates can move in opposite directions and that losses from one geographic area may be offset by gains from another geographic area.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements and related disclosures included in Part IV, Item 15 of this annual report are incorporated by reference into this Item 8.
Selected Quarterly Financial Data (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal 2018 | | | Fiscal 2017 | |
(In millions, except per share
data) | | Fourth
Quarter | | | Third
Quarter (1) | | | Second
Quarter | | | First
Quarter | | | Fourth
Quarter | | | Third
Quarter | | | Second
Quarter | | | First
Quarter | |
Net revenues | | $ | 1,210 | | | $ | 1,209 | | | $ | 1,240 | | | $ | 1,175 | | | $ | 1,115 | | | $ | 1,041 | | | $ | 979 | | | $ | 884 | |
Gross profit | | | 946 | | | | 960 | | | | 978 | | | | 918 | | | | 856 | | | | 806 | | | | 769 | | | | 735 | |
Operating income (loss) | | | 6 | | | | 96 | | | | (9 | ) | | | (44 | ) | | | (178 | ) | | | (16 | ) | | | (12 | ) | | | 106 | |
Income tax expense (benefit) | | | (7 | ) | | | (606 | ) | | | (53 | ) | | | (24 | ) | | | (71 | ) | | | (5 | ) | | | 19 | | | | 31 | |
Income (loss) from continuing operations | | | (58 | ) | | | 1,311 | | | | (16 | ) | | | (110 | ) | | | (177 | ) | | | (56 | ) | | | (69 | ) | | | 66 | |
Income (loss) from discontinued operations, net of income taxes | | | (1 | ) | | | 31 | | | | 4 | | | | (23 | ) | | | 34 | | | | 102 | | | | (75 | ) | | | 69 | |
Net income (loss) | | | (59 | ) | | | 1,342 | | | | (12 | ) | | | (133 | ) | | | (143 | ) | | | 46 | | | | (144 | ) | | | 135 | |
| | | | | | | | |
Income (loss) per share — basic:(2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | $ | (0.09 | ) | | $ | 2.12 | | | $ | (0.03 | ) | | $ | (0.18 | ) | | $ | (0.29 | ) | | $ | (0.09 | ) | | $ | (0.11 | ) | | $ | 0.11 | |
Discontinued operations | | $ | (0.00 | ) | | $ | 0.05 | | | $ | 0.01 | | | $ | (0.04 | ) | | $ | 0.06 | | | $ | 0.16 | | | $ | (0.12 | ) | | $ | 0.11 | |
Net income (loss) per share — basic | | $ | (0.10 | ) | | $ | 2.17 | | | $ | (0.02 | ) | | $ | (0.22 | ) | | $ | (0.23 | ) | | $ | 0.07 | | | $ | (0.23 | ) | | $ | 0.22 | |
| | | | | | | | |
Income (loss) per share — diluted:(2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | $ | (0.09 | ) | | $ | 1.97 | | | $ | (0.03 | ) | | $ | (0.18 | ) | | $ | (0.29 | ) | | $ | (0.09 | ) | | $ | (0.11 | ) | | $ | 0.11 | |
Discontinued operations | | $ | (0.00 | ) | | $ | 0.05 | | | $ | 0.01 | | | $ | (0.04 | ) | | $ | 0.06 | | | $ | 0.16 | | | $ | (0.12 | ) | | $ | 0.11 | |
Net income (loss) per share — diluted | | $ | (0.10 | ) | | $ | 2.01 | | | $ | (0.02 | ) | | $ | (0.22 | ) | | $ | (0.23 | ) | | $ | 0.07 | | | $ | (0.23 | ) | | $ | 0.22 | |
| (1) | During the third quarter of fiscal 2018, we recognized a gain on divestiture of our WSS and PKI solutions of $658 million and an income tax benefit of $810 million as a result of the enactment of the Act. |
| (2) | Net income (loss) per share amounts may not add due to rounding. |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.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 disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our management (with the participation of our Chief Executive Officer and Chief Financial Officer) has conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) of the Securities Exchange Act). Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded 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) | Management’s Report on Internal Control over Financial Reporting |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f) of the Exchange Act) for Symantec. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Our management has concluded that, as of March 30, 2018, our internal control over financial reporting was effective at the reasonable assurance level based on these criteria.
The effectiveness of our internal control over financial reporting as of March 30, 2018 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included in Part IV, Item 15 of this Annual Report on Form10-K.
| c) | Changes in Internal Control over Financial Reporting |
There were no changes in our internal control over financial reporting during the quarter ended March 30, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| d) | 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.
Item 9B.Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Criteria for Nomination to the Board
The Nominating and Governance Committee of our Board of Directors (the “Board”) will consider candidates submitted by Symantec stockholders, as well as candidates recommended by directors and management, for nomination to the Board. The Nominating and Governance Committee has generally identified nominees based upon recommendations by outside directors, management and executive recruiting firms. The goal of the Nominating and Governance Committee is to assemble a Board that offers a diverse portfolio of perspectives, backgrounds, experiences, knowledge and skills derived from high-quality business and professional experience. The Nominating and Governance Committee annually reviews the appropriate skills and characteristics required of directors in the context of the current composition of the Board, our operating requirements and the long-term interests of our stockholders.
Two of our director-nominees for our 2018 Annual Meeting of Stockholders (“the Annual Meeting”) have been nominated pursuant to an agreement we entered into with Starboard Value LP on September 16, 2018. For more information about this agreement, see “Agreement with Starboard Value LP”below.
The key attributes, experience and skills we consider important for our directors in light of our current business and structure are:
| • | | Industry and Technology Expertise. As a cybersecurity company, understanding new technologies and emerging industry trends or having experience in security and related technologies is useful in understanding our business and the market segments in which we compete, our research and development efforts, competing technologies, the various products and processes that we develop, and evolving customer requirements. |
| • | | Global Expertise. We are a global organization with employees, offices and customers in many countries. Directors with global operating expertise can provide a useful business and cultural perspective regarding many significant aspects of our business. |
| • | | Leadership Experience. Directors who have served in a senior leadership position, as a general manager of a business or as the functional leader of a global sales, marketing or product development organization, are important to us, because they bring experience and perspective in analyzing, shaping, and overseeing the execution of important strategic, operational and policy issues at a senior level. |
| • | | Public Company Board Experience. Directors who have served on other public company boards can offer advice and insights with regard to the dynamics and operation of a board of directors, the relations of a board to the company’s chief executive officer and other senior management personnel and the importance of public-company corporate governance, including oversight matters, strategic decisions and operational and compliance-related matters. |
| • | | Business Combinations and Partnerships Experience. Directors who have a background in mergers and acquisitions and strategic partnership transactions can provide insight into developing and implementing strategies for growing our business through combinations or partnerships with other organizations. |
| • | | Financial Expertise. Knowledge of financial markets, financial operations, and accounting and financial reporting processes is important because it assists our directors in understanding, advising, and overseeing Symantec’s capital structure, financing and investing activities, financial reporting, and internal control of such activities. |
| • | | Diversity. In addition to a diverse portfolio of professional background, experiences, knowledge and skills, the composition of the Board should reflect the benefits of diversity as to gender, race, and ethnic background. |
In addition to the brief biographical descriptions set forth under “Our Board of Directors” below, we include under “Director Qualifications” the key individual attributes, experience and skills of each of our directors that led to the conclusion that each director should serve as a member of the Board at this time.
Our Board of Directors
Our Board currently consists of thirteen directors, eleven of whom expect to be nominated for election at our 2018 Annual Meeting of Stockholders (the “Annual Meeting”), including ten independent directors and our Chief Executive Officer. Each director is elected to serve aone-year term, with all directors subject to annual election. Robert S. Miller, a member of our Board since 1994, and Geraldine B. Laybourne, a member of our Board since 2008, are not standing for reelection at the Annual Meeting. These directors are identified below, along with their ages at October 10, 2018 and other information.
| | | | | | | | | | |
Name | | Age | | | Principal Occupation | | Director
Since | |
Gregory S. Clark | | | 53 | | | Chief Executive Officer | | | 2016 | |
Frank E. Dangeard | | | 60 | | | Managing Partner, Harcourt | | | 2007 | |
Peter A. Feld | | | 39 | | | Managing Member and Head of Research, Starboard Value LP | | | 2018 | |
Dale L. Fuller | | | 60 | | | Operating Partner, The Riverside Company | | | 2018 | |
Kenneth Y. Hao | | | 50 | | | Managing Partner and Managing Director, Silver Lake Partners | | | 2016 | |
David W. Humphrey | | | 41 | | | Managing Director, Bain Capital | | | 2016 | |
Geraldine B. Laybourne | | | 71 | | | Chairman of the Board, Katapult Studio | | | 2008 | |
David L. Mahoney | | | 64 | | | Director | | | 2003 | |
Robert S. Miller | | | 76 | | | Former President and Chief Executive Officer, International Automotive Components Group | | | 1994 | |
Anita M. Sands | | | 42 | | | Director | | | 2013 | |
Daniel H. Schulman | | | 60 | | | President and Chief Executive Officer, PayPal Holdings, Inc. | | | 2000 | |
V. Paul Unruh | | | 70 | | | Director | | | 2005 | |
Suzanne M. Vautrinot | | | 58 | | | President, Kilovolt Consulting Inc. | | | 2013 | |
Mr. Clarkhas served as our Chief Executive Officer and a member of our Board since 2016. Prior to joining Symantec, he served as the Chief Executive Officer of Blue Coat, which we acquired in 2016, and as a member of Blue Coat’s board of directors from 2011 to August 2016. From 2008 to 2011, Mr. Clark was the President and Chief Executive Officer of Mincom, a global software and service provider to asset-intensive industries. Before joining Mincom, he was a Founder and served as President and Chief Executive Officer of E2open, a provider of cloud-based supply chain software, from 2001 until 2008. Earlier in his career, Mr. Clark founded a security software firm, Dascom, which was acquired by IBM in 1999. Mr. Clark previously served on the boards of directors of Imperva, Inc. from May 2014 through August 2015 and Emulex Corporation from 2013 through its acquisition by Avago Technologies Ltd. in 2015. He served as a distinguished engineer and Vice President of IBM’s Tivoli Systems, a division providing security and management products, from 1999 until 2001. Mr. Clark holds a Bachelor’s degree from Griffith University.
Director Qualifications:
| • | | Industry and Technology Experience— Chief Executive Officer of Symantec Corporation; former Chief Executive Officer of Blue Coat and former President and Chief Executive Officer of Mincom. |
| • | | Global Experience— Chief Executive Officer of Symantec Corporation; former Chief Executive Officer of Blue Coat and former President and Chief Executive Officer of Mincom. |
| • | | Leadership Experience— Chief Executive Officer of Symantec Corporation; former Chief Executive Officer of Blue Coat; former President and Chief Executive Officer of Mincom and Founder, President and Chief Executive Officer of E2open. |
| • | | Public Company Board Experience — former member of the board of directors of Imperva, Inc. and Emulex Corporation. |
| • | | Business Combinations and Partnerships Experience— Chief Executive Officer of Symantec Corporation; former Chief Executive Officer of Blue Coat; former President and Chief Executive Officer of Mincom and Founder, President and Chief Executive Officer of E2open. |
| • | | Financial Experience— Chief Executive Officer of Symantec Corporation; former Chief Executive Officer of Blue Coat; former President and Chief Executive Officer of Mincom and Founder, President and Chief Executive Officer of E2open. |
Mr. Dangeard has served as a member of our Board since 2007. He has been the Managing Partner of Harcourt, an advisory firm, since 2008. Mr. Dangeard was Chairman and Chief Executive Officer of Thomson, a provider of digital video technologies, solutions and services, from 2004 to 2008. From 2002 to 2004, he was Deputy Chief Executive Officer of France Telecom, a global telecommunications operator. From 1997 to 2002, Mr. Dangeard was Senior Executive Vice President of Thomson and served as its Vice Chairman in 2000. Prior to joining Thomson, he was Managing Director of SG Warburg & Co. Ltd. from 1989 to 1997 in London, Paris and Madrid and Chairman of SG Warburg France from 1995 to 1997. Prior to that, Mr. Dangeard was a lawyer with Sullivan & Cromwell, in New York and London. He serves on the boards of Arqiva PLC, Royal Bank of Scotland Group PLC (“RBS Group”), as chairman of the board of directors of Nat West Markets PLC, the investment bank of the RBS Group, and on a number of advisory boards. Mr. Dangeard has previously served as a director of a variety of companies, including Crédit Agricole CIB, Eutelsat, Home Credit, SonaeCom, Thomson, Electricité de France and Telenor. He graduated from the École des Hautes Études Commerciales, the Paris Institut d’Études Politiques and holds an LLM degree from Harvard Law School.
Director Qualifications:
| • | | Industry and Technology Experience — former Chairman and Chief Executive Officer of Thomson; former Deputy Chief Executive Officer of France Telecom; former Deputy Chairman of Telenor; former member of the boards of directors of Eutelsat, SonaeCom and RPX Corporation. |
| • | | Global Experience — member of the board of directors of RBS Group (UK), of Arqiva (UK) and chairman of NatWest Markets (UK); former Chairman and Chief Executive Officer of Thomson (France); former Deputy Chief Executive Officer of France Telecom (France); former Deputy Chairman of Telenor (Norway) and former member of the boards of directors of Crédit Agricole CIB (France), Eutelsat (France), Home Credit (Czech Republic), Electricité de France (France) and SonaeCom (Portugal). |
| • | | Leadership Experience — Managing Partner of Harcourt; former Chairman and Chief Executive Officer of Thomson; former Deputy Chief Executive Officer of France Telecom; former Deputy Chairman of Telenor and former Chairman of SG Warburg France and Managing Director of SG Warburg & Co. Ltd; Chairman of NatWest Markets. |
| • | | Public Company Board Experience —member of the board of directors of RBS Group; former Deputy Chairman of Telenor and former member of the boards of directors of Eutelsat, Electricité de France, Thomson, and SonaeCom. |
| • | | Business Combinations and Partnerships Experience — former Chairman and Chief Executive Officer of Thomson; former Deputy Chief Executive Officer of France Telecom; former Deputy Chairman of Telenor; former Chairman of SG Warburg France and former lawyer at Sullivan & Cromwell LLP. |
| • | | Financial Experience — former Chairman and Chief Executive Officer of Thomson; former Deputy Chief Executive Officer of France Telecom; former Chairman of the Audit Committee of Electricité de France and former Deputy Chairman of Telenor; member of the board of RBS Group; Chairman of NatWest Markets. |
Mr. Feld has served as a member of our Board since September 2018. Mr. Feld has served as a Managing Member and Head of Research of Starboard Value LP since 2011. Mr. Feld previously served on the boards of directors of several technology companies, including Marvell Technology Group Ltd. from May 2016 to June 2018, The Brink’s Company from January 2016 to November 2017, Insperity, Inc. from March 2015 to June 2017, Darden Restaurants, Inc. from October 2014 to September 2015, Tessera Technologies, Inc. (n/k/a Xperi Corporation) from 2013 to April 2014, Integrated Device Technology, Inc. from 2012 to February 2014 and Unwired Planet, Inc. (n/k/a Great Elm Capital Group, Inc.) from 2011 to March 2014 and as Chairman from 2011 to 2013. Mr. Feld received a Bachelor of Arts degree in Economics from Tufts University.
Director Qualifications:
| • | | Industry and Technology Experience —member of the boards of directors of many public and private technology companies. |
| • | | Global Expertise — Managing Member and the Head of Research of Starboard Value LP; former member of the board of directors of Marvell Technology Group, Insperity, Inc., and Darden Restaurants, Inc. |
| • | | Leadership Experience — Managing Member and the Head of Research of Starboard Value LP. |
| • | | Public Company Board Experience — former member of the boards of directors of Marvell Technology Group, Insperity, Inc., and Darden Restaurants, Inc. |
| • | | Business Combinations and Partnerships Experience — Managing Member and the Head of Research of Starboard Value LP. |
| • | | Financial Experience — over 10 years of capital markets and corporate governance experience. |
Mr. Fuller has served as a member of our Board since September 2018. Mr. Fuller has served as an Operating Partner at the Riverside Company, a private equity firm, since 2013 and on the board of
directors of comScore, Inc., a media measurement and analytics company, since March 2018, and as Chairman of the board of directors of MobiSocial, Inc., a technology startup, since 2013. Mr. Fuller previously served on the boards of directors of several technology companies, including Quantum Corporation from September 2014 to March 2017 and AVG Technologies N.V. from 2008 to October 2016 and as Chairman from 2009 to October 2016. Mr. Fuller holds an honorary doctorate degree from St. Petersburg State University and a Bachelor of Science degree from Pacific College.
Director Qualifications:
| • | | Industry and Technology Experience — member of the boards of directors of many public and private technology companies. |
| • | | Global Experience — former member of the boards of directors of Quantum Corporation, AVG Technologies, N.V., Zoran Corporation and Phoenix Technologies, Ltd. |
| • | | Leadership Experience — Operating Partner at the Riverside Company, prior president and CEO of MokaFive and member of the boards of directors of numerous major technology companies. |
| • | | Public Company Board Experience —member of the boards of directors of comScore; former board member of Quantum Corporation and AVG Technologies. |
| • | | Business Combinations and Partnerships Experience — former member of the boards of directors of Quantum Corporation, AVG Technologies, N.V., Zoran Corporation and Phoenix Technologies, Ltd. |
| • | | Financial Experience — over 10 years of capital markets and corporate governance experience. |
Mr. Hao has served as a member of our Board since 2016. Mr. Hao joined Silver Lake Partners in 2000 and currently serves Silver Lake as a Managing Partner and Managing Director. Mr. Hao also serves on the boards of directors of SMART Global Holdings, Inc., as well as on the boards of directors of a number of private companies in Silver Lake’s portfolio. Prior to joining Silver Lake, he was an investment banker with Hambrecht & Quist, where he served as a Managing Director in the Technology Investment Banking group. He also serves on the Executive Council for UCSF Health. Mr. Hao graduated from Harvard University with a Bachelor’s degree in economics.
Director Qualifications:
| • | | Industry and Technology Experience — over 25 years of technology investment experience; member of the boards of directors of many public and private technology companies. |
| • | | Global Experience — extensive experience investing in large global businesses and established Silver Lake’s Asia business. |
| • | | Leadership Experience — Managing Partner and Managing Director of Silver Lake and member of the boards of directors of numerous major technology companies. |
| • | | Public Company Board Experience —member of the board of directors of SMART Global Holdings, Inc.; former board member of Broadcom Limited and Netscout Systems. |
| • | | Business Combinations and Partnerships Experience — Managing Partner and Managing Director of Silver Lake Partners and former investment banker with Hambrecht & Quist. |
| • | | Financial Experience — over 25 years of investment experience in complex transactions. |
Mr. Humphrey has served as a member of our Board since August 2016 when he joined in connection with Bain Capital’s investment in Symantec, prior to which he served on Blue Coat’s board of directors since May 2015. He is a Managing Director of Bain Capital, a private equity firm, where heco-leads the firm’s investing efforts in technology, media and telecom investments and where he has worked since 2001. Prior to joining Bain Capital, Mr. Humphrey was an investment banker in the mergers and acquisitions group at Lehman Brothers from 1999 to 2001. He serves on the boards of directors of BMC Software and Genpact Ltd. and on the board of directors of a number of private companies in Bain Capital’s portfolio. Mr. Humphrey previously served on the boards of directors of Bright Horizons Family Solutions, Inc. Burlington Coat Factory Warehouse Corporation, Skillsoft PLC and Bloomin’ Brands, Inc. He received a Master of Business Administration degree from Harvard Business School and a Bachelor’s degree from Harvard University.
Director Qualifications:
| • | | Industry and Technology Experience — former member of the board of directors of Blue Coat; Managing Director of Bain Capital; and member of the boards of directors of BMC Software, Inc., Viewpoint Construction Software, Navicure, Inc. and Genpact Ltd. |
| • | | Global Experience — extensive experience investing in large global businesses. |
| • | | Leadership Experience — Managing Director of Bain Capital and leader of its technology, media and telecom vertical; and member of the boards of directors of BMC Software, Inc. Viewpoint Construction Software, Navicure, Inc. and Genpact Ltd. |
| • | | Public Company Board Experience —member of the board of directors of BMC Software and Genpact Ltd. and former member of the boards of directors of Bright Horizons Family Solutions, Inc. Burlington Coat Factory Warehouse Corporation, Skillsoft PLC and Bloomin’ Brands, Inc. |
| • | | Business Combinations and Partnerships Experience — Managing Director of Bain Capital and former investment banker with Lehman Brothers. |
| • | | Financial Experience — Managing Director of Bain Capital and former investment banker with Lehman Brothers. |
Ms. Laybourne has served as a member of our Board since January 2008. She has been the Chairman of the Board of Katapult Studio (formerly Kandu), a children’s software company, since May 2013, and was acting Chief Executive Officer from October 2014 to May 2015. Ms. Laybourne was the Chairman of the Board of Alloy, Inc., which later merged into Defy Media, LLC, a media company, from November 2010 to April 2015. She founded Oxygen Media in 1998 and served as its Chairman and Chief Executive Officer until November 2007, when the network was acquired by NBC Universal. Prior to starting Oxygen Media, Ms. Laybourne spent 16 years at Nickelodeon. From 1996 to 1998, she was President of Disney/ABC Cable Networks where she managed cable programming for the Walt Disney Company and ABC. Ms. Laybourne is also currently a member of the board of directors of four private companies, serves on the Board of Trustees for Vassar College, and is a former member of the board of directors of J.C. Penney, Electronic Arts and Move, Inc. She earned a Bachelor’s degree in art history from Vassar College and a Master of Science degree in elementary education from the University of Pennsylvania. Ms. Laybourne will not stand forre-election at the Annual Meeting.
Director Qualifications:
| • | | Leadership Experience — Chairman of Katapult Studio; Founder and former Chairman and Chief Executive Officer of Oxygen Media LLC; former President of Disney/ABC Cable Networks; former President of Nickelodeon and former Vice Chairman of MTV Networks. |
| • | | Public Company Board Experience — former board member of J.C. Penney Company, Electronic Arts Inc. and Move, Inc. |
| • | | Business Combinations and Partnerships Experience — Founder, former Chairman and Chief Executive Officer of Oxygen Media LLC until it was acquired by NBC Universal. |
Mr. Mahoney has served as a member of our Board since 2003. He previously served asco-Chief Executive Officer of McKesson HBOC, Inc., a healthcare services company, and as Chief Executive Officer of iMcKesson LLC, also a healthcare services company, from 1999 to 2001. Mr. Mahoney is a member of the boards of directors of Adamas Pharmaceuticals, Inc. Corcept Therapeutics Incorporated, and Mercy Corps, anon-profit organization, the board of trustees of Mount Holyoke College, as well as a trustee of the Schwab/Laudus fund family and the San Francisco Museum of Modern Art. He has previously served as a director of a variety of companies, including Tercica Inc. Mr. Mahoney has a Bachelor’s degree from Princeton University and a Master of Business Administration degree from Harvard Business School.
Director Qualifications:
| • | | Industry and Technology Experience — formerco-Chief Executive Officer of McKesson HBOC, Inc.; former Chief Executive Officer of iMcKesson LLC; various executive roles at McKesson Corporation and former Principal at McKinsey & Co. |
| • | | Global Experience— formerco-Chief Executive Officer of McKesson HBOC, Inc.; former Chief Executive Officer of iMcKesson LLC; various executive roles at McKesson Corporation and former Principal at McKinsey & Co. |
| • | | Leadership Experience — formerco-Chief Executive Officer of McKesson HBOC, Inc.; former Chief Executive Officer of iMcKesson LLC; various executive roles at McKesson Corporation and former Principal at McKinsey & Co. |
| • | | Public Company Board Experience —member of the board of directors of Corcept Therapeutics Incorporated; Lead Independent Director at Adamas Pharmaceuticals, Inc. and former member of the board of directors of Tercica, Inc. |
| • | | Business Combinations and Partnerships Experience — formerco-Chief Executive Officer of McKesson HBOC, Inc.; former Chief Executive Officer of iMcKesson LLC; various executive roles at McKesson Corporation and former Principal at McKinsey & Co. |
| • | | Financial Experience — former roles at McKesson HBOC; serves on the Audit Committee of Corcept Therapeutics Incorporated (former Chair of the Audit Committee) and the Investment Committee of the Schwab/Laudus fund family; served on the Audit Committees of Tercica Inc., Adamas Pharmaceuticals, Inc., Symantec, and is Chair of the Finance Committee of Mercy Corps and San Francisco Museum of Modern Art. |
Mr. Miller has served as a member of our Board since September 1994. Mr. Miller is also the Chairman of the Board of MidOcean Partners, a private equity firm specializing in leveraged buyouts,
recapitalizations and growth capital investments in middle-market companies and has served on the Board of the Dow Chemical Company since 2015. Mr. Miller previously served as the President and Chief Executive Officer of International Automotive Components (IAC) Group, a global supplier of automotive components and systems, from August 2015 through September 2018. He served as Chairman of the Board of American International Group (AIG), an insurance and financial services organization, from July 2010 to June 2015. Mr. Miller served as Chief Executive Officer of Hawker Beechcraft, an aircraft manufacturing company, from February 2012 to February 2013. He served as Executive Chairman of Delphi Corporation, an auto parts supplier, from January 2007 until November 2009 and as Chairman and Chief Executive Officer from July 2005 until January 2007. From January 2004 to June 2005, Mr. Miller wasnon-executive Chairman of Federal Mogul Corporation, an auto parts supplier. From September 2001 until December 2003, he was Chairman and Chief Executive Officer of Bethlehem Steel Corporation, a large steel producer. Prior to joining Bethlehem Steel, Mr. Miller served as Chairman and Chief Executive Officer on an interim basis upon the departure of Federal Mogul’s top executive in September 2000. Hawker Beechcraft filed a voluntary petition for reorganization under the United States Bankruptcy Code (USBC) in May 2012. In addition to his executive roles, Mr. Miller has previously served as a director of a variety of companies, including AIG, UAL Corporation, WL Ross Holding Corp., Reynolds American, Inc., U.S. Bancorp, and Waste Management, Inc. He earned a degree in economics from Stanford University, a law degree from Harvard Law School and a Master of Business Administration, majoring in finance from Stanford Business School. Mr. Miller will not stand forre-election at the Annual Meeting.
Director Qualifications:
| • | | Global Experience — former President and Chief Executive Officer of IAC Group; former Chairman of AIG; former Chief Executive Officer of Hawker Beechcraft, Inc.; former Chief Executive Officer of Delphi Corporation and former Vice Chairman of Chrysler Corporation. |
| • | | Leadership Experience — former President and Chief Executive Officer of IAC Group; Chairman of Mid Ocean Partners; former Chairman of AIG; former Chief Executive Officer of Hawker Beechcraft, Inc.; former Chairman and Chief Executive Officer of Delphi Corporation; former Chairman and Chief Executive Officer of Federal Mogul Corporation and former Chairman and Chief Executive Officer of Bethlehem Steel Corporation. |
| • | | Public Company Board Experience — member of the board of directors of Dow Chemical and former member of the boards of directors of AIG, UAL Corporation, WL Ross Holding Corp., Reynolds American, Inc., U.S. Bancorp and Waste Management, Inc. |
| • | | Business Combinations and Partnerships Experience — former President and Chief Executive Officer of IAC Group; former Chief Executive Officer of Hawker Beechcraft, Inc., Delphi Corporation and Federal Mogul Corporation and former Vice Chairman of Chrysler Corporation. |
| • | | Financial Experience — former Chief Financial Officer of Chrysler Corporation and served on the Audit Committees of AIG, UAL Corporation, Reynolds American, Waste Management, U.S. Bancorp, Federal Mogul Corporation and Pope & Talbot. |
Ms. Sandshas served as a member of our Board since October 2013. She served as Group Managing Director, Head of Change Leadership and a member of the Wealth Management Americas Executive Committee of UBS Financial Services, a global financial services firm, from April 2012 to September 2013. Ms. Sands was Group Managing Director and Chief Operating Officer of Wealth Management Americas at UBS Financial Services from April 2010 to April 2012. Prior to that, she was a Transformation Consultant at UBS Financial Services from October 2009 to April 2010. Prior to
joining UBS Financial Services, Ms. Sands was Managing Director, Head of Transformation Management at Citigroup’s Global Operations and Technology organization. She also held several leadership positions with RBC Financial Group and CIBC. Ms. Sands is on the boards of directors of ServiceNow, Inc., Pure Storage, Inc. and two private companies. She received a Bachelor’s degree in physics and applied mathematics from The Queen’s University of Belfast, Northern Ireland, a Doctorate in atomic and molecular physics from The Queen’s University of Belfast, Northern Ireland and a Master of Science degree in public policy and management from Carnegie Mellon University.
Director Qualifications:
| • | | Industry and Technology Experience — former Managing Director and Chief Operating Officer at UBS Financial Services and various executive positions of global financial services firms. |
| • | | Global Experience — former Managing Director and Chief Operating Officer at UBS Financial Services and various executive positions of global financial services firms. |
| • | | Leadership Experience — former Managing Director and Chief Operating Officer at UBS Financial Services and various executive positions of global financial services firms. |
| • | | Public Company Board Experience —member of the boards of directors of ServiceNow, Inc. and Pure Storage, Inc. |
| • | | Financial Experience — former Managing Director and Chief Operating Officer at UBS Financial Services and various executive positions of global financial services firms. |
Mr. Schulman has served as a member of our Board since 2000. He has served as President and then Chief Executive Officer of PayPal Holdings, Inc., an online payment system company, since September 2014. Previously, Mr. Schulman served as Group President, Enterprise Group of American Express, a financial services company, from 2010 to September 2014. He was President, Prepaid Group of Sprint Nextel Corporation, a cellular phone service provider, from 2009 until 2010. Mr. Schulman served as Chief Executive Officer of Virgin Mobile USA, a cellular phone service provider, from 2001 to 2009, when Sprint Nextel acquired that company. He also served as a member of the board of directors of Virgin Mobile USA from 2001 to 2009. Mr. Schulman is a member of the boards of directors of PayPal Holdings, Inc., Verizon Communications Inc. and anon-profit organization. He received a Bachelor’s degree in economics from Middlebury College and a Master of Business Administration degree, majoring in Finance, from New York University.
Director Qualifications:
| • | | Industry and Technology Experience — President and Chief Executive Officer of PayPal; former Group President, Enterprise Group of American Express and former Chief Executive Officer and Chief Operating Officer of priceline.com. |
| • | | Global Experience — President and Chief Executive Officer of PayPal and former Group President of American Express. |
| • | | Leadership Experience — President and Chief Executive Officer of PayPal; former Group President, Enterprise Group of American Express; former President, Prepaid Group of Sprint Nextel Corporation; former Chief Executive Officer of Virgin Mobile USA and former Chief Executive Officer and Chief Operating Officer of priceline.com. |
| • | | Public Company Board Experience — member of the boards of directors of PayPal Holdings, Inc. and Verizon Communications Inc. and former member of the boards of directors of Virgin Mobile USA and Flextronics International Ltd. |
| • | | Business Combinations and Partnerships Experience — President and Chief Executive Officer of PayPal and former Chief Executive Officer of Virgin Mobile USA. |
| • | | Financial Experience — President and Chief Executive Officer of PayPal; former Group President, Enterprise Group of American Express; former President, Prepaid Group of Sprint Nextel Corporation; former Chief Executive Officer of Virgin Mobile USA and former Chief Executive Officer and Chief Operating Officer of priceline.com. |
Mr. Unruh has served as a member of our Board since 2005 following the acquisition of Veritas, where he had served on the board of directors since 2003. Mr. Unruh retired as Vice Chairman of Bechtel Group, Inc., a global engineering and construction services company, in 2003. During his25-year tenure at Bechtel Group, he held a number of management positions including Treasurer, Controller and Chief Financial Officer. Mr. Unruh also served as President of Bechtel Enterprises, the finance, development and ownership arm from 1997 to 2001. He is a member of the board of directors of Aconex Ltd., which is traded on the Australian Stock Exchange, and a private company. Mr. Unruh is a Certified Public Accountant.
Director Qualifications:
| • | | Global Experience — former Vice Chairman of and held various executive positions at Bechtel Group, Inc.; former President of Bechtel Enterprises and member of the board of directors of Aconex Ltd. (Australia). |
| • | | Leadership Experience — former Vice Chairman of and held various executive positions at Bechtel Group, Inc. and former President of Bechtel Enterprises. |
| • | | Public Company Board Experience — former member of the boards of directors of Heidrick & Struggles International Inc., Move, Inc., URS Corporation and Aconex Ltd. (Australia). |
| • | | Business Combinations and Partnerships Experience — former board member of Veritas Corporation, Move, Inc., and URS Corporation. |
| • | | Financial Experience — certified public accountant; former Chief Financial Officer, Treasurer and Controller of Bechtel Group, Inc.; former President of Bechtel Enterprises; served on the Audit Committees of Heidrick & Struggles International, Inc. and Move, Inc. |
Ms. Vautrinothas served as a member of our Board since 2013. She has been President of Kilovolt Consulting Inc., an advisory firm, since October 2013. Ms. Vautrinot retired from the United States Air Force in October 2013 after over 30 years of service. During her career with the United States Air Force, she served in a number of leadership positions including Major General and Commander, 24th Air Force/Network Operations from 2011 to October 2013; Special Assistant to the Vice Chief of Staff from December 2010 to 2011; Director of Plans and Policy, U.S. Cyber Command from 2010 to 2010 and Deputy Commander, Network Warfare, U.S. Strategic Command, from 2008 and 2010. Ms. Vautrinot is a member of the board of directors of Ecolab, Inc., Wells Fargo & Company, a private company and anon-profit organization. She received a Bachelor of Science degree from the U.S. Air Force Academy, a Master of Systems Management degree from University of Southern California, and completed Air Command and Staff College as well as Air War College. Ms. Vautrinot was a National Security Fellow at the John F. Kennedy School of Government at Harvard University. In 2017 she was inducted into the National Academy of Engineering.
Director Qualifications:
| • | | Industry and Technology Experience — Major General and Commander (retired) and various leadership positions of United States Air Force. |
| • | | Global Experience — Major General and Commander (retired) of United States Air Force; member of the boards of directors of Ecolab, Inc. and Wells Fargo & Company. |
| • | | Leadership Experience — Major General and Commander (retired) and various leadership positions of United States Air Force. |
| • | | Public Company Board Experience — member of the boards of directors of Ecolab, Inc. and Wells Fargo & Company. |
| • | | Financial Experience — serves on the Audit Committees of Ecolab, Inc. and Wells Fargo & Company. |
Agreement with Starboard Value LP
In September 2018, the Company entered into an agreement with Starboard Value LP and certain of its affiliates (collectively, “Starboard”) regarding, among other things, the membership and composition of the Board and committees thereof (the “Starboard Agreement”). Under the terms of the Starboard Agreement, the Company appointed Peter A. Feld and Dale L. Fuller to serve on the Board and agreed to nominate them for election to the Board at the Annual Meeting. The Starboard Agreement also provides that Robert S. Miller and Geraldine B. Laybourne will not stand forre-election as directors at the Annual Meeting and that, within 30 days after the Annual Meeting, the Company will appoint Richard S. “Rick” Hill to the Board and an additional director to the Board who will be selected by the then-appointed Board from a list of candidates mutually agreed by the Company and Starboard pursuant to the procedures described in the Starboard Agreement. With respect to the Annual Meeting, Starboard has agreed to, among other things, vote all shares of the Company’s common stock beneficially owned by Starboard in favor of the Company’s director nominees and, subject to certain conditions, vote in accordance with the Board’s recommendations on all other proposals.
Pursuant to the Starboard Agreement, if at any time Starboard beneficially owns less than 3.0% of the Company’s then-outstanding common stock (the “Minimum Ownership Threshold”), Mr. Feld (or, if Mr. Feld is no longer serving on the Board, the substitute Starboard employee director who replaced Mr. Feld) will immediately resign from the Board. Furthermore, until the earlier of (x) 15 business days prior to the deadline for the submission of stockholder nominations for the 2019 annual meeting of stockholders and (y) 90 days prior to the first anniversary of the Annual Meeting, for so long as Starboard satisfies the Minimum Ownership Threshold, Starboard also has certain additional rights to recommend or select substitute directors as provided in the Starboard Agreement.
Summary of Director Qualifications and Experience
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Clark | | Dangeard | | Feld | | Fuller | | Hao | | Humphrey | | Laybourne | | Mahoney | | Miller | | Sands | | Schulman | | Unruh | | Vautrinot |
Industry and Technology Expertise | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | | | Ö | | | | Ö | | Ö | | Ö | | Ö |
Global Expertise | | Ö | | Ö | | | | Ö | | Ö | | Ö | | | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö |
Leadership Experience | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö |
Public Company Board Experience | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö |
Business Combinations and Partnerships Experience | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | | | Ö | | Ö | | |
Financial Expertise | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö | | | | Ö | | Ö | | Ö | | Ö | | Ö | | Ö |
Diversity | | | | | | | | | | Ö | | | | Ö | | | | | | Ö | | | | | | Ö |
Our Executive Officers
The names of our current executive officers, their ages as of October 10, 2018, and their positions are shown below.
| | | | | | |
Name | | Age | | | Position |
Gregory S. Clark | | | 53 | | | Chief Executive Officer |
Amy L. Cappellanti-Wolf | | | 53 | | | Senior Vice President and Chief Human Resources Officer |
Michael D. Fey | | | 43 | | | President and Chief Operating Officer |
Samir Kapuria | | | 45 | | | Executive Vice President, Cyber Security Services |
Nicholas R. Noviello | | | 49 | | | Executive Vice President and Chief Financial Officer |
Scott C. Taylor | | | 54 | | | Executive Vice President, General Counsel and Secretary |
The Board chooses executive officers, who then serve at the Board’s discretion. There is no family relationship between any of the directors or executive officers and any other director or executive officer of Symantec.
For information regarding Mr. Clark, please refer to“Our Board of Directors” above.
Ms. Cappellanti-Wolf has served as our Senior Vice President and Chief Human Resources Officer since July 2014. Prior to joining us, she was Chief Human Resources Officer at Silver Spring Networks, Inc., a smart grid products provider, from June 2009 to July 2014. From September 2001 to June 2009, Ms. Cappellanti-Wolf served as Vice President, Human Resources of Cisco Systems, Inc., a networking company. From 2000 to 2001, she served as a Human Resources Director at Sun Microsystems, Inc. Ms. Cappellanti-Wolf served as Human Resources Director for The Walt Disney Company from 1995 to 2000 and held various roles in human resources withFrito-Lay, Inc., a division of PepsiCo, Inc., from 1988 to 1995. She has a Bachelor’s degree in journalism from West Virginia University and a Master’s degree in industrial and labor relations from West Virginia University.
Mr. Fey has served as our President and Chief Operating Officer since August 2016. Prior to that, he served as the President and Chief Operating Officer of Blue Coat from December 2014 to August 2016, when we acquired that company. Prior to joining Blue Coat, Mr. Fey served in a variety of capacities at the Intel Security Group from 2012 until 2014, including as Executive Vice President, Chief Technology Officer and as General Manager of Corporate Products. Previously, he served as Senior Vice President, Advanced Technologies and Field Engineering with McAfee, a software security company, from 2007 until 2012. Mr. Fey holds a Bachelor’s degree from Embry-Riddle Aeronautical University.
Mr. Kapuria has served as our Executive Vice President, Cyber Security Services since May 2018. Prior to that, he served as our Senior Vice President, Cyber Security Services from November 2014 to May 2018, as our Vice President, Products and Services from July 2012 to November 2014, and as our Vice President, Business Strategy and Security Intelligence from April 2011 to July 2012. Prior to April 2011, Mr. Kapuria held numerous other management positions with Symantec. Mr. Kapuria holds a bachelor’s degree in finance from the University of Massachusetts.
Mr. Noviello has served as our Executive Vice President and Chief Financial Officer since December 2016. Prior to that, he served as our Executive Vice President and Chief Integration Officer from August 2016 to November 2016. Prior to joining Symantec, Mr. Noviello served as Blue Coat’s Chief Financial Officer from January 2016 to August 2016, when we acquired that company. Prior to joining Blue Coat, he served as Executive Vice President, Finance and Operations, and Chief Financial Officer for NetApp, a publicly traded global data management and storage company, from January 2012 through January 2016. From January 2008 until January 2012, Mr. Noviello held a variety of
positions of increasing seniority within the finance organization at NetApp, including Controller and Global Controller. Prior to joining NetApp, he spent eight years at Honeywell International, where he was Chief Financial Officer of two global business units, ran investor relations, and was a leader on the corporate mergers and acquisitions team. Mr. Noviello started his career at PricewaterhouseCoopers. He is a Certified Public Accountant and holds a Bachelor’s degree in business administration from Boston University and a Master’s degree in taxation from Fairleigh Dickinson University.
Mr. Taylor has served as our Executive Vice President, General Counsel and Secretary since August 2008. From February 2007 to August 2008, he served as our Vice President, Legal. Prior to joining Symantec, Mr. Taylor held various legal and administrative positions at Phoenix Technologies Ltd., a provider of core systems software, from January 2002 to February 2007, including most recently as Chief Administrative Officer, Senior Vice President and General Counsel. From May 2000 to September 2001, he was Vice President and General Counsel at Narus, Inc., a venture-backed private company that designs IP network management software. Mr. Taylor is a director of Piper Jaffray Companies, a national advisory board member of the Stanford University Center for Comparative Studies on Race and Ethnicity and serves on the board of trustees of Menlo School. He holds a Juris Doctorate from George Washington University and a Bachelor’s degree from Stanford University.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Exchange Act requires Symantec’s directors, executive officers and any persons who own more than 10% of Symantec’s common stock, to file initial reports of ownership and reports of changes in ownership with the SEC. Such persons are required by SEC regulation to furnish Symantec with copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms furnished to Symantec and written representations from the directors and executive officers, Symantec believes that all Section 16(a) filing requirements were met in fiscal 2018, except as follows: a Form 5 covering the distribution and sale of shares held in family trusts by Gregory S. Clark, due on May 14, 2018, was filed late on a Form 4 on June 5, 2018.
Code of Conduct and Code of Ethics
We have adopted a code of conduct that applies to all of our Board members, officers and employees. We have also adopted a code of ethics for our Chief Executive Officer and senior financial officers, including our principal financial officer and principal accounting officer. OurCode of ConductandFinancial Code of Ethicsare posted on the Investor Relations section of our website located atinvestor.symantec.com, by clicking on “Company Charters,” under “Corporate Governance.” Any amendments or waivers of ourCode of ConductandCode of Ethics for Chief Executive Officer and Senior Financial Officerspertaining to a member of our Board or one of our executive officers will be disclosed on our website at the above-referenced address.
Identification of Audit Committee and Financial Expert
We have a separately-designated Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee, including each member that our Board has determined is an “audit committee financial expert” under SEC rules and regulations, are identified below.
| | |
Members: | | Frank E. Dangeard Robert S. Miller Anita M. Sands V. Paul Unruh (Chair) Suzanne M. Vautrinot |
| |
Financial Experts: | | Our Board has unanimously determined that all Audit Committee members are financially literate under current Nasdaq listing standards, and at least one member has financial sophistication under Nasdaq listing standards. In addition, our Board has unanimously determined that V. Paul Unruh qualifies as an “audit committee financial expert” under SEC rules and regulations. Mr. Unruh is independent as defined by current Nasdaq listing standards for Audit Committee membership. Designation as an “audit committee financial expert” is an SEC disclosure requirement and does not impose any additional duties, obligations or liability on any person so designated. |
Item 11. Executive Compensation
Executive Compensation and Related Information
COMPENSATION DISCUSSION & ANALYSIS (CD&A)
This compensation discussion and analysis (“CD&A”) describes the material elements of Symantec’s fiscal 2018 executive compensation program. For fiscal 2018, our named executive officers (“NEOs”) included the following current executive officers:
Gregory S. Clark, Chief Executive Officer (“CEO”);
Michael D. Fey, President and Chief Operating Officer (“COO”);
Nicholas R. Noviello, Executive Vice President and Chief Financial Officer (“CFO”); and
Scott C. Taylor, Executive Vice President, General Counsel and Secretary.
Our fiscal 2018 NEOs also included one executive officer who resigned following the end of fiscal 2018:
Francis C. Rosch, Former Executive Vice President, Consumer Digital Safety
Three Years of Transformation, Success and Challenges
This CD&A largely focuses on executive compensation granted in fiscal 2018. It also includes a discussion of long-term incentive compensation granted in fiscal 2017 and fiscal 2016, but earned based all or partly on fiscal 2018 financial or stock price performance.
Symantec has undertaken a significant transformation of its business between fiscal 2016 and fiscal 2018. In fiscal 2016, Symantec completed its strategic decision to focus solely on cybersecurity with the divestiture of its information management business, Veritas, which was completed in the fourth quarter of fiscal 2016. Our fiscal 2016 executive compensation program rewarded performance against an EPS target for the first three quarters of fiscal 2016, as well as performance in our TSR ranking over atwo- and three-year period, respectively.
In fiscal 2017, Symantec continued its transformation by undertaking a major operational initiative to reduce costs and complexity, continuing to refocus its core business to deliver comprehensive cybersecurity products for both enterprises and consumers with the acquisitions of Blue Coat and LifeLock, and reconstituting its management team, which included a new CEO, COO and CFO from our Blue Coat acquisition. In fiscal 2017, we revised our executive compensation program to ensure that the appropriate incentives were in place to drive and complete our business transformation and cost reduction initiatives, a process we expected to take more than a single fiscal year. The fiscal 2017 executive compensation program leveragednon-GAAP operating income for fiscal 2018 as a key metric to focus the Company’s efforts on the announced cost savings plan and business transformation initiatives.
In fiscal 2018, Symantec focused on continued operational execution of the business transformation embarked upon in fiscal 2017 with a focus on revenue, operating income, EPS and cash flow growth. Key objectives for fiscal 2018 included:
Delivering strong revenue growth with the integrated business portfolio across both our Enterprise and Consumer segments;
Growingnon-GAAP operating income dollars;
Improvingnon-GAAP operating income margin;
Increasing deferred revenue balances; and
Delivering strong operating cash flow.
The improvement in our results over these three years of transformation demonstrates that we have met our key objectives.
Non-GAAP Operating Non-GAAP Revenue Income / Non-GAAP EPS Operating Cash Flow ($mm) (1) Margin Expansion ($)(1) ($mm) ($mm) (1) 29% 27% 9% 18 CAGR CAGR CAGR 18 18 17% 16 16 16 18 CAGR $1,710 16 $1.67 $4,960 $1,194 $950 $4,163 $1,026 $1.03 $1.18 $802 $3,600 34% 29% 29% ($209) FY16A FY17A FY18A FY16A FY17A FY18A FY16A FY17A FY18A FY16A FY17A FY18A
| (1) | Please see below “- Reconciliation of Selected GAAP Measures toNon-GAAP Measures” for a reconciliation of the relevant adjusted measures to the most directly comparable generally accepted accounting principles (“GAAP”) measures. |
The design of our fiscal 2018 executive compensation program was aligned with the objectives noted above, with the intent to ultimately reinforce metrics and goals that would support stockholder value creation. In addition, the compensation programs were established in consideration of competitive market practices, the fact that several of the senior leaders were relatively new to Symantec and that we operate in the highly competitive cybersecurity talent market.
In developing our fiscal 2018 executive compensation programs, the Compensation Committee also relied on our regular stockholder outreach and engagement activities as well as more formal channels to communicate with stockholders, including the opportunity for stockholders to casta non-binding advisory vote regarding executive compensation at our annual meeting. At our 2017 annual meeting of stockholders, the advisory vote on executive compensation for fiscal 2017 was approved by approximately 87% of stockholder votes.
Fiscal Year 2018 Business Results
During fiscal 2018, we focused on executing our plan and strategy following the substantial transformational changes we experienced in fiscal 2017. Symantec’s financial and operational results for fiscal 2018 demonstrate this increased focus on execution:
The Company’s fiscal 2018 total revenue, determined in accordance with GAAP, was $4.834 billion, an increase of 20% over fiscal 2017, with fiscal 2018 Enterprise Security segment GAAP revenue up 8%, and fiscal 2018 Consumer Digital Safety segment GAAP revenue up 37%.
Non-GAAP operating margin for fiscal 2018 was 34.5% compared to 28.7% in fiscal 2017. This year-over-year improvement reflects ourtop-line revenue growth, as well as enhanced operating efficiencies.
The Company significantly reduced the principal amount of debt during fiscal 2018 from approximately $8.3 billion to $5.1 billion, with $1.75 billion of the fiscal 2018year-end balance comprised of convertible notes.
The Company grew deferred revenue balances by $316 million in fiscal 2018.
The Company generated cash flow from operating activities in fiscal 2018 of $950 million, compared to $209 million used for operating activities in fiscal 2017. Cash flow from operating activities in fiscal 2017 was impacted by aone-time payment for income taxes related to the gain on sale from the divestiture of Veritas during fiscal 2016. The divestiture of Veritas focused our portfolio and was a key component of our strategic refocus of the business to deliver comprehensive cybersecurity products.
The Company developed compelling product portfolios across both our Enterprise and Consumer solutions.
The Company completed the sale of its website security business and related PKI assets to DigiCert Inc. to refine the Company’s focus on higher growth cybersecurity offerings.
Additional Matters — Audit Committee Investigation
As disclosed on May 10, 2018, the Audit Committee of the Board, with the assistance of independent outside counsel and a forensic accounting firm, undertook a thorough independent investigation relating to allegations raised by a former employee (the “Audit Committee Investigation”). On September 24, 2018, the Company issued a press release announcing the completion of the Audit Committee Investigation, providing the following details regarding the Audit Committee’s findings and recommendations:
The Company does not anticipate a restatement or adjustment of any audited or unaudited, filed or previously announced, GAAP ornon-GAAP financial statements, except as described below, with respect to a specific transaction with a customer entered into in the fourth quarter of fiscal 2018 (ended March 30, 2018).
No employment actions with respect to any Section 16 officer have been recommended as a result of this investigation.
The Audit Committee noted relatively weak and informal processes with respect to some aspects of the review, approval and tracking of transition and transformation expenses. The Audit Committee also observed that beginning in the second quarter of fiscal 2018 (ended September 29, 2017), the Company initiated a review by an outside accounting firm of, and took other steps to enhance, the Company’s policies and procedures regardingnon-GAAP measures.
In addition to the matters announced in May 2018, the Audit Committee reviewed a transaction with a customer for which $13 million was recognized as revenue in the fourth quarter of fiscal 2018. After subsequent review of the transaction, the Company has concluded that $12 million of the $13 million should be deferred. Accordingly, the previously announced financial results for the fourth quarter of fiscal 2018 and the first quarter of fiscal 2019 (ended June 29, 2018) will be revised to take into account this deferral and any other financial adjustments required as a result of this revision.
The Audit Committee also reviewed certain allegations concerning, and identified certain behavior inconsistent with, the Company’s Code of Conduct and related policies. The Audit Committee referred these matters to the Company for appropriate action, which the Company intends to take.
The Audit Committee proposed certain recommendations which the Board of Directors has adopted, including: appointing a separate Chief Accounting Officer; appointing a separate Chief Compliance Officer reporting to the Audit Committee; clarifying and enhancing the Code of Conduct and related policies; and adopting certain enhanced controls and policies related to the matters investigated.
Following the completion of the Audit Committee Investigation, the Company has either implemented, or is in the process of implementing, the Audit Committee’s recommendations. Additionally, following the completion of the Audit Committee Investigation, our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 30, 2018. As further described in Part II, Item 9A “Controls and Procedures” herein, our management has concluded that, as of March 30, 2018, our internal control over financial reporting was effective at the reasonable assurance level.
Also as previously announced, the Company voluntarily contacted the SEC regarding the Audit Committee’s investigation. The SEC commenced a formal investigation and the Company will continue to cooperate with that investigation.
Fiscal Year 2019 Compensation Preview
As announced in connection with the Audit Committee Investigation, certain of the Company’s filings with the Securities and Exchange Commission were delayed, including this Annual Report on Form10-K and the fiscal 2018 CD&A contained herein. Subsequent to the announcement of fiscal 2018 performance results, fiscal 2019 guidance, and the Audit Committee Investigation, Symantec’s stockholders experienced a substantial decline in the Company’s stock price. In this context, Mr. Clark, in consultation with the Compensation Committee, elected to forego a fiscal 2019 equity award. Mr. Clark also determined, in consultation with the Compensation Committee, that none of the Company’s NEOs would receive a base salary increase for fiscal 2019.
Fiscal Year 2018 Compensation Results — Overview of Compensation through Our Transformation
Fiscal Year 2018 Compensation Components
Our fiscal year 2017 compensation program design reflected the transformation we planned to undertake. Our fiscal year 2018 compensation programs built upon the substantial transformation achieved by the Company in fiscal 2017. In fiscal 2018, we maintained our historical compensation program design for base salary and short-term cash incentive awards, and reverted back to our historical compensation program design for PRUs, as shown below:
| | |
Component | | Metrics / Purpose |
| Base Salary | | • Supports attraction and retention of talent • Aligned with role, contributions, and competitive market practice |
| |
| Annual Incentive(1) | | • 50% Revenue(non-GAAP) Encourages overall company growth, a key stockholder value driver • 50% Operating Income(non-GAAP) Provides a strong focus on cost control, aligns with stockholder value growth |
| |
| Equity Incentive | | • 70% Performance Based Restricted Stock Units (PRUs) Independently-measured corporate metrics(non-GAAP EPS and relative TSR) provide short-term and long-term motivation • 30% time-vested restricted stock units (RSUs) Promotes retention and stockholder alignment |
| (1) | In fiscal 2018, these awards would have been payable in fully-vested RSU awards. |
Compensation Outcomes Driven by our 2018 Results
Our fiscal 2018 financial results and total stockholder return drove the outcomes of the 2018 Executive Annual Incentive Plan (“FY18 EAIP”) and the FY18 PRUs, FY17 PRUs and FY16 PRUs, as follows:
| | | | | | |
| Component | | Metric (1)(2) | | Achievement | | Funding |
| FY18 EAIP | | FY18 Adjusted Non-
GAAP Operating
Income (3) | | 95.20% | | 0% |
| | FY18 Adjusted Non-
GAAP Revenue (3) | | 96.40% | | 0% |
| FY18 PRUs | | FY18 Adjusted
Non-GAAP EPS | | 95.20% | | 50.5% of the FY18 Year One Shares became eligible to be earned at the end of fiscal 2020. |
| FY17 PRUs | | FY18 Adjusted Non-
GAAP Operating
Income (4) | | 109.29% | | 268.20% (of which 250.00% vested and was funded as of FY18 end)(5) |
| FY16 PRUs | | 2-year relative TSR | | 112.20% | | 106.45% (based on FY16Q1-Q3 EPS,1-year TSR ended FY17 and2-year TSR ended FY18) |
| (1) | Please refer to the respective sections for each component below for a full overview of how the targets for each award were calculated. |
| (2) | In calculating the actual FY18 performance of each metric, the Company utilizes the relevant metric that we report in our quarterly earnings releases, and makes certain adjustments where required, in accordance with the terms of the underlying plans. Please refer to the respective sections below for details on the adjustments to the actual results under each plan, where appropriate. |
| (3) | Please see“-II. Executive Annual Incentive Plan — Executive Annual Incentive Plan Performance Measures and Target Setting” for a description of how FY18 adjustednon-GAAP operating income and FY18 adjustednon-GAAP revenue is calculated under the FY18 EAIP. |
| (4) | Please see“-III. Equity Incentive Awards — Performance-based Restricted Stock Units (PRUs) — Fiscal Year 2017 PRU Achievement” for a description of how FY18 adjustednon-GAAP operating income is calculated under the FY17 PRUs. |
| (5) | An additional 18.20% is eligible to be earned at the end of fiscal 2019, subject to continued employment through that date. |
The plan payouts reflect mixed results relative to the performance goals established for the respective plans:
FY18 EAIP.In fiscal 2018, the Company set challenging performance targets for the FY18 EAIP based on the strong progress made against its business strategy during fiscal 2017. Our Compensation Committee established the adjustednon-GAAP operating income and revenue metrics because it believed, among other factors, that these measures strongly correlate with stockholder value creation. Despite significant year-over-year improvements in results, the Company did not achieve the incremental threshold levels set for thenon-GAAP operating income andnon-GAAP revenue under the FY18 Executive Annual Incentive Plan. Accordingly, no payouts were made to our named executive officers under the payout formula for the FY18 Executive Annual Incentive Plan.
FY18 PRUs.These awards may be earned over three years based on the Company’s achievement ofnon-GAAP EPS for fiscal 2018, as adjusted under the plan, along with relative TSR against the Nasdaq 100 index for thetwo-year and three-year periods ending at the completion of fiscal 2019 and fiscal 2020, respectively. 50% of the total FY18 PRUs (“FY18 Year One Shares”) were eligible to be earned based on fiscal 2018non-GAAP EPS. Our Compensation Committee established thenon-GAAP EPS portion for the FY18 Year One Shares because it believed it would allow evaluation of Company performance on its short-term strategy execution, while requiring longer-term three-year vesting to provide alignment with stockholders over a more extended time period. For fiscal 2018, ournon-GAAP EPS target under the FY18 PRUs was $1.64 per share with a threshold performance level of $1.56 per share. The Compensation Committee determined that we achieved a fiscal 2018non-GAAP EPS of $1.56 per share, or 95.2% of this metric, resulting in the threshold level having been achieved and 50.5% of the FY18 Year One Shares (25.25% of the total FY18 PRUs) becoming eligible to be earned at the end of the FY18 PRU Performance Period at the end of fiscal 2020.
FY17 PRUs.These awards were earned based on fiscal 2018 adjustednon-GAAP operating income, which was selected as the metric for the FY17 PRUs because it provided a powerful incentive to both complete the Company’s business transformation goal while also requiring the executive team to deliver increased profitability. The fiscal 2018non-GAAP operating income target under the FY17 PRUs was $1,560 million (which took into account the Blue Coat and LifeLock acquisition and DigiCert, Inc. divestiture). The Company achieved $1,705 million in adjustednon-GAAP operating income in fiscal 2018, resulting in the achievement of 109.29% of target, with a payout of 268.20%, 250% of which being earned and vested at the end of fiscal 2018. The Compensation Committee believes the targets set in June 2016, and subsequently revised in March 2017 and October 2017, had the desired effect to drive the demonstrated growth innon-GAAP operating income from fiscal 2016 to fiscal 2018.
FY16 PRUs.These awards were earned based on a combination of fiscal 2016 EPS results and subsequent relative TSR versus the S&P 500 over fiscal 2017 and fiscal 2018. The FY16 PRUs paid out at 112.2% of target.
See “II. Executive Annual Incentive Plan” below for details on the EAIP design and pay outcome, and “Previously Granted Long Term Incentive Pay Outcomes” below for a full description of the design and pay outcomes of the FY18, FY17, and FY16 PRUs.
Our Compensation Philosophy and Practices
Our executive compensation programs are designed to drive our success as a market leader in cybersecurity. As we structure and oversee these programs, we focus on the achievement of corporate and individual performance objectives, and aim to attract and retain highly-qualified executive management while maximizing long-term stockholder value.
A number of principles and circumstances inform our executive compensation decisions. One important principle is our belief that it benefits all of our constituencies for management’s compensation to be tied to the Company’s current and long-term performance. As a result,at-risk pay comprises a significant portion of our executive compensation, particularly for individuals in more senior and influential positions.
We believe it is important to attract, motivate and retain highly-qualified executives who demonstrate strong commitment to Symantec’s success. We review relevant market and industry practices to structure compensation packages that are competitive in the markets in which we compete for executive talent. While we strive for a basic level of internal pay equity among our management team members, we believe that it is also important to reward outstanding individual performance, team success, and Company-wide results.
We are also sensitive to our need to balance the interests of our executive officers with those of our stockholders, especially when compensation decisions might increase our cost structure or stockholder dilution. We strive to appropriately balance the interests of all of our constituencies — our stockholders, our executive officers, our employee base, our business partners and our community.
Compensation Policies and Practices
As described below, the overriding principle driving the design of our executive compensation programs continues to be our belief that our employees, customers, partners and stockholders all benefit when management’s compensation is tied to our current and long-term performance. The following factors demonstrate our commitment topay-for-performance and to corporate governance best practices:
| • | | Payouts Based on Performance. We reward performance that meets targets set by the Compensation Committee. Our compensation plans do not have guaranteed payout levels, and our executive officers do not receive any payouts under performance-based cash or equity awards if the goals are not met. Our compensation plans are also capped to discourage excessive or inappropriate risk-taking by our executive officers. |
| • | | Performance-based Restricted Stock Units (“PRUs”); no Options.The majority of the annual,at-target equity compensation of our executive officers is in the form of PRUs, which have no value unless our Company achieves the targeted metrics for each PRU award. We do not award stock options to our executive officers (although some executives that joined our Company in connection with an acquisition may hold options granted to them by the acquired company and assumed by our Company). |
| • | | Metrics Correspond to Stockholder Value.Our incentive plans use multiple,non-duplicative measures that correlate to stockholder value, with no single metric overly emphasized in determining payouts in any year. |
| • | | Relevant Compensation Peer Group.Our compensation peer group consists primarily of businesses with a focus on software development, or software and engineering-driven companies that compete with us for talent. Our peer group companies are comparable to us in terms of complexity, global reach, revenue and market capitalization. We reevaluate our peer group on an annual basis and, as necessary, make adjustments to our peer group. |
| • | | Meaningful Stock Ownership Guidelines for Executives.We have long-standing stock ownership guidelines for our named executive officers, requiring them to hold a significant minimum value in shares so that they have a material financial stake in our Company and our success, aligning the interests of our executives with those of our stockholders. We also prohibit the sale of shares by executives (except to meet tax withholding obligations) if doing so would cause them to fall below required ownership levels. |
| • | | AnnualSay-on-Pay Vote and Stockholder Engagement. We seek stockholder feedback on our executive compensation through an annual advisory vote and ongoing stockholder engagement. |
| • | | No TaxGross-ups Permitted. We do not provide forgross-ups of excise tax amounts under Section 4999 of the Code. |
| • | | Limited Cash Severance.We limit any potential cash severance payments to not more than 1x of each of ournon-CEO’s executive officers’ total target cash compensation and to 2x our CEO’s annual base salary. |
| • | | Clawback Provisions.We have a recoupment, or “clawback”, policy applicable to all incentive-based compensation for certain violations of Symantec policies and to all performance-based compensation granted to the Company’s executives (even after they leave Symantec). This policy supplements contractual clawback rights which we have had in place for all of our executive compensation plans for many years, providing that any excess compensation paid to an executive officer is to be returned if our financial statements are the subject of a restatement due to error or misconduct. |
| • | | Short-selling, Hedging and Pledging Prohibited.Our executives are prohibited from short-selling Symantec stock, hedging or engaging in transactions involving Symantec-based derivative securities, and they are prohibited from pledging their Symantec stock. For more on these prohibitions and waivers therefrom, see “Related Policies and Considerations–Insider Trading, Hedging and Pledging Policies.” |
| • | | Stockholder Approval Required for Repricing or Exchanges.Our equity incentive plan prohibits the repricing or exchange of equity awards without stockholder approval. |
Named Executive Officer Compensation
General
Our named executive officers were compensated in a manner consistent with our corepay-for-performance compensation philosophy. The following are some important elements of our named executive officers’ compensation for fiscal 2018:
Majority of pay at risk. For fiscal 2018, based on full target award value, approximately 95% of our CEO’s target total direct compensation was at risk and approximately 94% of the target total direct compensation for our other named executive officers was at risk.
Short-term incentive compensation linked directly to Symantec financial results. Our annual incentive compensation for executives is structured to emphasize performance. Under the FY18 Executive Annual Incentive Plan, the named executive officers were eligible to receive performance-based incentive cash awards based on Company achievement of targetednon-GAAP operating income andnon-GAAP revenue during fiscal 2018. In fiscal 2018, these short-term awards would have been payable in fully-vested RSU awards.
100% equity-based long-term incentive compensation, the majority of which is performance-based. For fiscal 2018, the long-term compensation component of our named executive officers’ compensation packages consisted entirely of equity incentive awards.
Seventy percent of the value of the target equity incentive awards granted to our named executive officers were made in PRUs (with the remaining 30% in RSUs).
Under the FY18 PRUs, the NEOs were eligible to earn:
50% of the shares based on Company achievement of adjustednon-GAAP EPS for fiscal 2018. The Compensation Committee believed this metric would create a near-term measure for goal achievement and short-term stockholder value creation that could be impacted by the performance of the executive team while creating long-term alignment with stockholder value creation.
25% of the shares may be earned at the end of fiscal 2019 and the final 25% of the shares may be earned at the end of fiscal 2020 based on Company achievement
| over thetwo-year and three-year periods of relative TSR for the Company compared to TSR for the Nasdaq 100 index. The Compensation Committee believed these were proper metrics to allow for continued evaluation of the Company’s performance on short-term financial execution against its peers while also maintaining multi-year sustainability of stockholder value creation. |
The FY18 PRUs further encourage executive retention with the Company since the executive must, subject to limited circumstance, be employed with the Company through the end of fiscal 2020 in order to vest in any earned FY18 PRUs.
The fiscal 2018 incentive compensation performance measureswere selected because they focus on measuring the executive team’s executionfollowingSymantec’s business transformation during the preceding fiscal year. The TSR benchmark group was updated to the Nasdaq 100 index under the FY18 PRU plan from the S&P 500 which was used in our prior PRU plans (except for the FY17 PRU plan, under which TSR was not a metric) because the Compensation Committee believes the Nasdaq 100 index is more closely aligned to Symantec in terms of industries represented in the index.
“Say on Pay” Advisory Vote on Executive Compensation and Stockholder Engagement
We hold an advisory vote on named executive officer compensation, commonly known as a“Say-on-Pay” vote, on an annual basis. While these votes are not binding, we believe that it is important for our stockholders to have an opportunity to express their views regarding our executive compensation programs and philosophy as disclosed in our proxy statement on an annual basis. The Compensation Committee values our stockholders’ opinions and the Board and the Compensation Committee consider the outcome of each vote when making future compensation decisions for our named executive officers. We received approximately 97% and 87% of the votes cast on the advisory vote in favor of our executive compensation programs in fiscal 2016 and fiscal 2017, respectively.
In addition to the annual advisory vote on executive compensation, we are committed to ongoing engagement with our stockholders on executive compensation matters generally. These engagement efforts take place through telephone calls,in-person meetings and correspondence with our stockholders. For example, during fiscal 2018 we engaged in discussions with stockholders representing approximately 65% of our then outstanding shares to discuss, among other topics, executive compensation matters.
COMPENSATION COMPONENTS
The major components of target compensation for our named executive officers during fiscal 2018 were: (i) base salary, (ii) short-term cash incentive awards and (iii) long-term equity incentive awards.
Analysis of Compensation Components
Note that the financial measures used as performance targets for our NEOs arenon-GAAP measures and differ from the comparable GAAP measures reported in our financial statements and may differ from thenon-GAAP results we report in our quarterly earnings releases. We explain how we use thesenon-GAAP measures in our discussions on the calculations of each metric below.
I. Base Salary
The Compensation Committee reviews the named executive officers’ base salaries annually as part of its overall competitive market assessment and may make adjustments based on talent,
experience, performance, contribution levels, individual role, positioning relative to market and our overall salary budget. Except as described under “Named Executive Officer Compensation” above, the independent members of the Board review the CEO’s salary in executive session (i.e., without any executives present), and changes are considered in light of market pay assessments and the Board’s annual CEO performance evaluation, in each case without the participation of our CEO. In setting the base salaries for the other named executive officers, the Compensation Committee also generally considers the recommendations of the CEO based upon his annual review of their performance. See “Factors We Consider in Determining Our Compensation Programs” for a discussion of how the Compensation Committee performs its competitive market assessment.
The following table presents each named executive officer’s base salary for fiscal 2018. None of our named executive officers received a base salary increase in fiscal 2018 as compared to fiscal 2017, because our Compensation Committee deemed the base salary for each named executive officer was effective in continuing to achieve the Compensation Committee’s goals for this component of each officer’s executive compensation.
| | | | | | | | | | | | |
Name of NEO | | Fiscal 2017
Annual Salary ($) | | | Change in
Salary (%) | | | Fiscal 2018
Annual Salary ($) | |
Gregory S. Clark(1) | | | 1,000,000 | | | | - | | | | 1,000,000 | |
Michael D. Fey(1) | | | 865,000 | | | | - | | | | 865,000 | |
Nicholas R. Noviello(1) | | | 650,000 | | | | - | | | | 650,000 | |
Scott C. Taylor | | | 600,000 | | | | - | | | | 600,000 | |
Francis C. Rosch(2) | | | 700,000 | | | | - | | | | 700,000 | |
| (1) | Messrs. Clark, Fey and Noviello joined the Company following the Company’s acquisition of Blue Coat in August 2016 and received an annualized portion of the amounts listed here for fiscal 2017. |
| (2) | Mr. Rosch served as our Executive Vice President, Consumer Digital Safety through June 28, 2018. |
II. Executive Annual Incentive Plan
Executive Annual Incentive Plans for our executive officers were adopted pursuant to the Senior Executive Incentive Plan, which was most recently approved by our stockholders in 2013. The Executive Annual Incentive Plans are annual cash incentives designed to reward named executive officers (and other participants) for generating strong financial results for our Company in the short term. In fiscal 2018, these awards would have been payable in fully-vested RSU awards. To align our executives’ incentive awards with key drivers of the Company’s financial performance, all named executive officers earn incentive compensation based on performance againstpre-set corporate targets. The Compensation Committee typically sets, and evaluates achievement of, individual performance targets for named executive officers as well.
Executive Annual Incentive Plan Target Opportunities: Under the Executive Annual Incentive Plans, each named executive officer has a target award opportunity for a given fiscal year, expressed as a percentage of base salary, with the ability to earn above or below that target based on actual performance. Target award opportunities for our Executive Annual Incentive Plans are established by the Compensation Committee using the various inputs described below. The following table presents each named executive officer’s target bonus opportunity (on an actual and percentage of base salary basis) for fiscal 2018 under the FY18 Executive Annual Incentive Plan:
| | | | | | | | |
Name of NEO | | Fiscal 2018 Target
Percent of Base (%) | | | Fiscal 2018
Target ($) | |
Gregory S. Clark | | | 150 | | | | 1,500,000 | |
Michael D. Fey | | | 150 | | | | 1,297,500 | |
Nicholas R. Noviello | | | 100 | | | | 650,000 | |
Scott C. Taylor | | | 100 | | | | 600,000 | |
Francis C. Rosch | | | 100 | | | | 700,000 | |
In general, these target award opportunities for fiscal 2018 were determined based on relevant market data, desired market positions, the desired mix between cash and equity-based incentive pay, internal pay equity goals, and the role of the named executive officer. Mr. Clark’s target bonus opportunity was increased to 150% of base salary for fiscal 2018 to more closely align with competitive market practices for CEOs with similar scope and responsibilities. When target bonus opportunities are established for executive officers, there is no assurance that the performance objectives associated with the awards will be realized and all payouts are capped based on achievement of relevant performance metrics. Payment is contingent upon achievement of the threshold performance level for both metrics.
The threshold performance levels were not achieved in fiscal 2018, so no payouts were made to our named executive officers under the FY18 Executive Annual Incentive Plan.
Executive Annual Incentive Plan Performance Measures and Target Setting: Executive Annual Incentive Plan performance targets are typically established within the first 90 days of each plan year. Our management develops goals to propose to the Compensation Committee after taking into account a variety of factors, including our historical performance, internal budgets, market and peer performance and external expectations for our performance. The Compensation Committee reviews, adjusts as necessary and approves the goals, the range of performance to be rewarded and the weighting of the goals. After the end of each fiscal year, the Compensation Committee reviews our actual performance against the performance measures established in the fiscal year’s Executive Annual Incentive Plans (after making any appropriate adjustments to such measures for the effects of corporate events that were not anticipated in establishing the performance measures), determines the extent of achievement and approves the payment of annual cash incentives, if warranted.
The FY18 Executive Annual Incentive Plan was comprised of two metrics:non-GAAP operating income andnon-GAAP revenue. We used these performance metrics because:
over time, we believe thatnon-GAAP operating income andnon-GAAP revenue measures strongly correlate with stockholder value creation for Symantec;
non-GAAP operating income andnon-GAAP revenue measures are transparent to investors and are calculated on the same basis as described in our quarterly earnings releases and supplemental materials, with certain adjustments as described below;
non-GAAP operating income andnon-GAAP revenue measures are designed to balance growth and profitability; and
the executive team can have a direct impact on these metrics through skillful management and oversight.
Consistent with the presentation in our quarterly earnings releases and supplemental materials, in our executive compensation programs, we define(i) non-GAAP operating income as GAAP operating income, adjusted, as applicable, to exclude website security and PKI results included in our third quarter of fiscal year 2018 results, stock-based compensation expense, charges related to the amortization of intangible assets, restructuring, separation, transition and other related expenses, acquisition and integration expenses, certain gains or losses on litigation contingencies and settlements, the impact from deferred revenue and inventory fair value adjustments as part of business combination accounting entries and certain other income and expense items that management considers unrelated to Symantec’s core operations; and(ii) non-GAAP revenue as GAAP revenue adjusted, as applicable, to exclude website security and PKI revenue included in our third quarter of fiscal year 2018 revenue, certain litigation contingencies and settlements, and the impact from deferred revenue fair value adjustments as part of business combination accounting entries. For purposes of calculating achievement of both metrics under the FY18 Executive Annual Incentive Plan, foreign exchange movements were held constant at plan rates, pursuant to the terms of the plans.
The FY18 Executive Annual Incentive Plan provides that the determination of achievement of thenon-GAAP operating income andnon-GAAP revenue metrics is formulaic, while the individual performance metric is determined based on a qualitative evaluation of the individual’s performance againstpre-established objectives with input from our CEO. In rating the individual’s performance, the Compensation Committee gives weight to the input of our CEO, but final decisions about the compensation of our named executive officers is made solely by the Compensation Committee. The Compensation Committee has discretion to adjust individual awards as appropriate.
Weighted Average Annual Individual Individual Base of Revenue and Incentive Performance Payout Salary $ Operating Income Target % Factor % Amount $ Funding %
The payout curves for each ofnon-GAAP revenue andnon-GAAP operating income are as follows:
| | |
Fiscal 2018 Non-GAAP Operating Income Performance and Payout Ranges | | Fiscal 2018 Non-GAAP Revenue Performance and Payout Ranges |
Payout as % of Target 200% 150% 100% 50% 0% Target level payout between $1.707 and $1.747 billion 130% payout at $1.792 billion Max at $2.000 billion 40% payout at $1.655 billion $1,600 $1,700 $1,800 $1,900 $2,000 Non-GAAP Operating Income (millions) Payout as % of Target 200% 150% 100% 50% 0% Max at $5.207 billion Target at $5.007 billion 40% payout at $4.901 billion $4,800 $4,900 $5,000 $5,100, $5,200 Non-GAAP Revenue (millions)
Thenon-GAAP operating income andnon-GAAP revenue metrics are tested and funded independently of each other and are weighted equally. With the exception of our CEO, the actual individual payouts are generally further modified based on the individual performance factor generally in the range of 0% to 140% based on the performance achievement againstpre-established individual goals for the fiscal year.
| | | | | | | | | | | | | | | | |
| | | Non-GAAP
Operating Income (%) | | | Non-GAAP
Revenue (%) | | | Individual
Performance
Modifier (%) | | | Total Payout
as a Percentage of
Target (%) | |
Threshold | | | 40 | | | | 40 | | | | 35 | | | | 14 | |
Target | | | 100 | | | | 100 | | | | 100 | | | | 100 | |
Maximum | | | 200 | | | | 200 | | | | 140 | | | | 280 | |
Non-GAAP operating income andnon-GAAP revenue performance targets were established based on a range of inputs, including external market economic conditions, growth outlooks for our product portfolio, the competitive environment, our internal budgets and market expectations. The targets for achievement ofnon-GAAP operating income andnon-GAAP revenue and payout curves for the FY18 Executive Annual Incentive Plan reflected the substantial improvement innon-GAAP operating income andnon-GAAP revenue that the Company experienced in fiscal 2017 and were adjusted to reflect the financial impact of the divestiture of the Company’s website security business and related PKI assets to DigiCert, Inc. that was completed in October 2017 (the adjustment also took into consideration the effect of two small acquisitions that were completed in July 2017).
As presented in the table below, for fiscal 2018, ournon-GAAP operating income target under the FY18 EAIP was $1,707 million and ournon-GAAP revenue target under the FY18 EAIP was $5,007 million. Thenon-GAAP operating income andnon-GAAP revenue targets prior to the October 2017 adjustment were $1,857 million and $5,210 million, respectively. The Compensation Committee sets rigorous targets for incentive plan metrics, the achievement of which would reflect outstanding performance. As described more fully below underAchievement of Fiscal 2018 Performance Metrics, the Company did not achieve either of the threshold performance levels and no payouts were made to our named executive officers.
Individual Performance Assessment:In general, individual awards are determined based in part on assessment of individual performance results and impact against both quantitative and qualitative expectations for the executive’s role. The CEO’s payout opportunity does not include any individual performance modifier.
Individual performance is evaluated based on both quantitative and qualitative results in the following key areas:
financial and operational goals for the executive’s area of responsibility and the entire Company;
leadership qualities as well as functional competencies and knowledge for the executive’s area of responsibility; and
development and management of the executive’s team of employees.
Leadership skills are a common component of each of these objectives and are a significant factor in the assessment of individual performance. The executive’s willingness to contribute to cross-functional initiatives outside his or her primary area of responsibility, and the executive’s contribution to our performance-focused culture, are also extremely important aspects of the individual performance assessment.
Under the FY18 Executive Annual Incentive Plan, if the threshold performance level for each Company performance metric is achieved, the CEO evaluates the level of each named executive officer’s individual performance against thepre-determined goals following the end of fiscal year and then make a recommendation to the Compensation Committee. The Compensation Committee would then review the CEO’s compensation recommendations for the other named executive officers, make any appropriate adjustments, and approve their compensation, if warranted.
Achievement of Fiscal 2018 Performance Metrics:
FY18 Executive Annual Incentive Plan Results
| | | | | | | | | | | | | | | | | | | | |
| | | Target ($)
(millions) | | | Actual ($)
(millions) (1) | | | Achievement (%) | | | Threshold (%) | | | Funding (%) | |
Non-GAAP Operating Income | | | 1,707 | | | | 1,625 | | | | 95.2 | % | | | 97 | % | | | 0 | % |
Non-GAAP Revenue | | | 5,007 | | | | 4,827 | | | | 96.4 | % | | | 98 | % | | | 0 | % |
Fiscal 2018 Funding | | | | | | | | | | | | | | | | | | | 0 | % |
| (1) | For purposes of calculating achievement of both metrics, foreign exchange movements were held constant at plan rates, pursuant to the terms of the plans. |
With the strong progress made against the business transition plan in fiscal 2017, including year-over-year improvements in financial results between fiscal 2016 and fiscal 2017, in fiscal 2018 the Compensation Committee set challenging targets fornon-GAAP operating income andnon-GAAP revenue under the FY18 Executive Annual Incentive Plan that required outstanding performance be achieved in fiscal 2018. Notwithstanding the year-over-year improvements in results between fiscal 2017 and fiscal 2018, the Company did not achieve either of the threshold performance levels set fornon-GAAP operating income andnon-GAAP revenue under the FY18 Executive Annual Incentive Plan. Because neither threshold was achieved, no payouts were made to our named executive officers under the payout formula for the FY18 Executive Annual Incentive Plan. Individual performance metrics were set for our executive officers and were designed to be a factor in determining payout amounts, but ultimately were not taken into consideration because the threshold financial operating metrics were not achieved.
III. Equity Incentive Awards
The primary purpose of our equity incentive awards is to align the interests of our named executive officers with those of our stockholders by rewarding the named executive officers for creating stockholder value over the long term. By compensating our executives with equity incentive awards, our executives hold a stake in Symantec’s financial future. The gains realized in the long term depend on our executives’ ability to drive the financial performance of Symantec as reflected in its share price. Equity incentive awards are also a useful vehicle for attracting and retaining executive talent in the highly-competitive market for talent in which we compete.
Our 2013 Plan, provides for the award of stock options, stock appreciation rights, restricted stock, and restricted stock units (including PRUs). For fiscal 2018, the equity incentive component of our executive compensation program consisted of PRUs and RSUs for all of our named executive officers. We also offer all employees in eligible countries the opportunity to participate in the 2008 Employee Stock Purchase Plan, which allows for the purchase of our stock at a discount to the fair market value through payroll deductions. This plan is designed to comply with Section 423 of the Code. During fiscal 2018, four of the named executive officers participated in the 2008 Employee Stock Purchase Plan.
We seek to provide equity incentive awards that are competitive with companies in our peer group and the other information technology companies that the Compensation Committee includes in its
competitive market assessment. As such, we establish target equity incentive award grant guideline levels for the named executive officers based on competitive market assessments. When making annual equity awards to named executive officers, we consider our Company performance during the past year, the role, responsibility and performance of the individual named executive officer, the competitive market assessment described above, prior equity awards, and the level of vested and unvested equity awards then held by each named executive officer. In making equity awards, we also generally take into consideration gains recognizable by the executive from equity awards made in prior years. Mercer, an outside consulting firm, provides the Compensation Committee with market data on these matters, as well as providing to the Compensation Committee summaries of the prior grants made to the individual named executive officers.
As discussed below, the Compensation Committee believes that for fiscal 2018, a mix of PRUs and time-vested RSUs was the appropriate long-term equity incentive for named executive officers. For fiscal 2018, our CEO received approximately 70% of the value of his target annual equity incentive award in the form of PRUs and 30% in the form of RSUs. This is consistent with our philosophy to allocate a significant portion of the value of the CEO’s target total long-term equity incentive award in the form of PRUs rather than time-vested RSUs. For the fiscal 2018 awards, in order to provide a strong incentive to deliver on our longer- term performance objectives, we applied the same philosophy to grant a majority of the value of the target total long-term equity incentive award in the form of PRUs with our other named executive officers as well. 70% of the other named executive officers’ equity incentive award target value was also granted in the form of PRUs and approximately 30% in the form of RSUs.
For Messrs. Clark, Noviello and Fey, fiscal 2018 marked each executive’s first full fiscal year with Symantec following the acquisition of Blue Coat in August 2016 and included each executive’s first full-year equity incentive grant by Symantec. Accordingly, comparisons with certain equity grant amounts listed for fiscal 2017 herein (for example, in the Summary Compensation Table, below) may not take into account the grants each of these executives received in fiscal 2017 by Blue Coat prior to the close of the acquisition. See Note 2 to the Summary Compensation Table, below.
Restricted Stock Units (RSUs): RSUs represent the right to receive one share of Symantec common stock for each RSU vested upon the settlement date, which is the date on which certain conditions, such as continued employment with us for apre-determined length of time, are satisfied. The Compensation Committee believes that RSUs align the interests of the named executive officers with the interests of our stockholders because the value of these awards appreciates if the trading price of our common stock appreciates, and these awards also have retention value even during periods in which our trading price does not appreciate, which supports continuity in the senior management team.
Shares of our common stock are issued to RSU holders as the awards vest. The vesting schedule for RSUs granted to our named executive officers in fiscal 2018 as part of the annual review process provide that each award vests in three installments: 30% in June 2018, 30% in June 2019 and 40% in June 2020.
Details of RSUs granted to our named executive officers in fiscal 2018 are disclosed in the Grants of Plan-Based Awards table on page 106 and summarized in the last table within the next subsection below.
Performance-based Restricted Stock Units (PRUs): The Compensation Committee grants PRUs in furtherance of our pay for performance philosophy. Our Compensation Committee established this program to enhance our pay for performance culture with components directly linked to Company performance against established metrics overtwo- and three-year periods. Unlike our RSU awards, the
shares underlying the PRUs awarded for fiscal 2018 are eligible to be earned only if we achieve a threshold ofnon-GAAP EPS for fiscal 2018 and a threshold of relative TSR against the Nasdaq 100 index for thetwo- and three-year periods ending fiscal 2019 and fiscal 2020, respectively, as shown below.
FY2018 PRU Design FY 2018 FY 2019 FY 2020 50% - FY2018 EPS Performance (A) Payout Range 0% - 200% for each metric 25% - 2-year TSR Performance (B) 25% - 3-year TSR Performance (C) A + B + C = Total Number of PRUs Earned (Subject to continued employment, all of the earned shares are released at the end of FY2020)
For fiscal 2018, our PRU design reflected a renewed focus on linking executive compensation to operational execution and stockholder value creation. The Compensation Committee believed that using independently-measured corporate metrics(non-GAAP EPS and relative TSR) for the FY18 PRUs would motivate our executive team by providing distinct separate opportunities to earn awards.Non-GAAP EPS was chosen to help create a near-term measure for goal achievement and short-term stockholder value creation that could be impacted by the performance of the executive team, while also supplementing thenon-GAAP operating income performance metrics under the FY17 PRUs and thenon-GAAP operating income and revenue performance metrics under the FY18 Executive Annual Incentive Plan.
For the FY18 PRUs, adjustednon-GAAP EPS is calculated as GAAP profit before tax, adjusted, as applicable, to exclude website security and PKI results included in our third quarter of fiscal year 2018 results, stock-based compensation expense, charges related to the amortization of intangible assets, restructuring, separation, transition and other related expenses, acquisition and integration expenses, certain gains or losses on litigation contingencies and settlements, the impact from deferred revenue and inventory fair value adjustments as part of business combination accounting entries,non-cash interest expense, gains on divestitures and sale of assets, loss from equity interest, income from discontinued operations and certain other income and expense items that management considers unrelated to Symantec’s core operations, less GAAP tax expense excluding (i) the discrete impacts of changes in tax legislation, (ii) most other significant discrete items, (iii) certain unique GAAP reporting requirements under discontinued operations and (iv) the income tax effects of thenon-GAAP adjustment to our operating results described above. This amount is divided by a fixed share count, which eliminates dilution or stock buybacks from impacting the financial performance in the calculation ofnon-GAAP EPS. For purposes of calculating achievement of this metric, foreign exchange movements were held constant at plan rates, pursuant to the terms of the plan.
The two and three-year relative TSR metric was chosen to enable evaluation of Company performance against its peers while maintaining multi-year sustainability of stockholder value creation. We changed our TSR benchmark group to the Nasdaq 100 index from the S&P 500 which was used in prior year PRU plans, because the Compensation Committee believed the Nasdaq 100 index is more closely aligned to Symantec in terms of industries and companies represented.
With respect to thenon-GAAP EPS metric of the FY18 PRUs, 50% of the shares underlying the FY18 PRUs (“FY18 Year One Shares”) are eligible to be earned based on the achievement of thenon-GAAP EPS threshold amount. Depending on actual results, 0% to 200% of the FY18 Year One Shares will be eligible to be earned at the end of the3-year performance period. With some exceptions (including acceleration of vesting upon a change in control of our Company under the terms of the Symantec Executive Retention Plan, as amended), the FY18 Year One Shares earned at the end of fiscal 2018 will vest, if at all, only at the end of fiscal 2020 (the “FY18 PRU Performance Period”), and the named executive officer must be employed by us at the end of such period in order to vest in the award. The following table presents threshold, target and maximum performance levels and payouts at thenon-GAAP EPS metric:
| | | | | | | | |
| | | EPS Performance as
a Percentage of
Target (%) | | | EPS Payout as
a Percentage of
Target (%) | |
Threshold Level Payout % | | | 95 | | | | 50 | |
Target Level Payout % | | | 100 | | | | 100 | |
Maximum Payout % | | | 108 | | | | 200 | |
For fiscal 2018, ournon-GAAP EPS target under the FY18 PRUs was $1.64 per share with a threshold level of $1.56 per share. The Compensation Committee determined that we achieved 95.2% of the target level of this metric, resulting in the threshold level having been achieved and 50.5% of the FY18 Year One Shares becoming eligible to be earned at the end of the FY18 PRU Performance Period at the end of fiscal 2020.
With respect to the relative TSR metric of the FY18 PRUs, 25% of the shares underlying the FY18 PRUs (“FY18 Year Two Shares”) are eligible to be earned based on the achievement of the Company’s relative TSR threshold amount over thetwo-year TSR performance ending on the last day of fiscal 2019, measured against thetwo-year TSR performance of companies comprising the Nasdaq 100 index over the same period. The companies deemed to be in the Nasdaq 100 index for this purpose consist of those companies that make up the Nasdaq 100 index at the end of fiscal 2019. Depending on achievement of this metric, 0% to 200% of the FY18 Year Two Shares will be eligible to be earned at the end of the FY18 PRU Performance Period. With some exceptions (including acceleration of vesting upon a change in control under the terms of the Symantec Executive Retention Plan, as amended), the FY18 Year Two Shares vest, if at all, only at the end of the FY18 PRU Performance Period, and the named executive officer must be employed by us at the end of such period in order to vest in the award.
An additional 25% of the shares underlying the FY18 PRUs (“FY18 Year Three Shares”) are eligible to be earned only based on the achievement of the Company’s relative TSR threshold amount over the three-year TSR performance ending on the last day of fiscal 2020, as measured against the three-year TSR performance of companies comprising the Nasdaq 100 index over the same period. The companies deemed to be in the Nasdaq 100 index for this purpose consist of those companies that make up the Nasdaq 100 index at the end of fiscal 2020. Depending on the achievement of this metric, 0% to 200% of the FY18 Year Three Shares will be eligible to be earned at the end of the FY18 PRU Performance Period. With some exceptions (including acceleration of vesting upon a change in control of our Company under the terms of the Symantec Executive Retention Plan, as amended), the FY18 Year Three Shares vest, if at all, only at the end of the FY18 PRU Performance Period, and the named executive officer must be employed by us at the end of such period in order to vest in the award. If our TSR performance applicable to the FY18 Year Two Shares(2-year performance) is below target, any unearned shares below the target level are added to the FY18 Year Three Shares. TSR is calculated using a60-trading day average stock price at the beginning and end of the applicable period plus the value of dividends provided in the respective period.
The following table presents threshold, target and maximum performance levels and payouts of the relative TSR metric for the FY18 Year Two Shares and the FY18 Year Three Shares:
| | | | | | | | |
| | TSR Percentile
Rank against
Nasdaq 100 | | | TSR Payout as a
Percentage of Target (%) | |
Threshold Level Payout % | | | 25th | | | | 50 | |
Target Level Payout % | | | 50th | | | | 100 | |
Maximum Payout % | | | 75th | | | | 200 | |
Details of PRUs granted to our named executive officers in fiscal 2018 are disclosed in the Grants of Plan-Based Awards table on page 106 and summarized in the last table within the next subsection below.
Equity Grant Summary:The following table summarizes the number of shares granted subject to equity awards in fiscal 2018, the value of each award and the total value of the equity awards for each named executive officer as of the grant date (with all values of RSU awards based upon the closing price for a share of our common stock of $29.71 on June 9, 2017). The grant values provided below were established in the context of various factors, including competitive award opportunities for direct peer roles and potential alternative roles for which key individuals were potential candidates and the strategic importance of roles relative to the fiscal year 2018 and ongoing execution of the business transformation begun in fiscal 2017.
For Messrs. Clark, Noviello and Fey, fiscal 2018 marked each executive’s first full fiscal year with Symantec following the acquisition of Blue Coat in August 2016 and included each executive’s first full-year equity grant by Symantec. Accordingly, comparisons with certain equity grant amounts listed for fiscal 2017 herein (for example, in the Summary Compensation Table, below) may not take into account the grants each of these executives received in fiscal 2017 by Blue Coat prior to the close of the acquisition. Please refer to Note 2 to the Summary Compensation Table on page 103 for additional information regarding the calculation of the PRU value at grant date.
| | | | | | | | | | | | | | | | | | | | |
Name of NEO | | Target PRUs (#) | | | PRU Value at
Grant Date ($) | | | RSUs (#) | | | RSU Value at
Grant Date ($) | | | Total Target
Equity Incentive
Awards Value
at Grant Date ($) | |
Gregory S. Clark | | | 339,674 | | | | 11,657,612 | | | | 145,575 | | | | 4,325,033 | | | | 15,982,645 | |
Michael D. Fey | | | 317,029 | | | | 10,880,435 | | | | 135,870 | | | | 4,036,698 | | | | 14,917,133 | |
Nicholas R. Noviello | | | 158,514 | | | | 5,440,200 | | | | 67,935 | | | | 2,018,349 | | | | 7,458,549 | |
Scott C. Taylor | | | 101,902 | | | | 3,497,276 | | | | 43,672 | | | | 1,297,495 | | | | 4,794,772 | |
Francis C. Rosch | | | 271,739 | | | | 9,326,082 | | | | 116,460 | | | | 3,460,026 | | | | 12,786,109 | |
Previously Granted Long Term Incentive Pay Outcomes
Our fiscal 2018 financial results resulted in compensation plan payouts for long term incentive plan awards that had been made in fiscal 2016 and fiscal 2017. The payouts reflect mixed results relative to the performance goals established for the respective plans in the different fiscal years.
The FY16 PRUs paid out at 112.2% of target based on a combination of fiscal 2016 EPS results and subsequent total stockholder return (“TSR”) versus the S&P 500 over fiscal 2017 and fiscal 2018.
The FY17 PRU was funded at 268.20% of target, based on fiscal 2018 adjustednon-GAAP operating income results that were ahead of the original goals and delivered achievement of 109.29% of target. 250% of the shares were earned and vested at the end of fiscal 2018, with the remaining shares vesting at the end of fiscal 2019.
The FY18 PRUs were structured so that 50% of the awards were eligible to be earned based on fiscal 2018non-GAAP EPS (the FY18 Year One Shares). We achievednon-GAAP EPS of $1.56 per share, or 95.2% of this metric, resulting in the threshold level having been achieved and 50.5% of the FY18 Year One Shares (25.25% of the total FY18 PRUs) becoming eligible to be earned at the end of the FY18 PRU Performance Period at the end of fiscal 2020. The remaining 50% of FY18 PRUs will be eligible to vest based on two and three year relative TSR; any shares earned based on relative TSR performance will vest at the end of fiscal year 2020.
Fiscal Year 2016 PRU Achievement
FY2016 PRU Design FY 2018 FY 2019 FY 2020 50% of shares earned based on FY2016 EPS TSR used as a Modifier (A) modified based on TSR Payout Range 100% - FY2016 1-year TSR Q1-Q3 EPS 0% - 150% Performance (B) Performance (A) 50% of shares earned based on FY2016 EPS(A) modified based on 2-year TSR Performance (C) EPS Payout Range 0% - 133% (A x 50% x B)+ (A x 50% x C) = Total Number of PRUs Earned (all of the earned shares are released after FY2020 end)
The PRUs granted to our named executive officers in fiscal 2016 (the “FY16 PRUs”) were eligible to be earned only if we achieved a threshold ofnon-GAAP EPS for the first three quarters of fiscal 2016. For purposes of calculating achievement for fiscal 2016, wedefine non-GAAP EPS as GAAP profit before tax, including discontinued operations, adjusted to exclude stock-based compensation expense, charges related to the amortization of intangible assets, restructuring, separation, transition and other related expenses, certain expenses related to transition service agreements with our former information management business, and certain other income and expense items that management considered unrelated to Symantec’s core operations, less GAAP tax expense excluding the income tax effects of thenon-GAAP adjustment to our operating results described above. This amount is divided by diluted weighted-average shares outstanding for the period. For purposes of calculating achievement of this metric, foreign exchange movements were held constant at plan rates.
Our fiscal 2016 awards were granted and specifically designed by our Compensation Committee to enhance our pay for performance culture with a component directly linked to our TSR over two and three-year periods. Depending on our achievement of this metric, 0% to 133% of the target shares would be eligible to be earned at the end of the second and third fiscal year after the fiscal year of grant, based on, and subject to further adjustment as a result of, the achievement of the TSR ranking for our Company as compared to the S&P 500. If any target shares became eligible (the “eligible shares”) to be earned in the second and third fiscal year after the fiscal year of grant as a result of achievement of thenon-GAAP EPS metric for the fiscal year of grant, then 50% to 150% ofone-half of the eligible shares would be earned based on the achievement of the TSR goal for the two years ended at the end of the second fiscal year after the fiscal year of grant and 50% to 150% ofone-half of the eligible shares (plus any eligible shares not earned at the end of the second fiscal year after the
fiscal year of grant if less than 100% of the TSR goal is achieved for thetwo-year period then ended) would be earned based on the achievement of the TSR goal for the three years ended at the end of the third fiscal year after the fiscal year of grant. For the FY16 PRUs, we measure the performance period of the TSR to one year (fiscal 2017) and two years (fiscal 2017-2018 period) to exclude in each case the impact of the Veritas separation which took place during fiscal 2016. Subject to certain exceptions (including acceleration of vesting upon a change in control of our Company under the terms of the Symantec Executive Retention Plan, as amended), the award shall vest, if at all, only at the end of the third year of the performance period (i.e., fiscal 2018), and the named executive officer must be employed by us at the end of such period in order to vest in the award.
Below is the summary of our FY16 PRU performance metric achievements. The three-year performance period for the fiscal 2016 awards granted in fiscal 2016 completed at the end of fiscal 2018. The Compensation Committee certified an overall payout of 106.45% of the target award level.
| | | | | | | | | | | | |
| Non-GAAP EPS | | 2-Year TSR | | 3-Year TSR |
Performance
as % of Target | | Eligible
Shares as %
of Target
Shares | | S&P 500
Percentile
Ranking | | Payout as %
of Target | | S&P 500
Percentile
Ranking | | Payout as %
of Target | | Overall
Payout |
| 88.71% | | 81.19% | | 94th | | 150.00% | | 56th | | 112.24% | | 106.45% |
Fiscal Year 2017 PRU Achievement
FY2017 PRU Design FY 2017 FY 2018 FY 2019 100% - FY2018 Operating Income Addl Vesting Period Up to 250% of target award vested after for the portion Payout Range FY2018 (A) exceeding 250% of 0% - 300% target award (B) A + B = Total Number of PRUs Earned (Subject to continued employment, earned shares up to 250% of target award are released after FY2018 end; earned shares exceeding 250% of target award are released after FY 2019)
As noted above, the achievement associated with the FY17 PRUs marks a significant element of executive compensation that was determined on fiscal 2018 results and awarded in fiscal 2019. As a key component of our fiscal 2017 long-term equity incentive compensation program, in June 2016, our Compensation Committee granted PRUs to our then-current executive team, including Messrs. Taylor and Rosch under our 2013 Equity Incentive Plan. Similarly, in anticipation of their joining our executive team, Blue Coat granted Messrs. Clark, Fey and Noviello PRUs under an identical Blue Coat equity plan prior to the Blue Coat acquisition closing. At the time of grant in June 2016, the Company had announced a cost savings plan and business transformation initiatives which the Compensation Committee recognized would involve a multi-year effort on the part of the Company’s executives. Accordingly, the FY17 PRUs were designed with a performance metric that would focus the Company’s efforts on producing significantly increased profitability by the end of fiscal 2018. The Compensation Committee revised the performance metric and the targets upward in March 2017 to take into account the Blue Coat and LifeLock acquisitions, and subsequently adjusted the targets down in October 2017 in connection with the divestiture of the Company’s website security business and related PKI assets to DigiCert, Inc., which divestiture was completed in October 2017 (the October 2017 adjustment also took into consideration the effect of two small acquisitions that were completed in July 2017).
The Compensation Committee chose fiscal 2018non-GAAP operating income as the appropriate metric for the FY17 PRUs because it provided a powerful incentive to both complete the Company’s business transformation goal while also requiring the executive team to deliver increased profitability. Taking into account the revisions to the performance metric in March 2017 and October 2017, the fiscal 2018non-GAAP operating income target under the FY17 PRUs was $1,560 million, and the Company achieved $1,705 million in adjustednon-GAAP operating income in fiscal 2018, resulting in the achievement of 109.29% of target, with funding at 268.20% of target, 250% of which was earned and vested at the end of fiscal 2018, as discussed below. The Compensation Committee believes the targets set in June 2016, and subsequently revised in March 2017 and October 2017, had the desired effect to drive the demonstrated growth innon-GAAP operating income from fiscal 2016 to fiscal 2018.
For purposes of calculating performance under the FY17 PRUs, we definenon-GAAP operating income as our fiscal 2018 GAAP operating income, adjusted, as applicable, to exclude website security and PKI results included in our third quarter of fiscal year 2018 results, stock-based compensation expense, charges related to the amortization of intangible assets, restructuring, separation, transition and other related expenses, acquisition and integration expenses, certain gains or losses on litigation contingencies and settlements, the impact from deferred revenue and inventory fair value adjustments as part of business combination accounting entries and certain other income and expense items that management and/or the Compensation Committee considers unrelated to Symantec’s core operations.Non-GAAP operating income was adjusted under FY17 PRUs to (i) allow for the negative impact of up to $91 million of foreign exchange rates on revenue, with no limit on the positive foreign exchange impact, and (ii) adjusted beneficially for changes to Symantec’s capital structure that positively impacted Symantec’s EPS on anon-GAAP Basis, such as cash interest expense savings due to prepayment of indebtedness.
Depending on our achievement of this metric, 0% to 300% of the target shares were eligible to be earned at the end of fiscal 2018, subject to additional vesting conditions in certain cases as discussed below. To further encourage continued service to our Company and our stockholders, for any achievement above 250% of target to be earned, the participant must generally be employed by our Company through the end of fiscal 2019 when the additional payout in excess of 250% will be made.
Below is the summary of our FY17 PRU performance metric achievement:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | FY18 non-GAAP
Operating
Income Target ($)
(millions) | | FY18 non-GAAP
Operating
Income Actual ($)
(millions) | | FY18 Non-GAAP
Operating
Income
Performance as a % of
Target | | Vesting Level
as a % of Target Award | | Eligible Shares as a % of
Target Shares
at end of
FY18 | | Eligible Shares
as a % of
Target
Shares
at end of
FY19 |
Fiscal 2017 PRU | | 1,560 | | 1,705 | | 109.29 | | 268.20 | | 250.00 | | 18.20 |
For purposes of calculating performance under the FY17 PRUs, our FY18non-GAAP operating income target was $1,560 million and our actual FY18non-GAAP operating income was $1,705 million. The Compensation Committee determined that we achieved 109.29% of target, resulting in a payout of 268.20% of target under the FY17 PRUs. According to the terms of the FY17 PRUs, 250% of the plan payout was earned at the end of fiscal 2018, and the additional 18.2% (the excess amount above 250% as described above) is eligible to be earned at the end of fiscal 2019, provided the participant is employed by our Company through the end of fiscal 2019.
Details of PRUs granted to our named executive officers in fiscal 2017 are disclosed in the Grants of Plan-Based Awards table on page 106 and summarized in the last table within the next subsection below.
Fiscal Year 2018 PRU Achievement
In designing the fiscal 2018 long-term incentive program, the Compensation Committee chosenon-GAAP earnings per share (“EPS”) and relative total stockholder return (“TSR”) against the Nasdaq 100 index as the applicable performance metrics for the fiscal 2018 PRU awards (the “FY18 PRUs”). These awards may be earned over three years based on the Company’s achievement ofnon-GAAP EPS for fiscal 2018, as adjusted under the plan, along with relative TSR against the Nasdaq 100 index for thetwo-year and three-year periods ending at the completion of fiscal 2019 and fiscal 2020, respectively, as described below. Our Compensation Committee established thenon-GAAP EPS portion of the FY18 PRUs because it believed it would allow evaluation of Company performance on its short-term strategy execution, while requiring longer-term three-year vesting to provide alignment with stockholders over a more extended time period. This EPS metric is balanced by longer-term relative TSR measurement of stockholder value creation which requires Symantec to match or exceed median market results to achieve a payout of target or a greater number of shares.
| | | | | | | | |
| | FY18 non-GAAP EPS Target | | 18 non-GAAP EPS Actual | | Achievement
as a
Percentage
of Target | | Eligible Shares as a % of Target Shares at end of FY18 |
Fiscal 2017 PRU | | $1.64 per share | | $1.56 per share | | 95.20% | | 50.5% of the FY18 Year One Shares (20.25% of the total FY18 PRUs) became eligible to be earned at the end of fiscal 2020. |
For fiscal 2018, ournon-GAAP EPS target under the FY18 PRUs was $1.64 per share with a threshold performance level of $1.56 per share. The Compensation Committee determined that we achieved a fiscal 2018non-GAAP EPS of $1.56 per share, or 95.20% of this metric, resulting in the threshold level having been achieved and 50.5% of the FY18 Year One Shares becoming eligible to be earned at the end of the FY18 PRU Performance Period at the end of fiscal 2020.*
| * | See “Compensation Components—III. Equity Incentive Awards – Performance Restricted Stock Units (PRUs)” below for a description of adjustednon-GAAP EPS target and relative TSR. |
Health and Welfare Benefits; Perquisites
All named executive officers are eligible to participate in our Section 401(k) plan (which includes our matching contributions), health and dental coverage, life insurance, disability insurance, paid time off, and paid holidays on the same terms as are available to all employees generally. These rewards are designed to be competitive with overall market practices, and are in place to attract and retain the talent needed in the business. In addition, named executive officers are eligible to participate in the deferred compensation plan, and to receive other benefits described below.
Deferred Compensation: Symantec’s named executive officers are eligible to participate in a nonqualified deferred compensation plan that provides management employees on our U.S. payroll with a base salary of $180,000 or greater (including our named executive officers) the opportunity to defer up to 75% of base salary, 100% of sales commissions, and 100% of annual incentive payments for payment at a future date. This plan is provided to be competitive in the executive talent market, and to provide executives with atax-efficient alternative for receiving earnings. Three of our named executive officers participated in this plan during fiscal 2018. The plan is described further under“Non-Qualified Deferred Compensation in Fiscal 2018,” on page 109.
Perquisites: Symantec’s executive officers typically do not receive perquisites, except in limited circumstances when deemed appropriate and approved by the Compensation Committee. For
example, an additional benefit available to executive officers is reimbursement for up to $10,000 for financial planning services. We also provide a car service for our CEO and incurred $155,196 in costs through the end of fiscal 2018 under this ongoing arrangement. In fiscal 2018, we entered into an aircraft lease agreement with our CEO for Company use of an aircraft owned by Mr. Clark, under which Mr. Clark recognized $3,075 in imputed income in fiscal 2018. The Compensation Committee provides these perquisites for business-related purposes and believes they are prevalent in the marketplace for executive talent. The value of the perquisites we provide is taxable to the named executive officers and the incremental cost to us for providing these perquisites is reflected in the Summary Compensation Table. These benefits are disclosed in the All Other Compensation column of the Summary Compensation Table on page 109.
Change of Control and Severance Arrangements: Our Executive Retention Plan provides (and the terms of our PRUs provide) participants with “double trigger” acceleration of vesting of equity awards and, if applicable, such awards become immediately exercisable, where the individual’s employment is terminated without cause, or is constructively terminated, within 12 months after a change in control of our Company (as defined in the plan). In the case of PRUs granted prior to fiscal 2017, PRUs will vest at target if the change in control occurs prior to the first performance period and will vest as to eligible shares based on the results for the initial performance period if the change in control occurs following the first performance period but before the end of the third performance period. In the case of PRUs granted in fiscal 2017, PRUs will vest at target regardless of whether the change in control event occurs prior to or during the performance period. The PRUs granted in fiscal 2018 will also vest at target if the change in control event takes place during the three-year performance period.
We believe that this double trigger acceleration appropriately furthers the intent of the applicable plan without providing an undue benefit to those executives who continue to be employed following a change in control transaction. The intent of the plan is to enable named executive officers to have a balanced perspective in making overall business decisions in the context of a potential acquisition of our Company, as well as to be competitive with market practices. The Compensation Committee believes that change in control benefits, if structured appropriately, serve to minimize the distraction caused by a potential transaction and reduce the risk that key talent would leave our Company before a transaction closes.
The change in control and severance payments and benefits described above do not influence and are not influenced by the other elements of compensation as these benefits serve different objectives than the other elements. We do not provide forgross-ups of excise tax values under Section 4999 of the Code. Rather, we allow the named executive officer to reduce the benefit received or waive the accelerated vesting of options to avoid excess payment penalties.
Details of each individual named executive officer’s severance payments and benefits, including estimates of amounts payable in specified circumstances in effect as of the end of fiscal 2018, are disclosed under “Potential Payments Upon Termination or Change-in-Control” below.
FACTORS WE CONSIDER IN DETERMINING OUR COMPENSATION PROGRAMS
The Compensation Committee applies a number of compensation policies and analytic tools in implementing our compensation principles. These policies and tools guide the Compensation Committee in determining the mix and value of the compensation components for our named executive officers, consistent with our compensation philosophy. They include:
Focus onPay-for-Performance: Our executive compensation program is designed to reward executives for results. As described below, the pay mix for our named executive officers emphasizes variable pay in the form of short-term cash and long-term equity awards. For cash awards, short-term
results are measured by annualnon-GAAP operating income, annualnon-GAAP revenue and, for all our named executive officers except the CEO, individual performance. A significant portion of equity grants for our named executive officers are directly based on our financial performance. The value of the remainder of the equity grants to our named executive officers depends on the Company share price performance.
A Total Rewards Approach: Elements of the total rewards offered to our executive officers include base salary, short- and long-term incentives including equity awards, health benefits and a deferred compensation program.
Appropriate Market Positioning: Our general pay positioning strategy is to target the levels of base salary, annual short-term cash incentive structure and long-term equity incentive opportunities and benefits for our named executive officers with reference to the relevant market data for each position. Nonetheless, the Compensation Committee bases its decisions on its subjective judgment and may set the actual components for an individual named executive officer above or below the positioning benchmark based on factors such as experience, performance achieved, specific skills or competencies, the desired pay mix (e.g., emphasizing short- or long-term results) and our budget.
Competitive Market Assessments: Market competitiveness is one factor that the Compensation Committee considers each year in determining a named executive officer’s overall compensation package, including pay mix. The Compensation Committee relies on various data sources to evaluate the market competitiveness of each pay element, including publicly-disclosed data from a peer group of companies and published survey data from a broader set of information technology companies that the Compensation Committee believes represent Symantec’s competition in the broader talent market, based on the advice of Mercer, an outside consulting firm engaged by the Compensation Committee for fiscal 2018. The proxy statements of peer group companies provide detailed pay data for the highest-paid executives. Survey data, which we obtain from the Radford Global Technology Survey, provides compensation information on a broader group of executives and from a broader group of information technology companies, with positions matched based on specific job scope and responsibilities. The Compensation Committee considers data from these sources as a framework for making compensation decisions for each named executive officer’s position.
The information technology industry in which we compete is characterized by rapid rates of change and intense competition from small and large companies, and the companies within this industry have significant cross-over in leadership talent needs. As such, we compete for executive talent with leading software and services companies as well as in the broad information technology industry. We face particularly intense competition with companies located in the geographic areas where Symantec operates, regardless of specific industry focus or company size. Further, consistent with prior years, in part because we believe that stockholders measure our performance against a wide array of technology peers, for fiscal 2018 the Compensation Committee used a peer group that consists of a broad group of high technology companies in different market segments that were of a comparable size to us. The Compensation Committee used this peer group, as well as other relevant market data, to evaluate named executive officer pay levels.
The Compensation Committee reviews our peer group on an annual basis, with input from Mercer, and the group may be adjusted from time to time based on, among other factors, a comparison of revenues, market capitalization, industry, peer group performance, merger and acquisition activity and stockholder input. The Compensation Committee reviewed and revised our peer group for fiscal 2018. The following criteria were used to select our updated peer group to be used to evaluate named executive officer pay levels in connection with setting compensation for fiscal 2018:
Business with software development focus including security related businesses where possible;
Similar breadth, complexity and global reach as Symantec; and
Annual revenue 0.5x to 2.0x as a starting point but including companies based on an assessment of overlapping geography, engineering focus and executive talent competition.
The Compensation Committee selected the following companies as our fiscal 2018 peer group:
Fiscal 2018 Symantec Peer Group
| | | | |
Activision Blizzard, Inc. | | eBay Inc. | | Red Hat Inc. |
Adobe Systems Incorporated | | Electronic Arts Inc. | | Salesforce.com, Inc. |
Autodesk, Inc. | | FireEye, Inc. | | Synopsys, Inc. |
Akamai Technologies Inc. | | Intuit Inc. | | VMware, Inc. |
CA, Inc. | | Palo Alto Networks Inc. | | |
Citrix Systems, Inc. | | PayPal Holdings, Inc. | | |
LinkedIn and Yahoo! were removed from our fiscal 2018 peer group as a result of their acquisitions. The Compensation Committee evaluated our peer group for fiscal 2019 and determined to keep the companies otherwise the same for fiscal 2019.
Appropriate Pay Mix: Consistent with ourpay-for-performance philosophy, our executive officers’ compensation is structured so that a large portion of their total direct compensation is paid based on the performance of our Company (modified by individual achievement). In determining the mix of the various reward elements and the value of each component, the Compensation Committee takes into account the executive’s role, the competitiveness of the market for executive talent, company performance, individual performance, internal pay equity and historical compensation. In making its determinations with regard to compensation, the Compensation Committee reviews the various compensation elements for the CEO and our other named executive officers (including base salary, target annual bonus and the value of vested and unvested equity awards actually or potentially issued).
The percentage of an executive officer’s compensation opportunity that is“at-risk,” or variable instead of fixed, is based primarily on the officer’s level of influence at Symantec. Executive officers generally have a greater portion of their pay at risk through short- and long-term incentive programs than the rest of our employee population because of their relatively greater responsibility and ability to influence our Company’s performance.
As illustrated by the following charts, for fiscal 2018, approximately 95% of our CEO’s target total direct compensation (sum of annual base salary, target annual incentive, and grant date fair value of equity awards) wasat-risk, and on average approximately 94% of our other named executive officers’ compensation opportunity wasat-risk compensation. As a result of no annual incentives being paid to our executive officers for fiscal 2018, actual pay was delivered 94% in the form of equity for our CEO and an average of 93% for our NEOs other than the CEO.
| | |
Fiscal 2018 Total Direct Compensation Mix(1) 
| | Fiscal 2018 Total Direct Compensation Mix(1) 
|
| (1) | Does not equal 100% due to rounding. |
Form and Mix of Long-Term Equity Incentive Compensation: The long-term equity incentive compensation component of our regular annual executive compensation program consists of PRUs and RSUs for all of our named executive officers. The Compensation Committee’s allocation between these two forms of equity is designed to strike the appropriate balance between performance and retention for long-term equity incentive awards.
For fiscal 2018, our CEO received approximately 70% of the value of his target annual equity incentive award in the form of PRUs and 30% in the form of RSUs. Other named executive officers, also received, on average, approximately 70% of the target annual equity incentive award in the form of PRUs and 30% in the form of RSUs. We consider slightly lower proportional weighting of base salary in the CEO’s total direct compensation, compared to the other named executive officers, to be appropriate given both the level of total direct compensation and the broader level of influence over Company performance associated with the CEO role.
The percentages described above (and other percentage-based equity award values discussed below) are generally based on the grant date fair value of the shares of common stock underlying the RSUs, and the grant date fair value of the PRUs at the target level award size.
In making its compensation decisions and recommendations, the Compensation Committee may consider factors such as the individual executive’s responsibilities, performance, industry experience, current pay mix, total compensation competitiveness, previous equity awards, retention considerations, and other factors.
Compensation Risk Assessment: The Compensation Committee, in consultation with Mercer, conducted its annual risk analysis of Symantec’s compensation policies and practices and does not believe that our compensation programs encourage excessive or inappropriate risk taking by our executives, or that they are reasonably likely to have a material adverse effect on Symantec.
Burn Rate and Dilution: We closely manage how we use our equity to compensate employees. We compute our “gross burn rate” as the total number of shares granted under all of our equity incentive plans during a period divided by the weighted average number of shares of common stock
outstanding during that period and expressed as a percentage. We compute our “net burn rate” as the total number of shares granted under all of our equity incentive plans during a period, minus the total number of shares returned to such plans through awards cancelled during that period, divided by the weighted average number of shares of common stock outstanding during that period, and expressed as a percentage. We compute “overhang” as the total number of shares underlying options and awards outstanding plus shares available for issuance under all of our equity incentive plans (other than our Employee Stock Purchase Plan) at the end of a period divided by the weighted average number of shares of common stock outstanding during that period and expressed as a percentage. The Compensation Committee reviews and approves our equity usage for our equity compensation programs throughout the year based on our business and talent strategy and competitive market practices to attract, motivate and retain talent. In addition, the Compensation Committee considers the accounting charges that will be reflected in our financial statements under GAAP when establishing the forms of equity to be granted and the size of the overall pool available. For fiscal 2018, our gross burn rate was 1.49%, our net burn rate was 0.96% and our overhang was 12.23%.
Roles of Our Compensation Committee, Independent Directors, Executive Officers and Consultants in our Compensation Process
The Compensation Committee, which is comprised entirely of independent directors, is responsible for overseeing all of Symantec’s compensation programs, including the review and recommendation to the independent directors of our Board of all compensation arrangements for our CEO and the review and approval of the compensation arrangement for our other named executive officers.
The independent members of the Board evaluate our CEO’s performance and the Compensation Committee then reviews and recommends to the independent members of the Board all compensation arrangements for our CEO. After discussion, the independent members of the Board determine our CEO’s compensation. The Compensation Committee also discusses the performance of the other named executive officers with our CEO, reviews the compensation recommendations that our CEO submits for the other named executive officers, makes any appropriate adjustments and approves their compensation. While our CEO provides input and makes compensation recommendations with respect to executive officers other than himself, our CEO does not make recommendations with respect to his own compensation or participate in the deliberations regarding the setting of his own compensation by the Board or the Compensation Committee.
Since fiscal 2004, the Compensation Committee has engaged Mercer, an outside consulting firm, to provide advice and ongoing recommendations on executive compensation matters. The Compensation Committee oversees Mercer’s engagement. Mercer representatives meet informally with the Compensation Committee Chair and the Chief Human Resources Officer and also with the Compensation Committee during its regular meetings, including in executive sessions from time to time without any members of management present.
As part of its engagement for fiscal 2018, Mercer provided, among other services, advice and recommendations on the amount and form of executive and director compensation. For example, Mercer evaluated and advised the Compensation Committee on the peer group that the Compensation Committee uses to develop a market composite for purposes of establishing named executive officer pay levels (as described below), the competitiveness of our executive and director compensation programs, the design of awards and proposed performance metrics and opportunity ranges for incentive plans, compensation-related trends and developments in our industry and the broader talent market and regulatory developments relating to compensation practices.
We paid Mercer approximately $478,000 for executive compensation services in fiscal 2018. In addition, management engaged and Symantec paid Mercer and its affiliates for other services,
including approximately $3,719,621 of unrelated consulting and business services in fiscal 2018. We also reimbursed Mercer and its affiliates for reasonable travel and business expenses. The Compensation Committee did not review or approve the other services provided by Mercer and its affiliates to Symantec, as those services were approved by management in the normal course of business within the scope of the Compensation Committee’spre-authorization for such services. Based in part on policies and procedures implemented by Mercer to ensure the objectivity of its executive compensation consultants and the Compensation Committee’s assessment of Mercer’s independence pursuant to the SEC rules, the Compensation Committee concluded that the consulting advice it receives from Mercer is objective and not influenced by Mercer and its affiliates’ other relationships with Symantec and that no conflict of interest exists that will prevent Mercer from being independent consultants to the Compensation Committee.
The Compensation Committee establishes our compensation philosophy, approves our compensation programs and solicits input and advice from several of our executive officers and Mercer. As mentioned above, our CEO provides the Board and the Compensation Committee with feedback on the performance of our executive officers and makes compensation recommendations (other than with respect to his own compensation) that are presented to the Compensation Committee for their approval. Our CEO, Chief Human Resources Officer and General Counsel regularly attend the Compensation Committee’s meetings to provide their perspectives on competition in the industry, the needs of the business, information regarding Symantec’s performance and other advice specific to their areas of expertise. In addition, at the Compensation Committee’s direction, Mercer works with our Chief Human Resources Officer and other members of management to obtain information necessary for Mercer to make their own recommendations as to various matters, as well as to evaluate management’s recommendations.
Equity Grant Practices: The Compensation Committee generally approves grants of equity awards to the named executive officers at its first meeting of each fiscal year, or shortly thereafter through subsequent action. The grant date for all equity grants made to employees, including the named executive officers, is generally the 10th day of the month following the applicable meeting. If the 10th day is not a business day, the grant is generally made on the previous business day. The Compensation Committee does not coordinate the timing of equity awards with the release of material, nonpublic information. RSUs may be granted from time to time throughout the year, but all RSUs (with the exception of grants assumed with acquisitions) generally vest on either March 1, June 1, September 1 or December 1 for administrative reasons.
Change of Control and Severance Arrangements: The vesting of certain stock options, RSUs and PRUs held by our named executive officers will accelerate if they are subject to an involuntary (including constructive) termination of employment under certain circumstances. For additional information about these arrangements, see “—Health and Welfare Benefits; Perquisites—Change of Control and Severance Arrangements” above and “Potential Payments Upon Termination orChange-in-Control,” below.
RELATED POLICIES AND CONSIDERATIONS
To ensure that the overall executive compensation structure is aligned with stockholder interests and competitive with the market, we maintain the following policies:
Stock Ownership Requirements
We believe that in order to align the interests of our executive officers with those of our stockholders, our executive officers should have a financial stake in our Company. We have maintained stock ownership requirements for our executive officers since October 2005. For fiscal
2018, our executive officers were required to hold shares of our common stock (excluding stock options and unvested RSUs and PRUs) with value equal to:
CEO: 6x base salary (increased from 5x base salary effective August 1, 2017 to further align with interests of stockholders);
CFO and President and COO: 3x base salary; and
Executive Vice Presidents: 2x base salary.
The executive officer is required to acquire and thereafter maintain the stock ownership required within four years of becoming an executive officer of Symantec. During the four-year transition period, each executive officer must retain at least 50% of all net(after-tax) equity grants until the required stock ownership level is met.
As of October 10, 2018, all of our named executive officers have reached the stated ownership requirements for fiscal 2018. See the table below for individual ownership levels relative to the executive’s ownership requirement.
| | | | | | | | |
Named Executive Officer | | Ownership
Requirement (1)
(# of shares) | | | Holdings as of
October 10, 2018
(# of shares) | |
Gregory S. Clark | | | 301,508 | | | | 2,901,511 | |
Michael D. Fey | | | 130,402 | | | | 1,007,398 | |
Nicholas R. Noviello | | | 97,990 | | | | 363,952 | |
Scott C. Taylor | | | 60,302 | | | | 350,364 | |
Francis C. Rosch(2) | | | n/a | | | | n/a | |
| (1) | Based on the closing price for a share of our common stock of $19.90 on October 10, 2018. |
| (2) | Mr. Rosch served as our Executive Vice President, Consumer Digital Safety through June 28, 2018. |
Recoupment “Clawback” Policies
In 2017, we adopted a recoupment, or “clawback”, policy applicable to all performance-based compensation granted to the Company’s officers (even after they leave Symantec). In August 2018, our Board further expanded this clawback policy to allow for recoupment for certain violations of the Company’s policies. This updated policy supplements the contractual clawback rights we have had in all of our executive compensation plans since fiscal 2009 (providing for the return of any excess compensation received by an executive officer if our financial statements are the subject of a restatement due to error or misconduct).
Insider Trading, Hedging and Pledging Policies
Our Insider Trading Policy prohibits all directors and employees from short-selling Symantec stock or engaging in transactions involving Symantec-based derivative securities, including, but not limited to, trading in Symantec-based option contracts (for example, buying and/or writing puts and calls). It also prohibits pledging Symantec stock as collateral for a loan. Notwithstanding this policy, the Board granted a waiver from the prohibition against transactions with respect to derivative securities for Mr. Feld and Starboard solely for the purpose of enabling Starboard to exercise the forward contracts that were in existence before Mr. Feld was appointed to the Board and that were described in Starboard’s Schedule 13D with respect to the Company filed with the SEC on August 16, 2018. The grant of this waiver was conditioned upon Mr. Feld’s and Starboard’s compliance with all applicable laws and all other provisions of our Insider Trading Policy in connection with such derivative securities transactions.
In addition, our Insider Trading Policy prohibits our directors, officers, employees and contractors from purchasing or selling Symantec securities while in possession of material,non-public information. It also requires that each of our directors, our Chief Executive Officer, our President, and our Chief Financial Officer conduct any open market sales of our securities only through use of stock trading plans adopted pursuant to Rule10b5-1 of the Exchange Act. Rule10b5-1 allows insiders to sell and diversify their holdings in our stock over a designated period by adoptingpre-arranged stock trading plans at a time when they are not aware of material nonpublic information about us, and thereafter sell shares of our common stock in accordance with the terms of their stock trading plans without regard to whether or not they are in possession of material nonpublic information about the Company at the time of the sale. All other executives are strongly encouraged to trade using Exchange Act Rule10b5-1 plans.
Tax and Accounting Considerations on Compensation
The financial reporting and income tax consequences to the Company of individual compensation elements are important considerations for the Compensation Committee when it reviews compensation practices and makes compensation decisions. While structuring compensation programs that result in more favorable tax and financial reporting treatment is a general principle, the Compensation Committee balances these goals with other business needs that may be inconsistent with obtaining the most favorable tax and accounting treatment for each component of its compensation.
Deductibility by Symantec. Section 162(m) of the Code generally disallows public companies a tax deduction for federal income tax purposes of remuneration in excess of $1 million paid to certain executive officers. While the Compensation Committee may consider the deductibility of awards as one factor in determining our executive compensation, it also looks at other factors in making its executive compensation decisions and retains the flexibility to grant awards or pay compensation the Compensation Committee determines to be consistent with its goals for Symantec’s executive compensation program, even if the awards may not be deductible by Symantec for tax purposes.
Recent changes to Section 162(m) in connection with the passage of the Tax Cuts and Jobs Act repealed the exception to the deductibility limit that were previously available for “qualified performance-based compensation” (including stock option grants, performance-based cash bonuses and performance-based equity awards, such as performance-based restricted stock units) effective for taxable years beginning after December 31, 2017. Compensation paid to certain of our executive officers for taxable years beginning prior to December 31, 2017 remains deductible if such compensation would otherwise be deductible for such taxable year. The Tax Cuts and Jobs Act also increased the number of executive officers who are affected by the loss of deductibility effective for taxable years beginning after December 31, 2017. As a result, any compensation paid to certain of our executive officers for taxable years beginning after December 31, 2017 in excess of $1 million will benon-deductible unless it qualifies for transition relief afforded by the Tax Cuts and Jobs Act to compensation payable pursuant to certain binding arrangements in effect on November 2, 2017 (including performance-based restricted stock units granted to our executive officers who were “covered employees” within the meaning of Section 162(m) that were intended to qualify as performance-based compensation for purposes of Section 162(m) and that were granted prior to such time but not yet vested or settled).
We believe that compensation expense incurred in respect of the exercise of our stock options granted to our executive officers prior to November 2, 2017 will continue to be deductible pursuant to this transition rule. However, because of uncertainties in the interpretation and implementation of the changes to Section 162(m) in the Tax Cuts and Jobs Act, including the scope of the transition relief, we can offer no assurance of such deductibility with respect to payment of cash bonuses paid or RSUs or PRUs settled after December 31, 2017.
Tax Implications for Officers. Section 409A of the Code imposes additional income taxes on executive officers for certain types of deferred compensation that do not comply with Section 409A. The Company attempts in good faith to structure compensation so that it either conforms with the requirements of or qualifies for an exception under Code Section 409A. Sections 280G and 4999 of the Code imposes an excise tax on payments to executives of severance or change of control compensation that exceed the levels specified in the Section 280G rules. Our named executive officers could receive the amounts shown in the section entitled “Potential Payments Upon Termination orChange-in-Control” (beginning on page 108 below) as severance or change of control payments that could implicate this excise tax. As mentioned above, we do not offer our officers as part of their change of control benefits any gross ups related to this excise tax under Code Section 4999.
Accounting Considerations. The Compensation Committee also considers the accounting and cash flow implications of various forms of executive compensation. In its financial statements, the Company records salaries and cash-based performance-based compensation incentives as expenses in the amount paid, or estimated to be paid, to the named executive officers. Accounting rules also require the Company to record an expense in its financial statements for equity awards, even though equity awards are not paid in cash to employees. The accounting expense of equity awards to employees is calculated in accordance with the requirements of FASB Accounting Standards Codification Topic 718. The Compensation Committee believes, however, that the many advantages of equity compensation, as discussed above, more than compensate for thenon-cash accounting expense associated with them.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee during fiscal 2018 were Geraldine B. Laybourne, David L. Mahoney, Robert S. Miller and Daniel H. Schulman. None of the members of the Compensation Committee in fiscal 2018 were at any time during fiscal 2018 or at any other time an officer or employee of Symantec or any of its subsidiaries, and none had or have any relationships with Symantec that are required to be disclosed under Item 404 of RegulationS-K. None of Symantec’s executive officers has served as a member of the board of directors, or as a member of the compensation or similar committee, of any entity that has one or more executive officers who served on our Board or Compensation Committee during fiscal 2018.
Compensation Committee Report
The information contained in the following report of Symantec’s Compensation Committee is not considered to be “soliciting material,” “filed” or incorporated by reference in any past or future filing by Symantec under the Exchange Act or the Securities Act of 1933 unless and only to the extent that Symantec specifically incorporates it by reference.The Compensation Committee has reviewed and discussed with management the CD&A contained in this Annual Report on Form10-K. Based on this review and discussion, the Compensation Committee has recommended to the Board that the CD&A be included in our proxy statement and our Annual Report on Form10-K for the fiscal year ended March 30, 2018.
By: The Compensation and Leadership Development Committee of the Board:
David L. Mahoney (Chair)
Peter A. Feld*
Geraldine B. Laybourne
Robert S. Miller
Daniel H. Schulman
| * | Joined the Compensation Committee on September 16, 2018. |
Reconciliation of Selected GAAP Measures toNon-GAAP Measures
(In millions, except per share data)
| | | | | | | | | | | | |
| | | March 30, 2018 | | | Year Ended
March 31, 2017 | | | April 1, 2016 | |
Net revenues (GAAP) | | $ | 4,834 | | | $ | 4,019 | | | $ | 3,600 | |
Deferred revenue fair value adjustment | | | 126 | | | | 144 | | | | - | |
| | | | | | | | | | | | |
Net revenues(Non-GAAP) | | $ | 4,960 | | | $ | 4,163 | | | $ | 3,600 | |
| | | | | | | | | | | | |
Operating income (loss) (GAAP) | | $ | 49 | | | $ | (100 | ) | | $ | 457 | |
Deferred revenue fair value adjustment | | | 126 | | | | 144 | | | | - | |
Inventory fair value adjustment | | | - | | | | 24 | | | | - | |
Unallocated corporate charges | | | - | | | | - | | | | 186 | |
Stock-based compensation | | | 610 | | | | 440 | | | | 161 | |
Amortization of intangible assets | | | 453 | | | | 293 | | | | 86 | |
Restructuring, transition and other costs | | | 410 | | | | 273 | | | | 136 | |
Acquisition-related costs | | | 60 | | | | 120 | | | | - | |
Litigation settlement | | | 2 | | | | - | | | | - | |
| | | | | | | | | | | | |
Operating income(Non-GAAP) | | $ | 1,710 | | | $ | 1,194 | | | $ | 1,026 | |
| | | | | | | | | | | | |
Operating margin (GAAP) | | | 1.0 | % | | | (2.5 | %) | | | 12.7 | % |
Operating margin(Non-GAAP) | | | 34.5 | % | | | 28.7 | % | | | 28.5 | % |
Diluted net income (loss) per share (GAAP)(1) | | $ | 1.70 | | | $ | (0.17 | ) | | $ | 3.71 | |
Adjustments to diluted net income (loss) per share | | | | | | | | | | | | |
Deferred revenue fair value adjustment | | | 0.19 | | | | 0.23 | | | | - | |
Inventory fair value adjustment | | | - | | | | 0.04 | | | | - | |
Unallocated corporate charges | | | - | | | | - | | | | 0.28 | |
Stock-based compensation | | | 0.91 | | | | 0.71 | | | | 0.24 | |
Amortization of intangible assets | | | 0.68 | | | | 0.47 | | | | 0.13 | |
Restructuring, transition and other costs | | | 0.61 | | | | 0.44 | | | | 0.20 | |
Acquisition-related costs | | | 0.09 | | | | 0.19 | | | | - | |
Litigation settlement | | | 0.00 | | | | - | | | | - | |
Non-cash interest expense | | | 0.07 | | | | 0.06 | | | | - | |
Gain on divestiture and gain on sale of assets | | | (0.98 | ) | | | - | | | | - | |
Loss from equity interest | | | 0.04 | | | | - | | | | - | |
Income tax reform | | | (0.99 | ) | | | - | | | | - | |
Other income tax effects and adjustments | | | (0.65 | ) | | | (0.54 | ) | | | 1.42 | |
| | | | | | | | | | | | |
Total adjustment from continuing operations | | | (0.02 | ) | | | 1.61 | | | | 2.27 | |
Total adjustment from discontinued operations | | | (0.02 | ) | | | (0.21 | ) | | | (4.94 | ) |
Incremental dilution effect | | | - | | | | (0.05 | ) | | | (0.01 | ) |
| | | | | | | | | | | | |
Diluted net income per share(Non-GAAP) | | $ | 1.67 | | | $ | 1.18 | | | $ | 1.03 | |
| | | | | | | | | | | | |
Diluted weighted-average shares outstanding (GAAP) | | | 668 | | | | 618 | | | | 670 | |
Incremental dilution | | | - | | | | 27 | | | | 6 | |
| | | | | | | | | | | | |
Diluted weighted-average shares outstanding(Non-GAAP) | | | 668 | | | | 645 | | | | 676 | |
| | | | | | | | | | | | |
| (1) | Net income (loss) per share amounts may not add due to rounding |
Objective ofnon-GAAP measures: We believe our presentation ofnon-GAAP financial measures, when taken together with corresponding GAAP financial measures, provides meaningful supplemental
information regarding the Company’s operating performance for the reasons discussed below. Our management team uses thesenon-GAAP financial measures in assessing Symantec’s performance, as well as in planning and forecasting future periods. Due to the importance of these measures in managing the business, we usenon-GAAP measures in the evaluation of management’s compensation. Thesenon-GAAP financial measures are not computed according to GAAP and the methods we use to compute them may differ from the methods used by other companies.Non-GAAP financial measures are supplemental and should not be considered a substitute for financial information presented in accordance with GAAP and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
Deferred revenue fair value adjustment: Ournon-GAAP net revenues eliminate the impact of deferred revenue purchase accounting adjustments required by GAAP. GAAP requires an adjustment to the liability for acquired deferred revenue such that the liability approximates how much we, the acquirer, would have to pay a third party to assume the liability. We believe that eliminating the impact of this adjustment improves the comparability of revenues between periods. Also, although the adjustment amounts will never be recognized in our GAAP financial statements, we do not expect the acquisitions to affect the future renewal rates of revenues excluded by the adjustments. In addition, our management usesnon-GAAP net revenues, adjusted for the impact of purchase accounting adjustments to assess our operating performance and overall revenue trends. Nevertheless,non-GAAP net revenues has limitations as an analytical tool and should not be considered in isolation or as a substitute for GAAP net revenues. We believe these adjustments are useful to investors as an additional means to reflect revenue trends of our business. However, other companies in our industry may not calculate these measures in the same manner which may limit their usefulness for comparative purposes.
Inventory fair value adjustment: Purchase accounting requires us to measure acquired inventory at fair value. The fair value of inventory reflects the acquired company’s cost of manufacturing plus a portion of the expected profit margin. Thesenon-GAAP adjustments to our cost of revenues exclude the expected profit margin component that is recorded under purchase accounting associated with our acquisitions. We believe the adjustments are useful to investors as an additional means to reflect cost of revenues and gross margin trends of our business.
Unallocated corporate charges: A significant portion of the segments’ expenses arise from shared services and infrastructure that we have historically provided to the segments in order to realize economies of scale and to efficiently use resources. These expenses, collectively called corporate charges, include legal, accounting, real estate, information technology services, treasury, human resources and other corporate infrastructure expenses. Charges were allocated to the segments, and the allocations were determined on a basis that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by the segments. Corporate charges previously allocated to our former information management business (“Veritas”), but not classified within discontinued operations, were not reallocated to our other segments. We eliminate these unallocated corporate charges from ournon-GAAP operating results to facilitate a more meaningful comparison of our past operating performance to current operating results.
Stock-based compensation: This consists of expenses for employee restricted stock units, performance-based awards, bonus share programs, stock options and our employee stock purchase plan, determined in accordance with GAAP. We evaluate our performance both with and without these measures because stock-based compensation is anon-cash expense and can vary significantly over time based on the timing, size, nature and design of the awards granted, and is influenced in part by certain factors that are generally beyond our control, such as the volatility of the market value of our common stock. In addition, for comparability purposes, we believe it is useful to provide anon-GAAP financial measure that excludes stock-based compensation to facilitate the comparison of our results to those of other companies in our industry.
Amortization of intangible assets: Amortization of intangible assets consists of amortization of acquisition-related intangibles assets such as developed technology, customer relationships and trade names acquired in connection with business combinations. We record charges relating to the amortization of these intangibles within both cost of revenues and operating expenses in our GAAP financial statements. Under purchase accounting, we are required to allocate a portion of the purchase price to intangible assets acquired and amortize this amount over the estimated useful lives of the acquired intangible assets. However, the purchase price allocated to these assets is not necessarily reflective of the cost we would incur to internally develop the intangible asset. Further, amortization charges for our acquired intangible assets are inconsistent in size and are significantly impacted by the timing and valuation of our acquisitions. We eliminate these charges from ournon-GAAP operating results to facilitate an evaluation of our current operating performance and provide better comparability to our past operating performance.
Restructuring, transition and other costs: Restructuring charges are costs associated with a formal restructuring plan and are primarily related to employee severance and benefit arrangements. Other charges include facilities and other exit and disposal costs, including asset write-offs. Transition costs are associated with formal discrete strategic information technology initiatives and primarily consist of consulting charges associated with our enterprise resource planning and supporting systems and costs to automate business processes. In addition, transition costs include expenses associated with our divestitures. We exclude restructuring, transition and other costs from ournon-GAAP results as we believe that these costs are incremental to core activities that arise in the ordinary course of our business and do not reflect our current operating performance, and that excluding these charges facilitates a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
Acquisition-related costs: These represent the transaction and business integration costs related to significant acquisitions that are charged to operating expense in our GAAP financial statements. These costs include incremental expenses incurred to affect these business combinations such as advisory, legal, accounting, valuation, and other professional or consulting fees. We exclude these cost from ournon-GAAP results as they have no direct correlation to the operation of our business, and because we believe that thenon-GAAP financial measures excluding these costs provide meaningful supplemental information regarding the spending trends of our business. In addition, these costs vary, depending on the size and complexity of the acquisitions, and are not indicative of costs of future acquisitions.
Litigation settlement: We may periodically incur charges or benefits related to litigation settlements. We exclude these charges and benefits when associated with a significant settlement because we do not believe they are reflective of ongoing business and operating results.
Non-cash interest expense and amortization of debt issuance costs: In accordance with GAAP, we separately account for the value of the conversion feature on our convertible notes as a debt discount that reflects our assumednon-convertible debt borrowing rates. We amortize the discount and debt issuance costs over the term of the related debt. We exclude the difference between the imputed interest expense, which includes the amortization of the conversion feature and of the issuance costs, and the coupon interest payments because we believe that excluding these costs provides meaningful supplemental information regarding the cash cost of our convertible debt and enhance investors’ ability to view the Company’s results from management’s perspective.
Gain on divestitures: We periodically recognize gains on divestitures, including in fiscal 2018 related to our WSS and PKI solutions. We have excluded these gains for purposes of calculating ournon-GAAP results. We believe making these adjustments facilitates a better evaluation of our current operating performance and comparisons to past operating results.
Gain (loss) from equity interest: We record gains or losses in equity method investments representing net income or loss attributable to our noncontrolling interest in companies over which we have limited control and visibility. We exclude such gains and losses in full because we lack control over the operations of the investee and the related gains and losses are not indicative of our ongoing core results.
Income tax effects and adjustments: Prior to the third quarter of fiscal 2018, we used a projected long-termnon-GAAP tax rate that reflected the elimination of the effects of thenon-GAAP adjustments to our operating results described above and significant discrete items, as well as certain unique GAAP reporting requirements under discontinued operations as a result of the sale of Veritas in order to provide better consistency across the interim financial reporting periods. Starting with the third quarter of fiscal 2018, as a result of U.S. tax reform, we use anon-GAAP tax rate that excludes (1) the discrete impacts of changes in tax legislation, (2) most other significant discrete items, (3) certain unique GAAP reporting requirements under discontinued operations and (4) the income tax effects of thenon-GAAP adjustment to our operating results described above. We believe making these adjustments facilitates a better evaluation of our current operating performance and comparisons to past operating results. Our tax rate is subject to change for a variety of reasons, such as significant changes in the geographic earnings mix due to acquisition and divestiture activities or fundamental tax law changes in major jurisdictions where we operate.
Discontinued operations: In August 2015, we entered into a definitive agreement to sell the assets of Veritas to Carlyle. The transaction closed on January 29, 2016. The results of Veritas, including the net gain on divestiture of $3.0 billion, are presented as discontinued operations in our Consolidated Statements of Operations and thus have been excluded fromnon-GAAP net income for all reported periods.
Diluted GAAP andnon-GAAP weighted-average shares outstanding: Diluted GAAP andnon-GAAP weighted-average shares outstanding are the same, except in periods that there is a GAAP loss from continuing operations. In accordance with GAAP, we do not present dilution for GAAP in periods in which there is a loss from continuing operations. However, if there isnon-GAAP net income, we present dilution fornon-GAAP weighted-average shares outstanding in an amount equal to the dilution that would have been presented had there been GAAP income from continuing operations for the period.
Summary of Compensation
The following table shows for the fiscal year ended March 30, 2018, compensation awarded to or paid to, or earned by each individual who served as our Chief Executive Officer, our Chief Financial Officer during fiscal 2018 and the three most highly compensated executive officers who were serving as executive officers (other than as our Chief Executive Officer or Chief Financial Officer) at the end of fiscal 2018 (the “named executive officers”).
Summary Compensation Table for Fiscal 2018
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name and Principal Position | | Fiscal
Year | | | Salary ($) | | | Bonus ($) | | | Stock
Awards (1)(2) ($) | | | Option
Awards
($) | | | Non-Equity
Incentive Plan
Compensation ($) | | | All Other
Compensation ($) | | | Total ($) | |
Gregory S. Clark Chief Executive Officer | | | 2018 | | | | 1,000,000 | | | | - | | | | 15,982,645 | | | | - | | | | - | (3) | | | 364,936 | (4) | | | 17,347,581 | |
| | | 2017 | | | | 666,667 | (5) | | | - | | | | 4,269,815 | (6) | | | - | | | | 743,333 | (7) | | | 379,937 | (8) | | | 6,059,752 | (6) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
Nicholas R. Noviello Executive Vice President and CFO | | | 2018 | | | | 650,000 | | | | - | | | | 7,458,549 | | | | - | | | | - | (3) | | | 47,606 | (9) | | | 8,156,155 | |
| | | 2017 | | | | 433,333 | (5) | | | - | | | | 1,077,917 | (6) | | | - | | | | 479,673 | (7) | | | 172,740 | (10) | | | 2,163,663 | (6) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
Michael D. Fey President and COO | | | 2018 | | | | 865,000 | | | | - | | | | 14,917,133 | | | | - | | | | - | (3) | | | 41,832 | (11) | | | 15,823,965 | |
| | | 2017 | | | | 544,167 | (5) | | | - | | | | 2,856,660 | (6) | | | - | | | | 909,370 | (7) | | | 131,000 | (12) | | | 4,441,197 | (6) |
| | | | | | | | | |
Scott C. Taylor Executive Vice President, General Counsel and Secretary | | | 2018 | | | | 600,000 | | | | - | | | | 4,794,772 | | | | - | | | | - | (3) | | | 621,788 | (13) | | | 6,016,560 | |
| | | 2017 | | | | 600,000 | | | | 150,000 | (14) | | | 4,831,307 | | | | - | | | | 568,374 | (7) | | | 363,462 | (15) | | | 6,513,143 | |
| | | 2016 | | | | 593,939 | | | | - | | | | 3,082,307 | | | | - | | | | 283,380 | (16) | | | 86,028 | (17) | | | 4,045,654 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| Francis C. Rosch Former Executive Vice President, Consumer Digital Safety* | | | 2018 | | | | 700,000 | | | | - | | | | 12,786,109 | | | | - | | | | - | (3) | | | 755,059 | (18) | | | 14,241,168 | |
| | | 2017 | | | | 612,500 | (19) | | | - | | | | 6,039,114 | | | | - | | | | 623,970 | (7) | | | 461,965 | (20) | | | 7,737,549 | |
| | | 2016 | | | | 504,394 | | | | - | | | | 5,137,221 | | | | - | | | | 320,750 | (16) | | | 97,334 | (21) | | | 6,059,699 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| * | Mr. Rosch served as our Executive Vice President, Consumer Digital Safety through June 28, 2018. |
| (1) | The amounts shown in this column reflect the aggregate grant date fair value of awards, calculated in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 for RSUs and PRUs) and was determined based on the fair value of our common stock on the date of grant/modification, except for the amounts listed for Messrs. Clark, Noviello and Fey for fiscal 2017 and described further in footnote 6 below. For a discussion of the valuation methodology used to value the PRUs awarded during fiscal years 2016, 2017 and 2018, see footnote 2 below. For details of the awards granted in fiscal 2018, see the table “Grants of Plan-Based Awards”, below. |
| (2) | The FY18 PRUs are based on a three-year performance period. The FY18 PRUs are eligible to be earned if we achieve at least the threshold level of the performance goal for adjustednon-GAAP EPS for fiscal 2018 and at least the threshold level of the performance goals for relative TSR against the Nasdaq 100 index for thetwo- and three- year periods ending fiscal 2019 and fiscal 2020, respectively. Depending on our achievement of these metrics, 0% to 200% of the target shares are eligible to be earned at the end of fiscal 2020, provided the participant is employed with the Company through the end of fiscal 2020, with certain exceptions.One-half of the eligible shares will be based on the achievement of the adjustednon-GAAP EPS performance goal,one-quarter of the eligible shares will be based on the achievement of thetwo-year relative TSR performance goal, and the remainingone-quarter of shares will be based on the achievement of the three-year relative TSR performance goal. |
The FY17 PRUs were aone-time design award based on aone-year performance period ended fiscal 2018. The FY17 PRUs are eligible to be earned if we achieve at least 50% of the target levelnon-GAAP operating income performance for fiscal 2018. Depending on our achievement of this metric, 0% to 300% of the target shares were eligible to be earned with the first 250% of the target shares eligible to be earned at the end of fiscal 2018 and any remaining eligible shares (up to 50% for an aggregate of 300%) eligible to be earned at the end of fiscal 2019, provided the participant is employed with the Company through the end of fiscal 2019 with certain exceptions.
The FY16 PRUs are based on a three-year performance period. The FY16 PRUs are eligible to be earned if we achieve at least 70% of the target levelnon-GAAP EPS performance. Depending on our achievement of this metric, 0% to 133% of the target shares was eligible to be earned at the end of the fiscal 2016, based on, and subject to further adjustment as a result of, the achievement of the TSR goal for our Company as compared to the S&P 500 (the market-related component) in fiscal 2017 and 2018. If any target shares become eligible (the “eligible shares”) to be earned as a result of achievement of the performance-
related component, then 50% to 150% ofone-half of the eligible shares may be earned based on the achievement of the TSR goal for the first and second fiscal years and 50% to 150% of the remainingone-half of the eligible shares (plus any eligible shares not earned at the end of the second fiscal year) may be earned based on the achievement of the TSR goal for the first, second and third fiscal years. Consistent with ASC Topic 718, the full grant date fair value for the market-related component, or the TSR adjustment, for the entire three-year performance cycle is included in the amounts shown for the year of grant and was determined using a Monte Carlo simulation option pricing model (“Monte Carlo model”) as of the date the PRUs were awarded.
The table below sets forth the grant date fair value (prior to any applicable modifications) determined in accordance with ASC Topic 718 principles for the performance-related components of these awards (i) based upon the probable outcome of the fiscal years 2016, 2017 and 2018 performance-related component as of the grant date, and (ii) based upon achieving the maximum level of performance under the fiscal years 2016, 2017 and 2018 performance-related component as of the grant date. Also set forth below are the grant date fair values pertaining to the market-related component or the TSR adjustment and significant inputs and assumptions used in the Monte Carlo model, determined upon grant in fiscal years 2016, 2017 and 2018, and which are not subject to probable or maximum outcome assumptions.
| | | | | | | | | | | | | | | | |
Name | | Fiscal
Year | | | Probable Outcome of
Performance
Conditions Grant
Date Fair Value
($) | | | Maximum
Outcome of
Performance
Conditions Grant
Date Fair Value
($) | | | Market-Related
Component Grant
Date Fair Value
($) | |
Gregory S. Clark | | | 2018 | | | | 11,657,612 | | | | 23,315,223 | | | | N/A | |
| | | | |
Nicholas R. Noviello | | | 2018 | | | | 5,440,200 | | | | 10,880,401 | | | | N/A | |
| | | | |
Michael D. Fey | | | 2018 | | | | 10,880,435 | | | | 21,760,871 | | | | N/A | |
| | | | |
Scott C. Taylor | | | 2018 | | | | 3,497,277 | | | | 6,994,553 | | | | N/A | |
| | | 2017 | | | | 2,866,870 | | | | 8,600,609 | | | | N/A | |
| | | 2016 | | | | 1,814,793 | | | | 2,584,234 | | | | 1,943,033 | |
Francis C. Rosch | | | 2018 | | | | 9,326,082 | | | | 18,652,165 | | | | N/A | |
| | | 2017 | | | | 3,583,574 | | | | 10,750,722 | | | | N/A | |
| | | 2016 | | | | 3,024,672 | | | | 4,307,081 | | | | 3,238,407 | |
| | | | | | | | | | | | | | | | |
Grant Date | | Fiscal Year | | | Grant Date
Fair Value
per Unit ($) | | | Volatility (%) | | | Risk-Free
Interest
Rate (%) | |
6/9/2017 | | | 2018 | | | | 34.32 | | | | 23.23 | | | | 1.47 | |
6/10/2015 | | | 2016 | | | | 27.03 | | | | 22.55 | | | | 1.07 | |
We adjusted the performance metrics under our FY17 PRU grants on March 8, 2017. The incremental modification charges were based on the Company’s stock price on the date of the modification ($29.60) multiplied by the incremental expected achievement percentage multiplied by the number of granted units. Volatility and interest rate were not factors.
For Messrs. Clark, Noviello and Fey, fiscal 2018 marked each executive’s first full fiscal year with Symantec following the acquisition of Blue Coat by Symantec in August 2016. The amounts listed for fiscal 2018 for such executives include each executive’s first full-year equity incentive grant by Symantec. The grants listed for such executives in fiscal 2017 do not take into account any grants such executives received in fiscal 2017 by Blue Coat prior to the close of the acquisition.
| (3) | No annual bonus under the FY18 Executive Annual Incentive Plan was earned in fiscal 2018 because the minimal threshold performance metrics were not met. |
| (4) | Represents (a) $199,665 for dividend equivalent payments on stock awards, (b) $7,000 of matching contributions to Mr. Clark’s account under our 401(k) plan, (c) $155,196 related to our provision of car and driver services for Mr. Clark, and (d) $3,075 imputed income charges to Mr. Clark for personal passengers flights on the corporate aircraft. |
| (5) | Represents the base salary earned by such executive from the closing of the Blue Coat acquisition in August 2016 through the end of fiscal 2017. The fiscal 2017 annual base salary for Messrs. Clark, Noviello, and Fey was $1,000,000, $650,000 and $865,000, respectively. Mr. Fey’s annual base salary, initially set at $800,000 in August 2016, was increased to $865,000 effective February 1, 2017. |
| (6) | These amounts represent the incremental fair values of modified PRUs that were granted prior to and assumed by us at the closing of the Blue Coat acquisition. Under SEC rules, we are required to disclose in the Stock Awards column the grant date fair value of each equity award computed in accordance with ASC 718. However, no grant date fair value was recorded by Symantec for these awards in accordance with ASC 718 because they were awarded by Blue Coat’s board of directors prior to the closing of the Blue Coat acquisition. As a result, the amounts reported in the Stock Awards column above may |
| understate the compensation awarded to these executive officers for fiscal 2017 because they do not include any grant date fair value for such awards. In March 2017 we adjusted the performance metrics under our FY17 PRU grants to reflect both the impact of the acquisitions of Blue Coat and LifeLock on the fiscal 2017 financial plan and to account for the transformational impact on our business of our cost and complexity reduction initiatives. As a result of these adjustments, incremental fair values of the modified awards are included in the Stock Awards column above and further described in the table below. |
| | | | | | | | |
| | 2017 Stock Awards | |
Name | | FY17 PRU
Modification
Charge
($) | | | 2017 Total (Without
PRU Modification
Charges)
($) | |
Gregory S. Clark | | | 4,269,815 | | | | - | |
Michael D. Fey | | | 2,856,660 | | | | - | |
Nicholas R. Noviello | | | 1,077,917 | | | | - | |
| (7) | Represents the executive officer’s annual bonus under the FY17 Executive Annual Incentive Plan, which was earned in fiscal 2017 and paid in fiscal 2018. |
| (8) | Represents (a) $250,000 in bonus payment earned by Mr. Clark prior to the closing of the Blue Coat acquisition under Blue Coat’s Fiscal 2017 Bonus Plan, but paid by Symantec in October 2016, (b) $75,000 for reimbursement of Mr. Clark’s attorney’s fees in connection with the negotiation of his employment agreement with us, (c) $32,515 for dividend equivalent payments on stock awards, (d) $17,422 related to our provision of car and driver services for Mr. Clark and (e) $5,000 of matching contributions to Mr. Clark’s account under our 401(k) plan. |
| (9) | Represents (a) $34,685 for dividend equivalent payments on stock awards, (b) $6,271 of matching contributions to Mr. Noviello’s account under our 401(k) plan, (c) $5,000 for reimbursement for tax services, (d) $930 in contributions to Mr. Noviello’s Company-sponsored long-term disability insurance and (e) $720 in Company wellness credit. |
| (10) | Represents (a) $162,500 in bonus payment earned by Mr. Noviello prior to the closing of the Blue Coat acquisition under Blue Coat’s Fiscal 2017 Bonus Plan, but paid by Symantec in October 2016, (b) $5,417 of matching contributions to Mr. Noviello’s account under our 401(k) plan and (c) $4,823 for dividend equivalent payments on stock awards. |
| (11) | Represents (a) $24,817 for dividend equivalent payments on stock awards, (b) $6,000 of matching contributions to Mr. Fey’s account under our 401(k) plan, (c) $6,000 for reimbursement for tax services, (d) $4,085 for coverage of expenses related to attendance at the fiscal 2018 sales achiever’s trip, and (d) $930 in contributions to Mr. Fey’s Company-sponsored long-term disability insurance. |
| (12) | Represents (a) $125,000 in bonus payment earned by Mr. Fey prior to the closing of the Blue Coat acquisition under Blue Coat’s Fiscal 2017 Bonus Plan, but paid by Symantec in October 2016 and (b) $6,000 of matching contributions to Mr. Fey’s account under our 401(k) plan. |
| (13) | Represents (a) $614,283 for dividend equivalent payments on stock awards, (b) $4,625 of matching contributions to Mr. Taylor’s account under our 401(k) plan, (c) $1,950 for reimbursement for tax services, and (d) $930 in contributions to Mr. Taylor’s Company-sponsored long-term disability insurance. |
| (14) | Represents an additional bonus paid to Mr. Taylor in connection with his service as a member of the Office of the President during the CEO transition process announced in April 2016. |
| (15) | Represents (a) $354,812 for dividend equivalent payments on stock awards, (b) $5,125 of matching contributions to Mr. Taylor’s account under our 401(k) plan, and (c) $3,525 for reimbursement for tax services. |
| (16) | Represents the executive officer’s annual bonus under the Executive Annual Incentive Plans for fiscal 2016, which was earned in fiscal 2016 and paid in fiscal 2017. |
| (17) | Represents (a) $60,816 for dividend equivalent payments on stock awards, (b) $15,834 for reimbursement for tax services, (c) $6,188 of matching contributions to Mr. Taylor’s account under our 401(k) plan, (d) $2,335 in contributions to Mr. Taylor’s Company-sponsored life insurance policy and (e) $855 in contributions to Mr. Taylor’s Company-sponsored long-term disability insurance. |
| (18) | Represents (a) $722,048 for dividend equivalent payments on stock awards, (b) $6,000 of matching contributions to Mr. Rosch’s account under our 401(k) plan, (c) $4,415 for reimbursement for tax services, (d) $22,386 for coverage of expenses related to attendance at the fiscal 2018 sales achiever’s trip, and (e) $210 in contributions to Mr. Rosch’s Company-sponsored long-term disability insurance. |
| (19) | Mr. Rosch’s base annual salary increased from $525,000 to $700,000 during fiscal 2017 to compensate him for his expanded role and responsibilities following the LifeLock acquisition. |
| (20) | Represents (a) $440,020 for dividend equivalent payments on stock awards, (b) $8,063 of matching contributions to Mr. Rosch’s account under our 401(k) plan, (c) $7,907 for coverage of expenses related to attendance at the fiscal 2016 sales achiever’s trip, and (d) $5,975 for reimbursement for tax and services. |
| (21) | Represents (a) $55,763 for dividend equivalent payments on stock awards, (b) $23,853 for coverage of expenses related to attendance at the fiscal 2015 sales achiever’s trip and paid in fiscal 2016, (c) $6,638 of matching contributions to Mr. Rosch’s account under our 401(k) plan, (d) $6,211 for spousal medical benefits, (e) $2,955 for reimbursement for tax services and (f) $1,914 in contributions to Mr. Rosch’s Company-sponsored life insurance policy. |
The following table shows for the fiscal year ended March 30, 2018 certain information regarding grants of plan-based awards to our named executive officers from our incentive plans:
Grants of Plan-Based Awards in Fiscal 2018
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name | | Grant
Date | | | Estimated Future Payouts Under
Non-Equity Incentive Plan
Awards (1) | | | Estimated Future Payouts
Under Equity Incentive Plan
Awards (2) | | | All Other
Stock
Awards:
Number
of
Shares
of
Stock or
Units (3)
(#) | | | All Other
Option
Awards:
Number
of
Securities
Underlying
Options
(#) | | | Exercise
or Base
Price of
Option
Awards
($/Sh) | | | Grant
Date Fair
Value
of Stock
and
Option
Awards (4)
($) | |
| | Threshold
($) | | | Target
($) | | | Maximum
($) | | | Threshold
(#) | | | Target
(#) | | | Maximum
(#) | |
| Clark, Gregory S. | | | 6/9/17 | | | | 750,000 | | | | 1,500,000 | | | | 3,000,000 | | | | 169,837 | | | | 339,674 | | | | 679,348 | | | | 145,575 | | | | - | | | | - | | | | 15,982,645 | |
| Noviello, Nicholas R. | | | 6/9/17 | | | | 113,750 | | | | 650,000 | | | | 1,820,000 | | | | 79,257 | | | | 158,514 | | | | 317,028 | | | | 67,935 | | | | - | | | | - | | | | 7,458,549 | |
| Fey, Michael D. | | | 6/9/17 | | | | 227,063 | | | | 1,297,500 | | | | 3,633,000 | | | | 158,515 | | | | 317,029 | | | | 634,058 | | | | 135,870 | | | | - | | | | - | | | | 14,917,133 | |
| Taylor, Scott C | | | 6/9/17 | | | | 105,000 | | | | 600,000 | | | | 1,680,000 | | | | 50,951 | | | | 101,902 | | | | 203,804 | | | | 43,672 | | | | - | | | | - | | | | 4,794,772 | |
| Rosch, Francis C. | | | 6/9/17 | | | | 122,500 | | | | 700,000 | | | | 1,960,000 | | | | 135,870 | | | | 271,739 | | | | 543,478 | | | | 116,460 | | | | - | | | | - | | | | 12,786,109 | |
| (1) | Represents threshold, target and maximum payouts with respect to each applicable metric under the FY18 Executive Annual Incentive Plan. For a summary of the terms of the FY18 Executive Annual Incentive Plan, see “Compensation Discussion & Analysis (CD&A) — Compensation Components — Executive Annual Incentive Plans” beginning on page 76. |
| (2) | The amounts shown in these rows reflect the threshold, target, and maximum potential eligible shares to be earned for the PRUs awarded during fiscal 2018 and as further described in the CD&A section beginning on page 72. These FY18 PRUs are eligible to be earned at the end of fiscal 2020 and are based on the achievement of performance goals for adjustednon-GAAP EPS for theone-year performance period ended March 30, 2018 and the relative TSR ranking for our Company as compared to the Nasdaq 100 index for thetwo- and three- year performance periods ending March 29, 2019 and April 3, 2020, respectively. |
| (3) | These RSUs vest as to 30% on June 1, 2018, 30% on June 1, 2019, and 40% on June 1, 2020. |
| (4) | The aggregate grant date fair value of the equity incentive plan awards is calculated by multiplying the target number of shares by the PRU grant date fair value on June 9, 2017, which was $34.32. For additional details on the grant date fair value of the PRUs, see footnotes 1 and 2 to the Summary Compensation Table above. The aggregate grant date fair value of Other Stock Awards is the number of shares multiplied by the RSU grant date fair value on June 9, 2017, which was $29.71. |
For a summary of the terms of the FY18 Executive Annual Incentive Plan, see “Compensation Discussion & Analysis (CD&A) — Compensation Components — Executive Annual Incentive Plans” above. Details of acceleration of the equity awards described are disclosed under “Compensation Discussion & Analysis (CD&A) — Health and Welfare Benefits; Perquisites — Change in Control and Severance Arrangements” above and “Potential Payments Upon Termination orChange-in-Control” below.
The following table shows for the fiscal year ended March 30, 2018, certain information regarding outstanding equity awards at fiscalyear-end for our named executive officers.
Outstanding Equity Awards at FiscalYear-End 2018
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Option Awards | | | Stock Awards | |
Name | | Grant
Date | | | Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#) | | | Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#) | | | Option
Exercise
Price
($) | | | Option
Expiration
Date | | | Number of
Shares
or Units
of Stock
That Have
Not
Vested
(#) | | | Market
Value of
Shares or
Units of
Stock
That Have
Not
Vested (1)
($) | | | Equity
Incentive
Plan Awards:
Number of
Unearned
Shares,
Units or
Other Rights
that
Have Not
Yet Vested
(#) | | | Equity
Incentive
Plan Awards:
Value
of Unearned
Shares, Units
or Other
Rights
that Have
Not
Yet Vested (1)
($) | |
Gregory S. Clark | | | 6/9/2017 | | | | | | | | | | | | | | | | | | | | 145,575 | (2) | | | 3,763,114 | | | | 425,441 | (3) | | | 10,997,650 | |
| | | (4 | ) | | | | | | | | | | | | | | | | | | | 288,499 | (5) | | | 7,457,699 | | | | 2,579,198 | (6) | | | 66,672,268 | |
| | | (4 | ) (7) | | | 2,860,006 | | | | 805,265 | | | | 6.73 | | | | 9/9/2025 | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Nicholas R. Noviello | | | 6/9/2017 | | | | | | | | | | | | | | | | | | | | 67,935 | (8) | | | 1,756,120 | | | | 198,538 | (3) | | | 5,132,207 | |
| | | (4 | ) | | | | | | | | | | | | | | | | | | | 88,908 | (9) | | | 2,298,272 | | | | 651,119 | (6) | | | 16,831,426 | |
| | | (4 | ) (10) | | | 875,570 | | | | 231,613 | | | | 8.35 | | | | 1/27/2026 | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Michael D. Fey | | | 6/9/2017 | | | | | | | | | | | | | | | | | | | | 135,870 | (11) | | | 3,512,240 | | | | 397,078 | (3) | | | 10,264,466 | |
| | | (4 | ) | | | | | | | | | | | | | | | | | | | 193,017 | (12) | | | 4,989,489 | | | | 1,725,576 | (6) | | | 44,606,140 | |
| | | (4 | ) (13) | | | 758,807 | | | | 542,006 | | | | 6.73 | | | | 9/9/2025 | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Scott C. Taylor | | | 6/9/2017 | | | | | | | | | | | | | | | | | | | | 43,672 | (14) | | | 1,128,921 | | | | 127,632 | (3) | | | 3,299,287 | |
| | | 6/10/2016 | | | | | | | | | | | | | | | | | | | | 49,714 | (15) | | | 1,285,107 | | | | 444,447 | (6) | | | 11,488,955 | |
| | | 6/10/2015 | | | | | | | | | | | | | | | | | | | | 19,167 | (16) | | | 495,467 | | | | 76,515 | (17) | | | 1,977,913 | |
| | | 6/10/2014 | | | | | | | | | | | | | | | | | | | | 9,297 | (18) | | | 240,327 | | | | | | | | | |
| | | | | | | | | |
Francis C. Rosch | | | 6/9/2017 | | | | | | | | | | | | | | | | | | | | 116,460 | (19) | | | 3,010,491 | | | | 340,353 | (3) | | | 8,798,125 | |
| | | 6/10/2016 | | | | | | | | | | | | | | | | | | | | 15,091 | (20) | | | 390,102 | | | | 517,857 | (6) | | | 13,386,603 | |
| | | 6/10/2015 | | | | | | | | | | | | | | | | | | | | 31,946 | (21) | | | 825,804 | | | | 127,526 | (17) | | | 3,296,547 | |
| | | 6/10/2014 | | | | | | | | | | | | | | | | | | | | 9,297 | (22) | | | 240,327 | | | | | | | | | |
| (1) | The market value of the equity awards that have not vested is calculated by multiplying the number of units of stock that have not vested by the closing price of our common stock on March 29, 2018, which was $25.85. |
| (2) | Of the 145,575 shares underlying this award, 43,673 shares vested on June 1, 2018, 43,672 shares vest on June 1, 2019 and 58,230 shares vest on June 1, 2020. |
| (3) | These FY18 PRUs are eligible to be earned at the end of fiscal 2020 and are based on the achievement of performance goals for adjustednon-GAAP EPS for theone-year performance period ended March 30, 2018 and the relative TSR ranking for our Company as compared to the Nasdaq 100 index for thetwo- and three- year performance periods ending March 29, 2019 and April 3, 2020, respectively. The number of shares and the payout value set forth above reflect the target potential payout which represents 125.25% of the target number of PRUs. Each PRU is subject to the Compensation Committee’s certification when approving the settlement thereof. |
| (4) | Represents an equity award previously granted by Blue Coat and assumed by Symantec upon the closing of the Blue Coat acquisition. Upon assumption, by their terms, these awards converted into the right to receive shares of our common stock, subject to applicable service or performance-based vesting conditions. |
| (5) | Of the remaining 288,499 shares underlying this award, 123,642 shares vested on August 1, 2018 and 164,857 shares vest on August 1, 2019. |
| (6) | These FY17 PRUs were eligible to vest at the end of fiscal 2018 based on, and subject to further adjustment as a result of, the achievement ofnon-GAAP operating income for fiscal 2018. The number of shares and the payout value set forth above reflect the target potential payout which represents 268.20% of the target number of PRUs. Any achievement above 250% of target will be paid at the end of fiscal 2019, subject to certain restrictions. Each PRU is subject to the Compensation Committee’s certification when approving the settlement thereof. |
| (7) | Of the remaining 805,265 unvested shares underlying this option, 161,053 shares vested monthly on the first of each month through August 1, 2018. |
| (8) | Of the 67,935 shares underlying this award, 20,381 shares vested on June 1, 2018, 20,380 shares vest on June 1, 2019 and 27,174 shares vest on June 1, 2020. |
| (9) | Of the remaining 88,908 shares underlying these awards, 16,076 shares vested on June 1, 2018, 31,214 shares vest on August 1, 2018 and 41,618 shares vest on August 1, 2019. |
| (10) | Of the remaining 231,613 unvested shares underlying this option, approximately 46,323 shares vested monthly on the first of each month through August 1, 2018. |
| (11) | Of the 135,870 shares underlying this award, 40,761 shares vested on June 1, 2018, 40,761 shares vest on June 1, 2019 and 54,348 shares vest on June 1, 2020. |
| (12) | Of the remaining 193,017 shares underlying this award, 82,722 shares vested on August 1, 2018 and 110,295 shares vest on August 1, 2019. |
| (13) | Of the remaining 542,006 unvested shares underlying this option, 108,401 shares vested monthly on the first of each month through August 1, 2018. |
| (14) | Of the 43,672 shares underlying this award, 13,102 shares vested on June 1, 2018, 13,102 shares vest on June 1, 2019 and 17,468 shares vest on June 1, 2020. |
| (15) | Of the remaining 49,714 shares underlying this award, 21,306 shares vested on June 1, 2018 and 28,408 shares vest on June 1, 2019. |
| (16) | The remaining 19,167 shares underlying this award vested on June 1, 2018. |
| (17) | These FY16 PRUs were eligible to vest at the end of fiscal 2018 based on, and subject to further adjustment as a result of, the achievement of the TSR ranking for our Company as compared to the S&P 500 for the3-year performance period ended March 30, 2018. The number of shares and the payout value set forth above reflect the maximum potential payout and represents 106.45% of the target number of PRUs. Each PRU is subject to the Compensation Committee’s certification when approving the settlement thereof. |
| (18) | The remaining 9,297 shares underlying this award vested on June 1, 2018. |
| (19) | Of the 116,460 shares underlying this award, 34,938 shares vested on June 1, 2018, 34,938 shares vest on June 1, 2019 and 46,584 shares vest on June 1, 2020. |
| (20) | The remaining 15,091 shares underlying this award vested on June 1, 2019. |
| (21) | The remaining 31,946 shares underlying this award vested on June 1, 2018. |
| (22) | The remaining 9,297 shares underlying this award vested on June 1, 2018. |
The following table shows for the fiscal year ended March 30, 2018, certain information regarding option exercises and stock vested during the last fiscal year with respect to our named executive officers:
Option Exercises and Stock Vested in Fiscal 2018
| | | | | | | | | | | | | | | | |
Name | | Option Awards | | | Stock Awards | |
| | Number of Shares
Acquired on Exercise
(#) | | | Value Realized on
Exercise
($) | | | Number of Shares
Acquired on Vesting (1)
(#) | | | Value Realized on
Vesting
($) | |
Gregory S. Clark | | | 200,000 | | | | 4,654,261 | | | | 2,961,345 | | | | 78,299,177 | |
Michael D. Fey | | | 1,300,812 | | | | 28,761,644 | | | | 1,691,202 | | | | 44,159,307 | |
Nicholas R. Noviello | | | 375,000 | | | | 7,887,155 | | | | 702,455 | | | | 18,524,813 | |
Scott C. Taylor | | | - | | | | - | | | | 622,938 | | | | 14,525,191 | |
Francis C. Rosch | | | 68,000 | | | | 1,058,907 | | | | 706,604 | | | | 18,494,345 | |
| (1) | The number of shares and value realized for stock awards set forth above reflect RSU awards vested and released in fiscal 2018 and PRUs vested in fiscal 2018 and released in fiscal 2019. |
Non-Qualified Deferred Compensation in Fiscal 2018
The table below provides information on thenon-qualified deferred compensation of the named executive officers for the fiscal year ended March 30, 2018.
| | | | | | | | | | | | | | | | | | | | |
| | | Non-Qualified Deferred Compensation | |
Name | | Executive
Contributions in
Last Fiscal Year
($) | | | Registrant
Contributions in
Last Fiscal Year
($) | | | Aggregate
Earnings in
Last Fiscal
Year
($) | | | Aggregate
Withdrawals/
Distributions
($) | | | Aggregate
Balance at Last
Fiscal Year-End
($) | |
Gregory S. Clark | | | - | | | | - | | | | - | | | | - | | | | - | |
Michael D. Fey | | | - | | | | - | | | | - | | | | - | | | | - | |
Nicholas R. Noviello | | | 65,000 | | | | - | | | | 3,867 | | | | - | | | | 85,322 | |
Scott C. Taylor | | | 210,000 | | | | - | | | | 5,101 | | | | - | | | | 260,481 | |
Francis C. Rosch | | | 70,000 | | | | - | | | | 7,377 | | | | - | | | | 134,121 | |
In fiscal 2018, certain management employees on our U.S. payroll with a base salary of $180,000 or greater, including each of the named executive officers, were eligible to participate in the Symantec Corporation Deferred Compensation Plan. Prior to January 1, 2017, the plan provided the opportunity for participants to defer up to 75% of base salary and 100% of variable pay each year. Variable pay included annual incentive plan and commission payments. Deferral elections must be made prior to the beginning of a calendar year and cannot be revoked as of the day immediately prior to commencement of that year. The plan is “unfunded” and all deferrals are general assets of Symantec. Amounts deferred by each participant under the plan are credited to a bookkeeping account maintained on behalf of each participant. The bookkeeping account under the plan will then be adjusted based on the performance of the measurement funds that have been selected by the participant. Prior to January 1, 2017, the measurement funds available under the plan were substantially identical to the investment funds available under our 401(k) plan. Each participant may change their measurement fund selections on a daily basis. The plan requires that benefits accumulated in the bookkeeping accounts for each participant not meeting a5-year service requirement be distributed to the participant following his or her termination of employment with us for any reason. If a5-year service requirement is met, accumulated benefits in the accounts established prior to 2017 will be distributed according to the participant’s designated payment election.
Beginning January 1, 2017, the investment options within the Deferred Compensation Plan were expanded to include additional asset classes. Participants are still able to defer up to 75% of salary and 100% of annual incentive payments, but are now able to defer up to 100% of sales commissions as a separate election. Additionally, participants have the opportunity to elect each year whether to receive that year’s deferrals upon a specified date or upon termination of employment, and the form of payment elected will be honored regardless of a participant’s length of service.
Beginning January 1, 2018, upon first entering the Deferred Compensation Plan, a participant has the option to make aone-time election, which will apply to all future account balances to determine how they will be paid in the event of a change in control. By making theone-time election a participant will receive all remaining account balances in a lump sum in the month following the month of termination, if termination occurs within two (2) years following a change in control. If a participant’s employment ended before the change in control, any remaining balances will be distributed in a lump sum within 90 days of the change in control.
Potential Payments Upon Termination orChange-In-Control
Set forth below is a description of the plans and agreements (other than the Deferred Compensation Plan) that could result in potential payouts to our named executive officers in the case
of their termination of employment and/or a change in control of Symantec. For information regarding potential payouts upon termination under the Deferred Compensation Plan, in which certain of our executive officers participate, see“Non-Qualified Deferred Compensation in Fiscal 2018” above.
Symantec Executive Retention Plan
In January 2001, the Board approved the Symantec Executive Retention Plan, to deal with employment termination resulting from a change in control of the Company. The plan was modified by the Board in July 2002, April 2006, June 2007, April 2012, February 2016 and January 2018. Under the terms of the plan, all equity compensation awards (including, among others, stock options, RSUs and PRUs) granted by the Company to the Company’s Section 16(b) officers (including our named executive officers) would become fully vested (at target or to the extent of achievement for PRUs) and, if applicable, exercisable following a change in control of the Company (as defined in the plan) after which the officer’s employment is terminated without cause or constructively terminated by the acquirer within 12 months after the change in control. In the case of PRUs granted prior to fiscal 2017, PRUs will vest at target if the change in control occurs prior to the first performance period, will vest as to eligible shares if the change in control occurs following the first performance period but before achievement is determined with respect to the second performance period, and will vest as to the sum of the eligible shares determined to be earned for the second performance period plus 50% of the eligible shares if the change in control occurs following the second performance period but before achievement is determined with respect to the third performance period. In the case of the PRUs granted in fiscal 2017, PRUs vest at target if the change in control occurs prior to the end of the performance period and will vest as to actual earned shares if the change in control occurs following the performance period but before the end of the additional vesting period. Additionally, in accordance with the terms of the PRU award agreement, in the case that an executive’s employment with the Company terminates by reason of the executive’s death, total and permanent disability or an involuntary termination by the Company other than for cause (as defined in the award agreement) after the end of the first year of the performance period but prior to the end of the performance period, then the executive will be entitled to payment of a prorated number of PRUs based on the number of months in the performance period during with the executive was employed by the Company, provided that the Company’s performance met at least the threshold level of the applicable performance metric during the first year of the performance period.
The plan also provides for the payment of a cash severance benefit for our named executive officers equal to one times such officer’s base salary and target payout under the Executive Annual Incentive Plan applicable to such named executive officer in the circumstances described above (i.e., following a change in control of the Company after which the officer’s employment is terminated without cause or constructively terminated by the acquirer within 12 months after the change in control.)
Symantec Executive Severance Plan
In April 2012, the Compensation Committee adopted the Symantec Executive Severance Plan to provide severance benefits to specified officers of Symantec, including our named executive officers. The executive officers must meet certain criteria in order to participate in the plan, including, among other criteria, (i) the executive officer was involuntarily terminated from active employment other than for cause (as defined in the plan); (ii) the executive officer was not terminated due to the sale of a business, part of a business, divestiture orspin-off and offered employment upon terms and conditions substantially identical to those in effect immediately prior to such sale, divestiture orspin-off; and (iii) the executive officer is not entitled to severance under any other plan, fund, program, policy, arrangement or individualized written agreement providing for severance benefits that is sponsored or funded by Symantec.
Under the terms of the plan, the executive officer will receive severance payments equal to one times the sum of his or her base salary in effect at the time of his or her involuntary termination. The executive officer will also receive aone-time bonus of $15,000, minus taxes and other legally required deductions. The executive officer is also entitled to receive six months of outplacement services, including counseling and guidance. The executive officer is solely responsible for all COBRA premiums for his or her continuation coverage.
In fiscal 2016, the Compensation Committee revised the plan to provide an additional payment equivalent to 75% of the executive officer’s prorated target incentive bonus under the Executive Annual Incentive Plan in effect for such fiscal year to the executive officer who was terminated in the second half of such fiscal year and was employed in good standing for a minimum of six (6) months prior to his or her termination date. This payment was added to standardize benefits to all of our executive officers and to be competitive with overall market practices.
Payment of severance payments,one-time bonus payment, outplacement services and 75% of the prorated target bonus under the Executive Annual Incentive Plan pursuant to the Symantec Executive Severance Plan is subject to the applicable executive officer returning a release of claims against Symantec.
Gregory S. Clark
The following table summarizes the value of the payouts to Mr. Clark pursuant to the Symantec Executive Retention Plan, the Symantec Executive Severance Plan and Mr. Clark’s employment agreement, assuming a qualifying termination as of March 30, 2018 (intrinsic values of equity awards are based upon the closing price for a share of our common stock of $25.85 on March 29, 2018 minus the exercise price):
| | | | | | | | | | | | | | | | |
| | | Severance Pay ($) | | | Option Vesting ($) | | | RSU Vesting ($) | | | PRU Vesting ($) | |
Involuntary Termination Because of Market Conditions or Division Performance | | | 2,020,031 | | | | 15,396,667 | | | | - | | | | 69,655,393 | |
| | | | |
Termination Without Cause or Constructive Termination Within 12 Months of a Change of Control | | | 2,000,000 | | | | 15,396,667 | | | | 7,457,699 | | | | 33,639,742 | |
| | | | |
Termination Without Cause | | | 2,020,031 | | | | 15,396,667 | | | | - | | | | 69,655,393 | |
| | | | |
Termination Due to Death or Disability | | | - | | | | 15,396,667 | | | | - | | | | 69,655,393 | |
Nicholas R. Noviello
The following table summarizes the value of the payouts to Mr. Noviello pursuant to the Symantec Executive Retention Plan and the Symantec Executive Severance Plan, assuming a qualifying termination as of March 30, 2018 (intrinsic values of equity awards are based upon the closing price for a share of our common stock of $25.85 on March 29, 2018 minus the exercise price):
| | | | | | | | | | | | | | | | |
| | | Severance Pay ($) | | | Option Vesting ($) | | | RSU Vesting ($) | | | PRU Vesting ($) | |
Involuntary Termination Because of Market Conditions or Division Performance | | | 1,156,538 | | | | 4,053,228 | | | | 415,565 | | | | 17,584,534 | |
| | | | |
Termination Without Cause or Constructive Termination Within 12 Months of a Change of Control | | | 1,300,000 | | | | 4,053,228 | | | | 4,054,392 | | | | 10,373,295 | |
| | | | |
Termination Without Cause | | | 1,156,538 | | | | 4,053,228 | | | | 4,054,392 | | | | 17,584,534 | |
| | | | |
Termination Due to Death or Disability | | | - | | | | 4,053,228 | | | | 415,565 | | | | 17,584,534 | |
Michael D. Fey
The following table summarizes the value of the payouts to Mr. Fey pursuant to the Symantec Executive Retention Plan and the Symantec Executive Severance Plan, assuming a qualifying termination as of March 30, 2018 (intrinsic values of equity awards are based upon the closing price for a share of our common stock of $25.85 on March 29, 2018 minus the exercise price):
| | | | | | | | | | | | | | | | |
| | | Severance Pay ($) | | | Option Vesting ($) | | | RSU Vesting ($) | | | PRU Vesting ($) | |
Involuntary Termination Because of Market Conditions or Division Performance | | | 1,857,163 | | | | 10,363,155 | | | | - | | | | 46,601,976 | |
| | | | |
Termination Without Cause or Constructive Termination Within 12 Months of a Change of Control | | | 2,162,500 | | | | 10,363,155 | | | | 8,501,729 | | | | 24,826,883 | |
| | | | |
Termination Without Cause | | | 1,857,163 | | | | 10,363,155 | | | | 8,501,729 | | | | 46,601,976 | |
| | | | |
Termination Due to Death or Disability | | | - | | | | 10,363,155 | | | | - | | | | 46,601,976 | |
Scott C. Taylor
The following table summarizes the value of the payouts to Mr. Taylor pursuant to the Symantec Executive Retention Plan and the Symantec Executive Severance Plan, assuming a qualifying termination as of March 30, 2018 (intrinsic values of equity awards are based upon the closing price for a share of our common stock of $25.85 on March 29, 2018):
| | | | | | | | | | | | | | | | |
| | | Severance Pay ($) | | | Option Vesting ($) | | | RSU Vesting ($) | | | PRU Vesting ($) | |
Involuntary Termination Because of Market Conditions or Division Performance | | | 1,069,038 | | | | - | | | | - | | | | 14,266,151 | |
| | | | |
Termination Without Cause or Constructive Termination Within 12 Months of a Change of Control | | | 1,200,000 | | | | - | | | | 3,149,823 | | | | 8,426,468 | |
| | | | |
Termination Without Cause | | | 1,069,038 | | | | - | | | | 3,149,823 | | | | 14,266,151 | |
| | | | |
Termination Due to Death or Disability | | | - | | | | - | | | | - | | | | 14,266,151 | |
Former Officer:
Francis C. Rosch
Mr. Rosch served as our Executive Vice President, Consumer Digital Safety through June 28, 2018. Mr. Rosch left the Company voluntarily and accordingly was not entitled to and did not receive any payouts under the Symantec Executive Retention Plan or the Symantec Executive Severance Plan.
CEO Pay Ratio
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, we are providing the ratio of the annual total compensation of Mr. Clark, our CEO, to the median of the annual total compensation of our employees. We believe that the pay ratio disclosed below is a reasonable estimate calculated in a manner consistent with Item 402(u) of RegulationS-K. SEC rules for identifying the median employee and calculating the pay ratio allow companies to apply various methodologies and apply various assumptions and, as result, the pay ratio reported by us may not be comparable to the pay ratio reported by other companies.
Symantec is a global cybersecurity company and operates in 46 countries. As of the end of fiscal 2018, March 30, 2018, we employed 11,830 employees globally. Of our total workforce, approximately 48% was based in the United States and 52% was based outside of the United States as of the end of fiscal 2018. Our compensation programs and reward offerings are designed to reflect local market practices across our global operations.
Pay Ratio:
Mr. Clark’s fiscal 2018 annual total compensation was $17,347,581, as reported in the “Total” column of the “2018 Summary Compensation Table” in this report.
The fiscal 2018 annual total compensation of our median employee (other than our CEO) was $102,869.
Based on this information, the pay ratio of the annual total compensation our CEO to the median of the annual total compensation of our employees is 168.6 to 1.
Identification of the Median Employee:
For purposes of identifying our median employee, we used our global employee population as of March 30, 2018, identified based on our global human resources system of record, inclusive of all regular employees employed by the company as of that date. We used total direct compensation as our consistently applied compensation measure. In this context, total direct compensation is the sum of the annualized value of base salary, the annual incentive target amount or annual commission target amount in effect as of March 30, 2018, and the grant date fair value of all equity awards granted during fiscal 2018. Part-time employees’ compensation reflects their part-time pay rate. Cash compensation figures were converted from local currency to U.S. dollars using the exchange rate the Company used for 2018 internal budgeting purposes. Symantec did not utilize the de minimis exemption to eliminate countries representing no more than 5% of our global population in the aggregate as allowed by SEC rules.
Director Compensation
The following table provides information for fiscal year 2018 compensation for all of ournon-employee directors:
Fiscal 2018 Director Compensation
| | | | | | | | | | | | |
Name | | Fees Earned
or Paid in
Cash
($) (1)(2) | | | Stock
Awards
($) (3)(4) | | | Total
($) | |
Frank E. Dangeard | | | 85,024 | | | | 274,976 | | | | 360,000 | |
Peter A. Feld(5) | | | 0 | | | | 0 | | | | 0 | |
Dale L. Fuller(5) | | | 0 | | | | 0 | | | | 0 | |
Kenneth Y. Hao | | | 40 | | | | 324,960 | (6) | | | 325,000 | |
David W. Humphrey | | | 40 | | | | 324,960 | (6) | | | 325,000 | |
Geraldine B. Laybourne | | | 80,024 | | | | 274,976 | | | | 355,000 | |
David L. Mahoney | | | 105,024 | | | | 274,976 | | | | 380,000 | |
Robert S. Miller | | | 35,040 | | | | 324,960 | (6) | | | 360,000 | |
Anita M. Sands | | | 20,040 | | | | 324,960 | (6) | | | 345,000 | |
Daniel H. Schulman | | | 195,024 | | | | 274,976 | | | | 470,000 | |
V. Paul Unruh | | | 95,024 | | | | 274,976 | | | | 370,000 | |
Suzanne M. Vautrinot | | | 70,024 | | | | 274,976 | | | | 345,000 | |
| (1) | Non-employee directors receive an annual retainer fee of $50,000 plus an additional annual fee of $15,000 (Compensation Committee and Nominating and Governance Committee) or $20,000 (Audit Committee) for membership on each committee. The chair of each committee receives an additional annual fee of $15,000 (Nominating and Governance Committee) or $25,000 (Audit Committee and Compensation Committee). The Lead Independent Director/Independent Chairman receives an annual fee of $100,000. |
| (2) | Includes payments for fractional share(s) from stock awards granted to eachnon-employee director. |
| (3) | Amounts shown in this column reflect the aggregate full grant date fair value calculated in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 for awards granted during fiscal 2018. |
| (4) | Eachnon-employee director, other than Messrs. Feld and Fuller, was granted 8,593 RSUs on May 15, 2017, with aper-share fair value of $32.00 and an aggregate grant date fair value of $274,976. The balance of each such director’s fee was paid in cash as reported in the “Fees Earned or Paid in Cash” column in the table above. |
| (5) | Messrs. Feld and Fuller joined our Board of Directors on September 16, 2018 and did not receive any compensation in fiscal 2018. |
| (6) | In lieu of cash, Messrs. Hao, Humphrey and Miller and Ms. Sands each received 100% of his or her respective annual retainer fee of $50,000 in the form of our common stock. Accordingly, pursuant to the terms of the 2000 Director Equity Incentive Plan, each was granted 1,562 shares at a per share fair value of $32.00 and an aggregate grant date fair value of $49,984. The balance of each such director’s fee was paid in cash as reported in the “Fees Earned or Paid in Cash” column in the table above. |
The policy of the Board is that compensation for independent directors should be a mix of cash and equity-based compensation. Symantec does not pay employee directors for Board service in addition to their regular employee compensation. Independent directors may not receive consulting, advisory or other compensatory fees from the Company. The Compensation Committee, which consists solely of independent directors, has the primary responsibility to review and consider any revisions to director compensation.
Director Stock Ownership Guidelines: Effective fiscal 2017, the Compensation Committee instituted the following stock ownership guidelines for ournon-employee directors to better align our directors’ interests with those of our stockholders:
Directors must maintain a minimum holding of Company stock with a fair market value equal to ten times (10x) such director’s total annual cash retainer;
In the event the annual retainer (or any portion thereof) is paid to anon-employee director in equity instead of cash, the value of such annual retainer for purposes of calculating the minimum holding requirement means the grant date fair value of the annual equity award (or applicable portion thereof);
New directors will have three years to reach the minimum holding level; and
Notwithstanding the foregoing, directors may sell enough shares to cover their income tax liability on vested grants.
Symantec stock ownership information for each of our directors is shown under the heading “Security Ownership of Certain Beneficial Owners and Management” on page 116 of this Annual Report on Form10-K.
Annual Fees: In accordance with the recommendation of the Compensation Committee, the Board determined thenon-employee directors’ compensation for fiscal 2018 as follows:
$50,000 annual cash retainer;
$15,000 annual fee for committee membership ($20,000 for Audit Committee membership);
$25,000 annual fee for chairing a committee of the Board ($15,000 for chairing the Nominating and Governance Committee); and
$100,000 annual fee for the Lead Independent Director/Independent Chairman.
The payment of the annual cash retainer is subject to the terms of the 2000 Director Equity Incentive Plan, as amended, which allows directors to choose to receive common stock in lieu of cash for all or a portion of the retainer payable to each director for serving as a member. We pay the annual retainer fee and any additional annual fees to each director at the beginning of the fiscal year. Directors who join the Company after the beginning of the fiscal year receive a prorated cash payment in respect
of their annual retainer fee and fees. These payments are considered earned when paid. Accordingly, we do not require them to be repaid in the event a director ceases serving in the capacity for which he or she was compensated.
Annual Equity Awards. Pursuant to aNon-Employee Director Grant Policy adopted by our Board, eachnon-employee member of the Board receives an annual award of fully-vested restricted stock under the 2013 Plan, having a fair market value on the grant date equal to apre-determined dollar value, which was $275,000 for fiscal 2018.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of October 10, 2018 with respect to the beneficial ownership of Symantec common stock by (i) each stockholder known by Symantec to be the beneficial owner of more than 5% of Symantec common stock, (ii) each member of the Board and nominee, (iii) the named executive officers of Symantec included in the Summary Compensation Table appearing on page 103 of this Annual Report on Form10-K and (iv) all current executive officers and directors of Symantec as a group.
Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Percentage ownership is based on 638,538,278 shares of Symantec common stock outstanding as of October 10, 2018 (excluding shares held in treasury). Shares of common stock subject to stock options and restricted stock units vesting on or before December 9, 2018 (within 60 days of October 10, 2018) are deemed to be outstanding and beneficially owned for purposes of computing the percentage ownership of such person but are not treated as outstanding for purposes of computing the percentage ownership of others.
Unless otherwise indicated, the address of each of the individuals and entities named below is c/o Symantec Corporation, 350 Ellis Street, Mountain View, California 94043.
| | | | | | | | |
Name and Address of Beneficial Owner | | Amount and Nature of
Beneficial Ownership | | | Percent of
Class | |
T. Rowe Price Associates, Inc.(1) | | | 78,822,026 | | | | 12.3 | % |
Vanguard Group Inc.(2) | | | 63,359,516 | | | | 9.9 | % |
Capital World Investors(3) | | | 43,353,589 | | | | 6.8 | % |
BlackRock, Inc.(4) | | | 40,184,068 | | | | 6.3 | % |
Starboard Value LP(5) | | | 36,000,796 | | | | 5.6 | % |
| | |
Directors and Executive Officers | | | | | | | | |
| | |
Gregory S. Clark(6) | | | 6,566,782 | | | | 1.0 | % |
Michael D. Fey(7) | | | 2,308,211 | | | | * | |
Nicholas R. Noviello(8) | | | 1,471,135 | | | | * | |
Scott C. Taylor | | | 350,364 | | | | * | |
David L. Mahoney(9) | | | 187,299 | | | | * | |
Amy L. Cappellanti-Wolf | | | 178,361 | | | | * | |
Daniel H. Schulman(10) | | | 156,865 | | | | * | |
Robert S. Miller | | | 141,097 | | | | * | |
| | | | | | | | |
Name and Address of Beneficial Owner | | Amount and Nature of
Beneficial Ownership | | | Percent of
Class | |
Geraldine B. Laybourne | | | 131,614 | | | | * | |
Samir Kapuria (11) | | | 105,116 | | | | * | |
Frank E. Dangeard | | | 104,050 | | | | * | |
V. Paul Unruh | | | 87,587 | | | | * | |
Francis C. Rosch**(12) | | | 83,268 | | | | * | |
Anita M. Sands | | | 49,706 | | | | * | |
Kenneth Y. Hao(13) | | | 43,899 | | | | * | |
Suzanne M. Vautrinot | | | 36,145 | | | | * | |
David W. Humphrey | | | 33,190 | | | | * | |
Dale E. Fuller | | | 14,200 | | | | * | |
Peter A. Feld (14) | | | - | | | | - | |
All current Symantec executive officers and directors as a group (18 persons)(15) | | | 11,965,621 | | | | 1.9 | % |
| (1) | Based solely on a Schedule 13G/A filing made by T. Rowe Price Associates on February 14, 2018, reporting sole voting and dispositive power over the shares. This stockholder’s address is 100 E. Pratt Street, Baltimore, MD 21202. |
| (2) | Based solely on a Schedule 13G/A filing made by The Vanguard Group on February 9, 2018, reporting sole voting and dispositive power over the shares. This stockholder’s address is 100 Vanguard Blvd., Malvern, PA 19355. |
| (3) | Based solely on a Schedule 13G/A filing made by Capital World Investors on September 10, 2018, reporting sole voting and dispositive power over the shares. This stockholder’s address is 333 South Hope Street, Los Angeles, CA 90071. |
| (4) | Based solely on a Schedule 13G/A filing made by the BlackRock, Inc. on February 8, 2018, reporting sole voting and dispositive power over the shares. This stockholder’s address is 55 East 52nd Street, New York, NY 10055. |
| (5) | Based solely on a Schedule 13D filing made by Starboard Value LP on September 18, 2018, reporting sole voting and dispositive power over the shares. This stockholder’s address is 777 Third Avenue, 18th Floor, New York, New York 10017. Mr. Feld is a Managing Member of Starboard Value LP and may be deemed to share voting and dispositive power over these shares. |
| (6) | Includes 1,122,938 shares held by the TR UA 01/29/2016 Gregory S. Clark Living Trust for which Mr. Clark exercises voting and dispositive power and 3,665,271 shares subject to options that will be exercisable as of December 9, 2018. |
| (7) | Includes 1,300,813 shares subject to options that will be exercisable as of December 9, 2018. |
| (8) | Includes 1,107,183 shares subject to options that will be exercisable as of December 9, 2018. |
| (9) | Includes 2,835 shares held by the Winnifred C. Ellis & David L Mahoney TR UA 06/25/1998 Trust for which Mr. Mahoney exercises voting and dispositive power. |
| (10) | Includes 135,952 shares held by the DHS 2017 Annuity Trust Agreement II for which Mr. Schulman exercises voting and dispositive power. |
| (11) | Includes 3,633 shares issuable upon the settlement of RSUs as of December 9, 2018. |
| (12) | Beneficial ownership data is current through Mr. Rosch’s departure date of June 28, 2018 and excludes 325,401 shares issued on the settlement of PRUs as of December 9, 2018. |
| (13) | These securities are held by Mr. Hao for the benefit of Silver Lake Technology Management LLC, certain of its affiliates and certain of the funds they manage (“Silver Lake”) and pursuant to Mr. Hao’s arrangement with Silver Lake, upon the sale of these securities, the proceeds are expected to be remitted to Silver Lake. |
| (14) | Excludes 36,000,796 shares of common stock beneficially owned by Starboard Value LP and its affiliates, which includes 11,499,000 shares underlying certain forward purchase contracts. |
| (15) | Includes 6,073,267 shares subject to options that will be exercisable as of December 9, 2018 and 3,633 shares issuable upon the settlement of RSUs as of December 9, 2018. |
Equity Compensation Plan Information
The following table gives information about Symantec’s common stock that may be issued upon the exercise of options, warrants and rights under all of Symantec’s existing equity compensation plans as of March 30, 2018:
| | | | | | | | | | | | |
| | Equity Compensation Plan Information | |
Plan Category | | Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights | | | Weighted-
Average Exercise
Price of
Outstanding Options,
Warrants and Rights | | | Number of Securities
Remaining Available for Future
Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a)) | |
| | (a) | | | (b) | | | (c) | |
Equity compensation plans approved by security holders | | | - | | | | - | | | | 82,997,034 | (1) |
Equity compensation plans not approved by security holders | | | - | (2) | | | - | | | | - | |
Total | | | - | | | | - | | | | 82,997,034 | |
| (1) | Represents 47,683 shares remaining available for future issuance under Symantec’s 2000 Director Equity Incentive Plan, 35,773,529 shares remaining available for future issuance under Symantec’s 2008 Employee Stock Purchase Plan, 22,019,375 shares issuable upon settlement of RSUs and PRUs (at 100% of target), and 25,156,447 shares issuable for future grant under our 2013 Plan as of March 30, 2018. Excludes 14,125,654 shares issuable upon settlement of RSUs and PRUs (at target) that were assumed in connection with various acquisitions. Note, this does not include shares granted after March 30, 2018 and excludes the proposed increase of 12,000,000 shares under the 2013 Plan. |
| (2) | Excludes outstanding options to acquire 13,605,035 shares as of March 30, 2018 that were assumed as part of various acquisitions. The weighted average exercise price of these outstanding options was $8.53 as of March 30, 2018. In connection with these acquisitions, Symantec has only assumed outstanding options and rights, but not the plan themselves, and therefore, no further options may be granted under these acquired-company plans. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Related-Person Transactions Policy and Procedure
Symantec has adopted a written related person transactions policy which provides for the Company’s policies and procedures regarding the identification, review, consideration and approval or ratification of “related person transactions.” The Nominating and Governance Committee reviews transactions that may be “related person transactions,” which are transactions between Symantec and any related persons in which the aggregate amount involved exceeds or may be expected to exceed $120,000, and in which the related person has or will have a direct or indirect material interest. For purposes of the policy, a related person is any Symantec executive officer, director, nominee for director, or stockholder holding more than 5% of any class of Symantec’s voting securities, in each case, since the beginning of the previous fiscal year, and their immediate family members.
Under the policy, absent any facts or circumstances indicating special or unusual benefits to the related person, the following transactions are deemed not to be “related person transactions” (meaning the related person is deemed to not have a direct or indirect material interest in the transaction):
compensation to executive officers determined by Symantec’s Compensation Committee;
any transaction with another company at which a related person is a director or an employee (other than an executive officer) if the aggregate amount involved does not exceed the greater of $2,000,000, or three percent of that company’s total annual gross revenues, provided that the transaction involves the purchase of either company’s goods and services and the transaction is subject to usual trade terms and is in the ordinary course of business and the related person is not involved in the negotiation of the transaction;
any compensation paid to a director if the compensation is required to be reported in Symantec’s proxy statement;
any transaction where the related person’s interest arises solely from the ownership of the Company’s common stock and all holders of the Company’s common stock received the same benefit on a pro rata basis;
any charitable contribution, grant or endowment by Symantec or the Symantec Foundation to a charitable organization, foundation or university at which a related person’s only relationship is as a director or an employee (other than an executive officer), if the aggregate amount involved does not exceed $120,000, or anynon-discretionary matching contribution, grant or endowment made pursuant to a matching gift program;
any transaction where the rates or charges involved are determined by competitive bids;
any transaction involving the rendering of services as a common or contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority; or
any transaction involving services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture, or similar services.
Under the policy, members of Symantec’s legal department review transactions involving related persons that do not fall into one of the above categories. If they determine that a related person could have a significant interest in a transaction, the transaction is referred to the Nominating and Governance Committee. In addition, transactions may be identified through Symantec’s Code of Conduct or other Symantec policies and procedures, and reported to the Nominating and Governance Committee. The Nominating and Governance Committee determines whether the related person has a material interest in a transaction and may approve, ratify, rescind or take other action with respect to the transaction.
Certain Related Person Transactions
Investments by Firms Affiliated with our Directors
On February 3, 2016, Symantec entered into an investment agreement with investment entities affiliated with Silver Lake, relating to the issuance to Silver Lake of $500 million principal amount of 2.5% convertible unsecured notes, due 2021. In connection with the investment, Kenneth Y. Hao, a managing partner and managing director of Silver Lake, was appointed to our Board.
On June 12, 2016, Symantec entered into an investment agreement with investment entities affiliated with Silver Lake and Bain Capital relating to the issuance of $1.25 billion aggregate principal amount of 2.0% convertible unsecured notes due 2021. Pursuant to the investment agreement, Silver Lake, a private equity firm of which Mr. Hao is a managing partner and managing director, has agreed to purchase $500 million aggregate principal amount of the notes, and Bain Capital, private equity firm of which Mr. Humphrey is a managing director, has agreed to purchase $750 million aggregate principal amount of the notes. The transactions contemplated by this investment agreement closed concurrently with the closing of the Blue Coat acquisition on August 1, 2016. In connection with the investment, David W. Humphrey, a managing director of Bain Capital, was appointed to our Board.
The 2.5% convertible unsecured notes, due 2021 (the “2.5% Notes”), bear interest at a rate of 2.5% per annum. The 2.0% convertible unsecured notes, due 2021 (the “2.0% Notes” and, together with the 2.5% Notes, collectively, the “Notes”), bear interest at a rate of 2.0% per annum. Interest is payable semiannually in cash under the Notes. The initial conversion rate for the 2.5% Notes was 59.6341 shares of our common stock, and cash in lieu of fractional shares, per $1,000 principal amount of the 2.5% Notes, which was equivalent to an initial conversion price of approximately $16.77 per share of common stock. The initial conversion rate for the 2.0% Notes was 48.9860 shares of our common stock, and cash in lieu of fractional shares, per $1,000 principal amount of the 2.0% Notes, which was equivalent to an initial conversion price of approximately $20.41 per share of common stock. The conversion rates under the Notes are subject to customary anti-dilution adjustments. Holders may surrender their Notes for conversion at any time prior to the close of business on the business day immediately preceding the maturity date for the Notes.
As of March 30, 2018, $1.75 billion in aggregate principal amount of the Notes was outstanding. During fiscal 2018, we paid an aggregate of $37.5 million in interest on the Notes.
Symantec also entered into a Registration Rights Agreement pursuant to which holders of the Notes have certain registration rights with respect to the Notes and the shares of our common stock issuable upon conversion of the Notes.
Reinvestment Agreements with our Executive Officers
On June 12, 2016, we entered into reinvestment agreements with Mr. Clark andGSC-OZ Investment LLC, an entity controlled by Mr. Clark, pursuant to which the parties agreed to purchase, in the aggregate, 2,329,520 shares our common stock for an aggregate purchase price of $40,300,696. On August 1, 2016, we issued and sold these shares to Mr. Clark andGSC-OZ Investment LLC. The agreements provide that, in the aggregate, 207,907 of such shares will vest monthly until October 30, 2019, subject to Mr. Clark’s continued service to the Company, and that all of the shares are subject to transfer restrictions. These transfer restrictions were lifted on August 1, 2017 when our common stock achieved the specified volume weighted average trading price over a defined period as set forth in the agreements.
On June 12, 2016, we entered into a reinvestment agreement with each of Mr. Fey and Mr. Noviello pursuant to which each of Mr. Fey and Mr. Noviello agreed not to transfer certain shares
of common stock to be issued upon exercise of options held by Mr. Fey and Mr. Noviello. On August 1, 2017 these shares were released from transfer restrictions when our common stock achieved the specified volume weighted average trading price over a defined period as set forth in the agreements.
Transactions with Starboard Value LP
In September 2018, the Company entered into the Starboard Agreement with Starboard, an affiliate of Mr. Feld. For more about the Starboard Agreement, see “Item 10–Directors, Executive Officers and Corporate Governance.”
Aircraft Lease Agreement
On November 9, 2017, the Company and Mr. Clark entered into an Aircraft Lease Agreement (the “Aircraft Lease Agreement”) for the occasional lease by the Company of an aircraft owned by Mr. Clark. Under the Aircraft Lease Agreement, the Company will reimburse Mr. Clark for business travel on his aircraft at a rate of $2,500 per flight hour plus additional operating costs. The Nominating and Governance Committee of our Board of Directors approved the Aircraft Lease Agreement after completing a competitive analysis of comparable chartered aircraft rates, which showed that the reimbursement rate is at or below market rates for the charter of similar aircraft. The Nominating and Governance Committee during fiscal 2018 also adopted a Company-wide Aircraft Usage Policy, which governs the approved business usage of corporate aircraft, including Mr. Clark’s, and set an annual cap on the amount of expenses to be incurred by the Company under the policy at two million dollars. During fiscal 2018, we incurred approximately $1,322,200 in fees for the aircraft owned by Mr. Clark. Please see “Executive Compensation and Related Information — Summary Compensation Table” on page 109 for more information.
Familial Relationships
From time to time, the Company or its subsidiaries may have employees who are related to our executive officers or directors. The step-daughter of Anita M. Sands, one of our directors, began employment with the Company in a customer service role during fiscal 2019. Because her employment did not begin until fiscal 2019, she did not earn any compensation in fiscal 2018. The Nominating and Governance Committee of the Board reviewed and approved her employment and determined that her employment with the Company would not present a conflict of interest under the Company’s Related-Person Transaction Policy.
Board Independence
It is the policy of the Board and Nasdaq rules require that listed companies have a board of directors with at least a majority of independent directors, as defined under Nasdaq’s Marketplace Rules. Currently, each member of our Board, other than our Chief Executive Officer, Gregory S. Clark, is an independent director, and all standing committees of the Board are composed entirely of independent directors. The Nasdaq independence definition includes a series of objective tests, such as that the director is not an employee of the company and has not engaged in various types of business dealings with the company. In addition, the Board has made a subjective determination as to each independent director that no relationship exists which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In making these determinations, the directors reviewed and discussed information provided by the directors and our Company with regard to each director’s business and other activities as they may relate to Symantec and our management. Based on this review and consistent with our independence criteria, the Board has affirmatively determined that the following current directors and director nominees are independent: Frank E. Dangeard, Peter A. Feld, Dale L. Fuller, Kenneth Y. Hao, David W. Humphrey, Geraldine B. Laybourne, David L. Mahoney, Robert S. Miller, Anita M. Sands, Daniel H. Schulman, V. Paul Unruh and Suzanne M. Vautrinot.
Item 14. Principal Accountant Fees and Services
We regularly review the services and fees from our independent registered public accounting firm, KPMG. These services and fees are also reviewed with the Audit Committee annually. In accordance with standard policy, KPMG periodically rotates the individuals who are responsible for our audit. Our Audit Committee has determined that the providing of certainnon-audit services, as described below, is compatible with maintaining the independence of KPMG.
In addition to performing the audit of our consolidated financial statements, KPMG provided various other services during fiscal years 2018 and 2017. Our Audit Committee has determined that KPMG’s provisioning of these services, which are described below, does not impair KPMG’s independence from Symantec. The aggregate fees billed for fiscal years 2018 and 2017 for each of the following categories of services are as follows:
| | | | | | | | |
Fees Billed to Symantec | | 2018 | | | 2017 | |
Audit fees(1) | | $ | 11,370,525 | | | $ | 9,985,434 | |
Audit related fees(2) | | | 753,689 | | | | 2,215,628 | |
Tax fees(3) | | | 469,449 | | | | 248,467 | |
All other fees(4) | | | 311,000 | | | | - | |
| | | | | | | | |
Total fees | | $ | 12,904,663 | | | $ | 12,449,529 | |
| | | | | | | | |
The categories in the above table have the definitions assigned under Item 9 of Schedule 14A promulgated under the Exchange Act, and these categories include in particular the following components:
| (1) | “Audit fees” include fees for audit services principally related to theyear-end examination and the quarterly reviews of our consolidated financial statements, consultation on matters that arise during a review or audit, review of SEC filings, audit services performed in connection with our acquisitions and divestitures and statutory audit fees. |
| (2) | “Audit related fees” include fees which are for assurance and related services other than those included in Audit fees. |
| (3) | “Tax fees” include fees for tax compliance and advice. |
| (4) | “All other fees” include fees for all othernon-audit services, principally for services in relation to certain information technology audits. |
An accounting firm other than KPMG performs supplemental internal audit services for Symantec. Another accounting firm provides the majority of Symantec’s outside tax services.
Policy on Audit CommitteePre-Approval of Audit and PermissibleNon-Audit Services of Independent Registered Public Accounting Firm
The Audit Committee’s policy is topre-approve all audit and permissiblenon-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services.Pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with thispre-approval, and the fees for the services performed to date. The Audit Committee may alsopre-approve particular services on acase-by-case basis.
All of the services relating to the fees described in the table above were approved by the Audit Committee.
PART IV
Item 15.Exhibits, Financial Statement Schedules
(a)
1. Financial Statements
Upon written request, we will provide, without charge, a copy of this annual report, including the Consolidated Financial Statements and financial statement schedule. All requests should be sent to:
Symantec Corporation
Attn: Investor Relations
350 Ellis Street
Mountain View, California 94043
(650)527-8000
The following documents are filed as part of this report:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Symantec Corporation:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Symantec Corporation and subsidiaries (the Company) as of March 30, 2018 and March 31, 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended March 30, 2018 and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of March 30, 2018, based on criteria established inInternal Control—Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 30, 2018 and March 31, 2017, and the results of their operations and their cash flows for each of the years in the three-year period ended March 30, 2018, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 30, 2018, based on criteria established inInternal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for their assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting under Item 9A.b. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of their inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Santa Clara, California
October 26, 2018
SYMANTEC CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except par value per share amounts)
| | | | | | | | |
| | | March 30,
2018 | | | March 31,
2017 | |
| ASSETS | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 1,774 | | | $ | 4,247 | |
Short-term investments | | | 388 | | | | 9 | |
Accounts receivable, net | | | 809 | | | | 649 | |
Other current assets | | | 522 | | | | 419 | |
| | | | | | | | |
Total current assets | | | 3,493 | | | | 5,324 | |
Property and equipment, net | | | 778 | | | | 937 | |
Intangible assets, net | | | 2,643 | | | | 3,004 | |
Goodwill | | | 8,319 | | | | 8,627 | |
Other long-term assets | | | 526 | | | | 282 | |
| | | | | | | | |
Total assets | | $ | 15,759 | | | $ | 18,174 | |
| | | | | | | | |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 168 | | | $ | 180 | |
Accrued compensation and benefits | | | 262 | | | | 272 | |
Current portion of long-term debt | | | - | | | | 1,310 | |
Deferred revenue | | | 2,368 | | | | 2,353 | |
Other current liabilities | | | 372 | | | | 507 | |
| | | | | | | | |
Total current liabilities | | | 3,170 | | | | 4,622 | |
Long-term debt | | | 5,026 | | | | 6,876 | |
Long-term deferred revenue | | | 735 | | | | 434 | |
Deferred income tax liabilities | | | 592 | | | | 2,401 | |
Long-term income taxes payable | | | 1,126 | | | | 251 | |
Other long-term liabilities | | | 87 | | | | 103 | |
| | | | | | | | |
Total liabilities | | | 10,736 | | | | 14,687 | |
Commitments and contingencies (Note 15) | | | | | | | | |
Stockholders’ equity: | | | | | | | | |
Preferred stock, $0.01 par value: 1 shares authorized; 0 shares issued and outstanding | | | - | | | | - | |
Common stock and additionalpaid-in capital, $0.01 par value: 3,000 shares authorized; 624 and 608 shares issued and outstanding as of March 30, 2018 and March 31, 2017, respectively | | | 4,691 | | | | 4,236 | |
Accumulated other comprehensive income | | | 4 | | | | 12 | |
Retained earnings (accumulated deficit) | | | 328 | | | | (761 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 5,023 | | | | 3,487 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 15,759 | | | $ | 18,174 | |
| | | | | | | | |
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
| | | | | | | | | | | | |
| | | Year Ended | |
| | | March 30,
2018 | | | March 31,
2017 | | | April 1,
2016 | |
Net revenues | | $ | 4,834 | | | $ | 4,019 | | | $ | 3,600 | |
Cost of revenues | | | 1,032 | | | | 853 | | | | 615 | |
| | | | | | | | | | | | |
Gross profit | | | 3,802 | | | | 3,166 | | | | 2,985 | |
Operating expenses: | | | | | | | | | | | | |
Sales and marketing | | | 1,593 | | | | 1,459 | | | | 1,292 | |
Research and development | | | 956 | | | | 823 | | | | 748 | |
General and administrative | | | 574 | | | | 564 | | | | 295 | |
Amortization of intangible assets | | | 220 | | | | 147 | | | | 57 | |
Restructuring, transition and other costs | | | 410 | | | | 273 | | | | 136 | |
| | | | | | | | | | | | |
Total operating expenses | | | 3,753 | | | | 3,266 | | | | 2,528 | |
| | | | | | | | | | | | |
Operating income (loss) | | | 49 | | | | (100 | ) | | | 457 | |
Interest expense | | | (256 | ) | | | (208 | ) | | | (75 | ) |
Gain on divestiture | | | 653 | | | | - | | | | - | |
Other income (expense), net | | | (9 | ) | | | 46 | | | | 10 | |
| | | | | | | | | | | | |
Income (loss) from continuing operations before income taxes | | | 437 | | | | (262 | ) | | | 392 | |
Income tax expense (benefit) | | | (690 | ) | | | (26 | ) | | | 1,213 | |
| | | | | | | | | | | | |
Income (loss) from continuing operations | | | 1,127 | | | | (236 | ) | | | (821 | ) |
Income from discontinued operations, net of income taxes | | | 11 | | | | 130 | | | | 3,309 | |
| | | | | | | | | | | | |
Net income (loss) | | $ | 1,138 | | | $ | (106 | ) | | $ | 2,488 | |
| | | | | | | | | | | | |
Income (loss) per share — basic: | | | | | | | | | | | | |
Continuing operations | | $ | 1.83 | | | $ | (0.38 | ) | | $ | (1.23 | ) |
Discontinued operations | | $ | 0.02 | | | $ | 0.21 | | | $ | 4.94 | |
Net income (loss) per share — basic | | $ | 1.85 | | | $ | (0.17 | ) | | $ | 3.71 | |
Income (loss) per share — diluted: | | | | | | | | | | | | |
Continuing operations | | $ | 1.69 | | | $ | (0.38 | ) | | $ | (1.23 | ) |
Discontinued operations | | $ | 0.02 | | | $ | 0.21 | | | $ | 4.94 | |
Net income (loss) per share — diluted(1) | | $ | 1.70 | | | $ | (0.17 | ) | | $ | 3.71 | |
Weighted-average shares outstanding: | | | | | | | | | | | | |
Basic | | | 616 | | | | 618 | | | | 670 | |
Diluted | | | 668 | | | | 618 | | | | 670 | |
| (1) | Net income (loss) per share amounts may not add due to rounding. |
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
| | | | | | | | | | | | |
| | | Year Ended | |
| | | March 30,
2018 | | | March 31,
2017 | | | April 1,
2016 | |
Net income (loss) | | $ | 1,138 | | | $ | (106 | ) | | $ | 2,488 | |
Other comprehensive income (loss), net of taxes: | | | | | | | | | | | | |
Foreign currency translation adjustments: | | | | | | | | | | | | |
Translation adjustments | | | (4 | ) | | | (8 | ) | | | (6 | ) |
Reclassification adjustments for net loss | | | 5 | | | | - | | | | 1 | |
| | | | | | | | | | | | |
Net foreign currency translation adjustments | | | 1 | | | | (8 | ) | | | (5 | ) |
Unrealized gain (loss) onavailable-for-sale securities: | | | | | | | | | | | | |
Unrealized gain (loss) | | | (5 | ) | | | (2 | ) | | | 4 | |
Reclassification adjustments for realized net gain | | | (4 | ) | | | - | | | | - | |
| | | | | | | | | | | | |
Net unrealized gain (loss) onavailable-for-sale securities | | | (9 | ) | | | (2 | ) | | | 4 | |
| | | | | | | | | | | | |
Other comprehensive loss, net of taxes | | | (8 | ) | | | (10 | ) | | | (1 | ) |
| | | | | | | | | | | | |
Comprehensive income (loss) | | $ | 1,130 | | | $ | (116 | ) | | $ | 2,487 | |
| | | | | | | | | | | | |
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | |
| | | Common Stock
and Additional
Paid-In Capital | | | Accumulated
Other
Comprehensive
Income | | | Retained
Earnings
(Accumulated
Deficit) | | | Total
Stockholders’
Equity | |
| | | Shares | | | Amount | |
Balance as of April 3, 2015 | | | 684 | | | $ | 6,101 | | | $ | 104 | | | $ | (270 | ) | | $ | 5,935 | |
Net income | | | - | | | | - | | | | - | | | | 2,488 | | | | 2,488 | |
Other comprehensive loss | | | - | | | | - | | | | (1 | ) | | | - | | | | (1 | ) |
Common stock issued under employee stock incentive plans | | | 15 | | | | 65 | | | | - | | | | - | | | | 65 | |
Shares withheld for taxes related to vesting of restricted stock units | | | (3 | ) | | | (68 | ) | | | - | | | | - | | | | (68 | ) |
Repurchases of common stock | | | (84 | ) | | | (1,868 | ) | | | - | | | | - | | | | (1,868 | ) |
Sale of Veritas | | | - | | | | - | | | | (81 | ) | | | - | | | | (81 | ) |
Cash dividends declared ($4.60 per share of common stock) and dividend equivalents accrued | | | - | | | | (212 | ) | | | - | | | | (2,873 | ) | | | (3,085 | ) |
Equity component of convertible notes issued | | | - | | | | 29 | | | | - | | | | - | | | | 29 | |
Stock-based compensation | | | - | | | | 245 | | | | - | | | | - | | | | 245 | |
Income tax benefit from employee stock incentive plans | | | - | | | | 17 | | | | - | | | | - | | | | 17 | |
| | | | | | | | | | | | | | | | | | | | |
Balance as of April 1, 2016 | | | 612 | | | | 4,309 | | | | 22 | | | | (655 | ) | | | 3,676 | |
Net loss | | | - | | | | - | | | | - | | | | (106 | ) | | | (106 | ) |
Other comprehensive loss | | | - | | | | - | | | | (10 | ) | | | - | | | | (10 | ) |
Common stock issued under employee stock incentive plans | | | 17 | | | | 95 | | | | - | | | | - | | | | 95 | |
Shares withheld for taxes related to vesting of restricted stock units | | | (3 | ) | | | (65 | ) | | | - | | | | - | | | | (65 | ) |
Common stock issued in connection with acquisitions | | | 3 | | | | 38 | | | | - | | | | - | | | | 38 | |
Equity awards assumed in acquisitions | | | - | | | | 112 | | | | - | | | | - | | | | 112 | |
Repurchases of common stock | | | (21 | ) | | | (500 | ) | | | - | | | | - | | | | (500 | ) |
Cash dividends declared ($0.30 per share of common stock) and dividend equivalents accrued | | | - | | | | (191 | ) | | | - | | | | - | | | | (191 | ) |
Equity component of convertible notes issued | | | - | | | | 12 | | | | - | | | | - | | | | 12 | |
Stock-based compensation | | | - | | | | 410 | | | | - | | | | - | | | | 410 | |
Income tax benefit from employee stock incentive plans | | | - | | | | 11 | | | | - | | | | - | | | | 11 | |
Other | | | - | | | | 5 | | | | - | | | | - | | | | 5 | |
| | | | | | | | | | | | | | | | | | | | |
Balance as of March 31, 2017 | | | 608 | | | | 4,236 | | | | 12 | | | | (761 | ) | | | 3,487 | |
Net income | | | - | | | | - | | | | - | | | | 1,138 | | | | 1,138 | |
Other comprehensive loss | | | - | | | | - | | | | (8 | ) | | | - | | | | (8 | ) |
Common stock issued under employee stock incentive plans | | | 22 | | | | 121 | | | | - | | | | - | | | | 121 | |
Shares withheld for taxes related to vesting of restricted stock units | | | (4 | ) | | | (107 | ) | | | - | | | | - | | | | (107 | ) |
Equity awards assumed in acquisitions | | | - | | | | 1 | | | | - | | | | - | | | | 1 | |
Repurchases of common stock | | | (2 | ) | | | - | | | | - | | | | - | | | | - | |
Cash dividends declared ($0.30 per share of common stock) and dividend equivalents accrued | | | - | | | | (144 | ) | | | - | | | | (49 | ) | | | (193 | ) |
Stock-based compensation | | | - | | | | 584 | | | | - | | | | - | | | | 584 | |
| | | | | | | | | | | | | | | | | | | | |
Balance as of March 30, 2018 | | | 624 | | | $ | 4,691 | | | $ | 4 | | | $ | 328 | | | $ | 5,023 | |
| | | | | | | | | | | | | | | | | | | | |
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| | | | | | | | | | | | |
| | | Year Ended | |
| | | March 30,
2018 | | | March 31,
2017 | | | April 1,
2016 | |
OPERATING ACTIVITIES: | | | | | | | | | | | | |
Net income (loss) | | $ | 1,138 | | | $ | (106 | ) | | $ | 2,488 | |
Income from discontinued operations, net of income taxes | | | (11 | ) | | | (130 | ) | | | (3,309 | ) |
Adjustments: | | | | | | | | | | | | |
Amortization and depreciation | | | 640 | | | | 492 | | | | 299 | |
Impairments of long-lived assets | | | 81 | | | | 49 | | | | 10 | |
Stock-based compensation expense | | | 610 | | | | 440 | | | | 161 | |
Deferred income taxes | | | (1,848 | ) | | | (168 | ) | | | 1,082 | |
Gain on divestiture | | | (653 | ) | | | - | | | | - | |
Other | | | 71 | | | | 32 | | | | 8 | |
Changes in operating assets and liabilities, net of acquisitions and divestitures: | | | | | | | | | | | | |
Accounts receivable, net | | | (170 | ) | | | 45 | | | | 38 | |
Accounts payable | | | (4 | ) | | | (67 | ) | | | (69 | ) |
Accrued compensation and benefits | | | (33 | ) | | | 20 | | | | (7 | ) |
Deferred revenue | | | 541 | | | | 125 | | | | 20 | |
Income taxes payable | | | 880 | | | | (871 | ) | | | 742 | |
Other assets | | | (199 | ) | | | 84 | | | | (52 | ) |
Other liabilities | | | (86 | ) | | | (90 | ) | | | 51 | |
| | | | | | | | | | | | |
Net cash provided by (used in) continuing operating activities | | | 957 | | | | (145 | ) | | | 1,462 | |
Net cash used in discontinued operating activities | | | (7 | ) | | | (64 | ) | | | (660 | ) |
| | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | 950 | | | | (209 | ) | | | 802 | |
INVESTING ACTIVITIES: | | | | | | | | | | | | |
Additions to property and equipment | | | (142 | ) | | | (70 | ) | | | (272 | ) |
Payments for acquisitions, net of cash acquired | | | (401 | ) | | | (6,736 | ) | | | (4 | ) |
Proceeds from divestiture, net of cash contributed and transaction costs | | | 933 | | | | 7 | | | | 6,535 | |
Purchases of short-term investments | | | (436 | ) | | | - | | | | (378 | ) |
Proceeds from maturities and sales of short-term investments | | | 49 | | | | 31 | | | | 1,355 | |
Other | | | (24 | ) | | | 2 | | | | - | |
| | | | | | | | | | | | |
Net cash provided by (used in) continuing investing activities | | | (21 | ) | | | (6,766 | ) | | | 7,236 | |
Net cash used in discontinued investing activities | | | - | | | | - | | | | (63 | ) |
| | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | (21 | ) | | | (6,766 | ) | | | 7,173 | |
FINANCING ACTIVITIES: | | | | | | | | | | | | |
Repayments of debt | | | (3,210 | ) | | | (90 | ) | | | (350 | ) |
Proceeds from issuance of debt, net of issuance costs | | | - | | | | 6,069 | | | | 500 | |
Net proceeds from sales of common stock under employee stock incentive plans | | | 121 | | | | 95 | | | | 65 | |
Tax payments related to restricted stock units | | | (107 | ) | | | (65 | ) | | | (39 | ) |
Dividends and dividend equivalents paid | | | (211 | ) | | | (222 | ) | | | (3,030 | ) |
Repurchases of common stock | | | - | | | | (500 | ) | | | (1,868 | ) |
Payment for dissenting LifeLock shareholder settlement | | | (68 | ) | | | - | | | | - | |
Other | | | - | | | | (7 | ) | | | (18 | ) |
| | | | | | | | | | | | |
Net cash provided by (used in) continuing financing activities | | | (3,475 | ) | | | 5,280 | | | | (4,740 | ) |
Net cash used in discontinued financing activities | | | - | | | | - | | | | (30 | )�� |
| | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (3,475 | ) | | | 5,280 | | | | (4,770 | ) |
Effect of exchange rate fluctuations on cash and cash equivalents | | | 73 | | | | (41 | ) | | | (96 | ) |
| | | | | | | | | | | | |
Change in cash and cash equivalents | | | (2,473 | ) | | | (1,736 | ) | | | 3,109 | |
Beginning cash and cash equivalents | | | 4,247 | | | | 5,983 | | | | 2,874 | |
| | | | | | | | | | | | |
Ending cash and cash equivalents | | $ | 1,774 | | | $ | 4,247 | | | $ | 5,983 | |
| | | | | | | | | | | | |
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
SYMANTEC CORPORATION
Notes to the Consolidated Financial Statements
Note 1. Description of Business and Significant Accounting Policies
Business
Symantec Corporation (“Symantec,” the “Company,” “we,” “us,” and “our” refer to Symantec Corporation and all of its subsidiaries) is a global leader in cybersecurity. We provide security products, services and solutions to organizations and individuals. Our Integrated Cyber Defense platform helps enterprise, business and government customers unify cloud andon-premises security to protect against threats and safeguard information across every control point and attack vector. Our Cyber Safety Solutions (delivered through our Norton and LifeLock offerings) help consumers protect their information, identities, devices and networks at home and online.
Principles of consolidation
The accompanying consolidated financial statements of Symantec and our wholly-owned subsidiaries are prepared in conformity with generally accepted accounting principles in the United States (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation.
Fiscal calendar
We have a52/53-week fiscal year ending on the Friday closest to March 31. Our fiscal years 2018, 2017 and 2016 were each52-week years.
Use of estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are based upon historical factors, current circumstances and the experience and judgment of management. Management evaluates its assumptions and estimates on an ongoing basis and may engage outside subject matter experts to assist in its valuations. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include those related to the allocation of revenue recognized and deferred amounts, valuation of business combinations including acquired intangible assets and goodwill, loss contingencies, and the recognition and measurement of current and deferred income taxes, including the measurement of uncertain tax positions.
Revenue recognition
General
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. Revenue is recognized net of allowances for returns, discounts, distributor incentives andend-user rebates, and any taxes collected from customers and subsequently remitted to governmental authorities.
For arrangements that include both software andnon-software elements, we allocate revenue to the software deliverables as a group andnon-software deliverables based on their relative selling
prices. In such circumstances, the accounting principles establishwe use a hierarchy to determine the selling pricefair value to be used for allocating revenue to deliverables as follows:the relative selling price allocation: (i) VSOE,vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of theestimated selling price (“ESP”). VSOE is based on historical stand-alone sales or the stated renewal rate for maintenance in certain license arrangements. When we are unable to establish a selling price using VSOE or TPE, we use ESP in the allocation of arrangement consideration. The objective of ESP fornon-software elements is to allocatedetermine the arrangement fees toprice at which we would transact a sale if the deliverables.
product or service were sold on a stand-alone basis. The determination of ESP is made through consultation with and formal approval by our management, taking into consideration thego-to-market strategy, pricing factors and historical transactions.For our consumer productssoftware arrangements that include multiple elements, including perpetual software licenses, maintenance, services, and packaged products with content updates and subscriptions, we allocate and defer revenue for the undelivered items based on VSOE of the fair value of the undelivered elements, and recognize revenuethe difference between the total arrangement fee and the amount deferred for the undelivered items as license revenue. When VSOE does not exist for serial undelivered items, the entire arrangement fee is recognized ratably over the termperformance period. When VSOE does not exist for a discrete undelivered item, consideration for the entire arrangement is deferred until that item is delivered.
Fornon-software arrangements that include multiple elements, we allocate revenue to each element based upon the relative selling price of each element. We use a hierarchy to determine the subscription upon sell-throughfair value to end-users, asbe used for the subscription period generally commences on the date of salerelative selling price allocation: (i) VSOE, (ii) TPE, and (iii) ESP. The revenue allocated to the end-user. We defereach element is recognized when all revenue and cost of revenue amountsrecognition criteria are met for unsold product held by our distributors and resellers.
that element.We expect our distributors and resellers to maintain adequate inventory of consumer packaged products to meet future customer demand, which is generally four or six weeks of customer demand based on recent buying trends. We ship product to our distributors and resellers at their request and based on valid purchase orders. Our distributors and resellers base the quantity of orders on their estimates to meet future customer demand, which may exceed the expected level of a four or six week supply. We offer limited rights of return if the inventory held by our distributors and resellers is below the expected level of a four or six week supply. We estimate reserves for product returns as described below. We typically offer liberal rights of return if inventory held by our distributors and resellers exceeds the expected level. Because we cannot reasonably estimate the amount of excess inventory that will be returned, we primarily offset deferred revenue against trade accounts receivable for the amount of revenue in excess of the expected inventory levels.
ArrangementsEnterprise Security
Revenue for maintenance, subscriptions, managed securityour Enterprise Security products is earned from arrangements that can include various combinations of software, hardware, and services, and SaaS offerings are generally offeredsold directly toend-users or through a multi-tiered distribution channel. We offer channel rebates and marketing programs for our customers over a specified period of time, and we recognize the related revenue ratably over the maintenance, subscription, or service period.
Reserves for product returns. We reserve for estimated product returns as an offset to revenue or deferred revenue based primarily on historical trends. We fully reserve for obsolete products in the distribution channels as an offset to deferred revenue. Actual product returns may be different than what was estimated. These factors and unanticipated changes in the economic and industry environment could make actual results differ from our return estimates.
Reserves for rebates. We estimate and record reserves for channel and end-user rebates as an offset to revenue or deferred revenue. For consumer products that include content updates, rebates are recorded as a ratable offset to revenue or deferred revenue over the term of the subscription.Enterprise Security products. Our estimated reserves for channel volume incentive rebates are based on distributors’ and resellers’ actual performance against the terms and conditions of volume incentive rebate programs, which are typically entered into quarterly. Our reserves forend-user rebates are estimated based on the terms and conditions of the promotional programs, actual sales during the promotion, the amount of actual redemptions received, historical redemption trends by product and by type of promotional program, and the value of the rebate. We also consider current market conditions and economic trends when estimating our reserves for rebates. If actual redemptions differ from our estimates, material differences may result in the amount and timing of our net revenues for any period presented.
Valuation As of goodwill, intangibleMarch 30, 2018 and March 31, 2017, we had reserves for Enterprise Security rebates and marketing programs of $6 million and $11 million, respectively.
Consumer Digital Safety
We sell consumer products directly toend-users and consumer packaged software products through a multi-tiered distribution channel. For consumer products that include content updates, we recognize revenue ratably over the term of the subscription upon sell-through toend-users, as the subscription period commences on the date of sale to theend-user.
We offer channel andend-user rebates for our Consumer Digital Safety products. Our estimated reserves for channel volume incentive rebates are based on distributors’ and resellers’ actual performance against the terms and conditions of volume incentive rebate programs, which are typically entered into quarterly. Our reserves forend-user rebates are estimated based on the terms and conditions of the promotional program, actual sales during the promotion, the amount of actual redemptions received, historical redemption trends by product and by type of promotional program, and the value of the rebate. We estimate and record reserves for channel andend-user rebates as an offset to revenue or deferred revenue. As of March 30, 2018 and March 31, 2017, we had reserves for Consumer Digital Safety rebates of $21 million and $18 million, respectively. For consumer products that include content updates, rebates are recorded as a ratable offset to revenue or deferred revenue over the term of the subscription.
Fair value measurements
For assets and long-livedliabilities measured at fair value, fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider assumptions that market participants would use when pricing the asset or liability.
The three levels of inputs that may be used to measure fair value are:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in less active markets or model-derived valuations. All significant inputs used in our valuations, such as discounted cash flows, are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities. We monitor and review the inputs and results of these valuation models to help ensure the fair value measurements are reasonable and consistent with market experience in similar asset classes.
Assets measured and recorded at fair value
Cash equivalents. We consider all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are carried at amounts that approximate fair value due to the short period of time to maturity.
Short-term investments. Short-term investments consist of investment and marketable equity securities that are classified asavailable-for-sale and recognized at fair value using Level 1 and Level 2 inputs, which are quoted using market prices, independent pricing vendors, or other sources, to determine the fair value. Unrealized gains and losses, net of tax, are included in accumulated other comprehensive income. We regularly review our investment portfolio to identify and evaluate
investments that have indications of impairment. Factors considered in determining whether a loss is other-than-temporary include: the length of time and extent to which the fair 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 market value.
Derivatives not designated as hedges.We have entered into foreign exchange forward contracts with up to 6 months in duration to mitigate our foreign currency risk. These foreign exchange forward contracts are derivatives not designated as hedges and recognized at fair value using Level 2 inputs to determine the fair value.
Non-marketable equity investments
We make equity investments in privately-held companies, which includes the B common shares we received as a portion of the net consideration in the sale of our information management business, Veritas Technology LLC (“Veritas”), and the outstanding common stock of DigiCert Parent Inc. (“DigiCert”) we received as a portion of the net consideration in the sale of our website security (“WSS”) and public key infrastructure (“PKI”) solutions. We account for the investment in Veritas under the cost method of accounting. We account for the investment in DigiCert under the equity method and record our interest in the net earnings (loss) of DigiCert based on the most recently available financial statements of DigiCert, which are provided to us on a three-month lag, along with adjustments for amortization of basis differences, in Other income (expense), net in our Consolidated Statements of Operations.
We assess the recoverability of ournon-marketable equity investments by reviewing various indicators of impairment. If indicators are present, a fair value measurement is made by performing a discounted cash flow analysis of the investment. If a decline in value is determined to be other-than-temporary, impairment is recognized and included in Other income (expense), net.
Accounts receivable
Accounts receivable are recorded at the invoiced amount and are not interest bearing. We maintain an allowance for doubtful accounts to reserve for potentially uncollectible receivables. We review our accounts receivables by aging category to identify specific customers with known disputes or collectability issues. In addition, we maintain an allowance for all other receivables not included in the specific reserve by applying specific percentages of projected uncollectible receivables to the various aging categories. In determining these percentages, we use judgment based on our historical collection experience and current economic trends. We also offset deferred revenue against accounts receivable when channel inventories are in excess of specified levels and for transactions where collection of a receivable is not considered probable.
Property and equipment
Property, equipment, and leasehold improvements are stated at cost, net of accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful lives. Estimated useful lives for financial reporting purposes are as follows: buildings, 20 to 30 years; building improvements, 7 to 20 years; leasehold improvements, the lesser of the life of the improvement or the initial lease term; computer hardware and software, and office furniture and equipment, 3 to 5 years.
Software development costs
The costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at
which time any additional costs would be capitalized in accordance with the accounting guidance for software. Because our current process for developing software is essentially completed concurrently with the establishment of technological feasibility, which occurs upon the completion of a working model, no costs have been capitalized for any of the periods presented.
Internal-use software development costs
We capitalize qualifying costs incurred during the application development stage related to software developed forinternal-use and enterprise cloud computing services, and amortize them over the estimated useful life of 3 years. We expense costs incurred related to the planning and post-implementation phases of development as incurred. As of March 30, 2018 and March 31, 2017, capitalized costs, net of amortization, were $100 million.
Business combinations.
We use the acquisition method of accounting under the authoritative guidance on business combinations. We allocate the purchase price of acquired businessesour acquisitions to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values onvalues. The excess of the acquisition date. Any residual purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Goodwill is allocated to reporting units expected to benefit from the business combination. The allocation of purchase price requires management to make significant estimates and assumptions in determining the fair values of the assets acquired and liabilities assumed especially with respect to intangible assets.
Critical estimates in valuing intangible assets include, butAcquisition-related expenses are not limited to, future cash flows from customer relationships, developed technology, trade names and acquired patents; and discount rates. Management estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
Goodwill impairment. Goodwill is allocated to our reporting units expected to benefitrecognized separately from the business combination basedand are expensed as incurred. Each acquired company’s operating results are included in our Consolidated Financial Statements starting on the relative fair values atdate of acquisition.Goodwill
Goodwill is recorded when consideration paid for an acquisition exceeds the acquisition date. We evaluate our reporting units which are the same as our operating segments when changes in our operating structure occur, and if necessary, reassign goodwill using a relative fair value allocation approach. of net tangible and intangible assets acquired.
We testperform an impairment assessment of goodwill for impairment at the reporting unit level at least annually on the first day ofin the fourth quarter of each fiscal year, or more frequently if events or changes in circumstances indicate that the asset may be impaired. For purpose of testing goodwill for impairment, we established reporting units based on our current reporting structure and our goodwill was allocated to the Enterprise Security and Consumer Digital Safety reporting units. The accounting guidance gives us the option to perform a qualitative assessment to determine whether further impairment testing is necessary. The qualitative assessment considers events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as the sale of a reporting unit or a sustained decrease in the company’s stock price. If it is determined, as a result of the qualitative assessment, that it is more-likely-than-notmore likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative test is performed.
In connection with the first stepsale of WSS and PKI solutions, on August 2, 2017, we performed a quantitative test at the quantitative testing, we comparereporting unit level and determined the fair value of each reporting unit to itssubstantially exceeded the carrying amount. If the first step indicates that the fair value of each reporting unit is greater than its carrying amount no further testing is required. Goodwill impairment tests require judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. To determine a reporting unit’s fair value, we generally use the income approach which is based on the estimated discounted future cash flows of that unit. The estimation of future cash flows requires us to make projections of future revenues and expenses of each reporting unit and, establish a weighted-average costtherefore, found no impairment of capital to discount these cash flows. Changesgoodwill. In addition, in these key assumptions and estimates or other assumptions used in this process could materially affect our impairment analysis in a given year. Forthe fourth quarter of the fiscal year ended April 1, 2016,March 30, 2018, we performed a qualitative assessment and concluded that goodwill wasit is more likely than not impaired as the results of our annual impairment test indicate that the fair values of our reporting units are significantly in excess ofmore than their carrying values.
Accordingly, there was no indication of impairment, and further quantitative testing was not required.Long-lived assets
In connection with our acquisitions, we generally recognize assets for customer relationships, developed technology, finite-lived trade names, patents, and indefinite-lived trade names. Finite-lived intangible assets are carried at cost less accumulated amortization. Such amortization is provided on a straight-line basis over the estimated useful lives of the respective assets, generally from 1 to 11 years.
Amortization for developed technology is recognized in cost of revenue. Amortization for customer relationships and certain trade names is recognized in operating expenses. Indefinite-lived intangible assets are not subject to amortization but instead tested for impairment. annually or more frequently if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Long-lived assets, including property and equipment, intangible assets and equity investments, excluding goodwill,property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows independent of other assets. An impairment loss would beis recognized when estimated undiscounted future cash flows generated from the assets are less than their carrying amount. Measurement of an impairment loss would beis based on the excess of the carrying amount of the asset group over its fair value.
Debt
Our estimatesdebt includes senior unsecured notes, senior term loans, convertible senior notes, and a senior unsecured revolving credit facility. Our senior unsecured notes are recorded at par value at issuance less a discount representing the amount by which the face value exceeds the fair value at the date of future cash flows require significant judgment based on historicalissuance and anticipated future operating results andan amount which represents issuance costs. Our senior term loans are subject to many factorsrecorded at par value less debt issuance costs, which are subject to variabilityrecorded as a reduction in the carrying value of the debt. Our convertible senior notes are recorded at par value less the fair value of the equity component of the notes, at their issuance date, determined using Level 2 inputs and change.
Contingenciesless any issuance costs. The discount and litigation
We evaluate contingent liabilities including threatened or pending litigation in accordanceissuance costs associated with the
authoritative guidance on contingencies. We assessvarious notes are amortized using the
likelihood of any adverse judgments or outcomes from potential claims or proceedings, as well as potential ranges of probable losses, wheneffective interest rate method over the
outcomesterm of the
claimsdebt as anon-cash charge to interest expense. Borrowings under our revolving credit facility, if any, are recognized at principal balance plus accrued interest based upon stated interest rates. Debt maturities are classified as current liabilities on our Consolidated Balance Sheets if we are contractually obligated to repay them in the next twelve months or,
proceedingsprior to the balance sheet date, we have the authorization and intent to repay them prior to their contractual maturities and within the next twelve months.Restructuring
Restructuring actions generally include significant actions involving employee-related severance charges and contract termination costs. Employee-related severance charges are largely based upon substantive severance plans, while some charges result from mandated requirements in certain foreign jurisdictions. These charges are reflected in the period when both the actions are probable and reasonablythe amounts are estimable. A determination ofContract termination costs for leased facilities primarily reflect costs that will continue to be incurred under the amount of accrued liabilities required, if any,contract for these contingencies is made after the analysis of each separate matter. Because of uncertainties relatedits remaining term without economic benefit to these matters, we base our estimates on the information available at the time of our assessment. As additional information becomes available, we reassess the potential liability related to our pending claims
and litigation and may revise our estimates. Any revisionsus. These charges are reflected in the estimates of potential liabilities could have a material impact on our operating results and financial position.
period when the facility ceases to be used.Income taxes
We are required to compute ourthe provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards in each federal, state, and international jurisdiction in which we operate. This process requires that we estimate the current tax exposure as well as assess temporary differences between the accounting and tax treatment of assets and liabilities, including items such as accruals and allowances not currently deductible for tax purposes. The income tax effects of the differences we identify are classified as current or long-termWe measure deferred tax assets and liabilities using the currently enacted tax rates that apply to taxable income in our Consolidated Balance Sheets as of April 3, 2015, and as long-term deferredeffect for the years in which those tax assets and liabilities as of April 1, 2016, following the adoption of Accounting Standards Update No. 2015-17, Income Taxes. See Note 1 of the Notes to Consolidated Financial Statements in this annual report for additional information. Our judgments, assumptions, and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax laws or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in our Consolidated Balance Sheets and Consolidated Statements of
Operations.Our effective tax rate includes the impact of providing U.S. taxes on certain undistributed foreign earnings attributable to the sale of Veritas as well as the impact of certain undistributed foreign earnings for which no U.S. taxes have been provided because such earnings are planned to be indefinitely reinvested outside the U.S. While we do not anticipate changing our intention regarding indefinitely reinvested earnings outside the U.S., material changes in our estimates of such earnings or tax legislation that limits or restricts the amount of such earnings could materially impact our income tax provision and effective tax rate. If certain foreign earnings previously treated as indefinitely reinvested outside the U.S. are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings.
We account for uncertain tax positions pursuant to authoritative guidance based on a two-step approach to recognize and measure those positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appealsrealized or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. settled.We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, the refinement of estimates, or the realization of earnings or deductions that differ from our estimates. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will impact our tax provision in our Consolidated Statements of
Operations in the period in which such determination is made.We must also assess the likelihood that deferred tax assets will be realized from future taxable income and, based on this assessment establish a valuation allowance, if required. The determination of our
valuation allowance involves assumptions, judgments and estimates, including forecasted earnings, future taxable income, and the relative proportions of revenue and income before taxes in the various domestic and international jurisdictions in which we operate. To the extent we establish a valuation allowance or change the valuation allowance in a period, we reflect the change with a corresponding increase or decrease to our tax provisiontax.
Stock-based compensation
We measure and recognize stock-based compensation for all stock-based awards, including restricted stock units (“RSU”), performance-based restricted stock units (“PRU”), stock options, and rights to purchase shares under our employee stock purchase plan (“ESPP”), based on their estimated fair value on the grant date. We recognize the costs in our financial statements on a straight-line basis over the award’s requisite service period except for PRUs with graded vesting, for which we recognize the costs on a graded basis. For awards with performance conditions, the amount of compensation cost we recognize over the requisite service period is based on the actual or estimated achievement of the performance condition. We estimate the number of stock-based awards that will be forfeited due to employee turnover.
The fair value of each RSU and PRU that does not contain a market condition is equal to the market value of our common stock on the date of grant. The fair value of each PRU that contains a market condition is estimated using the Monte Carlo simulation option pricing model. The fair values of RSUs and PRUs are not discounted by the dividend yield because our RSUs and PRUs include dividend-equivalent rights (“DER”). We use the Black-Scholes model to determine the fair value of unvested stock options assumed in acquisitions and the fair value of rights to acquire shares of common stock under our ESPP. The Black-Scholes valuation model incorporates a number of variables, including our expected stock price volatility over the expected life of the awards, actual and projected employee exercise and forfeiture behaviors, risk-free interest rates, and expected dividends.
We have certain liability-classified stock-based compensation awards for which the service inception date precedes the grant date. For these awards, we recognize stock-based compensation expense on a straight-line basis over the service period. The liability is reclassified to Additionalpaid-in capital in our Consolidated StatementsBalance Sheets when the award is granted. There is no substantive future service period that exists at the grant date for these awards.
Foreign currency
For foreign subsidiaries whose functional currency is the local currency, assets and liabilities are translated to U.S. dollars at exchange rates in effect at the balance sheet date. Gains and losses resulting from translation of Operations.
Recently issued authoritative guidance
See Note 1 of the Notes to Consolidated Financial Statements in this annual report for recently issued authoritative guidance, including the respective expected dates of adoption and effects on our results of operations and financial condition.
RESULTS OF OPERATIONS
The following table sets forth certain Consolidated Statements of Operations data as a percentage of net revenues for the fiscal years indicated below: |
| | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Net revenues | 100 | % | | 100 | % | | 100 | % |
| Cost of revenues | 17 | % | | 18 | % | | 19 | % |
| Gross profit | 83 | % | | 82 | % | | 81 | % |
| Operating expenses: | | | | | |
| Sales and marketing | 36 | % | | 42 | % | | 42 | % |
| Research and development | 21 | % | | 21 | % | | 17 | % |
| General and administrative | 8 | % | | 9 | % | | 10 | % |
| Amortization of intangible assets | 2 | % | | 2 | % | | 2 | % |
| Restructuring, separation, and transition | 4 | % | | 4 | % | | 6 | % |
| Total operating expenses | 70 | % | | 78 | % | | 78 | % |
| Operating income | 13 | % | | 4 | % | | 3 | % |
| Non-operating expense, net | 2 | % | | 1 | % | | 1 | % |
The total percentages may not add due to rounding.
Net revenues by fiscal year |
| | | | | | | | | | | | | | | | | |
| | | | | | | | Change in % |
| | 2016 | | 2015 | | 2014 | | 2016 v 2015 | | 2015 v 2014 |
| | (Dollars in millions) | | | | |
| Net revenues | $ | 3,600 |
| | $ | 3,956 |
| | $ | 4,183 |
| | (9) | % | | (5) | % |
2016 compared to 2015
Net revenues decreased $356 million year over year primarily due to unfavorablethese foreign currency
fluctuationsfinancial statements into U.S. dollars are recorded in accumulated other comprehensive income (“AOCI”). Remeasurement adjustments are recorded in Other income (expense), net.Concentrations of $171 millionrisk
A significant portion of our revenue is derived from international sales and declines in our consumer security revenue driven by the ongoing impact of changes to our renewal practicesindependent agents and a reduction in revenue from OEM arrangements. In addition, net revenues decreased partially due to the impact of the additional week from the 53-week fiscal 2015 year.
2015 compared to 2014
Net revenues decreased $227 million primarily due to declines in our consumer security products driven by our channel strategy to exit unprofitable retail arrangements and certain high-cost OEM arrangements, coupled with the impact to change our renewal practices. In addition, net revenues decreased due to the general strengtheningdistributors. Fluctuations of the U.S. dollar against foreign currencies,
changes in local regulatory or economic conditions, piracy, or nonperformance by independent agents or distributors could adversely affect our operating results.Financial instruments that potentially subject us to concentrations of risk consist principally of cash and weaknesscash equivalents, short-term investments, and trade accounts receivable. Our investment policy limits the amount of credit risk exposure to any one issuer and to any one country. The credit risk in endpoint management,our
trade accounts receivable is substantially mitigated by our credit evaluation process, reasonably short collection terms, and the geographical dispersion of sales transactions. Customers which are distributors that accounted for over 10% of our net accounts receivable, are as follows:
| | | | | | | | |
| | | March 30, 2018 | | | March 31, 2017 | |
Customer A | | | 22 | % | | | 12 | % |
Customer B | | | 15 | % | | | - | |
Customer C | | | - | | | | 14 | % |
Advertising and other promotional costs
Advertising and other promotional costs are charged to operations as incurred and included in sales and marketing expenses. These costs totaled $360 million, $212 million, and $211 million for fiscal 2018, 2017, and 2016, respectively.
Contingencies
We evaluate contingent liabilities including threatened or pending litigation in accordance with the authoritative guidance on contingencies. We assess the likelihood of any adverse judgments or outcomes from potential claims or proceedings, as well as potential ranges of probable losses, when the outcomes of the claims or proceedings are probable and reasonably estimable. A determination of the amount of an accrual required, if any, for these contingencies is made after the analysis of each separate matter. Because of uncertainties related to these matters, we base our estimates on the information available at the time of our assessment. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates.
Sales commissions
Sales commissions that are incremental and directly related to customer sales contracts in which revenue is deferred are accrued and capitalized upon execution of anon-cancelable customer contract, and subsequently expensed over the term of such contract in proportion to the related future revenue streams.
Reclassification
Certain amounts in the prior years have been reclassified to conform to the current year presentation.
Note 2. Recent Accounting Standards
Recently adopted authoritative guidance
Employee Stock-Based Compensation. In the first quarter of fiscal 2018, we adopted new guidance to simplify accounting for share-based payment transactions. Prior to adoption, excess tax benefits resulting from the difference between the deduction for tax purposes and the compensation costs recognized for financial reporting were not recognized until the deduction reduced taxes payable. As a result of the new guidance, we now recognize excess tax benefits or deficiencies in the period in which the award vests. We elected to continue to estimate forfeitures rather than record the forfeitures as they occur. We adopted the change in recognizing excess tax benefits using the modified retrospective method. We also elected to retrospectively apply the change in presentation of excess
tax benefits recognized related to stock-based compensation expense in our Consolidated Statements of Cash Flows from financing activities to operating activities. The cumulative effect of adopting the new accounting guidance was not material.
Recently issued authoritative guidance not yet adopted
Revenue Recognition — Contracts with Customers. In May 2014, the Financial Accounting Standards Board (“FASB”) issued new authoritative guidance for revenue from contracts with customers. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration that the company expects to receive in exchange for those goods or services. In doing so, companies may need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation.
The new guidance may be applied retrospectively to each prior period presented or retrospectively with cumulative effect recognized in retained earnings as of the date of adoption. We will adopt the new standard on a modified retrospective basis in the first quarter of fiscal 2019 and will apply the new standard to contracts that are not completed as of March 31, 2018.
We expect that the most significant impact on revenues relates to arrangements in our Enterprise Security segment that include multiple elements, such as hardware, perpetual software licenses, term-based software license subscriptions, maintenance, and services. We expect the new standard will impact the pattern and timing of the recognition for these Enterprise Security sales arrangements. We expect that revenues related to certain term-based software licenses with distinct deliverables, which are recognized ratably over the contract term under the current accounting standards, will have a portion of the arrangement fee recognized at a point in time under the new standard. In addition, revenues related to certain perpetual software licenses with interrelated deliverables, which are recognized at a point in time under the current accounting standards, will be recognized ratably over the estimated performance period under the new standard. We also expect there will be an impact to the timing and amount of revenue recognized in our software arrangements, where revenue was allocated to undelivered elements based on a residual basis under current guidance, but will be allocated based on a relative value basis under the new standard.
We expect that under the new standard revenue recognized for arrangements for (1) term-based software licenses with interrelated content updates and other deliverables, (2) cloud-delivered products and (3) maintenance and support will continue to be recognized ratably over the term of the arrangement, and that revenues related to arrangements that include perpetual software licenses and hardware with distinct deliverables will continue to be recognized upon delivery.
The table below summarizes the timing of when revenue will typically be recognized under the new revenue standard for these major areas:
| | |
Performance Obligation | | When Performance Obligations is Typically
Satisfied |
Products and services transferred at a point in time: | | |
License with distinct deliverables | | When software activation keys have been made available for download |
Hardware with distinct deliverables | | When control of the product passes to the customer; typically upon shipment |
| |
| Products and services transferred over time: | | |
License with interrelated deliverables | | Over the expected performance term, beginning on the date that software activation keys are made available to the customer |
Cloud hosted solutions | | Over the contract term, beginning on the date that service is made available to the customer |
Support and maintenance | | Ratably over the course of the service term |
| Professional services | | As the services are provided |
We do not expect that revenues related to Consumer Digital Safety solutions will be significantly impacted and will continue to be primarily recognized ratably over the term of the arrangement.
As a result of adopting the new standard on a modified retrospective basis and applied to contracts that are not completed as of March 31, 2018, the net impact of the changes related to revenue recognition will result in a decrease of deferred revenue as of March 30, 2018 of approximately $169 million, with the offset to retained earnings, primarily related to Enterprise Security contracts.
In addition, under current accounting standards, we have historically capitalized costs associated with obtaining a contract (most significantly sales commissions) and amortized them over the term of the related contract in proportion to the related revenue streams. As a result of adopting the new standard, sales commissions that are incremental to obtaining a customer contract for which revenue is deferred will be accrued and capitalized, and subsequently amortized to sales and marketing expense on a straight-line basis over three years, the expected period of benefit. In arriving at the average period of benefit, we will evaluate both qualitative and quantitative factors which include historical customer renewal rates, anticipated renewal periods, and the estimated useful life of the underlying product sold as part of the transaction. Commissions paid on renewals of support and maintenance are not commensurate with the initial commissions paid, and therefore the amortization period of commissions for initial contracts will consider the estimated term of specific anticipated renewal contracts over the life of the customer. The impact of this change will result in an increase of unamortized direct selling costs as of March 30, 2018 of $49 million, with the offset to retained earnings.
The impact of the adoption of the new standard on income taxes will also result in an increase of deferred income tax liabilities of approximately $47 million and an increase of accounts receivable of approximately $24 million as of March 30, 2018. We do not expect that the adoption of this standard will impact our operating cash flows.
Financial Instruments — Recognition and Measurement. In January 2016, the FASB issued new authoritative guidance on financial instruments. The new guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure.
The new guidance will be effective for us in our first quarter of fiscal 2019. For substantially all of our portfolio, we have elected to use the measurement alternative, defined as cost, less impairments, adjusted by observable price changes. Based on the composition of our investment portfolio, the adoption of this guidance is not expected to have a material impact on our Consolidated Financial Statements.
Leases. In February 2016, the FASB issued new guidance on lease accounting which will require lessees to recognize assets and liabilities on their balance sheet for the rights and obligations created by operating leases and will also require disclosures designed to give users of financial statements information on the amount, timing, and uncertainty of cash flows arising from leases. The new guidance will be effective for us in our first quarter of fiscal 2020. Early adoption is permitted but we do not plan to adopt the provisions of the new guidance early. We are currently in the assessment phase to determine the adoption methodology and are evaluating the impact of this new standard on our Consolidated Financial Statements and disclosures. We expect that most of our operating lease commitments will be subject to the new standard and recognized as lease liabilities andright-of-use assets upon adoption, which will increase the total assets and total liabilities we report. We are evaluating the impact to our Consolidated Financial Statements as it relates to other aspects of the business.
Credit Losses. In June 2016, the FASB issued new authoritative guidance on credit losses, which changes the impairment model for most financial assets and certain other instruments. For trade receivables and other instruments, we will be required to use a new forward-looking “expected loss” model. Additionally, foravailable-for-sale debt securities with unrealized losses, we will measure credit losses in a manner similar to today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The standard will be effective for us in our first quarter of fiscal 2021. We are currently evaluating the impact of the adoption of this guidance on our Consolidated Financial Statements.
Income Taxes — Intra-Entity Asset Transfers Other Than Inventory.In October 2016, the FASB issued new authoritative guidance that requires entities to immediately recognize the tax consequences of intercompany asset transfers, excluding inventory, at the transaction date, rather than deferring the tax consequences under current GAAP. We will adopt this new guidance in the first quarter of fiscal 2019 using a modified retrospective transition method. The adoption of this guidance will result in a cumulative-effect adjustment of a $742 million increase to retained earnings, consisting primarily of additional deferred tax assets related to an intra-entity sale of intangible assets in periods prior to adoption, partially offset by the impactwrite-off of the additional weekincome tax consequences deferred from the 53-week fiscal 2015 year.
Net revenues and operating income by segment by fiscal year
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | Change in % |
| | 2016 | | 2015 | | 2014 | | 2016 v 2015 | | 2015 v 2014 |
| | (Dollars in millions) | | | | |
| Net revenues: | | | | | | | | | |
| Consumer Security | $ | 1,670 |
| | $ | 1,887 |
| | $ | 2,063 |
| | (11) | % | | (9) | % |
| Enterprise Security | 1,930 |
| | 2,069 |
| | 2,135 |
| | (7) | % | | (3) | % |
| Percentage of total net revenues: | | | | | | | | | |
| Consumer Security | 46 | % | | 48 | % | | 49 | % | | | | |
| Enterprise Security | 54 | % | | 52 | % | | 51 | % | | | | |
| Operating income: | | | | | | | | | |
| Consumer Security | $ | 924 |
| | $ | 982 |
| | $ | 928 |
| | (6) | % | | 6 | % |
| Enterprise Security | 102 |
| | 293 |
| | 349 |
| | (65) | % | | (16) | % |
| Operating margin: | | | | | | | | | |
| Consumer Security | 55 | % | | 52 | % | | 45 | % | | | | |
| Enterprise Security | 5 | % | | 14 | % | | 16 | % | | | | |
2016 compared to 2015
Consumer Security revenue decreased $217 million primarily due to the ongoing impact of changes to our renewal practices and a reduction in revenue from OEM arrangements. Unfavorable currency fluctuations of $81 million also contributed to the decline in revenue. Consumer Security operating income decreased $58 million primarily due to the decreases in revenue in this segment, which were partially offset by reductions in cost of revenues, sales and marketing and research and development expenses.
Enterprise Security revenue decreased $139 million primarily due to unfavorable foreign currency fluctuations of $90 million, as well as decrease in sales of endpoint management and our mail cloud security products. The decrease of $191 million in operating income was primarily due to decreased revenue and increased allocation of stranded costs. These stranded costs consist of overhead expenses resulting from the sale of Veritas and primarily include information technology infrastructure and services, and real estate costs.
2015 compared to 2014
Consumer Security revenue decreased $176 million primarily due to our channel strategy to exit unprofitable retail arrangements and certain high-cost OEM arrangements, coupled with the impact of our decision to change our renewal practices. Consumer Security operating income increased $54 million primarily due to reductions in advertising and promotional expenses of $141 million and decreases in cost of revenues of $52 million and salaries and wages of $26 million, partially offset by the revenue decline in the segment.
Enterprise Security revenue decreased $66 million primarily due to unfavorable foreign currency fluctuations, as well as a decrease in the sales of endpoint management. The decrease of $56 million in operating income was mainly due to the reduction in revenue.
Net revenues by geographic region by fiscal yearpre-adoption |
| | | | | | | | | | | | | | | | | |
| | | | | | | | Change in % |
| | 2016 | | 2015 | | 2014 | | 2016 v 2015 | | 2015 v 2014 |
| | (Dollars in millions) | | | | |
| Revenues by geographic region: | | | | | | | | | |
| Americas (U.S., Canada and Latin America) | $ | 2,113 |
| | $ | 2,214 |
| | $ | 2,315 |
| | (5) | % | | (4) | % |
| EMEA (Europe, Middle East and Africa) | 894 |
| | 1,065 |
| | 1,129 |
| | (16) | % | | (6) | % |
| APJ (Asia Pacific and Japan) | 593 |
| | 677 |
| | 739 |
| | (12) | % | | (8) | % |
| Total net revenues | $ | 3,600 |
| | $ | 3,956 |
| | $ | 4,183 |
| | | | |
| | | | | | | | | | |
| U.S. | $ | 1,897 |
| | $ | 1,960 |
| | $ | 2,049 |
| | (3) | % | | (4) | % |
| International | 1,703 |
| | 1,996 |
| | 2,134 |
| | (15) | % | | (6) | % |
| Total net revenues | $ | 3,600 |
| | $ | 3,956 |
| | $ | 4,183 |
| | | | |
| | | | | | | | | | |
| Percentage of total net revenues: | | | | | | | | | |
| Americas (U.S., Canada and Latin America) | 59 | % | | 56 | % | | 55 | % | | | | |
| EMEA (Europe, Middle East and Africa) | 25 | % | | 27 | % | | 27 | % | | | | |
| APJ (Asia Pacific and Japan) | 16 | % | | 17 | % | | 18 | % | | | | |
| U.S. | 53 | % | | 50 | % | | 49 | % | | | | |
| International | 47 | % | | 50 | % | | 51 | % | | | | |
Fluctuations in the U.S. dollar compared to foreign currencies unfavorably impacted our international revenue by approximately $171 million for fiscal 2016 as compared to fiscal 2015. Fiscal 2016 revenue for the EMEA and APJ regions decreased primarily due to unfavorable foreign currency fluctuations of $119 million and $49 million, respectively, compared to fiscal 2015.
Fluctuations in the U.S. dollar compared to foreign currencies unfavorably impacted our international revenue by approximately $92 million for fiscal 2015 as compared to fiscal 2014. This was due to unfavorable foreign currency fluctuations of $53 million in the EMEA region and $39 million in the APJ region.
Our international sales are expected to continue to be a significant portion of our revenue. As a result, revenue is expected to 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 revenues by fiscal year |
| | | | | | | | | | | | | | | | | |
| |
| |
| |
| | Change in % |
| | 2016 | | 2015 | | 2014 | | 2016 v 2015 | | 2015 v 2014 |
| | (Dollars in millions) | | | | |
| Cost of revenues | $ | 615 |
| | $ | 727 |
| | $ | 791 |
| | (15) | % | | (8) | % |
2016 compared to 2015
Cost of revenues consists primarily of technical support costs, costs of billable services, and fees to OEMs under revenue-sharing agreements. Our cost of revenues decreased $112 million for fiscal 2016 compared to fiscal 2015 primarily due to favorable currency effects, a decrease in OEM royalty fees, and a decrease in service related and content delivery expenses.
2015 compared to 2014
Our cost of revenues decreased $64 million for fiscal 2015 compared to fiscal 2014 primarily due to favorable currency effects, a decrease in OEM royalty fees, and a decrease in service related and content delivery expenses in our Consumer Security segment.
Operating expenses by fiscal year |
| | | | | | | | | | | | | | | | | |
| | | | | | | | Change in % |
| | 2016 | | 2015 | | 2014 | | 2016 v 2015 | | 2015 v 2014 |
| | (Dollars in millions) | | | | |
| Sales and marketing expense | $ | 1,292 |
| | $ | 1,650 |
| | $ | 1,766 |
| | (22) | % | | (7) | % |
| Research and development expense | 748 |
| | 812 |
| | 722 |
| | (8) | % | | 12 | % |
| General and administrative expense | 295 |
| | 362 |
| | 420 |
| | (19) | % | | (14) | % |
| Amortization of intangible assets | 57 |
| | 87 |
| | 93 |
| | (34) | % | | (6) | % |
| Restructuring, separation, and transition | 136 |
| | 164 |
| | 247 |
| | (17) | % | | (34) | % |
| Total | $ | 2,528 |
| | $ | 3,075 |
| | $ | 3,248 |
| | (18) | % | | (5) | % |
2016 compared to 2015
The overall decreases in operating expenses for fiscal 2016 compared to fiscal 2015 were primarily due to a decrease in unallocated corporate charges previously allocated to Veritas. These unallocated corporate charges are included in expenses from continuing operations. Refer to Note 8 of the Notes to Consolidated Financial Statements in this annual report for more information about our unallocated corporate charges. The impacts of the unallocated corporate charges are discussed below. In addition to the impacts of unallocated corporate charges, we experienced favorable foreign currency effects on our operating expenses for fiscal 2016 compared to fiscal 2015.
Sales and marketing expense decreased $358 million primarily due to a reduction of unallocated corporate charges of $328 million.
Research and development expense decreased $64 million primarily due to a reduction of unallocated corporate charges of $76 million.
General and administrative expenses decreased $67 million primarily due to a reduction of unallocated corporate charges of $91 million, partially offset by an increase in stock-based compensation expense.
Amortization of intangible assets decreased $30 million primarily due to certain intangible assets becoming fully amortized during fiscal 2015.
Restructuring, separation, and transition costs include severance, facilities, separation, transition intra-entity transfers and other related costs. For fiscal 2016, we incurred $44 million of restructuring costs, $14 millionliabilities for amounts not recognized under current GAAP.Accumulated Other Comprehensive Income.In February 2018, the FASB issued new authoritative guidance thatwill permit entities to reclassify tax effects stranded in separation costs, and $78 million in transition costs. For further information on restructuring, separation, and transition costs, see
Note 6 of the Notes to Consolidated Financial Statements in this annual report.2015 compared to 2014
We experienced favorable foreign currency effects on our operating expenses in fiscal 2015 as compared to fiscal 2014.
Sales and marketing expense decreased $116 million in fiscal 2015, primarily due to lower advertisement and promotions expenses partly offset by higher unallocated corporate charges of $67 million.
The $90 million increase in research and development expense for fiscal 2015 was primarily due to higher unallocated corporate charges and stock-based compensation expense.
General and administrative expenses decreased $58 million primarily due to a reduction of unallocated corporate charges of $17 million.
Amortization of intangible assets decreased by $6 million primarilyaccumulated other comprehensive income as a result of
certainthe Act to retained earnings. The amendment will be effective for us in our first quarter of fiscal 2020. Early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance on our Consolidated Financial Statements.Although there are several other new accounting pronouncements issued or proposed by the FASB that we have adopted or will adopt, as applicable, we do not believe any of these accounting pronouncements has had, or will have, a material impact on our consolidated financial position, operating results or disclosures.
Note 3. Acquisitions and Divestitures
Fiscal 2018 acquisitions
Fireglass Ltd. and Skycure Ltd. acquisitions
In July 2017, we completed our acquisitions of Israel-based Fireglass Ltd. (“Fireglass”) and Skycure Ltd. (“Skycure”). Fireglass provides agentless isolation solutions that prevent ransomware,
malware, and phishing threats in real-time from reaching user endpoints or the corporate network. With this acquisition, we further strengthened our enterprise security strategy to deliver an Integrated Cyber Defense platform and extended our participation in the Secure Web Gateway and Email protection markets delivered both on premises and in the cloud. Skycure provides mobile threat defense for devices running modern operating systems, including iOS and Android. This acquisition extends our endpoint security capabilities. With the addition of Skycure, our Integrated Cyber Defense Platform now enables visibility into and control over all endpoint devices, including mobile devices, whether corporate owned or bring your own device. The total aggregate consideration for these acquisitions, primarily consisting of cash, was $345 million, net of $15 million cash acquired.
Our allocation of the aggregate purchase price for these two acquisitions as of July 24, 2017, was as follows:
| | | | | | | | |
| (In millions, except useful lives) | | Fair Value | | | Weighted-Average
Estimated Useful Life | |
Developed technology | | $ | 123 | | | | 5.5 years | |
Customer relationships | | | 11 | | | | 7.0 years | |
Goodwill | | | 247 | | | | | |
Deferred income tax liabilities | | | (35 | ) | | | | |
Other liabilities | | | (1 | ) | | | | |
| | | | | | | | |
Total purchase price | | $ | 345 | | | | | |
| | | | | | | | |
The goodwill arising from the acquisitions is attributed to the expected synergies, including revenue benefits that are expected to be generated by combining Fireglass and Skycure with Symantec. A portion of the goodwill recognized is expected to be deductible for tax purposes. See Note 4 for more information on goodwill.
Other fiscal 2018 acquisitions
During fiscal 2018, in addition to the acquisitions mentioned above, we completed acquisitions of other companies for an aggregate purchase price of $66 million, net of $1 million cash acquired. Of the aggregate purchase price, $48 million was recorded to goodwill.
Pro forma results of operations for our fiscal 2018 acquisitions have not been presented because they were not material to our consolidated results of operations, either individually or in the aggregate.
Fiscal 2017 acquisitions
Blue Coat, Inc. acquisition
On August 1, 2016, we acquired all of the outstanding common stock of Blue Coat, Inc. (“Blue Coat”), a provider of advanced web security solutions for global enterprises and governments. The addition of Blue Coat’s suite of network and cloud security products to our innovative Enterprise Security product portfolio has enhanced our threat protection and information protection products while providing us with complementary products, such as advanced web and cloud security solutions, that address the network and cloud security needs of enterprises.
The total consideration for the acquisition of Blue Coat was approximately $4.7 billion, net of cash acquired, and consisted of the following:
| | | | |
| (In millions) | | | |
Cash payments, net of cash acquired | | $ | 3,783 | |
Issuance of Symantec 2.0% convertible debt to Bain Capital Funds (selling shareholder) | | | 750 | |
Fair value of vested assumed stock options | | | 102 | |
Common stock issued | | | 38 | |
| | | | |
Total | | $ | 4,673 | |
| | | | |
Our allocation of the purchase price, based on the fair values of the assets acquired and liabilities assumed was as follows:
| | | | |
| (In millions) | | | |
Assets: | | | | |
Current assets | | $ | 190 | |
Intangible assets | | | 1,608 | |
Goodwill | | | 4,084 | |
Other long-term assets | | | 63 | |
Liabilities: | | | | |
Other current liabilities | | | (113 | ) |
Deferred revenue | | | (220 | ) |
Deferred tax liabilities | | | (920 | ) |
Other long-term obligations | | | (19 | ) |
| | | | |
Total | | $ | 4,673 | |
| | | | |
The goodwill of $4.1 billion arising from the acquisition is attributed to the expected synergies, including future cost efficiencies, and other benefits that are expected to be generated by combining Symantec and Blue Coat. The goodwill recognized is not deductible for tax purposes. See Note 4 for more information on goodwill.
Identified intangible assets becoming fully amortized duringand their respective useful lives were as follows:
| | | | | | |
| (In millions, except for useful lives) | | Fair Value | | | Weighted-Average
Estimated Useful Life |
Customer relationships | | $ | 844 | | | 7.0 years |
Developed technology and patents | | | 739 | | | 4.3 years |
Finite-lived trade names | | | 4 | | | 2.0 years |
Product backlog | | | 2 | | | 0.3 years |
| | | | | | |
Total identified finite-lived intangible assets | | | 1,589 | | | |
In-process research and development | | | 19 | | | N/A |
| | | | | | |
Total identified intangible assets | | $ | 1,608 | | | |
| | | | | | |
The fair value ofin-process research and development (“IPR&D”) was determined using the relief-from-royalty method. A key assumption of this method is a hypothetical technology licensing rate applied to forecasted revenue. The premise associated with this valuation method is that, in lieu of ownership of the asset, a market participant would be willing to pay a licensing fee for the use of that asset.
Our results of continuing operations in fiscal 2015.
Restructuring, separation, and transition costs include severance, facilities, separation, transition and other related costs. For fiscal 2015, we incurred $1012017 included $427 million of restructuring costs, $23 million in separation costs, and $40 million in transition costs. For further information on restructuring and transition costs, see Note 6 of the Notes to Consolidated Financial Statements in this annual report.
Non-operating expense, net by fiscal year
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | Change in % |
| 2016 | | 2015 | | 2014 | | 2016 v 2015 | | 2015 v 2014 |
| | (Dollars in millions) | | | | |
| Interest income | $ | 10 |
| | $ | 11 |
| | $ | 11 |
| | (9) | % | | — | % |
| Interest expense | (75 | ) | | (78 | ) | | (84 | ) | | (4) | % | | (7) | % |
| Other income, net | — |
| | 14 |
| | 36 |
| | * |
| | * |
|
| Non-operating expense, net | $ | (65 | ) | | $ | (53 | ) | | $ | (37 | ) | | 23 | % | | 43 | % |
* Percentage is not meaningful.
2016 compared to 2015
Non-operating expense, net, increased $12 million primarily due to net foreign currency remeasurement losses.
2015 compared to 2014
Non-operating expense, net, increased $16 million primarily due to a $32 million realized gain from sale of short-term investments during fiscal 2014, offset by favorable foreign currency effects and a reduction in interest expense.
Provision for income taxes by fiscal year
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | Change in % |
| 2016 | | 2015 | | 2014 | | 2016 v 2015 | | 2015 v 2014 |
| | (Dollars in millions) | | | | |
| Income from continuing operations before income taxes | $ | 392 |
| | $ | 101 |
| | $ | 107 |
| | 288 | % | | (6) | % |
| Provision for (benefit from) income taxes | $ | 1,213 |
| | $ | (8 | ) | | $ | 16 |
| | * |
| | * |
|
| Effective tax rate on continuing operations income | 309 | % | | (8 | )% | | 15 | % | |
|
| |
|
|
* Percentage is not meaningful.
We recorded an income tax expense on discontinued operations of $1.1 billion, $223 million and $242 million for fiscal 2016, 2015 and 2014, respectively. See Note 3 of the Notes to Consolidated Financial Statements in this annual report for additional information.
Tax expense in fiscal 2016 was primarily driven by (1) $1.1 billion of tax expense for providing U.S. taxes on certain undistributed foreign earnings, primarily thoserevenues attributable to Blue Coat products beginning August 1, 2016. It was impracticable to determine the saleamounts of Veritas, and (2) $10 million of tax expensenet income attributable to recording valuation allowances for certain deferred tax assets.
The tax expense in fiscal 2015 was reduced by the following benefits: (1) $59 million for tax benefitsBlue Coat as we integrated Blue Coat with our ongoingoperations. Net revenues and costs related to the settlementBlue Coat products were included in our Enterprise
Security segment results since the acquisition. Transaction costs of $48 million incurred by Symantec in connection with the acquisition were included in operating expenses in our Consolidated Statements of Operations during fiscal 2017. See Note 14 for more information on our segments.
LifeLock, Inc. acquisition
On February 9, 2017, we completed the acquisition of LifeLock, Inc. (“LifeLock”) a provider of proactive identity theft protection services for consumers and consumer risk management services for enterprises, for approximately $2.3 billion in total consideration. LifeLock’s services are provided on a monthly or annual subscription basis and provide identification and notification of identity-related and other events and assist users in remediating their impact.
The total consideration for the acquisition of LifeLock was approximately $2.3 billion, net of cash acquired, and consisted of the following:
| | | | |
| (In millions) | | | |
Cash payments, net of cash acquired | | $ | 2,204 | |
Fair value of vested assumed equity awards | | | 10 | |
Liability assumed for dissenting shareholders | | | 68 | |
Other liabilities | | | 1 | |
| | | | |
Total | | $ | 2,283 | |
| | | | |
In connection with this acquisition, we recognized a liability of $68 million for a claim related to appraisal rights by a LifeLock stockholder, which we settled in the second quarter of fiscal 2018 for $74 million in cash. The $6 million paid in addition to the recognized liability was recorded to general and administrative expense in our Consolidated Statements of Operations.
Our allocation of the purchase price, based on the fair values of the assets acquired and liabilities assumed was as follows:
| | | | |
| (In millions) | | | |
Assets: | | | | |
Current assets | | $ | 123 | |
Intangible assets | | | 1,247 | |
Goodwill | | | 1,397 | |
Other long-term assets | | | 75 | |
Liabilities: | | | | |
Deferred revenue | | | (96 | ) |
Other current liabilities | | | (62 | ) |
Deferred tax liabilities | | | (387 | ) |
Other long-term obligations | | | (14 | ) |
| | | | |
Total | | $ | 2,283 | |
| | | | |
The goodwill arising from the acquisition is attributed to the expected synergies, including future cost efficiencies, and other benefits that are expected to be generated by combining Symantec 2009 through 2013 Internal Revenue Service (“IRS”) audit, (2)and LifeLock. The goodwill recognized is not deductible for tax purposes. See Note 4 for more information on goodwill.
Identified intangible assets and their respective useful lives were as follows:
| | | | | | |
| (In millions, except for useful lives) | | Fair Value | | | Weighted-Average
Estimated Useful Life |
Customer relationships | | $ | 532 | | | 7.0 years |
Developed technology | | | 126 | | | 5.0 years |
Finite-lived trade names and other | | | 6 | | | 5.9 years |
| | | | | | |
Total identified finite-lived intangible assets | | | 664 | | | |
Indefinite-lived trade names | | | 583 | | | N/A |
| | | | | | |
Total identified intangible assets | | $ | 1,247 | | | |
| | | | | | |
The impact of this acquisition on our operating results for fiscal 2017 included $72 million and $98 million, of net revenues and apre-tax loss, respectively, attributable to LifeLock beginning February 9, 2017. LifeLock’s revenues of $67 million and $5 million were included in our Consumer Digital Safety and Enterprise Security segment results, respectively, during fiscal 2017. Transaction costs of $21 million incurred by Symantec in tax benefits resulting from tax settlementsconnection with the acquisition were included in operating expenses in our Consolidated Statements of Operations during fiscal 2017. See Note 14 for more information on our segments.
Unaudited combined pro forma information
The unaudited pro forma financial results combine the historical results of Symantec, Blue Coat and lapsesLifeLock for fiscal years 2017 and 2016. The results include the effects of statutespro forma adjustments as if Blue Coat and LifeLock were acquired at the beginning of limitations, (3) $14 million in tax benefits relatedour 2016 fiscal year and include adjustments for amortization of acquired intangible assets, stock-based compensation, commissions, interest on debt used to certain foreign operations,finance the acquisition, and (4) $14 million in tax benefits resulting from deductible separation costs.
The tax expense in fiscal 2014 was reduced by the following benefits: (1) $33 millionacquisition-related transaction costs, as well as for the
resolutionincome tax effect of
a tax matter related tothese pro forma adjustments.The unaudited pro forma financial results presented below do not include any anticipated synergies or other expected benefits of the acquisitions. These pro forma results are presented for informational purposes only and are not indicative of future operations or results that would have been achieved had the acquisition been completed as of the beginning of our 2016 fiscal year. The following table summarizes the pro forma financial information:
| | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 31, 2017 | | | April 1, 2016 | |
Net revenues | | $ | 4,817 | | | $ | 4,803 | |
Net income (loss) | | $ | (174 | ) | | $ | 1,791 | |
Fiscal 2018 Divestiture
Website Security and Public Key Infrastructure solutions
On October 31, 2017, we completed the sale of our 49% ownershipWSS and PKI solutions of our Enterprise Security segment to DigiCert. In accordance with the terms of the agreement, we received aggregate consideration of $1.1 billion, consisting of approximately $951 million in cash and shares of common stock representing an approximate 28% interest in the joint ventureoutstanding common stock of DigiCert valued at $160 million as of October 31, 2017.
We determined the estimated fair value of our equity investment with Huaweithe assistance of valuations performed by third party specialists and estimates made by management. We utilized a combination of the income approach based on a discounted cash flow method and market approach based on the guideline public company method that focuses on comparing DigiCert to reasonably similar publicly traded companies. See Note 6 for additional information regarding our equity investment.
As of the transaction close date, the carrying amounts of the major classes of assets and liabilities associated with the divestiture of our WSS and PKI solutions were as follows:
| | | | |
| (In millions) | | | |
Assets: | | | | |
Cash and cash equivalents | | $ | 2 | |
Accounts receivable, net | | | 34 | |
Goodwill and intangible assets, net | | | 670 | |
Other assets | | | 40 | |
| | | | |
Total assets | | | 746 | |
| | | | |
Liabilities: | | | | |
Deferred revenue | | | 285 | |
Other liabilities | | | 11 | |
| | | | |
Total liabilities | | $ | 296 | |
| | | | |
As of the transaction close date, we also had $8 million in cumulative currency translation losses related to subsidiaries that were sold, which was reclassified from AOCI to the gain on divestiture. In addition, we incurred direct costs of $8 million, which was netted against the gain on divestiture, and tax expense of $123 million.
The following table presents the gain before income taxes associated with the divestiture:
| | | | |
| (In millions) | | | |
Gain on sale of short-term investment | | $ | 7 | |
Gain on sale of other assets and liabilities | | | 646 | |
| | | | |
Total gain on divestiture | | $ | 653 | |
| | | | |
The gain on sale of short-term investment represents the gain on the sale of a short-term investment that was included in the transaction and resulted in the reclassification on the transaction close date of $7 million of unrealized gains from AOCI to the gain on divestiture.
The following table presents the income before income taxes for our WSS and PKI solutions for the periods indicated:
| | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | |
Income before income taxes | | $ | 66 | | | $ | 206 | |
Fiscal 2016 Divestiture
Veritas
On January 29, 2016, we completed the sale of Veritas. We received net consideration of $6.6 billion in cash excluding transaction costs and 40 million B common shares of Veritas, and Veritas assumed certain liabilities in connection with the acquisition. The disposition resulted in a net gain of $3.0 billion, which is presented as part of income from discontinued operations, net of income taxes in the Consolidated Statements of Operations for fiscal 2016. The results of Veritas are presented as discontinued operations in our Consolidated Statements of Operations and thus have been excluded from continuing operations and segment results for all reported periods.
In connection with the divestiture of Veritas, we entered into transition service agreements with Veritas pursuant to which we provide Veritas certain limited services including financial support services, information technology services, and access to facilities, and Veritas provides us certain limited financial support services. These agreements commenced with the close of the transaction and expire at various dates through fiscal 2019. Income, net of direct cost, for all services provided to Veritas were approximately $0 million, $22 million and $8 million during fiscal 2018, 2017 and 2016, respectively, which were presented as part of Other income (expense), net in the Consolidated Statements of Operations.
We have retained various customer relationships and contracts that were reported historically as a part of the Veritas business. Approximately $24 million and $71 million related to these relationships and contracts have been reported as part of our deferred revenue in the Consolidated Balance Sheets as of March 30, 2018 and March 31, 2017, respectively, along with an asset representing the service and maintenance rights we have under an agreement with Veritas of $8 million and $41 million, respectively. These balances are being amortized to discontinued operations through the remaining term of the underlying contracts.
The following table presents information regarding certain components of income from discontinued operations, net of income taxes:
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30,
2018 | | | March 31,
2017 | | | April 1,
2016 | |
Net revenues | | $ | 54 | | | $ | 172 | | | $ | 1,968 | |
Cost of revenues | | | (23 | ) | | | (15 | ) | | | (334 | ) |
Operating expenses | | | (21 | ) | | | (26 | ) | | | (1,270 | ) |
Gain on sale of Veritas | | | - | | | | 31 | | | | 4,060 | |
Other income, net | | | - | | | | 1 | | | | 3 | |
| | | | | | | | | | | | |
Income from discontinued operations before income taxes | | | 10 | | | | 163 | | | | 4,427 | |
Income tax expense (benefit) | | | (1 | ) | | | 33 | | | | 1,118 | |
| | | | | | | | | | | | |
Income from discontinued operations, net of income taxes | | $ | 11 | | | $ | 130 | | | $ | 3,309 | |
| | | | | | | | | | | | |
During fiscal 2017 we received additional payments which represented purchase price adjustments for the sale of Veritas.
Note 4. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill by segment are as follows:
| | | | | | | | | | | | |
| (In millions) | | Enterprise
Security | | | Consumer
Digital
Safety | | | Total | |
Balance as of April 1, 2016 | | $ | 1,917 | | | $ | 1,231 | | | $ | 3,148 | |
Acquisition of Blue Coat | | | 4,083 | | | | - | | | | 4,083 | |
Acquisition of LifeLock | | | 83 | | | | 1,318 | | | | 1,401 | |
Translation and other adjustments | | | (5 | ) | | | - | | | | (5 | ) |
| | | | | | | | | | | | |
Balance as of March 31, 2017 | | | 6,078 | | | | 2,549 | | | | 8,627 | |
Acquisitions | | | 256 | | | | 39 | | | | 295 | |
Divestiture of WSS and PKI solutions | | | (606 | ) | | | - | | | | (606 | ) |
Translation and other adjustments | | | 6 | | | | (3 | ) | | | 3 | |
| | | | | | | | | | | | |
Balance as of March 30, 2018 | | $ | 5,734 | | | $ | 2,585 | | | $ | 8,319 | |
| | | | | | | | | | | | |
Intangible assets, net
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 30, 2018 | | | March 31, 2017 | |
| (In millions) | | Gross
Carrying
Amount | | | Accumulated
Amortization | | | Net
Carrying
Amount | | | Gross
Carrying
Amount | | | Accumulated
Amortization | | | Net
Carrying
Amount | |
Customer relationships | | $ | 1,462 | | | $ | (357 | ) | | $ | 1,105 | | | $ | 1,646 | | | $ | (322 | ) | | $ | 1,324 | |
Developed technology | | | 1,037 | | | | (361 | ) | | | 676 | | | | 1,006 | | | | (229 | ) | | | 777 | |
Finite-lived trade names and other | | | 13 | | | | (8 | ) | | | 5 | | | | 46 | | | | (26 | ) | | | 20 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total finite-lived intangible assets | | | 2,512 | | | | (726 | ) | | | 1,786 | | | | 2,698 | | | | (577 | ) | | | 2,121 | |
Indefinite-lived trade names | | | 852 | | | | - | | | | 852 | | | | 864 | | | | - | | | | 864 | |
In-process research and development | | | 5 | | | | - | | | | 5 | | | | 19 | | | | - | | | | 19 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total intangible assets | | $ | 3,369 | | | $ | (726 | ) | | $ | 2,643 | | | $ | 3,581 | | | $ | (577 | ) | | $ | 3,004 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
In the fourth quarter of fiscal 2018, we reclassifiedin-process research and development assets of $14 million to developed technology as the related project was completed. Amortization will begin in fiscal 2019.
Amortization expense for purchased intangible assets is summarized below:
| | | | | | | | | | | | | | | | |
| | | Year Ended | | | Statements of
Operations
Classification | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Customer relationships and other | | $ | 220 | | | $ | 147 | | | $ | 57 | | | | Operating expenses | |
Developed technology | | | 233 | | | | 145 | | | | 28 | | | | Cost of revenues | |
| | | | | | | | | | | | | | | | |
Total | | $ | 453 | | | $ | 292 | | | $ | 85 | | | | | |
| | | | | | | | | | | | | | | | |
As of March 30, 2018, future amortization expense related to intangible assets that have finite lives is as follows by fiscal year:
| | | | |
| (In millions) | | March 30, 2018 | |
2019 | | $ | 439 | |
2020 | | | 434 | |
2021 | | | 323 | |
2022 | | | 262 | |
2023 | | | 220 | |
Thereafter | | | 108 | |
| | | | |
Total | | $ | 1,786 | |
| | | | |
See Note 3 for more information on our acquisitions and divestiture.
Note 5. Supplementary Information
Cash and cash equivalents:
| | | | | | | | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | |
Cash | | $ | 1,016 | | | $ | 1,183 | |
Cash equivalents | | | 758 | | | | 3,064 | |
| | | | | | | | |
Total cash and cash equivalents | | $ | 1,774 | | | $ | 4,247 | |
| | | | | | | | |
Accounts receivable, net:
| | | | | | | | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | |
Accounts receivable | | $ | 814 | | | $ | 657 | |
Allowance for doubtful accounts | | | (5 | ) | | | (8 | ) |
| | | | | | | | |
Accounts receivable, net | | $ | 809 | | | $ | 649 | |
| | | | | | | | |
Other current assets:
| | | | | | | | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | |
Prepaid expenses | | $ | 177 | | | $ | 165 | |
Income tax receivable and prepaid income taxes | | | 107 | | | | 79 | |
Short-term deferred commissions | | | 94 | | | | 62 | |
Assets held for sale | | | 26 | | | | - | |
Other | | | 118 | | | | 113 | |
| | | | | | | | |
Total current assets | | $ | 522 | | | $ | 419 | |
| | | | | | | | |
Property and equipment, net:
| | | | | | | | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | |
Land | | $ | 66 | | | $ | 73 | |
Computer hardware and software | | | 1,081 | | | | 1,100 | |
Office furniture and equipment | | | 110 | | | | 99 | |
Buildings | | | 365 | | | | 425 | |
Leasehold improvements | | | 339 | | | | 336 | |
Construction in progress | | | 29 | | | | 22 | |
| | | | | | | | |
Total property and equipment, gross | | | 1,990 | | | | 2,055 | |
Accumulated depreciation and amortization | | | (1,212 | ) | | | (1,118 | ) |
| | | | | | | | |
Total property and equipment, net | | $ | 778 | | | $ | 937 | |
| | | | | | | | |
Depreciation and amortization expense was $187 million, $199 million, and $213 million in fiscal 2018, 2017, and 2016, respectively.
In the fourth quarter of fiscal 2018, we reclassified certain land and buildings previously reported as property and equipment to assets held for sale because we expected to sell them within the next twelve months. As a result, we recognized a write-down of $29 million in fiscal 2018, which was included in Restructuring, transition and other costs, representing the difference between the estimated net sales price and the carrying value of the assets. In October 2018, we completed the sale of these assets for proceeds of $26 million, net of selling costs. See Note 9 for more information on the write-down.
Other long-term assets:
| | | | | | | | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | |
Cost method investments | | $ | 175 | | | $ | 158 | |
Equity method investment | | | 134 | | | | - | |
Long-term income tax receivable and prepaid income taxes | | | 61 | | | | 11 | |
Deferred income tax assets | | | 46 | | | | 43 | |
Long-term deferred commissions | | | 35 | | | | 15 | |
Other | | | 75 | | | | 55 | |
| | | | | | | | |
Total other long-term assets | | $ | 526 | | | $ | 282 | |
| | | | | | | | |
As of March 30, 2018, other long-term assets included $21 million related to a licensing arrangement resulting from the settlement of a patent infringement case with Finjan, Inc. (“Finjan”) during the fourth quarter of fiscal 2012, (2)2018. This amount will be amortized over the related licensing term. See Note 15 for further information regarding the settlement.
Long-term income taxes payable:
| | | | | | | | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | |
Deemed repatriation tax payable | | $ | 824 | | | $ | - | |
Uncertain tax positions (including interest and penalties) | | | 302 | | | | 251 | |
| | | | | | | | |
Total long-term income taxes payable | | $ | 1,126 | | | $ | 251 | |
| | | | | | | | |
Other income (expense), net:
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Interest income | | $ | 24 | | | $ | 21 | | | $ | 10 | |
Loss from equity interest | | | (26 | ) | | | - | | | | - | |
Foreign exchange loss | | | (28 | ) | | | (2 | ) | | | (10 | ) |
Other | | | 21 | | | | 27 | | | | 10 | |
| | | | | | | | | | | | |
Total other income (expense), net | | $ | (9 | ) | | $ | 46 | | | $ | 10 | |
| | | | | | | | | | | | |
Non-cash investing and financing activities and supplemental cash flow information:
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Non-cash Investing and Financing Activities: | | | | | | | | | | | | |
Additions to property and equipment in current liabilities | | $ | 26 | | | $ | 33 | | | $ | 16 | |
Equity investment received as consideration in divestitures | | $ | 160 | | | $ | - | | | $ | 149 | |
Fair value of equity awards assumed in acquisitions | | $ | 1 | | | $ | 112 | | | $ | - | |
Common stock issued in connection with acquisitions | | $ | - | | | $ | 38 | | | $ | - | |
Supplemental Cash Flow Information: | | | | | | | | | | | | |
Income taxes paid, net of refunds | | $ | 354 | | | $ | 1,081 | | | $ | 302 | |
Interest expense paid | | $ | 199 | | | $ | 143 | | | $ | 70 | |
Note 6. Financial Instruments and Fair Value Measurements
The following table summarizes our assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 30, 2018 | | | March 31, 2017 | |
| (In millions) | | Fair Value | | | Level 1 | | | Level 2 | | | Fair Value | | | Level 1 | | | Level 2 | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | | | | | | | | | | | | | | | |
Money market funds | | $ | 679 | | | $ | 679 | | | $ | - | | | $ | 2,532 | | | $ | 2,532 | | | $ | - | |
Certificates of deposit | | | 79 | | | | - | | | | 79 | | | | 15 | | | | - | | | | 15 | |
U.S. government securities | | | - | | | | - | | | | - | | | | 94 | | | | 94 | | | | - | |
U.S. agency securities | | | - | | | | - | | | | - | | | | 75 | | | | - | | | | 75 | |
Commercial paper | | | - | | | | - | | | | - | | | | 348 | | | | - | | | | 348 | |
Short-term investments: | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate bonds | | | 374 | | | | - | | | | 374 | | | | - | | | | - | | | | - | |
Commercial paper | | | 2 | | | | - | | | | 2 | | | | - | | | | - | | | | - | |
Certificates of deposit | | | 12 | | | | - | | | | 12 | | | | - | | | | - | | | | - | |
Marketable equity securities | | | - | | | | - | | | | - | | | | 9 | | | | - | | | | 9 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,146 | | | $ | 679 | | | $ | 467 | | | $ | 3,073 | | | $ | 2,626 | | | $ | 447 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
There were no transfers between fair value measurement levels during fiscal 2018.
The following table presents the contractual maturities of our investments in debt securities as of March 30, 2018:
| | | | |
| (In millions) | | Fair Value | |
Due in one year or less | | $ | 72 | |
Due after one year through five years | | | 316 | |
| | | | |
Total | | $ | 388 | |
| | | | |
Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.
Financial instruments not recorded at fair value on a recurring basis includenon-marketable equity method investment and our long-term debt.
Equity method investment
Our investment in equity securities that is accounted for using the equity method is included in Long-term other assets in our Consolidated Balance Sheets and consists of our equity investment in DigiCert which had a carrying value of $134 million at March 30, 2018. See Note 3 for information on our initial valuation of this investment.
We recorded a loss from equity interests of $26 million during fiscal 2018, in Other income (expense), net in the Consolidated Statements of Operations, which consisted of basis difference amortization of $2 million and our share of DigiCert’s net loss of $24 million. This loss was reflected as a reduction in the carrying amount of our investments in equity interests in the Consolidated Balance Sheets as of March 30, 2018.
Current and long-term debt
As of March 30, 2018, and March 31, 2017, the total fair value of our current and long-term fixed rate debt was $3.9 billion and $4.6 billion, respectively. The fair value of our variable rate debt approximated its carrying value. The fair value of all our debt obligations was based on Level 2 inputs on anon-recurring basis.
Note 7. Debt
The following table summarizes components of our debt:
| | | | | | | | | | | | |
| (In millions, except percentages) | | March 30, 2018 | | | March 31, 2017 | | | Effective
Interest Rate | |
2.75% Senior Notes due June 15, 2017 | | $ | - | | | $ | 600 | | | | 2.79 | % |
Senior Term LoanA-1 due May 10, 2019 | | | - | | | | 1,000 | | | | LIBOR plus | (1) |
Senior Term LoanA-2 due August 1, 2019 | | | 600 | | | | 800 | | | | LIBOR plus | (1) |
Senior Term LoanA-3 due August 1, 2019 | | | - | | | | 200 | | | | LIBOR plus | (1) |
4.2% Senior Notes due September 15, 2020 | | | 750 | | | | 750 | | | | 4.25 | % |
2.5% Convertible Senior Notes due April 1, 2021 | | | 500 | | | | 500 | | | | 3.76 | % |
Senior Term LoanA-5 due August 1, 2021 | | | 500 | | | | 1,710 | | | | LIBOR plus | (1) |
2.0% Convertible Senior Notes due August 15, 2021 | | | 1,250 | | | | 1,250 | | | | 2.66 | % |
3.95% Senior Notes due June 15, 2022 | | | 400 | | | | 400 | | | | 4.05 | % |
5.0% Senior Notes due April 15, 2025 | | | 1,100 | | | | 1,100 | | | | 5.23 | % |
| | | | | | | | | | | | |
Total principal amount | | | 5,100 | | | | 8,310 | | | | | |
Less: unamortized discount and issuance costs | | | (74 | ) | | | (124 | ) | | | | |
| | | | | | | | | | | | |
Total debt | | | 5,026 | | | | 8,186 | | | | | |
Less: current portion | | | - | | | | (1,310 | ) | | | | |
| | | | | | | | | | | | |
Total long-term portion | | $ | 5,026 | | | $ | 6,876 | | | | | |
| | | | | | | | | | | | |
| (1) | The senior term facilities bear interest at a rate equal to the London InterBank Offered Rate (“LIBOR”) plus a margin based on the current debt rating of ournon-credit-enhanced, senior unsecured long-term debt and our underlying loan agreements. The interest rates for the outstanding senior term loans are as follows: |
| | | | | | | | |
| | | March 30, 2018 | | | March 31, 2017 | |
Senior Term LoanA-1 due May 10, 2019 | | | - | | | | 2.38 | % |
Senior Term LoanA-2 due August 1, 2019 | | | 3.31 | % | | | 2.38 | % |
Senior Term LoanA-3 due August 1, 2019 | | | - | | | | 2.33 | % |
Senior Term LoanA-5 due August 1, 2021 | | | 3.54 | % | | | 2.58 | % |
As of March 30, 2018, the future contractual maturities of debt by fiscal year are as follows:
| | | | |
| (In millions) | | | |
2019 | | $ | - | |
2020 | | | 600 | |
2021 | | | 1,250 | |
2022 | | | 1,750 | |
2023 | | | 400 | |
Thereafter | | | 1,100 | |
| | | | |
Total future maturities of debt | | $ | 5,100 | |
| | | | |
Senior Term LoansA-1 andA-2
On May 10, 2016, we entered into a senior unsecured credit facility which provided for a3-year term loan (the “Senior Term LoanA-1”) in an amount of $1.0 billion. On July 18, 2016, we amended the credit facility and borrowed an additional $800 million3-year term loan (the “Senior Term LoanA-2”). The Senior Term LoansA-1 andA-2 bear interest at a floating rate of interest plus an applicable margin which is based on our senior unsecured credit agency rating. We may voluntarily repay the outstanding loans at any time without premium or penalty. We may request incremental loans up to the amount that, combined with other incremental commitments, doesn’t exceed $500 million for the credit facility, subject to customary conditions. During fiscal 2018, we prepaid principal amounts of $1.0 billion of our Senior Term LoanA-1 and $200 million of our Senior Term LoanA-2.
Senior Term LoanA-3 andA-5
On August 1, 2016, we entered into a term loan agreement that provides for a3-year term loan with a principal amount of $200 million (the “Senior Term LoanA-3”) and a5-year term loan with a principal amount of $1.8 billion (the “Senior Term LoanA-5”). The Senior Term LoansA-3 andA-5 bear interest at a floating rate of interest plus an applicable margin, which is based on our senior unsecured credit agency rating. The Senior Term LoanA-3 has no scheduled payments. For the duration of Senior Term LoanA-5, quarterly payments are due in aggregate annual amounts equal to 10% of the original principal amount. We may voluntarily repay outstanding principal balances under the Senior Term LoanA-3 and Senior Term LoanA-5 at any time without premium or penalty, and with regard to the Senior Term LoanA-5, prepayments must be applied to reduce the subsequent scheduled and outstanding required payments. During fiscal 2018, we prepaid a principal amount of $200 million of our Senior Term LoanA-3 and paid $1.2 billion of our Senior Term LoanA-5.
The Senior Term Loan agreementsA-1,A-2,A-3 andA-5 contain customary representations and warranties,non-financial covenants for financial reporting, affirmative and negative covenants, including a covenant that we maintain a ratio of consolidated funded debt to consolidated adjusted earnings before interest, taxes, depreciation, and amortization of not more than 6.00 to 1.0 through December 31, 2018, then 5.25 to 1.0 thereafter, and restrictions on subsidiary indebtedness, liens, stock repurchases and dividends (with exceptions permitting our regular quarterly dividend). As of March 30, 2018, we were in compliance of all debt covenants. See Note 16 for further information regarding our covenant compliance subsequent to March 30, 2018.
Senior Notes
On February 9, 2017, we issued $1.1 billion aggregate principal amount of our 5.0% Senior Notes due April 15, 2025 (the “5.0% Senior Notes”). The 5.0% Senior Notes bear interest at a rate of 5.00% per year, payable semiannually in arrears on April 15 and October 15 of each year, beginning on October 15, 2017.
We may redeem some or all of the 5.0% Senior Notes at any time prior to April 15, 2020 at a price equal to 100% of the principal amount of the 5.0% Senior Notes redeemed, plus accrued and unpaid interest, if any, and a premium, as described in the supplemental indenture to the 5.0% Senior Notes. On or after April 15, 2020, we may redeem some or all of the 5.0% Senior Notes at the applicable redemption prices set forth in the supplemental indenture, plus accrued and unpaid interest.
In addition, we had three series of senior notes, the 2.75% Senior Notes, 4.2% Senior Notes, and 3.95% Senior Notes that are senior unsecured obligations that rank equally in right of payment with all of our existing and future senior, unsecured, unsubordinated obligations and may be redeemed at any time, subject to the make-whole provisions contained in the applicable indenture relating to such series of notes.
Interest on each series of these notes is payable semi-annually in arrears, on June 15 and December 15 for the 2.75% Senior Notes, September 15 and March 15 for the 4.2% Senior Notes, and June 15 and December 15 for the 3.95% Senior Notes. During fiscal 2018, the $600 million principal balance of our 2.75% Senior Notes due June 15, 2017 matured and was settled by a cash payment.
Convertible Senior Notes
As of March 30, 2018, and March 31, 2017, we had two outstanding issuances of convertible notes which are senior unsecured obligations and rank equal in right of payment to all other senior, unsecured, unsubordinated indebtedness. On March 4, 2016, we issued $500 million of convertible notes which mature on April 1, 2021 and bear interest at an annual rate of 2.5% (“2.5% Convertible Notes”). On August 1, 2016, we issued an additional $1.25 billion of convertible notes which mature on August 15, 2021 and bear interest at an annual rate of 2.0% (“2.0% Convertible Notes”). Both the 2.5% Convertible Notes and the 2.0% Convertible Notes (collectively, “Convertible Senior Notes”) have coupon interest payable semiannually in arrears in cash. Interest payments on the Convertible Senior Notes are due on October 1 and April 1of each year in the case of the 2.5% Convertible Notes, and February 15 and August 15 in the case of the 2.0% Convertible Notes. The fair value of the equity component of our Convertible Senior Notes of $41 million, net of tax was recorded in additionalpaid-in capital and is being amortized as interest expense.
Holders of the Convertible Senior Notes may convert the notes into our common stock at any time up to the maturity date of each note. The conversion rate for the 2.0% Convertible Notes is 48.9860 shares of common stock per $1,000 principal amount of the notes, which represents an initial conversion price of approximately $20.41 per share. The conversion rate for the 2.5% Convertible Notes is 59.6341 shares of common stock per $1,000 principal amount of the notes, which represents an initial conversion price of approximately $16.77 per share. If holders of the Convertible Senior Notes convert them in connection with a fundamental change, we may be required to provide a make-whole premium in the form of an increased conversion rate, subject to a maximum amount, based on the effective date of the fundamental change as set forth in a table contained in the indenture governing each of the Convertible Senior Notes. A fundamental change, as defined, includes a sale of substantially all our assets, a change of the control of Symantec, or a plan for our liquidation or dissolution. The conversion rates under the Convertible Senior Notes are subject to customary anti-dilution adjustments. If the holders request a conversion, we have the option to settle the par amount of the Convertible Senior Notes using cash, shares of our common stock, or a combination of cash and shares with the cash settlement not exceeding the principal amount and accrued and unpaid interest of the Convertible Senior Notes.
As long as the holders of the Convertible Senior Notes each own at least 4% of our common stock on anas-converted basis, they are entitled to nominate one director to our Board of Directors. As of March 30, 2018, the holders’ percentage interest in our common stock exceeded this threshold.
On or after the4-year anniversary of the issuance date, holders of the 2.5% Convertible Senior Notes have the option to require us to repurchase the notes, in cash, equal to the principal amount and accrued and unpaid interest of the 2.5% Convertible Senior Notes.
We may redeem all or part of the principal of the 2.5% Convertible Senior Notes, at our option, at a purchase price equal to the principal amount plus accrued interest on or after the4-year anniversary of the issuance date of the 2.5% Convertible Senior Notes, if the closing trading price of our common stock exceeds 150% of the then-current conversion price for 20 or more trading days in the 30 consecutivetrading-day period preceding our exercise of the redemption right (including the last three such trading days) and provided that we have satisfied all regulatory common stock registration requirements. The 2.0% Convertible Senior Notes are not redeemable at our option.
Our Convertible Senior Notes agreements and the agreement for our 5.0% Senior Note due April 15, 2025 require us to file periodic reports with the U.S. Securities and Exchange Commission (the “SEC”) by specified deadlines. See Note 16 for further information regarding our covenant compliance subsequent to March 30, 2018.
Based on the closing price of our common stock of $25.85 on March 30, 2018, theif-converted values of our 2.5% and 2.0% Convertible Senior Notes exceed the principal amount by approximately $271 million and $333 million, respectively.
The following table sets forth total interest expense recognized related to our 2.5% and 2.0% Convertible Senior Notes:
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Contractual interest expense | | $ | 38 | | | $ | 29 | | | $ | 1 | |
Amortization of debt discount and issuance costs | | $ | 16 | | | $ | 13 | | | $ | 1 | |
Revolving Credit Facility
The aforementioned unsecured credit facility entered on May 10, 2016 also provided a revolving credit facility under which we can borrow up to $1.0 billion through May 10, 2021. As amended, for our current credit rating, borrowings under the revolving facility are subject to the same interest rate as the Senior Term LoansA-1 andA-2. We are obligated to pay commitment fees on the daily amount of the unused revolving commitment at a rate based on our debt ratings. We may request incremental commitments up to the amount that, combined with incremental loans we may request subsequently, doesn’t exceed $500 million for the credit facility, subject to customary conditions. The revolving credit facility is subject to the same covenants as our Senior Term Loans. As of March 30, 2018 and March 31, 2017, there were no borrowings outstanding under this revolving facility. See Note 16 for further information regarding our covenant compliance subsequent to March 30, 2018.
Note 8. Derivatives
We conduct business in numerous currencies throughout our worldwide operations and our entities hold monetary assets or liabilities, earn revenues or incur costs in currencies other than the entity’s functional currency. As a result, we are exposed to foreign exchange gains or losses which impacts our operating results. As part of our foreign currency risk mitigation strategy, we have entered into foreign exchange forward contracts with up to six months in duration. We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of the changes in foreign exchange rates.
The notional amount of our outstanding foreign exchange forward contracts in U.S. dollar equivalent was as follows:
| | | | | | | | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | |
Foreign exchange forward contracts purchased | | $ | 697 | | | $ | 492 | |
Foreign exchange forward contracts sold | | $ | 151 | | | $ | 204 | |
The fair value of our foreign exchange forward contracts is presented on a gross basis in our Consolidated Balance Sheets. As of March 30, 2018 and March 31, 2017, the fair value was insignificant. To mitigate losses in the event of nonperformance by counterparties, we have entered into master netting arrangements with our counterparties that allow us to settle payments on a net basis. The effect of netting on our derivative assets and liabilities was not material as of March 30, 2018 and March 31, 2017.
Our foreign exchange forward contracts are not designated as hedging instruments. The related gain (loss) recognized in Other income (expense), net in our Consolidated Statements of Operations was as follows:
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Foreign exchange forward contracts gain (loss) | | $ | 25 | | | $ | (17 | ) | | $ | 22 | |
Note 9. Restructuring, Transition and Other Costs
Our restructuring, transition and other costs and liabilities consist primarily of severance, facilities, transition and other related costs. Severance costs generally include severance payments, outplacement services, health insurance coverage and legal costs. Included in other exit and disposal costs are advisory fees incurred in connection with restructuring events and facilities exit costs, which generally include rent expense and lease termination costs, less estimated sublease income. Transition costs are incurred in connection with Board of Directors approved discrete strategic information technology transformation initiatives and primarily consist of consulting charges associated with our enterprise resource planning and supporting systems and costs to automate business processes. In addition, transition costs include expenses associated with divestitures of our product lines. Restructuring, transition and other costs are managed at the corporate level and are not allocated to our reportable segments. See Note 14 for information regarding the reconciliation of total segment operating income to total consolidated operating income (loss).
Fiscal 2017 Plan
We initiated a restructuring plan in the first quarter of fiscal 2017 to reduce complexity by means of long-term structural improvements (the “Fiscal 2017 Plan”). We have reduced headcount and closed certain facilities in connection with the Fiscal 2017 Plan and expect additional headcount reductions and facilities closures. We expect to incur additional costs of approximately $20 million in connection with the Fiscal 2017 Plan primarily consisting of severance and termination benefits and facilities exit costs. These actions are expected to be substantially completed in the first quarter of fiscal 2019. As of March 30, 2018, liabilities for excess facility obligations at several locations around the world are expected to be paid throughout the respective lease terms, the longest of which extends through fiscal 2023.
Restructuring, transition and other costs summary
Our continuing operations restructuring, transition and other costs are presented in the table below:
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Severance and termination benefit costs | | $ | 61 | | | $ | 76 | | | $ | 24 | |
Other exit and disposal costs | | | 52 | | | | 80 | | | | 20 | |
Asset write-offs | | | 25 | | | | 23 | | | | - | |
Transition costs | | | 272 | | | | 94 | | | | 92 | |
| | | | | | | | | | | | |
Total restructuring, transition and other costs | | $ | 410 | | | $ | 273 | | | $ | 136 | |
| | | | | | | | | | | | |
Included in our fiscal 2018 other exit and disposal costs is a $29 million impairment charge related to certain land and buildings previously reported as property and equipment that were reclassified to assets held for sale. See Note 5 for more information on our assets held for sale. Our asset write-offs in the above table consists primarily of equipment write-offs.
Restructuring summary
Our restructuring activities related to the settlementFiscal 2017 Plan are presented in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Balance as of
March 31,
2017 | | | Additional
Accruals, Net of
Adjustments | | | Cash
Payments | | | Non-Cash
Settlements | | | Balance as of
March 30,
2018 | | | Cumulative
Incurred to
Date | |
Severance and termination benefit costs | | $ | 20 | | | $ | 61 | | | $ | (71 | ) | | $ | - | | | $ | 10 | | | $ | 137 | |
Other exit and disposal costs | | | 26 | | | | 52 | | | | (26 | ) | | | (37 | ) | | | 15 | | | | 131 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 46 | | | $ | 113 | | | $ | (97 | ) | | $ | (37 | ) | | $ | 25 | | | $ | 268 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Ournon-cash settlements primarily consist of facilities impairment charges and leasehold improvement write-offs. The restructuring liabilities are included in accounts payable, other current liabilities and other long-term liabilities in our Consolidated Balance Sheets.
Note 10. Income Taxes
Pre-tax income from international operations was $890 million, $353 million, and $125 million for fiscal 2018, 2017, and 2016, respectively.
The components of income tax expense (benefit) recorded in continuing operations are as follows:
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Current: | | | | | | | | | | | | |
Federal | | $ | 1,011 | | | $ | 108 | | | $ | 69 | |
State | | | 40 | | | | 6 | | | | 13 | |
International | | | 107 | | | | 68 | | | | 46 | |
| | | | | | | | | | | | |
Total | | | 1,158 | | | | 182 | | | | 128 | |
| | | | | | | | | | | | |
Deferred: | | | | | | | | | | | | |
Federal | | | (1,664 | ) | | | (177 | ) | | | 1,060 | |
State | | | (151 | ) | | | (17 | ) | | | 15 | |
International | | | (33 | ) | | | (14 | ) | | | 10 | |
| | | | | | | | | | | | |
Total | | | (1,848 | ) | | | (208 | ) | | | 1,085 | |
| | | | | | | | | | | | |
Income tax expense (benefit) | | $ | (690 | ) | | $ | (26 | ) | | $ | 1,213 | |
| | | | | | | | | | | | |
The U.S. federal statutory income tax rates we have applied for fiscal year 2018, 2017, and 2016 are as follows:
| | | | | | | | | | | | |
| | | Year Ended | |
| | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
U.S. federal statutory income tax rate | | | 31.6 | % | | | 35.0 | % | | | 35.0 | % |
The difference between our effective income tax and the federal statutory income tax is as follows:
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Federal statutory tax expense (benefit) | | $ | 138 | | | $ | (92 | ) | | $ | 138 | |
Foreign earnings not considered indefinitely reinvested, net | | | - | | | | 12 | | | | 1,065 | |
State taxes, net of federal benefit | | | (26 | ) | | | (11 | ) | | | 9 | |
Foreign earnings taxed at less than the federal rate | | | (153 | ) | | | 34 | | | | 12 | |
Transition tax | | | 893 | | | | - | | | | - | |
Federal research and development credit | | | (12 | ) | | | (9 | ) | | | (9 | ) |
Valuation allowance increase (decrease) | | | 7 | | | | (1 | ) | | | 10 | |
Change in uncertain tax positions | | | (6 | ) | | | (24 | ) | | | (4 | ) |
Nondeductible transaction costs | | | - | | | | 11 | | | | - | |
Write-off of tax attributes due to restructuring | | | - | | | | 52 | | | | - | |
Excess tax benefit from employee stock incentive plans | | | (47 | ) | | | - | | | | - | |
Effect of tax rate change on deferred taxes | | | (132 | ) | | | - | | | | - | |
Re-assessment of deferred taxes on foreign earnings | | | (1,420 | ) | | | - | | | | - | |
Nondeductible officer compensation | | | 11 | | | | 7 | | | | - | |
Nondeductible goodwill | | | 59 | | | | - | | | | - | |
Other, net | | | (2 | ) | | | (5 | ) | | | (8 | ) |
| | | | | | | | | | | | |
Income tax expense (benefit) | | $ | (690 | ) | | $ | (26 | ) | | $ | 1,213 | |
| | | | | | | | | | | | |
The principal components of deferred tax assets and liabilities are as follows:
| | | | | | | | |
| | | As of | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | |
Deferred tax assets: | | | | | | | | |
Tax credit carryforwards | | $ | 30 | | | $ | 42 | |
Net operating loss carryforwards of acquired companies | | | 32 | | | | 82 | |
Other accruals and reserves not currently tax deductible | | | 66 | | | | 127 | |
Deferred revenue | | | 94 | | | | 137 | |
Loss on investments not currently tax deductible | | | 9 | | | | 9 | |
State income taxes | | | - | | | | 2 | |
Stock-based compensation | | | 141 | | | | 122 | |
Other | | | 18 | | | | 14 | |
| | | | | | | | |
Gross deferred tax assets | | | 390 | | | | 535 | |
Valuation allowance | | | (19 | ) | | | (38 | ) |
| | | | | | | | |
Deferred tax assets, net of valuation allowance | | $ | 371 | | | $ | 497 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Property and equipment | | $ | (5 | ) | | $ | (34 | ) |
Goodwill | | | (20 | ) | | | (54 | ) |
Intangible assets | | | (459 | ) | | | (783 | ) |
Unremitted earnings of foreign subsidiaries | | | (396 | ) | | | (1,939 | ) |
Prepaids and deferred expenses | | | (23 | ) | | | (24 | ) |
Discount on convertible debt | | | (14 | ) | | | (21 | ) |
| | | | | | | | |
Deferred tax liabilities | | | (917 | ) | | | (2,855 | ) |
| | | | | | | | |
Net deferred tax liabilities | | $ | (546 | ) | | $ | (2,358 | ) |
| | | | | | | | |
The Act was signed by the President of the Symantec 2005 through 2008 IRS audit, (3) $15United States and enacted into law on December 22, 2017. The Act significantly changes U.S. tax law by reducing the U.S. corporate income tax rate to 21.0% from 35.0%, adopting a territorial tax regime, creating new taxes on certain foreign sourced earnings and imposing aone-time transition tax on the undistributed earnings of certainnon-U.S. subsidiaries.
In addition, the SEC staff issued Staff Accounting Bulletin No. 118 — Income Tax Accounting Implications of the Tax Act, which allows us to record provisional amounts during a measurement period not to extend beyond one year from the enactment date.
The Act requires us, and other fiscal year taxpayers, to compute a blended statutory tax rate based on the ratio of the number of fiscal year days in calendar year 2017 at the 35.0% statutory rate versus the number of fiscal year days in calendar year 2018 at the new 21.0% statutory rate. Accordingly, thephase-in of the lower corporate tax rate has resulted in a blended rate of 31.6% for fiscal 2018, as compared to the previous 35.0%. Going forward our corporate U.S. statutory tax rate will be 21.0% starting from fiscal 2019 as the lower corporate tax rate fully phases in.
As of March 30, 2018, we have not completed our accounting for the tax effects of enactment of the Act; however, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and theone-time transition tax. These amounts may require further adjustments as a result of additional future guidance from the U.S. Department of the Treasury, changes in our assumptions, and the availability of further information and interpretations. In other cases, we have not been able to make a reasonable estimate and we continue to account for those
items based on our existing accounting policies and the provisions of the tax laws that were in effect immediately prior to enactment. For the items for which we were able to determine a reasonable estimate, we recognized a provisional tax benefit of $659 million, which is included as a component of income tax expense from continuing operations.
We remeasured certain deferred tax assets and liabilities based on an estimate of the rates at which they are expected to reverse. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. As of March 30, 2018, we have recognized a $1,552 million of income tax benefit resulting from the application of the Act to existing deferred tax balances, including a reduction of the previously accrued deferred tax liability for foreign earnings by $1,420 million. During the fourth quarter we decreased our provisional tax benefit related to certainthe remeasurement of deferred taxes by $70 million due to the actual reversals of year end temporary differences. This impacted the effective tax rate by 15.9%.
The Act contained aone-time transition tax that is based on our total post-1986 earnings and profits (“E&P”) that we previously deferred from U.S. income taxes. As of March 30, 2018, we have recognized an $893 million provisional tax expense on estimated E&P subject to the deemed mandatory repatriation. During the fourth quarter of fiscal 2018 we increased this provisional income tax expense amount reported in the third quarter by $72 million due to refined calculations and actual year end amounts. This impacted the effective tax rate by 16.6%. We have not yet completed our calculation of the total post-1986 E&P for these foreign operations,subsidiaries. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and (4) $13 million from lapsesfinalize the amounts held in cash or other specified assets. Future accounting guidance may also change our provisional estimates for the transition tax.
Subsequent to the year ended March 30, 2018, the Internal Revenue Service (“IRS”) and U.S. Treasury have issued various interpretations or regulations governing elements of statutesthe Act. We are still evaluating this new guidance and no estimate for the impact has been made at this time. The regulations, which could have a material impact on the provisional estimates made for purposes of limitation. Theseour fiscal 2018 Consolidated Financial Statements, include new guidance on transition tax benefitsand on deductibility of stock-based compensation issued on August 1, 2018 and August 21, 2018, respectively.
We have not completed our analysis of the deferred tax accounting for the new taxes on global intangible low taxed income and, therefore, have not recorded provisional amounts. We have not determined whether our accounting policy will be to record these amounts as deferred taxes or as period costs. We do not have sufficient information to complete the analysis and are awaiting potential further guidance required to evaluate the impact of deferred tax accounting for these provisions. Following the SEC guidance on changes in the tax law for which we are unable to make a provisional estimate, we have continued to compute this aspect of the tax provision based on the tax laws that were partially offsetin effect immediately prior to the Act being enacted.
The valuation allowance provided against our deferred tax assets as of March 30, 2018, is mainly attributable to capital losses, and net operating losses in foreign jurisdictions. The valuation allowance decreased by $12a net of $19 million in fiscal 2018, primarily due to the release of valuation allowances related to state tax expense, resulting from the salecredits and state net operating losses.
As of short-term investments.
The effective tax rates for all periods presented otherwise reflect the benefitsMarch 30, 2018, we have U.S. federal net operating losses attributable to various acquired companies of lower-taxed international earnings, domestic manufacturing incentives,approximately $46 million, which, if not used, will expire between fiscal 2019 and 2037. We have U.S. federal research and development credits partially offset by state income taxes.of approximately $3 million. The research and development credits, if not used, will expire between fiscal 2019 and 2024. The net operating loss
Wecarryforwards, and U.S. federal research and development tax credits are a U.S.-based multinational company subject to an annual limitation under Internal Revenue Code §382, but are expected to be fully realized. We have $5 million of foreign tax credits which, if not used, will expire beginning in multiplefiscal 2028. Furthermore, we have U.S. state net operating loss and international tax jurisdictions. A substantial portioncredit carryforwards attributable to various acquired companies of approximately $70 million and $30 million, respectively. If not used, our U.S. state net operating losses will expire between fiscal 2019 and 2037 and the majority of our international earningsU.S. state credit carryforwards can be carried forward indefinitely. In addition, we have foreign net operating loss carryforwards attributable to various foreign companies of approximately $77 million, $31 million of which were generated from subsidiaries organized in IrelandJapan, and Singapore. Our resultswill expire beginning in fiscal 2028, and the rest of operations wouldwhich, under current applicable foreign tax law, can be adversely affected to the extent that our geographical mix of income becomes more weighted toward jurisdictions with higher tax rates and would be favorably affected to the extent the relative geographic mix shifts to lower tax jurisdictions. Any change in our mix of earnings is dependent upon many factors and is therefore difficult to predict.
For further information on the impact of foreign earnings on our effective tax rate, see Note 11 of the Notes to Consolidated Financial Statements in this annual report.
See Critical Accounting Policies and Estimates above for additional information about our provision for income taxes.
carried forward indefinitely.In assessing the ability to realize our deferred tax assets, we considered whether it is more likely than not that some portion or all the deferred tax assets will not be realized. We considered the following: we have historical cumulative book income, as measured by the current and prior two years; we have strong, consistent taxpaying history; we have substantial U.S. federal income tax carryback potential; and we have substantial amounts of scheduled future reversals of taxable temporary differences from our deferred tax liabilities. Levels of future taxable income are subject to the various risks and uncertainties discussed in Part I, Item 1A, Risk Factors, set forth in this annual report. We have concluded that this positive evidence outweighs the negative evidence and, thus, that the deferred tax assets as of April 1, 2016 of $308 million, which are net of a valuation allowance of $50 million,March 30, 2018 are realizable on a “more likely than not” basis.
On September 3, 2013, we settled and effectively settled matters with the IRS for the Symantec 2005 through 2008 fiscal years. The result of the settlements, effective settlements, and re-measurements resulted in a reductionaggregate changes in the balance of our gross unrecognized tax benefits were as follows:
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Balance at beginning of year | | $ | 248 | | | $ | 197 | | | $ | 193 | |
Settlements with tax authorities | | | (4 | ) | | | (23 | ) | | | (25 | ) |
Lapse of statute of limitations | | | (3 | ) | | | (9 | ) | | | (15 | ) |
Decrease due to divestiture | | | - | | | | - | | | | (7 | ) |
Increase related to prior period tax positions | | | 35 | | | | 21 | | | | 4 | |
Decrease related to prior period tax positions | | | - | | | | (9 | ) | | | (7 | ) |
Increase related to current year tax positions | | | 98 | | | | 38 | | | | 54 | |
Increase due to acquisition | | | 4 | | | | 33 | | | | - | |
| | | | | | | | | | | | |
Net increase | | | 130 | | | | 51 | | | | 4 | |
| | | | | | | | | | | | |
Balance at end of year | | $ | 378 | | | $ | 248 | | | $ | 197 | |
| | | | | | | | | | | | |
There was a change of $130 million in gross unrecognized tax benefits during the 2018 fiscal year. This gross liability does not include offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, interest deductions, and state income taxes.
Of the total unrecognized tax benefits at March 30, 2018, $300 million, if recognized, would favorably affect our effective tax rate.
We recognize interest and/or penalties related to uncertain tax positions in income tax expense. At March 30, 2018, before any tax benefits, we had $31 million of accrued interest and penalties on unrecognized tax benefits. Interest included in our provision for income taxes was an expense of $10 million for the year ended March 30, 2018. If the accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced in the period that such determination is made, and reflected as a reduction of the overall income tax provision.
We file income tax returns in the U.S. on a federal basis and in many U.S. state and foreign jurisdictions. Our most significant tax jurisdictions are the U.S., Ireland, and Singapore. Our tax filings
remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate. Our fiscal years 2014 of $122 million.
On March 18, 2015, we settled and effectively settled matters withthrough 2018 remain subject to examination by the IRS for U.S. federal tax purposes. Our fiscal years prior to 2014 have been settled and closed with the Symantec 2009IRS. Our 2014 through 2018 fiscal years remain subject to examination by the appropriate governmental agencies for Irish tax purposes, and our 2013 through 2018 fiscal years. The settlement and effective settlement resulted in a benefityears remain subject to examination by the appropriate governmental agencies for Singapore tax expense in fiscal year 2015 of $59 million. Additionally, the Company settled transfer price related matters of $158 million, a portion of which was accounted for against deferred tax liabilities on unremitted foreign earnings. The Company has paid in $155 million to cover the final tax and interest liability on the settlement.
purposes.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 the gross unrecognized tax benefits related to these audits could decrease (whether by payment, release, or a combination of both) in the next 12 months by $7$11 million.
Depending on the nature of the settlement or expiration of statutes of limitations, we estimate $11 million could affect our income tax provision and therefore benefit the resulting effective tax rate.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.
LIQUIDITY AND CAPITAL RESOURCES
Divestiture of Veritas
In August 2015, we entered into a definitive agreement to sell the assets of Veritas to Carlyle and amended the terms in January 2016. Based on the amended terms of the definitive agreement, we received net consideration of $6.6 billion in cash excluding transaction costs and 40 million B common shares of Veritas and Veritas assumed certain liabilities in connection with the acquisition. Our U.S. and foreign income taxes and indirect taxes payable resulting from the transaction are estimated to be $1.0 billion.
Sources of cash
We have historically relied on cash flow from operations, borrowings under a credit facility, issuances of debt and equity securities, and sale of business, more recently, for our liquidity needs. As of April 1, 2016, we had cash, cash equivalents and short-term investments of $6.0 billion and an unused credit facility of $1.0 billion resulting in a liquidity position of approximately $7.0 billion. As of April 1, 2016, $4.9 billion in cash, cash equivalents, and short-term investments 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 such portion of these funds to support our operations in the U.S.
Senior Notes. In fiscal 2013, we issued $1.0 billion of Senior Notes consisting of the 3.95% Senior Notes due in 2022 and the 2.75% Senior Notes due in 2017. We received proceeds of $996 million, net of an issuance discount. In fiscal 2011, we issued $750 million of Senior Notes consisting of the 4.20% Senior Notes due in 2020.
Convertible Senior Notes. In fiscal 2016, we issued $500 million in 2.50% Convertible Senior Notes, due April 2021.
Revolving Credit Facility. In fiscal 2011, we entered into a $1.0 billion senior unsecured revolving credit facility (“credit facility”), which was amended in fiscal 2013. The amendment extended the term of the credit facility to June 7, 2017. This revolving credit facility was further amended in March 2016 to amend the definition of EBITDA (earnings before interest, taxes, depreciation and amortization) to account for the sale of Veritas and related expenses and to amend our consolidated leverage ratio under the agreement. 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. As of April 1, 2016, we were in compliance with the required covenants, and no amounts were outstanding.
In May 2016, we replaced our existing $1.0 billion senior unsecured revolving credit facility with a new $2.0 billion credit facility. See Note
13 of the Notes to the Consolidated Financial Statements in this annual report for more information.We believe that our existing cash and investment balances, our available revolving credit facility, our ability to issue new debt instruments, and cash generated from operations will be sufficient to meet our working capital and capital expenditure requirements, as well as to fund any cash dividends, principal and interest payments on debt, and repurchases of our11. Stockholders’ EquityPreferred stock for at least the next 12 months and foreseeable future. In connection with the divestiture of Veritas, our
Our Board of Directors committedhas the authority to returningissue up to 1 million shares of preferred stock and to determine the net proceedsprice, rights, preferences, privileges, and restrictions, including voting rights, of those shares without any further vote or action by the sale to stockholders through a combinationstockholders. As of March 30, 2018 and March 31, 2017, there were no shares outstanding.
Dividends
The following table summarizes dividends declared and paid and dividend equivalents paid for the periods presented:
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions, except per share data) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Dividends declared and paid | | $ | 185 | | | $ | 186 | | | $ | 3,020 | |
Dividend equivalents paid | | | 26 | | | | 36 | | | | 10 | |
| | | | | | | | | | | | |
Total dividends and dividend equivalents paid | | $ | 211 | | | $ | 222 | | | $ | 3,030 | |
| | | | | | | | | | | | |
Cash dividends declared per common share | | $ | 0.30 | | | $ | 0.30 | | | $ | 4.60 | |
Fiscal 2016 included a special dividend and share repurchases. The Board of Directors also resolved to adjust its annual dividend starting fiscal year 2017 to $0.30$4.00 per share to reflect reduced projected domestic cash flow following the sale of Veritas, while still enabling our company to invest in its future. Our strategy emphasizes organic growth through internal innovationthat was declared and will be complemented by acquisitions that fit strategically and meet specific internal profitability hurdles.
Uses of cash
Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on debt, and payments of taxes. Also, we may, from time to time, engage in the open market purchase of our notes prior to their maturity. Furthermore, our capital allocation strategy contemplates a quarterly cash dividend. In addition, we regularly evaluate our ability to repurchase stock, pay debts, and acquire other businesses.
Stock Repurchases on Open Market Transactions. In fiscal 2016, we repurchased 17 million shares, or $368 million of our common stock. In fiscal 2015, we repurchased 21 million shares, or $500 million, of our common stock. In fiscal 2014, we repurchased 21 million shares, or $500 million, of our common stock. Our active stock repurchase programs have $790 million remaining authorized for future repurchase as of April 1, 2016, with no expiration date.
Accelerated Stock Repurchase. In November and March of fiscal 2016, we entered into ASR agreements with financial institutions to repurchase an aggregate of $1.5 billion of our common stock. We made upfront payments of $500 million and $1 billion for a total of $1.5 billion, to the financial institutions pursuant to the ASR agreements and received and retired the initial deliveries of 19.9 million and 42.4 million shares of our common stock. The November 2015 ASR agreement's purchase period concluded inpaid during the fourth quarter of fiscal 2016 whereby upon settlement, we received an additional 5.0 million sharesand was recorded as a reduction of our common stock. The total shares receivedretained earnings. Our RSUs and retired under the terms of the November 2015 ASR were 24.9 million, with an average price paid per share of $20.08. The March 2016 purchase period is expected to close by or no later than the third quarter of fiscal 2017. The upfront payments for the November 2015 and March 2016 ASR agreementsPRUs are presented under the caption repurchases of common stock in our Consolidated Statements of Cash Flows.
Dividend Program. During fiscal 2016, we declared and paid aggregate cash dividends of $3.0 billion, or $4.60 per common share. These dividends were comprised of our quarterly dividends and a special dividend of $4.00 per share. During fiscal 2015, we declared and paid cash dividends of $413 million or $0.60 per common share. During fiscal 2014, we declared and paid cash dividends of $418 million or $0.60 per common share. Our restricted stock and performance-based stock units have dividend equivalent rights entitling holdersentitled to dividend equivalents to be paid in the form of cash upon vesting for each share of the underlying units.
unit.On May 12, 2016,10, 2018, we declaredannounced a cash dividend of $0.075 per share of common stock to be paid onin June 22, 20162018. On August 2, 2018, we announced a cash dividend of $0.075 per share of common stock to all stockholders of record as of the close of business on June 8, 2016.be paid in September 2018. All shares of common stock issued and outstanding and unvested restricted stockall RSUs and performance-based stock,PRUs as of the record date will be entitled to the dividend and dividend equivalents, respectively. Any future dividends and dividend equivalents will be subject to the approval of our Board of Directors.
Restructuring Plans.Stock repurchases
Under our stock repurchase programs, we may purchase shares of our outstanding common stock through open market and through accelerated stock repurchase (“ASR”) transactions. As of March 30, 2018, we have $800 million remaining under the authorization to be completed in future periods with no expiration date.
Repurchases in open market transactions
During fiscal 2016, we repurchased 17 million shares of common stock in the open market at the average price per share of $21.69 for an aggregate cost of $368 million. All the shares repurchased were retired.
Repurchases under accelerated stock repurchase agreements
In fiscalMarch 2017, we entered into an ASR agreement (the “March 2017 ASR”) with financial institutions to repurchase an aggregate of $500 million of our common stock. Pursuant to the March 2017 ASR agreement, we made an upfront payment of $500 million and received and retired an initial delivery of 14 million shares of our common stock in March 2017. In May 2017, we completed the March 2017 ASR and received and retired an additional delivery of 2 million shares of our common stock. The total shares received and retired under the terms of the March 2017 ASR agreement was 16 million, with an average price paid per share of $30.51.
In March 2016, we entered into an ASR agreement with financial institutions (the “March 2016 ASR”) to repurchase an aggregate of $1.0 billion of our common stock. Pursuant to the March 2016 ASR, we made an upfront payment of $1.0 billion and received and retired an initial delivery of 42 million shares of our common stock in March 2016. We completed the repurchase and received an additional 7 million shares of our common stock in November 2016. The total shares received and retired under the terms of the March 2016 ASR were 49 million, with an average price paid per share of $20.44.
In November 2015, we announced plansentered into an ASR agreement with a financial institution (the “November 2015 ASR”) to separaterepurchase an aggregate of $500 million of our securitycommon stock. Pursuant to the November 2015 ASR, we made an upfront payment of $500 million and information management businesses. In order to separatereceived and retired an initial delivery of 20 million shares of our common stock in November 2016. We completed the businesses, we put a restructuring planrepurchase and received an additional 5 million shares of our common stock in place to properly align personnel,January 2016. The total shares received and have therefore incurred associated severance and facilities costs. We also incurred separation costsretired under the terms of the November 2015 ASR were 25 million, with an average price paid per share of $20.08.
The upfront payment amounts for the ASRs are included in repurchases of common stock on our Consolidated Statements of Cash Flows in the formperiod paid.
Accumulated other comprehensive income
Components and activities of advisory, consulting and disentanglement expenses. These actionsAOCI, net of tax, were substantially completedas follows:
| | | | | | | | | | | | |
| (In millions) | | Foreign
Currency
Translation
Adjustments | | | Unrealized
Gain (Loss) On
Available-
For-Sale
Securities | | | Total
AOCI | |
Balance as of April 1, 2016 | | $ | 15 | | | $ | 7 | | | $ | 22 | |
Other comprehensive loss before reclassifications | | | (8 | ) | | | (2 | ) | | | (10 | ) |
| | | | | | | | | | | | |
Balance as of March 31, 2017 | | | 7 | | | | 5 | | | | 12 | |
Other comprehensive loss before reclassifications | | | (4 | ) | | | (5 | ) | | | (9 | ) |
Reclassification to net income (loss) | | | 5 | | | | (4 | ) | | | 1 | |
| | | | | | | | | | | | |
Balance as of March 30, 2018 | | $ | 8 | | | $ | (4 | ) | | $ | 4 | |
| | | | | | | | | | | | |
During fiscal 2018, a net foreign currency translation loss of $8 million related to foreign entities sold in the fourthdivestiture of our WSS and PKI solutions was reclassified to Gain on divestiture, and a net gain of $3 million related to liquidated foreign entities was reclassified to Other income (expense), net. A realized gain of $7 million on securities sold in connection with the divestiture of our WSS and PKI solutions was reclassified to Gain on divestiture. The tax effect of $3 million was reclassified to Income tax expense (benefit).
Note 12. Stock-Based Compensation and Other Benefit Plans
Stock incentive plans
The purpose of our stock incentive plans has been to attract, retain, and motivate eligible persons whose present and potential contributions are important to our success by offering them an opportunity to participate in our future performance through equity awards. As of March 30, 2018, we have one primary stock incentive plan: the 2013 Equity Incentive Plan (the “2013 Plan”). Under the 2013 Plan, incentive stock options may be granted only to employees (including officers and directors who are also employees) of Symantec or of a parent of Symantec. All other Awards may be granted to employees, officers, directors, consultants, independent contractors and advisors of Symantec or any parent, subsidiary or affiliate of Symantec. As amended in September 2017, our stockholders have approved and reserved 70 million shares of common stock for issuance under the 2013 Plan. As of March 30, 2018, 25 million shares remained available for future grant, calculated using the maximum potential shares that could be earned and issued at vesting.
In connection with the acquisitions of various companies, we have assumed the share-based awards granted under stock incentive plans of the acquired companies or issued share-based awards in replacement thereof. Our Board of Directors has provided that no new awards will be granted under our acquired stock plans.
RSUs
| | | | | | | | | | | | | | | | |
| (In millions, except per share and year data) | | Number of
Shares | | | Weighted-
Average
Grant Date Fair
Value | | | Weighted-
Average
Remaining
Years | | | Aggregate
Intrinsic
Value | |
Outstanding at March 31, 2017 | | | 23 | | | $ | 21.26 | | | | | | | | | |
Granted | | | 10 | | | $ | 30.01 | | | | | | | | | |
Vested | | | (10 | ) | | $ | 22.37 | | | | | | | | | |
Forfeited | | | (4 | ) | | $ | 22.90 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding and unvested at March 30, 2018 | | | 19 | | | $ | 25.06 | | | | 1.0 | | | $ | 500 | |
| | | | | | | | | | | | | | | | |
RSUs granted prior to November 2014 generally vest over a four-year period, whereas RSUs granted thereafter generally vest over a three-year period. The weighted-average grant date fair value per share of RSUs granted during fiscal 2018, 2017, and 2016 was $30.01, $20.56, and $23.20, respectively. The total grant date fair value of RSUs that vested in fiscal 2018, 2017, and 2016 was $294 million, $181 million and $250 million, respectively.
PRUs
| | | | | | | | | | | | | | | | |
| (In millions, except per share and year data) | | Number of
Shares | | | Weighted-
Average
Grant Date Fair
Value | | | Weighted-
Average
Remaining
Years | | | Aggregate
Intrinsic
Value | |
Outstanding at March 31, 2017 | | | 6 | | | $ | 21.05 | | | | | | | | | |
Granted | | | 4 | | | $ | 32.78 | | | | | | | | | |
Performance adjustment | | | 6 | | | $ | 21.51 | | | | | | | | | |
Vested | | | (13 | ) | | $ | 20.75 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding and unvested at March 30, 2018 | | | 3 | | | $ | 30.00 | | | | 1.6 | | | $ | 89 | |
| | | | | | | | | | | | | | | | |
The total grant date fair value of PRUs that vested in fiscal 2018, 2017, and 2016 was $275 million, $14 million, and $9 million, respectively.
Fiscal 2018 PRUs
During fiscal 2018, we granted 3 million PRUs with a three-year cliff vesting period to certain of our executives. Depending on the achievement of the performance and market conditions, 0% to 200% of the target shares are eligible to be earned at the end of fiscal 2020. The performance condition is based on our achievement of the fiscal 2018non-GAAP earnings per share. The market conditions are based on the achievement of our relative total shareholder return (“TSR”) over two and three-year periods.
During fiscal 2018, 1 million PRUs with a three-year graded vesting period were granted under the acquired companies’ equity award plan and assumed by us. Depending on the achievement of performance conditions based on a mix of fiscal 2018, fiscal 2019 and fiscal 2020 certain product milestones and billings, up to 100% of the target shares are eligible to be earned. As of March 30, 2018, 3 million PRUs granted in fiscal 2018 remained unvested.
Fiscal 2017 PRUs
During fiscal 2017, we granted 2 million PRUs and 3 million PRUs were granted under the Blue Coat equity incentive plan and assumed by us as part of our Blue Coat acquisition, with a graded
three-year vesting period to certain of our executives. Depending on the achievement of our fiscal 2018non-GAAP operating income, 0% to 300% of the target shares are eligible to be earned. Up to 250% of the target shares are eligible to vest at the end of fiscal 2018. Any amounts in excess of 250% will vest at the end of fiscal 2019. Our fiscal 2018non-GAAP operating income resulted in 268% of target PRUs, or 13 million shares, becoming eligible to be earned, of which 12 million shares vested at the end of fiscal 2018 and will be issued in our third quarter of fiscal 2019, and 1 million shares are eligible to vest at the end of fiscal 2019.
Fiscal 2016 PRUs
During fiscal 2016, we granted 1 million PRUs with a three-year cliff vesting period to certain of our executives. Depending on the sale of Veritas on January 29, 2016. However, we expect to incur immaterial adjustments to existing reserves in subsequent periods.
In May 2016, the Board of Directors approved a fiscal 2017 restructuring plan. See Note 13achievement of the Notesperformance and market conditions, 0% to 200% of the Consolidated Financial Statementstarget shares were eligible to be earned at the end of fiscal 2018. The performance condition was based on our achievement of the fiscal 2016non-GAAP earnings per share. The market conditions were based on the achievements of our relative TSR over two and three-year periods. During fiscal 2018, 1 million shares vested and will be issued in this annual report for more information.
Note Repayment. In the secondour third quarter of fiscal 2019.Stock options
| | | | | | | | | | | | | | | | |
| (In millions, except per share and year data) | | Number of
Shares | | | Weighted-
Average
Exercise Price | | | Weighted-
Average
Remaining
Years | | | Aggregate
Intrinsic
Value | |
Outstanding at March 31, 2017 | | | 20 | | | $ | 8.94 | | | | | | | | | |
Assumed in acquisitions | | | 1 | | | $ | 2.23 | | | | | | | | | |
Exercised | | | (6 | ) | | $ | 8.60 | | | | | | | | | |
Forfeited and expired | | | (1 | ) | | $ | 14.09 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding and unvested at March 30, 2018 | | | 14 | | | $ | 8.53 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Exercisable at March 30, 2018 | | | 9 | | | $ | 8.42 | | | | 7.4 | | | $ | 161 | |
The total intrinsic value of options exercised during fiscal 2018, 2017, and 2016 the principal balancewas $131 million, $78 million, and $4 million, respectively.
Restricted stock
In connection with our fiscal 2018 acquisitions, we issued approximately 1 million restricted shares of our 2.75% Senior Notes due September 15, 2015 maturedcommon stock with a fair value of $44 million on the issuance date. These restricted shares will be released to the individuals through three annual installments subject to the individuals’ continued employment at Symantec.
Liability-classified awards settled in shares
We will settle certain of our employees’ fiscal 2018 bonuses in RSUs that will be granted and vested in the first quarter of fiscal 2019. In addition, as part of our fiscal 2018 acquisitions, we granted compensatory awards with a fair value of $21 million at the time of the acquisition. These awards are settled in shares of common stock and vest quarterly over three years. As of March 30, 2018, the total liability associated with these liability classified awards was settled by$25 million which is presented in Accrued compensation and benefits in our Consolidated Balance Sheets.
ESPP
Under our 2008 ESPP, employees may annually contribute up to 10% of their gross compensation, subject to certain limitations, to purchase shares of our common stock at a cash paymentdiscounted
price. Beginning August 16, 2016, eligible employees are offered shares through a12-month offering period, which consists of $350two consecutive6-month purchase periods, at 85% of the lower of either the fair market value on the purchase date or the fair market value at the beginning of the offering period. Prior to that, employees were able to purchase shares of common stock at a price per share equal to 85% of the fair market value on the purchase date at the end of eachsix-month purchase period. As of March 30, 2018, 34 million along with the $5shares have been issued under this plan and 36 million semiannual interest payment.
Cash flows
shares remained available for future issuance.The following table summarizes activity related to the purchase rights issued under the ESPP:
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Shares issued under the ESPP | | | 3 | | | | 3 | | | | 3 | |
Proceeds from issuance of shares | | $ | 69 | | | $ | 56 | | | $ | 54 | |
Valuation assumptions
Valuation of PRUs
The fair value of each PRU that does not contain a market condition is equal to the market value of our common stock on the date of grant. The fair value of each PRU that contains a market condition is estimated using the Monte Carlo simulation option pricing model. The valuation and the underlying weighted-average assumptions for PRUs are summarized below:
| | | | | | | | | | | | |
| | | Year Ended | |
| | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Expected term | | | 2.8 years | | | | N/A | | | | 2.8 years | |
Expected volatility | | | 23.2 | % | | | N/A | | | | 25.4 | % |
Risk-free interest rate | | | 1.5 | % | | | N/A | | | | 1.1 | % |
Expected dividend yield | | | - | | | | N/A | | | | - | |
Weighted-average grant date fair value of PRUs | | $ | 32.78 | | | $ | 19.99 | | | $ | 27.10 | |
N/A: Not applicable as awards did not contain a market condition.
Valuation of ESPP
Prior to August 16, 2016, the fiscal periods indicated, selected itemsfair value of ESPP awards was equal to the discount on the purchase price of the shares. Beginning August 16, 2016, as a result of the lookback feature of our awards, we use the Black-Scholes model to estimate the fair value of rights to acquire shares of common stock under our ESPP using the following weighted-average assumptions:
| | | | | | | | |
| | | March 30, 2018 | | | March 31, 2017 | |
Expected term | | | 0.8 years | | | | 0.8 years | |
Expected volatility | | | 25.4 | % | | | 23.3 | % |
Risk-free interest | | | 1.3 | % | | | 0.5 | % |
Expected dividend yield | | | 1.1 | % | | | 1.3 | % |
Weighted-average grant date fair value | | $ | 6.53 | | | $ | 5.24 | |
Stock-based compensation expense
The following table sets forth the total stock-based compensation expense recognized for all of our equity incentive plans in our Consolidated Statements of Cash Flows:
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (Dollars in millions) |
| Net cash provided by (used in) from continuing operations: | | | | | |
| Operating activities | $ | 1,456 |
| | $ | 17 |
| | $ | 108 |
|
| Investing activities | 7,236 |
| | (1,076 | ) | | (517 | ) |
| Financing activities | (4,734 | ) | | (800 | ) | | (1,700 | ) |
Continuing operating activities
Operations: | | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Cost of revenues | | $ | 28 | | | $ | 21 | | | $ | 10 | |
Sales and marketing | | | 165 | | | | 107 | | | | 53 | |
Research and development | | | 200 | | | | 110 | | | | 56 | |
General and administrative | | | 217 | | | | 202 | | | | 42 | |
Discontinued operations | | | - | | | | - | | | | 81 | |
| | | | | | | | | | | | |
Total stock-based compensation expense | | $ | 610 | | | $ | 440 | | | $ | 242 | |
| | | | | | | | | | | | |
Income tax benefit for stock-based compensation expense | | $ | (116 | ) | | $ | (149 | ) | | $ | (75 | ) |
The income tax benefit associated with stock-based compensation expense for fiscal 2018 reflects the impact of the enactment of the Act. The tax benefit associated with stock-based compensation expense for fiscal 2017 and 2016 reflects the historical tax rates.
As of March 30, 2018, the total unrecognized stock-based compensation costs, net of estimated forfeitures, were as follows:
| | | | | | | | |
| (In millions) | | Unrecognized
compensation cost | | | Weighted-average
remaining years | |
RSUs | | $ | 253 | | | | 1.6 | |
PRUs | | | 60 | | | | 1.6 | |
Options | | | 52 | | | | 0.9 | |
Restricted stock | | | 34 | | | | 2.3 | |
Liability-classified awards settled in shares | | | 22 | | | | 1.9 | |
ESPP | | | 9 | | | | 0.4 | |
| | | | | | | | |
Total | | $ | 430 | | | | | |
| | | | | | | | |
Other employee benefit plans
401(k) plan
We expect cash frommaintain a salary deferral 401(k) plan for all of our operating activitiesU.S. employees. This plan allows employees to fluctuate in future periods as a resultcontribute their pretax salary up to the maximum dollar limitation prescribed by the Internal Revenue Code. We matched the first 3% of a participant’s eligible compensation prior to December 31, 2016 and the first 3.5% thereafter, up to $6,000 in a calendar year. Our employer matching contributions to the 401(k) plan were as follows:
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
401(k) matching contributions | | $ | 25 | | | $ | 19 | | | $ | 22 | |
Note 13. Net Income Per Share
Basic income per share is computed by dividing net income by the weighted-average number of factors, includingcommon shares outstanding during the timingperiod. Diluted net income per share also includes the
incremental effect of our billingsdilutive potentially issuable common shares outstanding during the period using the treasury stock method. Dilutive potentially issuable common shares includes the dilutive effect of the shares underlying convertible debt and collections, our operating results,employee equity awards. Diluted loss per share was the timingsame as basic loss per share for the years ended March 31, 2017 and amount of tax and other liability payments.
Net cash provided by operating activitiesApril 1, 2016, as there was
$1.5 billion for fiscal 2016 due to increases in deferred income taxes of $1.1 billion and income taxes payable of $693 million. These amounts were partially offset by a loss from continuing operations
netin the periods and inclusion of
income taxespotentially issuable shares was anti-dilutive.The components of $821 million, including non-cash items depreciationbasic and amortization charges of $304 million and stock-based compensation expense of $161 million.
Net cash provided by operating activities was $17 million for fiscal 2015, which resulted from income from continuing operations, net of income taxes of $109 million adjusted for non-cash items, including depreciation and amortization charges of $355 million and stock-based compensation expense of $131 million. These amounts were partially offset by decreases in income taxes payable of $405 million, deferred revenue of $83 million, and accounts payable of $73 million.
Net cash provided by operating activities was $108 million for fiscal 2014, which resulted fromdiluted net income from continuing operations of $91 million adjusted for non-cash items, including depreciation and amortization charges of $374 million and stock-based compensation expense of $105 million. These amounts were partially offset by decreases in income taxes payable of $240 million, deferred revenue of $161 million, and accrued compensation and benefits of $83 million.
Continuing investing activities
Net cash provided by investing activities was $7.2 billion for fiscal 2016 and was primarily due to net proceeds of $6.5 billion from(loss) per share are as follows: | | | | | | | | | | | | |
| | | Year Ended | |
| (In millions, except per share amounts) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Income (loss) from continuing operations | | $ | 1,127 | | | $ | (236 | ) | | $ | (821 | ) |
Income from discontinued operations, net of income taxes | | | 11 | | | | 130 | | | | 3,309 | |
| | | | | | | | | | | | |
Net income (loss) | | $ | 1,138 | | | $ | (106 | ) | | $ | 2,488 | |
| | | | | | | | | | | | |
Income (loss) per share — basic: | | | | | | | | | | | | |
Continuing operations | | $ | 1.83 | | | $ | (0.38 | ) | | $ | (1.23 | ) |
Discontinued operations | | $ | 0.02 | | | $ | 0.21 | | | $ | 4.94 | |
Net income (loss) per share — basic | | $ | 1.85 | | | $ | (0.17 | ) | | $ | 3.71 | |
Income (loss) per share — diluted: | | | | | | | | | | | | |
Continuing operations | | $ | 1.69 | | | $ | (0.38 | ) | | $ | (1.23 | ) |
Discontinued operations | | $ | 0.02 | | | $ | 0.21 | | | $ | 4.94 | |
Net income (loss) per share — diluted(1) | | $ | 1.70 | | | $ | (0.17 | ) | | $ | 3.71 | |
Weighted-average outstanding shares — basic | | | 616 | | | | 618 | | | | 670 | |
Dilutive potentially issuable shares: | | | | | | | | | | | | |
Convertible debt | | | 32 | | | | - | | | | - | |
Employee equity awards | | | 20 | | | | - | | | | - | |
| | | | | | | | | | | | |
Weighted-average shares outstanding — diluted | | | 668 | | | | 618 | | | | 670 | |
Anti-dilutive shares excluded from diluted net income (loss) per share calculation: | | | | | | | | | | | | |
Convertible debt | | | - | | | | 91 | | | | 30 | |
Employee equity awards | | | 1 | | | | 50 | | | | 19 | |
| | | | | | | | | | | | |
Total | | | 1 | | | | 141 | | | | 49 | |
| | | | | | | | | | | | |
| (1) | Net income (loss) per share amounts may not add due to rounding. |
Under the divestiture of Veritas and proceeds of $1.4 billion from maturities and sales of short-term investments, partially offset by purchases of $378 million of short-term investments and payments of $272 million for capital expenditures.
Net cash used in investing activities was $1.1 billion for fiscal 2015 and was primarily due to $1.8 billion in purchases of short-term investments, and payments of $303 million for capital expenditures, partially offset by $1.0 billion in proceeds from the sales and maturities of our short-term investments.
Net cash used in investing activities was $517 million for fiscal 2014 and was primarily due to the purchase of $492 million, of short-term investments and payments of $194 million for capital expenditures, partially offset by $186 million in proceeds from the sales and maturities of our short-term investments.
Continuing financing activities
Net cash used in financing activities was $4.7 billion for fiscal 2016, which was primarily due to cash dividend payments of $3.0 billion, repurchases of our commontreasury stock of $1.9 billion and repayment of Senior Notes and other obligations of $368 million, partially offset by proceeds from the issuance of Convertible Senior Notes of $500 million.
Net cash used in financing activities was $800 million for fiscal 2015, which was primarily due to the repurchases of our common stock of $500 million and cash dividends paid of $413 million, partially offset by net proceeds from sales of common stock through employee stock benefit plans of $116 million.
Net cash used in financing activities of $1.7 billion for fiscal 2014 was primarily due to the repayment ofmethod, our Convertible Senior Notes
will generally have a dilutive impact on net income per share when our average stock price for the period exceeds approximately $16.77 per share for the 2.5% Convertible Senior Notes and $20.41 per share for the 2.0% Convertible Senior Notes. The conversion feature of
$1.0 billion, repurchasesboth notes was anti-dilutive during fiscal 2017 due to a loss from continuing operations. The conversion feature of our
common stock2.5% Convertible Senior Notes was also anti-dilutive during fiscal 2016 due to a loss from continuing operations. See Note 7 for more information on our debt.Note 14. Segment and Geographic Information
We operate in the following two reportable segments, which are the same as our operating segments:
| • | | Enterprise Security. Our Enterprise Security segment focuses on providing solutions to protect organizations so they can securely conduct business while leveraging new platforms |
| and data. Our Enterprise Security portfolio includes products, services and solutions that are delivered as part of an Integrated Cyber Defense platform. |
| • | | Consumer Digital Safety. Our Consumer Digital Safety segment focuses on providing solutions to protect information, devices, networks and the identities of consumers. These solutions include our Norton-branded security solutions and LifeLock identity theft protection solutions. |
Operating segments are based upon the nature of $500our business and how our business is managed. Our Chief Operating Decision Makers (“CODMs”), comprised of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), use our operating segment financial information to evaluate segment performance and to allocate resources.
There were no inter-segment sales for the periods presented. The following table summarizes the operating results of our reportable segments:
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Total Segments: | | | | | | | | | | | | |
Net revenues | | $ | 4,834 | | | $ | 4,019 | | | $ | 3,600 | |
Operating income | | $ | 1,584 | | | $ | 1,026 | | | $ | 1,026 | |
Enterprise Security: | | | | | | | | | | | | |
Net revenues | | $ | 2,554 | | | $ | 2,355 | | | $ | 1,930 | |
Operating income | | $ | 473 | | | $ | 187 | | | $ | 102 | |
Consumer Digital Safety: | | | | | | | | | | | | |
Net revenues | | $ | 2,280 | | | $ | 1,664 | | | $ | 1,670 | |
Operating income | | $ | 1,111 | | | $ | 839 | | | $ | 924 | |
We do not allocate to our operating segments certain operating expenses that we manage separately at the corporate level and are not used in evaluating the results of, or in allocating resources to, our segments. These unallocated expenses consist primarily of stock-based compensation expense; amortization of intangible assets; restructuring, transition and other costs; and acquisition-related costs. In addition, corporate charges previously allocated to Veritas prior to its operational separation in the third quarter of fiscal 2016, but not reclassified within discontinued operations, were not reallocated to our segments. See Note 3 for more information about our discontinued operations.
The following table provides a reconciliation of our total reportable segments’ operating income to our total operating income (loss):
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Total segment operating income | | $ | 1,584 | | | $ | 1,026 | | | $ | 1,026 | |
Reconciling items: | | | | | | | | | | | | |
Unallocated corporate charges related to Veritas | | | - | | | | - | | | | 186 | |
Stock-based compensation expense | | | 610 | | | | 440 | | | | 161 | |
Amortization of intangible assets | | | 453 | | | | 293 | | | | 86 | |
Restructuring, transition and other costs | | | 410 | | | | 273 | | | | 136 | |
Acquisition-related costs | | | 60 | | | | 120 | | | | - | |
Other unallocated costs | | | 2 | | | | - | | | | - | |
| | | | | | | | | | | | |
Total consolidated operating income (loss) from continuing operations | | $ | 49 | | | $ | (100 | ) | | $ | 457 | |
| | | | | | | | | | | | |
Products and services revenue information
The following table summarizes net revenues by significant product and services categories:
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Enterprise Security: | | | | | | | | | | | | |
Endpoint and information protection | | $ | 983 | | | $ | 947 | | | $ | 959 | |
Network and web security | | | 782 | | | | 451 | | | | 29 | |
WSS and PKI | | | 238 | | | | 422 | | | | 413 | |
Other products and services | | | 551 | | | | 535 | | | | 529 | |
| | | | | | | | | | | | |
Total Enterprise Security | | $ | 2,554 | | | $ | 2,355 | | | $ | 1,930 | |
Consumer Digital Safety: | | | | | | | | | | | | |
Consumer security | | $ | 1,504 | | | $ | 1,527 | | | $ | 1,610 | |
Identity and information protection | | | 776 | | | | 137 | | | | 60 | |
| | | | | | | | | | | | |
Total Consumer Digital Safety | | | 2,280 | | | | 1,664 | | | | 1,670 | |
| | | | | | | | | | | | |
Total net revenues | | $ | 4,834 | | | $ | 4,019 | | | $ | 3,600 | |
| | | | | | | | | | | | |
Endpoint and information protection products include endpoint security, advanced threat protection, and information protection solutions and their related support services. Network and web security products include network security, web security, and cloud security solutions and their related support services. WSS and PKI products consist of the solutions we divested on October 31, 2017. Other products and services primarily consist of email security products, managed security services, consulting and other professional services.
Consumer security products include Norton security, Norton Secure VPN, and other consumer security solutions. Identity and information protection products include LifeLock identity theft protection and other information protection solutions.
Geographical information
Net revenues by geography are based on the billing addresses of our customers. The following table represents net revenues by geographic area for the periods presented:
| | | | | | | | | | | | |
| | | Year Ended | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | | | April 1, 2016 | |
Americas | | $ | 3,031 | | | $ | 2,329 | | | $ | 2,113 | |
EMEA | | | 1,048 | | | | 955 | | | | 894 | |
APJ | | | 755 | | | | 735 | | | | 593 | |
| | | | | | | | | | | | |
Total net revenues | | $ | 4,834 | | | $ | 4,019 | | | $ | 3,600 | |
| | | | | | | | | | | | |
Note: The Americas include U.S., Canada and Latin America; EMEA includes Europe, Middle East and Africa; APJ includes Asia Pacific and Japan
Revenues from customers inside the U.S. were $2.8 billion, $2.1 billion and $1.9 billion during fiscal 2018, 2017 and 2016, respectively. No other individual country accounted for more than 10% of revenues.
Most of our assets, excluding cash and cash equivalents and short-term investments, as of March 30, 2018 and March 31, 2017, were attributable to our U.S. operations. The table below
represents cash, cash equivalents and short-term investments held in the U.S. and internationally in various foreign subsidiaries.
| | | | | | | | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | |
U.S. | | $ | 858 | | | $ | 950 | |
International | | | 1,304 | | | | 3,306 | |
| | | | | | | | |
Total cash, cash equivalent and short-term investments | | $ | 2,162 | | | $ | 4,256 | |
| | | | | | | | |
The table below represents our property and equipment, net of accumulated depreciation and amortization, by geographic area, based on the physical location of the asset, at the end of each period presented.
| | | | | | | | |
| (In millions) | | March 30, 2018 | | | March 31, 2017 | |
U.S. | | $ | 677 | | | $ | 822 | |
International(1) | | | 101 | | | | 115 | |
| | | | | | | | |
Total property and equipment, net | | $ | 778 | | | $ | 937 | |
| | | | | | | | |
| (1) | No individual country represented more than 10% of the respective totals. |
Significant customers
In fiscal 2018, 2017 and 2016, no customer accounted for more than 10% of our net revenues.
Note 15. Commitments and Contingencies
Lease commitments
We lease certain of our facilities, equipment, and data centerco-locations under operating leases that expire at various dates through fiscal 2029. We currently sublease some space under various operating leases that will expire on various dates through fiscal 2022. Some of our leases contain renewal options, escalation clauses, rent concessions, and leasehold improvement incentives. Rent expense under operating leases was $78 million, $79 million, and $103 million for fiscal 2018, 2017, and 2016, respectively.
The minimum future rentals onnon-cancelable operating leases by fiscal year are as follows:
| | | | |
| (In millions) | | March 30, 2018 | |
2019 | | $ | 78 | |
2020 | | | 49 | |
2021 | | | 43 | |
2022 | | | 30 | |
2023 | | | 16 | |
Thereafter | | | 37 | |
| | | | |
Total minimum future lease payments | | | 253 | |
Sublease income | | | (17 | ) |
| | | | |
Total minimum future lease payments, net | | $ | 236 | |
| | | | |
Purchase obligations
We have purchase obligations that are associated with agreements for purchases of goods or services. Management believes that cancellation of these contracts is unlikely and we expect to make future cash dividends of paid of $418 million, partially offset by net proceeds from sales of common stock through employee stock benefit plans of $234 million.payments according to the contract terms.
Contractual obligations
The following isreflects estimated future payments for purchase obligations by fiscal year:
| | | | |
| (In millions) | | March 30, 2018 | |
2019 | | $ | 496 | |
2020 | | | 85 | |
2021 | | | 41 | |
2022 | | | 18 | |
2023 | | | 13 | |
Thereafter | | | 6 | |
| | | | |
Total purchase obligations | | $ | 659 | |
| | | | |
Deemed repatriation taxes
Under the Act, we are required to pay a schedule by yearsone-time transition tax on untaxed foreign earnings of our significant contractual obligations as of April 1, 2016:foreign subsidiaries over an8-year
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Fiscal Period |
| | Total | | 2017 | | 2018 - 2019 | | 2020 - 2021 | | Thereafter |
| | (Dollars in millions) |
Senior Notes and Convertible Senior Notes (1) | $ | 2,250 |
| | $ | — |
| | $ | 600 |
| | $ | 1,250 |
| | $ | 400 |
|
Interest payments on Senior Notes and Convertible Senior Notes (1) | 321 |
| | 76 |
| | 123 |
| | 103 |
| | 19 |
|
Purchase obligations (2) | 329 |
| | 256 |
| | 71 |
| | 2 |
| | — |
|
Operating leases (3) | 278 |
| | 81 |
| | 115 |
| | 62 |
| | 20 |
|
| Total | $ | 3,178 |
| | $ | 413 |
| | $ | 909 |
| | $ | 1,417 |
| | $ | 439 |
|
| |
(1)
| Interest payments were calculated based on terms of the related Senior Notes and Convertible Senior Notes. For further information on the Senior Notes and Convertible Senior Notes, see Note 5 of the Notes to Consolidated Financial Statements in this annual report.
|
| |
(2)
| These amounts are associated with agreements for purchases of goods or services generally including agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. The table above also includes agreements to purchase goods or services that have cancellation provisions requiring little or no payment. The amounts under such contracts are included in the table above because management believes that cancellation of these contracts is unlikely and we expect to make future cash payments according to the contract terms or in similar amounts for similar materials. |
| |
(3)
| We have entered into various non-cancelable operating lease agreements that expire on various dates through fiscal 2026. The amounts in the table above exclude expected sublease income and include $8 million in exited or excess facility costs related to restructuring activities. |
Due to period. See Note 10 for more information regarding the uncertainty with respect to the timing ofAct and its impact on our income taxes. The following reflects estimated future cash flows associated with our unrecognized tax benefits as of April 1, 2016 we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, $160 million in long-term incomepayments for deemed repatriation taxes payable has been excluded from the contractual obligations table. For further information, see Note 11 of the Notes to Consolidated Financial Statements in this annual report.
by fiscal year: | | | | |
| (In millions) | | March 30, 2018 | |
2019 | | $ | 72 | |
2020 | | | 72 | |
2021 | | | 72 | |
2022 | | | 72 | |
2023 | | | 72 | |
Thereafter | | | 536 | |
| | | | |
Total obligations | | $ | 896 | |
| | | | |
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, subsidiaries and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements or representations and warranties made by us. In addition, our bylaws contain indemnification obligations to our directors, officers, employees and agents, and we have entered into indemnification agreements with our directors and certain of our officers to give such directors and officers additional contractual assurances regarding the scope of the indemnification set forth in our bylaws and to provide additional procedural protections. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers. It is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements might not be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements and we have not accrued any material liabilities related to such indemnification obligations in our Consolidated Financial Statements.
In connection with the sale of Veritas, we assigned several leases to Veritas Technologies LLC or its related subsidiaries. As a condition to consenting to the assignments, certain lessors required us to agree to indemnify the lessor under the applicable lease with respect to certain matters, including, but not limited to, losses arising out of Veritas Technologies LLC or its related subsidiaries'subsidiaries’ breach of payment obligations under the terms of the lease. As with our other indemnification obligations
discussed above and in general, it is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. As with our other indemnification obligations, such indemnification agreements might not be subject to maximum loss clauses and to date, generally under our real estate obligations, we have not incurred material costs as a result of such obligations under our leases and have not accrued any liabilities related to such indemnification obligations underin our Consolidated Financial Statements.
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 on 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.
Item 7A. QuantitativeLitigation contingencies
Audit Committee Investigation
Several securities class action and Qualitative Disclosures about Market Risk
We are exposed to various market risks related to fluctuations in interest rates and foreign currency exchange rates. We may use derivative financial instruments to mitigate certain risks in accordance withlawsuits were filed against us following our investment and foreign exchange policies. We do not use derivatives or other financial instruments for trading or speculative purposes.
Interest rate risk
As of April 1, 2016, we had $2.3 billion in principal amount of fixed-rate Senior Notes and Convertible Senior Notes outstanding, with a carrying amount of $2.2 billion and a fair value of $2.3 billion, which fair value was basedannouncement on level 2 inputs. As of April 3, 2015, we had $2.1 billion in principal amount of fixed-rate Senior Notes outstanding, with a carrying amount of $2.1 billion and a fair value of $2.2 billion, which was based on level 2 inputs. We have performed sensitivity analysis as of April 1, 2016 and April 3, 2015 by using a modeling technique that measures the change in the fair values arising from a hypothetical 50 bps movement in the levels of market interest rates, with all other variables held constant. On April 1, 2016 and April 3, 2015, a hypothetical 50 bps increase or decrease in market interest rates would change the fair valueMay 10, 2018 of the fixed-rate Senior NotesAudit Committee Investigation, including an action brought derivatively on behalf of Symantec’s 2008 Employee Stock Purchase Plan. In addition, we have received certain demands from purported stockholders to inspect corporate books and Convertible Senior Notes by a decreaserecords under Delaware law. No specific amounts of approximately $41 milliondamages have been alleged in these lawsuits. We will continue to incur legal fees in connection with these pending cases, including expenses for the reimbursement of legal fees of present and $39 million, respectivelyformer officers and an increasedirectors under indemnification obligations. The expense of approximately $42 million and $40 million, respectively. However, this hypothetical change in market interest rates would not impact the interest expense on the fixed-rate debt.
Foreign currency exchange rate risk
continuing to defend such litigation may be significant. We conduct business in approximately 38 currencies through our worldwide operations and, as such,intend to defend these lawsuits vigorously, but there can be no assurance that we are exposed to foreign currency risk. Our entities conduct their businesses in the primary local currency in which they operate, however, they may conduct business in other currencies. To the extend our entities hold monetary assets or liabilities, earn revenues or expend costs in currencies other than that entity's functional currency, they will be exposed to foreign exchange gains or losses and impacts to margins as a result. As part of our foreign currency risk mitigation strategy, we have entered into foreign exchange forward contracts with up to six monthssuccessful in duration to help mitigate foreign exchange risk, however we are not able to mitigate all of our foreign exchange risk. We have considered historical trends in exchange rates and determined that it is possible that adverse changes in exchange rates for any currency could be experienced. The estimated impacts of a ten percent appreciation or depreciation of foreign currency are as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | April 1, 2016 | | April 3, 2015 |
| | | | | Change in Fair Value Due to 10% | | | | Change in Fair Value Due to 10% |
| Foreign Exchange Forward Contract | | Notional Amount | | Appreciation | | Depreciation | | Notional Amount | | Appreciation | | Depreciation |
| | | (Dollars in millions) |
| Purchased | | $ | 693 |
| | $ | 69 |
| | $ | (69 | ) | | $ | 102 |
| | $ | 10 |
| | $ | (10 | ) |
| Sold | | (198 | ) | | (19 | ) | | 19 |
| | (195 | ) | | (19 | ) | | 19 |
|
| Total net outstanding contracts | | $ | 495 |
| | $ | 50 |
| | $ | (50 | ) | | $ | (93 | ) | | $ | (9 | ) | | $ | 9 |
|
We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effectsdefense. If any of the changes in foreign exchange rates.
Item 8. Financial Statements and Supplementary Data
Annual financial statements
The Consolidated Financial Statements and related disclosures included in Part IV, Item 15 of this annual report are incorporated by reference into this Item 8.
Selected quarterly financial data |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal 2016 | | Fiscal 2015 |
| | Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter | | Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter |
| | (In millions, except per share data) |
| Net revenues | $ | 873 |
| | $ | 909 |
| | $ | 906 |
| | $ | 912 |
| | $ | 899 |
| | $ | 970 |
| | $ | 1,001 |
| | $ | 1,086 |
|
| Gross profit | 726 |
| | 759 |
| | 746 |
| | 754 |
| | 723 |
| | 793 |
| | 825 |
| | 888 |
|
| Operating income | 128 |
| | 146 |
| | 100 |
| | 83 |
| | (49 | ) | | 34 |
| | 96 |
| | 73 |
|
| Income (loss) from continuing operations | (1,013 | ) | | 114 |
| | 53 |
| | 25 |
| | 55 |
| | (25 | ) | | 32 |
| | 47 |
|
Income from discontinued operations, net of income taxes
| 3,058 |
| | 56 |
| | 103 |
| | 92 |
| | 121 |
| | 247 |
| | 212 |
| | 189 |
|
| Net income | 2,045 |
| | 170 |
| | 156 |
| | 117 |
| | 176 |
| | 222 |
| | 244 |
| | 236 |
|
| | | | | | | | | | | | | | | | |
| Income (loss) per share - basic: | | | | | | | | | | | | | | | |
| Continuing operations | $ | (1.56 | ) | | $ | 0.17 |
| | $ | 0.08 |
| | $ | 0.04 |
| | $ | 0.08 |
| | $ | (0.04 | ) | | $ | 0.05 |
| | $ | 0.07 |
|
| Discontinued operations | $ | 4.70 |
| | $ | 0.08 |
| | $ | 0.15 |
| | $ | 0.13 |
| | $ | 0.18 |
| | $ | 0.36 |
| | $ | 0.31 |
| | $ | 0.27 |
|
| Net income per share - basic | $ | 3.15 |
| | $ | 0.26 |
| | $ | 0.23 |
| | $ | 0.17 |
| | $ | 0.26 |
| | $ | 0.32 |
| | $ | 0.35 |
| | $ | 0.34 |
|
| | | | | | | | | | | | | | | | |
| Income (loss) per share - diluted: | | | | | | | | | | | | | | | |
| Continuing operations | $ | (1.56 | ) | | $ | 0.17 |
| | $ | 0.08 |
| | $ | 0.04 |
| | $ | 0.08 |
| | $ | (0.04 | ) | | $ | 0.05 |
| | $ | 0.07 |
|
| Discontinued operations | $ | 4.70 |
| | $ | 0.08 |
| | $ | 0.15 |
| | $ | 0.13 |
| | $ | 0.17 |
| | $ | 0.36 |
| | $ | 0.30 |
| | $ | 0.27 |
|
| Net income per share - diluted | $ | 3.15 |
| | $ | 0.25 |
| | $ | 0.23 |
| | $ | 0.17 |
| | $ | 0.25 |
| | $ | 0.32 |
| | $ | 0.35 |
| | $ | 0.34 |
|
Note: Net income per share amounts may not add due to rounding.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our management (with the participation of our Chief Executive Officer and Chief Financial Officer) has conducted 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). Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded 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) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) for Symantec. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of the effectiveness of our internal
control over financial reporting as of April 1, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Our management has concluded that, as of April 1, 2016, our internal control over financial reporting was effective at the reasonable assurance level based on these criteria.
The Company’s independent registered public accounting firm has issued an attestation report regarding its assessment of the Company’s internal control over financial reporting as of April 1, 2016, which is included in Part IV, Item 15 of this annual report.
c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended April 1, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
d) 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. Accordingly, our disclosure controls and procedures provide reasonable assurance of achieving their objectives.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item will be included in an amendment to this annual report on Form 10-K or incorporated by reference from Symantec’s definitive proxy statement to be filed pursuant to Regulation 14A.
Item 11. Executive Compensation
The information required by this item will be included in an amendment to this annual report on Form 10-K or incorporated by reference from Symantec’s definitive proxy statement to be filed pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be included in an amendment to this annual report on Form 10-K or incorporated by reference from Symantec’s definitive proxy statement to be filed pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in an amendment to this annual report on Form 10-K or incorporated by reference from Symantec’s definitive proxy statement to be filed pursuant to Regulation 14A.
Item 14. Principal Accounting Fees and Services
The information required by this item will be included in an amendment to this annual report on Form 10-K or incorporated by reference from Symantec’s definitive proxy statement to be filed pursuant to Regulation 14A.
PART IV
Item 15. Exhibits, Financial Statement Schedules
Upon written request, we will provide, without charge, a copy of this annual report, including the Consolidated Financial Statements and financial statement schedule. All requests should be sent to:
Symantec Corporation
Attn: Investor Relations
350 Ellis Street
Mountain View, California 94043
650-527-8000
The following documents are filed as part of this report: |
| | |
| | | Page |
| 1. | Consolidated Financial Statements: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included. | |
| 2. | |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Symantec Corporation:
We have audited the accompanying consolidated balance sheets of Symantec Corporation and subsidiaries as of April 1, 2016 and April 3, 2015, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended April 1, 2016. We also have audited Symantec Corporation’s internal control over financial reporting as of April 1, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Symantec Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A.b). Our responsibility is to express an opinion on these consolidated financial statements and an opinion on Symantec Corporation’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Symantec Corporation and subsidiaries as of April 1, 2016 and April 3, 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended April 1, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Symantec Corporation maintained, in all material respects, effective internal control over financial reporting as of April 1, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of the presentation of deferred income taxes as of April 1, 2016 due to the adoption of Accounting Standards Update 2015-17, Accounting for Income Taxes: Balance Sheet Classification of Deferred Taxes. Prior period amounts have not been reclassified.
/s/ KPMG LLP
Santa Clara, California
May 20, 2016
SYMANTEC CORPORATION
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| | April 1, 2016 | | April 3, 2015 |
| | (In millions, except par value) |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 5,983 |
| | $ | 2,843 |
|
| Short-term investments | 42 |
| | 1,017 |
|
| Accounts receivable, net of allowance for doubtful accounts of $16 and $5, respectively | 556 |
| | 700 |
|
| Deferred income taxes | — |
| | 152 |
|
| Other current assets | 378 |
| | 295 |
|
| Current assets of discontinued operations | — |
| | 415 |
|
| Total current assets | 6,959 |
| | 5,422 |
|
| Property and equipment, net | 957 |
| | 950 |
|
| Intangible assets, net | 443 |
| | 525 |
|
| Goodwill | 3,148 |
| | 3,146 |
|
| Equity investments | 157 |
| | 10 |
|
| Other long-term assets | 103 |
| | 70 |
|
| Long-term assets of discontinued operations | — |
| | 3,110 |
|
| Total assets | $ | 11,767 |
| | $ | 13,233 |
|
| | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Current liabilities: | | | |
| Accounts payable | $ | 175 |
| | $ | 169 |
|
| Accrued compensation and benefits | 219 |
| | 232 |
|
| Deferred revenue | 2,279 |
| | 2,427 |
|
| Current portion of long-term debt | — |
| | 350 |
|
| Income taxes payable | 941 |
| | 47 |
|
| Other current liabilities | 419 |
| | 292 |
|
| Current liabilities of discontinued operations | — |
| | 936 |
|
| Total current liabilities | 4,033 |
| | 4,453 |
|
| Long-term debt | 2,207 |
| | 1,746 |
|
| Long-term deferred revenue | 359 |
| | 444 |
|
| Long-term deferred tax liabilities | 1,235 |
| | 308 |
|
| Long-term income taxes payable | 160 |
| | 134 |
|
| Other long-term obligations | 97 |
| | 79 |
|
| Long-term liabilities of discontinued operations | — |
| | 134 |
|
| Total liabilities | 8,091 |
| | 7,298 |
|
| Commitments and contingencies |
|
| |
|
|
| Stockholders’ equity: | | | |
| Common stock and additional paid-in capital, $0.01 par value, 3,000 shares authorized; 612 and 898 shares issued; 612 and 684 shares outstanding, respectively | 4,309 |
| | 6,101 |
|
| Accumulated other comprehensive income | 22 |
| | 104 |
|
| Accumulated deficit | (655 | ) | | (270 | ) |
| Total stockholders’ equity | 3,676 |
| | 5,935 |
|
| Total liabilities and stockholders’ equity | $ | 11,767 |
| | $ | 13,233 |
|
| | | | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | |
| | Year Ended |
| | April 1, 2016 | | April 3, 2015 | | March 28, 2014 |
| | (In millions, except per share data) |
| Net revenues | $ | 3,600 |
| | $ | 3,956 |
| | $ | 4,183 |
|
| Cost of revenues | 615 |
| | 727 |
| | 791 |
|
| Gross profit | 2,985 |
| | 3,229 |
| | 3,392 |
|
| Operating expenses: | | | | | |
| Sales and marketing | 1,292 |
| | 1,650 |
| | 1,766 |
|
| Research and development | 748 |
| | 812 |
| | 722 |
|
| General and administrative | 295 |
| | 362 |
| | 420 |
|
| Amortization of intangible assets | 57 |
| | 87 |
| | 93 |
|
| Restructuring, separation, and transition | 136 |
| | 164 |
| | 247 |
|
| Total operating expenses | 2,528 |
| | 3,075 |
| | 3,248 |
|
| Operating income | 457 |
| | 154 |
| | 144 |
|
| Interest income | 10 |
| | 11 |
| | 11 |
|
| Interest expense | (75 | ) | | (78 | ) | | (84 | ) |
| Other income, net | — |
| | 14 |
| | 36 |
|
| Income from continuing operations before income taxes | 392 |
| | 101 |
| | 107 |
|
| Income tax expense (benefit) | 1,213 |
| | (8 | ) | | 16 |
|
| Income (loss) from continuing operations | (821 | ) | | 109 |
| | 91 |
|
| Income from discontinued operations, net of income taxes | 3,309 |
| | 769 |
| | 807 |
|
| Net income | $ | 2,488 |
| | $ | 878 |
| | $ | 898 |
|
| | | | | | |
| Income (loss) per share - basic: | | | | | |
| Continuing operations | $ | (1.23 | ) | | $ | 0.16 |
| | $ | 0.13 |
|
| Discontinued operations | $ | 4.94 |
| | $ | 1.12 |
| | $ | 1.16 |
|
| Net income per share - basic | $ | 3.71 |
| | $ | 1.27 |
| | $ | 1.29 |
|
| | | | | | |
| Income (loss) per share - diluted: | | | | | |
| Continuing operations | $ | (1.23 | ) | | $ | 0.16 |
| | $ | 0.13 |
|
| Discontinued operations | $ | 4.94 |
| | $ | 1.10 |
| | $ | 1.15 |
|
| Net income per share - diluted | $ | 3.71 |
| | $ | 1.26 |
| | $ | 1.28 |
|
| | | | | | |
| Weighted-average shares outstanding: | | | | | |
| Basic | 670 |
| | 689 |
| | 696 |
|
| Diluted | 670 |
| | 696 |
| | 704 |
|
| Cash dividends declared per common share | $ | 4.60 |
| | $ | 0.60 |
| | $ | 0.60 |
|
Note: Net income per share amounts may not add due to rounding.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | |
| | Year Ended |
| | April 1,
2016 | | April 3,
2015 | | March 28,
2014 |
| | (Dollars in millions) |
| Net income | $ | 2,488 |
| | $ | 878 |
| | $ | 898 |
|
| Other comprehensive (loss) income, net of taxes: | | | | | |
| Foreign currency translation adjustments: | | | | | |
| Translation adjustments | (6 | ) | | (89 | ) | | 1 |
|
| Reclassification adjustments for loss (gain) included in net income | 1 |
| | (1 | ) | | 4 |
|
| Net foreign currency translation adjustments | (5 | ) | | (90 | ) | | 5 |
|
| Available-for-sale securities: | | | | | |
| Unrealized gain, net of taxes of $2, $0, and $1, respectively | 4 |
| | — |
| | 1 |
|
| Reclassification adjustments for realized gain included in net income, net of taxes of $0, $0, and $(10), respectively | — |
| | — |
| | (14 | ) |
| Net increase (decrease) from available-for-sale securities | 4 |
| | — |
| | (13 | ) |
| Other comprehensive loss, net of taxes | (1 | ) | | (90 | ) | | (8 | ) |
| Comprehensive income | $ | 2,487 |
| | $ | 788 |
| | $ | 890 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | |
| | Common Stock and Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Retained Earnings (Accumulated Deficit) | | Total
Stockholders’
Equity |
| | Shares | | Amount | |
| | (In millions) |
| Balance as of March 29, 2013 | 698 |
| | $ | 7,320 |
| | $ | 202 |
| | $ | (2,046 | ) | | $ | 5,476 |
|
| Net income | — |
| | — |
| | — |
| | 898 |
| | 898 |
|
| Other comprehensive loss | — |
| | — |
| | (8 | ) | | — |
| | (8 | ) |
| Common stock issued under employee stock plans | 18 |
| | 234 |
| | — |
| | — |
| | 234 |
|
| Repurchases of common stock | (21 | ) | | (500 | ) | | — |
| | — |
| | (500 | ) |
| Tax payments related to restricted stock units | — |
| | (45 | ) | | — |
| | — |
| | (45 | ) |
| Dividends paid and accrued | — |
| | (429 | ) | | — |
| | — |
| | (429 | ) |
| Stock-based compensation | — |
| | 157 |
| | — |
| | — |
| | 157 |
|
| Income tax benefit from employee stock transactions | — |
| | 14 |
| | — |
| | — |
| | 14 |
|
| Balance as of March 28, 2014 | 695 |
| | 6,751 |
| | 194 |
| | (1,148 | ) | | 5,797 |
|
| Net income | — |
| | — |
| | — |
| | 878 |
| | 878 |
|
| Other comprehensive loss | — |
| | — |
| | (90 | ) | | — |
| | (90 | ) |
| Common stock issued under employee stock plans | 10 |
| | 116 |
| | — |
| | — |
| | 116 |
|
| Repurchases of common stock | (21 | ) | | (500 | ) | | — |
| | — |
| | (500 | ) |
| Tax payments related to restricted stock units | — |
| | (47 | ) | | — |
| | — |
| | (47 | ) |
| Dividends paid and accrued | — |
| | (428 | ) | | — |
| | — |
| | (428 | ) |
| Stock-based compensation | — |
| | 198 |
| | — |
| | — |
| | 198 |
|
| Income tax benefit from employee stock transactions | — |
| | 11 |
| | — |
| | — |
| | 11 |
|
| Balance as of April 3, 2015 | 684 |
| | 6,101 |
| | 104 |
| | (270 | ) | | 5,935 |
|
| Net income | — |
| | — |
| | — |
| | 2,488 |
| | 2,488 |
|
| Other comprehensive loss | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Common stock issued under employee stock plans | 12 |
| | 65 |
| | — |
| | — |
| | 65 |
|
| Repurchases of common stock | (84 | ) | | (1,868 | ) | | — |
| | — |
| | (1,868 | ) |
| Tax payments related to restricted stock units | — |
| | (68 | ) | | — |
| | — |
| | (68 | ) |
| Sale of Veritas | — |
| | — |
| | (81 | ) | | — |
| | (81 | ) |
| Dividends paid and accrued | — |
| | (212 | ) | | — |
| | (2,873 | ) | | (3,085 | ) |
| Equity component of convertible notes | — |
| | 29 |
| | — |
| | — |
| | 29 |
|
| Stock-based compensation | — |
| | 245 |
| | — |
| | — |
| | 245 |
|
| Income tax benefit from employee stock transactions | — |
| | 17 |
| | — |
| | — |
| | 17 |
|
| Balance as of April 1, 2016 | 612 |
| | $ | 4,309 |
| | $ | 22 |
| | $ | (655 | ) | | $ | 3,676 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | Year Ended |
| | April 1,
2016 | | April 3,
2015 | | March 28,
2014 |
| | (Dollars in millions) |
| OPERATING ACTIVITIES: | | | | | |
| Net income | $ | 2,488 |
| | $ | 878 |
| | $ | 898 |
|
| Income from discontinued operations, net of income taxes | (3,309 | ) | | (769 | ) | | (807 | ) |
| Adjustments to reconcile income from continuing operations to net cash provided by operating activities: | | | | | |
| Depreciation | 213 |
| | 229 |
| | 236 |
|
| Amortization of intangible assets | 86 |
| | 122 |
| | 131 |
|
| Amortization of debt issuance costs and discounts | 5 |
| | 4 |
| | 7 |
|
| Stock-based compensation expense | 161 |
| | 131 |
| | 105 |
|
| Deferred income taxes | 1,082 |
| | (29 | ) | | 46 |
|
| Excess income tax benefit from the exercise of stock options | (6 | ) | | (10 | ) | | (17 | ) |
| Net gain from sale of short-term investments | — |
| | — |
| | (32 | ) |
| Other | 13 |
| | 8 |
| | 7 |
|
| Net change in assets and liabilities, excluding effects of acquisitions: | | | | | |
| Accounts receivable, net | 38 |
| | (35 | ) | | 36 |
|
| Accounts payable | (69 | ) | | (73 | ) | | (55 | ) |
| Accrued compensation and benefits | (7 | ) | | 7 |
| | (83 | ) |
| Deferred revenue | 20 |
| | (83 | ) | | (161 | ) |
| Income taxes payable | 693 |
| | (405 | ) | | (240 | ) |
| Other assets | (3 | ) | | 16 |
| | 16 |
|
| Other liabilities | 51 |
| | 26 |
| | 21 |
|
| Net cash provided by continuing operating activities | 1,456 |
| | 17 |
| | 108 |
|
| Net cash provided by (used in) discontinued operating activities | (660 | ) | | 1,295 |
| | 1,173 |
|
| Net cash provided by operating activities | 796 |
| | 1,312 |
| | 1,281 |
|
| INVESTING ACTIVITIES: | | | | | |
| Purchases of property and equipment | (272 | ) | | (303 | ) | | (194 | ) |
| Payments for acquisitions, net of cash acquired, and purchases of intangibles | (4 | ) | | (39 | ) | | (17 | ) |
| Purchases of short-term investments | (378 | ) | | (1,758 | ) | | (492 | ) |
| Proceeds from maturities of short-term investments | 1,056 |
| | 681 |
| | 117 |
|
| Proceeds from sales of short-term investments | 299 |
| | 343 |
| | 69 |
|
| Proceeds from divestiture of information management business, net of cash contributed and transaction costs | 6,535 |
| | — |
| | — |
|
| Net cash provided by (used in) continuing investing activities | 7,236 |
| | (1,076 | ) | | (517 | ) |
| Net cash used in discontinued investing activities | (63 | ) | | (78 | ) | | (66 | ) |
| Net cash provided by (used in) investing activities | 7,173 |
| | (1,154 | ) | | (583 | ) |
| FINANCING ACTIVITIES: | | | | | |
| Repayments of debt and other obligations | (368 | ) | | (21 | ) | | (1,189 | ) |
| Proceeds from issuance of Convertible Senior Notes | 500 |
| | — |
| | — |
|
| Proceeds from convertible note hedge | — |
| | — |
| | 189 |
|
| Net proceeds from sales of common stock under employee stock benefit plans | 65 |
| | 116 |
| | 234 |
|
| Excess income tax benefit from the exercise of stock options | 6 |
| | 10 |
| | 17 |
|
| Tax payments related to restricted stock units | (39 | ) | | (36 | ) | | (33 | ) |
| Dividends and dividend equivalents paid | (3,030 | ) | | (413 | ) | | (418 | ) |
| Repurchases of common stock | (1,868 | ) | | (500 | ) | | (500 | ) |
| Proceeds from other financing, net | — |
| | 44 |
| | — |
|
| Net cash used in continuing financing activities | (4,734 | ) | | (800 | ) | | (1,700 | ) |
| Net cash used in discontinued financing activities | (30 | ) | | (11 | ) | | (12 | ) |
| Net cash used in financing activities | (4,764 | ) | | (811 | ) | | (1,712 | ) |
| Effect of exchange rate fluctuations on cash and cash equivalents | (96 | ) | | (180 | ) | | 36 |
|
| Change in cash and cash equivalents | 3,109 |
| | (833 | ) | | (978 | ) |
| Beginning cash and cash equivalents | 2,874 |
| | 3,707 |
| | 4,685 |
|
| Ending cash and cash equivalents | 5,983 |
| | 2,874 |
| | 3,707 |
|
| Less: Cash and cash equivalents of discontinued operations | — |
| | 31 |
| | 12 |
|
| Cash and cash equivalents of continuing operations | $ | 5,983 |
| | $ | 2,843 |
| | $ | 3,695 |
|
| Equity investment in Veritas received as consideration | $ | 149 |
| | $ | — |
| | $ | — |
|
| Income taxes paid, net of refunds | $ | 302 |
| | $ | 353 |
| | $ | 224 |
|
| Interest expense paid | $ | 70 |
| | $ | 75 |
| | $ | 79 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
SYMANTEC CORPORATION
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Business
Symantec Corporation (“we,” “us,” “our,” and “the Company” refer to Symantec Corporation and all of its subsidiaries) is a global leader in security.
In August 2015, we entered into a definitive agreement to sell the assets of our information management business ("Veritas") to The Carlyle Group ("Carlyle"). On January 19, 2016, the Company and Carlyle amended the terms of the definitive agreement for Carlyle's acquisition of Veritas. The results of Veritas are presented as discontinued operations in our Consolidated Statements of Operations and thus have been excluded from continuing operations and segment results for all reported periods. Furthermore, Veritas' assets and liabilities were removed from our Consolidated Balance Sheet upon consummation of its sale on January 29, 2016, and have been classified as discontinued operations on our Consolidated Balance Sheet as of April 3, 2015. For additional information on the sale of Veritas and on our discontinued operations, see Note 3.
Principles of consolidation
The accompanying consolidated financial statements of Symantec Corporation and its wholly-owned subsidiaries are prepared in conformity with generally accepted accounting principles ("GAAP") in the United States ("U.S."). All significant intercompany accounts and transactions have been eliminated in consolidation.
Fiscal calendar
We have a 52/53-week fiscal year ending on the Friday closest to March 31. Our fiscal 2016 and 2014 were 52-week years ended April 1, 2016 and March 28, 2014, whereas our fiscal 2015 was a 53-week year ended April 3, 2015.
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are based upon historical factors, current circumstances and the experience and judgment of management. Management evaluates its assumptions and estimates on an ongoing basis and may engage outside subject matter experts to assist in its valuations. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include those related to the allocation of revenue recognized and deferred amounts, valuation of goodwill, intangible assets and long-lived assets, contingencies and litigation, and the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions).
Foreign currency translation
Assets and liabilities denominated in foreign currencies are translated using the exchange rate on the balance sheet dates. Revenues and expenses are translated using monthly average exchange rates prevailing during the year. The translation adjustments resulting from this process are included as a component of accumulated other comprehensive income. Deferred tax assets and liabilities are established on the cumulative translation adjustment attributable to unremitted foreign earnings that are not intended to be indefinitely reinvested. In the event of liquidation of a foreign subsidiary, the cumulative translation adjustment attributable to that foreign subsidiary is reclassified from accumulated other comprehensive income and included in other income, net.
Revenue recognition
We market and distribute our software products both as stand-alone products and as integrated product suites. We recognize revenue when 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) fees are fixed or determinable and 4) collectability is probable. If we determine that any one of the four criteria is not met, we will defer recognition of revenue until all the criteria are met.
We derive revenue primarily from sales of content, subscriptions, and maintenance and licenses. We present revenue net of sales taxes and any similar assessments.
Content, subscription, and maintenance revenue includes arrangements for software maintenance and technical support for our products, content and subscription services primarilylawsuits related to our security products, revenue from arrangements where vendor-specific objective evidence ("VSOE")Audit Committee Investigation are decided adversely, we may be liable for significant damages directly or under our indemnification obligations, which could adversely affect our business, results of the fair value of undelivered elements does not exist, arrangements for managed security services,operations and software as a service ("SaaS") offerings. These arrangements are generally offered to our customers over a specified period of time, and we recognize the related revenue ratably over the maintenance, subscription, or service period. We enter into perpetual software license agreements through direct sales to customers and indirect sales with distributors and resellers. The license agreements generally include product maintenance agreements, for which the related
revenue is included with content, subscriptions, and maintenance and is deferred and recognized ratably over the period of the agreements.
Content, subscription, and maintenance revenue also includes professional services revenue, consisting primarily of the fees we earn related to consulting and educational services. We generally recognize revenue from professional services as the services are performed or upon written acceptance from customers, if applicable, assuming all other conditions for revenue recognition noted above have been met.
License revenue is derived primarily from the licensing of our various products and technology. We generally recognize license revenue upon delivery of the product, assuming all other conditions for revenue recognition noted above have been met. License revenue also includes appliance product revenue. We generally recognize appliance product revenue as each product is delivered, assuming all other conditions for revenue recognition noted above have been met.
For software arrangements that include multiple elements, including perpetual software licenses, maintenance, services, and packaged products with content updates and subscriptions, we allocate and defer revenue for the undelivered items based on VSOE of the fair value of the undelivered elements, and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as license revenue. VSOE of each element is based on historical evidence of our stand-alone sales of these elements to third parties or from the stated renewal rate for the undelivered elements. When VSOE does not exist for undelivered items, the entire arrangement fee is recognized ratably over the performance period. Our deferred revenue consists primarily of the unamortized balance of enterprise product maintenance, consumer product content updates, managed security services, subscriptions, and arrangements where VSOE does not exist for an undelivered element.
For arrangements that include both software and non-software elements, we allocate revenue to the software deliverables as a group and non-software deliverables based on their relative selling prices. In such circumstances, the accounting principles establish a hierarchy to determine the selling price used for allocating revenue to the deliverables as follows: (i) VSOE, (ii) third-party evidence of selling price (“TPE”) and (iii) the best estimate of the selling price (“ESP”). Our appliance products, SaaS and certain other services are considered to be non-software elements in our arrangements.
Whencash flows. At this stage, we are unable to establish a selling price using VSOEassess whether any material loss or TPE, we use ESP in the allocation of arrangement consideration. The objective of ESPadverse effect is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. The determination of ESP is made through consultation with and formal approval by our management, taking into consideration the go-to-market strategy, pricing factors, and historical transactions.
Indirect channel sales
We sell consumer packaged software products through a multi-tiered distribution channel. For consumer products that include content updates, we recognize revenue ratably over the term of the subscription upon sell-through to end-users, as the subscription period commences on the date of sale to the end-user. For most other consumer products, we recognize packaged product revenue on distributor and reseller channel inventory that is not in excess of specified inventory levels in these channels. We offer the right of return of our products under various policies and programs with our distributors, resellers, and end-user customers. We estimate and record reserves for product returns as an offset to revenue or deferred revenue. We fully reserve for obsolete products in the distribution channel as an offset to deferred revenue for products with content updates and to revenue for all other products.
For security products, we generally recognize revenue from the licensing of software products through our indirect sales channel upon sell-through or with evidence of an end-user. For licensing of our software to original equipment manufacturers (“OEMs”), royalty revenue is recognized when the OEM reports the sale of the software products to an end-user, generally on a quarterly basis. In addition to license royalties, some OEMs pay an annual flat fee and/or support royalties for the right to sell maintenance and technical support to the end-user. We recognize revenue from OEM support royalties and fees ratably over the term of the support agreement.
We offer channel and end-user rebates for our products. Our estimated reserves for channel volume incentive rebates are based on distributors’ and resellers’ actual performance against the terms and conditions of volume incentive rebate programs, which are typically entered into quarterly. Our reserves for end-user rebates are estimated based on the terms and conditions of the promotional program, actual sales during the promotion, the amount of actual redemptions received, historical redemption trends by product and by type of promotional program, and the value of the rebate. We estimate and record reserves for channel and end-user rebates as an offset to revenue or deferred revenue. As of April 1, 2016 and April 3, 2015, we had reserves for rebates of $32 million and $30 million, respectively. For consumer products that include content updates, rebates are recorded as a ratable offset to revenue or deferred revenue over the term of the subscription.
Financial instruments
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 methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash equivalents. We consider all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are carried at amounts that approximate fair value due to the short period of time to maturity.
Short-term investments. Short-term investments consist of investment and marketable equity securities that are classified as available-for-sale and recognized at fair value using Level 1 and Level 2 inputs, which are quoted using market prices, independent pricing vendors, or other sources, to determine the fair value. Unrealized gains and losses, net of tax, are included in accumulated other comprehensive income. We regularly review our investment portfolio to identify and evaluate investments that have indications of impairment. Factors considered in determining whether a loss is other-than-temporary include: the length of time and extent to which the fair 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 market value.
Debt. Our debt includes senior unsecured notes, convertible senior notes, and a revolving credit facility. Our senior unsecured notes and convertible senior notes are recorded at cost based upon par value at issuance less discounts. The discount associated with our senior notes represents the amount by which the face value exceeds the fair value of the debt at the date of issuance. The discount and issuance costs are amortized using the effective interest rate method over the term of the debt as a non-cash charge to interest expense. Borrowings under our senior unsecured revolving credit facility (“credit facility”), if any, are recognized at cost plus accrued interest based upon stated interest rates.
Equity investments. We make equity investments in privately-held companies, which includes the B common shares we received as a portion of the net consideration in the sale of Veritas. These investments are 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 these companies. We assess the recoverability of these investments by reviewing various indicators of impairment. If indicators are present, a fair value measurement is made by performing a discounted cash flow analysis of the investment. If a decline in value is determined to be other-than-temporary, impairment would be recognized and included in other income, net.
Accounts receivable
Accounts receivable are recorded at the invoiced amount and are not interest bearing. We maintain an allowance for doubtful accounts to reserve for potentially uncollectible receivables. We review our accounts receivables by aging category to identify specific customers with known disputes or collectability issues. In addition, we maintain an allowance for all other receivables not included in the specific reserve by applying specific percentages of projected uncollectible receivables to the various aging categories. In determining these percentages, we use judgment based on our historical collection experience and current economic trends. We also offset deferred revenue against accounts receivable when channel inventories are in excess of specified levels and for transactions where collection of a receivable is not considered probable.
Property and equipment
Property, equipment, and leasehold improvements are stated at cost, net of accumulated depreciation. We capitalize costs incurred during the application development stage related to the development of internal use software and enterprise cloud computing services. We expense costs incurred related to the planning and post-implementation phases of development as incurred. Depreciation is provided on a straight-line basis over the estimated useful lives. Estimated useful lives for financial reporting purposes are as follows: buildings, 20 to 30 years; leasehold improvements, the lesser of the life of the improvement or the initial lease term; computer hardware and software, and office furniture and equipment, 3 to 5 years.
The following table summarizes property and equipment, net of accumulated depreciation by categories for the periods presented: |
| | | | | | | |
| | April 1, 2016 | | April 3, 2015 |
| | (Dollars in millions) |
| Land | $ | 73 |
| | $ | 73 |
|
| Computer hardware and software | 987 |
| | 922 |
|
| Office furniture and equipment | 92 |
| | 88 |
|
| Buildings | 426 |
| | 426 |
|
| Leasehold improvements | 310 |
| | 249 |
|
| Construction in progress | 74 |
| | 79 |
|
| Gross property and equipment | 1,962 |
| | 1,837 |
|
| Accumulated depreciation | (1,005 | ) | | (887 | ) |
| Property and equipment, net | $ | 957 |
| | $ | 950 |
|
Depreciation expense was $213 million, $229 million, and $236 million in fiscal 2016, 2015, and 2014, respectively.
Business combinations
We use the acquisition method of accounting under the authoritative guidance on business combinations. Each acquired company’s operating results are included in our Consolidated Financial Statements starting on the date of acquisition. The purchase price is equivalent to the fair value of consideration transferred. Tangible and identifiable intangible assets acquired and liabilities assumed as of the date of acquisition are recorded at their estimated fair values at acquisition date. Goodwill is recognized for the excess of purchase price over the net fair value of assets acquired and liabilities assumed.
Goodwill and intangible assets
Goodwill. Goodwill represents the excess of the purchase price of an acquisition over the net fair value of assets acquired and liabilities assumed. Goodwill is allocated to our reporting units expected to benefit from the business combination based on the relative fair value at the acquisition date. We review goodwill for impairment for each reporting unit on an annual basis during the fourth quarter of our fiscal year or more frequently if facts and circumstances warrant. Under the authoritative guidance we have the option to perform a qualitative assessment to determine whether further impairment testing is necessary. During the annual impairment reviews in fiscal 2015 and 2014, we performed the qualitative assessment and determined there were no indicators of significant risk of goodwill impairment. During the fourth quarter of fiscal 2016, we completed the divestiture of Veritas. See Note 3. As a result, we determined that we should perform a quantitative assessment related to the goodwill of our two remaining reporting units: Customer Security and Enterprise Security. Based on the guidance, we performed the first step of the quantitative assessment and concluded that the fair values of these two reporting units exceeded their respective carrying amounts. Based on this assessment, we concluded that for fiscal 2016, goodwill was not impaired.
Intangible assets. In connection with our acquisitions, we generally recognize assets for customer relationships, developed technology, finite-lived trade names, patents, and indefinite-lived trade names. Finite-lived intangible assets are carried at cost less accumulated amortization. Such amortization is provided on a straight-line basis over the estimated useful lives of the respective assets, generally from 1 to 11 years. Amortization for developed technology is recognized in cost of revenue. Amortization for customer relationships and certain trade names is recognized in operating expenses. Indefinite-lived intangible assets are not subject to amortization but instead tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of indefinite-lived intangible assets is measured by the comparison of the carrying amount of the asset to the discounted future cash flows of the asset is expected to generate. If the carrying amount of the asset exceeds its discounted future cash flows, an impairment loss is recognized for the difference between the asset’s carrying amount and fair value.
Restructuring, separation and transition
Restructuring actions generally include significant actions involving employee-related severance charges and contract termination costs. Employee-related severance charges are largely based upon substantive severance plans, while some charges result from mandated requirements in certain foreign jurisdictions. These charges are reflected in the period when both the actions are probable and the amounts are estimable. Separation and other related costs include advisory, consulting and other costs incurred in connection with the separation of Veritas. Contract termination costs for leased facilities primarily reflect costs that will continue to be incurred under the contract for its remaining term without economic benefit to the Company. These charges are reflected in the period when the facility ceases to be used. Costs of providing transition services to Veritas after January 29, 2016, the date of the sale, are recorded in continuing operations.
Income taxes
The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards in each jurisdiction in which we operate. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
We are required to compute our income taxes in each federal, state, and international jurisdiction in which we operate. This process requires that we estimate the current tax exposure as well as assess temporary differences between the accounting and tax treatment of assets and liabilities, including items such as accruals and allowances not currently deductible for tax purposes. The income tax effects of the differences we identify are classified as current or long-term deferred tax assets and liabilities in our Consolidated Balance Sheets as of April 3, 2015, and as long-term deferred tax assets and liabilities as of April 1, 2016, following the adoption of Accounting Standards Update ("ASU") No. 2015-17, Income Taxes. Our judgments, assumptions, and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws, andreasonably possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax laws or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in our Consolidated Balance Sheets and Consolidated Statements of Operations. We must also assess the likelihood that deferred tax assets will be realized from future taxable income and, based on this assessment, establish a valuation allowance, if required. Our determination of our valuation allowance is based upon a number of assumptions, judgments, and estimates, including forecasted earnings, future taxable income, and the relative proportions of revenue and income before taxes in the various domestic and international jurisdictions in which we operate. To the extent we establish a valuation allowance or change the valuation allowance in a period, we reflect the change with a corresponding increase or decrease to our tax provision in our Consolidated Statements of Operations.
We apply the authoritative guidance on income taxes that prescribes a minimum recognition threshold that a tax position is required to meet before being recognized in the consolidated financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.
This guidance prescribes a two-step process to determine the amount of tax benefit to be recognized. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.
Stock-based compensation
Stock-based compensation expense is measured at the grant date based on the fair value of the award and is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award. No compensation cost is ultimately recognized for awards for which employees do not render the requisite service and are forfeited. We estimate forfeitures based on historical experience. Our stock-based awards principally consist of restricted stock units (“RSUs”). The fair value of each RSU is equal to the market value of Symantec’s common stock on the date of grant. The fair values of RSUs are not discounted by the dividend yield because the Company’s RSUs include dividend-equivalent rights ("DERs"). As of April 1, 2016 and April 3, 2015, our total accrued DERs were $75 million and $20 million, respectively, which are included in other current liabilities and other long-term obligations on our Consolidated Balance Sheets.
Concentrations of credit risk
A significant portion of our revenue and net income is derived from international sales and independent agents and distributors. Fluctuations of the U.S. dollar against foreign currencies, changes in local regulatory or economic conditions, piracy, or nonperformance by independent agents or distributors could adversely affect operating results.
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments, and trade accounts receivable. Our investment policy limits the amount of credit risk exposure to any one issuer and to any one country. We are exposed to credit risks in the event of default by the issuers to the extent of the amount recorded in our Consolidated Balance Sheets. The credit risk in our trade accounts receivable is substantially mitigated by our credit evaluation process, reasonably short collection terms, and the geographical dispersion of sales transactions. As of April 1, 2016, we had one distributor that accounted for 10% of our total accounts receivable. We maintain reserves for potential credit losses and such losses have been within management’s expectations.
Advertising and other promotional costs
Advertising and other promotional costs are charged to operations as incurred and included in operating expenses. These costs totaled $211 million, $326 million, and $436 million for fiscal 2016, 2015, and 2014, respectively.
Contingencies
We evaluate contingent liabilities including threatened or pending litigation in accordance with the authoritative guidance on contingencies. We assess the likelihood of any adverse judgments or outcomes from potential claims or proceedings, as well as potential ranges of probable losses, when the outcomes of the claims or proceedings are probable and reasonably estimable. A determination of the amount of an accrual required, if any, for these contingencies is made after the analysis of each separate matter. Because of uncertainties related to these matters, we base our estimates on the information available at the time of our assessment. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Any revisions in the estimates of potential liabilities could have a material impact on our operating results and financial position.
Sales Commissions
Sales commissions that are incremental and directly related to customer sales contracts in which revenue is deferred are accrued and capitalized upon execution of a non-cancelable customer contract, and subsequently expensed over the term of such contract in proportion to the related future revenue streams. For commission costs where revenue is recognized, the related commission costs are recorded in the period of revenue recognition. As of April 1, 2016 and April 3, 2015, we had total deferred commissions of $74 million and $73 million, respectively, which are included in other current assets and long-term other assets on our Consolidated Balance Sheets.
Recently adopted accounting guidance
In April 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-08, Presentation of Financial Statements and Property, Plant and Equipment, that provides new guidance related to reporting discontinued operations. This new standard raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The standard became effective for the Company in the first quarter of fiscal 2016, and applied to the presentation and disclosure of the sale of Veritas, which closed in January 2016. For additional information about our reporting of discontinued operations, see Note 3.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest, which requires debt issuance costs to be presented as a direct deduction from the carrying amount of the related liability. We adopted the standard in the first quarter of fiscal 2016, and it did not have a material impact on our Consolidated Financial Statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes, which simplifies the presentation of deferred income taxes by requiring that all deferred income tax liabilities and assets be classified as long-term. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The standard was adopted by the Company in the fourth quarter of fiscal 2016 on a prospective basis, and it resulted in balance sheet reclassifications of current deferred income tax liabilities and assets to long-term on April 1, 2016.
Recent accounting guidance not yet adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, that requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and will replace most existing revenue recognition guidance in U.S. GAAP. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which defers the effective date of the new revenue reporting standard by one year. The standard will be effective for the Company for the fiscal year beginning on March 31, 2018. We have not yet selected a transition method nor have we determined the effect of the standard on our Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The update to the standard is effective for the Company for the fiscal year beginning March 31, 2018, with early adoption permitted under limited circumstances. The Company is currently evaluating the effect the standard will have on its Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires lessees to recognize a right-of-use asset and a lease liability for all leases except those with a term of 12 months or less. The liability will be equal to the present value of lease payments. The asset will be based on the liability. The standard is effective for the Company for the fiscal year beginning March 30, 2019. Early adoption is permitted. Adoption of the standard will result in a gross up of our
balance sheet for the right-of-use asset and the lease liability for operating leases. It is not expected that adoption of the standard will have a material impact to our operating results.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments finalize the guidance in the new revenue standard on assessing whether an entity is a principal or an agent in a revenue transaction. The conclusion impacts whether an entity reports revenue on a gross or net basis. The amendments have the same effective date as the new revenue standard, which for the Company is the fiscal year beginning March 31, 2018. The Company is currently evaluating the effect the standard will have on its Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Accounting. The amendments will require companies to recognize the income tax effects of awards in the income statement when the awards vest or are settled. The guidance requires companies to present excess tax benefits as an operating activity and cash paid to a taxing authority to satisfy statutory withholding as a financing activity on the statement of cash flows. The guidance will also allow entities to make an alternative policy election to account for forfeitures as they occur. The guidance is effective for the Company for the fiscal year beginning April 1, 2017. The Company is currently evaluating the effect the standard will have on its Consolidated Financial Statements.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The update provides guidance on accounting for licenses of intellectual property (“IP”) and identifying performance obligations. The amendments clarify how an entity should evaluate its promise when granting a license of IP. They also clarify when a promised good or service is separately identifiable and allow entities to disregard items that are immaterial in the context of the contract. The amendments have the same effective date as the new revenue standard, which for the Company is the fiscal year beginning March 31, 2018. The Company is currently evaluating the effect the standard will have on its Consolidated Financial Statements.
In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The update clarifies certain issues related to transition to the new revenue guidance, as well as, assessing collectability, recognition of noncash consideration and presentation of sales and other similar taxes in revenue transactions. The amendments have the same effective date as the new revenue standard, which for the Company is the fiscal year beginning March 31, 2018. The Company is currently evaluating the effect the standard will have on its Consolidated Financial Statements.
There was no other recently issued authoritative guidance that is expected to have a material impact to our Consolidated Financial Statements through the reporting date.
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
Cash equivalents. Cash equivalents consist primarily of money market funds with original maturities of three months or less at the time of purchase, and the carrying amount is a reasonable estimate of fair value.
Short-term investments. Short-term investments consist of investment and marketable equity securities with original maturities greater than three months. Investment securities are priced using inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from quoted market prices, independent pricing vendors, or
other sources, to determine the fair value of these assets. Marketable equity securities are recorded at fair value using quoted prices in active markets for identical assets.
The following table summarizes our assets measured at fair value on a recurring basis, by level, within the fair value hierarchy: |
| | | | | | | | | | | | | | | | | | | | | | | |
| | April 1, 2016 | | April 3, 2015 |
| | Fair Value | | Cash and Cash Equivalents | | Short-term Investments | | Fair Value | | Cash and Cash Equivalents | | Short-term Investments |
| | (Dollars in millions) |
| Cash | $ | 1,072 |
| | $ | 1,072 |
| | $ | — |
| | $ | 776 |
| | $ | 776 |
| | $ | — |
|
| Non-negotiable certificates of deposit | 1 |
| | — |
| | 1 |
| | 296 |
| | 260 |
| | 36 |
|
| Level 1 | | | | | | | | | | | |
| Money market | 2,905 |
| | 2,905 |
| | — |
| | 1,725 |
| | 1,725 |
| | — |
|
| U.S. government securities | 335 |
| | 310 |
| | 25 |
| | 284 |
| | — |
| | 284 |
|
| Marketable equity securities | 11 |
| | — |
| | 11 |
| | 5 |
| | — |
| | 5 |
|
| | 3,251 |
| | 3,215 |
| | 36 |
| | 2,014 |
| | 1,725 |
| | 289 |
|
| Level 2 | | | | | | | | | | | |
| Corporate bonds | 45 |
| | 43 |
| | 2 |
| | 166 |
| | — |
| | 166 |
|
| U.S. agency securities | 526 |
| | 523 |
| | 3 |
| | 68 |
| | — |
| | 68 |
|
| Commercial paper | 1,121 |
| | 1,121 |
| | — |
| | 333 |
| | 82 |
| | 251 |
|
Negotiable certificates of deposit
| 9 |
| | 9 |
| | — |
| | 184 |
| | — |
| | 184 |
|
| International government securities | — |
| | — |
| | — |
| | 23 |
| | — |
| | 23 |
|
| | 1,701 |
| | 1,696 |
| | 5 |
| | 774 |
| | 82 |
| | 692 |
|
| Total | $ | 6,025 |
| | $ | 5,983 |
| | $ | 42 |
| | $ | 3,860 |
| | $ | 2,843 |
| | $ | 1,017 |
|
There were no transfers between fair value measurement levels during fiscal 2016.
Fair value of debt
As of April 1, 2016 and April 3, 2015, the total fair value of our current and long-term debt was $2.3 billion and $2.2 billion, respectively, based on Level 2 inputs. As of April 1, 2016, the fair value of the equity component of our 2.5% Convertible Notes was $29 million, based on Level 3 inputs.
Note 3. Discontinued Operations
In August 2015, we entered into a definitive agreement to sell the assets of Veritas to Carlyle and amended the terms on January 19, 2016. Based on the amended terms of the definitive agreement, we received net consideration of $6.6 billion in cash excluding transaction costs and 40 million B common shares of Veritas and Veritas assumed certain liabilities in connection with the acquisition. The transaction closed on January 29, 2016. The disposition resulted in a net gain of $3.0 billion, which is presented as part of income from discontinued operations, net of income taxes in the Consolidated Statements of Operations for fiscal 2016. See Note 6 for more information on severance, facilities and separation costs related to our fiscal 2015 plans to separate our security and information management businesses.
The results of Veritas are presented as discontinued operations in our Consolidated Statements of Operations and thus have been excluded from continuing operations and segment results for all reported periods. Furthermore, Veritas' assets and liabilities were removed from our Consolidated Balance Sheet upon consummation of the sale on January 29, 2016, and have been classified as discontinued operations on our Consolidated Balance Sheet as of April 3, 2015. The Company has two remaining reporting segments, Consumer Security and Enterprise Security. See Note 8 for more information on our operating segments.
In connection with the divestiture of Veritas, the Company and Veritas entered into Transition Service Agreements ("TSA") pursuant to which the Company provides Veritas certain limited services including financial support services, information technology services, and access to facilities, and Veritas provides the Company certain limited financial support services. The TSAs commenced with the close of the transaction and expire at various dates through fiscal 2019. During fiscal 2016, the Company recorded income of approximately $8 million for all services provided to Veritas, which is presented as part of other income, net in the Consolidated Statements of Operations.
The Company also has retained various customer relationships and contracts that were reported historically as a part of the Veritas business. Approximately $330 million related to these relationships and contracts have been reported as part of the Company's deferred revenues in the Consolidated Balance Sheets as of April 1, 2016, along with a $131 million asset representing the fair value of the service and maintenance rights the Company has under an agreement with Veritas. These balances will be amortized to discontinued operations through the remaining term of the underlying contracts.
The following table presents the aggregate carrying amounts of the classes of assets and liabilities of discontinued operations: |
| | | |
| | April 3, 2015 |
| | (Dollars in millions) |
| Assets: | |
| Cash and cash equivalents | $ | 31 |
|
| Accounts receivable, net | 293 |
|
| Other current assets | 91 |
|
| Property and equipment, net | 255 |
|
| Intangible assets, net | 103 |
|
| Goodwill | 2,701 |
|
| Equity investments | 5 |
|
| Other long-term assets | 46 |
|
| Total assets classified as discontinued operations | $ | 3,525 |
|
| | |
| Liabilities: | |
| Accounts payable | $ | 44 |
|
| Accrued compensation and benefits | 166 |
|
| Deferred revenue | 682 |
|
| Other current liabilities | 44 |
|
| Long-term deferred revenue | 111 |
|
| Other long-term obligations | 23 |
|
| Total liabilities classified as discontinued operations | $ | 1,070 |
|
The following table presents information regarding certain components of income from discontinued operations, net of income taxes: |
| | | | | | | | | | | |
| | Year Ended |
| | April 1, 2016 | | April 3, 2015 | | March 28, 2014 |
| | (Dollars in millions) |
| Net revenues | $ | 1,968 |
| | $ | 2,552 |
| | $ | 2,493 |
|
| Cost of revenues | (334 | ) | | (426 | ) | | (358 | ) |
| Operating expenses | (1,270 | ) | | (1,131 | ) | | (1,096 | ) |
| Gain on sale of Veritas | 4,060 |
| | — |
| | — |
|
| Other income (expense), net | 3 |
| | (3 | ) | | 10 |
|
| Income from discontinued operations before income taxes | 4,427 |
| | 992 |
| | 1,049 |
|
| Provision for income taxes | 1,118 |
| | 223 |
| | 242 |
|
| Income from discontinued operations, net of income taxes | $ | 3,309 |
| | $ | 769 |
| | $ | 807 |
|
Note 4. Goodwill and Intangible Assets
During fiscal 2016, 2015, and 2014 we completed business acquisitions primarily to enhance our technology portfolio for aggregate cash consideration, net of cash acquired, of $4 million, $19 million, and $17 million, respectively. The results of operations related to these acquisitions have been included in our Consolidated Statements of Operations from the acquisition date. Pro forma results of operations have not been presented because the acquisitions were not material to our results of operations. Goodwill related to the business acquisitions is summarized in the following table.
Goodwill
The changes in the carrying amount of goodwill are as follows: |
| | | | | | | | | | | |
| | Consumer Security | | Enterprise Security | | Total |
| | (Dollars in millions) |
| Balance as of March 28, 2014 | $ | 1,233 |
| | $ | 1,918 |
| | $ | 3,151 |
|
| Acquisitions | — |
| | 11 |
| | 11 |
|
| Translation adjustments | (3 | ) | | (13 | ) | | (16 | ) |
| Balance as of April 3, 2015 | 1,230 |
| | 1,916 |
| | 3,146 |
|
| Translation adjustments | 1 |
| | 1 |
| | 2 |
|
| Balance as of April 1, 2016 | $ | 1,231 |
| | $ | 1,917 |
| | $ | 3,148 |
|
Intangible assets, net
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | April 1, 2016 | | April 3, 2015 |
| | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| | (Dollars in millions) |
| Customer relationships | $ | 406 |
| | $ | (320 | ) | | $ | 86 |
| | $ | 637 |
| | $ | (498 | ) | | $ | 139 |
|
| Developed technology | 144 |
| | (84 | ) | | 60 |
| | 200 |
| | (117 | ) | | 83 |
|
| Finite-lived trade names | 2 |
| | (2 | ) | | — |
| | 21 |
| | (19 | ) | | 2 |
|
| Patents | 21 |
| | (18 | ) | | 3 |
| | 21 |
| | (17 | ) | | 4 |
|
| Total finite-lived intangible assets | 573 |
| | (424 | ) | | 149 |
| | 879 |
| | (651 | ) | | 228 |
|
| Indefinite-lived trade names | 294 |
| | — |
| | 294 |
| | 297 |
| | — |
| | 297 |
|
| Total | $ | 867 |
| | $ | (424 | ) | | $ | 443 |
| | $ | 1,176 |
| | $ | (651 | ) | | $ | 525 |
|
Goodwill and intangible assets that were disposed of as a result of our salethese lawsuits or estimate the range of Veritas were included in assets classified as discontinued operations in our Consolidated Balance Sheets as of April 3, 2015, and accordingly, are excluded from the tables above.
As of April 1, 2016, future amortization expense related to intangible assets that have finite lives is as follows by fiscal year: |
| | | | |
| | | April 1, 2016 |
| | | (Dollars in millions) |
| 2017 | | $ | 68 |
|
| 2018 | | 51 |
|
| 2019 | | 25 |
|
| 2020 | | 5 |
|
| Total | | $ | 149 |
|
Note 5. Debt
The following table summarizes components of our debt: |
| | | | | | | | | | | | | |
| | April 1, 2016 | | April 3, 2015 |
| | Amount | | Effective
Interest Rate | | Amount | | Effective
Interest Rate |
| | (Dollars in millions) |
| 2.75% Senior Notes due September 15, 2015 | $ | — |
| | — | % | | $ | 350 |
| | 2.76 | % |
| 2.75% Senior Notes due June 15, 2017 | 600 |
| | 2.79 | % | | 600 |
| | 2.79 | % |
| 4.20% Senior Notes due September 15, 2020 | 750 |
| | 4.25 | % | | 750 |
| | 4.25 | % |
| 3.95% Senior Notes due June 15, 2022 | 400 |
| | 4.05 | % | | 400 |
| | 4.05 | % |
| 2.50% Convertible Senior Notes due April 1, 2021 | 500 |
| | 3.76 | % | | — |
| | — | % |
| Total principal amount | 2,250 |
| | | | 2,100 |
| | |
| Less: unamortized discount and issuance costs | (43 | ) | | | | (4 | ) | | |
| Total debt | 2,207 |
| | | | 2,096 |
| | |
| Less: current portion | — |
| | | | (350 | ) | | |
| Total long-term portion | $ | 2,207 |
| | | | $ | 1,746 |
| | |
The future maturities of debt by fiscal year are as follows: |
| | | | |
| | | April 1, 2016 |
| | | (Dollars in millions) |
| 2017 | | $ | — |
|
| 2018 | | 600 |
|
| 2019 | | — |
|
| 2020 | | — |
|
| 2021 | | 1,250 |
|
| Thereafter | | 400 |
|
| Total | | $ | 2,250 |
|
Senior Notes
In fiscal 2013, we issued $1.0 billion of Senior Notes consisting of the 3.95% Senior Notes due in 2022 and the 2.75% Senior Notes due in 2017. We received proceeds of $996 million, net of an issuance discount. We also incurred issuance costs of $6 million in fiscal 2013. In fiscal 2011, we issued $750 million of the 4.20% Senior Notes due in 2020.
Our Senior Notes are senior unsecured obligations that rank equally in right of payment with all of our existing and future unsecured, unsubordinated obligations and are redeemable by us at any time, subject to a “make-whole” premium. Interest on our Senior Notes is payable semiannually. Both the discount and issuance costs are being amortized as incremental interest expense over the respective terms of the Senior Notes. The principal balance of our 2.75% Senior Notes due September 15, 2015 matured and was settled by a cash payment of $350 million in the second quarter of fiscal 2016. Contractual interest expense totaled $68 million, $73 million, and $73 million in fiscal years 2016, 2015, and 2014, respectively.
Convertible Senior Notes
On March 4, 2016 (the “Issuance Date”), we issued $500 million of Convertible Senior Notes due in 2021 (the “Notes”). The Notes were issued at par and bear an annual interest rate of 2.50%, payable semiannually in arrears, beginning on October 1, 2016. Debt issuance costs of $6 million were recorded as a reduction to the Notes on the Company’s Consolidated Balance Sheets and are being amortized to interest expense over four years. The fair value of the equity component of the Notes recorded in additional paid-in capital was $29 million.
The Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and common stock at the Company’s option, at any time prior to the maturity date at an initial conversion rate of 59.6341 per $1,000 principal amount of the Notes (which represents an initial conversion price of approximately $16.77 per share). The conversion rate is subject to customary anti-dilution adjustments. The Notes are senior unsecured obligations of the Company and rank equal in right of payment to all senior unsecured indebtedness of the Company. As of April 1, 2016, the conversion price of the Notes remained approximately $16.77.
Holders of the Notes have the right to redeem the Notes for 100% of the principal plus accrued interest on or after the fourth anniversary of the issuance date, or if a fundamental change or an event of default occurs. A fundamental change, as defined in
the indenture governing the Notes, includes a sale of substantially all the Company’s assets, a change of the control of the Company, or a plan for the Company’s liquidation or dissolution. If holders of the Notes convert them in connection with a fundamental change, the Company may be required to provide a make whole premium in the form of an increased conversion rate, subject to a maximum amount, based on the effective date of the fundamental change as set forth in a table contained in the indenture governing the Notes. As long as the holders of the Notes own at least 4% of the Company’s common stock on an as-converted basis, they are entitled to nominate one director to the Company’s board of directors. As of April 1, 2016, the holders’ percentage interest in the Company’s common stock exceeded this threshold.
The Company may redeem all or part of the principal of the Notes, at its option, at a purchase price equal to the principal amount plus accrued interest on or after the fourth anniversary of the Issuance Date, if the closing trading price of the Company’s common stock exceeds 150% of the then-current conversion price for 20 or more trading days in the 30 consecutive trading-day period preceding the Company’s exercise of the redemption right (including the last three such trading days) and provided that the Company has on file with the Securities and Exchange Commission an effective shelf registration statement on Form S-3 for the Company’s common stock. Upon conversion, the Company has the intent and the current ability to pay the holders the cash value of the applicable number of shares of the Company’s common stock, up to the principal amount and accrued and paid interest of the Notes.
Revolving credit facility
In fiscal 2011, we entered into a $1.0 billion senior unsecured revolving credit facility, which was amended in fiscal 2013. The amendment extended the term of the credit facility to June 7, 2017 and revolving loans under the credit facility will bear interest, at our option, either at a rate equal to a) London InterBank Offered Rate plus a margin based on debt ratings, as defined in the credit facility agreement or b) the bank’s base rate plus a margin based on debt ratings, as defined in the credit facility agreement. This revolving credit facility was further amended in March 2016 to amend the definition of EBITDA (earnings before interest, taxes, depreciation and amortization) to account for the sale of Veritas and related expenses and to amend our consolidated leverage ratio under the agreement. 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. As of April 1, 2016, and April 3, 2015, we were in compliance with the required covenants, and no amounts were outstanding.
In May 2016, we replaced our existing $1.0 billion senior unsecured revolving credit facility with a new $2.0 billion credit facility. See Note 13 for more information.
Note 6. Restructuring, Separation, and Transition
Our restructuring, separation, and transition costs and liabilities consist primarily of severance, facilities, separation, transition and other related costs. Severance costs generally include severance payments, outplacement services, health insurance coverage, and legal costs. Facilities costs generally include rent expense and lease termination costs, less estimated sublease income. Separation and other related costs include advisory, consulting and other costs incurred in connection with the separation of our information management business. Transition and other related costs primarily consist of consulting charges associated with the implementation of new enterprise resource planning systems. Restructuring, separation, and transition costs are managed at the corporate level and are not allocated to our reportable segments. See Note 8 for information regarding the reconciliation of total segment operating income to total consolidated operating income.
Fiscal 2014 Plan
We initiated a restructuring plan in the fourth quarter of fiscal 2013 to reduce management and redundant personnel resulting in headcount reductions across the Company. As of April 1, 2016, the related costs for severance and benefits are substantially complete; however, we expect to incur immaterial adjustments to existing reserves in subsequent periods.
Fiscal 2015 Plan
In fiscal 2015, we announced plans to separate our security and information management businesses. In order to separate the businesses, we put a restructuring plan in place to properly align personnel, and have therefore incurred associated severance and facilities costs. We also incurred separation costs in the form of advisory, consulting and disentanglement expenses. These actions were substantially completed in the fourth quarter of fiscal 2016 with the sale of Veritas on January 29, 2016. However, we expect to incur immaterial adjustments to existing reserves in subsequent periods. See Note 3 for more information on the sale of Veritas. As of April 1, 2016, liabilities for excess facility obligations at several locations around the world are expected to be paid throughout the respective lease terms, the longest of which extends through fiscal 2022.
Restructuring, separation, and transition summary
We incurred $78 million in continuing operations transition and other related costs during fiscal 2016. In addition, the following table summarizes changes to our restructuring and separation liabilities, which remain with the Company in continuing operations and are included in accounts payable, other current liabilities, and other long-term obligations in our Consolidated Balance Sheets. A portion of the following restructuring and separation costs is included in income from discontinued operations, net of income taxes. |
| | | | | | | | | | | | | | | | | | | |
| | April 3, 2015 | | Costs, Net of
Adjustments | | Cash Payments | | April 1, 2016 | | Cumulative
Incurred to Date |
| | (Dollars in millions) |
| Fiscal 2014 Plan total | $ | 4 |
| | $ | — |
| | $ | (4 | ) | | $ | — |
| | $ | 238 |
|
| Fiscal 2015 Plan | | | | | | | | | |
| Severance costs | 59 |
| | 34 |
| | (88 | ) | | 5 |
| | 136 |
|
| Separation costs | 17 |
| | 214 |
| | (215 | ) | | 16 |
| | 295 |
|
| Other exit and disposal costs | 6 |
| | 18 |
| | (16 | ) | | 8 |
| | 25 |
|
| Fiscal 2015 Plan total | 82 |
| | 266 |
| | (319 | ) | | 29 |
| | $ | 456 |
|
| Restructuring and separation plans total | $ | 86 |
| | 266 |
| | $ | (323 | ) | | $ | 29 |
| | |
Note 7. Commitments and Contingencies
Lease commitments
We lease certain of our facilities, equipment, and co-locations under operating leases that expire at various dates through fiscal 2026. We currently sublease some space under various operating leases that will expire on various dates through fiscal 2023. Some of our leases contain renewal options, escalation clauses, rent concessions, and leasehold improvement incentives. Rent expense under operating leases was $103 million, $113 million, and $106 million for fiscal 2016, 2015, and 2014, respectively.
The minimum future rentals on non-cancelable operating leases by fiscal year are as follows: |
| | | | |
| | | April 1, 2016 |
| | | (Dollars in millions) |
| 2017 | | $ | 86 |
|
| 2018 | | 66 |
|
| 2019 | | 58 |
|
| 2020 | | 37 |
|
| 2021 | | 32 |
|
| Thereafter | | 25 |
|
| Total minimum future lease payments | | 304 |
|
| Sublease income | | (70 | ) |
| Total minimum future lease payments, net | | $ | 234 |
|
Purchase obligations
We have purchase obligations that are associated with agreements for purchases of goods or services. Management believes that cancellation of these contracts is unlikely and we expect to make future cash payments according to the contract terms.
The following reflects unrecognized purchase obligations by fiscal year: |
| | | | |
| | | April 1, 2016 |
| | | (Dollars in millions) |
| 2017 | | $ | 256 |
|
| 2018 | | 21 |
|
| 2019 | | 50 |
|
| Thereafter | | 2 |
|
| Total purchase obligations | | $ | 329 |
|
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, subsidiaries and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements or representations and warranties made by us. In addition, our bylaws contain indemnification obligations to our directors, officers, employees and agents, and we have entered into indemnification agreements with our directors and certain of our officers to give such directors and officers additional contractual assurances regarding the scope of the indemnification set forth in our bylaws and to provide additional procedural protections. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers. It is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements might not be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements and we have not accrued any liabilities related to such indemnification obligations in our Consolidated Financial Statements.
In connection with the sale of Veritas, we assigned several leases to Veritas Technologies LLC or its related subsidiaries. As a condition to consenting to the assignments, certain lessors required us to agree to indemnify the lessor under the applicable lease with respect to certain matters, including, but not limited to, losses arising out of Veritas Technologies LLC or its related subsidiaries' breach of payment obligations under the terms of the lease. As with our other indemnification obligations discussed above and in general, it is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. As with our other indemnification obligations, such indemnification agreements might not be subject to maximum loss clauses and to date, generally under our real estate obligations, we have not incurred material costs as a result of such obligations under our leases and have not accrued any liabilities related to such indemnification obligations under our Consolidated Financial Statements.
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 on 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
During the first quarter of fiscal 2013, we were advised by the Commercial Litigation Branch of the Department of Justice’s (“DOJ”) Civil Division and the Civil Division of the U.S. Attorney’s Office for the District of Columbia that the government is investigating our compliance with certain provisions of our U.S. General Services Administration (“GSA”) Multiple Award Schedule Contract No.GS-35F-0240T effective January 24, 2007, including provisions relating to pricing, country of origin, accessibility, and the disclosure of commercial sales practices.
As reported on the GSA’s publicly-available database, our total sales under the GSA Schedule contract were approximately $222 million from the period beginning January 2007 and ending September 2012. We have fully cooperated with the government throughout its investigation and in January 2014, representatives of the government indicated that their initial analysis of our actual damages exposure from direct government sales under the GSA schedule was approximately $145 million; since the initial meeting, the government’s analysis of our potential damages exposure relating to direct sales has increased. The government has also indicated they are going to pursue claims for certain sales to California, Florida, and New York California, and Florida as well as sales to the federal government through reseller GSA Schedule contracts, which could significantly increase our potential damages exposure.
Note
8. Segment and Geographic InformationThe Company operates in the following two reporting segments,16. Subsequent EventsRestructuring plan
On August 2, 2018, we announced a restructuring plan under which are the same as our operating segments:
Consumer Security: Our Consumer Security segment focuses on making it simple for customers to be productive and protected at home and at work. Our Norton-branded services provide multi-layer security and identity protection on major desktop and mobile operating systems, to defend against increasingly complex online threats to individuals, families, and small businesses.
Enterprise Security:Our Enterprise Security segment protects organizations so they can securely conduct business while leveraging new platforms and data. Our Enterprise Security segment includes our threat protection products, information protection products, cyber security services, and website security offerings, previously named trust services.
There were no intersegment sales for the periods presented. The historical information presented has been retrospectively adjusted to reflect the sale of Veritas.
The following table summarizes the operating resultswe will initiate targeted reductions of our reporting segments: |
| | | | | | | | | | | |
| | Consumer Security | | Enterprise Security | | Total Segments |
| | (Dollars in millions) |
| Fiscal 2016 | | | | | |
| Net revenues | $ | 1,670 |
| | $ | 1,930 |
| | $ | 3,600 |
|
| Operating income | 924 |
| | 102 |
| | 1,026 |
|
| Fiscal 2015 | | | | | |
| Net revenues | $ | 1,887 |
| | $ | 2,069 |
| | $ | 3,956 |
|
| Operating income | 982 |
| | 293 |
| | 1,275 |
|
| Fiscal 2014 | | | | | |
| Net revenues | $ | 2,063 |
| | $ | 2,135 |
| | $ | 4,198 |
|
| Operating income | 928 |
| | 349 |
| | 1,277 |
|
Our operating segments are based upon the natureglobal workforce of our business and how our business is managed. During fiscal 2016, 2015, and 2014, our Chief Operating Decision Makers, comprised of our Chief Executive Officer and Chief Financial Officer, use operating segment financial informationup to evaluate the Company's performance and to assign resources. Except for goodwill, as disclosed in Note 4, our assets are not discretely identified by segment.
A significant portion of the segments' operating expenses and cost of revenues, to a lesser extent, arise from shared services and infrastructureapproximately 8%. We estimate that we have historically provided towill incur total costs in connection with the segments in order to realize economies of scale and to efficiently use resources. These expenses (collectively "corporate charges") include legal, accounting, real estate, information technology services, treasury, human resources, other corporate infrastructure expenses. Corporate charges were allocated to the segments, and the allocations were determined on a basis that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by the segments. Corporate charges previously allocated to Veritas, but not classified within discontinued operations, were not reallocated to our other segments. These unallocated corporate charges also include a $15 million reduction of revenue during fiscal 2014 related to the GSA investigation. At the beginning of the third quarter of fiscal 2016, as Veritas became operationally separate, operating costs related to Veritas were attributed directly to Veritas which reduced our unallocated corporate charges to zero. These charges are presented below as a component of the reconciliation between the total segment operating income and the Company's income from continuing operations and are classified as unallocated corporate charges. In addition, we do not allocate stock-based compensation expense, amortization of intangible assets and restructuring separation, and transition charges.
The following table provides a reconciliation of the total of the Company's reportable segments’ operating income to the consolidated operating income from continuing operations: |
| | | | | | | | | | | |
| | Year Ended |
| | April 1, 2016 | | April 3, 2015 | | March 28, 2014 |
| | (Dollars in millions) |
| Total segment operating income | $ | 1,026 |
| | $ | 1,275 |
| | $ | 1,277 |
|
| Less reconciling items: | | | | | |
| Unallocated corporate charges | 186 |
| | 704 |
| | 650 |
|
| Stock-based compensation | 161 |
| | 131 |
| | 105 |
|
| Amortization of intangibles | 86 |
| | 122 |
| | 131 |
|
| Restructuring, separation, and transition | 136 |
| | 164 |
| | 247 |
|
| Total consolidated operating income from continuing operations | $ | 457 |
| | $ | 154 |
| | $ | 144 |
|
Product revenue information
The following table summarizes net revenues by significant product categories: |
| | | | | | | | | | | |
| | Year Ended |
| | April 1, 2016 | | April 3, 2015 | | March 28, 2014 |
| | (Dollars in millions) |
| Consumer security | $ | 1,670 |
| | $ | 1,887 |
| | $ | 2,063 |
|
| Threat protection | 1,014 |
| | 1,136 |
| | 1,197 |
|
Others (1) | 916 |
| | 933 |
| | 938 |
|
Total product revenue (2) | $ | 3,600 |
| | $ | 3,956 |
| | $ | 4,198 |
|
| |
(1)
| No other product category was material to the respective totals. |
| |
(2)
| A $15 million reduction of revenue during fiscal 2014 related to a loss contingency is unallocated and excluded from total product revenue. |
Geographical information
The following table represents net revenues amounts recognized for sales in the corresponding countries: |
| | | | | | | | | | | |
| | Year Ended |
| | April 1, 2016 | | April 3, 2015 | | March 28, 2014 |
| | (Dollars in millions) |
| U.S. | $ | 1,897 |
| | $ | 1,960 |
| | $ | 2,049 |
|
Foreign countries (1) | 1,703 |
| | 1,996 |
| | 2,134 |
|
| Total net revenue | $ | 3,600 |
| | $ | 3,956 |
| | $ | 4,183 |
|
| |
(1)
| No individual country represented more than 10% of the respective totals. |
The table below lists our property and equipment, net of accumulated depreciation, by geographic area for the periods presented. We do not identify or allocate our other assets by geographic area: |
| | | | | | | |
| | April 1, 2016 | | April 3, 2015 |
| | (Dollars in millions) |
| U.S. | $ | 809 |
| | $ | 693 |
|
Foreign countries (1) | 148 |
| | 257 |
|
| Total | $ | 957 |
| | $ | 950 |
|
| |
(1)
| No individual country represented more than 10% of the respective totals. |
Significant customers
In fiscal 2016, 2015 and 2014, no customers accounted for more than 10% of our total net revenues.
Note 9. Stockholders' Equity
Dividends
We declared and paid aggregate cash dividends by fiscal year as follows: |
| | | | | | | | | | | |
| | Year Ended
|
| | April 1, 2016 | | April 3, 2015 | | March 28, 2014 |
| | (Dollars in millions, except dividends per share) |
| Dividends per share | $ | 4.60 |
| | $ | 0.60 |
| | $ | 0.60 |
|
| Total amount | $ | 3,020 |
| | $ | 413 |
| | $ | 418 |
|
Fiscal 2016 included a special dividend of $4.00 per share that was declared and paid during the fourth quarter of fiscal 2016 and was recorded as a reduction of retained earnings. Our restricted stock and performance-based stock units have DERs entitling holders to dividend equivalents to be paid in the form of cash upon vesting, for each share of the underlying units.
On May 12, 2016, we declared a cash dividend of $0.075 per share of common stock to be paid on June 22, 2016 to all stockholders of record as of the close of business on June 8, 2016. All shares of common stock issued and outstanding, and unvested restricted stock and performance-based stock, as of the record date will be entitled to the dividend and dividend equivalents, respectively. Any future dividends and dividend equivalents will be subject to the approval of our Board of Directors.
Stock repurchases
Through our stock repurchase programs we have repurchased shares on a quarterly basis since the fourth quarter of fiscal 2004. Under the programs, shares are repurchased on the open market and through accelerated stock repurchase ("ASR") transactions. During the second quarter of fiscal 2016, our Board of Directors authorized a new $1.5 billion stock repurchase program which commenced immediately.
Repurchases on open market transactions
The following table summarizes our stock repurchases on open market transactions for the periods presented and excludes the impact of shares purchased under our ASR agreements (except for the remaining authorization amount): |
| | | | | | | | | | | |
| | Year Ended |
| | April 1, 2016 | | April 3, 2015 | | March 28, 2014 |
| | (In millions, except per share data) |
| Total number of shares repurchased | 17 |
| | 21 |
| | 21 |
|
| Dollar amount of shares repurchased | $ | 368 |
| | $ | 500 |
| | $ | 500 |
|
| Average price paid per share | $ | 21.69 |
| | $ | 23.73 |
| | $ | 23.87 |
|
| Remaining authorization at end of period | $ | 790 |
| | $ | 1,158 |
| | $ | 658 |
|
Accelerated Stock Repurchase agreements
In November 2015, we entered into an ASR agreement with a financial institution to repurchase an aggregate of $500 million of our common stock. During the third quarter of fiscal 2016, we made an upfront payment of $500 million to the financial institution pursuant to the ASR agreement, and received and retired an initial delivery of 19.9 million shares of our common stock. The ASR was completed on January 15, 2016, which, per the terms of the agreement, resulted in the Company receiving an additional 5.0 million shares of our common stock. The total shares received and retired under the terms of the ASR agreement were 24.9 million, with an average price paid per share of $20.08.
In March 2016, we entered into an ASR agreement with financial institutions to repurchase an aggregate of $1.0 billion of our common stock. During the fourth quarter of fiscal 2016, we made an upfront payment of $1.0 billion to the financial institutions pursuant to the ASR agreement, and received and retired an initial delivery of 42.4 million shares of our common stock. The total number of shares ultimately delivered, and therefore the average repurchase price paid per share, is determined at the end of the purchase period. The purchase period for the March 2016 ASR agreement will end in or before the third quarter of fiscal 2017.
The upfront payments for the November 2015 and March 2016 ASR agreements totaled $1.5 billion and are presented under the caption repurchases of common stock in our Consolidated Statements of Cash Flows.
Changes in accumulated other comprehensive income by component
Components of accumulated other comprehensive income, on a net of tax basis, were as follows: |
| | | | | | | | | | | |
| | Foreign Currency Translation Adjustments | | Unrealized Gain On Available-For-Sale Securities | | Total |
| | (Dollars in millions) |
| Balance as of April 3, 2015 | $ | 101 |
| | $ | 3 |
| | $ | 104 |
|
| Sale of Veritas | (81 | ) | | — |
| | (81 | ) |
| Other comprehensive (loss) income before reclassifications | (6 | ) | | 4 |
| | (2 | ) |
Amounts reclassified from accumulated other
comprehensive income | 1 |
| | — |
| | 1 |
|
| Balance as of April 1, 2016 | $ | 15 |
| | $ | 7 |
| | $ | 22 |
|
In fiscal 2016, we reclassified $1 million of realized loss on foreign currency translation adjustments from accumulated other comprehensive income to other income, net in our Consolidated Statements of Operations.
Note 10. Stock-Based Compensation
Stock purchase plans
2008 Employee Stock Purchase Plan
We maintain the 2008 Employee Stock Purchase Plan, as amended (“ESPP”) under which eligible employees may annually contribute up to 10% of their gross compensation, subject to certain limitations, to purchase shares of our common stock at 85% of its fair market value on the purchase date at the end of each purchase period, which is generally six months. As of April 1, 2016, 28 million shares have been issued under this plan and 42 million shares remained available for future issuance.
Stock award plans
2000 Director Equity Incentive Plan
Our stockholders approved the 2000 Director Equity Incentive Plan and subsequent amendments which reserved 200,000 shares of common stock for issuance thereunder. The purpose of this plan is to provide the members of the Board of Directors with an opportunity to receive common stock for all or a portion of the retainer payable to each director for serving as a member. Each director may elect any portion up to 100% of the retainer to be paid in the form of stock. As of April 1, 2016, a total of 137,000 shares have been issued under this plan and 63,000 shares remained available for future issuance.
2004 and 2013 Equity Incentive Plans
Under both the 2004 Equity Incentive Plan ("2004 Plan") and the 2013 Equity Incentive Plan ("2013 Plan") (collectively “the Equity Plans”), the Company has granted incentive and nonqualified stock options, stock appreciation rights, RSUs, restricted stock awards, and performance-based awards to employees, officers, directors, consultants, independent contractors, and advisors to us. These may also be granted to any parent, subsidiary, or affiliate of ours. The purpose of the Equity Plans has been to attract, retain, and motivate eligible persons whose present and potential contributions are important to our success by offering them an opportunity to participate in our future performance through equity awards. RSUs granted prior to November 2014 generally vest over a four-year period, whereas RSUs granted thereafter generally vest over a three-year period.
All RSUs and performance-based awards granted under the Equity Plans have DERs which entitle participants to the same dividend value per share as holders of Company’s common stock. The DERs are to be paid in the form of cash upon vesting for each share of the underlying award, and are subject to the same terms and conditions as the underlying award.
Upon adoption, our stockholders approved and reserved 45 million shares of common stock for issuance under the 2013 Plan. As of April 1, 2016, 20 million shares remained available for future grant. We use RSUs as our primary equity awards and stock option activity is not material to our Consolidated Financial Statements.
Stock-based compensation expense
The following table sets forth the total stock-based compensation expense recognized in our Consolidated Statements of Operations. |
| | | | | | | | | | | |
| | Year Ended |
| | April 1, 2016 | | April 3, 2015 | | March 28, 2014 |
| | (Dollars in millions) |
| Cost of revenue | $ | 10 |
| | $ | 15 |
| | $ | 10 |
|
| Sales and marketing | 53 |
| | 46 |
| | 35 |
|
| Research and development | 56 |
| | 39 |
| | 29 |
|
| General and administrative | 42 |
| | 31 |
| | 31 |
|
| Total stock-based compensation expense from continuing operations | 161 |
| | 131 |
| | 105 |
|
| Tax benefit associated with stock-based compensation expense | (50 | ) | | (37 | ) | | (30 | ) |
| Net stock-based compensation expense from continuing operations | 111 |
| | 94 |
| | 75 |
|
| Net stock-based compensation expense from discontinued operations | 56 |
| | 46 |
| | 36 |
|
| Net stock-based compensation expense | $ | 167 |
| | $ | 140 |
| | $ | 111 |
|
Restricted stock units
|
| | | | | | | | | | | | |
| | Number of
Shares | | Weighted-
Average
Grant Date Fair Value | | Weighted-
Average
Remaining
Years | | Aggregate Intrinsic
Value |
| | (In millions, except per share and years data) |
| Outstanding at April 3, 2015 | 26 |
| | $ | 22.23 |
| | | | |
| Granted | 14 |
| | 23.20 |
| | | | |
| Vested and released | (11 | ) | | 21.73 |
| | | | |
| Forfeited | (12 | ) | | 22.91 |
| | | | |
| Outstanding and unvested at April 1, 2016 | 17 |
| | $ | 22.72 |
| | 1.2 | | $ | 306 |
|
| Expected to vest at April 1, 2016 | 14 |
| | | | 1.1 | | $ | 256 |
|
The weighted-average grant date fair value per share of restricted stock granted during fiscal 2016, 2015, and 2014, including assumed restricted stock was $23.20, $22.66, and $23.90, respectively. The total fair value of restricted stock that vested and was released in fiscal 2016, 2015, and 2014 was $250 million, $133 million, and $147 million, respectively.
As of April 1, 2016, total unrecognized compensation cost adjusted for estimated forfeitures related restricted stock was $213 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.9 years.
Performance-based restricted stock units
During fiscal 2016 we granted performance-based restricted stock units ("PRUs") to certain senior level employees under our 2013 Plan. As of April 1, 2016 there were 2 million PRUs outstanding, with a weighted-average grant date fair value of $27.10 per share. As of April 1, 2016, total unrecognized compensation cost related to the PRUs was approximately $16 million, which is expected to be recognized over the remaining weighted-average period of 1.5 years. During fiscal 2016, 2015 and 2014 the total number of PRUs and performance-contingent stock units ("PCSUs") released was 0.4 million, 1.0 million, and 0.5 million, respectively. No PCSUs were granted during fiscal 2016 and none remained unvested as of April 1, 2016.
Shares reserved
We reserved the following shares of authorized but unissued common stock: |
| | |
| April 1, 2016 |
| (In millions) |
Stock purchase plans | 42 |
|
Stock award plans | 39 |
|
Total | 81 |
|
Note 11. Income Taxes
The components of the provision for income taxes recorded in continuing operations are as follows: |
| | | | | | | | | | | |
| | Year Ended |
| | April 1, 2016 | | April 3, 2015 | | March 28, 2014 |
| | (Dollars in millions) |
| Current: | | | | | |
| Federal | $ | 69 |
| | $ | 4 |
| | $ | (18 | ) |
| State | 13 |
| | (18 | ) | | (10 | ) |
| International | 46 |
| | 40 |
| | 31 |
|
| | 128 |
| | 26 |
| | 3 |
|
| Deferred: | | | | | |
| Federal | 1,060 |
| | (38 | ) | | 5 |
|
| State | 15 |
| | (4 | ) | | 12 |
|
| International | 10 |
| | 8 |
| | (4 | ) |
| | 1,085 |
| | (34 | ) | | 13 |
|
| Provision for income taxes | $ | 1,213 |
| | $ | (8 | ) | | $ | 16 |
|
Pretax income from international operations was $125 million, $41 million, and $102 million for fiscal 2016, 2015, and 2014, respectively.
The difference between our effective income tax and the federal statutory income tax is as follows: |
| | | | | | | | | | | |
| | Year Ended |
| | April 1, 2016 | | April 3, 2015 | | March 28, 2014 |
| | (Dollars in millions) |
| Federal statutory tax | $ | 138 |
| | $ | 35 |
| | $ | 38 |
|
| Foreign earnings not considered indefinitely reinvested, net | 1,065 |
| | (8 | ) | | 2 |
|
| State taxes, net of federal benefit | 9 |
| | (13 | ) | | 1 |
|
| Foreign earnings taxed at less than the federal rate | 12 |
| | 34 |
| | 8 |
|
| Domestic production activities deduction | (5 | ) | | (1 | ) | | — |
|
| Federal research and development credit | (9 | ) | | (8 | ) | | (4 | ) |
| Valuation allowance (decrease) increase | 10 |
| | 1 |
| | (3 | ) |
| Nondeductible separation costs | 1 |
| | 2 |
| | — |
|
| Change in uncertain tax positions | (4 | ) | | (57 | ) | | (19 | ) |
| Other, net | (4 | ) | | 7 |
| | (7 | ) |
| Provision for income taxes | $ | 1,213 |
| | $ | (8 | ) | | $ | 16 |
|
The principal components of deferred tax assets are as follows: |
| | | | | | | |
| | Year Ended |
| | April 1, 2016 | | April 3, 2015 |
| | (Dollars in millions) |
| Deferred tax assets: | | | |
| Tax credit carryforwards | $ | 53 |
| | $ | 31 |
|
| Net operating loss carryforwards of acquired companies | 34 |
| | 57 |
|
| Other accruals and reserves not currently tax deductible | 112 |
| | 173 |
|
| Deferred revenue | 89 |
| | 74 |
|
| Loss on investments not currently tax deductible | 14 |
| | 16 |
|
| State income taxes | 8 |
| | 14 |
|
| Stock-based compensation | 39 |
| | 45 |
|
| Other | 9 |
| | — |
|
| Gross deferred tax assets | 358 |
| | 410 |
|
| Valuation allowance | (50 | ) | | (60 | ) |
| Deferred tax assets, net of valuation allowance | $ | 308 |
| | $ | 350 |
|
| Deferred tax liabilities: | | | |
| Property and equipment | $ | (106 | ) | | $ | (88 | ) |
| Goodwill | (50 | ) | | (54 | ) |
| Intangible assets | (11 | ) | | (24 | ) |
| Unremitted earnings of foreign subsidiaries | (1,327 | ) | | (273 | ) |
| Prepaids and deferred expenses | (17 | ) | | (42 | ) |
| Total deferred tax liabilities | (1,511 | ) | | (481 | ) |
| Net deferred tax assets (liabilities) | $ | (1,203 | ) | | $ | (131 | ) |
The valuation allowance provided against our deferred tax assets as of April 1, 2016 is mainly attributable to net operating loss and tax credit carryforwards of acquired companies, state tax credits, and net operating losses in foreign jurisdictions. The valuation allowance decreased by a net of $10 million in fiscal 2016 due to changes in corresponding deferred tax assets primarily related to state tax credit carryforwards.
As of April 1, 2016, we have U.S. federal net operating losses attributable to various acquired companies of approximately $47$50 million, which, if not used, will expire between fiscal 2018primarily for severance and 2032. These net operating loss carryforwards are subject to an annual limitation under Internal Revenue Code §382, but are expected to be fully realized. Furthermore, we have U.S. state net operating loss and credit carryforwards attributable to various acquired companies of approximately $131 million and $20 million, respectively. If not used, our U.S. state net operating losses will expire between fiscal 2017 and 2033 and the majority of our U.S. state credit carryforwards can be carried forward indefinitely. In addition, we have foreign net operating loss carryforwards attributable to various acquired foreign companies of approximately $48 million net of valuation allowances, the majority of which, under current applicable foreign tax law, can be carried forward indefinitely.
In assessing the ability to realize our deferred tax assets, we considered whether it is more likely than not that some portion or all the deferred tax assets will not be realized. We considered the following: we have historical cumulative book income, as measured by the current and prior two years; we have strong, consistent taxpaying history; we have substantial U.S. federal income tax carryback potential; and we have substantial amounts of scheduled future reversals of taxable temporary differences from our deferred tax liabilities. We have concluded that this positive evidence outweighs the negative evidence and, thus, that the deferred tax assets as of April 1, 2016 are realizable on a “more likely than not” basis.
As of April 1, 2016, no provision has been made for federal or state income taxes on $3.8 billion of cumulative unremitted earnings of certain of our foreign subsidiaries since we plan to indefinitely reinvest these earnings. As of April 1, 2016, the unrecognized deferred tax liability for these earnings was approximately $1.1 billion.
The aggregate changes in the balance of gross unrecognized tax benefits were as follows: |
| | | | | | | | | | | |
| | Year Ended |
| | April 1, 2016 | | April 3, 2015 | | March 28, 2014 |
| | (Dollars in millions) |
| Balance at beginning of year | $ | 193 |
| | $ | 282 |
| | $ | 412 |
|
| Settlements with tax authorities | (25 | ) | | (150 | ) | | (122 | ) |
| Lapse of statute of limitations | (15 | ) | | (13 | ) | | (11 | ) |
| Decrease due to divestiture | (7 | ) | | — |
| | — |
|
| Increase related to prior period tax positions | 4 |
| | 147 |
| | 27 |
|
| Decrease related to prior period tax positions | (7 | ) | | (96 | ) | | (50 | ) |
| Increase related to current year tax positions | 54 |
| | 23 |
| | 26 |
|
| Net increase (decrease) | 4 |
| | (89 | ) | | (130 | ) |
| Balance at end of year | $ | 197 |
| | $ | 193 |
| | $ | 282 |
|
There was a change of $4 million in gross unrecognized tax benefits during the fiscal year as disclosed above. This gross liability does not include offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, interest deductions, and state income taxes.
Of the total unrecognized tax benefits at April 1, 2016, $203 million, if recognized, would favorably affect the Company’s effective tax rate, while a $5 million offsetting impact would affect the cumulative translation adjustments. However, one or more of these unrecognized tax benefits could be subject to a valuation allowance if and when recognized in a future period, which could impact the timing of any related effective tax rate benefit.
At April 1, 2016, before any tax benefits, we had $12 million of accrued interest and penalties on unrecognized taxtermination benefits. Interest included in our provision for income taxes was a benefit of approximately $8 million, offset by accruals of $3 million for the year ended April 1, 2016. If the accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced in the period that such determination is made, and reflected as a reduction of the overall income tax provision.
We file income tax returns in the U.S. on a federal basis and in many U.S. state and foreign jurisdictions. Our most significant tax jurisdictions are the U.S., Ireland, and Singapore. Our tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate. Our fiscal years 2014 through 2016 remain subject to examination by the Internal Revenue Service (“IRS”) for U.S. federal tax purposes. Our fiscal years prior to 2014 have been settled and closed with the IRS. Our 2012 through 2016 fiscal years remain subject to examination by the appropriate governmental agencies for Irish tax purposes, and our 2011 through 2016 fiscal years remain subject to examination by the appropriate governmental agencies for Singapore tax purposes. Other significant jurisdictions include California, Japan, the UK, India and Australia. We are under examination by the California Franchise Tax Board for the Symantec California income taxes for the 2009 through 2013 tax years, the Indian income tax authorities for fiscal years 2004 through 2014, and the Australian income tax authorities for fiscal years 2011 through 2014.
On September 3, 2013, we settled and effectively settled matters with the IRS for the Symantec 2005 through 2008 fiscal years. The result of the settlements, effective settlements, and re-measurements resulted in a reduction in the balance of our gross unrecognized tax benefits in fiscal year 2014 of $122 million.
On March 18, 2015, we settled and effectively settled matters with the IRS for the Symantec 2009 through 2013 fiscal years. The settlement and effective settlement resulted in a benefit to tax expense in fiscal year 2015 of $59 million. Additionally, the Company settled transfer price related matters of $158 million, a portion of which was accounted for against deferred tax liabilities on unremitted foreign earnings. The Company has paid in $155 million to cover the final tax and interest liability on the settlement.
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 the gross unrecognized tax benefits related to these audits could decrease (whether by payment, release, or a combination of both) in the next 12 months by $7 million. Depending on the nature of the settlement or expiration of statutes of limitations, we estimate $6 million could affect our income tax provision and therefore benefit the resulting effective tax rate.
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.
Note 12. Earnings Per Share
Basic and diluted earnings per share are computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share also include the incremental effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include the dilutive effect of shares underlying outstanding stock options, restricted stock, ESPP and Convertible Senior Notes.
The components of earnings per share are as follows: |
| | | | | | | | | | | |
| | Year Ended |
| | April 1, 2016 | | April 3, 2015 | | March 28, 2014 |
| | (In millions, except per share data) |
| Income (loss) from continuing operations | $ | (821 | ) | | $ | 109 |
| | $ | 91 |
|
| Income from discontinued operations, net of tax | 3,309 |
| | 769 |
| | 807 |
|
| Net income | $ | 2,488 |
| | $ | 878 |
| | $ | 898 |
|
| Income (loss) per share - basic: | | | | | |
| Continuing operations | $ | (1.23 | ) | | $ | 0.16 |
| | $ | 0.13 |
|
| Discontinued operations | $ | 4.94 |
| | $ | 1.12 |
| | $ | 1.16 |
|
| Net income per share | $ | 3.71 |
| | $ | 1.27 |
| | $ | 1.29 |
|
| Income (loss) per share - diluted: | | | | | |
| Continuing operations | $ | (1.23 | ) | | $ | 0.16 |
| | $ | 0.13 |
|
| Discontinued operations | $ | 4.94 |
| | $ | 1.10 |
| | $ | 1.15 |
|
| Net income per share | $ | 3.71 |
| | $ | 1.26 |
| | $ | 1.28 |
|
| | | | | | |
| Weighted-average outstanding shares - basic | 670 |
| | 689 |
| | 696 |
|
| Dilutive potential shares from stock-based compensation | — |
| | 7 |
| | 8 |
|
| Weighted-average shares outstanding - diluted | 670 |
| | 696 |
| | 704 |
|
| Anti-dilutive potential shares | 20 |
| | 1 |
| | 5 |
|
Net income per share amounts may not add due to rounding.
Note 13. Subsequent Events
In May 2016, the Board of Directors approved a fiscal 2017 restructuring plan to reduce complexity by means of long-term structural improvements. These actions are expected to be completed in fiscal
2018. We expect2019.Purchase obligations
In September 2018, we entered into a five-year purchase agreement with a service provider for a total contract value of $500 million.
Debt covenant compliance
Subsequent to incur total costs between $230 million and $280 million.
In May 2016,March 30, 2018, we
replaced our existing $1.0 billion senior unsecureddid not meet the requirements in the Senior Term Loan agreementsA-2,A-5, the revolving credit facility
(“Old Credit Facility”)agreement, the Convertible Senior Notes agreements and the agreement for our 5.0% Senior Note due April 15, 2025 to deliver audited financial statements for our fiscal year ended March 30, 2018 and file our annual report on Form10-K for such period with
a new $2.0 billion credit facility (“New Credit Facility”). The New Credit Facility is comprised of a $1.0 billion senior unsecuredthe SEC by the specified deadlines. In addition, we subsequently did not meet the requirements under the Convertible Senior Notes agreements and the agreement for our 5.0% Senior Note due April 15, 2025 to file our quarterly report on Form10-Q for our fiscal quarter ended June 29, 2018 with the SEC by the specified deadlines.On June 22, 2018, we reached agreement with lenders to waive the financial reporting requirements under the Senior Term Loan agreementsA-2,A-5 and the revolving credit facility (“New Revolver”) along withagreement through October 27, 2018. We satisfied these requirements for our fiscal year 2018 by filing this Form10-K for our year ended March 30, 2018.
The filing of this Form10-K also satisfied our SEC reporting requirements for our fiscal year ended March 30, 2018 under the Convertible Senior Notes agreements and the agreement for our 5.0% Senior Note due April 15, 2025. We have not yet met our SEC reporting requirements under these notes for our quarter ended June 30, 2018.
The failure to meet these reporting requirements under the 5.0% Notes and the Convertible Senior Notes does not mature into the right for noteholders to take action until notice is received from noteholders and a $1.0 billion term loan (“Term Loan”). The New Revolver maturesgrace period, as defined in five years, however, the Term Loan is pre-payable andassociated indentures, has no required amortization payments untilpassed. Furthermore, according to the final maturity in three years. UnderConvertible Senior Note agreements, we have the termsoption to remedy an event of default by paying additional interest for up to 360 days after the passage of the New Credit Facility, we must comply with certain financial and non-financial covenants, including a covenant to maintain a specified ratiograce period. As of debt to EBITDA (earnings before interest, taxes, depreciation and amortization), as well as an interest coverage ratio.
On April 28, 2016, Symantec announced that Michael A. Brown would be stepping down as President and Chief Executive Officer ("CEO") of Symantec. Mr. Brown will continue to serve as CEO and on the Board of Directors until a successorthis date, no notice has been appointed. The Board of Directors has begun the search for the Company’s next CEO. To facilitate a continued focus on the Company’s strategic priorities throughout the CEO search and transition, the Board of Directors has created an Office of the President composed of: Ajei S. Gopal, Interim President and Chief Operating Officer; Thomas J. Seifert, Symantec’s Executive Vice President and Chief Financial Officer; and Scott C. Taylor, Symantec’s Executive Vice President, General Counsel and Secretary. The Office of the President is expected to remain in place until a new CEO has joined the Company.received from noteholders.
