e10vq
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended
December 29, 2006
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period
from to
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Commission File Number
000-17781
Symantec Corporation
(Exact name of the registrant as
specified in its charter)
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Delaware
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77-0181864
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. employer
identification no.)
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20330 Stevens Creek Blvd.,
Cupertino, California
(Address of principal
executive offices)
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95014-2132
(Zip
Code)
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Registrants telephone number, including area code:
(408) 517-8000
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
Filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Shares of Symantec common stock, $0.01 par value per share,
outstanding as of January 26, 2007: 924,575,651 shares.
SYMANTEC
CORPORATION
FORM 10-Q
Quarterly
Period Ended December 29, 2006
TABLE OF
CONTENTS
2
PART I.
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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SYMANTEC
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
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December 31,
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March 31,
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2006
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2006
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(Unaudited)
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(In thousands, except par value)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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2,592,003
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$
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2,315,622
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Short-term investments
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385,607
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550,180
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Trade accounts receivable, net
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742,989
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670,937
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Inventories
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41,240
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48,687
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Current deferred income taxes
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154,673
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131,833
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Other current assets
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210,017
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190,673
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Total current assets
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4,126,529
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3,907,932
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Property and equipment, net
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1,038,526
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946,217
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Acquired product rights, net
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992,638
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1,238,511
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Other intangible assets, net
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1,295,445
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1,440,873
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Goodwill
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10,352,430
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10,331,045
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Other long-term assets
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94,148
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48,605
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$
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17,899,716
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$
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17,913,183
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LIABILITIES AND
STOCKHOLDERS EQUITY
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Current liabilities:
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Convertible subordinated notes
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$
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$
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512,800
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Accounts payable
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198,622
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167,135
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Accrued compensation and benefits
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301,142
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277,170
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Current deferred revenue
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2,113,056
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1,915,179
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Other accrued expenses
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186,193
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185,882
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Income taxes payable
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343,148
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419,401
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Total current liabilities
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3,142,161
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3,477,567
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Convertible senior notes
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2,100,000
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Long-term deferred revenue
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349,466
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248,273
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Long-term deferred tax liabilities
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231,240
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493,956
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Other long-term obligations
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22,118
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24,916
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Commitments and contingencies
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Stockholders equity:
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Preferred stock (par value: $0.01,
1,000 shares authorized; none issued and outstanding)
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Common stock (par value: $0.01,
3,000,000 shares authorized; 1,311,155 and
1,210,660 shares issued at December 31, 2006 and
March 31, 2006; 927,504 and 1,040,885 shares
outstanding at December 31, 2006 and March 31, 2006)
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9,275
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|
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10,409
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Capital in excess of par value
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10,511,659
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12,426,690
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Accumulated other comprehensive
income
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188,574
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146,810
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Deferred stock-based compensation
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(43,595
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)
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Retained earnings
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1,345,223
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1,128,157
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Total stockholders equity
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12,054,731
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13,668,471
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$
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17,899,716
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$
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17,913,183
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The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these
financial statements.
3
SYMANTEC
CORPORATION
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Three Months Ended
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Nine Months Ended
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December 31,
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December 31,
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2006
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2005
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2006
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2005
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(Unaudited)
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(In thousands, except per share data)
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Net revenues:
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|
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Content, subscriptions, and
maintenance
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$
|
989,384
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$
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747,371
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$
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2,843,501
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$
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2,033,381
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Licenses
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323,656
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401,655
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990,698
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871,451
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Total net revenues
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|
1,313,040
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|
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1,149,026
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3,834,199
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2,904,832
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Cost of revenues:
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|
|
|
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|
|
|
|
|
|
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Content, subscriptions, and
maintenance
|
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|
218,035
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|
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167,186
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622,078
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439,211
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Licenses
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12,177
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16,256
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40,193
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33,983
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Amortization of acquired product
rights
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84,511
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85,036
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257,460
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225,521
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|
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|
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|
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Total cost of revenues
|
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|
314,723
|
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|
|
268,478
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919,731
|
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|
698,715
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|
|
|
|
|
|
|
|
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|
|
|
|
|
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Gross profit
|
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|
998,317
|
|
|
|
880,548
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|
|
|
2,914,468
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2,206,117
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Operating expenses:
|
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|
|
|
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Sales and marketing
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493,378
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437,183
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1,420,366
|
|
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|
1,055,229
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Research and development
|
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|
219,578
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|
|
|
193,191
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|
|
|
657,746
|
|
|
|
479,605
|
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General and administrative
|
|
|
79,040
|
|
|
|
64,335
|
|
|
|
238,887
|
|
|
|
157,145
|
|
Amortization of other intangible
assets
|
|
|
50,476
|
|
|
|
48,427
|
|
|
|
151,569
|
|
|
|
98,475
|
|
Acquired in-process research and
development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
284,000
|
|
Restructuring
|
|
|
|
|
|
|
15,566
|
|
|
|
19,478
|
|
|
|
20,492
|
|
Patent settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,200
|
|
Integration
|
|
|
|
|
|
|
2,185
|
|
|
|
|
|
|
|
15,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
842,472
|
|
|
|
760,887
|
|
|
|
2,488,046
|
|
|
|
2,112,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
155,845
|
|
|
|
119,661
|
|
|
|
426,422
|
|
|
|
93,632
|
|
Interest and other income, net
|
|
|
24,845
|
|
|
|
22,525
|
|
|
|
103,045
|
|
|
|
85,246
|
|
Interest expense
|
|
|
(6,257
|
)
|
|
|
(6,843
|
)
|
|
|
(20,988
|
)
|
|
|
(14,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
174,433
|
|
|
|
135,343
|
|
|
|
508,479
|
|
|
|
164,532
|
|
Provision for income taxes
|
|
|
60,711
|
|
|
|
44,609
|
|
|
|
176,532
|
|
|
|
126,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
113,722
|
|
|
$
|
90,734
|
|
|
$
|
331,947
|
|
|
$
|
38,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
basic
|
|
$
|
0.12
|
|
|
$
|
0.08
|
|
|
$
|
0.34
|
|
|
$
|
0.04
|
|
Net income per share
diluted
|
|
$
|
0.12
|
|
|
$
|
0.08
|
|
|
$
|
0.33
|
|
|
$
|
0.04
|
|
Shares used to compute net income
per share basic
|
|
|
932,122
|
|
|
|
1,069,123
|
|
|
|
975,900
|
|
|
|
984,192
|
|
Shares used to compute net income
per share diluted
|
|
|
963,309
|
|
|
|
1,096,609
|
|
|
|
1,000,020
|
|
|
|
1,012,956
|
|
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these
financial statements.
4
SYMANTEC
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
331,947
|
|
|
$
|
38,039
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
163,544
|
|
|
|
135,156
|
|
Amortization
|
|
|
418,361
|
|
|
|
304,553
|
|
Stock-based compensation expense
|
|
|
118,746
|
|
|
|
28,503
|
|
Write-off of acquired in-process
research and development
|
|
|
|
|
|
|
284,000
|
|
Deferred income taxes
|
|
|
(89,708
|
)
|
|
|
(180,764
|
)
|
Income tax benefit from stock
options
|
|
|
25,641
|
|
|
|
78,523
|
|
Excess income tax benefit from
stock options
|
|
|
(19,588
|
)
|
|
|
|
|
Gain on sale of property and
equipment
|
|
|
(16,716
|
)
|
|
|
|
|
Other
|
|
|
4,055
|
|
|
|
3,498
|
|
Net change in assets and
liabilities, excluding effects of acquisitions:
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net
|
|
|
(47,455
|
)
|
|
|
(141,823
|
)
|
Inventories
|
|
|
9,484
|
|
|
|
(17,835
|
)
|
Accounts payable
|
|
|
25,072
|
|
|
|
51,415
|
|
Accrued compensation and benefits
|
|
|
12,078
|
|
|
|
6,612
|
|
Deferred revenue
|
|
|
229,409
|
|
|
|
410,981
|
|
Income taxes payable
|
|
|
(82,124
|
)
|
|
|
32,795
|
|
Other operating assets and
liabilities
|
|
|
(29,415
|
)
|
|
|
16,199
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
1,053,331
|
|
|
|
1,049,852
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(303,722
|
)
|
|
|
(202,277
|
)
|
Proceeds from sale of property and
equipment
|
|
|
86,904
|
|
|
|
|
|
Cash acquired in (payments for)
business acquisitions, net
|
|
|
(25,015
|
)
|
|
|
884,988
|
|
Purchases of technology
|
|
|
(13,300
|
)
|
|
|
|
|
Purchases of equity investments
|
|
|
|
|
|
|
(7,367
|
)
|
Purchases of
available-for-sale
securities
|
|
|
(129,566
|
)
|
|
|
(1,714,008
|
)
|
Proceeds from sales of
available-for-sale
securities
|
|
|
295,458
|
|
|
|
4,615,743
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(89,241
|
)
|
|
|
3,577,079
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Issuance of convertible senior notes
|
|
|
2,067,762
|
|
|
|
|
|
Purchase of hedge on convertible
senior notes
|
|
|
(592,490
|
)
|
|
|
|
|
Sale of common stock warrants
|
|
|
326,102
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(2,251,314
|
)
|
|
|
(3,474,207
|
)
|
Net proceeds from issuance of
common stock under employee stock benefit plans
|
|
|
169,256
|
|
|
|
130,064
|
|
Repayment of debt
|
|
|
(520,000
|
)
|
|
|
(491,462
|
)
|
Excess income tax benefit from
stock options
|
|
|
19,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(781,096
|
)
|
|
|
(3,835,605
|
)
|
Effect of exchange rate
fluctuations on cash and cash equivalents
|
|
|
93,387
|
|
|
|
(43,514
|
)
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash
equivalents
|
|
|
276,381
|
|
|
|
747,812
|
|
Beginning cash and cash equivalents
|
|
|
2,315,622
|
|
|
|
1,091,433
|
|
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
$
|
2,592,003
|
|
|
$
|
1,839,245
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash
transactions:
|
|
|
|
|
|
|
|
|
Issuance of common stock and stock
options for business acquisitions
|
|
$
|
|
|
|
$
|
13,196,850
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these
financial statements.
5
SYMANTEC
CORPORATION
(Unaudited)
|
|
Note 1.
|
Basis of
Presentation
|
The condensed consolidated financial statements of Symantec
Corporation as of December 31, 2006 and March 31, 2006
and for the three-month and nine-month periods ended
December 31, 2006 and 2005 are unaudited and have been
prepared in accordance with the instructions for
Form 10-Q
pursuant to the rules and regulations of the Securities and
Exchange Commission, or SEC, and, therefore, do not include all
information and notes normally provided in audited financial
statements. In the opinion of management, the condensed
consolidated financial statements contain all adjustments,
consisting only of normal recurring items, except as otherwise
noted, necessary for the fair presentation of our financial
position and results of operations for the interim periods.
These condensed consolidated financial statements should be read
in conjunction with the Consolidated Financial Statements and
Notes thereto included in our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2006. The results of
operations for the three-month and nine-month periods ended
December 31, 2006 are not necessarily indicative of the
results to be expected for the entire fiscal year. All
significant intercompany accounts and transactions have been
eliminated. Certain previously reported amounts have been
reclassified to conform to the current presentation, primarily
relating to the consolidation of our segments as discussed in
Note 13.
We have a
52/53-week
fiscal accounting year. Accordingly, all references as of and
for the periods ended December 31, 2006, March 31,
2006, and December 31, 2005 reflect amounts as of and for
the periods ended December 29, 2006, March 31, 2006,
and December 30, 2005, respectively. The three-month
periods ended December 31, 2006 and 2005 each comprised
13 weeks of activity. The nine-month periods ended
December 31, 2006 and 2005 each comprised 39 weeks of
activity.
Significant
accounting policies
On April 1, 2006, we adopted a new policy related to
stock-based compensation and on October 1, 2006, we adopted
a new policy related to legal expenses, as discussed more fully
below. Other than these changes, there have been no significant
changes in our significant accounting policies during the nine
months ended December 31, 2006 as compared to the
significant accounting policies described in our Annual Report
on
Form 10-K
for the fiscal year ended March 31, 2006.
Stock-based
compensation
Prior to April 1, 2006, we accounted for stock-based
compensation awards to employees using the intrinsic value
method in accordance with Accounting Principles Board Opinion,
or APB, No. 25, Accounting for Stock Issued to
Employees, and to non-employees using the fair value method
in accordance with Statement of Financial Accounting Standards,
or SFAS, No. 123, Accounting for Stock-Based
Compensation. In addition, we applied applicable provisions
of FASB Interpretation No., or FIN, 44, Accounting for
Certain Transactions Involving Stock Compensation, an
interpretation of APB No. 25.
Effective April 1, 2006, we adopted the provisions of
SFAS No. 123R, Share-Based Payment, which
replaced SFAS No. 123 and superseded APB No. 25
and related interpretations. Under SFAS No. 123R, we
must measure the fair value of all stock-based awards, including
stock options, restricted stock units, and employee stock
purchase plan purchase rights, on the date of grant and amortize
the fair value of the award to compensation expense over the
service period. We elected the modified prospective application
method, under which prior periods are not revised for
comparative purposes. The valuation provisions of
SFAS No. 123R apply to new awards and to awards
outstanding as of the effective date that are subsequently
modified. For stock-based awards granted on or after
April 1, 2006, we recognize stock-based compensation
expense on a straight-line basis over the requisite service
period, which is generally the vesting period. We recognize
estimated compensation expense for stock-based awards that were
outstanding and unvested as of the effective date on a
straight-line basis over the remaining service period under the
pro forma provisions of SFAS No. 123.
6
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The adoption of SFAS No. 123R had a material effect on
our consolidated financial position and results of operations.
See Note 8 for further information regarding stock-based
compensation expense and the assumptions used in estimating that
expense.
Legal
expenses
Prior to October 1, 2006, we recognized a liability for
cases where we are the defendant for estimated external legal
costs to be incurred during the next fiscal quarter. Effective
October 1, 2006, we changed our policy related to legal
costs from one generally accepted method of accounting to
another generally accepted method of accounting. Under our new
policy, we will no longer recognize a liability for external
legal costs related to future periods. Instead, we will expense
such amounts in the period incurred. We believe that this new
policy is preferable in the circumstances because the costs and
administrative burden involved in estimating future legal
expenses outweigh the benefits. Further, we believe that this
new method more accurately aligns the expense with the
accounting period in which it is incurred. We will continue to
accrue amounts related to external legal costs that are incurred
during the quarter and to accrue probable losses in the period
in which the loss is identified. The impact of this change in
accounting method is inconsequential for all prior periods
presented, and, therefore, prior periods have not been revised
to reflect this change.
Recent
accounting pronouncements
In September 2006, the SEC issued Staff Accounting Bulletin, or
SAB, No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year
Financial Statements. SAB No. 108 provides
guidance on how prior year misstatements should be taken into
consideration when quantifying misstatements in current year
financial statements for purposes of determining whether the
current years financial statements are materially
misstated. SAB No. 108 is effective for fiscal years
ending on or after November 15, 2006. Historically, we have
evaluated uncorrected differences utilizing the
rollover approach. The rollover approach quantifies
a misstatement based on the amount of the error originating in
the current year income statement. Thus, this approach ignores
the effects of correcting the portion of the current year
balance sheet misstatement that originated in prior years (i.e.,
it ignores the carryover effects of prior year
misstatements). Although we believe that our assessment of
uncorrected differences in prior periods and the conclusions
reached regarding the qualitative and quantitative effects of
such uncorrected differences were appropriate, we expect that,
due to the analysis required by SAB No. 108, we will
correct certain historical uncorrected differences as a
cumulative effect adjustment to the opening Retained earnings
balance as of April 1, 2006, as allowed by
SAB No. 108. We have not yet completed our analysis of
the impact of SAB No. 108. However, we currently
estimate that the adoption of SAB No. 108 will result
in a net reduction to Retained earnings as of April 1, 2006
of approximately $80 million to $110 million,
excluding the tax effect. We also estimate that the impact to
current period earnings associated with the items underlying the
uncorrected differences is immaterial and will not have a
material impact on our revenue or earnings trends. The
cumulative adjustment which we have identified to date is
primarily attributable to the following:
|
|
|
|
1)
|
Changes in our accounting conventions related to amortization
of deferred revenue and capitalized
inventory: Amortization refers to the process of
recognizing an amount of revenue or cost over a period of time.
We have used different amortization conventions for different
product lines. Upon adoption of SAB No. 108 in the
March 2007 quarter, we will implement amortization conventions
for both deferred revenue and capitalized inventory that are the
same for all product lines.
|
|
|
2)
|
Deferral of revenue on our low dollar population of
transactions: Prior to the December 2006 quarter,
we recorded our low dollar security product transactions by
allocating revenue to all elements in the transaction according
to the allocation defined in the contractual arrangement. Low
dollar transactions are generally those deals with standard
terms and conditions that are below a specified deal value
threshold. Upon implementing new buying programs and a new
enterprise resource planning tool in the December
|
7
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
2006 quarter, we commenced deferring revenue based upon
vendor-specific objective evidence, or VSOE, for the entire
enterprise deal population.
|
We are continuing to evaluate the impact of adopting
SAB No. 108, and the actual reduction to Retained
earnings as of April 1, 2006 could be different from the
amount currently estimated.
In September 2006, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 establishes a framework
for measuring the fair value of assets and liabilities. This
framework is intended to provide increased consistency in how
fair value determinations are made under various existing
accounting standards which permit, or in some cases require,
estimates of fair market value. SFAS No. 157 is
effective for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. Earlier
application is encouraged, provided that the reporting entity
has not yet issued financial statements for that fiscal year,
including any financial statements for an interim period within
that fiscal year. We are currently in the process of evaluating
the impact of SFAS No. 157 on our financial position
and results of operations.
In July 2006, the FASB issued FIN 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109. FIN 48 clarifies the accounting and
reporting for uncertainties in income tax law. FIN 48
prescribes a comprehensive model for the financial statement
recognition, measurement, presentation, and disclosure of
uncertain tax positions taken or expected to be taken in income
tax returns. FIN 48 is effective for fiscal years beginning
after December 15, 2006. We are currently in the process of
evaluating the impact of FIN 48 on our financial position
and results of operations.
In June 2006, the FASB ratified Emerging Issues Task Force
Issue, or EITF,
No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation). EITF
No. 06-3
requires that, for interim and annual reporting periods
beginning after December 15, 2006, we disclose our policy
related to the presentation of sales taxes and similar
assessments related to our revenue transactions. Early adoption
is permitted. Symantec presents revenue net of sales taxes and
any similar assessments. EITF
No. 06-3
had no effect on our financial position and results of
operations.
In addition, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments, in
February 2006 and FASB Staff Position
FAS 143-1,
Accounting for Electronic Equipment Waste Obligations, in
June 2005. The potential effects of these pronouncements on our
financial position and results of operations is discussed in
Summary of Significant Accounting Policies in our Annual Report
on
Form 10-K
for the fiscal year ended March 31, 2006.
8
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 2.
|
Balance
Sheet Information
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Trade accounts receivable,
net:
|
|
|
|
|
|
|
|
|
Receivables
|
|
$
|
752,198
|
|
|
$
|
679,731
|
|
Less: allowance for doubtful
accounts
|
|
|
(9,209
|
)
|
|
|
(8,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
742,989
|
|
|
$
|
670,937
|
|
|
|
|
|
|
|
|
|
|
Property and equipment,
net:
|
|
|
|
|
|
|
|
|
Computer hardware and software
|
|
$
|
767,621
|
|
|
$
|
654,946
|
|
Office furniture and equipment
|
|
|
160,816
|
|
|
|
149,591
|
|
Buildings
|
|
|
528,535
|
|
|
|
434,548
|
|
Leasehold improvements
|
|
|
237,494
|
|
|
|
190,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,694,466
|
|
|
|
1,429,470
|
|
Less: accumulated depreciation and
amortization
|
|
|
(777,192
|
)
|
|
|
(612,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
917,274
|
|
|
|
817,398
|
|
Land
|
|
|
121,252
|
|
|
|
128,819
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,038,526
|
|
|
$
|
946,217
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3.
|
Comprehensive
Income
|
The components of comprehensive income, net of tax, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net income
|
|
$
|
113,722
|
|
|
$
|
90,734
|
|
|
$
|
331,947
|
|
|
$
|
38,039
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss)
on
available-for-sale
securities, net of tax
|
|
|
196
|
|
|
|
(22
|
)
|
|
|
1,808
|
|
|
|
(4,589
|
)
|
Change in cumulative translation
adjustment, net of tax
|
|
|
11,397
|
|
|
|
(6,124
|
)
|
|
|
39,956
|
|
|
|
(33,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
(loss)
|
|
|
11,593
|
|
|
|
(6,146
|
)
|
|
|
41,764
|
|
|
|
(37,719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
125,315
|
|
|
$
|
84,588
|
|
|
$
|
373,711
|
|
|
$
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income as of December 31,
2006 and 2005 consists primarily of foreign currency translation
adjustments, net of taxes. Unrealized gains and losses on
available-for-sale
investments, net of taxes, were immaterial for all periods
presented.
|
|
Note 4.
|
Business
Combinations
|
On December 1, 2006, we completed our acquisition of
Company-i Limited, a UK-based professional services firm that
specializes in addressing key challenges associated with
operating and managing a data center in the financial services
industry, for $26 million in cash, including an immaterial
amount for acquisition related expenses. The aggregate purchase
price was allocated as follows, based on the currency exchange
rate on the date of acquisition: goodwill, $22 million;
other intangible assets, $6 million; net deferred tax
liabilities, $2 million; and an immaterial amount to net
tangible assets. This allocation is preliminary pending the
finalization of various estimates
9
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and the analysis of income taxes. In addition, the purchase
price may be increased by up to $11 million in cash if
Company-i meets certain billings targets by September 30,
2008. Payment of the additional consideration may be accelerated
if certain billings targets are met by March 31, 2007 or
September 30, 2007. Any increase in the purchase
consideration would result in a corresponding increase in
goodwill. Goodwill resulted primarily from our expectation of
synergies from the integration of Company-is service
offerings with our service offerings. The amount allocated to
Other intangible assets is being amortized to operating expenses
in the Condensed Consolidated Statements of Income over its
estimated useful life of eight years. The results of operations
of Company-i have been included in our results of operations
since its acquisition date. The financial results of this
acquisition are considered insignificant for purposes of pro
forma financial disclosures.
|
|
Note 5.
|
Goodwill,
Acquired Product Rights, and Other Intangible Assets
|
Goodwill
Goodwill by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security and
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
Data
|
|
|
Data Center
|
|
|
|
|
|
Total
|
|
|
|
Products
|
|
|
Management
|
|
|
Management
|
|
|
Services
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2006
|
|
$
|
102,810
|
|
|
$
|
4,597,889
|
|
|
$
|
5,396,985
|
|
|
$
|
233,361
|
|
|
$
|
10,331,045
|
|
Goodwill acquired through business
combination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,820
|
|
|
|
21,820
|
|
Goodwill adjustments
|
|
|
|
|
|
|
(4,224
|
)
|
|
|
2,822
|
|
|
|
75
|
|
|
|
(1,327
|
)
|
Effect of exchange rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
892
|
|
|
|
892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2006
|
|
$
|
102,810
|
|
|
$
|
4,593,665
|
|
|
$
|
5,399,807
|
|
|
$
|
256,148
|
|
|
$
|
10,352,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended December 31, 2006, we adjusted
the goodwill from certain acquisitions for individually
immaterial amounts primarily related to purchase consideration
adjustments for cash received and deferred taxes based on
post-closing reviews.
Goodwill is tested for impairment on an annual basis during the
March quarter, or earlier if indicators of impairment exist.
During the June 2006 quarter, we reclassified our operating
segments and the related goodwill as described in Note 13,
and determined that there were no indicators of impairment of
goodwill. In addition, we review various factors including our
operating results to determine if any indicators of impairment
exist. Based on our review at December 31, 2006, we
determined there were no indicators of impairment. We will also
continue to test for impairment during the March quarter of each
year, or earlier if indicators of impairment exist.
Acquired
product rights, net
Acquired product rights, net, subject to amortization are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Developed technology
|
|
$
|
1,607,566
|
|
|
$
|
(671,352
|
)
|
|
$
|
936,214
|
|
Patents
|
|
|
80,301
|
|
|
|
(23,877
|
)
|
|
|
56,424
|
|
Backlog and other
|
|
|
60,661
|
|
|
|
(60,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,748,528
|
|
|
$
|
(755,890
|
)
|
|
$
|
992,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Developed technology
|
|
$
|
1,597,567
|
|
|
$
|
(420,887
|
)
|
|
$
|
1,176,680
|
|
Patents
|
|
|
78,713
|
|
|
|
(18,416
|
)
|
|
|
60,297
|
|
Backlog and other
|
|
|
60,661
|
|
|
|
(59,127
|
)
|
|
|
1,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,736,941
|
|
|
$
|
(498,430
|
)
|
|
$
|
1,238,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for acquired product rights was
$85 million for each of the three-month periods ended
December 31, 2006 and 2005. Amortization expense for
acquired product rights was $257 million and
$226 million for the nine-month periods ended
December 31, 2006 and 2005, respectively. Amortization of
acquired product rights is included in Cost of revenues in the
Condensed Consolidated Statements of Income. Amortization
expense for acquired product rights, based upon our existing
acquired product rights and their current useful lives as of
December 31, 2006, is estimated to be as follows:
|
|
|
|
|
Last quarter of fiscal 2007
|
|
$
|
85 million
|
|
2008
|
|
$
|
338 million
|
|
2009
|
|
$
|
331 million
|
|
2010
|
|
$
|
179 million
|
|
2011
|
|
$
|
43 million
|
|
2012
|
|
$
|
17 million
|
|
Other
intangible assets, net
Other intangible assets, net subject to amortization are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Customer base
|
|
$
|
1,500,123
|
|
|
$
|
(288,240
|
)
|
|
$
|
1,211,883
|
|
Trade name
|
|
|
107,202
|
|
|
|
(24,886
|
)
|
|
|
82,316
|
|
Marketing-related assets
|
|
|
2,100
|
|
|
|
(2,100
|
)
|
|
|
|
|
Partnership agreements
|
|
|
2,300
|
|
|
|
(1,054
|
)
|
|
|
1,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,611,725
|
|
|
$
|
(316,280
|
)
|
|
$
|
1,295,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Customer base
|
|
$
|
1,493,982
|
|
|
$
|
(147,168
|
)
|
|
$
|
1,346,814
|
|
Trade name
|
|
|
107,202
|
|
|
|
(15,426
|
)
|
|
|
91,776
|
|
Marketing-related assets
|
|
|
2,100
|
|
|
|
(1,925
|
)
|
|
|
175
|
|
Partnership agreements
|
|
|
2,300
|
|
|
|
(192
|
)
|
|
|
2,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,605,584
|
|
|
$
|
(164,711
|
)
|
|
$
|
1,440,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization expense for other intangible assets was
$50 million and $48 million for the three-month
periods ended December 31, 2006 and 2005, respectively.
Amortization expense for other intangible assets was
$152 million and $98 million for the nine-month
periods ended December 31, 2006 and 2005, respectively.
Amortization of other intangible assets is included in Operating
expenses in the Condensed Consolidated Statements of Income.
Amortization expense for other intangible assets, based upon our
existing other intangible assets and their current useful lives
as of December 31, 2006, is estimated to be as follows:
|
|
|
|
|
Last quarter of fiscal 2007
|
|
$
|
50 million
|
|
2008
|
|
$
|
199 million
|
|
2009
|
|
$
|
198 million
|
|
2010
|
|
$
|
196 million
|
|
2011
|
|
$
|
196 million
|
|
2012
|
|
$
|
194 million
|
|
Thereafter
|
|
$
|
262 million
|
|
Convertible
senior notes
In June 2006, we issued $1.1 billion principal amount of
0.75% Convertible Senior Notes due June 15, 2011, or
the 0.75% Notes, and $1.0 billion principal amount of
1.00% Convertible Senior Notes due June 15, 2013, or
the 1.00% Notes, to initial purchasers in a private
offering for resale to qualified institutional buyers pursuant
to SEC Rule 144A. We refer to the 0.75% Notes and the
1.00% Notes collectively as the Senior Notes. We received
proceeds of $2.1 billion from the Senior Notes and incurred
net transaction costs of approximately $32 million, which
were allocated proportionately to the 0.75% Notes and the
1.00% Notes. The transaction costs were primarily recorded
in Other long-term assets and are being amortized to interest
expense using the effective interest method over five years for
the 0.75% Notes and seven years for the 1.00% Notes.
The 0.75% Notes and 1.00% Notes were each issued at
par and bear interest at 0.75% and 1.00% per annum,
respectively. Interest is payable semiannually in arrears on
June 15 and December 15, beginning December 15, 2006.
Each $1,000 of principal of the Senior Notes will initially be
convertible into 52.2951 shares of Symantec common stock,
which is the equivalent of $19.12 per share, subject to
adjustment upon the occurrence of specified events set forth
under the terms of the Senior Notes. Upon conversion, we would
pay the holder the cash value of the applicable number of shares
of Symantec common stock, up to the principal amount of the
note. Amounts in excess of the principal amount, if any, may be
paid in cash or in stock at our option. Holders who convert
their Senior Notes in connection with a change in control of
Symantec may be entitled to a make whole premium in
the form of an increase in the conversion rate. In addition,
upon a change in control, the holders of the Senior Notes may
require us to repurchase for cash all or any portion of their
Senior Notes for 100% of the principal amount. As of
December 31, 2006, none of the conditions allowing holders
of the Senior Notes to convert had been met.
Under the terms of the Senior Notes, we are required to use
reasonable efforts to file a shelf registration statement
regarding the Senior Notes with the SEC and cause the shelf
registration statement to be declared effective within
180 days of the closing of the offering of the Senior
Notes. In addition, we must maintain the effectiveness of the
shelf registration statement for a period of two years after the
closing of the offering of the Senior Notes. If we fail to meet
these terms, we will be required to pay additional interest on
the Senior Notes in the amount of 0.25% per annum. We have
filed the shelf registration statement with the SEC and it
became effective on December 11, 2006.
Concurrently with the issuance of the Senior Notes, we entered
into note hedge transactions with affiliates of certain of the
initial purchasers whereby we have the option to purchase up to
110 million shares of our common stock at a price of
$19.12 per share. The options as to 58 million shares
expire on June 15, 2011 and the options as to
52 million shares expire on June 15, 2013. The options
must be settled in net shares. The cost of the note hedge
12
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
transactions to us was approximately $592 million. In
addition, we sold warrants to affiliates of certain of the
initial purchasers whereby they have the option to purchase up
to 110 million shares of our common stock at a price of
$27.3175 per share. The warrants expire on various dates from
July 2011 through August 2013 and must be settled in net shares.
We received approximately $326 million in cash proceeds
from the sale of these warrants.
The cost incurred in connection with the note hedge
transactions, net of the related tax benefit and the proceeds
from the sale of the warrants, is included as a net reduction in
Capital in excess of par value in the accompanying Condensed
Consolidated Balance Sheet as of December 31, 2006, in
accordance with the guidance in Emerging Issues Task Force
Issue, or EITF,
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock.
In accordance with SFAS No. 128, Earnings per
Share, the Senior Notes will have no impact on diluted
earnings per share, or EPS, until the price of our common stock
exceeds the conversion price of $19.12 per share because
the principal amount of the Senior Notes will be settled in cash
upon conversion. Prior to conversion we will include the effect
of the additional shares that may be issued if our common stock
price exceeds $19.12 per share using the treasury stock
method. As a result, for the first $1.00 by which the price of
our common stock exceeds $19.12 per share there would be
dilution of approximately 5.4 million shares. As the share
price continues to increase, additional dilution would occur at
a declining rate such that a price of $27.3175 per share
would yield cumulative dilution of approximately
32.9 million shares. If our common stock exceeds
$27.3175 per share we will also include the effect of the
additional potential shares that may be issued related to the
warrants using the treasury stock method. The Senior Notes along
with the warrants have a combined dilutive effect such that for
the first $1.00 by which the price exceeds $27.3175 per
share there would be cumulative dilution of approximately
39.5 million shares prior to conversion. As the share price
continues to increase, additional dilution would occur but at a
declining rate.
Prior to conversion, the note hedge transactions are not
considered for purposes of the EPS calculation as their effect
would be anti-dilutive. Upon conversion, the note hedge will
serve to neutralize the dilutive effect of the Senior Notes when
the stock price is above $19.12 per share. For example, if
upon conversion the price of our common stock was
$28.3175 per share, the cumulative effect of approximately
39.5 million shares in the example above would be reduced
to approximately 3.9 million shares.
The preceding calculations assume that the average price of our
common stock exceeds the respective conversion prices during the
period for which EPS is calculated and exclude any potential
adjustments to the conversion ratio provided under the terms of
the Senior Notes. See Note 10 for information regarding the
impact on EPS of the Senior Notes and warrants in the current
periods.
Convertible
subordinated notes
In connection with the acquisition of Veritas Software
Corporation on July 2, 2005, we assumed the Veritas
0.25% convertible subordinated notes, or the
0.25% Notes. On August 1, 2006, at the option of
certain of the holders, we repurchased $510 million of the
0.25% Notes at a price equal to the principal amount, plus
accrued and unpaid interest. On August 28, 2006, at our
election, we repurchased the remaining $10 million of the
0.25% Notes at a price equal to the principal amount plus
accrued and unpaid interest.
Line
of credit
In July 2006, we entered into a five-year $1 billion senior
unsecured revolving credit facility that expires in July 2011.
Borrowings under the facility will bear interest, at our option,
at either a rate equal to the banks base rate or a rate
equal to LIBOR plus a margin based on our leverage ratio, as
defined in the credit facility agreement. In connection with the
credit facility, we must maintain certain covenants, including a
specified ratio of debt to EBITDA (earnings before interest,
taxes, depreciation, and amortization), as well as various other
non-financial covenants. At December 31, 2006, we were in
compliance with all covenants. We have made no borrowings under
the credit facility through December 31, 2006.
13
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 7.
|
Stock
Transactions
|
Stock
repurchases
We have operated stock repurchase programs since 2001. On
January 31, 2006, we announced that the Board, through one
of its committees, authorized the repurchase of $1 billion
of Symantec common stock, without a scheduled expiration date.
At the beginning of fiscal 2007, $846 million of this
authorization remained available for future repurchases. In
addition to the January authorization, on June 5, 2006, the
Board of Directors authorized the repurchase of
$1.5 billion of Symantec common stock, which was announced
on June 12, 2006 in connection with the announcement of our
offering of the Senior Notes.
During the nine-month period ended December 31, 2006, we
repurchased 129 million shares of our common stock at
prices ranging from $15.61 to $21.23 per share for an
aggregate amount of $2.3 billion. During the nine-month
period ended December 31, 2005, we repurchased
165 million shares at prices ranging from $17.34 to
$23.85 per share for an aggregate amount of
$3.5 billion. As of December 31, 2006, an aggregate of
$95 million remained authorized for future repurchases
under our authorized stock repurchase programs. In January 2007,
we repurchased 4 million shares at prices ranging from
$21.41 to $21.66 for a total of $95 million and completed
the repurchase program.
On January 24, 2007, we announced that the Board authorized
the repurchase of $1 billion of Symantec common stock,
without a scheduled expiration date.
|
|
Note 8.
|
Stock-Based
Compensation
|
Effective April 1, 2006, we adopted the provisions of
SFAS No. 123R. See Note 1 for a description of
our adoption of SFAS No. 123R. We currently have in
effect certain stock purchase plans, stock award plans, and
equity incentive plans, as described in detail in Note 11
of Notes to Consolidated Financial Statements in our Annual
Report on
Form 10-K
for the fiscal year ended March 31, 2006. There have been
no material changes to any such plans, except with regard to our
2004 Equity Incentive Plan, or 2004 Plan, which was amended and
restated by our stockholders on September 13, 2006, as
described below.
2004
Equity Incentive Plan
Under the 2004 Plan, our Board of Directors, or a committee of
the Board of Directors, may grant incentive and nonqualified
stock options, stock appreciation rights, restricted stock units
(RSUs), or restricted stock awards to employees, officers,
directors, consultants, independent contractors, and advisors to
us, or to any parent, subsidiary, or affiliate of ours. The
purpose of the 2004 Plan is 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 of
stock options and stock bonuses. Under the terms of the 2004
Plan, the exercise price of stock options may not be less than
100% of the fair market value on the date of grant. Options
generally vest over a four-year period. Options granted prior to
October 2005 generally have a maximum term of ten years and
options granted thereafter generally have a maximum term of
seven years.
We have reserved 71.4 million shares for issuance under the
2004 Plan. These shares include 18.0 million shares
originally reserved for issuance under the 2004 Plan upon its
adoption by our stockholders in September 2004,
13.4 million shares that were transferred to the 2004 Plan
from the 1996 Equity Incentive Plan, or 1996 Plan, and
40.0 million shares that were approved for issuance on the
amendment and restatement of the 2004 Plan at our 2006 annual
meeting of stockholders. In addition to the shares currently
reserved under the 2004 Plan, any shares reacquired by us from
options outstanding under the 1996 Plan upon their expiration
will also be added to the 2004 Plan reserve. As of
December 31, 2006, 52.1 million shares remain
available for future grant under the 2004 Plan.
At our 2006 annual meeting of stockholders, our stockholders
approved the amendment and restatement of the 2004 Plan, which
included the following key changes: 1) an increase of
40.0 million in the number of shares reserved for issuance
under the 2004 Plan; 2) modification of the share pool
available under the 2004 Plan to reflect a ratio-based pool,
where the grant of each full-value award, such as a share of
restricted stock or an RSU decreases
14
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the pool by two shares; and 3) a change in the form of
equity grants to our non-employee directors from stock options
to a fixed dollar amount of RSUs.
Acceleration
of stock option vesting
On March 30, 2006, we accelerated the vesting of certain
stock options with exercise prices equal to or greater than
$27.00 per share that were outstanding on that date. We did
not accelerate the vesting of any stock options held by our
executive officers or directors. The vesting of options to
purchase approximately 6.7 million shares of common stock,
or approximately 14% of our outstanding unvested options, was
accelerated. The weighted average exercise price of the stock
options for which vesting was accelerated was $28.73. We
accelerated the vesting of the options to reduce future
stock-based compensation expense that we would otherwise be
required to recognize in our results of operations after
adoption of SFAS No. 123R. Because of system
constraints, it is not practicable for us to estimate the amount
by which the acceleration of vesting will reduce our future
stock-based compensation expense. The acceleration of the
vesting of these options did not result in a charge to expense
in fiscal 2006.
Valuation
of stock-based awards
The fair value of each stock option granted under our equity
incentive plans is estimated on the date of grant using the
Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Expected life
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
3 years
|
|
Expected volatility
|
|
|
0.33
|
|
|
|
0.43
|
|
|
|
0.34
|
|
|
|
0.45
|
|
Risk free interest rate
|
|
|
4.71
|
%
|
|
|
4.29
|
%
|
|
|
4.88
|
%
|
|
|
3.51
|
%
|
The expected life of options is based on an analysis of our
historical experience of employee exercise and post-vesting
termination behavior considered in relation to the contractual
life of the option. Expected volatility is based on the average
of the historical volatility for the 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 constant maturity rates for the period equal
to the expected life. We do not currently pay cash dividends on
our common stock and do not anticipate doing so in the
foreseeable future. Accordingly, our expected dividend yield is
zero. The fair value of each RSU is equal to the market value of
Symantecs common stock on the date of grant. The fair
value of each ESPP purchase right is equal to the 15% discount
on shares purchased. We estimate forfeitures of options, RSUs,
and ESPP purchase rights at the time of grant based on
historical experience and record compensation expense only for
those awards that are expected to vest.
15
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock-based
compensation expense
Stock-based compensation is classified in the Condensed
Consolidated Statements of Income in the same expense line items
as cash compensation. The following table sets forth the total
stock-based compensation expense recognized in our Condensed
Consolidated Statements of Income for the three- and nine-month
periods ended December 31, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
Content, subscriptions, and maintenance
|
|
$
|
2,878
|
|
|
$
|
|
|
|
$
|
9,639
|
|
|
$
|
|
|
Cost of revenues
Licenses
|
|
|
941
|
|
|
|
|
|
|
|
3,344
|
|
|
|
|
|
Sales and marketing
|
|
|
12,520
|
|
|
|
4,089
|
|
|
|
43,770
|
|
|
|
9,352
|
|
Research and development
|
|
|
13,803
|
|
|
|
5,658
|
|
|
|
44,807
|
|
|
|
13,526
|
|
General and administrative
|
|
|
5,975
|
|
|
|
2,582
|
|
|
|
17,186
|
|
|
|
5,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
|
36,117
|
|
|
|
12,329
|
|
|
|
118,746
|
|
|
|
28,503
|
|
Tax benefit associated with
stock-based compensation expense
|
|
|
(9,772
|
)
|
|
|
(3,848
|
)
|
|
|
(27,652
|
)
|
|
|
(8,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect of stock-based
compensation expense on net income
|
|
$
|
26,345
|
|
|
$
|
8,481
|
|
|
$
|
91,094
|
|
|
$
|
20,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of adopting SFAS No. 123R, Net income per
share basic and Net income per share
diluted are each $0.02 lower for the three months ended
December 31, 2006 and are $0.09 and $0.08 lower,
respectively, for the nine months ended December 31, 2006
than if we had continued to account for stock-based compensation
in accordance with APB No. 25.
As of December 31, 2006, total unrecognized compensation
cost related to unvested stock options and RSUs was
$199 million and $31 million, respectively, which is
expected to be recognized over the remaining weighted average
vesting periods of 2.8 years for stock options and
2.9 years for RSUs.
16
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Prior to the adoption of SFAS No. 123R, we provided
the pro forma information regarding net income and net income
per share required by SFAS No. 123. This information
was required to be determined as if we had accounted for our
employee stock options, including shares issued under our ESPP,
granted subsequent to March 31, 1995 under the fair value
method of SFAS No. 123. We generally did not recognize
stock-based compensation expense in our Condensed Consolidated
Statements of Income for option grants to our employees for the
periods prior to our adoption of SFAS No. 123R because
the exercise price of options granted was equal to the fair
market value of the underlying common stock on the date of
grant. Prior to April 1, 2006, stock-based compensation
expense resulted primarily from stock options and RSUs assumed
in acquisitions and restricted stock granted to executives. The
following table illustrates the effect on net income and net
income per share as if we had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee
compensation using the Black-Scholes option-pricing model for
the three- and nine-month periods ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net income, as reported
|
|
$
|
90,734
|
|
|
$
|
38,039
|
|
Add: Amortization of deferred
stock-based compensation included in reported net loss, net of
tax
|
|
|
8,481
|
|
|
|
20,426
|
|
Less: Stock-based employee
compensation expense excluded from reported net loss, net of tax
|
|
|
(51,113
|
)
|
|
|
(148,161
|
)1
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$
|
48,102
|
|
|
$
|
(89,696
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share basic
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.08
|
|
|
$
|
0.04
|
|
Pro forma
|
|
$
|
0.04
|
|
|
$
|
(0.09
|
)
|
Net income (loss) per
share diluted
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.08
|
|
|
$
|
0.04
|
|
Pro forma
|
|
$
|
0.04
|
|
|
$
|
(0.09
|
)
|
|
|
|
1 |
|
Includes a charge of $18 million resulting from the
inclusion of unamortized expense for ESPP offering periods that
were cancelled as a result of a plan amendment to eliminate the
two-year offering period effective July 1, 2005. |
Prior to the adoption of SFAS No. 123R, we presented
Deferred stock-based compensation as a separate component of
Stockholders Equity. In accordance with the provisions of
SFAS No. 123R, on April 1, 2006, we reversed the
balance in Deferred stock-based compensation to Capital in
excess of par value in the Condensed Consolidated Balance Sheet.
Prior to the adoption of SFAS No. 123R, we presented
all tax benefits for deductions related to stock options as
operating cash flows in our Condensed Consolidated Statements of
Cash Flows. SFAS No. 123R requires cash flows
resulting from the tax benefits for tax deductions in excess of
the compensation expense recorded for exercised options to be
classified as financing cash flows. Accordingly, we classified
$20 million of such excess tax benefits as financing cash
flows rather than operating cash flows in our Condensed
Consolidated Statements of Cash Flows for the nine months ended
December 31, 2006.
We have calculated the tax benefit related to stock options in
accordance with the guidance provided in
SFAS No. 123R. However, we are continuing to evaluate
the short-cut method allowed by FSP
FAS 123R-3,
Transition Election Related to Accounting for the Tax Effects
of Share-Based Payment Awards. We will make a final
determination of the method that we will use no later than
March 31, 2007. If we ultimately determine that we will
17
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
use the short-cut method, all post-adoption amounts
related to the entire income tax benefit from fully vested stock
options on the date of adoption would be reclassified in our
Condensed Consolidated Statements of Cash Flows from operating
activities to financing activities.
Award
activity
The following table summarizes stock option activity for the
nine months ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
of Shares
|
|
|
Price
|
|
|
Term
|
|
|
Intrinsic
Value1
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding at April 1, 2006
|
|
|
123,023
|
|
|
$
|
17.72
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
15,826
|
|
|
|
16.96
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(13,220
|
)
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
Forfeited2
|
|
|
(5,381
|
)
|
|
|
19.33
|
|
|
|
|
|
|
|
|
|
Expired3
|
|
|
(8,071
|
)
|
|
|
26.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
112,177
|
|
|
$
|
17.83
|
|
|
|
5.7 years
|
|
|
$
|
559,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
75,196
|
|
|
$
|
17.38
|
|
|
|
5.3 years
|
|
|
$
|
458,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
December 31, 2006
|
|
|
105,576
|
|
|
$
|
17.78
|
|
|
|
5.6 years
|
|
|
$
|
542,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Intrinsic value is calculated as the difference between the
market value of Symantecs common stock as of
December 31, 2006 and the exercise price of the option. The
aggregate intrinsic value of options outstanding and exercisable
includes options with an exercise price below $20.85, the
closing price of our common stock on December 31, 2006, as
reported by the NASDAQ Global Select Market. |
|
2 |
|
Refers to options cancelled before their vest dates. |
|
3 |
|
Refers to options cancelled on or after their vest dates. |
The weighted-average fair value per share of options granted
during the nine months ended December 31, 2006 and 2005 was
$5.00 and $8.35, respectively. The total intrinsic value of
options exercised during the nine months ended December 31,
2006 and 2005 was $116 million and $133 million,
respectively.
The following table summarizes RSU activity for the nine months
ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Number
|
|
|
Purchase
|
|
|
Aggregate
|
|
|
|
of Shares
|
|
|
Price
|
|
|
Intrinsic Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding at April 1, 2006
|
|
|
346
|
|
|
$
|
|
|
|
|
|
|
Granted
|
|
|
3,100
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
3,178
|
|
|
$
|
|
|
|
$
|
66,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
December 31, 2006
|
|
|
2,482
|
|
|
$
|
|
|
|
$
|
51,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted-average fair value per share of RSUs granted during
the nine months ended December 31, 2006 was $16.50. There
were no RSUs granted during the nine months ended
December 31, 2005. The total fair value of RSUs that vested
during the nine months ended December 31, 2006 and 2005 was
$790,000 and $4 million, respectively.
As of December 31, 2006, we had a restructuring reserve of
$19 million, of which $12 million was included in
Other accrued expenses in the Condensed Consolidated Balance
Sheets and $7 million was included in Other long-term
liabilities in the Condensed Consolidated Balance Sheets. The
restructuring reserve consists of $5 million related to a
restructuring reserve assumed from Veritas in connection with
the acquisition, $7 million related to restructuring
reserves established in the nine months ended December 31,
2006, and $7 million related to restructuring reserves
established in fiscal 2006. Restructuring reserves established
in fiscal 2006 include $4 million related to our 2006
restructuring plan, an immaterial amount related to
restructuring costs as a result of the Veritas acquisition, and
$3 million related to restructuring costs as a result of
our other acquisitions.
Restructuring
expense
During the nine months ended December 31, 2006, we recorded
$19 million of restructuring costs. These restructuring
costs are related to executive severance and to severance,
associated benefits, and outplacement services for the
termination of 323 redundant employees located in the United
States, Europe, and Asia Pacific. The restructuring costs also
included an immaterial amount related to excess facilities that
we vacated in the United States, Europe, and Asia Pacific.
During the nine months ended December 31, 2006, we paid
$12 million related to this reserve. We expect the
remainder of the costs to be paid by the end of fiscal 2008.
In fiscal 2006, we recorded $25 million of restructuring
costs, of which $20 million was recorded in the nine months
ended December 31, 2005. The fiscal 2006 restructuring
costs included $18 million related to severance, associated
benefits, and outplacement services and $7 million related
to excess facilities. These restructuring costs reflect the
termination of 446 redundant employees located in the United
States, Europe, and Asia Pacific and the consolidation of
certain facilities in Europe and Asia Pacific. At March 31,
2006, $9 million remained related to this reserve. During
the nine months ended December 31, 2006, we paid
$4 million related to this reserve and further reduced this
reserve by an immaterial amount as we determined that the costs
related to certain facilities would be less than originally
accrued. We expect the remainder of the costs, the majority of
which relate to restructured facilities, to be paid by the end
of fiscal 2018.
Amounts related to restructuring expense are included in
Restructuring in the Condensed Consolidated Statements of Income.
Acquisition-related
restructuring
In connection with the Veritas acquisition, we assumed a
restructuring reserve of $53 million related to the 2002
Veritas facilities restructuring plan. At March 31, 2006,
$9 million remained related to this reserve. During the
nine months ended December 31, 2006, we paid
$5 million related to this reserve and increased this
reserve by an immaterial amount as we determined that the costs
related to certain facilities would be greater than originally
accrued. The remaining reserve amount of $5 million will be
paid over the remaining lease terms, ending at various dates
through 2013. The majority of costs are currently scheduled to
be paid by the end of fiscal 2011.
In connection with the Veritas acquisition, we recorded
$7 million of restructuring costs, of which $2 million
related to excess facilities costs and $5 million related
to severance, associated benefits, and outplacement services.
These restructuring costs reflect the termination of redundant
employees and the consolidation of certain facilities as a
result of the Veritas acquisition. At March 31, 2006,
$3 million remained related to this reserve. During the
nine months ended December 31, 2006, we paid an immaterial
amount related to this reserve and reduced this reserve by
19
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$2 million as we determined that the costs related to
certain facilities would be less than originally accrued. We
expect the remainder of the costs to be paid by the end of
fiscal 2007.
In connection with our other acquisitions in fiscal 2006, we
recorded $12 million of restructuring costs, of which
$8 million related to severance, associated benefits, and
outplacement services and $4 million related to excess
facilities costs. These restructuring costs reflect the
termination of redundant employees and the consolidation of
certain facilities as a result of our other acquisitions. At
March 31, 2006, $9 million remained related to this
reserve. During the nine months ended December 31, 2006, we
paid $5 million related to this reserve and reduced this
reserve by an immaterial amount as we determined that the costs
related to certain facilities would be less than originally
accrued. We expect the remainder of the costs to be paid by the
end of fiscal 2012.
Amounts related to acquisition-related restructuring are
reflected in the purchase price allocation of the applicable
acquisition.
|
|
Note 10.
|
Net
Income Per Share
|
The components of net income per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Net income per
share basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
113,722
|
|
|
$
|
90,734
|
|
|
$
|
331,947
|
|
|
$
|
38,039
|
|
Weighted average number of common
shares outstanding during the period
|
|
|
932,122
|
|
|
|
1,069,123
|
|
|
|
975,900
|
|
|
|
984,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
basic
|
|
$
|
0.12
|
|
|
$
|
0.08
|
|
|
$
|
0.34
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
share diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
113,722
|
|
|
$
|
90,734
|
|
|
$
|
331,947
|
|
|
$
|
38,039
|
|
Weighted average number of common
shares outstanding during the period
|
|
|
932,122
|
|
|
|
1,069,123
|
|
|
|
975,900
|
|
|
|
984,192
|
|
Shares issuable from assumed
exercise of options using the treasury stock method
|
|
|
21,891
|
|
|
|
27,486
|
|
|
|
20,877
|
|
|
|
28,764
|
|
Dilutive impact of restricted
stock units using the treasury stock method
|
|
|
828
|
|
|
|
|
|
|
|
420
|
|
|
|
|
|
Dilutive impact of assumed
conversion of Senior Notes using the treasury stock method
|
|
|
8,468
|
1
|
|
|
|
|
|
|
2,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares for purposes of
calculating diluted net income per share diluted
|
|
|
963,309
|
|
|
|
1,096,609
|
|
|
|
1,000,020
|
|
|
|
1,012,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
diluted
|
|
$
|
0.12
|
|
|
$
|
0.08
|
|
|
$
|
0.33
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
See Note 6 for explanation of the impact of the Senior
Notes on Net income per share diluted. |
20
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following potential common shares were excluded from the
computation of diluted net income per share as their effect
would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Stock
options1
|
|
|
57,955
|
|
|
|
61,399
|
|
|
|
57,955
|
|
|
|
59,095
|
|
Restricted stock
units1
|
|
|
28
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
Veritas
0.25% Notes2
|
|
|
|
|
|
|
12,674
|
|
|
|
|
|
|
|
12,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,983
|
|
|
|
74,073
|
|
|
|
57,983
|
|
|
|
71,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
These employee stock options and RSUs were excluded from the
computation of diluted net income per share because their impact
is anti-dilutive. |
|
2 |
|
Potential common shares related to 0.25% Notes were
excluded from the computation of diluted net income per share
because the effective conversion price was higher than the
average market price of our common stock during the period, and
therefore the effect was anti-dilutive. |
For the three- and nine-month periods ended December 31,
2006, the effect of the warrants was excluded because, as
discussed in Note 6, they have no impact on diluted net
income per share until our average stock price for the
applicable period reaches $27.3175 per share.
The effective tax rate was approximately 35% for the three- and
nine-month periods ended December 31, 2006 compared to 33%
and 77% for the comparable periods in 2005. Absent the tax
effect of non-recurring items, we have provided for income taxes
at an estimated annualized effective tax rate of 36.5% for
fiscal 2007, compared to a 33% rate for fiscal 2006. The higher
rate in fiscal 2007 reflects non-deductible stock-based
compensation resulting from the adoption of
SFAS No. 123R as well as reduced benefits from
low-taxed foreign earnings.
In the December 2006 quarter, we revised the estimated
annualized effective tax rate from 35% to 36.5% to take into
consideration changes in our forecast for fiscal 2007. As a
result, we recorded $5 million of additional tax expense to
true-up
taxes provided on pre-tax income generated in the June and
September quarters. Additionally, we recorded a $6 million
tax benefit which relates to favorable prior year items,
including the retroactive reinstatement of the U.S. federal
research credit.
In the September 2006 quarter, we recorded an $8 million
tax benefit for the final Internal Revenue Service, or IRS,
audit settlement of Symantecs fiscal years 2003 and 2004.
The tax expense for the June 2006 quarter includes an accrual of
approximately $6 million for penalty risks associated with
the late filing of Veritas final pre-acquisition tax
return.
The tax rate for the nine months ended December 31, 2005
reflects the non-deductibility of the IPR&D charge of
$284 million recorded in the quarter ended
September 30, 2005. The June 2005 quarters tax
expense reflects a $20 million tax benefit related to
technical corrections to the American Jobs Creation Act of 2004
with respect to the treatment of foreign taxes paid on the
earnings repatriated under the Act.
On September 5, 2006, we executed a closing agreement with
the IRS with respect to the audit of Symantecs fiscal 2003
and 2004 federal income tax returns. The closing agreement
represents the final assessment by the IRS of additional tax for
these fiscal years of approximately $35 million, including
interest. Based on the final settlement, a tax benefit of
$8 million is reflected in the September 2006 quarter.
21
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On June 26, 2006, we filed a petition with the
U.S. Tax Court to protest a Notice of Deficiency from the
IRS claiming that we owe $867 million, excluding penalties
and interest, for the 2000 and 2001 tax years based on an audit
of Veritas, which we acquired in July, 2005. On August 30,
2006, the IRS answered our petition and the case has been
docketed for trial in U.S. Tax Court. See Note 12 for
further discussion.
In connection with the note hedge transactions discussed in
Note 6, we established a deferred tax asset of
approximately $232 million to account for the book-tax
basis difference in the convertible notes resulting from note
hedge transactions. The deferred tax asset has been accounted
for as an increase to Capital in excess of par value.
On March 29, 2006, we received a Notice of Deficiency from
the IRS claiming that we owe additional taxes, plus interest and
penalties, for the 2000 and 2001 tax years based on an audit of
Veritas. The incremental tax liability asserted by the IRS is
$867 million, excluding penalties and interest. We do not
agree with the IRS position and on June 26, 2006, we filed
a petition with the U.S. Tax Court protesting the IRS claim
for such additional taxes. On August 30, 2006, the IRS
answered our petition and this matter has been docketed for
trial in U.S. Tax Court. We strongly believe the IRS
position with regard to this matter is inconsistent with
applicable tax laws and existing Treasury regulations, and that
our previously reported income tax provision for the years in
question is appropriate.
Since the September quarter of 2002, Veritas has received
subpoenas issued by the SEC in the investigation entitled In
the Matter of AOL/Time Warner. The SEC has requested
information regarding transactions with AOL Time Warner, or AOL,
and related accounting and disclosure matters. Veritas
transactions with AOL, entered into in September 2000, involved
a software and services purchase by AOL at a stated value of
$50 million and the purchase by Veritas of advertising
services from AOL at a stated value of $20 million. In
March 2003, Veritas restated its financial statements for 2001
and 2000 to reflect a reduction in revenues and expenses of
$20 million, as well as an additional reduction in revenues
and expenses of $1 million related to two other
contemporaneous transactions with other parties in 2000 that
involved software licenses and the purchase of online
advertising services. In March 2005, the SEC charged AOL with
securities fraud pursuant to a complaint entitled Securities
and Exchange Commission v. Time Warner, Inc. In its
complaint, the SEC described certain transactions between AOL
and a California-based software company that creates and
licenses data storage software that appear to reference
Veritas transactions with AOL as described above, and
alleged that AOL aided and abetted that California-based
software company in violating Section 10(b) of the
Securities Exchange Act of 1934 and Exchange Act
Rule 10b-5.
In March 2004, Veritas announced its intention to restate its
financial statements for 2002 and 2001 and to revise previously
announced financial results for 2003. The decision resulted from
the findings of an investigation into past accounting practices
that concluded on March 12, 2004. In the first quarter of
2004, Veritas voluntarily disclosed to the staff of the SEC past
accounting practices applicable to its 2002 and 2001 financial
statements that were not in compliance with GAAP. In June 2004,
Veritas restated its financial statements for 2002 and 2001 and
reported revised financial results for 2003.
Prior to our acquisition of Veritas, Veritas had been in
discussions with the staff of the SEC regarding the SECs
review of these matters, and, based on communications with the
staff, Veritas expected these discussions to result in a
settlement with the SEC in which we would be required to pay a
$30 million penalty. We would be unable to deduct the
$30 million penalty for income tax purposes, be reimbursed
or indemnified for such payment through insurance or any other
source, or use the payment to setoff or reduce any award of
compensatory damages to plaintiffs in related securities
litigation. Final settlement with the SEC is subject to
agreement on final terms and documentation, approval by our
board of directors, and approval by the SEC Commissioners. In
the March quarter of 2005, Veritas recorded a charge of
$30 million in its consolidated statement of operations,
and a corresponding accrual in its balance sheet. As of the
filing of this Quarterly Report, the terms of the final
settlement are still under consideration by the SEC
Commissioners, and have not been approved. As part of our
accounting for the acquisition of Veritas, we recorded the
accrual of $30 million in Other accrued expenses in the
Condensed Consolidated Balance Sheets. We intend to cooperate
with the SEC in its investigation and review of the foregoing
matters.
22
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On August 2, 2004, Veritas received a copy of an amended
complaint in Stichting Pensioenfonds ABP v. AOL Time
Warner, et. al. in which Veritas was named as a defendant.
The case was originally filed in the United States District
Court for the Southern District of New York in July 2003 against
Time Warner (formerly, AOL Time Warner), current and former
officers and directors of Time Warner and AOL, and Time
Warners outside auditor, Ernst & Young LLP. The
plaintiff alleges that Veritas aided and abetted AOL in alleged
common law fraud and also alleges that it engaged in common law
fraud as part of a civil conspiracy. The plaintiff seeks an
unspecified amount of compensatory and punitive damages. On
March 17, 2006, the parties entered into a Settlement
Agreement and Mutual Release resolving all claims in the
lawsuit. This action was dismissed by the Court with prejudice
on May 31, 2006.
On July 7, 2004, a purported class action complaint
entitled Paul Kuck, et al. v. Veritas Software
Corporation, et al. was filed in the United States
District Court for the District of Delaware. The lawsuit alleges
violations of federal securities laws in connection with
Veritas announcement on July 6, 2004 that it expected
results of operations for the fiscal quarter ended June 30,
2004 to fall below earlier estimates. The complaint generally
seeks an unspecified amount of damages. Subsequently, additional
purported class action complaints have been filed in Delaware
federal court, and, on March 3, 2005, the Court entered an
order consolidating these actions and appointing lead plaintiffs
and counsel. A consolidated amended complaint, or CAC, was filed
on May 27, 2005, expanding the class period from
April 23, 2004 through July 6, 2004. The CAC also
named another officer as a defendant and added allegations that
Veritas and the named officers made false or misleading
statements in the companys press releases and SEC filings
regarding the companys financial results, which allegedly
contained revenue recognized from contracts that were unsigned
or lacked essential terms. The defendants to this matter filed a
motion to dismiss the CAC in July 2005; the motion was denied in
May 2006. The defendants to this matter intend to defend this
case vigorously.
We are also involved in a number of other judicial and
administrative proceedings that are incidental to our business.
Although adverse decisions (or settlements) may occur in one or
more of the cases, it is not possible to estimate the possible
loss or losses from each of these cases. The final resolution of
these lawsuits, individually or in the aggregate, is not
expected to have a material adverse affect on our financial
condition or results of operations.
|
|
Note 13.
|
Segment
Information
|
In the June 2006 quarter, we consolidated our Enterprise
Security, Data Protection, and Storage and Server Management
segments into two segments the Security and Data
Management segment and the Data Center Management segment.
Amounts for the three and nine months ended December 31,
2005 have been reclassified to conform to our current
presentation.
Our operating segments are significant strategic business units
that offer different products and services, distinguished by
customer needs. As of December 31, 2006, we had five
operating segments:
|
|
|
|
|
Consumer Products. Our Consumer Products
segment focuses on delivering our Internet security and
problem-solving products to individual users, home offices, and
small businesses.
|
|
|
|
Security and Data Management. Our Security and
Data Management segment focuses on providing enterprise and
large enterprise customers with endpoint security, information
security, and security management software, as well as providing
small and medium-sized businesses with software to provision,
backup, secure, and remotely access their personal computers and
servers.
|
|
|
|
Data Center Management. Our Data Center
Management segment focuses on providing enterprise and large
enterprise customers with storage and server management, data
protection, and application performance management solutions.
|
|
|
|
Services. Our Services segment provides a full
range of consulting and educational services to assist our
customers in assessing, architecting, implementing, supporting,
and maintaining their security, storage, and infrastructure
software solutions.
|
23
SYMANTEC
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Other. Our Other segment is comprised of
sunset products and products nearing the end of their life
cycle. It also includes general and administrative expenses;
amortization of acquired product rights, other intangible
assets, and other assets; charges, such as acquired in-process
research and development, patent settlement, stock-based
compensation, and restructuring; and certain indirect costs,
that are not charged to the other operating segments.
|
The accounting policies of the segments are the same as those
described in our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2006. There are no
intersegment sales. Our chief operating decision maker evaluates
performance based on direct profit or loss from operations
before income taxes not including nonrecurring gains and losses,
foreign exchange gains and losses, and miscellaneous other
income and expenses. Except for goodwill, as disclosed in
Note 5, the majority of our assets are not discretely
identified by segment. The depreciation and amortization of our
property, equipment, and leasehold improvements are allocated
based on headcount, unless specifically identified by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
Data
|
|
|
Data Center
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Products
|
|
|
Management
|
|
|
Management
|
|
|
Services
|
|
|
Other
|
|
|
Company
|
|
|
|
(In thousands)
|
|
|
Three months ended
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
408,789
|
|
|
$
|
515,213
|
|
|
$
|
336,194
|
|
|
$
|
52,844
|
|
|
$
|
|
|
|
$
|
1,313,040
|
|
Operating income (loss)
|
|
|
238,297
|
|
|
|
195,541
|
|
|
|
94,245
|
|
|
|
(19,873
|
)
|
|
|
(352,365
|
)
|
|
|
155,845
|
|
Depreciation and amortization
expense
|
|
|
598
|
|
|
|
6,107
|
|
|
|
10,477
|
|
|
|
845
|
|
|
|
172,836
|
|
|
|
190,863
|
|
Three months ended
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
329,036
|
|
|
$
|
470,713
|
|
|
$
|
303,272
|
|
|
$
|
45,998
|
|
|
$
|
7
|
|
|
$
|
1,149,026
|
|
Operating income (loss)
|
|
|
205,489
|
|
|
|
205,188
|
|
|
|
7,167
|
|
|
|
(11,296
|
)
|
|
|
(286,887
|
)
|
|
|
119,661
|
|
Depreciation and amortization
expense
|
|
|
318
|
|
|
|
6,710
|
|
|
|
12,011
|
|
|
|
1,121
|
|
|
|
163,271
|
|
|
|
183,431
|
|
Nine months ended
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,188,305
|
|
|
$
|
1,475,592
|
|
|
$
|
1,004,853
|
|
|
$
|
165,385
|
|
|
$
|
64
|
|
|
$
|
3,834,199
|
|
Operating income (loss)
|
|
|
709,598
|
|
|
|
547,825
|
|
|
|
286,262
|
|
|
|
(38,932
|
)
|
|
|
(1,078,331
|
)
|
|
|
426,422
|
|
Depreciation and amortization
expense
|
|
|
1,573
|
|
|
|
18,503
|
|
|
|
32,400
|
|
|
|
2,523
|
|
|
|
526,906
|
|
|
|
581,905
|
|
Nine months ended
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,042,002
|
|
|
$
|
1,227,187
|
|
|
$
|
532,770
|
|
|
$
|
102,850
|
|
|
$
|
23
|
|
|
$
|
2,904,832
|
|
Operating income (loss)
|
|
|
681,320
|
|
|
|
489,145
|
|
|
|
(15,769
|
)
|
|
|
(25,923
|
)
|
|
|
(1,035,141
|
)
|
|
|
93,632
|
|
Depreciation and amortization
expense
|
|
|
1,153
|
|
|
|
18,806
|
|
|
|
26,336
|
|
|
|
2,525
|
|
|
|
390,889
|
|
|
|
439,709
|
|
|
|
Note 14.
|
Subsequent
Events
|
On January 26, 2007, we signed a definitive agreement to
acquire Altiris, Inc., a leading provider of information
technology, or IT, management software that enables businesses
to easily manage and service network-based endpoints, for a cash
purchase price of $33 per share. The aggregate purchase
price, excluding acquisition related costs, will be
approximately $830 million, which amount is net of
Altiris estimated cash balance. We believe this
acquisition will enable us to help customers better manage and
enforce security policies at the endpoint, identify and protect
against threats, and repair and service assets. The acquisition
is expected to close in the first quarter of fiscal 2008,
subject to the satisfaction of customary closing conditions,
including regulatory review and Altiris stockholder approval.
24
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements and Factors That May Affect Future Results
The discussion below contains forward-looking statements, which
are subject to safe harbors under the Securities Act of 1933 and
the Securities Exchange Act of 1934. Forward-looking statements
include references to the expected results of the cost reduction
program that was announced in January 2007 and statements
including words such as expects, plans,
anticipates, believes,
estimates, predicts,
projects, and similar expressions. In addition,
statements that refer to projections of our future financial
performance, anticipated growth and trends in our businesses and
in our industries, the anticipated impacts of acquisitions, and
other characterizations of future events or circumstances are
forward-looking statements. These statements are only
predictions, based on our current expectations about future
events and may not prove to be accurate. We do not undertake any
obligation to update these forward-looking statements to reflect
events occurring or circumstances arising after the date of this
report. These forward-looking statements involve risks and
uncertainties, and our actual results, performance, or
achievements could differ materially from those expressed or
implied by the forward-looking statements on the basis of
several factors, including those that we discuss in Risk
Factors, set forth in Part II, Item 1A of this
Quarterly Report and in Part I, Item 1A, of our Annual
Report on
Form 10-K
for the fiscal year ended March 31, 2006. We encourage you
to read these sections carefully.
OVERVIEW
Our
Business
We are a world leader in providing infrastructure software to
protect individuals and enterprises from a variety of risks. We
provide consumers, home offices, and small businesses with
Internet security and personal computer, or PC, problem-solving
products; we provide small and medium-sized businesses with
software to provision, backup, secure, and remotely access their
PCs and servers; we provide enterprise and large enterprise
customers with security, storage and server management, data
protection, and application performance management solutions;
and we provide a full range of consulting and educational
services to enterprises of all sizes. In addition, we
continually work to enhance the features and functionality of
our existing products, extend our product leadership, and create
innovative solutions for our customers to address the rapidly
changing threat environment. Founded in 1982, we have operations
in 40 countries worldwide.
We have a
52/53-week
fiscal accounting year. Accordingly, all references as of and
for the periods ended December 31, 2006, March 31,
2006, and December 31, 2005 reflect amounts as of and for
the periods ended December 29, 2006, March 31, 2006,
and December 30, 2005, respectively. The three-month
periods ended December 31, 2006 and 2005 each comprised
13 weeks of activity. The nine-month periods ended
December 31, 2006 and 2005 each comprised 39 weeks of
activity.
Our operating segments are significant strategic business units
that offer different products and services, distinguished by
customer needs. In the June 2006 quarter, we consolidated our
Enterprise Security, Data Protection, and Storage and Server
Management segments into two segments the Security
and Data Management segment and the Data Center Management
segment. Amounts for the three- and nine-month periods ended
December 31, 2005 have been reclassified to conform to our
current presentation. As of December 31, 2006, we had five
operating segments, descriptions of which are provided in
Note 13 of Notes to Condensed Consolidated Financial
Statements.
On July 2, 2005, we completed the acquisition of Veritas
Software Corporation, or Veritas, a leading provider of software
and services to enable storage and availability, whereby Veritas
became a wholly owned subsidiary of Symantec in a transaction
accounted for using the purchase method. The results of
Veritas operations have been included in our results of
operations beginning on July 2, 2005, and have had a
significant impact on our revenues, cost of revenues, and
operating expenses since the date of acquisition.
On January 26, 2007, we signed a definitive agreement to
acquire Altiris, Inc., a leading provider of information
technology, or IT, management software that enables businesses
to easily manage and service network-based endpoints, for a cash
purchase price of $33 per share. The aggregate purchase
price, excluding
25
acquisition related costs, will be approximately
$830 million, which amount is net of Altiris
estimated cash balance. We believe this acquisition will enable
us to help customers better manage and enforce security policies
at the endpoint, identify and protect against threats, and
repair and service assets. The acquisition is expected to close
in the first quarter of fiscal 2008, subject to the satisfaction
of customary closing conditions, including regulatory review and
Altiris stockholder approval.
Financial
Results and Trends
Our net income was $114 million and $332 million,
respectively, for the three and nine months ended
December 31, 2006 as compared to our net income of
$91 million and $38 million, respectively, for the
three and nine months ended December 31, 2005. The higher
net income in the December 2006 quarter as compared to the
December 2005 quarter was due to higher revenue, which was
partially offset by stock-based compensation expense related to
our adoption of Statement of Financial Accounting Standards, or
SFAS, No. 123R, Share-Based Payment, effective
April 1, 2006 and higher employee compensation costs
resulting from increased employee headcount. As of
December 31, 2006, employee headcount had increased by
approximately 16% from December 31, 2005. The higher net
income in the nine months ended December 31, 2006 as
compared to the comparable prior year period was primarily due
to the write-off of $284 million of acquired in-process
research and development, or IPR&D, as a result of the
Veritas acquisition in the nine months ended December 31,
2005 for which there is no comparable charge in the 2006 period.
In addition, revenue increased from the inclusion of Veritas for
the full nine-month period in 2006 as compared to only the six
months subsequent to the acquisition date of July 2, 2005
in the comparable 2005 period. These factors were partially
offset by the inclusion of amortization of acquired product
rights and other intangible assets resulting from our
acquisition of Veritas for the full nine-month period in 2006
while the comparable 2005 period includes this amortization only
for the six months subsequent to the acquisition date, as well
as the impact of stock-based compensation expense and higher
employee compensation costs, as discussed above.
For the three months ended December 31, 2006, revenue
growth was primarily attributable to the reduced effect of the
purchase accounting adjustments to Veritas deferred
revenue, as discussed under Total Net Revenues
below, relative to the comparable 2005 period and to growth in
our Consumer Products segment across all of our geographic
regions. For the nine-month period ended December 31, 2006,
the overall revenue growth is primarily attributable to our
acquisition of Veritas. In both periods, growth is due to the
continued growth in the use of the Internet and an increase in
awareness of threats around the world to the safety and
integrity of a companys data, both from Internet-related
sources and from other factors such as systems failures.
Strength in most major foreign currencies favorably impacted our
international revenue growth by $44 million and
$63 million, respectively, during the three- and nine-month
periods ended December 31, 2006 as compared to the same
periods in 2005.
Although revenue for the three months ended December 31,
2006 was higher than revenue for the comparable 2005 period, it
did not meet our expectations, largely because of the following
key factors which impacted revenue from our enterprise
customers: the impact of increased flexibility in our contract
terms, the combination of our buying programs, and a large
number of maintenance renewals, each of which resulted in a
greater percentage of revenue being deferred and recognized over
an extended period of time. Specifically, in the December 2006
quarter, we provided more flexibility in our contract terms and
in product deployments and more services in combination with
licenses and we experienced an increase in the value of
multi-year arrangements compared to prior periods, particularly
within our Data Center Management segment. These changes
resulted in a greater percentage of revenue being deferred and
recognized over an extended period of time. In addition, we
combined the legacy buying programs of Symantec and Veritas into
one buying program for all of our enterprise offerings, which
resulted in a change in the vendor-specific objective evidence,
or VSOE, of pricing for our storage and availability offerings.
Additional information regarding factors that we believe
impacted net revenue during the December 2006 quarter are
discussed under Total Net Revenues below. We expect
the key factors discussed above, and our increasing focus on
total contract value rather than license revenue, to result in
revenue growth rates that are lower than our historic
experience. As a result, we anticipate that our deferred revenue
will increase and the amortization of such deferred revenue will
comprise a greater portion of our revenue in future periods.
26
In the three- and nine-month periods ended December 31,
2006, we incurred higher enterprise technical support costs as
we added resources to address the business process changes
associated with our IT systems consolidation. The implementation
is not yet complete and we will continue to incur costs and
expenses associated with the systems implementation. In
addition, foreign currency exchange rates had a negative impact
on our expenses in the 2006 periods as compared to the 2005
periods.
In light of the foregoing factors, we will implement cost
reduction programs beginning in the fourth quarter of fiscal
2007 to better align our expenses with our new revenue
expectations. We believe that these cost reductions, combined
with our ongoing business re-engineering and cost-improvement
initiatives, will result in annual cost savings of approximately
$200 million. Only a modest amount of these savings is
expected to impact the results of our March 2007 quarter;
however, the cost reduction programs could result in a
restructuring charge in such period.
Critical
Accounting Estimates
On April 1, 2006, we adopted a new policy related to
stock-based compensation pursuant to our adoption of
SFAS No. 123R, as more fully described below. During
the quarter ended December 31, 2006, we modified the
discussion of goodwill included in our critical accounting
estimate titled Business Combinations in our
Annual Report on
Form 10-K
for the year ended March 31, 2006, as set forth below.
Other than these changes, there have been no significant changes
in our critical accounting estimates during the nine months
ended December 31, 2006 as compared to the critical
accounting estimates disclosed in Managements Discussion
and Analysis of Financial Condition and Results of Operations
included in our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2006.
Stock-based
compensation
Effective April 1, 2006, we adopted the provisions of, and
accounted for stock-based compensation in accordance with,
SFAS No. 123R. Under SFAS No. 123R, we must
measure the fair value of all stock-based awards, including
stock options, restricted stock units, or RSUs, and purchase
rights under our employee stock purchase plan, or ESPP, on the
date of grant and amortize the fair value of the award over the
requisite service period. We elected the modified prospective
application method, under which prior periods are not revised
for comparative purposes. The valuation provisions of
SFAS No. 123R apply to new awards and to awards that
were outstanding as of the effective date and are subsequently
modified. For stock-based awards granted on or after
April 1, 2006, we recognize stock-based compensation
expense on a straight-line basis over the requisite service
period, which is generally the vesting period. We recognize
estimated compensation expense for awards that were outstanding
as of the effective date on a straight-line basis over the
remaining service period using the compensation costs estimated
for the SFAS No. 123 pro forma disclosures.
We currently use the Black-Scholes option-pricing model to
determine the fair value of stock options. The determination of
the fair value of stock-based awards on the date of grant using
an option-pricing model is affected by our stock price as well
as assumptions regarding a number of complex and subjective
variables. These variables include our expected stock price
volatility over the term of the awards, actual and projected
employee stock option exercise behaviors, risk-free interest
rates, and expected dividends.
We estimate the expected life of options granted based on an
analysis of our historical experience of employee exercise and
post-vesting termination behavior considered in relation to the
contractual life of the option. Expected volatility is based on
the average of historical volatility for the 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 constant maturity rates for the period equal
to the expected life. We do not currently pay cash dividends on
our common stock and do not anticipate doing so in the
foreseeable future. Accordingly, our expected dividend yield is
zero. We are required to estimate forfeitures at the time of
grant and revise those estimates in subsequent periods if actual
forfeitures differ from those estimates. We estimate forfeitures
of options, RSUs, and ESPP purchase rights at the time of grant
based on historical experience and record compensation expense
only for those awards that are expected to vest. All stock-based
awards are amortized on a straight-line basis over the requisite
service periods of the awards, which are generally the vesting
periods.
27
If factors change and we employ different assumptions for
estimating stock-based compensation expense in future periods or
if we decide to use a different valuation model, the amount of
such expense recorded in future periods may differ significantly
from what we have recorded in the current period.
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable, characteristics not
present in our option grants. Existing valuation models,
including the Black-Scholes and lattice binomial models, may not
provide reliable measures of the fair values of our stock-based
compensation. Consequently, there is a risk that our estimates
of the fair values of our stock-based compensation awards on the
grant dates may bear little resemblance to the actual values
realized upon the exercise, expiration, early termination, or
forfeiture of those stock-based payments in the future. Certain
stock-based payments, such as employee stock options, may expire
worthless or otherwise result in zero intrinsic value as
compared to the fair values originally estimated on the grant
date and reported in our financial statements. Alternatively,
value may be realized from these instruments that is
significantly higher than the fair values originally estimated
on the grant date and reported in our financial statements.
The guidance in SFAS No. 123R is relatively new. The
application of these principles may be subject to further
interpretation and refinement over time. There are significant
differences among valuation models, and there is a possibility
that we will adopt different valuation models in the future.
This may result in a lack of consistency in future periods and
materially affect the fair value estimate of stock-based
payments. It may also result in a lack of comparability with
other companies that use different models, methods, and
assumptions.
Stock-based compensation expense related to employee stock
options, RSUs, and employee stock purchases recognized under
SFAS No. 123R for the three and nine months ended
December 31, 2006 was $36 million and
$119 million, respectively.
See Note 8 of Notes to Condensed Consolidated Financial
Statements for further information regarding
SFAS No. 123R disclosures.
Goodwill
We test goodwill for impairment on an annual basis during the
March quarter, or earlier if indicators of impairment exist. We
reviewed the factors discussed in Financial Results and
Trends above and the fact that our management has recently
revised its estimates of operating results for the fourth
quarter of fiscal 2007 to determine if these factors constituted
an indication of impairment. Based on our review, we determined
that there were no indicators of impairment at December 31,
2006. During the March 2007 quarter, we will perform our annual
evaluation of goodwill for impairment by comparing the fair
value of each of our reporting units, which are the same as our
operating segments, to its carrying value, including the
goodwill allocated to that reporting unit. If the full
evaluation results in a lower than expected estimate of the fair
value of certain of our reporting units, we may be required to
record goodwill impairment charges.
RESULTS
OF OPERATIONS
Total Net
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Net revenues
|
|
$
|
1,313,040
|
|
|
$
|
1,149,026
|
|
|
$
|
3,834,199
|
|
|
$
|
2,904,832
|
|
Period over period increase
|
|
$
|
164,014
|
|
|
|
|
|
|
$
|
929,367
|
|
|
|
|
|
|
|
|
14
|
%
|
|
|
|
|
|
|
32
|
%
|
|
|
|
|
In connection with our acquisition of Veritas on July 2,
2005, we were required under purchase accounting rules to reduce
the amount of Veritas deferred revenue to an amount equal
to the fair value of our contractual obligation related to that
deferred revenue. As a result, a portion of the increase in
revenue related to storage and availability products and
services in the three- and nine-month periods ended
December 31, 2006 is due to the fact
28
that the amount of revenue recognized in the comparable 2005
periods was lower as a result of the purchase accounting
adjustment. Unless otherwise specified, storage and
availability products and services include products and
services obtained through our acquisition of Veritas, and
complementary products and services obtained or developed
subsequent to such acquisition.
Several factors have contributed to increased deferred revenue
and lower current period revenue. In recent periods, we began
negotiating more deals that commit customers to multi-year
periods, offer more flexibility in contractual terms and in
product deployments, and provide more services in combination
with license and maintenance sales. In the December 2006
quarter, we combined our buying programs for all of our
enterprise offerings to provide our customers and partners a
single vendor relationship and simplify the way that we do
business. Previously, our storage and availability products and
services were sold under Veritas pre-merger buying
programs, while our security products and services were sold
under our historical buying programs. These factors have
resulted in, and will continue to result in, lower near-term
recognized revenue growth rates. For example, an increase in
multi-year contracts results in a higher level of revenue
attributable to content
and/or
maintenance included in those deals, which results in a larger
portion of our revenues being recognized ratably over the term
of the arrangement and a smaller portion being recognized in the
current period. More flexibility in contractual terms, such as
installment payments, increases our deferred revenue as such
flexibility may result in ratable recognition, recognition on a
due and payable basis, or deferral until the contractual term
expires.
Our customers have also requested increased flexibility in
product deployments in site license arrangements. This may
result in an increase in deferred revenue and classification of
all revenues associated with the specific contract as Content,
subscriptions, and maintenance, which is recognized over time,
as VSOE may not exist in certain types of flexible deployment
contracts. As a result of our initiative to offer customers a
more comprehensive solution to protect and manage a global IT
infrastructure, we expect to see an increasing amount of
services sold in conjunction with license and maintenance
contracts. Inclusion of such services often results in increased
deferred revenue and increased classification of revenues as
Content, subscriptions, and maintenance, as VSOE may not exist
for some of the services provided. The combination of buying
programs resulted in a change in the VSOE for some of our
acquired storage and availability products and services. This
change, coupled with increased maintenance renewals sold with a
license component, resulted in a larger portion of contracts
being classified as Content, subscriptions, and maintenance,
which is subject to deferral, instead of Licenses revenue, which
is generally recognized immediately.
Net revenues increased during the three months ended
December 31, 2006 as compared to the comparable prior year
period due to increased revenues from our enterprise products
and consumer products of $84 million and $80 million,
respectively. The enterprise product increase was due to the
effect of the purchase accounting adjustment discussed above,
which accounted for an increase in revenue from enterprise
products of $94 million in the December 2006 quarter as
compared to the December 2005 quarter. This increase was offset
by decreases in recognized revenue resulting from the increased
flexibility in contract terms and the combination of the buying
programs for all of our enterprise offerings in the December
2006 quarter as discussed above.
During the nine-month period ended December 31, 2006, a
substantial portion of the net revenues increase as compared to
the comparable prior year period was due to the inclusion of the
storage and availability products and services that were
obtained through our acquisition of Veritas for the full nine
months in the 2006 period compared to six months in the 2005
period. These products and services contributed
$513 million of net revenues in the June 2006 quarter for
which there was no comparable revenue in the June 2005 quarter.
In addition, the purchase accounting adjustment related to
deferred revenue accounted for an aggregate increase of
$217 million in the September 2006 and December 2006
quarters as compared to the comparable prior year periods. Our
consumer products revenue increased $146 million resulting
from continuing growth in demand for our consumer products due
to growth in the use of the Internet and an increased awareness
of security threats. Our enterprise products and services
revenue increased $85 million from growth in our
maintenance renewals due to an increasing installed base,
partially offset by the effects of the increased flexibility in
contract terms and the combination of our buying programs
discussed above.
29
Content,
subscriptions, and maintenance revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Content, subscriptions, and
maintenance revenues
|
|
$
|
989,384
|
|
|
$
|
747,371
|
|
|
$
|
2,843,501
|
|
|
$
|
2,033,381
|
|
Percentage of total net revenues
|
|
|
75
|
%
|
|
|
65
|
%
|
|
|
74
|
%
|
|
|
70
|
%
|
Period over period increase
|
|
$
|
242,013
|
|
|
|
|
|
|
$
|
810,120
|
|
|
|
|
|
|
|
|
32
|
%
|
|
|
|
|
|
|
40
|
%
|
|
|
|
|
Content, subscriptions, and maintenance revenue includes
arrangements for software maintenance and technical support for
our products, content and subscription services primarily
related to our security products, revenue from arrangements
where VSOE of the fair value of undelivered elements does not
exist, and managed security services. 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. Beginning with the
release of our 2006 consumer products that include content
updates in the December 2005 quarter, we recognize revenue
related to these products ratably. As a result, this revenue has
been classified as Content, subscriptions, and maintenance
beginning in the December 2005 quarter. In addition, as noted
above, increased flexibility in contract terms and the
combination of our buying programs have impacted revenue
recognition. These changes caused a larger portion of contracts
to be classified as Content, subscriptions, and maintenance,
which is subject to deferral, instead of Licenses revenue, which
is generally recognized immediately, as discussed above in
Total Net Revenues.
Content, subscriptions, and maintenance revenue also includes
professional services revenue, which consists primarily of the
fees we earn related to consulting and educational services. We
generally recognize revenue from our professional services as
the services are performed or upon written acceptance from
customers, if applicable, assuming all other conditions for
revenue recognition have been met.
Content, subscriptions, and maintenance revenue related to sales
of storage and availability products and services acquired
through the Veritas acquisition accounted for $113 million
in increased revenues in the three months ended
December 31, 2006 as compared to the three months ended
December 31, 2005. The majority of the increase was due to
the fact that the amount of revenue recognized in the comparable
2005 period was lower as a result of the purchase accounting
adjustment, partially offset by the effects of the increased
flexibility in contract terms and the combination of our buying
programs in the December 2006 quarter, all of which are
discussed under Total Net Revenues above. In
addition, Content, subscriptions, and maintenance revenue
increased in the December 2006 quarter as compared to the
comparable prior year period due to an increase of
$73 million in revenue related to our consumer products,
particularly Norton Internet Security, due to growth in the use
of the Internet and an increased awareness of security threats.
Enterprise products, excluding storage and availability products
and services, increased $56 million as a result of growth
in our maintenance renewals due to an increasing installed base.
During the nine-month period ended December 31, 2006,
Content, subscriptions, and maintenance revenue increased as
compared to the comparable prior year period partially due to
the inclusion of the storage and availability products and
services that were obtained through our acquisition of Veritas
for the full nine months in the 2006 period compared to six
months in the 2005 period. These products and services
contributed $246 million of Content, subscriptions, and
maintenance revenues in the June 2006 quarter for which there
was no comparable revenue in the June 2005 quarter. In addition,
in the nine months ended December 31, 2006, Content,
subscriptions, and maintenance revenue related to our storage
and availability products increased $217 million due to the
fact that the amount of revenue recognized in the comparable
2005 period was lower as a result of the purchase accounting
adjustment. This increase was partially offset by the effects of
the increased flexibility in our contract terms and the
combination of our buying programs. All of these factors are
discussed in Total Net Revenues above. Enterprise
products, excluding storage and availability products and
services, increased $190 million due in large part to
growth in our maintenance renewals due to an increasing
installed base. Revenue related to our consumer products
30
increased $141 million as compared to the 2005 period due
primarily to growth in Norton Internet Security products and
online revenues as a result of growth in the use of the Internet
and an increased awareness of security threats.
Licenses
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Licenses revenues
|
|
$
|
323,656
|
|
|
$
|
401,655
|
|
|
$
|
990,698
|
|
|
$
|
871,451
|
|
Percentage of total net revenues
|
|
|
25
|
%
|
|
|
35
|
%
|
|
|
26
|
%
|
|
|
30
|
%
|
Period over period increase
(decrease)
|
|
$
|
(77,999
|
)
|
|
|
|
|
|
$
|
119,247
|
|
|
|
|
|
|
|
|
(19
|
)%
|
|
|
|
|
|
|
14
|
%
|
|
|
|
|
As a result of the combination of our buying programs in the
December 2006 quarter, which increased revenue deferrals and
classification of Licenses revenue to Content, subscriptions,
and maintenance revenue, as discussed above under Total
Net Revenues, Licenses revenue decreased in the December
2006 quarter as compared to the comparable prior year period.
During the nine-month period ended December 31, 2006,
Licenses revenues increased as compared to the comparable prior
year period primarily due to the inclusion of the storage and
availability products that were obtained through our acquisition
of Veritas for the full nine months in the 2006 period compared
to six months in the 2005 period. These products contributed
$268 million of Licenses revenues in the June 2006 quarter
for which there was no comparable revenue in the June 2005
quarter. Excluding this June 2006 contribution, Licenses
revenues from our enterprise products decreased significantly
primarily as a result of the increased flexibility in contract
terms and the combination of our buying programs in the December
2006 quarter, both of which caused a larger portion of contracts
to be classified as Content, subscriptions, and maintenance,
which is subject to deferral, instead of Licenses revenue, which
is generally recognized immediately, as discussed above in
Total Net Revenues.
Net
revenues by segment
Consumer
Products segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Consumer Products revenues
|
|
$
|
408,789
|
|
|
$
|
329,036
|
|
|
$
|
1,188,305
|
|
|
$
|
1,042,002
|
|
Percentage of total net revenues
|
|
|
31
|
%
|
|
|
29
|
%
|
|
|
31
|
%
|
|
|
36
|
%
|
Period over period increase
|
|
$
|
79,753
|
|
|
|
|
|
|
$
|
146,303
|
|
|
|
|
|
|
|
|
24
|
%
|
|
|
|
|
|
|
14
|
%
|
|
|
|
|
The increase in Consumer Products revenues in the three- and
nine-month periods ended December 31, 2006 was due
primarily to increases of $89 million and
$228 million, respectively, in revenue from our Norton
Internet Security products as compared to the comparable 2005
periods. These increases were partially offset by aggregate
decreases in revenue from our Norton AntiVirus and Norton System
Works products in the three- and nine-month periods ended
December 31, 2006 of $7 million and $73 million,
respectively. These decreases resulted from our customers
continued migration to the Norton Internet Security products,
which offer broader protection to address the rapidly changing
threat environment. Our electronic distribution channel includes
original equipment manufacturer, or OEM, subscriptions,
upgrades, online sales, and renewals. Revenue from this channel
(which includes sales of our Norton Internet Security products
and our Norton AntiVirus products) grew by $68 million and
$156 million, respectively, in the three- and nine-month
periods ended December 31, 2006 as compared to the
comparable 2005 periods.
31
Security
and Data Management segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Security and Data Management
revenues
|
|
$
|
515,215
|
|
|
$
|
470,713
|
|
|
$
|
1,475,592
|
|
|
$
|
1,227,187
|
|
Percentage of total net revenues
|
|
|
39
|
%
|
|
|
41
|
%
|
|
|
38
|
%
|
|
|
42
|
%
|
Period over period increase
|
|
$
|
44,502
|
|
|
|
|
|
|
$
|
248,405
|
|
|
|
|
|
|
|
|
9
|
%
|
|
|
|
|
|
|
20
|
%
|
|
|
|
|
The increase in revenues from our Security and Data Management
segment in the December 2006 quarter as compared to the December
2005 quarter was due primarily to the fact that the amount of
revenue recognized in the comparable 2005 period was lower as a
result of the purchase accounting adjustment discussed in
Total Net Revenues above. The purchase accounting
adjustment accounted for $30 million of the
$45 million increase. Of the remaining amount,
$10 million was due to increased revenues in the December
2006 quarter associated with products obtained from companies
acquired since December 31, 2005 for which there is no
comparable revenue in the December 2005 quarter.
During the nine-month period ended December 31, 2006,
revenue from our Security and Data Management segment increased
as compared to the comparable prior year period partially due to
the inclusion of the storage and availability products that were
obtained through our acquisition of Veritas for the full nine
months in the 2006 period compared to six months in the 2005
period. These products contributed $150 million of Security
and Data Management revenue in the June 2006 quarter for which
there was no comparable revenue in the June 2005 quarter. In
addition, the purchase accounting adjustment related to deferred
revenue discussed in Total Net Revenues above
accounted for an aggregate revenue increase of $72 million
in the September 2006 and December 2006 quarters as compared to
the comparable prior year periods. Products obtained from
companies acquired within the last year contributed
$32 million in increased revenues in the nine months ended
December 31, 2006 compared to the 2005 period.
Data
Center Management segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Data Center Management revenues
|
|
$
|
336,194
|
|
|
$
|
303,272
|
|
|
$
|
1,004,853
|
|
|
$
|
532,770
|
|
Percentage of total net revenues
|
|
|
26
|
%
|
|
|
26
|
%
|
|
|
26
|
%
|
|
|
18
|
%
|
Period over period increase
|
|
$
|
32,922
|
|
|
|
|
|
|
$
|
472,083
|
|
|
|
|
|
|
|
|
11
|
%
|
|
|
|
|
|
|
89
|
%
|
|
|
|
|
The Data Center Management segment is comprised of storage and
availability products. The purchase accounting adjustment
discussed in Total Net Revenues above accounted for
a $61 million increase in revenues in the December 2006
quarter as compared to the December 2005 quarter. Excluding the
purchase accounting adjustment, Data Center Management revenue
decreased $28 million compared to the December 2005
quarter. Revenue in the December 2006 quarter was negatively
impacted by the higher value of multi-year maintenance contracts
signed in the December 2006 quarter as compared to prior
periods, which resulted in a larger portion of contracts being
subject to deferral and a correspondingly lower amount of
revenue recognized in the current period, as discussed in
Total Net Revenues above.
The revenue increase in the nine-month period ended
December 31, 2006 as compared to the comparable prior year
period was due primarily to the inclusion of sales of storage
and availability products acquired through the Veritas
acquisition for the full nine-month period compared to six
months in 2005. These products contributed $336 million of
Data Center Management revenue in the June 2006 quarter for
which there was no comparable revenue in the June 2005 quarter.
In addition, the purchase accounting adjustment related to
deferred revenue
32
discussed in Total Net Revenues above accounted for
an aggregate revenue increase of $139 million in the
September 2006 and December 2006 quarters as compared to the
comparable prior year periods.
Services
segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Services revenues
|
|
$
|
52,844
|
|
|
$
|
45,998
|
|
|
$
|
165,385
|
|
|
$
|
102,850
|
|
Percentage of total net revenues
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
Period over period increase
|
|
$
|
6,846
|
|
|
|
|
|
|
$
|
62,535
|
|
|
|
|
|
|
|
|
15
|
%
|
|
|
|
|
|
|
61
|
%
|
|
|
|
|
The increase in revenue from our Services segment in the
December 2006 quarter as compared to the comparable prior year
period was due to an increase in consulting services and
business critical services revenue in the December 2006 quarter.
During the nine-month period ended December 31, 2006,
$40 million of the revenue increase in our Services segment
as compared to the comparable period last year was due to an
increase in consulting services, partially related to the
inclusion of the storage and availability services that were
obtained through our acquisition of Veritas for the full nine
months in the 2006 period compared to six months in the 2005
period. These services contributed $28 million of Services
revenues in the June 2006 quarter for which there was no
comparable revenue in the June 2005 quarter.
Other
segment
Our Other segment is comprised primarily of sunset products and
products nearing the end of their life cycle. Revenues from the
Other segment during the three- and nine-month periods ended
December 31, 2006 and 2005 were immaterial.
Net
revenues by geographic region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
North America (U.S. and Canada)
|
|
$
|
695,319
|
|
|
$
|
602,074
|
|
|
$
|
2,031,540
|
|
|
$
|
1,533,914
|
|
Percentage of total net revenues
|
|
|
53
|
%
|
|
|
52
|
%
|
|
|
53
|
%
|
|
|
53
|
%
|
Period over period increase
|
|
$
|
93,245
|
|
|
|
|
|
|
$
|
497,626
|
|
|
|
|
|
|
|
|
15
|
%
|
|
|
|
|
|
|
32
|
%
|
|
|
|
|
EMEA (Europe, Middle East, Africa)
|
|
$
|
413,377
|
|
|
$
|
374,882
|
|
|
$
|
1,198,924
|
|
|
$
|
922,249
|
|
Percentage of total net revenues
|
|
|
31
|
%
|
|
|
33
|
%
|
|
|
31
|
%
|
|
|
32
|
%
|
Period over period increase
|
|
$
|
38,495
|
|
|
|
|
|
|
$
|
276,675
|
|
|
|
|
|
|
|
|
10
|
%
|
|
|
|
|
|
|
30
|
%
|
|
|
|
|
Asia Pacific/Japan
|
|
$
|
178,175
|
|
|
$
|
152,463
|
|
|
$
|
529,909
|
|
|
$
|
398,512
|
|
Percentage of total net revenues
|
|
|
14
|
%
|
|
|
13
|
%
|
|
|
14
|
%
|
|
|
14
|
%
|
Period over period increase
|
|
$
|
25,712
|
|
|
|
|
|
|
$
|
131,397
|
|
|
|
|
|
|
|
|
17
|
%
|
|
|
|
|
|
|
33
|
%
|
|
|
|
|
Latin America
|
|
$
|
26,169
|
|
|
$
|
19,607
|
|
|
$
|
73,826
|
|
|
$
|
50,157
|
|
Percentage of total net revenues
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
Period over period increase
|
|
$
|
6,562
|
|
|
|
|
|
|
$
|
23,669
|
|
|
|
|
|
|
|
|
33
|
%
|
|
|
|
|
|
|
47
|
%
|
|
|
|
|
The increase in revenue in the three months ended
December 31, 2006 as compared to the three months ended
December 31, 2005 was due primarily to the fact that the
amount of revenue recognized in the comparable 2005
33
period was lower as a result of the purchase accounting
adjustment discussed in Total Net Revenues above.
The purchase accounting adjustment accounted for
$65 million in North America and $29 million in
international regions in increased revenues compared to the
comparable December 2005 period. In addition, foreign currency
had a positive impact on international revenue of
$44 million in the December 2006 quarter as compared to the
comparable prior year period. We are unable to predict the
extent to which revenues in future periods will be impacted by
changes in foreign currency exchange rates. If international
sales become a greater portion of our total sales in the future,
changes in foreign currency exchange rates may have a
potentially greater impact on our revenues and operating
results. Consumer revenue experienced strong growth across all
regions, driven by growth in Norton Internet Security, while
enterprise offerings were negatively impacted primarily due to
the increased flexibility in our contract terms and the
combination of our buying programs. These changes resulted in a
larger portion of contracts being subject to deferral and a
correspondingly lower amount of revenue recognized in the
current period, as discussed in Total Net Revenues
above.
During the nine-month period ended December 31, 2006,
international revenues increased as compared to the comparable
period last year substantially due to the inclusion of the
storage and availability products and services that were
obtained through our acquisition of Veritas for the full nine
months in the 2006 period compared to six months in the 2005
period. These products and services contributed
$240 million of international revenues in the June 2006
quarter for which there was no comparable revenue in the June
2005 quarter. In addition, the purchase accounting adjustment
related to deferred revenue discussed in Total Net
Revenues above accounted for an aggregate revenue increase
of $150 million North America and an aggregate revenue
increase of $67 million in international regions in the
September 2006 and December 2006 quarters as compared to the
comparable prior year periods. In the nine months ended
December 31, 2006, our Consumer Products segment also
contributed an additional $109 million of international
revenue, driven by Norton Internet Security. Foreign currencies
had a favorable impact on net revenues of $63 million in
the nine-month period ended December 31, 2006 compared to
the 2005 period. We are unable to predict the extent to which
revenues in future periods will be impacted by changes in
foreign currency exchange rates. If international sales become a
greater portion of our total sales in the future, changes in
foreign currency exchange rates may have a potentially greater
impact on our revenues and operating results. Revenue in the
nine months ended December 31, 2006 was negatively impacted
by the increased flexibility in our contract terms and the
combination of our buying programs. These changes resulted in a
larger portion of contracts being subject to deferral and
correspondingly lower amount of revenue recognized in the
current period, as discussed in Total Net Revenues
above.
Cost of
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Cost of revenues
|
|
$
|
314,723
|
|
|
$
|
268,478
|
|
|
$
|
919,731
|
|
|
$
|
698,715
|
|
Gross margin
|
|
|
76
|
%
|
|
|
77
|
%
|
|
|
76
|
%
|
|
|
76
|
%
|
Period over period increase
|
|
$
|
46,245
|
|
|
|
|
|
|
$
|
221,016
|
|
|
|
|
|
|
|
|
17
|
%
|
|
|
|
|
|
|
32
|
%
|
|
|
|
|
Cost of revenues consists primarily of amortization of acquired
product rights, fee-based technical support costs, costs of
billable services, payments to OEMs under revenue-sharing
arrangements, manufacturing and direct material costs, and
royalties paid to third parties under technology licensing
agreements.
Gross margin decreased in the December 2006 quarter as compared
to the December 2005 quarter due to higher enterprise technical
support costs as we added resources to address the business
process changes associated with our IT systems consolidation.
Gross margin remained constant in the nine months ended
December 31, 2006 as compared to the comparable prior year
period. The impact of increased revenues for the nine months
ended December 31, 2006 was offset by a combination of
higher technical support and billable services costs, higher OEM
royalties, and amortization of acquired product rights from our
acquisition of Veritas for the full nine month period. A
significant portion of our Cost of revenues is fixed and,
therefore, any change in revenue will directly impact our gross
margin. We anticipate that net revenues from our Services
segment may grow to comprise a higher percentage
34
of our total net revenues, which would have a negative impact on
our gross margin, as our services typically have higher cost of
revenues than our software products. We also expect that our
gross margins may be negatively impacted by increases in OEM
royalties in the Consumer Products segment.
Cost
of content, subscriptions, and maintenance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Cost of content, subscriptions,
and maintenance
|
|
$
|
218,035
|
|
|
$
|
167,186
|
|
|
$
|
622,078
|
|
|
$
|
439,211
|
|
As a percentage of related revenue
|
|
|
22
|
%
|
|
|
22
|
%
|
|
|
22
|
%
|
|
|
22
|
%
|
Period over period increase
|
|
$
|
50,849
|
|
|
|
|
|
|
$
|
182,867
|
|
|
|
|
|
|
|
|
30
|
%
|
|
|
|
|
|
|
42
|
%
|
|
|
|
|
Cost of content, subscriptions, and maintenance consists
primarily of fee-based technical support costs, costs of
billable services, and payments to OEMs under revenue sharing
agreements. Cost of content, subscriptions, and maintenance
remained constant as a percentage of the related revenue in the
three-month period ended December 31, 2006 as compared to
the comparable prior year period. The effect of increased
revenues in the December 2006 quarter was offset primarily by
the impact of higher enterprise technical support costs as we
added resources to address the business process changes
associated with our IT systems consolidation. In addition, Cost
of content, subscriptions, and maintenance related to our
security services consulting and consumer products increased
$8 million and $24 million, respectively, in the
three-month period ended December 31, 2006 as compared to
the comparable prior year period.
During the nine-month period ended December 31, 2006, Cost
of content, subscriptions, and maintenance remained constant as
a percentage of the related revenue as compared to the
comparable prior year period. The impact of increased revenues
for the nine months ended December 31, 2006 was offset by
higher technical support and billable services costs, higher OEM
royalties, and the inclusion of costs related to the storage and
availability products and services that were obtained through
our acquisition of Veritas for the full nine months compared to
the inclusion of these costs for six months in the 2005 period.
These products and services contributed $76 million of
additional costs in the June 2006 quarter for which there were
no comparable costs in the June 2005 quarter. In addition, Cost
of content, subscriptions, and maintenance related to our
security services consulting and consumer products increased
$23 million and $42 million, respectively, in the
nine-month period ended December 31, 2006 as compared to
the comparable prior year period.
Cost
of licenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Cost of licenses
|
|
$
|
12,177
|
|
|
$
|
16,256
|
|
|
$
|
40,193
|
|
|
$
|
33,983
|
|
As a percentage of related revenue
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
Period over period increase
(decrease)
|
|
$
|
(4,079
|
)
|
|
|
|
|
|
$
|
6,210
|
|
|
|
|
|
|
|
|
(25
|
)%
|
|
|
|
|
|
|
18
|
%
|
|
|
|
|
Cost of licenses consists primarily of royalties paid to third
parties under technology licensing agreements and manufacturing
and direct material costs. Cost of licenses was constant as a
percentage of the related revenue in the three- and nine-month
periods ended December 31, 2006 as compared to the
comparable prior year periods. In the nine months ended
December 31, 2006, excess inventory related to our
appliance products added $5 million in license costs. In
addition, costs related to the storage and availability products
obtained from the Veritas acquisition are included for the full
nine months in 2006 as compared to six months for the 2005
period. The storage and availability products added
$3 million in additional license costs in the June 2006
quarter for which there were no comparable costs in the June
2005 quarter.
35
Amortization
of acquired product rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Amortization of acquired product
rights
|
|
$
|
84,511
|
|
|
$
|
85,036
|
|
|
$
|
257,460
|
|
|
$
|
225,521
|
|
Percentage of total net revenues
|
|
|
6
|
%
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
8
|
%
|
Period over period increase
(decrease)
|
|
$
|
(525
|
)
|
|
|
|
|
|
$
|
31,939
|
|
|
|
|
|
|
|
|
(1
|
)%
|
|
|
|
|
|
|
14
|
%
|
|
|
|
|
Acquired product rights are comprised of developed technologies,
revenue-related order backlog and contracts, and patents from
acquired companies. Amortization in the December 2006 quarter
was relatively flat as compared to the December 2005 quarter as
higher amortization associated with our acquisitions in the
second half of fiscal 2006 was offset by certain acquired
product rights becoming fully amortized. The increase in
amortization in the nine months ended December 31, 2006 as
compared to the comparable period of 2005 is due primarily to
the inclusion of the amortization of acquired product rights
acquired through the Veritas acquisition for the full nine-month
period compared to six months in 2005. We amortize the fair
value of acquired product rights over their expected useful
lives, generally one to eight years. For further discussion of
acquired product rights and related amortization, see
Note 5 of Notes to Condensed Consolidated Financial
Statements.
Operating
Expenses
Sales
and marketing expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Sales and marketing
|
|
$
|
493,378
|
|
|
$
|
437,183
|
|
|
$
|
1,420,366
|
|
|
$
|
1,055,229
|
|
Percentage of total net revenues
|
|
|
38
|
%
|
|
|
38
|
%
|
|
|
37
|
%
|
|
|
36
|
%
|
Period over period increase
|
|
$
|
56,195
|
|
|
|
|
|
|
$
|
365,137
|
|
|
|
|
|
|
|
|
13
|
%
|
|
|
|
|
|
|
35
|
%
|
|
|
|
|
Sales and marketing expenses as a percentage of total revenues
were relatively constant for all periods. The increase in
absolute dollars in sales and marketing expenses in the December
2006 quarter as compared to the comparable prior year period was
due primarily to higher employee compensation expense resulting
from an increase in employee headcount. In addition, the
adoption of SFAS No. 123R as of April 1, 2006
added $8 million of stock-based compensation expense in the
December 2006 quarter as compared to the comparable prior year
period. For the nine months ended December 31, 2006, almost
half of the dollar increase in sales and marketing expenses as
compared to the same period in 2005 is due to sales and
marketing expenses from the Veritas acquisition, which are
included for the full nine months in the 2006 period as compared
to six months in the 2005 period and which contributed
$171 million of additional expenses in the June 2006
quarter for which there were no comparable expenses in the June
2005 quarter. Higher employee compensation expense resulting
from increased employee headcount and the adoption of
SFAS No. 123R, which added $34 million of
stock-based compensation expense in the nine months ended
December 31, 2006, also contributed to the increase in
expense for the nine months ended December 31, 2006 as
compared to the comparable prior year period.
36
Research
and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Research and development
|
|
$
|
219,578
|
|
|
$
|
193,191
|
|
|
$
|
657,746
|
|
|
$
|
479,605
|
|
Percentage of total net revenues
|
|
|
17
|
%
|
|
|
17
|
%
|
|
|
17
|
%
|
|
|
17
|
%
|
Period over period increase
|
|
$
|
26,387
|
|
|
|
|
|
|
$
|
178,141
|
|
|
|
|
|
|
|
|
14
|
%
|
|
|
|
|
|
|
37
|
%
|
|
|
|
|
Research and development expenses as a percentage of total
revenues were constant for all periods. The increase in absolute
dollars in research and development expenses in the December
2006 quarter as compared to the comparable prior year period was
due primarily to higher employee compensation expense resulting
from an increase in employee headcount. In addition, the
adoption of SFAS No. 123R as of April 1, 2006
added $8 million in stock-based compensation expense in the
December 2006 quarter as compared to the comparable prior year
period. The dollar increase in research and development expenses
in the nine months ended December 31, 2006 as compared to
the same period in 2005 is due substantially to research and
development expenses from the Veritas acquisition, which are
included for the full nine months in the 2006 period as compared
to six months in the 2005 period and which contributed
$96 million of additional expenses in the June 2006 quarter
for which there were no comparable expenses in the June 2005
quarter. The increase in the nine-months ended December 31,
2006 as compared to the comparable period in 2005 is also due to
higher employee compensation expense resulting from increased
employee headcount and the adoption of SFAS No. 123R,
which added $31 million of stock-based compensation expense
for the nine months ended December 31, 2006 as compared to
the comparable prior year period.
General
and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
General and administrative
|
|
$
|
79,040
|
|
|
$
|
64,335
|
|
|
$
|
238,887
|
|
|
$
|
157,145
|
|
Percentage of total net revenues
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
5
|
%
|
Period over period increase
|
|
$
|
14,705
|
|
|
|
|
|
|
$
|
81,742
|
|
|
|
|
|
|
|
|
23
|
%
|
|
|
|
|
|
|
52
|
%
|
|
|
|
|
General and administrative expenses as a percentage of total
revenues were relatively constant for all periods. The increase
in absolute dollars in general and administrative expenses in
both the three- and nine-month periods ended December 31,
2006 as compared to the comparable prior year periods was due
primarily to higher employee compensation expense resulting from
an increase in employee headcount. In addition, the adoption of
SFAS No. 123R as of April 1, 2006 added
$3 million and $12 million, respectively, in
stock-based compensation expense in the 2006 periods as compared
to the comparable prior year periods. For the nine months ended
December 31, 2006 general and administrative expenses from
the Veritas acquisition are included for the full nine months as
compared to six months in the 2005 period and contributed
$20 million in additional expenses in the June 2006 quarter
for which there were no comparable expenses in the June 2005
quarter.
37
Amortization
of other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Amortization of other intangible
assets
|
|
$
|
50,476
|
|
|
$
|
48,427
|
|
|
$
|
151,569
|
|
|
$
|
98,475
|
|
Percentage of total net revenues
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
3
|
%
|
Period over period increase
|
|
$
|
2,049
|
|
|
|
|
|
|
$
|
53,094
|
|
|
|
|
|
|
|
|
4
|
%
|
|
|
|
|
|
|
54
|
%
|
|
|
|
|
Other intangible assets are comprised of customer base, trade
names, partnership agreements, and marketing-related assets. The
increased amortization in the December 2006 quarter as compared
to the December 2005 quarter is primarily associated with our
acquisitions in the second half of fiscal 2006. The increase in
amortization in the nine months ended December 31, 2006 as
compared to the comparable period of 2005 is due primarily to
the inclusion of the amortization of other intangible assets
acquired through the Veritas acquisition for the full nine-month
period compared to six months in 2005. For further discussion of
other intangible assets and related amortization, see
Note 5 of Notes to Condensed Consolidated Financial
Statements.
Acquired
in-process research and development (IPR&D)
In the nine-month period ended December 31, 2005, we wrote
off IPR&D of $284 million in connection with our
acquisition of Veritas. The IPR&D was written off because
the acquired technologies had not reached technological
feasibility and had no alternative uses. Technological
feasibility is defined as being equivalent to completion of a
beta-phase working prototype in which there is no remaining risk
relating to the development. At the time of the acquisition,
Veritas was developing new products in multiple product areas
that qualified as IPR&D. These efforts included NetBackup
6.1, Backup Exec 11.0, Server Management 5.0 and various other
projects.
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Restructuring
|
|
$
|
|
|
|
$
|
15,566
|
|
|
$
|
19,478
|
|
|
$
|
20,492
|
|
Percentage of total net revenues
|
|
|
|
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Period over period decrease
|
|
$
|
(15,566
|
)
|
|
|
|
|
|
$
|
(1,014
|
)
|
|
|
|
|
|
|
|
(100
|
)%
|
|
|
|
|
|
|
(5
|
)%
|
|
|
|
|
In the nine months ended December 31, 2006, we recorded
$19 million of restructuring costs. These restructuring
costs related to executive severance and to severance,
associated benefits, and outplacement services for the
termination of 323 redundant employees located in the United
States, Europe, and Asia Pacific. The restructuring costs also
included an immaterial amount related to excess facilities that
we vacated in the United States, Europe, and Asia Pacific.
In the nine months ended December 31, 2006, we paid
$12 million related to this reserve. We expect the
remainder of the costs to be paid by the end of fiscal 2008.
In the three and nine months ended December 31, 2005, we
recorded $16 million and $20 million, respectively, of
restructuring costs primarily for severance, associated
benefits, and outplacement services. These restructuring costs
also reflect the termination of redundant employees located in
the United States, Europe, and Asia Pacific as a result of the
Veritas acquisition, as well as an immaterial amount related to
excess facilities that we vacated.
Patent
settlement
On May 12, 2005, we resolved the Altiris patent litigation
matters with a cross-licensing agreement that resolved all legal
claims between the companies. As part of the settlement, we paid
Altiris $10 million for use of the disputed technology.
Under the transaction, we expensed $2 million of patent
settlement costs in the June 2005 quarter that was related to
benefits received by us in and prior to the June 2005 quarter.
The remaining $8 million
38
was capitalized and is being amortized to Cost of revenues in
the Condensed Consolidated Statements of Income over the
remaining life of the primary patent, which expires in May 2017.
Integration
In conjunction with our acquisition of Veritas, we recorded
integration costs of $2 million and $15 million during
the three and nine months ended December 31, 2005,
respectively, which consisted primarily of costs incurred for
consulting services and other professional fees.
Non-operating
Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Interest and other income, net
|
|
$
|
24,845
|
|
|
$
|
22,525
|
|
|
$
|
103,045
|
|
|
$
|
85,246
|
|
Interest expense
|
|
|
(6,257
|
)
|
|
|
(6,843
|
)
|
|
|
(20,988
|
)
|
|
|
(14,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,588
|
|
|
$
|
15,682
|
|
|
$
|
82,057
|
|
|
$
|
70,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total net revenues
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
Period over period increase
|
|
$
|
2,906
|
|
|
|
|
|
|
$
|
11,157
|
|
|
|
|
|
|
|
|
19
|
%
|
|
|
|
|
|
|
16
|
%
|
|
|
|
|
The increase in Interest and other income, net, in the
three-month period ended December 31, 2006 was primarily
related to higher average interest rates realized on our
invested cash and
available-for-sale
securities. The increase in Interest and other income, net, in
the nine-month period ended December 31, 2006 as compared
to the comparable prior year period was due primarily to a gain
of $17 million on the sale of property and equipment,
primarily related to a building in Milpitas, California.
Interest expense in the three and nine months ended
December 31, 2006 was due primarily to the interest and
amortization of issuance costs related to our 0.75% and 1.00%
Convertible Senior Notes issued in June 2006. In addition, the
nine-month period includes the interest and accretion related to
the 0.25% Convertible Subordinated Notes that we assumed in
connection with our acquisition of Veritas. Interest expense in
the three and nine months ended December 31, 2005 was due
primarily to the interest and accretion related to the 0.25%
Convertible Subordinated Notes. The 0.25% Convertible
Subordinated Notes were paid in full during August 2006. For
further discussion of the convertible notes, see Note 6 of
Notes to Condensed Consolidated Financial Statements.
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Provision for income taxes
|
|
$
|
60,711
|
|
|
$
|
44,609
|
|
|
$
|
176,532
|
|
|
$
|
126,493
|
|
Effective income tax rate
|
|
|
35
|
%
|
|
|
33
|
%
|
|
|
35
|
%
|
|
|
77
|
%
|
The effective tax rate was approximately 35% for the three- and
nine-month periods ended December 31, 2006 compared to 33%
and 77% for the comparable periods in 2005. Absent the tax
effect of non-recurring items, we have provided for income taxes
at an estimated annualized effective tax rate of 36.5% for
fiscal year 2007, compared to a 33% rate for fiscal year 2006.
The higher fiscal 2007 tax rate reflects non-deductible
stock-based compensation resulting from the adoption of
SFAS No. 123R as well as reduced benefits from
low-taxed foreign earnings.
In the December 2006 quarter, we revised the estimated
annualized effective tax rate from 35% to 36.5% to take into
consideration changes in our forecast for fiscal 2007. As a
result, we recorded $5 million of additional tax expense to
true-up
taxes provided on pre-tax income generated in the June and
September quarters. Additionally, we
39
recorded a $6 million tax benefit which relates to
favorable prior year items, including the retroactive
reinstatement of the U.S. federal research credit.
In the September 2006 quarter, we recorded an $8 million
tax benefit for the final Internal Revenue Service, or IRS,
audit settlement of Symantecs fiscal years 2003 and 2004.
The tax expense for the June 2006 quarter includes an accrual of
approximately $6 million for penalty risks associated with
the late filing of Veritas final pre-acquisition tax
return.
The tax rate for the nine months ended December 31, 2005
reflects the non-deductibility of the IPR&D charge of
$284 million recorded in the quarter ended
September 30, 2005. The June 2005 quarters tax
expense reflects a $20 million tax benefit related to
technical corrections to the American Jobs Creation Act of 2004
with respect to the treatment of foreign taxes paid on the
earnings repatriated under the Act.
We believe realization of substantially all of our net deferred
tax assets as of December 31, 2006 is more likely than not
based on the future reversal of temporary tax differences,
refundable taxes in the statutory carryback period, and future
taxable earnings exclusive of reversing temporary differences in
certain foreign jurisdictions. Levels of future taxable income
are subject to the various risks and uncertainties discussed in
Risk Factors, set forth in Part I, Item 1A, of
our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2006. An additional
valuation allowance against net deferred tax assets may be
necessary if it is more likely than not that all or a portion of
the net deferred tax assets will not be realized. We assess the
need for an additional valuation allowance on a quarterly basis.
LIQUIDITY
AND CAPITAL RESOURCES
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Net cash provided by (used for):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
1,053,331
|
|
|
$
|
1,049,852
|
|
Investing activities
|
|
|
(89,241
|
)
|
|
|
3,577,079
|
|
Financing activities
|
|
|
(781,096
|
)
|
|
|
(3,835,605
|
)
|
Effect of exchange rate
fluctuations on cash and cash equivalents
|
|
|
93,387
|
|
|
|
(43,514
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash
equivalents
|
|
$
|
276,381
|
|
|
$
|
747,812
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, our principal source of liquidity
was our existing cash, cash equivalents, and short-term
investments of $3.0 billion, of which 46% was held
domestically and the remainder was held outside of the U.S. At
the beginning of fiscal 2007, we completed the reorganization of
certain international subsidiaries acquired as part of the
Veritas acquisition. This reorganization is expected to result
in a rebalancing of our cash between the U.S. and foreign
operations over the next several years.
In June 2006, we issued $1.1 billion principal amount of
0.75% Convertible Senior Notes due June 15, 2011, and
$1.0 billion principal amount of 1.00% Convertible Senior
Notes due June 15, 2013, to initial purchasers in a private
offering for resale to qualified institutional buyers pursuant
to SEC Rule 144A. We refer to these Notes collectively as
the Senior Notes. Concurrently with the issuance of the Senior
Notes, we entered into note hedge transactions with affiliates
of certain of the initial purchasers whereby we have the option
to purchase up to 110 million shares of our common stock at
a price of $19.12 per share. In addition, concurrently with the
issuance of the Senior Notes, we also sold warrants to
affiliates of certain of the initial purchasers whereby they
have the option to purchase up to 110 million shares of our
common stock at a price of $27.3175 per share. The warrants
expire on various dates from July 2011 through August 2013 and
must be settled in net shares.
For additional information regarding the Senior Notes and
related transactions, see Note 6 of Notes to Condensed
Consolidated Financial Statements, which information is
incorporated herein by reference. For information regarding the
deferred tax asset established in connection with the note hedge
transactions, see
40
Note 11 of Notes to Condensed Consolidated Financial
Statements, which information is incorporated herein by
reference.
The cost incurred in connection with the note hedge
transactions, net of the related tax benefit and the proceeds
from the sale of the warrants, is included as a net reduction in
Capital in excess of par value in the accompanying Condensed
Consolidated Balance Sheets as of December 31, 2006, in
accordance with the guidance in Emerging Issues Task Force
Issue, or EITF,
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock.
On August 1, 2006, at the option of certain of the holders,
we repurchased for cash $510 million of the Veritas 0.25%
Convertible Subordinated Notes, or the 0.25% Notes, that we had
assumed in connection with the acquisition of Veritas at a price
equal to the principal amount, plus accrued and unpaid interest.
On August 28, 2006, at our election, we repurchased the
remaining $10 million of the Veritas 0.25% Notes at a price
equal to the principal amount plus accrued and unpaid interest.
For additional information regarding the 0.25% Notes, see
Note 6 of Notes to Condensed Consolidated Financial
Statements, which information is incorporated herein by
reference.
In July 2006, we entered into a five-year $1 billion senior
unsecured revolving credit facility that expires in July 2011.
Borrowings under the facility will bear interest, at our option,
at either a rate equal to the banks base rate or a rate
equal to LIBOR plus a margin based on our leverage ratio, as
defined in the credit facility agreement. In connection with the
credit facility, we must maintain certain covenants, including a
specified ratio of debt to EBITDA (earnings before interest,
taxes, depreciation, and amortization), as well as various other
non-financial covenants. At December 31, 2006, we were in
compliance with all covenants. We have made no borrowings under
the credit facility through the date of filing of this Quarterly
Report.
During April 2006, we purchased two office buildings totaling
approximately 236,000 square feet in Cupertino, California for
$81 million. Approximately 64,000 square feet is leased to
a third party. In September 2006, we sold a building in
Milpitas, California for net proceeds of $83 million. In
January 2007, we sold a building in Maidenhead, UK for net
proceeds of $35 million.
On January 24, 2007, we announced that the Board of
Directors authorized the repurchase of $1 billion of
Symantec common stock without a scheduled expiration date.
On January 26, 2007, we signed a definitive agreement to
acquire Altiris, Inc., a leading provider of IT management
software that enables businesses to easily manage and service
network-based endpoints, for a cash purchase price of $33 per
share. The aggregate purchase price, excluding acquisition
related costs, will be approximately $830 million, which
amount is net of Altiris estimated cash balance. The
acquisition is expected to close in the first quarter of fiscal
2008, subject to the satisfaction of customary closing
conditions, including regulatory review and Altiris stockholder
approval.
We believe that our cash balances, cash that we generate over
time from operations, and our borrowing capacity will be
sufficient to satisfy our anticipated cash needs for working
capital and capital expenditures for at least the next
12 months.
Operating
activities
Net cash provided by operating activities during the nine months
ended December 31, 2006 resulted from net income of
$332 million, plus non-cash depreciation and amortization
charges of $582 million, non-cash stock-based compensation
expense of $119 million, and an increase in deferred
revenue of $229 million. These amounts were offset by an
increase in trade accounts receivable of $47 million and
decreases in income taxes payable and deferred taxes of
$82 million and $90 million, respectively, primarily
due to payments, including amounts related to Veritas
pre-acquisition tax liabilities on foreign subsidiary
distributions.
Net cash provided by operating activities during the nine months
ended December 31, 2005 resulted largely from net income of
$38 million plus non-cash depreciation and amortization
charges of $440 million, the write off of IPR&D of
$284 million related to our acquisition of Veritas, and an
increase in deferred revenue of $411 million. These
increases were partially offset by a decrease in deferred taxes
of $181 million and by an increase in accounts receivable
of $142 million.
41
Investing
Activities
Net cash provided by investing activities during the nine months
ended December 31, 2006 was primarily the result of
proceeds of $295 million from sales of
available-for-sale
securities and net proceeds from the sale of property and
equipment, primarily a building in Milpitas, California, of
$87 million. These items were offset by capital
expenditures of $304 million, including $81 million
for the purchase of two office buildings in Cupertino,
California, and purchases of
available-for-sale
securities of $130 million.
Net cash provided by investing activities during the nine months
ended December 31, 2005 was primarily the result of net
sales of
available-for-sale
investments of $2.9 billion and cash acquired through the
acquisition of Veritas, net of acquisition costs and cash
expenditures for our other three acquisitions, of
$885 million. These amounts were offset by capital
expenditures of $202 million, including $63 million
for the purchase of two buildings in Mountain View, California.
Financing
Activities
In the June 2006 quarter, we issued the Senior Notes for net
proceeds of approximately $2.1 billion. We used
$1.5 billion of the proceeds to repurchase shares of our
common stock, as discussed below. We also purchased hedges
related to the Senior Notes for $592 million and received
proceeds of $326 million from the sale of common stock
warrants. In addition, we applied the remainder of the proceeds
from the Senior Notes to the $520 million used to
repurchase the Veritas 0.25% Notes in August 2006.
During the nine-month period ended December 31, 2006, we
repurchased 129 million shares of our common stock at
prices ranging from $15.61 to $21.23 per share for an aggregate
amount of $2.3 billion. During the nine-month period ended
December 31, 2005, we repurchased 165 million shares
at prices ranging from $17.34 to $23.85 per share for an
aggregate amount of $3.5 billion. For further information
regarding stock repurchase activity see Part II,
Item 2, Unregistered Sales of Equity Securities and Use
of Proceeds of this Quarterly Report and Note 7 of
Notes to Condensed Consolidated Financial Statements in this
Quarterly Report, which information is incorporated herein by
reference. In January 2007, we repurchased 4 million shares
at prices ranging from $21.41 to $21.66 for a total of
$95 million and completed the repurchase program.
In the nine months ended December 31, 2006 and 2005, we
received net proceeds from the issuance of our common stock
through employee stock plans of $169 million and
$130 million, respectively, and we repaid debt of
$520 million and $491 million, respectively.
Contractual
Obligations
Senior
notes and convertible subordinated notes
In June 2006, we issued $1.1 billion principal amount of
0.75% Notes due June 15, 2011 and $1.0 billion
principal amount of 1.00% Notes due June 15, 2013 to
initial purchasers in a private offering for resale to qualified
institutional buyers pursuant to SEC Rule 144A. In August
2006, we repurchased $520 million of the Veritas 0.25%
Notes. See Note 6 of Notes to Condensed Consolidated
Financial Statements for more information.
Purchase
obligations
We enter into purchase obligations in the normal course of our
business. There were no significant changes in our purchase
obligations during the nine months ended December 31, 2006
as compared to what was previously reported in Part II,
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, in our Annual
Report on
Form 10-K
for the fiscal year ended March 31, 2006.
Development
agreements
During fiscal 2006, we entered into agreements in connection
with the construction of, or refurbishments to, buildings in
Springfield, Oregon, and Culver City, California. Payment is
contingent upon the achievement of certain
agreed-upon
milestones. During the nine months ended December 31, 2006,
we increased our commitments under these agreements by
$44 million. The remaining commitment under these
agreements is $114 million as of
42
December 31, 2006, which relates to the construction of the
Culver City, California, facility. At December 31, 2006,
the Springfield, Oregon project had been completed and there
were no remaining commitments under that agreement.
Leases
We lease office space in North America (principally in the
United States) and various locations throughout the world. There
were no significant changes in our operating lease commitments
during the nine months ended December 31, 2006 as compared
to what was previously reported in Part II, Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, in our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2006.
Indemnification
As permitted under Delaware law, we have agreements whereby we
indemnify our officers and directors for certain events or
occurrences while the officer or director is, or was, serving at
our request in such capacity. The maximum potential amount of
future payments we could be required to make under these
indemnification agreements is not limited; however, we have
director and officer insurance coverage that reduces our
exposure and enables us to recover a portion or all of any
future amounts paid. We believe the estimated fair value of
these indemnification agreements in excess of applicable
insurance coverage is minimal.
Recent
Accounting Pronouncements
Information with respect to Recent Accounting Pronouncements may
be found in Note 1 of Notes to Condensed Consolidated
Financial Statements in this
Form 10-Q,
which information is incorporated herein by reference.
Item 3. Quantitative
and Qualitative Disclosures about Market Risk
We believe there have been no significant changes in our market
risk exposures during the nine months ended December 31,
2006 as compared to what was previously disclosed in our Annual
Report on
Form 10-K
for the fiscal year ended March 31, 2006.
Item 4. Controls
and Procedures
(a) Material
Weakness in Internal Control Over Financial
Reporting
As described in Item 9A of our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2006, our management
evaluated the effectiveness of our internal control over
financial reporting as of March 31, 2006, and based on this
evaluation, identified a material weakness in our internal
control over financial reporting related to accounting for
income taxes. A material weakness is a significant deficiency,
as defined in Public Company Accounting Oversight Board Auditing
Standard No. 2, or a combination of significant
deficiencies, that results in more than a remote likelihood that
a material misstatement of a companys annual or interim
financial statements would not be prevented or detected by
company personnel in the normal course of performing their
assigned functions.
Management has determined that, as of March 31, 2006, we
had insufficient personnel resources with adequate expertise to
properly manage the increased volume and complexity of income
tax matters associated with the acquisition of Veritas Software
Corporation. This lack of resources resulted in inadequate
levels of supervision and review related to our IRS filings and
our accounting for income taxes. This material weakness resulted
in our failure to follow established policies and procedures
designed to ensure timely income tax filings. Specifically, we
did not complete the timely filing of an extension request with
the IRS for the final pre-acquisition income tax return for
Veritas and, accordingly, did not secure certain income tax
related elections. In addition, this material weakness resulted
in errors in our annual accounting for income taxes. These
errors in accounting were corrected prior to the issuance of our
2006 consolidated financial statements.
43
Because of the material weakness described above, management
concluded that Symantec did not maintain effective internal
control over financial reporting as of March 31, 2006,
based on criteria established in Internal Control
Integrated Framework issued by the COSO. Our independent
registered public accounting firm, KPMG LLP, audited
managements assessment of the effectiveness of our
internal control over financial reporting. KPMG LLP issued
an audit report thereon, which is included in Part IV,
Item 15 of our
Form 10-K
for the fiscal year ended March 31, 2006.
(b) Changes
in Internal Control over Financial Reporting
During the quarter ended December 29, 2006, we completed a
comprehensive review of our pre-existing processes and controls
relating to our interim accounting for income taxes. As a result
of such review, we have implemented several changes, which we
believe, in the aggregate, are reasonably likely to materially
affect our internal control over financial reporting. In
particular, we have implemented the following improvements:
|
|
|
|
|
We have completed our restructuring of personnel dedicated to
financial reporting for income taxes
|
|
|
|
We have more specifically defined existing key controls, and
developed additional controls, applicable to our interim
accounting for income taxes
|
|
|
|
We have automated certain elements of our processes to enhance
the analysis and calculation of the income tax provision and the
reconciliation of the tax accounts
|
|
|
|
We have enhanced the documentation regarding conclusions reached
in the implementation of generally accepted accounting principles
|
|
|
|
We have added additional levels of review by qualified personnel
of the application of each key control
|
Notwithstanding the foregoing efforts, we are continuing to
undertake steps to resolve the material weakness described
above. We expect to complete our evaluation of the effectiveness
of our internal control over financial reporting, including with
regard to the remediation of this material weakness, as of the
end of fiscal year 2007.
During the quarter ended December 29, 2006, there were no
other changes in our internal control over financial reporting
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
(c) Evaluation of Disclosure Controls and
Procedures
Our Chief Executive Officer and our Chief Financial Officer have
concluded, based on an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as
amended) by our management, with the participation of our Chief
Executive Officer and our Chief Financial Officer, that, as a
result of the material weakness described above, such disclosure
controls and procedures were not effective as of the end of the
period covered by this report.
(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 Symantec have been
detected.
44
PART II. OTHER
INFORMATION
Item 1. Legal
Proceedings
Information with respect to this Item may be found in
Note 12 of Notes to Condensed Consolidated Financial
Statements in this
Form 10-Q,
which information is incorporated into this Item 1 by
reference.
Item 1A. Risk
Factors
A description of the risks associated with our business,
financial condition, and results of operations is set forth in
Part I, Item 1A, of our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2006. There have been
no material changes in our risks from such description, other
than the addition of the following risk factors:
We are
currently implementing information systems enhancements, and
problems with the design or implementation of these enhancements
could interfere with our business and operations.
We are currently in the process of significantly enhancing our
information systems. The implementation of significant
enhancements is frequently disruptive to the underlying business
of an enterprise, which may especially be the case for us due to
the size and complexity of our businesses. Any disruptions
relating to our systems enhancements, particularly any
disruptions impacting our operations during the implementation
period, could adversely affect our ability to process customer
orders, ship products, provide services and support to our
customers, bill and track our customers, fulfill contractual
obligations, and otherwise run our business. Even if we do not
encounter these adverse effects, the implementation may be much
more costly than we anticipated. If we are unable to
successfully implement the information systems enhancements as
planned, our financial position, results of operations, and cash
flows could be negatively impacted.
We
have not historically maintained substantial levels of
indebtedness, and our financial condition and results of
operations could be adversely affected if we do not effectively
manage our liabilities.
In June 2006, we sold $2.1 billion in aggregate principal
amount of convertible senior notes. As a result of the sale of
the notes we have a substantially greater amount of long term
debt than we have maintained in the past. In addition, we have
entered into a credit facility with a borrowing capacity of
$1 billion. Our credit facility would allow us immediate
access to domestic funds if we identify opportunities for its
use. Our maintenance of substantial levels of debt could
adversely affect our flexibility to take advantage of certain
corporate opportunities and could adversely affect our financial
condition and results of operations.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
Stock repurchases during the three-month period ended
December 31, 2006 were as follows:
ISSUER
PURCHASES OF EQUITY SECURITIES
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|
Maximum Dollar
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Value of Shares
|
|
|
|
Total
|
|
|
|
|
|
Shares Purchased
|
|
|
That May yet be
|
|
|
|
Number of
|
|
|
Average
|
|
|
Under Publicly
|
|
|
Purchased Under
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Announced Plans
|
|
|
the Plans or
|
|
|
|
Purchased
|
|
|
per Share
|
|
|
or Programs
|
|
|
Programs
|
|
|
September 30, 2006 to
October 27, 2006
|
|
|
4,769,085
|
|
|
$
|
20.97
|
|
|
|
4,769,085
|
|
|
$
|
380 million
|
|
October 28, 2006 to
November 24, 2006
|
|
|
11,114,700
|
|
|
$
|
20.22
|
|
|
|
11,114,700
|
|
|
$
|
155 million
|
|
November 25, 2006 to
December 29, 2006
|
|
|
2,878,300
|
|
|
$
|
20.94
|
|
|
|
2,878,300
|
|
|
$
|
95 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18,762,085
|
|
|
$
|
20.52
|
|
|
|
18,762,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In January 2007, our board of directors authorized an additional
$1 billion share repurchase program, with no scheduled
expiration date. For information with regard to our stock
repurchase programs, see Note 7 of Notes to Condensed
Consolidated Financial Statements, which information is
incorporated herein by reference.
45
Item 5. Other
Information
We permit our directors, officers, and employees to enter into
stock trading plans adopted pursuant to
Rule 10b5-1
of the Securities Exchange Act of 1934.
Rule 10b5-1
allows insiders to sell and diversify their holdings in our
stock over a designated period by adopting pre-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. We have recently amended our
Rule 10b5-1
Trading Policy to require that our Chief Executive Officer,
Chief Financial Officer, and each of our directors only conduct
open market transactions in our securities through use of a
Rule 10b5-1
trading plan.
Item 6. Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed
|
|
|
|
|
|
|
|
|
|
|
|
|
with
|
|
|
|
|
|
|
|
|
|
|
|
|
this
|
Exhibit Number
|
|
Exhibit Description
|
|
Form
|
|
File Number
|
|
Exhibit
|
|
File Date
|
|
10-Q
|
|
|
4
|
.01
|
|
Form of Common Stock Certificate
|
|
S-3ASR
|
|
333-139230
|
|
|
4
|
.07
|
|
12/11/06
|
|
|
|
10
|
.01+
|
|
Employment Agreement, dated
April 10, 2006, between Symantec Corporation and George W.
Harrington
|
|
8-K
|
|
000-17781
|
|
|
10
|
.01
|
|
01/22/07
|
|
|
|
10
|
.02++
|
|
Second Amended and Restated
Symantec Online Store Agreement, by and among Symantec
Corporation, Symantec Limited, Digital River, Inc. and Digital
River Ireland Limited, entered into on October 19, 2006
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
18
|
.01
|
|
Letter re: Change in Accounting
Principles
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
31
|
.01
|
|
Certification of Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
31
|
.02
|
|
Certification of Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
32
|
.01*
|
|
Certification of Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
32
|
.02*
|
|
Certification of Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
+ |
|
Indicates a management contract or compensatory plan or
arrangement. |
|
++ |
|
Certain portions of this exhibit have been omitted and have been
filed separately with the SEC pursuant to a request for
confidential treatment under
Rule 24b-2
as promulgated under the Securities Exchange Act of 1934. |
|
* |
|
This exhibit is being furnished rather than filed, and shall not
be deemed incorporated by reference into any filing, in
accordance with Item 601 of
Regulation S-K. |
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SYMANTEC CORPORATION
(Registrant)
John W. Thompson
Chairman of the Board and
Chief Executive Officer
James A. Beer
Executive Vice President and
Chief Financial Officer
Date: February 5, 2007
47
Exhibit Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed
|
|
|
|
|
|
|
|
|
|
|
|
|
with
|
|
|
|
|
|
|
|
|
|
|
|
|
this
|
Exhibit Number
|
|
Exhibit Description
|
|
Form
|
|
File Number
|
|
Exhibit
|
|
File Date
|
|
10-Q
|
|
|
4
|
.01
|
|
Form of Common Stock Certificate
|
|
S-3ASR
|
|
333-139230
|
|
|
4
|
.07
|
|
12/11/06
|
|
|
|
10
|
.01+
|
|
Employment Agreement, dated
April 10, 2006, between Symantec Corporation and George W.
Harrington
|
|
8-K
|
|
000-17781
|
|
|
10
|
.01
|
|
01/22/07
|
|
|
|
10
|
.02++
|
|
Second Amended and Restated
Symantec Online Store Agreement, by and among Symantec
Corporation, Symantec Limited, Digital River, Inc. and Digital
River Ireland Limited, entered into on October 19, 2006
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
18
|
.01
|
|
Letter re: Change in Accounting
Principles
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
31
|
.01
|
|
Certification of Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
31
|
.02
|
|
Certification of Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
32
|
.01*
|
|
Certification of Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
32
|
.02*
|
|
Certification of Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
+ |
|
Indicates a management contract or compensatory plan or
arrangement. |
|
++ |
|
Certain portions of this exhibit have been omitted and have been
filed separately with the SEC pursuant to a request for
confidential treatment under
Rule 24b-2
as promulgated under the Securities Exchange Act of 1934. |
|
* |
|
This exhibit is being furnished rather than filed, and shall not
be deemed incorporated by reference into any filing, in
accordance with Item 601 of
Regulation S-K. |
48