e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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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
March 31,
2010
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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:
001-31216
McAfee, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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77-0316593
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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3965 Freedom Circle
Santa Clara, California
(Address of principal
executive offices)
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95054
(Zip
Code)
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Registrants telephone number, including area code:
(408) 988-3832
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
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
As of April 30, 2010, 156,018,166 shares of the
registrants common stock, $0.01 par value, were
outstanding.
MCAFEE,
INC. AND SUBSIDIARIES
FORM 10-Q
March 31,
2010
CONTENTS
2
PART I:
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements (Unaudited)
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MCAFEE,
INC. AND SUBSIDIARIES
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March 31,
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December 31,
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2010
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2009
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(Unaudited)
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(In thousands, except share data)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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631,346
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$
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677,137
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Short-term marketable securities
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221,225
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215,894
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Accounts receivable, net
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230,657
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294,315
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Deferred income taxes
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289,500
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312,080
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Prepaid expenses and deferred costs of revenue
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239,495
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228,102
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Other current assets
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33,160
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35,789
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Total current assets
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1,645,383
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1,763,317
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Long-term marketable securities
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48,956
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57,137
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Property and equipment, net
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129,284
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133,016
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Deferred income taxes
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312,723
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292,657
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Intangible assets, net
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261,815
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292,583
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Goodwill
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1,274,838
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1,284,574
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Other assets
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135,408
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139,902
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Total assets
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$
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3,808,407
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$
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3,963,186
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LIABILITIES
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Current liabilities:
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Accounts payable
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$
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48,307
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$
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55,104
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Accrued compensation and benefits
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98,619
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108,332
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Other accrued liabilities
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190,623
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203,967
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Deferred revenue
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1,061,705
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1,068,682
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Total current liabilities
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1,399,254
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1,436,085
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Deferred revenue, less current portion
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316,799
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338,791
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Accrued taxes and other long-term liabilities
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75,048
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70,772
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Total liabilities
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1,791,101
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1,845,648
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Commitments and contingencies (Notes 8, 9 and 15)
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STOCKHOLDERS EQUITY
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Preferred stock, $0.01 par value:
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Authorized: 5,000,000 shares; Issued and outstanding: none
in 2010 and 2009
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Common stock, $0.01 par value:
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Authorized: 300,000,000 shares; Issued:
188,475,015 shares at March 31, 2010 and
186,700,719 shares at December 31, 2009
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Outstanding: 155,855,389 shares at March 31, 2010 and
158,286,352 shares at December 31, 2009
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1,885
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1,868
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Treasury stock, at cost: 32,619,626 shares at
March 31, 2010 and 28,414,367 shares at
December 31, 2009
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(1,014,892
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)
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(845,118
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)
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Additional paid-in capital
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2,294,200
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2,251,916
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Accumulated other comprehensive loss
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(13,626
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)
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(3,291
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)
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Retained earnings
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749,739
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712,163
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Total stockholders equity
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2,017,306
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2,117,538
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Total liabilities and stockholders equity
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$
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3,808,407
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$
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3,963,186
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
MCAFEE,
INC. AND SUBSIDIARIES
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Three Months Ended
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March 31,
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2010
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2009
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(Unaudited)
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(In thousands, except per share data)
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Net revenue:
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Service, support and subscription
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$
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452,864
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$
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410,345
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Product
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49,881
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37,364
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Total net revenue
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502,745
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447,709
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Cost of net revenue:
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Service, support and subscription
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88,155
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72,728
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Product
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23,927
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20,934
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Amortization of purchased technology
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20,493
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19,394
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Total cost of net revenue
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132,575
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113,056
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Operating costs:
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Research and development
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84,124
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78,904
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Sales and marketing
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166,245
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148,764
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General and administrative
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44,851
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40,160
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Amortization of intangibles
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7,642
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9,995
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Restructuring charges
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15,754
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5,060
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Total operating costs
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318,616
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282,883
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Income from operations
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51,554
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51,770
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Interest and other income, net
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570
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2,811
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Impairment of marketable securities
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(710
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)
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(Loss) gain on sale of investments, net
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(41
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)
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166
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Income before provision for income taxes
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52,083
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54,037
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Provision for income taxes
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14,507
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581
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Net income
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$
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37,576
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$
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53,456
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Other comprehensive income:
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Unrealized gain (loss) on marketable securities, net
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$
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540
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$
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(274
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)
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Foreign currency translation loss
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(10,875
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)
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(6,718
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)
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Comprehensive income
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$
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27,241
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$
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46,464
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Net income per share basic
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$
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0.24
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$
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0.35
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Net income per share diluted
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$
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0.23
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$
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0.34
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Shares used in per share calculation basic
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157,738
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153,721
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Shares used in per share calculation diluted
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160,567
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156,169
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
MCAFEE,
INC. AND SUBSIDIARIES
|
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Three Months Ended
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March 31,
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2010
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2009
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(Unaudited)
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(In thousands)
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Cash flows from operating activities:
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Net income
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$
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37,576
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$
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53,456
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation and amortization
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43,013
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41,909
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Impairment of marketable securities
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710
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Deferred income taxes
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2,983
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4,113
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Non-cash restructuring charge
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13,566
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3,912
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Stock-based compensation expense
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29,308
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24,035
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Excess tax benefits from stock-based awards
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(3,844
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)
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(4,241
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)
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Other non-cash items
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2,190
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969
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Changes in assets and liabilities, net of acquisitions:
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Accounts receivable, net
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55,647
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74,018
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Prepaid expenses, deferred costs of revenue and other assets
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(11,774
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)
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5,865
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Accounts payable
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(5,458
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)
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10,583
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Accrued compensation and benefits and other liabilities
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(11,406
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)
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(80,287
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)
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Deferred revenue
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5,460
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10,934
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Net cash provided by operating activities
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157,261
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145,976
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Cash flows from investing activities:
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Purchase of marketable securities
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(110,431
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)
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(133,932
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)
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Proceeds from sales of marketable securities
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2,549
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10,147
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Proceeds from maturities of marketable securities
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111,464
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17,292
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Purchase of property and equipment
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(17,489
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)
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(11,029
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)
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Acquisitions, net of cash acquired
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(2,455
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)
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Other investing activities
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1,511
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Net cash used in investing activities
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(12,396
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)
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(119,977
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)
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Cash flows from financing activities:
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Proceeds from issuance of common stock under our employee stock
benefit plans
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9,446
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7,757
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Excess tax benefits from stock-based awards
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3,844
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4,241
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Repurchase of common stock
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(169,774
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)
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(16,504
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)
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Bank borrowings
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100,000
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Other financing activities
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(9,469
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)
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Net cash (used in) provided by financing activities
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(165,953
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)
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95,494
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Effect of exchange rate fluctuations on cash
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(24,703
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)
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(18,998
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)
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Net (decrease) increase in cash and cash equivalents
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|
|
(45,791
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)
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102,495
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Cash and cash equivalents at beginning of period
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|
|
677,137
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|
|
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483,302
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|
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Cash and cash equivalents at end of period
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$
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631,346
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|
|
$
|
585,797
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|
|
|
|
|
|
|
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
MCAFEE,
INC. AND SUBSIDIARIES
|
|
1.
|
Organization
and Business
|
McAfee, Inc. and our wholly owned subsidiaries (we,
us or our) are a global dedicated
security technology company that delivers proactive and proven
solutions and services that help secure systems and networks
around the world, allowing users to safely connect to the
internet, browse and shop the web more securely. We create
innovative products that empower home users, businesses, the
public sector, and service providers by enabling them to prove
compliance with regulations, protect data, prevent disruptions,
identify vulnerabilities and continuously monitor and improve
their security. We operate our business in five geographic
regions: North America; Europe, Middle East and Africa
(EMEA); Japan; Asia-Pacific, excluding Japan
(APAC); and Latin America.
|
|
2.
|
Summary
of Significant Accounting Policies
|
The accompanying condensed consolidated financial statements
include our accounts as of March 31, 2010 and
December 31, 2009 and for the three months ended
March 31, 2010 and March 31, 2009. All intercompany
accounts and transactions have been eliminated in consolidation.
These condensed consolidated financial statements have been
prepared by us, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to
such rules and regulations. The December 31, 2009 condensed
consolidated balance sheet was derived from audited consolidated
financial statements, but does not include all disclosures
required by accounting principles generally accepted in the
United States of America. However, we believe the disclosures
are adequate to make the information presented not misleading.
The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto,
included in our annual report on
Form 10-K
for the year ended December 31, 2009.
In the opinion of our management, all adjustments (which consist
of normal recurring adjustments, except as disclosed herein)
necessary to fairly present our financial position, results of
operations and cash flows for the interim periods presented have
been included. The results of operations for the three months
ended March 31, 2010 are not necessarily indicative of the
results to be expected for the full year or for any future
periods.
Significant
Accounting Policies
Deferred
Costs of Revenue and Prepaid Expenses
Deferred costs of revenue consist primarily of costs related to
revenue-sharing and royalty arrangements and the direct cost of
materials that are associated with product revenue and revenue
from licenses under subscription arrangements. These costs are
deferred over a service period, including arrangements that are
deferred due to lack of Vendor Specific Objective Evidence
(VSOE) of fair value on an undelivered element.
Deferred costs are classified as current or non-current
consistent with the associated deferred revenue. We recognize
deferred costs ratably as revenue is recognized. Our short-term
deferred costs of revenue are in the prepaid expenses and
deferred costs of revenue line item and our long-term
deferred costs of revenue are in the other assets
line item on our condensed consolidated balance sheets. At
March 31, 2010 and December 31, 2009, deferred costs
of revenue are as follows (in thousands):
|
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|
|
|
|
|
|
|
|
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March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Short-term deferred costs of revenue
|
|
$
|
96,127
|
|
|
$
|
89,618
|
|
Long-term deferred costs of revenue
|
|
|
17,773
|
|
|
|
17,739
|
|
|
|
|
|
|
|
|
|
|
Total deferred costs of revenue
|
|
$
|
113,900
|
|
|
$
|
107,357
|
|
|
|
|
|
|
|
|
|
|
6
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Prepaid expenses consist primarily of revenue sharing costs that
have been paid in advance of the anticipated renewal
transactions, royalty costs paid in advance of revenue
transactions, prepaid insurance, prepaid rent and prepaid taxes.
Our short-term prepaid expenses are in the prepaid
expenses and deferred costs of revenue line item and our
long-term prepaid expenses are in the other assets
line item on our condensed consolidated balance sheets. The
current and non-current classification of advance payments
related to revenue sharing and royalties is based upon estimates
of the anticipated timing of future transactions that give rise
to revenue sharing or royalty obligations. These estimates rely
on forecasted future revenues, which are subject to adjustment
as forecasts are revised. At March 31, 2010 and
December 31, 2009, prepaid expenses associated with
revenue-sharing and royalty arrangements are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Short-term prepaid expenses
|
|
$
|
67,235
|
|
|
$
|
71,388
|
|
Long-term prepaid expenses
|
|
|
89,243
|
|
|
|
93,069
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses
|
|
$
|
156,478
|
|
|
$
|
164,457
|
|
|
|
|
|
|
|
|
|
|
Inventory
Inventory, which consists primarily of finished goods held at
our warehouse and other fulfillment partner locations and
finished goods sold to our channel partners but not yet sold
through to the end user, is stated at lower of cost or market.
Cost is computed using standard cost, which approximates actual
cost on a first in, first out basis. Inventory balances, net of
write downs for excess and obsolete inventory, are included in
other current assets on our condensed consolidated balance
sheets and were $10.4 million as of March 31, 2010 and
$11.4 million at December 31, 2009.
Reclassifications
During the fourth quarter of 2009, we reclassified a limited
number of Stock Keeping Units (SKUs) which were
incorrectly classified as service and support net revenue
instead of subscription net revenue. In the three months ended
March 31, 2009, such service and support net revenue should
have been $212.0 million, a decrease of $16.0 million
from the amount previously reported. In the three months ended
March 31, 2009, such subscription net revenue should have
been $198.4 million, an increase of $16.0 million from
the amount previously reported. Total net revenue, gross profit
and net income were not impacted by this reclassification. We
have combined service and support net revenue and subscription
net revenue in our condensed consolidated statements of income
and comprehensive income into one line item labeled service,
support and subscription net revenue. The combination of these
two line items is consistent with how we manage our business as
the entire amount relates to service revenue that is primarily
recognized ratably over the performance period.
Recent
Accounting Pronouncements
Revenue
Recognition
In October 2009, the Financial Accounting Standards Board
(FASB) issued guidance on revenue recognition that
will become effective for us beginning January 1, 2011,
with earlier adoption permitted. Under the new guidance tangible
products that have software components that are essential to the
functionality of the tangible product will no longer be within
the scope of the software revenue recognition guidance; such
software-enabled products will now be subject to other relevant
revenue recognition guidance. Additionally, the FASB issued
authoritative guidance on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue
recognition guidance. Under the new guidance, when VSOE or third
party evidence for deliverables in an arrangement cannot be
determined, a best estimate of the selling price is required to
separate deliverables and allocate arrangement consideration
using the relative selling price method. The new guidance
includes new
7
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
disclosure requirements on how the application of the relative
selling price method affects the timing and amount of revenue
recognition. We believe that when we adopt this new guidance our
consolidated financial statements will be impacted and we are
currently assessing the magnitude of the impact.
In 2009, we acquired 100% of the outstanding shares of Endeavor
Security, Inc. (Endeavor) for $3.2 million,
Solidcore Systems, Inc. (Solidcore) for
$40.5 million and MX Logic, Inc. (MX Logic) for
$163.1 million. The results of operations for these
acquisitions have been included in our results of operations
since their respective acquisition dates.
Our management determined the purchase price allocations for
these acquisitions based on estimates of the fair values of the
tangible and intangible assets acquired and liabilities assumed.
We utilized recognized valuation techniques, including the
income approach for intangible assets and earn-out liabilities
and the cost approach for certain tangible assets, using a
discount rate reflective of the risk of the respective cash
flows. In the three months ended March 31, 2010, we had
purchase price tax adjustments totaling $1.0 million for
Solidcore, which were recorded to goodwill and deferred taxes.
The Solidcore purchase agreement provides for earn-out payments
up to $14.0 million contingent upon the achievement of
certain Solidcore financial and product delivery targets. The
fair value of the contingent consideration arrangement at
acquisition of $8.4 million was accrued as part of the
purchase price. Since the acquisition date, the range of
outcomes and the assumptions used to develop the estimates of
the remaining accrual has not changed significantly, and the
amount accrued in the financial statements has increased by
$1.2 million due to an increase in the net present value of
the liability due to the passage of time, of which
$0.6 million was expensed in the three months ended
March 31, 2010. One of the product development and
integration milestones was achieved in the fourth quarter of
2009, which resulted in the payment of $2.0 million of
contingent consideration during the three months ended
March 31, 2010.
The MX Logic purchase agreement provides for earn-out payments
up to $30.0 million contingent upon the achievement of
certain MX Logic revenue targets. The fair value of the
contingent consideration arrangement at acquisition of
$24.6 million was accrued as part of the purchase price.
One of the revenue targets was achieved in the first quarter of
2010 and $15.0 million will be paid in the second quarter
of 2010. Since the acquisition date, the range of outcomes and
the assumptions used to develop the estimates of the accrual has
not changed significantly, and the amount accrued in the
financial statements has increased by $2.9 million
primarily due to an increase in the net present value of the
liability due to the passage of time, of which $1.3 million
was expensed in the three months ended March 31, 2010.
Pro
Forma Effect of Acquisitions
Pro forma results of operations have not been presented for
Endeavor or MX Logic as the effect of these acquisitions was not
material to our results of operations. The following unaudited
pro forma financial information presents our combined results
with Solidcore as if the acquisitions had occurred at the
beginning of 2009 (in thousands, except per share data):
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2009
|
|
Pro forma net revenue
|
|
$
|
448,160
|
|
Pro forma net income
|
|
$
|
49,589
|
|
Pro forma net income per share basic
|
|
$
|
0.32
|
|
Pro forma net income per share diluted
|
|
$
|
0.32
|
|
Shares used in per share calculation basic
|
|
|
153,721
|
|
Shares used in per share calculation diluted
|
|
|
156,169
|
|
8
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The above unaudited pro forma financial information includes
adjustments for amortization of identifiable intangible assets
that were acquired, adjustments to interest income and related
tax effects. In managements opinion, the unaudited pro
forma combined results of operations are not indicative of the
actual results that would have occurred had the acquisition been
consummated at the beginning of 2009, nor are they indicative of
future operations of the combined companies.
Marketable
Securities
Marketable securities, which are classified as
available-for-sale,
are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
Amortized
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Cost
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Aggregate
|
|
|
|
Basis
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
United States treasury and agency securities
|
|
$
|
91,113
|
|
|
$
|
116
|
|
|
$
|
(18
|
)
|
|
$
|
91,211
|
|
Foreign government securities
|
|
|
25,108
|
|
|
|
19
|
|
|
|
(15
|
)
|
|
|
25,112
|
|
Certificates of deposit and time deposits
|
|
|
47,463
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
47,461
|
|
Corporate debt securities
|
|
|
83,133
|
|
|
|
797
|
|
|
|
(26
|
)
|
|
|
83,904
|
|
Mortgage-backed securities
|
|
|
7,980
|
|
|
|
1,099
|
|
|
|
(307
|
)
|
|
|
8,772
|
|
Asset-backed securities
|
|
|
12,663
|
|
|
|
1,776
|
|
|
|
(718
|
)
|
|
|
13,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
267,460
|
|
|
$
|
3,807
|
|
|
$
|
(1,086
|
)
|
|
$
|
270,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Amortized
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Cost
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Aggregate
|
|
|
|
Basis
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
United States treasury and agency securities
|
|
$
|
95,310
|
|
|
$
|
208
|
|
|
$
|
(243
|
)
|
|
$
|
95,275
|
|
Foreign government securities
|
|
|
26,882
|
|
|
|
4
|
|
|
|
(58
|
)
|
|
|
26,828
|
|
Certificates of deposit and time deposits
|
|
|
39,212
|
|
|
|
|
|
|
|
|
|
|
|
39,212
|
|
Corporate debt securities
|
|
|
91,636
|
|
|
|
618
|
|
|
|
(46
|
)
|
|
|
92,208
|
|
Mortgage-backed securities
|
|
|
9,153
|
|
|
|
783
|
|
|
|
(560
|
)
|
|
|
9,376
|
|
Asset-backed securities
|
|
|
9,017
|
|
|
|
1,991
|
|
|
|
(876
|
)
|
|
|
10,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
271,210
|
|
|
$
|
3,604
|
|
|
$
|
(1,783
|
)
|
|
$
|
273,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010, $221.2 million of marketable debt
securities had scheduled maturities of less than one year and
are classified as current assets. Marketable securities of
$49.0 million have maturities greater than one year with
most of the maturities being greater than ten years, and are
classified as non-current assets.
9
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the fair value and gross
unrealized losses related to those
available-for-sale
securities that have unrealized losses, aggregated by investment
category and length of time that the individual securities have
been in a continuous unrealized loss position, at March 31,
2010 and December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
As of March 31, 2010
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
United States treasury and agency securities
|
|
$
|
19,102
|
|
|
$
|
(18
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19,102
|
|
|
$
|
(18
|
)
|
Foreign government securities
|
|
|
6,177
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
6,177
|
|
|
|
(15
|
)
|
Certificates of deposit and time deposits
|
|
|
5,803
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
5,803
|
|
|
|
(2
|
)
|
Corporate debt securities
|
|
|
22,497
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
22,497
|
|
|
|
(26
|
)
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
4,669
|
|
|
|
(307
|
)
|
|
|
4,669
|
|
|
|
(307
|
)
|
Asset-backed securities
|
|
|
3,729
|
|
|
|
(7
|
)
|
|
|
2,241
|
|
|
|
(711
|
)
|
|
|
5,970
|
|
|
|
(718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,308
|
|
|
$
|
(68
|
)
|
|
$
|
6,910
|
|
|
$
|
(1,018
|
)
|
|
$
|
64,218
|
|
|
$
|
(1,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
As of December 31, 2009
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
United States treasury and agency securities
|
|
$
|
20,652
|
|
|
$
|
(36
|
)
|
|
$
|
2,565
|
|
|
$
|
(207
|
)
|
|
$
|
23,217
|
|
|
$
|
(243
|
)
|
Foreign government securities
|
|
|
14,865
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
14,865
|
|
|
|
(58
|
)
|
Corporate debt securities
|
|
|
28,635
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
28,635
|
|
|
|
(46
|
)
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
5,449
|
|
|
|
(560
|
)
|
|
|
5,449
|
|
|
|
(560
|
)
|
Asset-backed securities
|
|
|
1,719
|
|
|
|
(2
|
)
|
|
|
2,192
|
|
|
|
(874
|
)
|
|
|
3,911
|
|
|
|
(876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
65,871
|
|
|
$
|
(142
|
)
|
|
$
|
10,206
|
|
|
$
|
(1,641
|
)
|
|
$
|
76,077
|
|
|
$
|
(1,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We do not intend to sell the securities with unrealized losses
and
other-than-temporary
impairments recorded in accumulated other comprehensive income
and it is not more likely than not that we will be required to
sell the securities before recovery of their amortized cost
basis, which may be maturity. When assessing
other-than-temporary
impairments, we consider factors including: the likely reason
for the unrealized loss, period of time and extent to which the
fair value was below amortized cost, changes in the performance
of the underlying collateral, changes in ratings, and market
trends and conditions. As of March 31, 2010, the amount of
previously recognized credit losses remaining in retained
earnings for securities for which a portion of
other-than-temporary
impairment was recorded in other comprehensive income was
$6.2 million.
Prior to April 1, 2009, any
other-than-temporary
decline in value was reported in earnings and a new cost
basis for the marketable security was established. In the first
quarter of 2009, we recorded $0.7 million of
other-than-temporary
impairments. We had no impairment of marketable securities in
2010. If we have an impairment in future periods, the credit
loss component of the impairment will be recognized in earnings
and the non-credit loss component will be recognized in
accumulated other comprehensive loss.
10
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We recognize gains (losses) upon the sale of investments using
the specific identification cost method. The following table
summarizes the gross realized gains (losses) for the periods
indicated and does not reflect
other-than-temporary
impairments recognized within the interest and other
income line item on our condensed consolidated statements
of income and comprehensive income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Realized gains
|
|
$
|
36
|
|
|
$
|
167
|
|
Realized losses
|
|
|
(77
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Net realized (loss) gain
|
|
$
|
(41
|
)
|
|
$
|
166
|
|
|
|
|
|
|
|
|
|
|
Derivative
Financial Instruments
We conduct business globally. As a result, we are exposed to
movements in foreign currency exchange rates. From time to time
we enter into forward exchange contracts to reduce exposures
associated with monetary assets and liabilities that are not
denominated in the functional currency, such as accounts
receivable and accounts payable denominated in Euro, British
Pound, and Japanese Yen. The forward contracts typically range
from one to three months in original maturity. We recognize
derivatives, which are included in other current
assets and other accrued liabilities line
items on the condensed consolidated balance sheets, at fair
value. On the condensed consolidated statements of cash flows,
the derivatives offset the increase or decrease in cash related
to the underlying asset or liability. In general, we do not
hedge anticipated foreign currency cash flows, nor do we enter
into forward contracts for trading or speculative purposes.
The forward contracts do not qualify for hedge accounting and
accordingly are marked to market at the end of each reporting
period with any unrealized gain or loss being recognized in the
interest and other income, net line item on our
condensed consolidated statements of income and comprehensive
income.
Forward contracts outstanding are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Notional U.S.
|
|
|
|
|
|
|
|
|
Notional U.S.
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Asset
|
|
|
Liability
|
|
|
Dollar
|
|
|
Asset
|
|
|
Liability
|
|
|
|
Equivalent
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Equivalent
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Euro
|
|
$
|
52,687
|
|
|
$
|
108
|
|
|
$
|
(178
|
)
|
|
$
|
46,165
|
|
|
$
|
35
|
|
|
$
|
(193
|
)
|
British Pound
|
|
|
8,848
|
|
|
|
122
|
|
|
|
|
|
|
|
9,422
|
|
|
|
146
|
|
|
|
|
|
Japanese Yen
|
|
|
1,792
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
63,327
|
|
|
$
|
230
|
|
|
$
|
(193
|
)
|
|
$
|
55,587
|
|
|
$
|
181
|
|
|
$
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the three months ended March 31, 2010 and 2009, we
recorded a $2.7 million and a $1.6 million realized
loss, respectively, on derivatives. These amounts are recognized
in the interest and other income, net line item on
our condensed consolidated statements of income and
comprehensive income along with the remeasurement of the assets
and liabilities.
|
|
5.
|
Fair
Value Measurements
|
Carrying amounts of our financial instruments including accounts
receivable, accounts payable, and accrued liabilities
approximate fair value due to their short maturities. Accounting
guidance establishes a three-level hierarchy for disclosure that
is based on the extent and level of judgment used to estimate
the fair value of assets and liabilities. Level 1
classification is applied to any financial instrument that has a
readily available quoted price from an active market where there
is significant transparency in the executed/quoted price. Our
Level 1 measurements
11
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
relate primarily to United States treasury and agency securities
and foreign currency contracts. Level 2 classification is
applied to financial instruments that have evaluated prices
received from fixed income vendors with data inputs that are
observable either directly or indirectly, but do not represent
quoted prices from an active market for each individual
security. Our Level 2 measurements relate primarily to
certificates of deposit and corporate debt securities.
Level 3 classification is applied to fair value
measurements when fair values are derived from significant
unobservable inputs. Our Level 3 measurements relate to our
contingent purchase consideration liabilities. In the three
months ended March 31, 2010, we did not have any transfers
amongst Level 1, Level 2 and Level 3.
The following table presents the types of fair value
measurements for our marketable debt securities, foreign
currency contracts and contingent purchase consideration
liabilities as of March 31, 2010 and December 31, 2009
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2010 Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
March 31,
|
|
|
Using Identical
|
|
|
Observable Inputs
|
|
|
Unobservable
|
|
Description
|
|
2010
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
Inputs (Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents(1)
|
|
$
|
189,272
|
|
|
$
|
12,749
|
|
|
$
|
176,523
|
|
|
$
|
|
|
United States treasury and agency securities(2)
|
|
|
91,211
|
|
|
|
70,642
|
|
|
|
20,569
|
|
|
|
|
|
Foreign government securities(2)
|
|
|
25,112
|
|
|
|
15,202
|
|
|
|
9,910
|
|
|
|
|
|
Certificates of deposit and time deposits(2)
|
|
|
47,461
|
|
|
|
|
|
|
|
47,461
|
|
|
|
|
|
Corporate debt securities(2)
|
|
|
83,904
|
|
|
|
|
|
|
|
83,904
|
|
|
|
|
|
Mortgage-backed securities(2)
|
|
|
8,772
|
|
|
|
|
|
|
|
8,772
|
|
|
|
|
|
Asset-backed securities(2)
|
|
|
13,721
|
|
|
|
|
|
|
|
13,721
|
|
|
|
|
|
Foreign exchange derivative assets(3)
|
|
|
230
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
459,683
|
|
|
$
|
98,823
|
|
|
$
|
360,860
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivative liabilities(4)
|
|
$
|
193
|
|
|
$
|
193
|
|
|
$
|
|
|
|
$
|
|
|
Contingent purchase consideration liabilities(5)
|
|
|
35,550
|
|
|
|
|
|
|
|
|
|
|
|
35,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
35,743
|
|
|
$
|
193
|
|
|
$
|
|
|
|
$
|
35,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009 Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
December 31,
|
|
|
Using Identical
|
|
|
Observable Inputs
|
|
|
Unobservable
|
|
Description
|
|
2009
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
Inputs (Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents(1)
|
|
$
|
152,632
|
|
|
$
|
|
|
|
$
|
152,632
|
|
|
$
|
|
|
United States treasury and agency securities(2)
|
|
|
95,275
|
|
|
|
79,539
|
|
|
|
15,736
|
|
|
|
|
|
Foreign government securities(2)
|
|
|
26,828
|
|
|
|
5,094
|
|
|
|
21,734
|
|
|
|
|
|
Certificates of deposit and time deposits(2)
|
|
|
39,212
|
|
|
|
|
|
|
|
39,212
|
|
|
|
|
|
Corporate debt securities(2)
|
|
|
92,208
|
|
|
|
|
|
|
|
92,208
|
|
|
|
|
|
Mortgage-backed securities(2)
|
|
|
9,376
|
|
|
|
|
|
|
|
9,376
|
|
|
|
|
|
Asset-backed securities(2)
|
|
|
10,132
|
|
|
|
|
|
|
|
10,132
|
|
|
|
|
|
Foreign exchange derivative assets(3)
|
|
|
181
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
425,844
|
|
|
$
|
84,814
|
|
|
$
|
341,030
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivative liabilities(4)
|
|
$
|
193
|
|
|
$
|
193
|
|
|
$
|
|
|
|
$
|
|
|
Contingent purchase consideration liabilities(5)
|
|
|
36,061
|
|
|
|
|
|
|
|
|
|
|
|
36,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
36,254
|
|
|
$
|
193
|
|
|
$
|
|
|
|
$
|
36,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes certificates of deposit, corporate debt securities,
commercial paper and United States agency securities that have
maturities less than 90 days on the date of purchase.
Balance is included in cash and cash equivalents on our
condensed consolidated balance sheets. |
|
(2) |
|
Included in short-term or long-term marketable securities on our
condensed consolidated balance sheets. |
|
(3) |
|
Included in other current assets on our condensed consolidated
balance sheets. |
|
(4) |
|
Included in other accrued liabilities on our condensed
consolidated balance sheets. |
|
(5) |
|
Included in other accrued liabilities and in accrued taxes and
other long-term liabilities on our condensed consolidated
balance sheets. See Note 3 for further discussion. |
Market values were determined for each individual security in
the investment portfolio. For marketable securities and foreign
currency contracts reported at fair value, quoted market prices
or pricing services that utilize observable market data inputs
are used to estimate fair value. We utilize pricing service
quotes to determine the fair value of our securities for which
there are not active markets for the identical security. The
primary input for the pricing service quotes are recent trades
in the same or similar securities, with appropriate adjustments
for yield curves, prepayment speeds, default rates and
subordination level for the security being measured. Similar
securities are selected based on the similarity of the
underlying collateral and level of subordination for
asset-backed and collateralized mortgage securities, and
similarity of the issuer, including credit ratings, for
corporate debt securities. Investments are held by a custodian
who obtains investment prices from a third party pricing
provider that uses standard inputs to models that vary by asset
class. We corroborate the prices obtained from the pricing
service against other independent sources and, as of
March 31, 2010, have not found it necessary to make any
adjustments to the prices obtained. Our corporate debt
securities, with the exception of one impaired security with a
fair value of
13
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$1.3 million that has no rating, are high quality,
investment-grade securities with a minimum credit rating of A-
and 83% have a credit rating of A+ or better.
The fair values of the foreign exchange derivatives do not
reflect any adjustment for nonperformance risk as the contract
terms are three months or less and the counterparties have high
credit ratings.
The fair value of the contingent purchase consideration
liabilities were determined for each arrangement individually.
The fair value is determined using the income approach with
significant inputs that are not observable in the market. Key
assumptions include discount rates consistent with the level of
risk of achievement and probability adjusted financial
projections. The expected outcomes are recorded at net present
value.
|
|
6.
|
Goodwill
and Other Intangible Assets
|
Goodwill by geographic region is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
Currency
|
|
|
March 31,
|
|
|
|
2009
|
|
|
Adjustments
|
|
|
Exchange
|
|
|
2010
|
|
|
North America
|
|
$
|
912,958
|
|
|
$
|
(982
|
)
|
|
$
|
(1,839
|
)
|
|
$
|
910,137
|
|
EMEA
|
|
|
256,207
|
|
|
|
(11
|
)
|
|
|
(6,768
|
)
|
|
|
249,428
|
|
Japan
|
|
|
41,578
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
41,534
|
|
APAC
|
|
|
52,303
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
52,298
|
|
Latin America
|
|
|
21,528
|
|
|
|
(3
|
)
|
|
|
(84
|
)
|
|
|
21,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,284,574
|
|
|
$
|
(1,045
|
)
|
|
$
|
(8,691
|
)
|
|
$
|
1,274,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The adjustments to goodwill are a result of our final purchase
accounting tax adjustments for the Solidcore acquisition.
The components of intangible assets are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
(Including
|
|
|
|
|
|
|
|
|
(Including
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Effects of
|
|
|
|
|
|
|
|
|
Effects of
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
Foreign
|
|
|
Net
|
|
|
Gross
|
|
|
Foreign
|
|
|
Net
|
|
|
|
Useful
|
|
|
Carrying
|
|
|
Currency
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Currency
|
|
|
Carrying
|
|
|
|
Life
|
|
|
Amount
|
|
|
Exchange)
|
|
|
Amount
|
|
|
Amount
|
|
|
Exchange)
|
|
|
Amount
|
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technologies
|
|
|
4.2 years
|
|
|
$
|
440,093
|
|
|
$
|
(271,967
|
)
|
|
$
|
168,126
|
|
|
$
|
444,732
|
|
|
$
|
(255,148
|
)
|
|
$
|
189,584
|
|
Trademarks and patents
|
|
|
5.1 years
|
|
|
|
42,966
|
|
|
|
(37,851
|
)
|
|
|
5,115
|
|
|
|
43,206
|
|
|
|
(37,604
|
)
|
|
|
5,602
|
|
Customer base and other intangibles
|
|
|
5.8 years
|
|
|
|
216,287
|
|
|
|
(127,713
|
)
|
|
|
88,574
|
|
|
|
218,967
|
|
|
|
(121,570
|
)
|
|
|
97,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
699,346
|
|
|
$
|
(437,531
|
)
|
|
$
|
261,815
|
|
|
$
|
706,905
|
|
|
$
|
(414,322
|
)
|
|
$
|
292,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate amortization expenses for the intangible assets
listed above totaled $28.1 million and $29.4 million
in the three months ended March 31, 2010 and 2009,
respectively.
14
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Expected future intangible asset amortization expense as of
March 31, 2010 is as follows (in thousands):
|
|
|
|
|
Remainder of 2010
|
|
$
|
82,190
|
|
2011
|
|
|
85,584
|
|
2012
|
|
|
47,803
|
|
2013
|
|
|
22,247
|
|
2014
|
|
|
14,058
|
|
Thereafter
|
|
|
9,933
|
|
|
|
|
|
|
|
|
$
|
261,815
|
|
|
|
|
|
|
We have initiated certain restructuring actions to reduce our
cost structure and enable us to invest in certain strategic
growth initiatives to enhance our competitive position.
During 2010 (the 2010 Restructuring), we continued
our efforts to consolidate and took the following measures:
(i) disposed of excess facilities and (ii) realigned
our staffing across various departments.
During 2009 (the 2009 Restructuring), we took the
following measures: (i) realigned our sales and marketing
workforce and staffing across various departments,
(ii) disposed of excess facilities and
(iii) eliminated redundant positions related to
acquisitions.
During 2008 (the 2008 Restructuring), we took the
following measures: (i) eliminated redundant positions
related to the SafeBoot and Secure Computing acquisitions,
(ii) realigned our sales force and (iii) realigned
staffing across various departments.
Restructuring charges in the three months ended March 31,
2010 totaled $15.8 million, consisting of
$11.3 million related to five facilities that were vacated
in the first quarter of 2010, $4.4 million related to the
elimination of certain positions and $0.1 million net
additional accruals over the service period for our 2009
Restructuring.
Restructuring charges in the three months ended March 31,
2009 totaled $5.1 million, consisting of $2.9 million
related to the 2009 Restructuring and a $2.2 million
additional accrual over the service period for our 2008
elimination of certain positions at Secure Computing.
2010
Restructuring
Activity and liability balances related to our 2010
Restructuring are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Severance and
|
|
|
|
|
|
|
Costs
|
|
|
Other Benefits
|
|
|
Total
|
|
|
Balance, January 1, 2010
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Restructuring accrual
|
|
|
8,831
|
|
|
|
4,408
|
|
|
|
13,239
|
|
Accretion
|
|
|
10
|
|
|
|
|
|
|
|
10
|
|
Cash payments
|
|
|
(391
|
)
|
|
|
(2,090
|
)
|
|
|
(2,481
|
)
|
Effects of foreign currency exchange
|
|
|
(21
|
)
|
|
|
(8
|
)
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2010
|
|
$
|
8,429
|
|
|
$
|
2,310
|
|
|
$
|
10,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the total $11.3 million 2010 restructuring charge for
facilities, $8.6 million and $2.7 million was recorded
in North America and EMEA, respectively. Approximately
$2.5 million of the facilities restructuring charge was
15
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
related to accelerated depreciation net of deferred rent
associated with the terminated leases that are not included in
the restructuring accrual. Lease termination costs will be paid
through 2018.
Of the total 2010 restructuring charge for severance and other
benefits, $2.4 million, $1.5 million and
$0.5 million was recorded in North America, EMEA and APAC,
respectively. Severance and other benefits are expected to be
paid in 2010.
2009
Restructuring
Activity and liability balances related to our 2009
Restructuring are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Severance and
|
|
|
|
|
|
|
Costs
|
|
|
Other Benefits
|
|
|
Total
|
|
|
Balance, January 1, 2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Restructuring accrual
|
|
|
1,523
|
|
|
|
11,227
|
|
|
|
12,750
|
|
Adjustment to liability
|
|
|
144
|
|
|
|
80
|
|
|
|
224
|
|
Accretion
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
Cash payments
|
|
|
(512
|
)
|
|
|
(9,326
|
)
|
|
|
(9,838
|
)
|
Effects of foreign currency exchange
|
|
|
|
|
|
|
(45
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
1,170
|
|
|
$
|
1,936
|
|
|
$
|
3,106
|
|
Restructuring accrual
|
|
|
|
|
|
|
205
|
|
|
|
205
|
|
Adjustment to liability
|
|
|
99
|
|
|
|
(297
|
)
|
|
|
(198
|
)
|
Accretion
|
|
|
8
|
|
|
|
|
|
|
|
8
|
|
Cash payments
|
|
|
(139
|
)
|
|
|
(1,576
|
)
|
|
|
(1,715
|
)
|
Effects of foreign currency exchange
|
|
|
|
|
|
|
(14
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2010
|
|
$
|
1,138
|
|
|
$
|
254
|
|
|
$
|
1,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease termination costs are expected to be paid through 2014 and
severance and other benefits are expected to be paid in 2010.
16
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2008
Restructuring
Activity and liability balances related to our 2008
Restructuring are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Severance and
|
|
|
|
|
|
|
Costs
|
|
|
Other Benefits
|
|
|
Total
|
|
|
Balance, January 1, 2009
|
|
|
6,171
|
|
|
|
1,175
|
|
|
|
7,346
|
|
Restructuring accrual
|
|
|
|
|
|
|
2,961
|
|
|
|
2,961
|
|
Adjustment to liability
|
|
|
357
|
|
|
|
(156
|
)
|
|
|
201
|
|
Accretion
|
|
|
251
|
|
|
|
|
|
|
|
251
|
|
Cash payments
|
|
|
(3,106
|
)
|
|
|
(3,940
|
)
|
|
|
(7,046
|
)
|
Effects of foreign currency exchange
|
|
|
189
|
|
|
|
(7
|
)
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
3,862
|
|
|
$
|
33
|
|
|
$
|
3,895
|
|
Adjustment to liability
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
Accretion
|
|
|
41
|
|
|
|
|
|
|
|
41
|
|
Cash payments
|
|
|
(559
|
)
|
|
|
(40
|
)
|
|
|
(599
|
)
|
Effects of foreign currency exchange
|
|
|
(82
|
)
|
|
|
|
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2010
|
|
$
|
3,262
|
|
|
$
|
|
|
|
$
|
3,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease termination costs will be paid through 2015.
|
|
8.
|
Warranty
Accrual and Guarantees
|
We offer a warranty of 90 days on our hardware products and
a warranty period from 30 to 60 days on our software
products. We record a liability for the estimated future costs
associated with warranty claims, which is based upon historical
experience and our estimate of the level of future costs. A
reconciliation of the change in our warranty obligation as of
March 31, 2010 and December 31, 2009 follows (in
thousands):
|
|
|
|
|
|
|
Warranty
|
|
|
|
Accrual
|
|
|
Balance, January 1, 2009
|
|
$
|
1,110
|
|
Additional accruals
|
|
|
3,519
|
|
Costs incurred during the period
|
|
|
(3,323
|
)
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
1,306
|
|
Additional accruals
|
|
|
864
|
|
Costs incurred during the period
|
|
|
(1,071
|
)
|
|
|
|
|
|
Balance, March 31, 2010
|
|
$
|
1,099
|
|
|
|
|
|
|
The following is a summary of certain guarantee and
indemnification agreements as of March 31, 2010:
|
|
|
|
|
Under the indemnification provision of our software license
agreements and selected managed service agreements, we agree
that in the event the software sold infringes upon any patent,
copyright, trademark, or any other proprietary right of a
third-party, we will indemnify our customer against any loss,
expense, or liability from any damages that may be awarded
against our customer. We have not incurred any significant
expense or recorded any liability associated with this
indemnification.
|
|
|
|
Under the indemnification provision of certain vendor agreements
we have agreed that in the event the service provided to the
customer by the vendor on behalf of us infringes upon any
patent, copyright, trademark, or any other proprietary right of
a third- party, we will indemnify our vendor against any loss,
|
17
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
expense, or liability from any damages. We have not incurred any
significant expense or recorded any liability associated with
this indemnification. The estimated fair value of these
indemnification clauses is minimal.
|
|
|
|
|
|
Under the indemnification provision of our agreements to sell
Magic in January 2004, Sniffer in July 2004, and McAfee Labs
assets in December 2004, we agreed to indemnify the purchasers
for breach of any representation or warranty as well as for any
liabilities related to the assets prior to sale incurred by the
purchaser that were not expressly assumed in the purchase.
Subject to limited exceptions, the maximum liability under these
indemnifications is $10.0 million, $200.0 million and
$1.5 million, respectively. Subject to limited exceptions,
the representations and warranties made in these agreements have
expired. We have not paid any amounts, incurred any significant
expense or recorded any accruals under these indemnifications.
The estimated fair value of these indemnification clauses is
minimal.
|
|
|
|
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. Our maximum potential liability
under these indemnification agreements is not limited; however,
we have director and officer insurance coverage that we believe
will enable us to recover a portion or all of any future amounts
paid.
|
|
|
|
Under the indemnification provision of the agreement entered
into by Secure Computing in July 2008 to sell its SafeWord
assets, we are obligated to indemnify the purchaser for breach
of any representation or warranty as well as for any liabilities
related to the assets prior to sale incurred by the purchaser
that were not expressly assumed in the purchase. Subject to
limited exceptions, the maximum potential liability under this
indemnification is $64.3 million. We have not paid any
amounts, incurred any significant expense or recorded any
accruals related to this indemnification. The purchaser has made
claims against the escrow and we are currently evaluating the
validity of these claims.
|
If we believe a liability associated with any of our
indemnifications becomes probable and the amount of the
liability is reasonably estimable or the minimum amount of a
range of loss is reasonably estimable, then an appropriate
liability will be established.
In December 2008, we entered into a credit agreement with a
group of financial institutions, which we amended in February
2010 (Credit Facility). The Credit Facility provides
for a $450.0 million unsecured revolving credit facility
with a $25.0 million letter of credit sublimit. Subject to
the satisfaction of certain conditions, we may further increase
the revolving loan commitments to an aggregate of
$600.0 million. Loans may be made in U.S. Dollars,
Euros or other currencies agreed to by the lenders. Commitment
fees range from 0.38% to 0.63% of the unused portion on the
Credit Facility depending on our consolidated leverage ratio.
Loans bear interest at our election at the prime rate or at an
adjusted LIBOR rate plus a margin (ranging from 2.5% to 3.0%)
that varies with our consolidated leverage ratio (a
eurocurrency loan). Interest on the loans is payable
quarterly in arrears with respect to prime rate loans and at the
end of an interest period (or at each three month interval in
the case of loans with interest periods greater than three
months) in the case of eurocurrency loans. No balances were
outstanding under the Credit Facility as of March 31, 2010
and December 31, 2009.
The credit facility, which is subject to certain quarterly
financial covenants, terminates on December 22, 2012, on
which date all outstanding principal of, together with accrued
interest on, any revolving loans will be due. We may prepay the
loans and terminate the commitments at any time, without premium
or penalty, subject to reimbursement of certain costs in the
case of eurocurrency loans. At March 31, 2010 and
December 31, 2009, we were in compliance with all financial
covenants in the Credit Facility.
In addition, we have a 14 million Euro credit facility with
a bank (the Euro Credit Facility). The Euro Credit
Facility is available on an offering basis, meaning that
transactions under the Euro Credit Facility will be on such
terms and conditions, including interest rate, maturity,
representations, covenants and events of default, as mutually
18
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
agreed between us and the bank at the time of each specific
transaction. The Euro Credit Facility is intended to be used for
short-term credit requirements, with terms of one year or less.
The Euro Credit Facility can be canceled at any time. No
balances were outstanding under the Euro Credit Facility as of
March 31, 2010 and December 31, 2009.
|
|
10.
|
Other
Comprehensive Income (Loss)
|
Unrealized gains (losses) on
available-for-sale
securities and foreign currency translation adjustments are
included in our components of comprehensive income (loss), which
are excluded from net income.
The components of other comprehensive income (loss), net of
income taxes, is comprised of the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Other comprehensive loss, before tax:
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities, net
|
|
$
|
859
|
|
|
$
|
(1,000
|
)
|
Reclassification adjustment for net loss on marketable
securities recognized during the period
|
|
|
41
|
|
|
|
544
|
|
Foreign currency translation loss
|
|
|
(10,875
|
)
|
|
|
(6,718
|
)
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss, before tax
|
|
|
(9,975
|
)
|
|
|
(7,174
|
)
|
Income tax related to items of other comprehensive income
|
|
|
(360
|
)
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss, net of tax
|
|
$
|
(10,335
|
)
|
|
$
|
(6,992
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss is comprised of the
following items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Unrealized gain on
available-for-sale
securities
|
|
$
|
1,632
|
|
|
$
|
1,092
|
|
Cumulative translation adjustment
|
|
|
(15,258
|
)
|
|
|
(4,383
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(13,626
|
)
|
|
$
|
(3,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Employee
Stock Benefit Plans
|
We record compensation expense for stock-based awards issued to
employees and outside directors in exchange for services
provided based on the estimated fair value of the awards on
their grant dates. Stock-based compensation expense is
recognized over the required service or performance period of
the awards. Our stock-based awards include stock options
(options), restricted stock units
(RSUs), restricted stock awards (RSAs),
restricted stock units with performance-based vesting
(PSUs) and employee stock purchase rights issued
pursuant to our Employee Stock Purchase Plan (ESPP
grants).
19
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes stock-based compensation expense
recorded by condensed consolidated statements of income and
comprehensive income line item (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Cost of net revenue service, support and subscription
|
|
$
|
1,503
|
|
|
$
|
831
|
|
Cost of net revenue product
|
|
|
383
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in cost of net revenue
|
|
|
1,886
|
|
|
|
1,171
|
|
Research and development
|
|
|
7,748
|
|
|
|
6,850
|
|
Sales and marketing
|
|
|
12,306
|
|
|
|
9,763
|
|
General and administrative
|
|
|
7,368
|
|
|
|
6,251
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in operating costs
|
|
|
27,422
|
|
|
|
22,864
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
|
29,308
|
|
|
|
24,035
|
|
Deferred tax benefit
|
|
|
(8,600
|
)
|
|
|
(7,080
|
)
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense, net of tax
|
|
$
|
20,708
|
|
|
$
|
16,955
|
|
|
|
|
|
|
|
|
|
|
We had no stock-based compensation costs capitalized as part of
the cost of an asset.
At March 31, 2010, the estimated fair value of all unvested
options, RSUs, RSAs, PSUs and ESPP grants that have not yet been
recognized as stock-based compensation expense was
$172.4 million, net of expected forfeitures. We expect to
recognize this amount over a weighted-average period of
2.2 years. This amount does not reflect stock-based
compensation expense relating to 0.5 million PSUs for which
the performance criteria had not been set as of March 31,
2010.
We estimate our annual effective tax rate based on year to date
operating results and our forecast of operating results for the
remainder of the year, by jurisdiction, and apply this rate to
the year to date operating results. If our actual results, by
jurisdiction, differ from each successive interim periods
forecasted operating results or if we change our forecast of
operating results for the remainder of the year, our effective
tax rate will change accordingly, affecting tax expense for both
that successive interim period as well as
year-to-date
interim results.
Our consolidated provision for income taxes for the three months
ended March 31, 2010 and 2009 was $14.5 million and
$0.6 million, respectively, reflecting an effective tax
rate of 28% and 1%, respectively. The effective tax rate for the
three months ended March 31, 2010 differs from the
U.S. federal statutory rate (statutory rate)
primarily due to the benefit of lower tax rates in certain
foreign jurisdictions. The effective tax rate for the three
months ended March 31, 2009 differs from the statutory rate
primarily due to the benefit of lower tax rates in certain
foreign jurisdictions, as well as tax benefits recognized in the
first quarter as a result of statute expirations in various
jurisdictions.
The earnings from our foreign operations in India are subject to
a tax holiday. In August 2009, the Indian government extended
the holiday period to March 31, 2011. The tax holiday
provides for zero percent taxation on certain classes of income
and requires certain conditions to be met. We were in compliance
with these conditions as of March 31, 2010.
We apply a more-likely-than-not recognition threshold for all
tax uncertainties. Accounting guidance only allows the
recognition of those tax benefits that have a greater than 50%
likelihood of being sustained upon examination by the taxing
authorities. We believe it is reasonably possible that, in the
next 12 months, the amount of
20
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
unrecognized tax benefits related to the resolution of federal,
state and foreign matters could be reduced by $19.0 million
to $25.1 million as audits close and statutes expire.
We are presently under audit in many jurisdictions, including
notably the United States, California, Germany and Japan. The
Internal Revenue Service is presently conducting an examination
of our federal income tax returns for the calendar years 2006
and 2007. We are also currently under examination by the State
of California for the years 2004 to 2007, in Germany for the
years 2002 to 2007 and in Japan for the years 2007 to 2009. We
cannot reasonably determine if these examinations will have a
material impact on our financial statements. Further, we cannot
predict the timing regarding the resolution of any tax
examinations. In January 2009 we concluded pre-filing
discussions with the Dutch tax authorities with respect to the
2004 tax year resulting in a tax benefit of approximately
$2.2 million. In addition, in the first quarter of 2009,
the statute of limitations related to various domestic and
foreign jurisdictions expired, resulting in a tax benefit of
approximately $9.1 million.
Basic net income per share is computed using the
weighted-average number of common shares outstanding during the
period. Diluted net income per share is computed using the
weighted-average number of common shares and dilutive potential
common shares outstanding during the period using the treasury
stock method. Dilutive potential common shares include options,
RSUs, RSAs, PSUs and ESPP grants. A reconciliation of the
numerator and denominator of basic and diluted net income per
share is provided as follows (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Numerator basic and diluted net income
|
|
$
|
37,576
|
|
|
$
|
53,456
|
|
|
|
|
|
|
|
|
|
|
Denominator basic
|
|
|
|
|
|
|
|
|
Basic weighted-average common stock outstanding
|
|
|
157,738
|
|
|
|
153,721
|
|
|
|
|
|
|
|
|
|
|
Denominator diluted
|
|
|
|
|
|
|
|
|
Basic weighted-average common stock outstanding
|
|
|
157,738
|
|
|
|
153,721
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Options, RSUs, RSAs, PSUs and ESPP grants(1)
|
|
|
2,829
|
|
|
|
2,448
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares
|
|
|
160,567
|
|
|
|
156,169
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$
|
0.24
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted
|
|
$
|
0.23
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In the three months ended March 31, 2010 and 2009,
4.5 million and 6.6 million RSUs and options,
respectively, were excluded from the calculation since the
effect was anti-dilutive. In addition, we excluded
1.2 million and 1.1 million PSUs for the three months
ended March 31, 2010 and 2009, respectively, as they are
contingently issuable shares. |
|
|
14.
|
Business
Segment Information
|
We have one business and operate in one industry. We develop,
market, distribute and support computer and network security
solutions for large enterprises, governments, and small and
medium-sized business and consumer users, as well as resellers
and distributors. Management measures operations based on our
five operating segments: North America; EMEA; Japan; APAC; and
Latin America. Our chief operating decision maker is our chief
executive officer.
21
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We market and sell anti-virus and security software, hardware
and services through our geographic regions. These products and
services are marketed and sold worldwide primarily through
resellers, distributors, systems integrators, retailers,
original equipment manufacturers, internet service providers and
directly by us. In addition, we offer on our web site, suites of
online products and services personalized for the user based on
the users personal computer configuration, attached
peripherals and resident software. We also offer managed
security and availability applications to corporations and
governments on the internet.
Our chief operating decision maker evaluates performance based
on income from operations, which includes only cost of revenue
and selling expenses directly attributable to a sale. Summarized
financial information concerning our net revenue and income from
operations by geographic region is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net revenue by region:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
284,197
|
|
|
$
|
254,442
|
|
EMEA
|
|
|
137,548
|
|
|
|
120,619
|
|
Japan
|
|
|
36,435
|
|
|
|
35,509
|
|
APAC
|
|
|
25,160
|
|
|
|
20,603
|
|
Latin America
|
|
|
19,405
|
|
|
|
16,536
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
502,745
|
|
|
$
|
447,709
|
|
|
|
|
|
|
|
|
|
|
Income from operations by region:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
216,296
|
|
|
$
|
189,234
|
|
EMEA
|
|
|
103,452
|
|
|
|
92,862
|
|
Japan
|
|
|
27,182
|
|
|
|
27,271
|
|
APAC
|
|
|
15,301
|
|
|
|
13,590
|
|
Latin America
|
|
|
14,063
|
|
|
|
12,457
|
|
Corporate and other
|
|
|
(324,740
|
)
|
|
|
(283,644
|
)
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
51,554
|
|
|
$
|
51,770
|
|
|
|
|
|
|
|
|
|
|
Corporate and other includes research and development expenses,
cost of net revenues and sales and marketing expenses not
directly related to the sale of our products and services,
general and administrative expenses, stock-based compensation
expense, amortization of purchased technology and other
intangibles and restructuring charges. These expenses are either
not attributable to any specific geographic region or are not
included in the segment measure of profit and loss reviewed by
our chief operating decision maker. Additionally, operating
income by region, excluding corporate and other, reflects
certain costs such as sales commissions and customer acquisition
costs that are recognized over the period during which the
related revenue is recognized for consolidated GAAP operating
income and are reflected as period expense in the operating
income above. The difference between income from operations and
income before taxes is reflected on the face of our condensed
consolidated statements of income and comprehensive income.
Settled
Cases
In July 2006, the United States District Court for the Northern
District of California consolidated several purported
stockholder derivative suits as In re McAfee, Inc. Derivative
Litigation, Master File No. 5:06CV03484 (JF) (the
Consolidated Action). In September 2006, three
identical lawsuits that had been filed in the Superior Court of
the State of California, County of Santa Clara, were
consolidated in that court (the State Action). The
22
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidated Action and State Action asserted that we improperly
backdated stock option grants for a period ending in May 2006.
In December 2007, we reached a tentative settlement with the
plaintiffs in both Actions. The Court preliminarily approved the
settlement in October 2008 and granted final approval in
February 2009. We paid $13.8 million in the three months
ended March 31, 2009 for this previously accrued settlement.
In the three months ended March 31, 2009, we recorded a
benefit of $6.5 million related to reimbursements from
insurance for legal fees we incurred related to cost of defense
incurred in connection with our stock option investigation that
commenced in May 2006. This benefit is reflected in the general
and administrative line on our condensed consolidated statements
of income and comprehensive income.
Open
Cases
While we cannot predict the likelihood of future claims or
inquiries, we expect that new matters may be initiated against
us from time to time. As of March 31, 2010, we had accrued
aggregate liabilities of approximately $38.2 million for
all of our litigation matters. The results of claims, lawsuits
and investigations cannot be predicted, and it is possible that
the ultimate resolution of these matters, individually and in
the aggregate, may have a material adverse effect on our
business, financial condition, results of operations or cash
flows.
In June 2006, Finjan Software, Ltd. (Finjan) filed a
complaint in the United States District Court for the District
of Delaware against Secure Computing, which we acquired in
November 2008, alleging Webwasher Secure Content Management
suite and CyberGuard TSP infringe three Finjan patents. In March
2008, a jury found that Secure Computing willfully infringed
certain claims of three Finjan patents and awarded
$9.2 million in damages. This was recorded as an assumed
liability in the allocation of the purchase price for Secure
Computing. In August 2009, the judge amended the jury damages
award to include additional infringing sales through March 2008
as well as specified pre-judgment and post-judgment interest.
The judge also awarded enhanced damages in the amount of 50% of
the amended jury damages award and enjoined Secure Computing
from infringing the asserted claims of the Finjan patents. We
have accrued the amended jury damages. We have appealed and will
vigorously challenge the verdict and post-trial rulings.
We have other patent infringement cases pending against us that
we intend to vigorously defend.
In addition, we are engaged in other legal and administrative
proceedings incidental to our normal business activities.
On April 21, 2010, we released a faulty signature file
update that caused some of our customers computers to be
rendered inoperable or significantly impaired. We are assisting
our customers to resolve their computer problems and taking
steps to ensure that a similar problem will not reoccur. We
anticipate that our consolidated financial position, results of
operations and cash flows will be negatively impacted as a
result of this file update.
23
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements; Trademarks
This Report on
Form 10-Q
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are statements that look to future
events and consist of, among other things, statements about our
anticipated future income including the amount and mix of
revenue among type of product, category of customer, geographic
region and distribution method and our anticipated future
expenses and tax rates. Forward-looking statements include our
business strategies and objectives and include statements about
the expected benefits of our strategic alliances and
acquisitions, our plans for the integration of acquired
businesses, our continued investment in complementary
businesses, products and technologies, our expectations
regarding product acceptance, product and pricing competition,
cash requirements and the amounts and uses of cash and working
capital that we expect to generate, as well as statements
involving trends in the security risk management market and
statements including such words as may,
believe, plan, expect,
anticipate, could, estimate,
predict, goals, continue,
project, and similar expressions or the negative of
these terms or other comparable terminology. These
forward-looking statements speak only as of the date of this
Report on
Form 10-Q
and are subject to business and economic risks, uncertainties
and assumptions that are difficult to predict, including those
discussed in Risk Factors in Part II,
Item 1A in this quarterly report and in Item 1,
Business, Item 1A, Risk
Factors and 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 December 31, 2009. Therefore, our
actual results may differ materially and adversely from those
expressed in any forward-looking statements. We cannot assume
responsibility for the accuracy and completeness of
forward-looking statements, and we undertake no obligation to
revise or update publicly any forward-looking statements for any
reason.
This report includes registered trademarks and trade names of
McAfee and other corporations. Trademarks or trade names owned
by McAfee
and/or its
affiliates include, but are not limited to: McAfee,
ePolicy Orchestrator, AntiVirus Plus,
VirusScan, IntruShield,
Foundstone, SiteAdvisor, Total
Protection, AntiSpyware,
SecurityAlliance, McAfee Security,
SafeBoot, ScanAlert, McAfee
SECURE, McAfee Family Protection, McAfee
Labs, McAfee Total Care, McAfee Online
Backup, McAfee Security Center, McAfee
Virtual Technician, McAfee Web Protection,
Policy Auditor, and TrustedSource. Any
other non-McAfee related products, registered
and/or
unregistered trademarks contained herein are only by reference
and are the sole property of their respective owners.
The following discussion should be read in conjunction with the
condensed consolidated financial statements and related notes
included elsewhere in this report. The results shown herein are
not necessarily indicative of the results to be expected for the
full year or any future periods.
Overview
and Executive Summary
We are the worlds largest dedicated security technology
company. We deliver proactive and proven solutions and services
that help secure systems and networks around the world, allowing
users to safely connect to the internet, browse and shop the web
more securely. We create innovative products that empower home
users, businesses, the public sector and service providers by
enabling them to prove compliance with regulations, protect
data, prevent disruptions, identify vulnerabilities and
continuously monitor and improve their security.
We have one business and operate in one industry: developing,
marketing, distributing and supporting computer security
solutions for large enterprises, governments, small and
medium-sized businesses and consumers either directly or through
a network of qualified distribution partners. We derive our
revenue from two sources: (i) service, support and
subscription revenue, which includes maintenance, training and
consulting revenue as well as revenue from licenses under
subscription arrangements and (ii) product revenue, which
includes revenue from perpetual licenses (those with a one-time
license fee) and from hardware product sales. In the three
months ended March 31, 2010, service, support and
subscription revenue accounted for 90% of net revenue and
product revenue accounted for 10% of net revenue.
24
Operating
Results and Trends
We evaluate our consolidated financial performance utilizing a
variety of indicators. Five of the primary indicators that we
utilize to evaluate the growth and health of our business are
total net revenue, operating income, net income, net cash
provided by operating activities and deferred revenue. In
addition, our management considers certain non-GAAP
metrics (derived by adjusting operating income and net income
for certain items) when evaluating our ongoing performance
and/or
predicting our earnings trends. These items include stock-based
compensation expense, amortization of purchased technology and
intangibles, restructuring charges, acquisition-related costs,
loss on sale/disposal of assets and technology,
investigation-related and other costs, marketable securities
(accretion) impairment, GAAP income taxes and certain other
items. See the Reconciliation of GAAP to
Non-GAAP Financial Measures below.
Net Revenue. As discussed more fully below,
our net revenue in the three months ended March 31, 2010
grew by $55.0 million, or 12%, to $502.7 million from
$447.7 million in the three months ended March 31,
2009. Our net revenue is directly impacted by corporate
information technology, government and consumer spending levels.
Net revenue from our 2009 acquisitions contributed
$11.3 million in the three months ended March 31,
2010. Changes in the U.S. Dollar compared to foreign
currencies positively impacted our revenue growth by
$10.8 million in the three months ended March 31, 2010
when compared to the three months ended March 31, 2009.
Operating Income. Operating income decreased
$0.2 million in the three months ended March 31, 2010
compared to the three months ended March 31, 2009 as the
increase in costs of net revenue and operating costs slightly
exceeded the increase in net revenue. The increase in expenses
included: (i) a $10.7 million increase in
restructuring charges due to vacating five facilities and
realigning our staffing across all departments, (ii) a
$9.1 million increase in salaries and benefits due to
increases in headcount, (iii) a $5.3 million increase
in stock-based compensation expense primarily due to increased
grants of RSUs and PSUs and (iv) increases in costs of
revenues primarily related to infrastructure costs and costs
related to our online subscription arrangements.
The $13.1 million increase in non-GAAP operating income
(which is adjusted for certain items excluded by management when
evaluating our ongoing performance
and/or
predicting our earnings trends) for the three months ended
March 31, 2010 compared to the three months ended
March 31, 2009 resulted from a $55.0 million increase
in net revenue that exceeded (i) the $17.7 million
increase in non-GAAP costs of net revenue and (ii) the
$24.2 million increase in non-GAAP operating expenses that
was primarily related to an increase in salaries and benefits
due to an increase in headcount and an increase in overall
expenses due to the U.S. Dollar weakening against both the
Euro and the Yen on an average quarterly exchange basis. See the
Reconciliation of GAAP to Non-GAAP Financial
Measures below.
On April 21, 2010, we released a faulty signature file
update that caused some of our customers computers to be
rendered inoperable or significantly impaired. We are assisting
our customers to resolve their computer problems and taking
steps to ensure that a similar problem will not reoccur. We
anticipate that our consolidated financial position, results of
operations and cash flows will be negatively impacted as a
result of this file update.
Net Income. The $15.9 million decrease in
net income in the three months ended March 31, 2010
compared to three months ended March 31, 2009 was primarily
attributable to an increase in our effective tax rate discussed
more fully in Provision for Income Taxes below.
The $7.8 million increase in non-GAAP net income (which is
adjusted for certain items excluded by management when
evaluating our ongoing performance
and/or
predicting our earnings trends) for the three months ended
March 31, 2010 compared to the three months ended
March 31, 2009 resulted from the increase in non-GAAP
operating income described above, offset by using a 24% non-GAAP
effective tax rate to calculate non-GAAP net income in both
periods. See the Reconciliation of GAAP to
Non-GAAP Financial Measures below.
Net cash provided by operating activities. The
$11.3 million increase in net cash provided by operating
activities in the three months ended March 31, 2010
compared to three months ended March 31, 2009 was primarily
attributable to managements continued focus on operating
cash flows. The decrease in net income of $15.9 million was
offset by a $15.8 million increase in non-cash adjustments
to net income, which included a $9.7 million increase in
non-cash restructuring charges and a $5.3 million increase
in non-cash stock-based compensation expense, and a
$11.4 million increase in operating cash flows from working
capital, primarily driven by changes in our accrued taxes and
other liabilities. During the three months ended March 31,
2010 the change in accrued compensation and benefits and other
liabilities was a $11.4 million decrease compared to an
$80.3 million decrease in the three months ended
25
March 31, 2009. The $80.3 million decrease in 2009 was
primarily related to payments of our derivative lawsuit
settlement, taxes and commissions. See Liquidity and
Capital Resources below. As a result of our release of a
faulty signature file on April 21, 2010, we anticipate that
our consolidated cash flows will be negatively impacted.
Deferred Revenue. Our deferred revenue balance
at March 31, 2010 decreased 2% to $1,378.5 million,
compared to $1,407.5 million at December 31, 2009. Our
deferred revenue decreased primarily due the negative impact of
the U.S dollar strengthening against the Euro and, to a lesser
extent, the Japanese Yen during the three months ended
March 31, 2010. Excluding the impact of changes in exchange
rates, our deferred revenue increased $5.5 million as a
result of growing sales of maintenance renewals from our
expanding customer base and increased sales of
subscription-based products. We receive up-front payments for
maintenance and subscriptions, but we recognize revenue over the
service or subscription term. We monitor our deferred revenue
balance because it represents a significant portion of revenue
to be recognized in future periods. Approximately 75 to 85% of
our total net revenue during both 2010 and 2009 came from
prior-period deferred revenue. As with revenue, we believe that
deferred revenue is a key indicator of the growth and health of
our business.
Acquisitions. We continue to focus our efforts
on building a full line of system and network protection
solutions and technologies that support our multi-platform
strategy of personal computer, internet and mobile security
solutions. In 2009, we acquired MX Logic, for
$163.1 million and Solidcore for $40.5 million. We
expect that the 2009 acquisitions of MX Logic and Solidcore will
have a dilutive impact on net income for the remainder of 2010,
primarily due to the amortization of intangibles. We expect that
the 2009 acquisitions of MX Logic and Solidcore will have a
slightly accretive impact for the remainder of 2010 when
adjusting net income for certain items excluded by management
when evaluating our ongoing performance
and/or
predicting our earnings trends. See the Reconciliation of
GAAP to Non-GAAP Financial Measures below for such
items excluded by management.
Net Revenue by Product Groups and Customer
Category. Transactions from our corporate
business include the sale of product offerings intended for
enterprise, mid-market and small business use. Net revenue from
our corporate products increased $36.5 million, or 13%, to
$312.5 million during the three months ended March 31,
2010 from $276.0 million in the three months ended
March 31, 2009. The
year-over-year
increase in revenue was due to a $33.6 million increase in
revenue from our network security solutions due to increased
revenue from our Secure acquisition and new revenue from our MX
Logic acquisition. These increases were offset in part by slight
decreases in revenue from our risk and compliance solutions and
service solutions. In 2009, we experienced an increase in the
sale of our hardware solutions, which resulted in higher upfront
revenue recognition. During 2009, we also experienced an
increase in both the number and size of larger transactions sold
to customers through a solution selling approach, which bundles
multiple products and services into suite offerings. This
positively impacted revenue and deferred revenue and should
continue to positively impact revenue in future periods.
Transactions from our consumer business include the sale of
product offerings primarily intended for consumer use, as well
as any revenue or activities associated with providing an
overall safe consumer experience on the internet or cellular
networks. Net revenue from our consumer security market
increased $18.5 million, or 11%, to $190.2 million in
the three months ended March 31, 2010 from
$171.7 million in the three months ended March 31,
2009. The increase in revenue from our consumer market in the
three months ended March 31, 2010 was primarily
attributable to our continued relationships with strategic
channel partners, such as Acer, Dell, Sony Computer, and Toshiba.
Foreign Exchange Fluctuations. The Euro and
Japanese Yen are the two predominant
non-U.S. currencies
that affect our financial statements. As the U.S. Dollar
strengthens against foreign currencies, our revenues from
transactions outside the U.S. and operating income may be
negatively impacted. As the U.S. Dollar weakens against
foreign currencies, our revenues may be positively impacted.
During the three months ended March 31, 2010, on an average
quarterly exchange basis, the U.S. Dollar weakened against
both the Euro and the Yen compared to the three months ended
March 31, 2009. Overall, the U.S. Dollar weakening
against the Euro had the most significant impact to our
financial statements and this has resulted in an increase in the
revenue and expense amounts in certain foreign countries in our
condensed consolidated statements of income and comprehensive
income for the three months ended March 31, 2010 compared
to the three months ended March 31, 2009. The recent
volatility in the European capital markets has caused the
U.S. Dollar to strengthen against the Euro. If this
continues, our revenues and operating income may be negatively
impacted.
26
Critical
Accounting Policies and Estimates
We had no significant changes in our critical accounting
policies and estimates during the three months ended
March 31, 2010 as compared to the critical accounting
policies and 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 year ended December 31, 2009.
Results
of Operations
Managements discussion and analysis of results of
operations has been revised for the effects of correcting
previously reported components of net revenue discussed in the
reclassification disclosure within Note 2 to our condensed
consolidated financial statements in Part I, Item 1.
Net
Revenue
The following table sets forth, for the periods indicated, a
year-over-year
comparison of the key components of our net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
2010 vs. 2009
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, support and subscription
|
|
$
|
452,864
|
|
|
$
|
410,345
|
|
|
$
|
42,519
|
|
|
|
10
|
%
|
Product
|
|
|
49,881
|
|
|
|
37,364
|
|
|
|
12,517
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
502,745
|
|
|
$
|
447,709
|
|
|
$
|
55,036
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
284,197
|
|
|
$
|
254,442
|
|
|
$
|
29,755
|
|
|
|
12
|
%
|
EMEA
|
|
|
137,548
|
|
|
|
120,619
|
|
|
|
16,929
|
|
|
|
14
|
|
Japan
|
|
|
36,435
|
|
|
|
35,509
|
|
|
|
926
|
|
|
|
3
|
|
APAC
|
|
|
25,160
|
|
|
|
20,603
|
|
|
|
4,557
|
|
|
|
22
|
|
Latin America
|
|
|
19,405
|
|
|
|
16,536
|
|
|
|
2,869
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
502,745
|
|
|
$
|
447,709
|
|
|
$
|
55,036
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net revenue in a specific period is an aggregation of
thousands of transactions ranging from high-volume, low-dollar
transactions to high-dollar, multiple-element transactions that
are individually negotiated. The impact of pricing and volume
changes on revenue is complex as substantially all of our
transactions contain multiple elements, primarily software
licenses and post-contract support. Additionally, approximately
75 to 85% of our revenue in a specific period is derived from
prior-period transactions for which revenue has been deferred
and is being amortized into income over the period of the
arrangement. Therefore, the impact of pricing and volume changes
on revenue in a specific period results from transactions in
multiple prior periods.
Net
Revenue by Geography
Net revenue outside of North America accounted for approximately
43% of net revenue in both the three months ended March 31,
2010 and 2009. Net revenue from North America and EMEA has
historically comprised between 80% and 90% of our total net
revenue.
The increase in net revenue in North America during the three
months ended March 31, 2010 compared to the three months
ended March 31, 2009 was primarily related to (i) a
$25.3 million increase in corporate revenue and (ii) a
$4.4 million increase in consumer revenue. The increase in
corporate revenue was due to a $26.0 million increase in
revenue from our network security offerings due to increased
revenue from our Secure acquisition and new revenue from our MX
Logic acquisition. The increase in revenue from our consumer
market in the three
27
months ended March 31, 2010 was primarily attributable to
our continued relationships with strategic channel partners,
such as Acer, Dell, Sony Computer, and Toshiba.
The increase in net revenue in EMEA during the three months
ended March 31, 2010 compared to the three months ended
March 31, 2009 was attributable to revenue growth from both
our consumer and corporate offerings and the positive impact of
the U.S. Dollar weakening against the Euro on an average
exchange basis for the three months ended March 31, 2010
compared to the three months ended March 31, 2009.
Corporate revenue increased $10.0 million due to increased
revenue from our network security offerings. Consumer revenue
increased $6.9 million due to an increase in our customer
base. Included in the increased corporate and consumer revenue
is a positive foreign exchange impact of approximately
$10.0 million in the three months ended March 31, 2010
compared to March 31, 2009.
Our Japan, APAC and Latin America operations combined have
historically comprised less than 20% of our total net revenue
and we expect this trend to continue. Net revenue in Japan was
positively impacted by the weakening U.S. Dollar against
the Japanese Yen, which resulted in an approximate
$0.7 million contribution to Japan net revenue in the three
months ended March 31, 2010 compared to the three months
ended March 31, 2009, respectively. The increase in net
revenue from Japan, APAC and Latin America during the three
months ended March 31, 2010 compared to the three months
ended March 31, 2009 was primarily attributable to
increased revenue from our consumer offerings in all three
geographic regions and increased revenue from our corporate
offerings in both APAC and Latin America.
Service,
Support and Subscription Revenue
The increase in service, support and subscription revenue in the
three months ended March 31, 2010 compared to the three
months ended March 31, 2009 was attributable to (i) an
increase in sales of support and subscription renewals to
existing and new customers, (ii) amortization of previously
deferred revenue from support arrangements, (iii) increases
in our online subscription arrangements due to our continued
relationships with strategic partners such as Acer, Dell, Sony
Computer and Toshiba, (iv) increases in revenue from our
McAfee Total Protection Service for small and mid-market
businesses and (v) increases in royalties from sales by our
strategic channel partners. Revenue from consulting increased
due to growth in integration and implementation services.
Although we expect our service, support and subscription revenue
to continue to increase, our growth rate and net revenue depend
significantly on renewals of support arrangements as well as our
ability to respond successfully to the pace of technological
change and expand our customer base. If our renewal rate or our
pace of new customer acquisition slows, our net revenue and
operating results would be adversely affected.
Product
Revenue
The increase in product revenue in the three months ended
March 31, 2010 compared to the three months ended
March 31, 2009 was attributable to (i) increased
revenue from our Secure Computing acquisition,
(ii) increased revenue from our network security solutions
that have a higher hardware content and, therefore, more upfront
revenue realization and (iii) increased revenue from our
data protection solutions and upgrade initiatives related to our
total protection solutions.
28
Cost
of Net Revenue
The following table sets forth, for the periods indicated a
comparison of cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
2010 vs. 2009
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, support and subscription
|
|
$
|
88,155
|
|
|
$
|
72,728
|
|
|
$
|
15,427
|
|
|
|
21
|
%
|
Product
|
|
|
23,927
|
|
|
|
20,934
|
|
|
|
2,993
|
|
|
|
14
|
|
Amortization of purchased technology
|
|
|
20,493
|
|
|
|
19,394
|
|
|
|
1,099
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
$
|
132,575
|
|
|
$
|
113,056
|
|
|
$
|
19,519
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, support and subscription
|
|
$
|
364,709
|
|
|
$
|
337,617
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
25,954
|
|
|
|
16,430
|
|
|
|
|
|
|
|
|
|
Amortization of purchased technology
|
|
|
(20,493
|
)
|
|
|
(19,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
370,170
|
|
|
$
|
334,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin percentage
|
|
|
74
|
%
|
|
|
75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Service, Support and Subscription Revenue
Cost of service, support and subscription revenue consists
primarily of costs related to the sale of online subscription
arrangements and the costs of providing customer support,
training, and consulting services which include salaries,
benefits, and stock-based compensation for employees and fees
related to professional service subcontractors. The costs
related to the sale of online subscription arrangements include
revenue-share arrangements and royalties paid to our strategic
partners as well as the costs of media, manuals and packaging
related to our subscription-based product offerings. The cost of
service, support and subscription revenue increased in the three
months ended March 31, 2010 compared to the three months
ended March 31, 2009 due to increased infrastructure costs
and increased costs related to our online subscription
arrangements. The cost of service, support and subscription
revenue as a percentage of service, support and subscription
revenue for the three months ended March 31, 2010 increased
slightly compared to the same period in 2009 primarily due to
increased infrastructure costs.
We anticipate the cost of service, support and subscription
revenue will increase in absolute dollars driven primarily by
(i) increased demand for our subscription-based products
with associated revenue-sharing costs, (ii) increased costs
attributable to providing customer and technical support to
existing and new customers, (iii) increased infrastructure
costs and (iv ) additional growth in our consulting services,
which provide end users with product design, user training and
deployment support.
Cost of
Product Revenue
Cost of product revenue consists primarily of the cost of media,
manuals and packaging for products distributed through
traditional channels and, with respect to hardware-based
security products, the cost of computer platforms, other
hardware and embedded third-party components and technologies.
The cost of product revenue increased in the three months ended
March 31, 2010 compared to the three months ended
March 31, 2009 due primarily to increased transactions
associated with our network security solutions. The cost of
product revenue as a percentage of product revenue for the three
months ended March 31, 2010 decreased as a percentage of
product revenue compared to the same period in 2009 primarily
due to an increase in both the number and size of higher margin
corporate transactions sold to customers through a solution
selling approach.
We anticipate that cost of product revenue will increase in
absolute dollars due to mix and size of certain
enterprise-related transactions.
29
Amortization
of Purchased Technology
The increase in amortization of purchased technology in the
three months ended March 31, 2010 compared to the three
months ended March 31, 2009 was primarily attributable to
our acquisition of Solidcore in June 2009 and MX Logic in
September 2009, offset by purchased technology that became fully
amortized during 2009. Amortization for the purchased technology
related to Solidcore and MX Logic was $2.5 million in the
three months ended March 31, 2010.
Assuming no new acquisitions, we expect amortization of
purchased technology will decrease slightly in absolute dollars
during the remainder of 2010 as a result of certain purchased
technology becoming fully amortized during 2010.
Gross
Margin
The slight decrease in our gross margin in the three months
ended March 31, 2010 compared to the three months ended
March 31, 2009 was due primarily to (i) our product
mix, (ii) the increase in the cost of service, support and
subscription revenue as a percentage of service, support and
subscription revenue and (iii) a slight increase in
amortization of purchased technology related to acquisitions
made during 2009. Gross margin may fluctuate in the future due
to various factors, including the mix of products sold, upfront
revenue realization, sales discounts, revenue-sharing
arrangements, material and labor costs, warranty costs and
amortization of purchased technology and patents.
Stock-based
Compensation Expense
Stock-based compensation expense consists of expense associated
with all stock-based awards made to our employees and outside
directors. Our stock-based awards include options, RSUs, RSAs,
PSUs and ESPP grants.
The following table sets forth, for the periods indicated, a
comparison of our stock-based compensation expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
2010 vs. 2009
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Stock-based compensation expense
|
|
$
|
29,308
|
|
|
$
|
24,035
|
|
|
$
|
5,273
|
|
|
|
22
|
%
|
The $5.3 million increase in stock-based compensation
expense during the three months ended March 31, 2010
compared to the three months ended March 31, 2009 was
primarily attributable to (i) a $3.2 million increase
in expense relating to increased grants of RSUs and PSUs and
(ii) a $1.8 million increase in expense related to
options. See Note 11 to the condensed consolidated
financial statements for additional information.
Operating
Costs
Research
and Development
The following table sets forth, for the periods indicated, a
comparison of our research and development expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31
|
|
2010 vs. 2009
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Research and development(1)
|
|
$
|
84,124
|
|
|
$
|
78,904
|
|
|
$
|
5,220
|
|
|
|
7
|
%
|
Percentage of net revenue
|
|
|
17
|
%
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense of $7.7 million
and $6.9 million in the three months ended March 31,
2010 and 2009, respectively. |
Research and development expenses consist primarily of salary,
benefits, and stock-based compensation for our development and a
portion of our technical support staff, contractors fees
and other costs associated with the
30
enhancement of existing products and services and development of
new products and services. The increase in research and
development expenses in the three months ended March 31,
2010 compared to the three months ended March 31, 2009 was
primarily attributable to (i) a $1.9 million increase
in salary and benefit expense for individuals performing
research and development activities due to an increase in
headcount, (ii) a $1.4 million increase in the use of
third-party contractors for research and development activities,
(iii) a $0.8 million increase in stock-based
compensation expense and (iv) increases in various other
expenses associated with research and development activities.
The overall increase in research and development expenses in the
three months ended March 31, 2010 compared to the three
months ended March 31, 2009 included a net increase of
$1.7 million due to the net impact of foreign exchange
rates, primarily driven by the average U.S. Dollar exchange
rate weakening against foreign currencies.
We believe that continued investment in product development is
critical to attaining our strategic objectives. We expect
research and development expenses will increase in absolute
dollars during the remainder of 2010 when compared to the same
prior-year periods.
Sales and
Marketing
The following table sets forth, for the periods indicated, a
comparison of our sales and marketing expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
2010 vs. 2009
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Sales and marketing(1)
|
|
$
|
166,245
|
|
|
$
|
148,764
|
|
|
$
|
17,481
|
|
|
|
12
|
%
|
Percentage of net revenue
|
|
|
33
|
%
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense of $12.3 million
and $9.8 million in the three months ended March 31,
2010 and 2009, respectively. |
Sales and marketing expenses consist primarily of salary,
commissions, stock-based compensation and benefits and costs
associated with travel for sales and marketing personnel,
advertising and marketing promotions. The increase in sales and
marketing expenses during the three months ended March 31,
2010 compared to the three months ended March 31, 2009
reflected (i) a $9.2 million increase in salary and
benefit expense, including commissions, for individuals
performing sales and marketing activities due to an increase in
headcount and increased commissions, (ii) a
$2.5 million increase in stock-based compensation expense,
(iii) a $1.6 million increase related to agreements
with certain PC OEM partners and (iv) increases in various
other expenses associated with sales and marketing activities.
The increase in sales and marketing expenses during the three
months ended March 31, 2010 compared to the three months
ended March 31, 2009 included a net increase of
$6.1 million due to the net impact of foreign exchange
rates, primarily driven by the average U.S. Dollar exchange
rate weakening against foreign currencies.
We anticipate that sales and marketing expenses will increase in
absolute dollars during the remainder of 2010 when compared to
the same prior year periods primarily due to agreements with our
strategic partners, primarily our PC OEM partners, where we have
seen growth in volume and an increase in the number of partner
agreements, our planned branding initiatives and our additional
investment in sales capacity.
General
and Administrative
The following table sets forth, for the periods indicated, a
comparison of our general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
2010 vs. 2009
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
General and administrative(1)
|
|
$
|
44,851
|
|
|
$
|
40,160
|
|
|
$
|
4,691
|
|
|
|
12
|
%
|
Percentage of net revenue
|
|
|
9
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
31
|
|
|
(1) |
|
Includes stock-based compensation expense of $7.4 million
and $6.3 million in the three months ended March 31,
2010 and 2009, respectively. |
General and administrative expenses consist primarily of salary,
stock-based compensation and benefit costs for executive and
administrative personnel, professional services and other
general corporate activities. The increase in general and
administrative expenses during the three months ended
March 31, 2010 compared to the three months ended
March 31, 2009 reflected changes in legal expense and
increased stock-based compensation expense, offset by decreases
in various other expenses associated with general and
administrative activities, including decreased professional fees
and decreased salary and benefit expense for individuals
performing general corporate activities. Our legal expenses in
the three months ended March 31, 2010 compared to the three
months ended March 31, 2009 were flat, however, in the
three months ended March 31, 2009, we received a
$6.5 million reimbursement from an insurance carrier for
legal fees incurred related to the cost of defense in connection
with our investigation of historical stock option granting
practices that concluded in 2007.
We anticipate that general and administrative expenses will
increase in absolute dollars during the remainder of 2010 when
compared to the same prior-year periods.
Amortization
of Intangibles
The following table sets forth, for the periods indicated, a
comparison of the amortization of intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
2010 vs. 2009
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Amortization of intangibles
|
|
$
|
7,642
|
|
|
$
|
9,995
|
|
|
$
|
(2,353
|
)
|
|
|
(24
|
)%
|
Intangibles consist primarily of customer-related intangible
assets. The decrease in amortization of intangibles during the
three months ended March 31, 2010 compared to the three
months ended March 31, 2009 was primarily attributable to
(i) decreased amortization of Secure Computings
customer-related intangible assets that are being amortized
using an accelerated method and (ii) certain intangibles
acquired in previous acquisitions becoming fully amortized in
the fourth quarter of 2009, offset by the acquisitions of
Solidcore in June 2009 and MX Logic in September 2009, in which
we acquired $38.0 million of customer-related intangible
assets.
Assuming no new acquisitions, we expect amortization of
intangibles will be flat or decrease slightly in absolute
dollars during the remainder of 2010 as a result of certain
intangibles acquired in previous acquisitions becoming fully
amortized during 2010.
Restructuring
Charges
Restructuring charges in the three months ended March 31,
2010 totaled $15.8 million, of which $11.3 million
related to five facilities that were vacated and
$4.4 million related to the realignment of staffing across
all departments in the first quarter of 2010.
Restructuring charges in the three months ended March 31,
2009 totaled $5.1 million, of which $2.7 million
related to the realignment of our sales and marketing workforce
and $2.2 million related to additional accrual over the
service period for our 2008 elimination of certain positions at
Secure Computing. See Note 7 to our condensed consolidated
financial statements for a description of restructuring
activities.
We anticipate that we will have additional restructuring charges
during the remainder of 2010.
32
Interest
and Other Income, Net
The following table sets forth, for the periods indicated, a
comparison of our interest and other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
2010 vs. 2009
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Interest and other income, net
|
|
$
|
570
|
|
|
$
|
2,811
|
|
|
$
|
(2,241
|
)
|
|
|
(80
|
)%
|
Interest and other income, net includes interest earned on
investments and interest expense related to our credit facility,
as well as net foreign currency transaction gains or losses and
net forward contract gains or losses. The decrease in interest
and other income, net in the three months ended March 31,
2010 compared to the three months ended March 31, 2009 was
primarily due to net foreign currency transaction losses of
$0.7 million in the three months ended March 31, 2010
compared to a gain of $1.3 million during the three months
ended March 31, 2009.
We anticipate that interest and other income, net will decrease
during the remainder of 2010 as a result of lower cash balances
due to our stock repurchase program and acquisitions, the
declining interest rate environment, our shifting a large
percentage of our investment portfolio to shorter-term and
U.S. government and FDIC guaranteed investments, which have
a lower yield, and higher costs on our revised credit facility.
Provision
for Income Taxes
The following table sets forth, for the periods indicated, a
comparison of our provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
2010 vs. 2009
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Provision for income taxes
|
|
$
|
14,507
|
|
|
$
|
581
|
|
|
$
|
13,926
|
|
|
*
|
Effective tax rate
|
|
|
28
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
* |
|
Calculation not meaningful |
We estimate our annual effective tax rate based on year to date
operating results and our forecast of operating results for the
remainder of the year, by jurisdiction, and apply this rate to
the year to date operating results. If our actual results, by
jurisdiction, differ from each successive interim periods
forecasted operating results or if we change our forecast of
operating results for the remainder of the year, our effective
tax rate will change accordingly, affecting tax expense for both
that successive interim period as well as
year-to-date
interim results.
The effective tax rate for the three months ended March 31,
2010 differs from the U.S. federal statutory rate
(statutory rate) primarily due to the benefit of
lower tax rates in certain foreign jurisdictions. The increase
in the effective tax rate for the three months ended
March 31, 2010 as compared to the prior period is primarily
due to the tax impact of a shift in jurisdictional earnings and
the tax benefits recognized in the first quarter 2009 that did
not recur in the first quarter 2010. The effective tax rate for
the three months ended March 31, 2009 differs from the
U.S. federal statutory rate (statutory rate)
primarily due to the benefit of lower tax rates in certain
foreign jurisdictions as well as tax benefits recognized in the
first quarter as a result of statute expirations in various
jurisdictions.
Our future tax rates could be adversely affected if pretax
earnings are proportionally less than amounts in prior years in
countries where we have lower statutory rates or by unfavorable
changes in tax laws and regulations. We cannot reasonably
estimate the impact to our future effective tax rates for
possible changes in earnings or tax laws and regulations. The
Internal Revenue Service is presently conducting an examination
of our federal income tax returns for the calendar years 2006
and 2007. We are also currently under examination by the State
of California for the years 2004 to 2007, in Germany for the
years 2002 to 2007, and in Japan for years 2007 to 2009. We
cannot reasonably determine if these examinations will have a
material impact on our financial statements.
33
Reconciliation
of GAAP to Non-GAAP Financial Measures
The following presentation includes non-GAAP
measures. Our non-GAAP measures are not meant to
be considered in isolation or as a substitute for comparable
GAAP measures. For a detailed explanation of the adjustments
made to comparable GAAP measures, the reasons why management
uses these measures, the usefulness of these measures and the
material limitation of these measures, see items (1)
(9) below.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
GAAP operating income
|
|
$
|
51,554
|
|
|
$
|
51,770
|
|
Stock-based compensation expense(1)
|
|
|
29,308
|
|
|
|
24,035
|
|
Amortization of purchased technology(2)
|
|
|
20,493
|
|
|
|
19,394
|
|
Restructuring charges(3)
|
|
|
15,754
|
|
|
|
5,060
|
|
Amortization of intangibles(2)
|
|
|
7,642
|
|
|
|
9,995
|
|
Acquisition-related costs(4)
|
|
|
2,000
|
|
|
|
3,276
|
|
Loss on sale/disposal of assets and technology(5)
|
|
|
8
|
|
|
|
59
|
|
Investigation-related and other costs(6)
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP operating income
|
|
$
|
126,759
|
|
|
$
|
113,635
|
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
GAAP net income
|
|
$
|
37,576
|
|
|
$
|
53,456
|
|
Stock-based compensation expense(1)
|
|
|
29,308
|
|
|
|
24,035
|
|
Amortization of purchased technology(2)
|
|
|
20,493
|
|
|
|
19,394
|
|
Restructuring charges(3)
|
|
|
15,754
|
|
|
|
5,060
|
|
Amortization of intangibles(2)
|
|
|
7,642
|
|
|
|
9,995
|
|
Acquisition-related costs(4)
|
|
|
2,000
|
|
|
|
3,276
|
|
Loss on sale/disposal of assets and technology(5)
|
|
|
8
|
|
|
|
59
|
|
Investigation-related and other costs(6)
|
|
|
|
|
|
|
46
|
|
Marketable securities (accretion) impairment(7)
|
|
|
(428
|
)
|
|
|
710
|
|
Provision for income taxes(8)
|
|
|
14,507
|
|
|
|
581
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP income before provision for income taxes
|
|
|
126,860
|
|
|
|
116,612
|
|
Non-GAAP provision for income taxes(9)
|
|
|
30,446
|
|
|
|
27,987
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income
|
|
$
|
96,414
|
|
|
$
|
88,625
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted *:
|
|
|
|
|
|
|
|
|
GAAP net income per share diluted
|
|
$
|
0.23
|
|
|
$
|
0.34
|
|
Stock-based compensation expense per share(1)
|
|
|
0.18
|
|
|
|
0.15
|
|
Other adjustments per share(2-9)
|
|
|
0.18
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income per share diluted*
|
|
$
|
0.60
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute non-GAAP net income per share
diluted
|
|
|
160,567
|
|
|
|
156,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Non-GAAP net income per share is computed independently for each
period presented. The sum of GAAP net income per share and
non-GAAP adjustments may not equal non-GAAP net income per share
due to rounding differences. |
34
|
|
|
|
|
The non-GAAP financial measures are non-GAAP operating income,
non-GAAP net income and non-GAAP net income per
share diluted, which adjust for the following items:
stock-based compensation expense, amortization of purchased
technology and intangibles, restructuring charges,
acquisition-related costs, loss on sale/disposal of assets and
technology, investigation-related and other costs, marketable
securities (accretion) impairment, income taxes and certain
other items discussed below. We believe that the presentation of
these non-GAAP financial measures is useful to investors, and
such measures are used by our management, for the reasons
associated with each of the adjusting items as described below: |
|
(1) |
|
Stock-based compensation expense consist of expense
relating to stock-based awards issued to employees and outside
directors including stock options, restricted stock awards and
units, restricted stock units with performance-based vesting and
our Employee Stock Purchase Plan. Because of varying available
valuation methodologies, subjective assumptions and the variety
of award types, we believe that the exclusion of stock-based
compensation expense allows for more accurate comparisons of our
operating results to our peer companies, and for a more accurate
comparison of our financial results to previous periods. In
addition, we believe it is useful to investors to understand the
specific impact of stock-based compensation expense on our
operating results. |
|
(2) |
|
Amortization of purchased technology and intangibles are
non-cash charges that can be impacted by the timing and
magnitude of our acquisitions. We consider our operating results
without these charges when evaluating our ongoing performance
and/or predicting our earnings trends, and therefore exclude
such charges when presenting non-GAAP financial measures. We
believe the assessment of our operations excluding these costs
is relevant to our assessment of internal operations and
comparisons to the performance of other companies in our
industry. |
|
(3) |
|
Restructuring charges include excess facility and
asset-related restructuring charges and severance costs
resulting from reductions of personnel driven by modifications
to our business strategy, such as acquisitions or divestitures.
These costs may vary in size based on our restructuring plan. In
addition, our assumptions are continually evaluated, which may
increase or reduce the charges in a specific period. Our
management excludes these costs when evaluating our ongoing
performance and/or predicting our earnings trends, and therefore
excludes these charges when presenting non-GAAP financial
measures. |
|
(4) |
|
Acquisition-related costs include direct costs of the
acquisition and expenses related to acquisition integration
activities. Examples of costs directly related to an acquisition
include transactions fees, due diligence costs, acquisition
retention bonuses and severance, fair value adjustments related
to contingent consideration, amounts or recoveries subject to
escrow provisions, and certain legal costs related to acquired
litigation. These expenses vary significantly in size and amount
and are disregarded by our management when evaluating and
predicting earnings trends because these charges are unique to
specific acquisitions, and are therefore excluded by us when
presenting non-GAAP financial measures. |
|
(5) |
|
Loss on sale/disposal of assets and technology relate to
the sale or disposal of our assets. These losses or gains can
vary significantly in size and amount. Our management excludes
these losses or gains when evaluating our ongoing performance
and/or predicting our earnings trends, and therefore excludes
these items when presenting non-GAAP financial measures. In
addition, in periods where we realize gains or incur losses on
the sale of assets and/or technology, we believe it is useful to
investors to highlight the specific impact of these amounts on
our operating results. |
|
(6) |
|
Investigation-related and other costs are charges related
to discrete and unusual events where we have incurred
significant costs which, in our view, are not incurred in the
ordinary course of operations. Recent examples of such charges
include legal expenses related to the special committee
investigation into our past stock option granting practices
which was completed in December 2007. Our management excludes
these costs when evaluating our ongoing performance and/or
predicting our earnings trends, and therefore excludes these
charges when presenting non-GAAP financial measures. Further, we
believe it is useful to investors to understand the specific
impact of these charges on our operating results. |
|
(7) |
|
Marketable securities (accretion) impairment includes
other than temporary declines in the fair value of
our
available-for-sale
securities and subsequent recoveries of these losses. Our
management excludes these losses/income when evaluating our
ongoing performance and/or predicting our earnings trends, and
therefore excludes these losses/income when presenting non-GAAP
financial measures. |
35
|
|
|
(8) |
|
Provision for income taxes is our GAAP provision that
must be added back to GAAP net income to reconcile to non-GAAP
income before taxes. |
|
(9) |
|
Non-GAAP provision for income taxes reflects a 24%
non-GAAP effective tax rate in 2010 and 2009 which is used by
our management to calculate non-GAAP net income. Management
believes that the 24% effective tax rate is reflective of a
long-term normalized tax rate under the global McAfee legal
entity and operating structure as of the respective period end. |
Non-GAAP Operating
Income
The $13.1 million increase in non-GAAP operating income
(which is adjusted for certain items excluded by management when
evaluating our ongoing performance
and/or
predicting our earnings trends) for the three months ended
March 31, 2010 compared to the three months ended
March 31, 2009 resulted from a $55.0 million increase
in net revenue that exceeded (i) the $17.7 million
increase in non-GAAP costs of net revenue and (ii) the
$24.2 million increase in non-GAAP operating expenses that
was primarily related to an increase in salaries and benefits
due to an increase in headcount and an increase in overall
expenses due to the U.S. Dollar weakening against both the
Euro and the Yen on an average quarterly exchange basis.
Non-GAAP Net
Income
The $7.8 million increase in non-GAAP net income (which is
adjusted for certain items excluded by management when
evaluating our ongoing performance
and/or
predicting our earnings trends) for the three months ended
March 31, 2010 compared to the three months ended
March 31, 2009 resulted from the increase in non-GAAP
operating income described above, offset by using a 24% non-GAAP
effective tax rate to calculate non-GAAP net income in both
periods.
Recent
Accounting Pronouncements
See Note 2 to the condensed consolidated financial
statements.
Acquisitions
MX
Logic
In September 2009, we acquired 100% of the outstanding shares of
MX Logic, a Software-as-a-Service provider of on-demand email,
web security and archiving solutions for a total purchase price
of $163.1 million. With this acquisition, we plan to
deliver a comprehensive, cloud-based security portfolio. The
results of operations for MX Logic have been included in our
results of operations since the date of acquisition.
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2010
|
|
2009
|
|
|
(In thousands)
|
|
Net cash provided by operating activities
|
|
$
|
157,261
|
|
|
$
|
145,976
|
|
Net cash used in investing activities
|
|
|
(12,396
|
)
|
|
|
(119,977
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(165,953
|
)
|
|
|
95,494
|
|
Overview
At March 31, 2010, our cash, cash equivalents and
marketable securities totaled $901.5 million. Our principal
sources of liquidity were our existing cash, cash equivalents
and short-term marketable securities of $852.6 million and
our operating cash flows. Our principal uses of cash were
operating costs, which consist primarily of employee-related
expenses, such as compensation and benefits, as well as other
general operating expenses, partner and OEM arrangements,
acquisitions, and purchases of marketable securities.
36
During the three months ended March 31, 2010, we had net
income of $37.6 million and we received $9.4 million
from proceeds from the issuance of common stock under our
employee stock benefit plans. In addition, we used
$169.8 million for repurchases of our common stock and
$17.5 million for purchases of property and equipment. Of
the $169.8 million used for stock repurchases,
$150.0 million was used for share repurchases in the open
market and $19.8 million was used to repurchase shares of
common stock in connection with our obligation to holders of
RSUs, RSAs and PSUs to withhold the number of shares required to
satisfy the holders tax liabilities in connection with the
vesting of such shares.
During the three months ended March 31, 2009, we had
proceeds of $100.0 million from the draw down under an
unsecured term loan, net income of $53.5 million and
$7.8 million from proceeds from the issuance of common
stock under our employee stock benefit plans. We used
$16.5 million to repurchase shares of common stock in
connection with our obligation to holders of RSUs, RSAs and PSUs
to withhold the number of shares required to satisfy the
holders tax liabilities in connection with the vesting of
such shares, $11.0 million for purchases of property and
equipment and $2.5 million for the acquisition of Endeavor.
We classify our investment portfolio as
available-for-sale,
and our investments are made with a policy of capital
preservation and liquidity as the primary objectives. We
generally hold investments in money market, U.S. government
fixed income, U.S. government agency fixed income and
investment grade corporate fixed income securities to maturity.
We may sell an investment at any time if the quality rating of
the investment declines, the yield on the investment is no
longer attractive or we are in need of cash. We expect to
continue our investing activities, including holding investment
securities of a short-term and long-term nature. During the
current challenging markets, we are investing new cash in
instruments with short to medium-term maturities of highly-rated
issuers, including U.S. government and FDIC guaranteed
investments.
In December 2008, we entered into a credit agreement with a
group of financial institutions, which we amended in February
2010 (Credit Facility). The Credit Facility provides
for a $450.0 million unsecured revolving credit facility
with a $25.0 million letter of credit sublimit. Subject to
the satisfaction of certain conditions, we may further increase
the revolving loan commitments to an aggregate of
$600.0 million. We borrowed $100.0 million under the
term loan portion of the Credit Facility in January 2009 and
paid the principal and accrued interest on our term loan in
December 2009. We had no amounts outstanding under the Credit
Facility as of March 31, 2010 and December 31, 2009.
Our management continues to monitor the financial markets and
general global economic conditions as a result of the recent
distress in the financial markets. As we monitor market
conditions, our liquidity position and strategic initiatives, we
may seek either short-term or long-term financing from external
credit sources in addition to the credit facilities discussed
herein. Our ability to raise funds may be adversely affected by
a number of factors, including factors beyond our control, such
as the current weakness in the economic conditions in the
markets in which we operate and into which we sell our products,
and increased uncertainty in the financial, capital and credit
markets. There can be no assurance that additional financing
would be available on terms acceptable to us, if at all.
Our management plans to use our cash and cash equivalents for
future operations, potential acquisitions and earn-out payments
related to current acquisitions. We may in the future repurchase
our common stock on the open market. We believe that our cash
and cash equivalent balances and cash that we generate over time
from operations, along with amounts available for borrowing
under the Credit Facility, will be sufficient to satisfy our
anticipated cash needs for working capital and capital
expenditures for at least the next 12 months and the
foreseeable future.
Operating
Activities
Net cash provided by operating activities in the three months
ended March 31, 2010 and 2009 was primarily the result of
our net income of $37.6 million and $53.5 million,
respectively, net of non-cash related expenses. During the three
months ended March 2010, our primary working capital sources
were decreased accounts receivable due to significant cash
collections in the first quarter of the year associated with a
higher accounts receivable balance at December 31, 2009.
Our primary working capital uses of cash was increased prepaid
expenses, deferred costs of revenue and other assets primarily
attributable to prepayments to our partners. The amounts for
changes in assets and liabilities presented in the condensed
consolidated statements of cash flows reflect adjustments to
exclude certain asset items that have not been paid in the
current period.
37
During the three months ended March 31, 2009, our primary
working capital source was decreased accounts receivable
primarily due to significant cash collections in the first
quarter of the year due to a higher accounts receivable balance
at December 31, 2008. Working capital uses of cash included
decreased accrued taxes and other liabilities primarily due to
payments of our derivative lawsuit settlement, taxes and
commissions.
Our cash and marketable securities balances are held in numerous
locations throughout the world, including substantial amounts
held outside the United States. As of March 31, 2010 and
December 31, 2009, $624.5 million and
$580.6 million, respectively, were held outside the United
States. We utilize a variety of operational and financing
strategies to ensure that our worldwide cash is available in the
locations in which it is needed.
In the ordinary course of business, we enter into various
agreements with minimum contractual commitments including
telecom contracts, advertising, software licensing, royalty and
distribution-related agreements. In the first three months of
2010, we entered into lease agreements for a new corporate
headquarters facility, which expire in 2020, for approximately
$49 million. In addition, in April 2010, we entered into an
additional distribution-related agreement for approximately
$39 million, which expires in 2011. These commitments were
in the ordinary course of our business and we expect to meet
these and other obligations as they become due through available
cash, borrowings under the Credit Facility, and internally
generated funds. We expect to continue generating positive
working capital through our operations. However, we cannot
predict whether current trends and conditions will continue or
what the effect on our business might be from the competitive
environment in which we operate. In addition, we currently
cannot predict the outcome of the litigation described in
Note 15 to the condensed consolidated financial statements.
Investing
Activities
Net cash used in investing activities was $12.4 million in
the three months ended March 31, 2010 compared to
$120.0 million in the three months ended March 31,
2009. In the three months ended March 31, 2010, we had net
proceeds from marketable securities totaling $3.6 million
compared to net purchases of marketable securities totaling
$106.5 million in the three months ended March 31,
2009.
We had no acquisitions in the three months ended March 31,
2010. In the three months ended March 31, 2009, we paid
$2.5 million, net of cash acquired, to purchase Endeavor.
Our cash used for purchases of property and equipment increased
to $17.5 million for the three months ended March 31,
2010 compared to $11.0 million in the three months ended
March 31, 2009. The property and equipment purchased during
the three months ended March 31, 2010 was primarily for
purchases of computers, equipment and software. The property and
equipment purchased during the three months ended March 31,
2009 was primarily for upgrades of our existing systems and
purchases of computers, equipment and software and for leasehold
improvements at various offices.
For the remainder of 2010, we expect to continue to have slight
increases in capital expenditures compared to the prior year.
Financing
Activities
Net cash used in financing activities was $166.0 million in
the three months ended March 31, 2010 compared to net cash
provided by financing activities of $95.5 million in the
three months ended March 31, 2009.
In February 2010, our board of directors authorized the
repurchase of up to $500.0 million of our common stock from
time to time in the open market or through privately negotiated
transactions through December 2011, depending upon market
conditions, share price and other factors. During the three
months ended March 31, 2010, we used $150.0 million to
repurchase approximately 3.7 million shares of our common
stock in the open market, including commissions paid on these
transactions. We had no repurchases of our common stock in the
open market during the three months ended March 31, 2009.
During the three months ended March 31, 2010 and 2009, we
used $19.8 million and $16.5 million, respectively, to
repurchase shares of our common stock in connection with our
obligation to holders of RSUs,
38
RSAs and PSUs to withhold the number of shares required to
satisfy the holders tax liabilities in connection with the
vesting of such shares. These shares were not part of the
publicly announced repurchase program.
The primary source of cash provided by financing activities is
proceeds from the issuance of common stock under our employee
stock benefit plans. In the three months ended March 31,
2010, we received proceeds of $9.4 million compared to
$7.8 million in the three months ended March 31, 2009
from issuance of stock under such plans. In addition, during the
three months ended March 31, 2009, cash provided by
financing activities included $100.0 million borrowed under
the term loan portion of the Credit Facility.
While we expect to continue to receive proceeds from our
employee stock benefit plans in future periods, the timing and
amount of such proceeds are difficult to predict and are
contingent on a number of factors including the type of equity
awards granted to our employees, the price of our common stock,
the number of employees participating in the plans and general
market conditions.
Credit
Facilities
In December 2008, we entered into a credit agreement with a
group of financial institutions, which we amended in February
2010 (Credit Facility). The Credit Facility provides
a $450.0 million unsecured revolving credit facility with a
$25.0 million letter of credit sublimit. Subject to the
satisfaction of certain conditions, we may further increase the
revolving loan commitments to an aggregate of
$600.0 million. Loans may be made in U.S. Dollars,
Euros or other currencies agreed to by the lenders. Commitment
fees range from 0.38% to 0.63% of the unused portion on the
Credit Facility depending on our consolidated leverage ratio.
Loans bear interest at our election at the prime rate or at an
adjusted LIBOR rate plus a margin (ranging from 2.5% to 3.0%)
that varies with our consolidated leverage ratio (a
eurocurrency loan). Interest on the loans is payable
quarterly in arrears with respect to prime rate loans and at the
end of an interest period (or at each three month interval in
the case of loans with interest periods greater than three
months) in the case of eurocurrency loans. No balances were
outstanding under the Credit Facility as of March 31, 2010
and December 31, 2009.
The Credit Facility contains financial covenants, measured at
the end of each of our quarters, providing that our consolidated
leverage ratio (as defined in the Credit Facility) cannot exceed
2.0 to 1.0 and our consolidated interest coverage ratio (as
defined in the Credit Facility) cannot be less than 3.0 to 1.0.
Additionally, the Credit Facility contains affirmative
covenants, including covenants regarding the payment of taxes,
maintenance of insurance, reporting requirements and compliance
with applicable laws. The Credit Facility contains negative
covenants, among other things, limiting our ability and our
subsidiaries ability to incur debt, liens, make
acquisitions, make certain restricted payments and sell assets.
The events of default under the Credit Facility include payment
defaults, cross defaults with certain other indebtedness,
breaches of covenants, judgment defaults, bankruptcy events and
the occurrence of a change in control (as defined in the Credit
Facility). At December 31, 2009, we had $1.5 million
of restricted cash deposited at one of our lenders. The
$1.5 million deposit was released in the three months ended
March 31, 2010 when we amended the Credit Facility. We
borrowed $100.0 million under the term loan portion of the
Credit Facility in January 2009. No balances were outstanding
under the Credit Facility as of March 31, 2010 or
December 31, 2009. At March 31, 2010 and
December 31, 2009, we were in compliance with all covenants
in the Credit Facility.
The credit facility terminates on December 22, 2012, on
which date all outstanding principal of, together with accrued
interest on, any revolving loans will be due. We may prepay the
loans and terminate the commitments at any time, without premium
or penalty, subject to reimbursement of certain costs in the
case of eurocurrency loans. At March 31, 2010 and
December 31, 2009, we were in compliance with all financial
covenants in the Credit Facility.
In addition, we have a 14.0 million Euro credit facility
with a bank (the Euro Credit Facility). The Euro
Credit Facility is available on an offering basis, meaning that
transactions under the Euro Credit Facility will be on such
terms and conditions, including interest rate, maturity,
representations, covenants and events of default, as mutually
agreed between us and the bank at the time of each specific
transaction. The Euro Credit Facility is intended to be used for
short-term credit requirements, with terms of one year or less.
The Euro Credit Facility can be canceled at any time. No
balances were outstanding under the Euro Credit Facility as of
March 31, 2010 and December 31, 2009.
39
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Our market risks at March 31, 2010, are consistent with
those discussed in Item 7A of our annual report on
Form 10-K
for the year ended December 31, 2009 filed with the SEC.
|
|
Item 4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Based on their evaluation as of March 31, 2010, our chief
executive officer and our chief financial officer, have
evaluated the effectiveness of our disclosure controls and
procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended) and
concluded that our disclosure controls and procedures were
effective to ensure that the information required to be
disclosed by us in this quarterly report on
Form 10-Q
was (i) recorded, processed, summarized and reported within
the time periods specified in the SECs rules and
regulations and (ii) accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required
disclosure.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial
reporting (as such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934, as amended) during
the quarter ended March 31, 2010 that have materially
affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
40
PART II:
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
Information with respect to this item is incorporated by
reference to Note 15 to our condensed consolidated
financial statements included in this
Form 10-Q,
which information is incorporated into this Part II,
Item 1 by reference.
Investing in our common stock involves a high degree of risk.
Some but not all of the risks we face are described below. Any
of the following risks could materially adversely affect our
business, operating results, financial condition and cash flows
and reduce the value of an investment in our common stock.
Adverse
conditions in the national and global economies and financial
markets may adversely affect our business and financial
results.
National and global economies and financial markets have
experienced a prolonged downturn stemming from a multitude of
factors, including adverse credit conditions impacted by the
sub-prime
mortgage crisis, slower or receding economic activity, concerns
about inflation and deflation, fluctuating energy costs, high
unemployment, decreased consumer confidence, reduced corporate
profits and capital spending, adverse business conditions and
liquidity concerns and other factors. The U.S. and many
other countries have been experiencing slowed or receding
economic growth and disruptions in the financial markets. These
conditions have been heightened recently by increased volatility
in the European capital markets. The severity or length of time
these economic and financial market conditions may persist is
unknown. During challenging economic times, periods of
heightened volatility in the capital markets, periods of high
unemployment and in tight credit markets, many customers may
delay or reduce technology purchases. This could result in
reductions in sales of our products, longer sales cycles,
difficulties in collection of accounts receivable, slower
adoption of new technologies, lower renewal rates, and increased
price competition. These results may persist even if certain
economic conditions improve. In addition, weakness in the
end-user market could negatively affect the cash flow of our
distributors and resellers who could, in turn, delay paying
their obligations to us. This would increase our credit risk
exposure and cause delays in our recognition of revenue on
future sales to these customers. Specific economic trends, such
as declines in the demand for PCs, servers, and other computing
devices, or softness in corporate information technology
spending, could have a more direct impact on our business. Any
of these events would likely harm our business, operating
results, cash flows and financial condition.
If
our products do not work properly, we could experience negative
publicity, damage to our reputation, legal liability, declining
sales and increased
expenses.
Failure to protect against security
breaches. Because of the complexity of our
products, we have in the past found errors in versions of our
products that were not detected before first introduced, or in
new versions or enhancements, and we may find such errors in the
future. Because of the complexity of the environments in which
our products operate, our products may have errors or defects
that customers identify after deployment. Failures, errors or
defects in our products could result in security breaches or
compliance violations for our customers, disruption or damage to
their networks or other negative consequences and could result
in negative publicity, damage to our reputation, declining
sales, increased expenses and customer relation issues. Such
failures could also result in product liability damage claims
against us by our customers, even though our license agreements
with our customers typically contain provisions designed to
limit our exposure to potential product liability claims.
Furthermore, the correction of defects could divert the
attention of engineering personnel from our product development
efforts. A major security breach at one of our customers that is
attributable to or not preventable by our products could be very
damaging to our business. Any actual or perceived breach of
network or computer security at one of our customers, regardless
of whether the breach is attributable to our products, could
adversely affect the markets perception of our security
products and our stock price.
False alarms or false positives. Our system
protection software products have in the past, and these
products and our intrusion protection products may at times in
the future, falsely detect viruses or computer threats that do
not
41
actually exist. These false alarms or false positives, while
typical in the security industry, can damage or impair the
affected computers or network, for example causing the affected
computers or network to slow or even shut down, which may have
adverse economic consequences to our customers. Our license
agreements typically contain provisions, such as disclaimers of
warranty and limitations of liability, which seek to limit our
exposure to potential product liability claims. However, these
provisions may not be enforceable on statutory, public policy or
other grounds. In addition, these false alarms or false
positives could impair the perceived reliability of our products
and could therefore adversely impact market acceptance of our
products. Damage to our reputation or product liability or
related claims brought against us could materially adversely
affect our sales or subject us to significant liabilities,
including litigation damages. On April 21, 2010, we
released a faulty signature file that caused some of our
customers computers to be rendered inoperable or
significantly impaired. We may be subject to litigation claiming
damages related to a false alarm or false positive. We
anticipate that our consolidated financial position, results of
operations and cash flow will be negatively impacted as a result
of this file update.
Our email and web solutions (anti-spam, anti-spyware and safe
search products) may falsely identify emails, programs or web
sites as unwanted spam, potentially unwanted
programs or unsafe. They may also fail to
properly identify unwanted emails, programs or unsafe web sites,
particularly because spam emails, spyware or malware are often
designed to circumvent anti-spam or spyware products and to
incorrectly identify legitimate web sites as unsafe. Parties
whose emails or programs are incorrectly blocked by our
products, or whose web sites are incorrectly identified as
unsafe or as utilizing phishing techniques, may seek redress
against us for labeling them as spammers or unsafe
and/or for
interfering with their businesses. In addition, false
identification of emails or programs as unwanted spam or
potentially unwanted programs may discourage potential customers
from using or continuing to use these products.
Customer misuse of products. Our products may
also not work properly if they are misused or abused by
customers or non-customer third parties who obtain access and
use of our products. These situations may arise where an
organization uses our products in a manner that impacts their
end users or employees privacy or where our products
are misappropriated to censor private access to the internet.
Any of these situations could impact the perceived reliability
of our products, result in negative press coverage, negatively
affect our reputation and adversely impact our financial results.
We
face intense competition and we expect competitive pressures to
increase in the future. This competition could have a negative
impact on our business and financial
results.
The markets for our products are intensely competitive and we
expect both product and pricing competition to increase. If our
competitors gain market share in the markets for our products,
our sales could grow more slowly or decline. Competitive
pressures could also lead to increases in expenses such as
advertising expenses, product rebates, product placement fees,
and marketing funds provided to our channel partners.
Advantages of larger competitors. Our
principal competitors in each of our product categories are
described in Business Competition
of our annual report on
Form 10-K
for the fiscal year ended December 31, 2009. Our
competitors include some large enterprises such as Microsoft,
Cisco Systems, Symantec, IBM and Google. Large vendors of
hardware or operating system software increasingly incorporate
system and network security functionality into their products,
and enhance that functionality either through internal
development or through strategic alliances or acquisitions. Some
of our competitors have longer operating histories, more
extensive international operations, greater name recognition,
larger technical staffs, established relationships with more
distributors and hardware vendors, significantly greater product
development and acquisition budgets,
and/or
greater financial, technical and marketing resources than we do.
Consumer business competition. More than 35%
of our revenue comes from our consumer business. Our growth of
this business relies on direct sales and sales through
relationships with ISPs such as AOL, Cox, Verizon and AT&T
and PC OEMs, such as Acer, Dell, Sony Computer, Hewlett Packard
and Toshiba. As competition in this market increases, we have
and will continue to experience pricing pressures that could
have a negative effect on our ability to sustain our revenue,
operating margin and market share growth. Further, as
penetration of the consumer anti-virus market through the ISP
model increases, we expect that pricing and competitive
pressures in this market will become even more acute.
42
Low-priced or free competitive
products. Security protection is increasingly
being offered by third parties at significant discounts to our
prices or, in some cases is bundled for free. The widespread
inclusion of lower-priced or free products that perform the same
or similar functions as our products within computer hardware or
other companies software products could reduce the
perceived need for our products or render our products
unmarketable even if these incorporated products are
inferior or more limited than our products. It is possible that
a major competitor may offer a free anti-malware enterprise
product. Purchasers of mini notebooks or netbooks, which
generally are sold at a lower price than laptops, may place a
greater emphasis on price in making their security purchasing
decision as they did in making their computer purchasing
decision. The expansion of these competitive trends could have a
significant negative impact on our sales and financial results.
We also face competition from numerous smaller companies,
shareware and freeware authors and open source projects that may
develop competing products, as well as from future competitors,
currently unknown to us, who may enter the markets because the
barriers to entry are fairly low. Smaller
and/or newer
companies often compete aggressively on price.
We
face product development risks due to rapid changes in our
industry. Failure to keep pace with these changes could harm our
business and financial
results.
The markets for our products are characterized by rapid
technological developments, continually-evolving industry trends
and standards and ongoing changes in customer requirements. Our
success depends on our ability to timely and effectively keep
pace with these developments.
Keeping pace with industry changes. We must
enhance and expand our product offerings to reflect industry
trends, new technologies and new operating environments as they
become increasingly important to customer deployments. For
example, we must expand our offerings for virtual computer
environments; we must continue to expand our security
technologies for mobile environments to support a broader range
of mobile devices such as mobile phones, personal digital
assistants and smart phones; we must develop products that are
compatible with new or otherwise emerging operating systems,
while remaining compatible with popular operating systems such
as Linux, Suns Solaris, UNIX, Macintosh OS_X, and Windows
XP, NT, Vista and 7; and we must continue to expand our business
models beyond traditional software licensing and subscription
models, specifically, software-as-a- service is becoming an
increasingly important method and business model for the
delivery of applications. We must also continuously work to
ensure that our products meet changing industry certifications
and standards. Failure to keep pace with any changes that are
important to our customers could cause us to lose customers and
could have a negative impact on our business and financial
results.
Impact of product development delays or competitive
announcements. Our ability to adapt to changes
can be hampered by product development delays. We may experience
delays in product development as we have at times in the past.
Complex products like ours may contain undetected errors or
version compatibility problems, particularly when first
released, which could delay or adversely impact market
acceptance. We may also experience delays or unforeseen costs
associated with integrating products we acquire with products we
develop because we may be unfamiliar with errors or
compatibility issues of products we did not develop ourselves.
We may choose not to deliver a partially-developed product,
thereby increasing our development costs without a corresponding
benefit. This could negatively impact our business.
We
face risks associated with past and future
acquisitions.
We may buy or make investments in complementary or competitive
companies, products and technologies. We may not realize the
anticipated benefits from these acquisitions. Future
acquisitions could result in significant acquisition-related
charges and dilution to our stockholders. In addition, we face a
number of risks relating to our acquisitions, including the
following, any of which could harm our ability to achieve the
anticipated benefits of our past or future acquisitions.
Integration. Integration of an acquired
company or technology is a complex, time consuming and expensive
process. The successful integration of an acquisition requires,
among other things, that we integrate and retain key management,
sales, research and development and other personnel; integrate
the acquired products into our product offerings from both an
engineering and sales and marketing perspective; integrate and
support pre-existing suppliers, distribution and customer
relationships; coordinate research and development efforts; and
consolidate
43
duplicate facilities and functions and integrate back-office
accounting, order processing and support functions. If we do not
successfully integrate an acquired company or technology, we may
not achieve the anticipated revenue or cost reduction synergies.
The geographic distance between the companies, the complexity of
the technologies and operations being integrated and the
disparate corporate cultures being combined may increase the
difficulties of integrating an acquired company or technology.
Managements focus on the integration of operations may
distract attention from our
day-to-day
business and may disrupt key research and development, marketing
or sales efforts. In addition, it is common in the technology
industry for aggressive competitors to attract customers and
recruit key employees away from companies during the integration
phase of an acquisition. If integration of our acquired
businesses or assets is not successful, we may experience
adverse financial or competitive effects.
Internal controls, policies and
procedures. Acquired companies or businesses are
likely to have different standards, controls, contracts,
procedures and policies, making it more difficult to implement
and harmonize company-wide financial, accounting, billing,
information and other systems. Acquisitions of privately held
and/or
non-US companies are particularly challenging because their
prior practices in these areas may not meet the requirements of
the Sarbanes-Oxley Act and public accounting standards.
Use of cash and securities. Our available cash
and securities may be used to acquire or invest in companies or
products. Moreover, when we acquire a company, we may have to
incur or assume that companys liabilities, including
liabilities that may not be fully known at the time of
acquisition. To the extent we continue to make acquisitions, we
will require additional cash
and/or
shares of our common stock as payment. The use of securities
would cause dilution for our existing stockholders.
Key employees from acquired companies may be difficult to
retain and assimilate. The success of many
acquisitions depends to a great extent on our ability to retain
key employees from the acquired company. This can be
challenging, particularly in the highly competitive market for
technical personnel. Retaining key executives for the long-term
can also be difficult due to other opportunities available to
them. Disputes that may arise out of earn-outs, escrows and
other arrangements related to an acquisition of a company in
which a key employee was a principal may negatively affect the
morale of the employee and make retaining the employee more
difficult. It could be difficult, time consuming and expensive
to replace any key management members or other critical
personnel that do not accept employment with McAfee following
the acquisition. In addition to retaining key employees, we must
integrate them into our company, which can be difficult and
costly. Changes in management or other critical personnel may be
disruptive to our business and might also result in our loss of
some unique skills and the departure of existing employees
and/or
customers.
Accounting charges. Acquisitions may result in
substantial accounting charges for restructuring and other
expenses, amortization of purchased technology and intangible
assets and stock-based compensation expense, any of which could
materially adversely affect our operating results.
Potential goodwill, intangible asset and purchased technology
impairment. We perform an impairment analysis on
our goodwill balances on an annual basis or whenever events
occur that may indicate impairment. If the fair value of a
reporting unit is less than the carrying amount, then we must
write down goodwill to its estimated fair value. We perform an
impairment analysis on our intangible assets and purchased
technologies whenever events occur that may indicate impairment.
If the undiscounted cash flows expected to be derived from the
intangible asset or purchased technology are less than its
carrying amount, then we must write down the intangible asset or
purchased technology to its estimated fair value. We cannot be
certain that a future downturn in our business, changes in
market conditions or a long-term decline in the quoted market
price of our stock will not result in an impairment of goodwill,
intangible assets or purchased technologies and the recognition
of resulting expenses in future periods, which could adversely
affect our results of operations for those periods.
Establishment of Vendor Specific Objective Evidence
(VSOE). Following an acquisition, we
may be required to defer the recognition of revenue that we
receive from the sale of products that we acquired, or from the
sale of a bundle of products that includes products that we
acquired, if we have not established VSOE for the undelivered
elements in the arrangement. A delay in the recognition of
revenue from sales of acquired products or bundles that include
acquired products may cause fluctuations in our quarterly
financial results and may adversely
44
affect our operating margins. Similarly, companies that we
acquire may operate with different cost and margin structures,
which could further cause fluctuations in our operating results
and adversely affect our operating margins. If our quarterly
financial results or our predictions of future financial results
fail to meet the expectations of securities analysts and
investors, our stock price could be negatively affected.
Our
international operations involve risks that could divert the
time and attention of management, increase our expenses and
otherwise adversely impact our business and financial
results.
Our international operations increase our risks in several
aspects of our business, including but not limited to risks
relating to revenue, legal and compliance, currency exchange and
interest rate, and general operating. Net revenue in our
operating regions outside of North America represented 43% of
total net revenue in both the three months ended March 31,
2010 and March 31, 2009. The risks associated with our
continued focus on international operations could adversely
affect our business and financial results.
Revenue risks. Revenue risks include, among
others, longer payment cycles, greater difficulty in collecting
accounts receivable, tariffs and other trade barriers,
seasonality, currency fluctuations, and the high incidence of
software piracy and fraud in some countries. The primary product
development risk to our revenue is our ability to deliver new
products in a timely manner and to successfully localize our
products for a significant number of international markets in
different languages.
Legal and compliance risks. We face a variety
of legal and compliance risks. For example, international
operations pose a compliance risk with the Foreign Corrupt
Practices Act (FCPA). Some countries have a
reputation for businesses to engage in prohibited practices with
government officials to consummate transactions. Although we
have implemented training along with policies and procedures
designed to ensure compliance with this and similar laws, there
can be no assurance that all employees and third-party
intermediaries will comply with anti-corruption laws. Any such
violation could have a material adverse effect on our business.
Another legal risk is that some of our computer security
solutions incorporate encryption technology that is governed by
U.S. export regulations. The cost of compliance with those
regulations can affect our ability to sell certain products in
certain markets and could have a material adverse effect on our
international revenue and expense. If we, or our resellers, fail
to comply with applicable laws and regulations, we may become
subject to penalties and fines or restrictions that may
adversely affect our business.
Increasingly, the United States Congress (Congress)
is taking a more active interest in information and
communications technology companies doing business in China and
other countries whose governments pressure businesses to comply
with domestic laws and policies in ways that may conflict with
the internationally recognized human rights of freedom of
expression and privacy. Congress has not prohibited companies
from doing business in many of these countries, however,
Congress could change the export laws and regulations to
prohibit or restrict the sale of products in many of these
countries, which could have a material adverse effect upon our
international revenue.
Other legal risks include international labor laws and our
relationship with our employees and regional work councils;
compliance with more stringent consumer protection and privacy
laws; unexpected changes in regulatory requirements; and
compliance with our code of conduct and other internal policies.
Currency exchange and interest rate risks. A
significant portion of our transactions outside of the
U.S. are denominated in foreign currencies. We translate
revenues and costs from these transactions into
U.S. dollars for reporting purposes. As a result, our
future operating results will continue to be subject to
fluctuations in foreign currency rates. This combined with
economic instability, such as higher interest rates in the
U.S. and inflation, could reduce our customers
ability to obtain financing for software products, or could make
our products more expensive or could increase our costs of doing
business in certain countries. During the three months ended
March 31, 2010, we recorded net foreign currency
transaction losses of $0.7 million. During the three months
ended March 31, 2009, we recorded net foreign currency
transaction gains of $1.3 million. We may be positively or
negatively affected by fluctuations in foreign currency rates in
the future, especially if international sales continue to grow
as a percentage of our total sales. Additionally, fluctuations
in currency exchange rates will impact our deferred revenue
balance,
45
which is a key financial metric at each period end. The risk
associated with fluctuation in foreign currency exchange rates
may be heightened due to the recent volatility in the European
capital markets.
General operating risks. More general risks of
international business operations include the increased costs of
establishing, managing and coordinating the activities of
geographically dispersed and culturally diverse operations
(particularly sales and support and shared service centers)
located on multiple continents in a wide range of time zones.
We
face a number of risks related to our product sales through
distributors and other third
parties.
We sell substantially all of our products through third-party
intermediaries such as distributors, value-added resellers, PC
OEMs, ISPs and other distribution channel partners (referred to
collectively as distributors). Reliance on third parties for
distribution exposes us to a variety of risks, some of which are
described below, which could have a material adverse impact on
our business and financial results.
Limited control over timing of product
delivery. We have limited control over the timing
of the delivery of our products to customers by third-party
distributors. We generally do not require our resellers and OEM
partners to meet minimum sales volumes, so their sales may vary
significantly from period to period. For example, the volume of
our products shipped by our OEM partners depends on the volume
of computers shipped by the PC OEMs, which is outside of our
control. These factors can make it difficult for us to forecast
our revenue accurately and they also can cause our revenue to
fluctuate unpredictably.
Competitive aspects of distributor
relationships. Our distributors may sell other
vendors products that compete with our products. Although
we offer our distributors incentives to focus on sales of our
products, they often give greater priority to products of our
competitors, for a variety of reasons. In order to maximize
sales of our products rather than those of our competitors, we
must effectively support these partners with, among other
things, appropriate financial incentives to encourage them to
invest in sales tools, such as online sales and technical
training and product collateral needed to support their
customers and prospects and technical expertise through local
sales engineers. If we do not properly support our partners,
they may focus more on our competitors products, and their
sales of our products would decline.
A significant portion of our revenue is derived from sales
through our OEM partners that bundle our products with their
products. Our reliance on this sales channel is significantly
affected by our partners sales of new products into which
our products are bundled. Our revenue from sales through our OEM
partners is affected by the number of personal computers on
which our products are bundled and the rate at which consumers
purchase or subscribe for the bundled products. Adverse
developments in global economic conditions, competitive risks
and other factors may adversely affect personal computer sales
and could adversely affect our sales and financial results. In
addition, decreases in the rate at which consumers purchase or
subscribe for our bundled products would adversely affect our
sales and financial results. For example, if our PC OEM partners
begin selling a greater percentage of netbooks and the
conversion rate on netbooks is lower than the conversion rate on
laptops, our sales would be adversely affected.
Our PC OEM partners are also in a position to exert competitive
pricing pressure. Competition for OEMs business continues
to increase, and it gives the OEMs leverage to demand lower
product prices or other financial concessions from us in order
to secure their business. Even if we negotiate what we believe
are favorable pricing terms when we first establish a
relationship with an OEM, at the time of the renewal of the
agreement, we may be required to renegotiate our agreement with
them on less favorable terms. Lower net prices for our products
would adversely impact our operating margins.
Reliance on a small number of distributors. A
significant portion of our net revenue is attributable to a
fairly small number of distributors. Our top ten distributors
represented 36% and 35% of our net revenue in the three months
ended March 31, 2010 and March 31, 2009, respectively.
Reliance on a relatively small number of third parties for a
significant portion of our distribution exposes us to
significant risks to net revenue and net income if our
relationship with one or more of our key distributors is
terminated for any reason.
Risk of loss of distributors. We invest
significant time, money and resources to establish and maintain
relationships with our distributors, but we have no assurance
that any particular relationship will continue for any specific
period of time. The agreements we have with our distributors can
generally be terminated by either party
46
without cause with no or minimal notice or penalties. If any
significant distributor terminates its agreement with us, we
could experience a significant interruption in the distribution
of our products and our revenue could decline. We could also
lose the benefit of our investment of time, money and resources
in the distributor relationship.
Although a distributor can terminate its relationship with us
for any reason, one factor that may lead to termination is a
divergence of our business interests and those of our
distributors and potential conflicts of interest. For example,
our acquisition activity has resulted in the termination of
distributor relationships that no longer fit with the
distributors business priorities. Future acquisition
activity could cause similar termination of, or disruption in,
our distributor relationships, which could adversely impact our
revenue.
Credit risk. Some of our distributors may
experience financial difficulties, which could adversely impact
our collection of accounts receivable. Our allowance for
doubtful accounts was approximately $6.2 million as of
March 31, 2010. We regularly review the collectability and
credit-worthiness of our distributors to determine an
appropriate allowance for doubtful accounts. Our uncollectible
accounts could exceed our current or future allowances, which
could adversely impact our financial results.
Other. We also face legal and compliance risks
with respect to our use of third party intermediaries operating
outside the United States. As described above in Our
international operations involve risks that could divert the
time and attention of management, increase our expenses and
otherwise adversely impact our business and financial
results, any violations by such third party
intermediaries of FCPA or similar laws could have a material
adverse effect on our business.
We
face numerous risks relating to the enforceability of our
intellectual property rights and our use of third-party
intellectual property, many of which could result in the loss of
our intellectual property rights as well as other material
adverse impacts on our business and financial results and
condition.
Limited protection of our intellectual property rights
against potential infringers. We rely on a
combination of contractual rights, trademarks, trade secrets,
patents and copyrights to establish and protect proprietary
rights in our technology. However, the steps we have taken to
protect our proprietary technology may not deter its misuse,
theft or misappropriation. Competitors may independently develop
technologies or products that are substantially equivalent or
superior to our products or that inappropriately incorporate our
proprietary technology into their products. Competitors may hire
our former employees who may misappropriate our proprietary
technology. We are aware that a number of users of our security
products have not paid license, technical support, or
subscription fees to us. Certain jurisdictions may not provide
adequate legal infrastructure for effective protection of our
intellectual property rights. Changing legal interpretations of
liability for unauthorized use of our software or lessened
sensitivity by corporate, government or institutional users to
refraining from intellectual property piracy or other
infringements of intellectual property could also harm our
business.
Frequency, expense and risks of intellectual property
litigation in the network and system security
market. Litigation may be necessary to enforce
and protect our trade secrets, patents and other intellectual
property rights. Similarly, we may be required to defend against
claimed infringement by others.
The security technology industry has increasingly been subject
to patent and other intellectual property rights litigation,
particularly from special purpose entities that seek to monetize
their intellectual property rights by asserting claims against
others. We expect this trend to continue and that in the future
as we become a larger and more profitable company, we can expect
this trend to accelerate and that we will be required to defend
against this type of litigation. The litigation process is
subject to inherent uncertainties, so we may not prevail in
litigation matters regardless of the merits of our position. In
addition to the expense and distraction associated with
litigation, adverse determinations could cause us to lose our
proprietary rights, prevent us from manufacturing or selling our
products, require us to obtain licenses to patents or other
intellectual property rights that our products are alleged to
infringe (licenses may not be available on reasonable commercial
terms or at all), and subject us to significant liabilities.
If we acquire technology to include in our products from third
parties, our exposure to infringement actions may increase
because we must rely upon these third parties to verify the
origin and ownership of such technology. Similarly, we face
exposure to infringement actions if we hire software engineers
who were previously employed by
47
competitors and those employees inadvertently or deliberately
incorporate proprietary technology of our competitors into our
products despite efforts by our competitors and us to prevent
such infringement.
Litigation may be necessary to enforce and protect our trade
secrets, patents and other intellectual property rights.
Potential risks of using open source
software. Like many other software companies, we
use and distribute open source software in order to
expedite development of new products. Open source software is
generally licensed by its authors or other third parties under
open source licenses, including, for example, the GNU General
Public License. These license terms may be ambiguous, in many
instances have not been interpreted by the courts and could be
interpreted in a manner that results in unanticipated
obligations regarding our products. Depending upon how the open
source software is deployed by our developers, we could be
required to offer our products that use the open source software
for no cost, or make available the source code for modifications
or derivative works. Any of these obligations could have an
adverse impact on our intellectual property rights and revenue
from products incorporating the open source software.
Our use of open source code could also result in us developing
and selling products that infringe third-party intellectual
property rights. It may be difficult for us to accurately
determine the developers of the open source code and whether the
code incorporates proprietary software. We have processes and
controls in place that are designed to address these risks and
concerns, including a review process for screening requests from
our development organizations for the use of open source.
However, we cannot be sure that all open source is submitted for
approval prior to use in our products.
We also have processes and controls in place to review the use
of open source in the products developed by companies that we
acquire. Despite having conducted appropriate due diligence
prior to completing the acquisition, products or technologies
that we acquire may nonetheless include open source software
that was not identified during the initial due diligence. Our
ability to commercialize products or technologies of acquired
companies that incorporate open source software or to otherwise
fully realize the anticipated benefits of any acquisition may be
restricted for the reasons described in the preceding two
paragraphs.
Pending
or future litigation could have a material adverse impact on our
results of operation, financial condition and
liquidity.
In addition to intellectual property litigation, from time to
time, we have been, and may be in the future, subject to other
litigation including stockholder derivative actions or actions
brought by current or former employees. If we continue to make
acquisitions in the future, we are more likely to be subject to
acquisition related shareholder derivative actions and actions
resulting from the use of earn-outs, purchase price escrow
holdbacks and other similar arrangements. Where we can make a
reasonable estimate of the liability relating to pending
litigation and determine that an adverse liability resulting
from such litigation is probable, we record a related liability.
As additional information becomes available, we assess the
potential liability and revise estimates as appropriate.
However, because of the inherent uncertainties relating to
litigation, the amount of our estimates could be wrong. In
addition to the related cost and use of cash, pending or future
litigation could cause the diversion of managements
attention. Managing, defending and indemnity obligations related
to these actions have caused significant diversion of
managements and the board of directors time and
resulted in material expense to us. See Note 15 to the
condensed consolidated financial statements for additional
information with respect to certain currently pending legal
matters.
Our
financial results can fluctuate significantly, making it
difficult for us to accurately estimate operating
results.
Impact of fluctuations. Over the years our
revenue, gross margins and operating results, which we disclose
from time to time on a Generally Accepted Accounting Principles
(GAAP) and non-GAAP basis, have fluctuated
significantly from quarter to quarter and from year to year, and
we expect this to continue in the future. Thus, our operating
results for prior periods may not be effective predictors of our
future performance. These fluctuations make it difficult for us
to accurately forecast operating results. We try to adjust
expenses based in part on our expectations regarding future
revenue, but in the short term expenses are relatively fixed.
This makes it difficult for us to adjust our expenses in time to
compensate for any unexpected revenue shortfall in a given
period.
48
Volatility in our quarterly financial results may make it more
difficult for us to raise capital in the future or pursue
acquisitions that involve issuances of our stock. If our
quarterly financial results or our predictions of future
financial results fail to meet the expectations of securities
analysts and investors, our stock price could be negatively
affected.
Factors that may cause our revenue, gross margins and other
operating results to fluctuate significantly from period to
period, include, but are not limited to, the following:
Establishment of VSOE. We may in the future
sell products in an arrangement for which we have not
established VSOE for the undelivered elements in the arrangement
and would be required to delay the recognition of revenue. A
delay in the recognition of revenue from sales of products may
cause fluctuations in our quarterly financial results and may
adversely affect our operating margins.
Timing of product orders. A significant
portion of our revenue in any quarter comes from previously
deferred revenue, which is a somewhat predictable component of
our quarterly revenue. However, a meaningful part of revenue
depends on contracts entered into or orders booked and shipped
in the current quarter. Typically we generate the most orders in
the last month of each quarter and significant new orders
generally close at the end of the quarter. Some customers
believe they can enhance their bargaining power by waiting until
the end of our quarter to place their order. Personnel
limitations and system processing constraints could adversely
impact our ability to process the large number of orders that
typically occur near the end of a quarter, which could adversely
affect our results for the quarter. Any failure or delay in
closing significant new orders in a given quarter also could
have a material adverse impact on our results for that quarter.
Reliability and timeliness of expense data. We
increasingly rely upon third-party manufacturers to manufacture
our hardware-based products; therefore, our reliance on their
ability to provide us with timely and accurate product cost
information exposes us to risk, negatively impacting our ability
to accurately and timely report our operating results.
Issues relating to third-party distribution, manufacturing
and fulfillment relationships. We rely heavily on
third parties to manufacture and distribute our products. Any
changes in the performance of these relationships can impact our
operating results. Changes in our supply chain could result in
product fulfillment delays that contribute to fluctuations in
operating results from period to period. We have in the past and
may in the future make changes in our product delivery network,
which may disrupt our ability to timely and efficiently meet our
product delivery commitments, particularly at the end of a
quarter. As a result, we may experience increased costs in the
short term as temporary delivery solutions are implemented to
address unanticipated delays in product delivery. In addition,
product delivery delays may negatively impact our ability to
recognize revenue if shipments are delayed at the end of a
quarter.
Product and geographic mix. Another source of
fluctuations in our operating results and, in particular, gross
profit margins, is the mix of products we sell and services we
offer, as well as the mix of countries in which our products and
services are sold, including the mix between corporate versus
consumer products; hardware-based compared to software-based
products; perpetual licenses versus subscription licenses; and
maintenance and support services compared to consulting services
or product revenue. Product and geographic mix can impact
operating expenses as well as the amount of revenue and the
timing of revenue recognition, so our profitability can
fluctuate significantly.
Timing of new products and customers. The
timing of the introduction and adoption of new products, product
upgrades or updates can have a significant impact on revenue
from period to period. For example, revenue tends to be higher
in periods shortly after we introduce new products compared to
periods without new products. Our revenue may decline after new
product introductions by competitors. In addition, the volume,
size, and terms of new customer licenses can cause fluctuations
in our revenue.
Additional cash and non-cash sources of
fluctuations. A number of other factors that are
peripheral to our core business operations also contribute to
variability in our operating results. These include, but are not
limited to, changes in foreign exchange rates for the Japanese
Yen and the Euro (which may be more volatile due to the recent
volatility in the European capital markets), international sales
become a greater percentage of our total sales, repurchases
under our stock repurchase program, expenses related to our
acquisition and
49
disposition activities, arrangements with minimum contractual
commitments including royalty and distribution-related
agreements, stock-based compensation expense, unanticipated
costs associated with litigation or investigations, costs
related to Sarbanes-Oxley compliance efforts, costs and charges
related to certain extraordinary events such as restructurings,
substantial declines in estimated values of long-lived assets
below the value at which they are reflected in our financial
statements, impairment of goodwill, intangible assets or
purchased technologies and changes in GAAP, such as increased
use of fair value measures, new guidance relating to GAAP, such
as the guidance issued by the Financial Accounting Standards
Board in October 2009 on software revenue recognition and on
revenue arrangements with multiple deliverables, changes in tax
laws and the potential requirement that U.S. registrants
prepare financial statements in accordance with International
Financial Reporting Standards (IFRS).
Material
weaknesses in our internal control and financial reporting
environment may impact the accuracy, completeness and timeliness
of our external financial
reporting.
Section 404 of the Sarbanes-Oxley Act requires that
management report annually on the effectiveness of our internal
control over financial reporting and identify any material
weaknesses in our internal control and financial reporting
environment. If management identifies any material weaknesses,
their correction could require remedial measures that could be
costly and time-consuming. In addition, the presence of material
weaknesses could result in financial statement errors that in
turn could require us to restate our operating results. This in
turn could damage investor confidence in the accuracy and
completeness of our financial reports, which could affect our
stock price and potentially subject us to litigation.
Our
strategic alliances and our relationships with manufacturing
partners expose us to a range of business risks and
uncertainties that could have a material adverse impact on our
business and financial
results.
Uncertainty of realizing anticipated benefit of strategic
alliances. We have entered into strategic
alliances with numerous third parties to support our future
growth plans. For example, these relationships may include
technology licensing, joint technology development and
integration, research cooperation, co-marketing activities and
sell-through arrangements. We face a number of risks relating to
our strategic alliances, including those described below. These
risks may prevent us from realizing the desired benefits from
our strategic alliances on a timely basis or at all, which could
have a negative impact on our business and financial results.
Challenges relating to integrated products from strategic
alliances. Strategic alliances require
significant coordination between the parties involved,
particularly if an alliance requires that we integrate their
products with our products. This could involve significant time
and expenditure by our technical staff and the technical staff
of our strategic partner. The integration of products from
different companies may be more difficult than we anticipate,
and the risk of integration difficulties, incompatible products
and undetected programming errors or defects may be higher than
that normally associated with new products. The marketing and
sale of products that result from strategic alliances might also
be more difficult than that normally associated with new
products. Sales and marketing personnel may require special
training, as the new products may be more complex than our other
products.
We invest significant time, money and resources to establish and
maintain relationships with our strategic partners, but we have
no assurance that any particular relationship will continue for
any specific period of time. Generally, our strategic alliance
agreements are terminable without cause with no or minimal
notice or penalties. If we lose a significant strategic partner,
we could lose the benefit of our investment of time, money and
resources in the relationship. In addition, we could be required
to incur significant expenses to develop a new strategic
alliance or to determine and implement an alternative plan to
pursue the opportunity that we targeted with the former partner.
We rely on a limited number of third parties to manufacture some
of our hardware-based network security and system protection
products. We expect the number of our hardware-based products
and our reliance on third-party manufacturers to increase as we
continue to expand these types of solutions. We also rely on
third parties to replicate and package our boxed software
products. This reliance on third parties involves a number of
risks that could have a negative impact on our business and
financial results.
50
Less control of the manufacturing process and outcome with
third party manufacturing relationships. Our use
of third-party manufacturers results in a lack of control over
the quality and timing of the manufacturing process, limited
control over the cost of manufacturing, and the potential
absence or unavailability of adequate manufacturing capacity.
Risk of inadequate capacity with third party manufacturing
relationships. If any of our third-party
manufacturers fails for any reason to manufacture products of
acceptable quality, in required volumes, and in a cost-effective
and timely manner, it could be costly as well as disruptive to
product shipments. We might be required to seek additional
manufacturing capacity, which might not be available on
commercially reasonable terms or at all. Even if additional
capacity was available, the process of qualifying a new vendor
could be lengthy and could cause significant delays in product
shipments and could strain partner and customer relationships.
In addition, supply disruptions or cost increases could increase
our costs of goods sold and negatively impact our financial
performance. Our risk is relatively greater in situations where
our hardware products contain critical components supplied by a
single or a limited number of third parties. Any significant
shortage of components could lead to cancellations of customer
orders or delays in placement of orders, which would adversely
impact revenue.
Risk of hardware obsolescence and excess inventory with third
party manufacturing relationships. Hardware-based
products may face greater obsolescence risks than software
products. We could incur losses or other charges in disposing of
obsolete hardware inventory. In addition, to the extent that our
third-party manufacturers upgrade or otherwise alter their
manufacturing processes, our hardware-based products could face
supply constraints or risks associated with the transition of
hardware-based products to new platforms. This could increase
the risk of losses or other charges associated with obsolete
inventory. We determine the quantities of our products that our
third-party manufacturers produce and we base these orders upon
our expected demand for our products. Although we order products
as close in time to the actual demand as we can, if actual
demand is not what we project, we may accumulate excess
inventory, which may adversely affect our financial results.
Our
global operations may expose us to tax
risk.
We are generally required to account for taxes in each
jurisdiction in which we operate. This process may require us to
make assumptions, interpretations and judgments with respect to
the meaning and application of promulgated tax laws and related
administrative and judicial interpretations. The positions that
we take and our interpretations of the tax laws may differ from
the positions and interpretations of the tax authorities in the
jurisdictions in which we operate. We are presently under
examination in many jurisdictions, including notably the U.S.,
California, Germany and Japan. An adverse outcome in one or more
of these ongoing examinations, or in any future examinations
that may occur, could have a significant negative impact on our
cash position and net income. Although we have established
reserves for these examination contingencies, there can be no
assurance that the reserves will be sufficient to cover our
ultimate liabilities.
Our provision for income taxes is subject to volatility and can
be adversely affected by a variety of factors, including but not
limited to: unanticipated decreases in the amount of revenue or
earnings in countries with low statutory tax rates, changes in
tax laws and the related regulations and interpretations
(including various proposals currently under consideration),
changes in accounting principles (including accounting for
uncertain tax positions), and changes in the valuation of our
deferred tax assets. Significant judgment is required to
determine the recognition and measurement attributes prescribed
in certain accounting guidance. This guidance applies to all
income tax positions, including the potential recovery of
previously paid taxes, which if settled unfavorably could
adversely impact our provision for income taxes.
Critical
personnel may be difficult to attract, assimilate and
retain.
Our success depends in large part on our ability to attract and
retain senior management personnel, as well as technically
qualified and highly-skilled sales, consulting, technical,
finance and marketing personnel. Other than members of executive
management who have at will employment agreements,
our employees are not typically subject to an employment
agreement or non-competition agreement. It could be difficult,
time consuming and expensive to locate, replace and integrate
any key management member or other critical personnel. Changes
in
51
management or other critical personnel may be disruptive to our
business and might also result in our loss of unique skills and
the departure of existing employees
and/or
customers.
Other personnel related issues that we may encounter include:
Competition for personnel; need for competitive pay
packages. Competition for qualified individuals
in our industry is intense and we must provide competitive
compensation packages, including equity awards. Increases in
shares available for issuance under our equity incentive plans
require stockholder approval, and there may be times, as we have
seen in the past, where we may not obtain the necessary
approval. If we are unable to attract and retain qualified
individuals, our ability to compete in the markets for our
products could be adversely affected, which would have a
negative impact on our business and financial results.
Risks relating to senior management changes and new
hires. From 2006 to 2008, we experienced
significant changes in our senior management team as a number of
officers resigned or were terminated and several key management
positions were vacant for a significant period of time. We may
continue to experience changes in senior management going
forward.
We continue to hire in key areas and have added a number of new
employees in connection with our acquisitions. For new
employees, including senior management, there may be reduced
levels of productivity as it takes time for new hires to be
trained or otherwise assimilated into the company.
Increased
customer demands on our technical support services may adversely
affect our relationships with our customers and negatively
impact our financial
results.
We offer technical support services with many of our products.
We may be unable to respond quickly enough to accommodate
short-term increases in customer demand for support services. We
also may be unable to modify the format of our support services
to compete with changes in support services provided by
competitors or successfully integrate support for our customers.
Further customer demand for these services, without
corresponding revenue, could increase costs and adversely affect
our operating results.
We have outsourced a substantial portion of our worldwide
consumer support functions to third-party service providers. If
these companies experience financial difficulties, service
disruptions, do not maintain sufficiently skilled workers and
resources to satisfy our contracts, or otherwise fail to perform
at a sufficient level under these contracts, the level of
support services to our customers may be significantly
disrupted, which could materially harm our relationships with
these customers.
We
face risks related to customer outsourcing to system
integrators.
Some of our customers have outsourced the management of their
information technology departments to large system integrators.
If this trend continues, our established customer relationships
could be disrupted and our products could be displaced by
alternative system and network security solutions offered by
system integrators that do not bundle our solutions. Significant
product displacements could negatively impact our revenue and
have a material adverse effect on our business.
If
we fail to effectively upgrade or modify our information
technology system, we may not be able to accurately report our
financial results or prevent
fraud.
We may experience difficulties in transitioning to new or
upgraded information technology systems and in applying
maintenance patches to existing systems, including loss of data
and decreases in productivity as personnel become familiar with
new, upgraded or modified systems. Our management information
systems will require modification and refinement as we grow and
as our business needs change, which could prolong the
difficulties we experience with systems transitions, and we may
not always employ the most effective systems for our purposes.
If we experience difficulties in implementing new or upgraded
information systems or experience significant system failures,
or if we are unable to successfully modify our management
information systems and respond to changes in our business
needs, our operating results could be harmed or we may fail to
meet our reporting obligations. We may also experience similar
results if we have difficulty applying routine maintenance
patches to existing systems in a timely manner.
52
Computer
hackers may damage our products, services and
systems.
Due to our high profile in the network and system protection
market, we have been a target of computer hackers who have,
among other things, created viruses to sabotage or otherwise
attack our products and services, including our various web
sites. For example, we have seen the spread of viruses, or
worms, which intentionally delete anti-virus and firewall
software. Similarly, hackers may attempt to penetrate our
network security and misappropriate proprietary information or
cause interruptions of our internal systems and services. Also,
a number of web sites have been subject to denial of service
attacks, where a web site is bombarded with information requests
eventually causing the web site to overload, resulting in a
delay or disruption of service. If successful, any of these
events could damage users or our own computer systems. In
addition, since we do not control disk duplication by
distributors or our independent agents, media containing our
software may be infected with viruses.
Business
interruptions may impede our operations and the operations of
our
customers.
We are continually updating or modifying our accounting and
other internal and external facing business systems.
Modifications of these types of systems are often disruptive to
business and may cause us to incur higher costs than we
anticipate. Failure to properly manage this process could
materially harm our business operations.
In addition, we and our customers face a number of potential
business interruption risks that are beyond our respective
control. Natural disasters or other events could interrupt our
business or the business of our customers, and each of us is
reliant on external infrastructure that may be antiquated. Our
corporate headquarters in California is located near a major
earthquake fault. The potential impact of a major earthquake on
our facilities, infrastructure and overall operations is not
known, but could be quite severe. Despite business interruption
and disaster recovery programs that have been implemented, an
earthquake could seriously disrupt our entire business process.
We are largely uninsured for losses and business disruptions
caused by an earthquake and other natural disasters.
Our
investment portfolio is subject to volatility, losses and
liquidity limitations. Continued negative conditions in the
global credit markets could impair the value of or limit our
access to our
investments.
Historically, investment income has been a significant component
of our net income. The ability to achieve our investment
objectives is affected by many factors, some of which are beyond
our control. We invest our cash, cash equivalents and marketable
securities in a variety of investment vehicles in a number of
countries with and in the custody of financial institutions with
high credit ratings. While our investment policy and strategy
attempt to manage interest rate risk, limit credit risk, and
only invest in what we view as very high-quality debt
securities, the outlook for our investment holdings is dependent
on general economic conditions, interest rate trends and
volatility in the financial marketplace, which can all affect
the income that we receive, the value of our investments, and
our ability to sell them. Current economic conditions have had
widespread negative effects on the financial markets and global
economies. These conditions have been heightened recently by
increased volatility in the European capital markets. During
these challenging markets, we are investing new cash in
instruments with short to medium-term maturities of highly-rated
issuers, including U.S. government guaranteed investments.
We do not hold any auction rate securities or structured
investment vehicles. The underlying collateral for certain of
our mortgage-backed and asset-backed securities is comprised of
some
sub-prime
mortgages, as well as prime and
Alt-A
mortgages.
The outlook for our investment income is dependent on the amount
of any acquisitions that we effect, the timing of our stock
repurchases under our stock repurchase program and the amount of
cash flows from operations that are available for investment.
Our investment income is also affected by the yield on our
investments and our recent shift to a larger percentage of our
investment portfolio to shorter-term and U.S. government
guaranteed investments. This shift has negatively impacted our
income from our investment portfolio in light of declining
yields. Continued decline in our investment income or the value
of our investments will have an adverse effect on our results of
operations or financial condition.
During 2009, we recorded additional impairment on previously
impaired marketable securities totaling $0.7 million. We
believe that our investment securities are carried at fair
value. However, over time the economic and market environment
may provide additional insight regarding the fair value and the
expected recoverability of certain securities, which could
change our judgment regarding impairment. This could result in
realized losses
53
being charged against future income. Given the current market
conditions involved, there is continuing risk additional
impairments may be charged to income in future periods.
Most of our cash and investments held outside the U.S. are
subject to fluctuations in currency exchange rates. A
repatriation of these
non-U.S. investment
holdings to the U.S. under current law could be subject to
foreign and U.S. federal income and withholding taxes, less
any applicable foreign tax credits. Local regulations and
potential further capital market turmoil could limit our ability
to utilize these offshore funds.
Our
stock price has been volatile and is likely to remain
volatile.
During 2009 and through April 30, 2010, our stock price was
highly volatile, ranging from a high of $45.68 to a low of
$26.65. On April 30, 2010, our stocks closing price
was $34.75. Announcements, business developments, such as
material acquisitions or dispositions, litigation developments
and our ability to meet the expectations of investors with
respect to our operating and financial results, may contribute
to current and future stock price volatility. In addition,
third-party announcements such as those made by our partners and
competitors may contribute to current and future stock price
volatility. For example, future announcements by major
competitors related to consumer and corporate security solutions
may contribute to future volatility in our stock price. Certain
types of investors may choose not to invest in stocks with this
level of stock price volatility.
Our stock price may also experience volatility that is
completely unrelated to our performance or that of the security
industry. For the past year, the major U.S. and
international stock markets have been extremely volatile.
Fluctuations in these broad market indices can impact our stock
price regardless of our performance.
Our
charter documents and Delaware law may impede or discourage a
takeover, which could lower our stock
price.
Under our certificate of incorporation, our board of directors
has the authority to issue up to 5.0 million shares of
preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those
shares without any further vote or action by our stockholders.
The issuance of preferred stock could have the effect of making
it more difficult for a third party to acquire a majority of our
outstanding voting stock and could have the effect of
discouraging a change of control of the company or changes in
management.
Delaware law and other provisions of our certificate of
incorporation and bylaws could also delay or make a merger,
tender offer or proxy contest involving us or changes in our
board of directors and management more difficult. For example,
any stockholder wishing to make a stockholder proposal
(including director nominations) at our 2010 annual meeting must
meet the qualifications and follow the procedures specified
under both the Securities Exchange Act of 1934 and our bylaws.
In addition, we have a classified board of directors; however,
our board of directors will be declassified over the three year
period ending with our annual meeting of stockholders in 2012.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
Common
Stock Repurchases
In February 2010, our board of directors authorized the
repurchase of up to $500.0 million of our common stock from
time to time in the open market or through privately negotiated
transactions through December 2011, depending upon market
conditions, share price and other factors. During the three
months ended March 31, 2010, we repurchased approximately
3.7 million shares of our common stock in the open market
for approximately $150.0 million.
54
The table below sets forth all repurchases by us of our common
stock during the three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Approximate Dollar
|
|
|
|
Total
|
|
|
|
|
|
Shares Purchased as
|
|
|
Value of Shares That
|
|
|
|
Number of
|
|
|
Average
|
|
|
Part of Publicly
|
|
|
May yet be Purchased
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Announced Plan or
|
|
|
Under Our Stock
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Repurchase Program
|
|
|
Repurchase Program
|
|
|
|
(In thousands, except price per share)
|
|
|
January 1, 2010 through January 31, 2010
|
|
|
4
|
|
|
$
|
38.37
|
|
|
|
|
|
|
$
|
500,000
|
|
February 1, 2010 through February 28, 2010
|
|
|
1,568
|
|
|
|
39.73
|
|
|
|
1,093
|
|
|
|
456,426
|
|
March 1, 2010 through March 31, 2010
|
|
|
2,626
|
|
|
|
40.87
|
|
|
|
2,604
|
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,198
|
|
|
$
|
40.44
|
|
|
|
3,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2010 and 2009, we
repurchased approximately 0.5 million and 0.6 million
shares, respectively, of our common stock for approximately
$19.8 million and $16.5 million in connection with our
obligation to holders of RSUs, RSAs and PSUs to withhold the
number of shares required to satisfy the holders tax
liabilities in connection with the vesting of such shares. These
shares were not part of the publicly announced repurchase
program.
|
|
Item 3.
|
Defaults
upon Senior Securities
|
None.
|
|
Item 5.
|
Other
Information
|
None.
(a) Exhibits. The exhibits listed in the
accompanying Exhibit Index are filed or incorporated by
reference as part of this Report.
55
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.
McAfee Inc.
/s/ Albert
A. Rocky Pimentel
Albert A. Rocky Pimentel
Chief Financial Officer and Chief Operating Officer
May 7, 2010
56
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
File
|
|
Exhibit
|
|
|
|
Filed with
|
Number
|
|
Description
|
|
Form
|
|
Number
|
|
Number
|
|
Filing Date
|
|
this 10-Q
|
|
|
3
|
.1
|
|
Third Amended and Restated Certificate of Incorporation of the
Registrant, as amended on April 27, 2009
|
|
8-K
|
|
001-31216
|
|
|
3
|
.1
|
|
May 1, 2009
|
|
|
|
3
|
.2
|
|
Certificate of Ownership and Merger between Registrant and
McAfee, Inc.
|
|
10-Q
|
|
001-31216
|
|
|
3
|
.2
|
|
November 8, 2004
|
|
|
|
3
|
.3
|
|
Fourth Amended and Restated Bylaws of the Registrant.
|
|
8-K
|
|
001-31216
|
|
|
3
|
.2
|
|
May 1, 2009
|
|
|
|
3
|
.4
|
|
Certificate of Designation of Series A Preferred Stock of
the Registrant
|
|
10-Q
|
|
000-20558
|
|
|
3
|
.3
|
|
November 14, 1996
|
|
|
|
3
|
.5
|
|
Certificate of Designation of Rights, Preferences and Privileges
of Series B Participating Preferred Stock of the Registrant
|
|
8-K
|
|
000-20558
|
|
|
5
|
.0
|
|
October 22, 1998
|
|
|
|
10
|
.1
|
|
First Amendment to Credit Agreement, dated February 10,
2010, by and among the Registrant, McAfee Ireland Holdings
Limited, the subsidiaries of the Registrant party thereto as
guarantors, the lenders from time to time party thereto and Bank
of America, N.A., as Administrative Agent and L/C Issuer
|
|
8-K
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|
001-31216
|
|
|
10
|
.1
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|
February 17, 2010
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|
|
|
10
|
.2
|
|
Form of Change of Control and Retention Agreement
(Mr. DeWalt and Tier 2 Executives)
|
|
8-K
|
|
001-31216
|
|
|
10
|
.1
|
|
February 22, 2010
|
|
|
|
31
|
.1
|
|
Certification of Chief Executive Officer and Chief Accounting
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
32
|
.1
|
|
Certification of Chief Executive Officer and Chief Accounting
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
101
|
|
|
The following materials from McAfee, Inc.s Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2010, formatted in XBRL
(Extensible Business Reporting Language): (i) the Condensed
Consolidated Balance Sheets, (ii) the Condensed
Consolidated Statements of Income and Comprehensive Income,
(iii) the Condensed Consolidated Statements of Cash Flows,
and (iv) Notes to Condensed Consolidated Financial
Statements, tagged as blocks of text.
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|
|
|
|
|
|
|
|
|
|
|
X
|
57