e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended December 31,
2009
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Or
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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
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common stock, par value $0.01 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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
The aggregate market value of the voting stock held by
non-affiliates of the issuer as of the last business day of the
Registrants most recently completed second fiscal quarter
(June 30, 2009) as reported on the New York Stock
Exchange was approximately $6.6 billion. As of
February 24, 2010, Registrant had outstanding approximately
158,693,872 shares of common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to
stockholders in connection with our 2010 Annual Meeting of
Stockholders are incorporated by reference in Part III
herein.
MCAFEE,
INC. AND SUBSIDIARIES
FORM 10-K
For the
fiscal year ended December 31, 2009
TABLE OF
CONTENTS
2
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. 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
Annual Report on
Form 10-K
and are subject to business and economic risks, uncertainties
and assumptions that are difficult to predict, including those
identified below in Item 1A, Risk Factors
as well as in Item 1, Business and
Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations in
this Annual Report on
Form 10-K.
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.
TRADEMARKS
AND TRADE NAMES
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.
3
PART I
Overview
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.
Information security threats continue to grow increasingly
sophisticated, complex and difficult to detect and intercept.
Todays security challenges include virus, spam, spyware,
data loss, host intrusion, management, mobile malware and
messaging and email threats. From servers to routers and laptops
to personal digital assistants, every device is a potential
target and entry point. Many of todays threats are
blended, multi-vectored threats that exploit vulnerabilities in
networks and systems to get a foothold in any way possible.
Combating these exploits requires integrated protection. We
deliver proactive, integrated protection for networks, systems,
data and the web backed by our global threat research team
McAfee Labs.
Our
Solution
We apply business discipline and a pragmatic approach to
security that is based on four principles of security risk
management: (i) identify and prioritize assets,
(ii) determine acceptable risk, (iii) protect against
threats and (iv) enforce policies and measure and report on
compliance. We incorporate some or all of these principles into
our solutions. Our solutions protect systems and networks by
blocking immediate threats while proactively providing
protection from future threats and visibility into how threats
attempt to interact with the network. We also provide solutions
to manage and enforce security policies for organizations of any
size. Finally, we incorporate McAfee Labs, Foundstone
Professional Services and technical support to ensure a solution
is actively meeting our customers needs. These integrated
solutions help our customers solve problems, enhance security,
improve audit compliance and reduce costs.
ePolicy Orchestrator, our unified security management platform,
links together our endpoint and network security, our global
threat intelligence research and our risk and compliance
capabilities. It provides our customers with centralized policy
management, a common endpoint agent, efficient deployment,
actionable reporting and streamlined administration processes.
The protection and risk and compliance capabilities of our Total
Protection solutions and other key enterprise and midmarket
solutions are integrated with ePolicy Orchestrator to help
customers increase operational efficiencies, achieve a more
effective defense against threats, optimize compliance and
reduce security costs. For our security software-as-a-service
(SaaS) customers, we offer McAfee Security Center,
an easy-to-use graphical interface with a real-time external
security alert system that assesses, informs and warns consumers
about their personal computer (PC) security
vulnerabilities and then provides recommendations so they can
act quickly to secure their computers.
We deliver global threat intelligence to our suite of system,
network, SaaS, and risk and compliance solutions through our
research at McAfee Labs. McAfee Labs follows a complete range of
threats in real time, identifying application vulnerabilities
and analyzing and correlating risks to enable remediation using
our security solutions.
Our
Strategy
We are focused on the following business objectives:
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Extend our leadership position in corporate and consumer
endpoint security;
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Establish and extend leadership in network security;
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Establish and extend leadership in SaaS;
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Establish and extend leadership in risk and compliance solutions;
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Interlock our endpoint, network, SaaS and risk and compliance
solutions; and
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Pursue new solution opportunities that build upon our
multi-platform strategy of PCs, cloud, internet and mobile
security.
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Business
Developments and Highlights
During 2009, we took the following actions, among others, to
enhance our business.
We developed and launched several new products and integrated
enhanced feature functionality into new versions of our products
across our offerings, including, but not limited to the
following:
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We released our next generation of ePolicy Orchestrator platform
to help secure organizations from a growing threat landscape.
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We introduced McAfee Web Protection Services, a SaaS web
security solution providing protection from malware and other
web borne threats without any on-premises requirements.
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We introduced McAfee Family Protection, which includes email
contact approval, content filtering, time limits and social
network controls.
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We released McAfee Total Protection Service, a SaaS solution
offering always on guard protection without additional
investment in on-premises infrastructure. Total Protection
Service provides integrated endpoint, email and web protections
with access to an online console managed by us and available
over the internet, providing organizations with more flexibility
in management, reporting and design.
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We launched McAfee Online Backup, a new secure online service
for consumers that stores and encrypts digital assets such as
photos, videos, music,
e-mails and
other files.
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We expanded our endpoint protection products for the Apple
Macintosh platform with the release of McAfee Endpoint
Protection for Mac.
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We formed strategic relationships with numerous new partners
including Adobe Systems Incorporated (Adobe). Under
our multi-year partnership with Adobe, Adobe agreed to allow us
to give Adobe consumers the ability to run a security scan, get
a trial subscription to our products, or buy our products when
downloading an Adobe program or update. On the enterprise side,
we agreed to deliver and jointly sell an integrated data loss
prevention and enterprise digital rights management solution to
expand the reach of data protection beyond the enterprise
boundaries.
We expanded our relationships with existing partners, including
Dell, Inc. (Dell) and Lenovo Group Limited
(Lenovo). We extended our premiere position with
Dell through October 31, 2011 with our option to extend
until October 31, 2012. Our agreement with Dell provides
that we will have recommended and
default placement status on Dell personal computers
sold world wide. Lenovo agreed to preinstall our VirusScan Plus
on windows
7-based
Lenovo consumer PCs under the Idea
tm
brand.
We acquired Solidcore Systems, Inc. (Solidcore) and
MX Logic, Inc. (MX Logic).
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Solidcores dynamic whitelisting and compliance enforcement
provide protection against vulnerable or malicious applications
and ensure that only pre-authorized software and code can run on
servers, endpoints, fixed function devices and mobile devices.
By combining these technologies with our compliance mapping and
policy auditing we can deliver
end-to-end
compliance solutions. We believe that customers benefit from
centralized management and reporting of the integrated
technologies through the ePolicy Orchestrator console.
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MX Logic is a leading global provider of cloud-based
e-mail and
Web security, email archiving and email continuity services.
Adding MX Logics technologies and services enables us to
offer a comprehensive cloud-based security portfolio that
combines our leading global threat intelligence technologies
with our SaaS solutions.
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Lorrie Norrington, president of eBay Marketplaces, joined our
Board of Directors. We appointed George Kurtz our Worldwide
Chief Technology Officer. In his new role, Mr. Kurtz will
help drive innovation throughout McAfee by analyzing market
trends and customer feedback and incorporating it into the
product development cycle.
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Our
Business and Products
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 operate our
business in five geographic regions: North America; Europe,
Middle East and Africa; Japan; Asia-Pacific, excluding Japan;
and Latin America.
Customers
We categorize our customers as:
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consumer and small business;
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mid-market; and
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corporate and enterprise.
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We develop products and services specific to each customer group
and deliver these solutions through various routes to markets
based on customer group requirements. Customer groups are
supported by designated sales and marketing resources and go to
market partners as described below in Sales and
Marketing. Our consumer products and services provide an
overall safe consumer experience on the internet or mobile
networks. Our corporate products and services include our small
and mid-market business products and services as well as our
corporate and enterprise products and services. For financial
information about the amount of net revenue contributed by
product group, customer category and key components of net
revenue, see Item 7 Managements Discussion
and Analysis of Financial Condition and Results of
Operations.
Geographic
Theatres
We divide our markets into five geographic theaters:
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North America;
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Europe, Middle East and Africa (EMEA);
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Asia-Pacific, excluding Japan (APAC);
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Japan; and
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Latin America.
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Each geographic theater is supported by corporate resources and
local sales and marketing resources. We develop products and
services specific to customer groups as well as geographic
location, including internationalization and localization for
some of our offerings, theater price lists and specific routes
to market. For financial information about our foreign and
domestic segment operations, including net revenue, operating
income and total assets by geographic area, see Note 17 to
our consolidated financial statements. For information about
risks associated with our foreign operations, see Item 1A,
Risk Factors.
Products
We manage our products under business units that enable us to be
entrepreneurial and responsive within a specific market, moving
quickly to seize emerging opportunities and fostering focus and
customer-centricity within a particular market and our
customers. Our security products address security in three key
areas: endpoint security, network security and risk and
compliance.
Endpoint
Security Offerings
Our endpoint security offerings secure corporate and consumer
computer systems, including servers, desktop and laptop
computers, handheld voice and data phones, and other devices
that are connected to corporate systems and networks and home
PCs. Within our endpoint security offerings are our system
security products and our data protection products, each of
which is managed under its own business unit. Our system
security products include
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anti-virus, anti-spyware and anti-spam, desktop firewall, host
intrusion prevention, web security, host network access control,
web filtering for endpoint and device control. The majority of
our net revenue has historically been derived from the system
security products now represented in our Total Protection
solutions Our data protection products include our endpoint
encryption products that use strong encryption to safeguard
vital information residing on various devices, and our data loss
prevention products that prevent malicious or unintentional data
loss that occurs through unauthorized transmission or through
theft or loss of devices that contain sensitive information.
Our consumer security offerings, which we operate as a separate
business unit from our system security products, shield
consumers from identity theft, phishing scams, spyware,
malicious web sites and other threats that endanger the online
experience. Our consumer products are typically distributed
through partner, direct and retail channels, providing access
wherever consumers choose to purchase. Consumer products are
compatible with Windows computers, including the recently
released Windows 7 operating system.
Our endpoint security offerings include our mobile security
solutions that proactively protect mobile operators and their
users by safeguarding mobile terminals, applications and
content. Our mobile security offerings limit the spread of
mobile malware, inappropriate content and unsolicited messaging.
They reduce negative brand impact, recovery costs, customer
service issues and revenue disruptions that may result from
mobile exploits while enabling value-added operator strategies
such as mobile payments, location-based services and mobile
advertising. Our approach helps mobile network operators assess
global and local risks, protect their network and devices and
recover from attacks to their environment.
Network
Security Offerings
Our network security offerings apply to corporate networks of
all sizes and provide the same type of security measures that
endpoint protection provides but are tailored to protect network
systems, servers, laptops and other network devices as well as
users and data. Network security encompasses enterprise-class
firewall, intrusion detection and prevention, network access
control, network behavior analysis, network threat response,
web, email and data loss prevention security appliances and
solutions. Network security appliances provide network-class
policy enforcement and threat detection and prevention across
network boundaries as well as visibility and control of user
access and behavior. Email protection includes spam filtering,
virus, spyware and worm protection and content encryption for
email traffic. Web protection products block malicious websites
and content at the network gateway and data loss protection
discovers, detects and blocks the loss of confidential and
restricted data. Network solutions also available as SaaS
offerings include email security service and web protection
service.
Our network security offerings include our McAfee SECURE
standard, an aggregate of industry best practices, separate from
the Payment Card Industry (PCI) Data Security
Standard, designed to provide a level of security that an online
merchant can reasonably achieve to help provide consumers with
better protection when interacting with websites and shopping
online. Merchants who comply with the McAfee SECURE standard can
promote their certification by publicly displaying the McAfee
SECURE trustmark. When consumers see this trustmark, they feel
more secure when they shop online. Merchants displaying the
McAfee SECURE trustmark benefit by gaining consumer confidence.
Risk and
Compliance Offerings
Our risk and compliance offerings provide real-time insight into
risk, vulnerabilities and compliance profile. We enable
customers to direct security and resource investments where they
minimize the risks that matter the most, for compliance and
business availability. Customers are able to demonstrate more
control in audits and reviews by easily indentifying and
resolving security policy and regulatory issues in a measureable
and sustainable manner. Our risk management
solutions risk advisor, vulnerability manager and
remediation manager assess and prioritize risks from
known vulnerabilities, threats and existing countermeasures as
well as providing the tools necessary to remediate those risks.
Our vulnerability management service is also available as a SaaS
offering.
Our compliance and availability solutions change
control, application control, policy auditor and PCI
compliance assess, monitor, enforce and report on
customer IT policies in order to give customers both a real-time
view of their governance and compliance profiles as well as
continuous control of those configurations and policies to
prevent unwanted or unauthorized changes. Our application
control, change control and PCI compliance
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products were added in 2009 as part of our acquisition of
Solidcore. Our risk and compliance solutions are integrated into
ePolicy Orchestrator to provide a single security, risk and
compliance management platform.
As described below, we offer many of our security products under
a SaaS delivery model, and which we manage under a separate
business unit.
Security
Software-as-a-Service
Our SaaS portfolio includes protection for endpoints, email and
the web as well as vulnerability assessment, and is managed and
updated using an online management console that reduces
on-premise capital expenses. Our SaaS endpoint protection
solutions include anti-virus, anti-spyware, desktop firewall and
web security for Windows-based desktops, laptops, PCs and file
servers. Compatible with all email applications, our SaaS email
protection solutions include spam filtering, virus, spyware,
phishing and worm protection, message continuity and archiving
of email traffic, all filtered in the cloud. Our SaaS web
protection solutions include browser protection which provides
web safety ratings from our McAfee SiteAdvisor technology, as
well as host and gateway-based web filtering to secure users
from online threats, including spyware and other malicious
downloads, spam and identity theft scams. Our SaaS vulnerability
assessment provides scanning for network weaknesses, PCI
certification for businesses providing transactional websites
and website Trustmark certification to merchants who comply with
the McAfee SECURE standards. All our SaaS solutions are
delivered and managed over the internet, in subscription-based
licenses, to provide visibility and automatic, transparent
updates and product upgrades.
Product
Licensing
We typically license our software products to corporate and
government customers using our perpetual-plus licensing
arrangements, which provide a perpetual license coupled with an
initial support period of one year. We also sell perpetual
licenses in connection with sales of our hardware-based products
in which software is bundled with the hardware platform. Most of
our licenses are sold with renewable annual maintenance
contracts.
For our online subscription services, customers rent
or subscribe to use our security services for a defined period
of time by downloading our software to their personal computers.
Some products or product features are also available under a
SaaS, under which we offer our software applications to
customers for their use over the Internet. This allows customers
to purchase and use applications and modules on a subscription
basis, without the need for individual client installations or
additional maintenance costs. Because our online subscription
services and our SaaS offerings are versionless, or
self-updating,
customers subscribing to these services can use the most recent
version of the software without having to purchase product
updates or upgrades. Our online subscription consumer products
and services are found at our web site where customers download
our applications. We also make our online subscription products
and services available over the internet as a managed
environment. Unlike our online subscription service solutions,
these managed service provider solutions are customized,
monitored and updated by networking professionals for a specific
customer.
Support
and Services
Our technical support provides our customers worldwide
continuous comprehensive coverage through online,
telephone-based and
on-site
technical support services and proactive protection for all of
our product offerings. These services extend the value of our
customers security investment. We have a full portfolio of
corporate support offerings, Gold, Gold Select, Platinum and
Platinum Select, that align our core capabilities with tailored
levels of support for the smallest businesses to the largest
multi-nationals and government departments.
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Our core support capabilities are standard with all corporate
support offerings and include a suite of tools that provide
preventive, responsive and analytical resources to our
customers. Our customers benefit from daily and real-time
malware protection updates, proactive alerting and product
upgrades, an online product evaluation lab, automated diagnostic
tools and a
state-of-the-art
knowledgebase backed up by rapid access to our support experts
around the clock.
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Our premium support offerings, Gold Select, Platinum and
Platinum Select, deliver expert resources that offer flexible
levels of enhanced support coverage specialist
support for escalated technical assistance,
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personalized management through support account managers,
dedicated coverage from assigned technical experts, and onsite
support through a security specialist co-located at the
customers site.
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Our on-site
resource options include: (i) our Resident Support Account
Manager offering, which provides a dedicated onsite expert for
planning assistance, operational advice, strategic account
management, and direct intercession with McAfee teams; and
(ii) our Resident Malware Researcher offering that provides
an on-call or co-located researcher to investigate the business
impact of malware threats and write exclusive signatures to
protect the customers environment.
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Our consumer support provides both free and fee based support
offerings. Customers are guided first to self resolution tools,
including McAfee Virtual Technician, McAfee Community Forums and
an extensive knowledge base. Free chat based support is provided
and new customers can use phone support free for the first
30-days
following product installation. Fee based support options
include phone based support supplemented by remote control
technology.
In 2009 we launched McAfee Total Care Services, a host of
premium support services for consumers, covering virus removal,
PC tune up and software configuration assistance. These services
allow us to leverage our support staff for fee services beyond
basic product support.
Our corporate solutions services consultants help customers to
improve the
time-to-value
of their security investment by helping speed up deployment,
optimize configurations to our customers specific needs
and provide guidance on areas of risk. Customers can also choose
from a comprehensive array of online and classroom training
courses to maximize the value of their products.
Our Foundstone Professional Services include (i) threat
modeling to identify potential software security problems,
(ii) security assessments and (iii) education.
Foundstone Professional Services assist clients in the early
assessment, design and enhancement of their security and risk
architectures. The Foundstone Security Practice advises
government and commercial organizations on the most effective
countermeasures required to meet business and legislative
policies for security and privacy. Foundstone Education provides
a range of classroom-based training and education courses.
Research
and Development, Investments and Acquisitions
The market for computer software has low barriers to entry, is
subject to rapid technological change and is highly competitive
with respect to timely product introductions. We believe that
our ability to maintain our competitiveness depends in large
part upon our ability to develop, acquire, integrate and launch
new products and solutions, and to enhance existing offerings.
Our research and development efforts support all of our
offerings. They refine our security risk management processes,
improve our product design and usability and keep us at the
forefront of threat research. Most importantly, our research
helps us better protect our customers. In addition to developing
new offerings and solutions, our development staff focuses on
upgrades and updates to existing products and on enhancement and
integration of acquired technology. Future upgrades and updates
may include additional functionality to respond to market needs,
while also assuring compatibility with new systems and
technologies.
We are committed to providing leading global threat intelligence
through McAfee Labs. McAfee Labs provides precise and predictive
intelligence about global threats through a team of 350
multidisciplinary researchers in 30 countries around the world
who conduct research in the areas of host intrusion prevention,
network intrusion prevention, wireless intrusion prevention,
malicious code defense, security policy and management,
high-performance assurance and forensics and threats, attacks,
vulnerabilities and architectures. McAfee Labs follows a
complete range of threats in real time, identifying application
vulnerabilities, analyzing and correlating risks, and enabling
remediation through the use of McAfee solutions.
For 2009, 2008 and 2007, we expensed $324.4 million,
$252.0 million and $217.9 million, respectively, on
research and development, excluding in-process research and
development. Technical leadership is essential to our success
and we expect to continue devoting substantial resources to
research and development.
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As part of our growth strategy, we have also made and expect to
continue to make acquisitions of, or investments in,
complementary businesses, products and technologies. See
Note 3 to our consolidated financial statements included
elsewhere in this report for more information about our recent
business combination activities.
Sales and
Marketing
We market our brand, business solutions and offerings directly
to commercial and government customers through traditional
demand generation programs and events as well as indirectly
through resellers and distributors. Our two largest
distributors, Ingram Micro Inc. and Tech Data Corp., together
accounted for 23% of our net revenue in 2009. See Note 17
to our consolidated financial statements included elsewhere in
this report for more information about the percentage of net
revenue from sales to each of these distributors. We market our
consumer solutions and offerings to individual consumers
directly through online distribution methods and indirectly
through various distribution channels, such as retail, original
equipment manufacturers (OEMs) and service
providers. Our consumer business is responsible for online
distribution of our products sold to individual consumers over
the internet, including products distributed by our online
partners, and for licensing of technology to strategic
distribution partners for sale to individual consumers, with
certain exceptions.
Sales in
North America
Our North American sales force is organized by product offerings
and customer type. Our customers are served primarily through
our reseller partners with a channel marketing organization
assisting with lead generation and a channel support team
responsible for partner training and support. Although members
of our sales team are a necessary part of the sales process, the
majority of our ordering and fulfillment for our commercial
customers is handled by our distribution partners.
Sales
Outside of North America
Outside of North America, we have sales and support operations
in EMEA, Japan, APAC and Latin America. In 2009, 2008 and 2007,
net revenue outside of North America accounted for 43%, 47% and
48% of our net revenue, respectively. Within our global
geographies, our sales resources are organized by country, and
the larger markets may further allocate their sales resources by
product line
and/or
customer types. As in North America, the majority of our
ordering and fulfillment is handled by our distribution partners.
Resellers
and Distributors
Substantially all of our sales come through our network of
resellers, distributors and retailers. Our SecurityAlliance
Global Partner Program is a global sales and marketing
enablement program designed to meet the needs of our reseller
partners in supporting end-user customers. We currently utilize
corporate resellers, including CDW Corporation, Computacenter
PLC, Dell, Dimension Data, Insight Enterprises, Inc., Softmart,
Inc., Software House International, Softchoice Corporation and
others, as well as network and systems integrators who offer our
solutions to corporate, small and medium-business and government
customers.
Independent software distributors who currently supply our
products include Ingram Micro Inc., Tech Data Corp., Avnet, Inc.
and Alternative Technology, Inc. These distributors supply our
products primarily to large retailers, value-added resellers
(VARs), mail order and telemarketing companies. We
also sell our retail packaged products through several of the
larger computer and software retailers as well as broader-based
retailers, including Frys, Office Depot, Wal-Mart, Costco
and Yamada. Our sales and marketing teams work closely with our
major reseller and distributor accounts to manage demand
generating activities, training, order flow and affiliate
relationships.
Our top ten distributors represented 30% to 45% of net sales
during 2009, 2008 and 2007. Our agreements with our distributors
are not exclusive and may be terminated by either party without
cause. Terminated distributors may
10
not continue to sell our products. If one of our significant
distributors terminated its relationship with us, we could
experience a significant disruption in the distribution of our
products and a decline in our net revenue.
We use a sell-through revenue recognition model for
distributors, under which we recognize revenue at the time our
distributors sell the products to their customers. Under this
model, our distributors are permitted to purchase software
licenses from us at the same time they fill customer orders and
to pay for hardware and retail products only when they sell
these products to their customers. In addition, prior to selling
our products to their customers, our distributors are permitted
rights of return subject to varying limitations. After a
distributor sells a product to its customer, the distributor
generally has no right to return the product to us, unless we
approve the return from the final customer to the distributor.
Strategic
Channel Partners
Our channel efforts include strategic alliances with
complementary manufacturers to expand our reach and scale. OEMs
and internet service providers (ISPs) license our
products for resale to end users or inclusion with their
products. Strategic channel partners include Acer, Inc., AOL
Inc., AT&T, Cable and Wireless PLC, Dell, Hewlett Packard
Company, Lenovo, Sony Corporation, Telecom Italia S.p.A.,
Toshiba America Information Systems, Inc. and Telefonica S.A.,
among others. Depending on the arrangement, OEMs may sell our
software bundled with the PC or related services, pre-install
our software and allow us to complete the sale, or sublicense a
single version of our products to end users who must register
the product with us in order to receive updates.
Strategic
Alliances
From time to time, we enter into strategic alliances with third
parties to produce innovative technology solutions and support
our future growth plans. These relationships may include joint
technology development and integration, research cooperation,
co-marketing activities
and/or
sell-through arrangements. For example, in partnership with
Intel Corporation (Intel), our Endpoint Encryption
for PC product incorporates unique functionality taking
advantage of Intels AES-NI technology in their new
Westmere chipset to deliver increased, high-speed security
capabilities. With BMC Software, Inc. (BMC) we have
integrated McAfee Policy Auditor for Desktops with BMCs
Configuration Automation for Clients allowing customers to
automate and integrate security operations within their systems
management processes and tools. In addition, this technology
integration provides both McAfee and BMC with the opportunity to
benefit from each others sales and installed customer
accounts. Our Security Innovation Alliance program is a
technology partnering program that is designed to accelerate the
development of interoperable security products that can be
integrated in complex customer environments. Members of the
alliance can develop products that will integrate with ePolicy
Orchestrator and market them as McAfee-compatible. Our customers
benefit from faster and less costly deployment and a partner
ecosystem that delivers comprehensive solutions.
Marketing
Activities
Our marketing approach involves a collaborative planning process
to develop global marketing campaigns aligned to corporate goals
and objectives. Global marketing campaigns drive awareness,
demand generation and enablement for cross-sell, up-sell and net
new customer acquisition activity in support of our business
model across our major product lines, five regional theaters and
three customer types. One of the principal means of marketing
our brand, products and services is online via the internet. Our
web site, www.mcafee.com, supports marketing activities to our
key customers and prospects, including home and home office
users, small and medium-sized businesses, large enterprises and
our partner community. Our web site contains various marketing
materials and information about our products. Our customers can
download and purchase some products directly online. We also
promote the McAfee brand, our products and services through
marketing activities in trade publications, direct mail
campaigns, television, billboards and strategic arrangements, as
well as, online through key word and search-based advertising.
In 2009 we hosted C-level executives in twelve countries to
collaborate on our vision for security interlock and held our
second annual FOCUS user conference where customers, prospects
and partners joined together to learn about security interlock
and how to secure their business from the growing sophistication
of targeted cyber attacks. We attend trade shows and industry
conferences, publish periodic channel and customer newsletters,
and generate sales leads through email marketing campaigns.
11
We also market our products through the use of rebate programs
and marketing development funds. Within most countries, we
typically offer incentive rebates to channel partners based on
sales and promotional rebates to end users. We use channel
marketing to market, promote, train and provide incentives to
our resellers and distributors and to promote our offerings to
their end-user customers. We offer our resellers and
distributors technical and sales training classes, online
training resources and sales and marketing demand generation
assistance kits. We also provide specific cooperative marketing
programs for end-user seminars, catalogs, demand creation
programs, sales events and other items.
Competition
The markets for our products are intensely competitive and are
subject to rapid changes in technology. We expect both product
and pricing competitive pressures to increase in the near-term
as the industry continues to consolidate and our competitors
grow rapidly through acquisitions. Many of our competitors have
longer operating histories, greater brand recognition, stronger
relationships with strategic channel partners, larger technical
staffs, established relationships with hardware vendors
and/or
greater financial, technical and marketing resources and other
market advantages. Increasingly, commoditized security
protection is offered by third parties at significant discounts
to our prices or, in some cases is bundled for free. Potential
customers may perceive our products as less valuable or even
unnecessary if similar functionality is available at a
significant discount or free. 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 competition-driven expenses such as advertising
expenses, product rebates and marketing funds provided to our
channel partners. See Risk Factors 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.
We believe that the principal competitive factors affecting the
market for our corporate products include, but are not limited
to, the following: performance; functionality and features;
brand name recognition; breadth of product group; integration of
products; time to market; price; the effectiveness of
distributor promotion programs; sales and marketing efforts;
quality of customer support and financial stability. We believe
that we generally compete favorably against our competitors in
these areas. However, lack of name recognition may be a concern
with potential new customers. Competitor solutions may be more
attractive than ours to the extent they are integrated with a
larger product solution such as networking equipment and
operating software. In addition, our pricing may be less
competitive, particularly compared to smaller competitors trying
to enter the market.
Our principal competitors in the corporate market are set forth
below:
Endpoint Security Market. Our principal
competitors in this market are Kaspersky Lab ZAO, Microsoft
Corp, Panda Security SL, Sophos Plc, Symantec Corp., and Trend
Micro, Inc.
Network Security Market. Our principal
competitors in the network security market are Barracuda
Networks Inc., Blue Coat Systems, Inc., Check Point Software
Technologies Ltd., Cisco Systems, Inc., EMC Corp., Fortinet,
Inc., International Business Machines, Corp., Juniper Networks,
Inc., Proofpoint, Inc., Symantec Corp., Trend Micro, Inc.,
SonicWALL, Inc., Sourcefire, Inc., Websense, Inc., and 3Com Corp.
Risk and Compliance Market. Our principal
competitors in the risk and compliance market are BigFix, Inc.,
International Business Machines, Corp., nCircle Network
Security, Inc., Qualys, Inc., Symantec Corp., and Tripwire, Inc.
Security Software-as-a-Service (SaaS)
Market. Our principal competitors in the SaaS
market are Google, Inc., Symantec Corp., Microsoft Corp., and
Websense, Inc.
Other Competitors. In addition to competition
from large technology companies such as Cisco Systems, Inc.,
Google, Inc., International Business Machines, Corp., Microsoft
Corp., and Symantec Corp., we also face competition from smaller
companies and shareware authors that may develop competing
products.
12
In the consumer market, we believe that the principal
competitive factors include, but are not limited to, the
following: brand name recognition and reputation; convenience of
purchase; price; breadth of functionality and features; ease of
use; and frequency of upgrades and updates. We believe that we
generally compete effectively in each of these areas. However,
if it is more convenient for consumers to use a competitive
product (for example, when they purchase computers that are
prebundled with a competitors product), we could be at a
competitive disadvantage. Our prices are also at a competitive
disadvantage compared to free solutions or when competitors
offer significant discounts. Our principal competitors are
Symantec Corp. with its Norton product line, Microsoft Corp,
Kaspersky Lab ZAO, AVG Technologies, Trend Micro, Inc., ALWIL
Software (Avast), Avira, F-Secure and AhnLab. There are also
several smaller regional security companies that we compete
against primarily in the EMEA and APAC regions.
Our
Proprietary Technology
Our success depends to a great extent on our proprietary
software technology. We rely on a combination of patents,
trademarks, trade secrets and copyrights to establish and
protect proprietary rights to our software. We enforce our
intellectual property rights in the U.S. and abroad. The
duration of our trademark registrations varies from country to
country, and in the U.S. we generally are able to maintain
our trademark rights and renew any trademark registrations for
as long as the trademarks are in use. We have a number of
U.S. and foreign issued patents and pending patent
applications, including patents and rights to patent
applications acquired through strategic transactions, which
relate to various aspects of our products and technology. The
duration of our patents is determined by the laws of the country
of issuance and for the U.S. is typically 17 years
from the date of issuance of the patent or 20 years from
the date of filing of the patent application resulting in the
patent, which we believe is adequate relative to the expected
lives of our products. Our products are protected under
U.S. and international copyright laws and laws related to
the protection of intellectual property and proprietary
information. We take measures to label such products with the
appropriate proprietary rights notices, and we actively enforce
such rights in the U.S. and abroad. We generally enter into
non-disclosure agreements with our employees, distributors and
partners, and we enter into license agreements with our
customers with respect to our software and other proprietary
information. However, the steps taken by us to protect our
proprietary software technology may be inadequate to deter
misuse or theft of this technology. Often, we do not obtain
signed license agreements from customers who license products
from us. In these cases, we include an electronic version of an
end-user license in all of our electronically distributed
software and a printed license with our products that are
distributed in a box. Although this is common practice for
software companies that sell
off-the-shelf
products to have licenses that are not signed by the licensee,
certain legal authorities believe that such licenses may not be
enforceable under the laws of many states and foreign
jurisdictions. In addition, the laws of some foreign countries
either do not protect these rights at all or offer only limited
protection for these rights. Furthermore, we are aware that many
users of our anti-virus products have not paid any license or
support fees to us. See Risk Factors 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 below.
Seasonality
As is typical for many large software companies, our business is
seasonal. Software license and maintenance orders are generally
higher in our third and fourth quarters and lower in our first
and second quarters. A significant decline in license and
maintenance orders is typical in the first quarter of our year
as compared to license and maintenance orders in the fourth
quarter of the prior year. In addition, we generally receive a
higher volume of software license and maintenance orders in the
last month of a quarter, with orders concentrated in the later
part of that month. We believe that this seasonality primarily
reflects customer spending patterns and budget cycles, as well
as the impact of compensation incentive plans for our sales
personnel. Revenue generally reflects similar seasonal patterns
but to a lesser extent than orders because revenue is not
recognized until an order is shipped or services are performed
and other revenue recognition criteria are met and a large
portion of our in period revenues are recognized ratably from
our deferred revenue balance.
13
OUR
EMPLOYEES
As of December 31, 2009, we employed approximately 6,100
individuals worldwide, with approximately 50% in the
U.S. Less than 2% of our employees are represented by a
labor union or work council. Competition for qualified
management and technical personnel is intense in the software
industry.
Company
Information
We were incorporated in the state of Delaware in 1992 under the
name of McAfee Associates, Inc. In conjunction with our 1997
merger with Network General Corporation, we changed our name to
Networks Associates, Inc. In 2004, we changed our name to
McAfee, Inc. and began trading on the New York Stock Exchange
under the symbol MFE. We are headquartered at 3965 Freedom
Circle, Santa Clara, California, 95054, and the telephone
number at that location is
(408) 988-3832.
Our internet address is www.mcafee.com. Other than the
information expressly set forth in this annual report, the
information contained, or referred to, on our website is not
part of this annual report.
Additional
Information
We file registration statements, periodic and current reports,
proxy statements, and other materials with the Securities and
Exchange Commission (SEC). You may read and copy any
materials we file with the SEC at the SECs Office of
Public Reference at 100 F Street, NE,
Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains a web site at www.sec.gov that contains
reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC,
including our filings. We make available, free of charge,
through the investor relations section of our web site
(investor.mcafee.com), our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K,
and any amendments to those reports filed pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after they
are electronically filed with or furnished to the SEC. Except as
expressly set forth in this
Form 10-K
annual report, the contents of our web site are not incorporated
into, or otherwise to be regarded as part of this report.
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. The
severity or length of time these economic and financial market
conditions may persist is unknown. During challenging economic
times, 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.
14
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
above. 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. As our consumer
business becomes increasingly more dependent upon the partner
model, our retail businesses may continue to decline. 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.
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-
15
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.
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. 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 actually exist. These
false alarms, while typical in the security industry, would
likely impair the perceived reliability of our products and may
therefore adversely impact market acceptance of our products. In
addition, we have in the past been subject to litigation
claiming damages related to a false alarm, and similar claims
may be made in the future.
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.
16
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 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
17
occur that may indicate impairment. If the undiscounted cash
flows expected to be derived from the intangible asset or
purchased technology is 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 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 2009 compared to 47% in 2008 and 48% in
2007. 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.
18
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 2009, we recorded net
foreign currency transaction losses of $2.4 million. During
2008 and 2007, we recorded net foreign currency transaction
gains of $6.4 million and $1.0 million, respectively.
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, which is a key
financial metric at each period end.
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, that 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 have adversely affected personal computer
sales and if this trend continues, could continue to 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
19
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 34% of our net revenue in 2009, 38% in 2008 and 39%
in 2007. 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 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 $6.5 million as of
December 31, 2009. 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
20
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 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 18 to the
consolidated financial statements for additional information
with respect to certain currently pending legal matters.
21
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.
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.
22
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 particularly for
the Euro and the Japanese Yen and if international sales become
a greater percentage of our total sales, repurchases under our
stock repurchase program, expenses related to our acquisition
and 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 which could be
costly and time-consuming. In addition, the presence of material
weaknesses could result in financial statement errors which 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
23
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.
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 and Germany. 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
24
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 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.
25
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.
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, that 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. 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
26
mortgage-backed and asset-backed securities is comprised of some
sub-prime
mortgages, as well as prime and Alt-A mortgages. We are no
longer purchasing mortgage-backed or asset-backed securities.
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 2008, we recorded an
other-than-temporary
impairment charge of $18.5 million related to marketable
securities. 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 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 February 24, 2010, our stock price
was highly volatile, ranging from a high of $45.68 to a low of
$26.65. On February 24, 2010, our stocks closing
price was $40.33. 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.
27
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Our worldwide headquarters currently occupies approximately
208,000 square feet in facilities located in
Santa Clara, California under leases expiring through 2013.
Worldwide, we lease facilities with approximately 1,577,000
total square feet, with leases that expire at various times.
Total square footage excludes approximately 41,000 square
feet of leased space in North America that we sublease to third
parties. Our primary international facilities are located in
Australia (supporting sales, marketing and finance), France
(principally a sales office), India (supporting engineering,
customer support and sales), Ireland (supporting sales,
engineering and finance), Japan (supporting sales, marketing and
finance) and the United Kingdom (supporting sales, marketing,
finance, human resources, legal and IT). Significant domestic
sites include California, Minnesota (supporting engineering and
customer support), Oregon (supporting engineering) and Texas
(supporting groups described below). We believe that our
existing facilities are adequate for the present and that
additional space will be available as needed.
We own our regional office located in Plano, Texas. The
approximately 170,000 square feet facility opened in
January 2003 and is located on 21.0 acres of owned land.
This facility supports approximately 975 employees working
in our customer support, engineering, accounting and finance,
information technology, internal audit, human resources, legal
and sales groups.
|
|
Item 3.
|
Legal
Proceedings
|
Information with respect to this item is incorporated by
reference to Note 18 to our consolidated financial
statements included in this
Form 10-K,
which information is incorporated into this Part I,
Item 3 by reference.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of stockholders during the
quarter ended December 31, 2009.
28
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Price
Range of Common Stock
Our common stock is traded on the New York Stock Exchange
(NYSE), under the symbol MFE. The following table
sets forth, for the period indicated, the high and low sales
prices for our common stock for the last eight quarters, all as
reported by NYSE. The prices appearing in the table below do not
reflect retail
mark-up,
mark-down or commission.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
34.90
|
|
|
$
|
26.65
|
|
Second Quarter
|
|
|
42.57
|
|
|
|
32.93
|
|
Third Quarter
|
|
|
45.52
|
|
|
|
38.64
|
|
Fourth Quarter
|
|
|
45.68
|
|
|
|
37.15
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
37.40
|
|
|
$
|
27.80
|
|
Second Quarter
|
|
|
37.82
|
|
|
|
30.71
|
|
Third Quarter
|
|
|
40.97
|
|
|
|
30.63
|
|
Fourth Quarter
|
|
|
34.98
|
|
|
|
24.72
|
|
The annual certification to the NYSE attesting to our compliance
with the NYSEs corporate governance listing standards was
submitted by our chief executive officer to the NYSE in May
2009. We believe that we are currently in compliance and expect
to be able to submit our annual 2010 certification.
Dividend
Policy
We have not paid any cash dividends since our reorganization
into a corporate form in October 1992. We intend to retain
future earnings for use in our business and do not anticipate
paying cash dividends in the foreseeable future. Our credit
agreement by and among us, McAfee Ireland Holdings Limited,
certain of our subsidiaries as guarantors, the lenders from time
to time party thereto and Bank of America, N.A., as
administrative agent and letter of credit issuer contains
restrictions regarding the payment of dividends.
29
Stock
Performance
The following Performance Graph and related information shall
not be deemed soliciting material or to be
filed with the SEC, nor shall such information be
incorporated by reference into any future filing under the
Securities Act of 1933 or Securities Exchange Act of 1934, each
as amended, except to the extent that we specifically
incorporate it by reference into such filing.
The following graph shows a five-year comparison of cumulative
total returns for our common stock, the NYSE Market Index,
S&P Information Technology Index and S&P 500 Index
each of which assumes an initial value of $100 and reinvestment
of dividends. The information presented in the graph and table
is as of the end of each fiscal year ended December 31. The
comparisons in the graph below are based on historical data and
are not intended to forecast the possible future performance of
our common stock.
Comparison
of Five-Year Cumulative Total Returns
COMPARISON
5-YEAR
CUMULATIVE TOTAL RETURN
AMONG MCAFEE, INC., NYSE MARKET INDEX,
S&P 500 INDEX AND S&P INFORMATION TECHNOLOGY
INDEX
ASSUMES
$100 INVESTED ON JAN. 01, 2005
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec-04
|
|
Dec-05
|
|
Dec-06
|
|
Dec-07
|
|
Dec-08
|
|
Dec-09
|
|
McAfee, Inc.
|
|
|
100.0
|
|
|
|
93.8
|
|
|
|
98.1
|
|
|
|
129.6
|
|
|
|
119.5
|
|
|
|
140.2
|
|
NYSE Market Index
|
|
|
100.0
|
|
|
|
109.4
|
|
|
|
131.8
|
|
|
|
143.4
|
|
|
|
87.1
|
|
|
|
111.8
|
|
S&P Information Technology Index
|
|
|
100.0
|
|
|
|
101.0
|
|
|
|
109.5
|
|
|
|
127.4
|
|
|
|
72.4
|
|
|
|
117.1
|
|
S&P 500 Index
|
|
|
100.0
|
|
|
|
104.9
|
|
|
|
121.5
|
|
|
|
128.2
|
|
|
|
80.7
|
|
|
|
102.1
|
|
Performance for 2009 reflects the December 31, 2009 closing
price of our common stock on the NYSE of $40.57.
30
Holders
of Common Stock
As of February 24, 2010, there were 1,052 record owners of
our common stock.
Securities
Authorized for Issuance under Equity Compensation
Plans
The number of securities to be issued upon exercise of all
outstanding options and rights (including unvested stock units),
the weighted average per share exercise price of such options,
and the number of shares remaining available for issuance under
all of our equity compensation plans as of December 31,
2009 are reflected in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
Securities
|
|
|
Issued Upon
|
|
|
|
Remaining Available
|
|
|
Exercise of
|
|
|
|
for Future Issuance
|
|
|
Outstanding
|
|
Weighted-Average
|
|
(Excluding
|
|
|
Options
|
|
Exercise Price of
|
|
Securities Reflected
|
Plan Category
|
|
and Rights
|
|
Outstanding Options(1)
|
|
in First Column)
|
|
Plans approved by stockholders
|
|
|
13,706,704
|
|
|
$
|
32.11
|
|
|
|
8,430,650
|
|
Plans not approved by stockholders
|
|
|
430,751
|
|
|
$
|
16.19
|
|
|
|
|
|
|
|
|
(1) |
|
The weighted average exercise price is calculated based solely
on the outstanding options. |
Common
Stock Repurchases
During 2009, we repurchased approximately 0.8 million
shares of our common stock for approximately $25.3 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. During 2008, we repurchased
approximately 14.5 million shares of our common stock in
the open market for approximately $499.7 million, excluding
commissions paid. During 2008, we repurchased approximately
0.5 million shares of our common stock for approximately
$16.6 million in connection with our obligation to holders
of restricted stock units (RSUs), restricted stock
awards (RSAs) and restricted stock units with
performance-based vesting (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 table below sets forth all repurchases by us of our common
stock during the three months ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
October 1, 2009 through October 31, 2009
|
|
|
23
|
|
|
$
|
43.45
|
|
|
|
|
|
|
$
|
|
|
November 1, 2009 through November 30, 2009
|
|
|
57
|
|
|
|
41.40
|
|
|
|
|
|
|
|
|
|
December 1, 2009 through December 31, 2009
|
|
|
4
|
|
|
|
38.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
84
|
|
|
$
|
41.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
31
|
|
Item 6.
|
Selected
Financial Data
|
You should read the following selected financial data with our
consolidated financial statements and related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations. Historical
results may not be indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008(1)
|
|
|
2007
|
|
|
2006
|
|
|
2005(2)
|
|
|
|
(In thousands, except for per share amounts)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,927,332
|
|
|
$
|
1,600,065
|
|
|
$
|
1,308,220
|
|
|
$
|
1,145,158
|
|
|
$
|
981,628
|
|
Income from operations
|
|
|
222,307
|
|
|
|
189,571
|
|
|
|
159,813
|
|
|
|
139,028
|
|
|
|
141,407
|
|
Income before provision for income taxes
|
|
|
224,223
|
|
|
|
222,206
|
|
|
|
229,204
|
|
|
|
183,781
|
|
|
|
166,678
|
|
Net income
|
|
|
173,420
|
|
|
|
172,209
|
|
|
|
166,980
|
|
|
|
137,471
|
|
|
|
118,217
|
|
Net income per share basic
|
|
$
|
1.11
|
|
|
$
|
1.10
|
|
|
$
|
1.04
|
|
|
$
|
0.85
|
|
|
$
|
0.72
|
|
Net income per share diluted
|
|
$
|
1.09
|
|
|
$
|
1.08
|
|
|
$
|
1.02
|
|
|
$
|
0.84
|
|
|
$
|
0.70
|
|
Shares used in per share calculation basic
|
|
|
156,144
|
|
|
|
156,205
|
|
|
|
159,819
|
|
|
|
160,945
|
|
|
|
165,042
|
|
Shares used in per share calculation diluted
|
|
|
158,988
|
|
|
|
159,406
|
|
|
|
164,126
|
|
|
|
163,052
|
|
|
|
169,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005(2)
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
677,137
|
|
|
$
|
483,302
|
|
|
$
|
394,158
|
|
|
$
|
389,627
|
|
|
$
|
728,592
|
|
Working capital
|
|
|
327,232
|
|
|
|
76,160
|
|
|
|
230,145
|
|
|
|
146,253
|
|
|
|
688,015
|
|
Total assets
|
|
|
3,963,186
|
|
|
|
3,457,881
|
|
|
|
3,386,524
|
|
|
|
2,760,834
|
|
|
|
2,608,357
|
|
Deferred revenue, current and long-term
|
|
|
1,407,473
|
|
|
|
1,293,110
|
|
|
|
1,044,513
|
|
|
|
897,525
|
|
|
|
751,806
|
|
Accrued taxes and other long-term liabilities
|
|
|
70,772
|
|
|
|
72,751
|
|
|
|
88,241
|
|
|
|
149,924
|
|
|
|
147,128
|
|
Total equity
|
|
|
2,117,538
|
|
|
|
1,752,488
|
|
|
|
1,905,325
|
|
|
|
1,427,249
|
|
|
|
1,434,641
|
|
|
|
|
(1) |
|
In 2008, we expensed $19.5 million for in-process research
and development related to the acquisition of Secure Computing
Corporation (Secure Computing). |
|
(2) |
|
In 2005, we expensed $50.0 million in connection with a
settlement with the SEC. We deposited the $50.0 million in
an escrow account with the SEC as the designated beneficiary. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements and Factors That May Affect Future Results
This Managements Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking
statements that involve known and unknown risks, uncertainties
and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different
from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking
statements. Please see Special Note Regarding
Forward-Looking Statements.
Overview
and Executive Summary
We 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,
32
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 2009, service,
support and subscription revenue accounted for 90% of net
revenue and product revenue accounted for 10% of net revenue.
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 adjusts 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, acquisition-related costs, restructuring charges
(benefits), legal settlement, in-process research and
development, investigation-related and other costs, loss on
sale/disposal of assets and technology, change in fair value of
stock-based liability awards, impairment of marketable
securities, 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 2009 grew by $327.3 million, or 20%, to
$1,927.3 million from $1,600.1 million in 2008. Our
net revenue is directly impacted by corporate information
technology, and government and consumer spending levels. Net
revenue was positively impacted by $248.3 million from our
2009 and 2008 acquisitions. Changes in the U.S. Dollar
compared to foreign currencies negatively impacted our revenue
growth by $23.4 million in 2009.
Operating Income. Operating income increased
$32.7 million in 2009 compared to 2008 as the increase in
net revenue exceeded the increase in costs of net revenue and
operating costs. The increase in these expenses included:
(i) a $109.6 million increase in salaries and benefits
due to an increase in headcount, primarily as a result of our
Secure Computing acquisition, (ii) a $35.4 million
increase in amortization expense as a result of purchased
technology and intangibles in recent acquisitions, (iii) a
$32.2 million increase in stock-based compensation expense
associated with all stock-based awards made to our employees and
outside directors and (iv) a $15.6 million increase in
restructuring charges due to eliminating redundant positions
from our Secure Computing acquisition and reorganization of our
sales and marketing workforce.
The $117.4 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) in 2009 compared to 2008
resulted from a $327.3 million increase in net revenue that
exceeded the increase in costs of net revenue and operating
expenses that was primarily related to a $109.6 million
increase in salaries and benefits. See the Reconciliation
of GAAP to Non-GAAP Financial Measures below.
Net Income. The $1.2 million increase in
net income in 2009 compared to 2008 resulted from the increase
in operating income described above and a $17.8 million
decrease in marketable security impairment charges, offset by a
$43.5 million decrease in interest and other income
primarily attributable to lower yields and lower cash and
marketable securities balances.
The $65.0 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) in 2009 compared to 2008
resulted from the increase in operating income described above,
offset by a $43.5 million decrease in interest and other
income primarily attributable to lower yields and lower cash and
marketable securities balances. See the Reconciliation of
GAAP to Non-GAAP Financial Measures below.
33
Net cash provided by operating activities. The
$188.1 million increase in net cash provided by operating
activities in 2009 compared to 2008 was primarily attributable
to managements focus on operating cash flows. Our working
capital provided $37.2 million in 2009 compared to using
$57.4 million in 2008. This resulted in a
$94.6 million increase in operating cash flows from working
capital, primarily driven by improved collections of accounts
receivable. In addition, we had a $92.2 million increase in
non-cash adjustments to net income, which included a
$26.4 million increase in non-cash stock-based compensation
expense and a $22.6 million increase in deferred income
taxes. See Liquidity and Capital Resources below.
Deferred Revenue. Our deferred revenue balance
at December 31, 2009 increased 9% to $1,407.5 million,
compared to $1,293.1 million at December 31, 2008. Our
deferred revenue continued to increase 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. In
addition, our deferred revenue balance was positively impacted
as a result of (i) the weaker U.S. dollar against the
Euro on December 31, 2009 compared to December 31,
2008 and (ii) acquired deferred revenue totaling
$4.4 million from our acquisitions in 2009. 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
2009 and 2008 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 and enhancing a full line of system and network
security 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. With
the MX Logic acquisition, we plan to deliver a comprehensive
cloud-based security portfolio. With the Solidcore acquisition,
we plan to couple Solidcores whitelisting and compliance
enforcement technology with our compliance mapping and policy
auditing to deliver an
end-to-end
compliance solution. In 2008, we acquired Secure Computing for
$490.1 million. With the Secure Computing acquisition, we
deliver a complete network security solution to organizations of
all sizes. During 2007, we acquired SafeBoot Holding B.V.
(SafeBoot) for $346.6 million. With this
acquisition, we provide customers with endpoint and data
security, including file and folder encryption. We expect that
the 2009 acquisitions of MX Logic and Solidcore will have a
dilutive impact on net income in 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 in 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 $250.1 million, or 26%, to
$1,213.9 million during 2009 from $963.8 million in
2008. The
year-over-year
increase in revenue was due to a $202.5 million increase in
revenue from our network security offerings, which includes a
$181.3 million increase from our Secure Computing
acquisition and a $17.5 million increase from our MX Logic
acquisition, a $23.6 million increase in revenue from our
end point solutions offerings, a $18.7 million increase in
revenue primarily from our services offerings and a
$5.4 million increase in revenue from our vulnerability and
risk management services. 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.
During 2008, net revenue from our corporate products increased
$194.0 million, or 25%, to $963.8 million from
$769.8 million in 2007. The
year-over-year
increase in revenue was due to a $122.2 million increase in
revenue from our end point solutions, which includes increased
revenue from our system security solutions and new revenue from
data encryption products integrated from our SafeBoot
acquisition, a $60.1 million increase in revenue from our
network security offerings and an $11.7 million increase in
revenue from our vulnerability and risk management services.
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
34
experience on the internet or cellular networks. Net revenue
from sales of our consumer products increased
$77.1 million, or 12%, to $713.5 million in 2009 from
$636.4 million in 2008. The increase was primarily due to
(i) an increase in our online customer base,
(ii) increased online renewal subscriptions from a larger
customer base and (iii) increased up-sell to higher level
suites with higher price points. We continue to strengthen our
relationships with strategic channel partners, such as Acer,
Dell, Sony Computer and Toshiba. During 2008, net revenue from
our consumer products increased $97.9 million, or 18%, to
$636.4 million from $538.5 million in 2007 primarily
due to (i) an increase in our customer base and
(ii) increased percentage of suite sales from McAfee
Internet Security Suites to McAfee Total Protection Suites.
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 2009, on an average quarterly exchange basis, the
U.S. Dollar strengthened against the Euro and weakened
against the Yen compared to 2008. Overall, the U.S. Dollar
strengthening against the Euro had the most significant impact
to our financial statements and this has resulted in a decrease
in the revenue and expense amounts in certain foreign countries
in our consolidated statements of income and comprehensive
income in 2009 as compared to the 2008.
Critical
Accounting Policies and Estimates
In preparing our consolidated financial statements, we make
estimates, assumptions and judgments that can have a significant
impact on our net revenue, income from operations and net
income, as well as the value of certain assets and liabilities
on our consolidated balance sheets. To apply critical accounting
policies we must evaluate a number of complex criteria and make
significant accounting judgments. Management bases its estimates
on historical experience and on various other assumptions that
they believe to be reasonable under the circumstances. These
estimates form the basis for making judgments about the carrying
values of assets and liabilities. We evaluate our estimates on a
regular basis and make changes accordingly.
Senior management has discussed the development, selection and
disclosure of these estimates with the audit committee of our
board of directors. Actual results may materially differ from
these estimates under different assumptions or conditions. If
actual results were to differ from these estimates materially,
the resulting changes could have a material effect on the
consolidated financial statements. We believe our significant
accounting policies, which are discussed in Note 2,
Summary of Significant Accounting Policies in the
Notes to Consolidated Financial Statements, involve a high
degree of judgment and complexity. Accordingly, we believe the
following policies are the most critical to aid in fully
understanding and evaluating our financial condition and
operating results.
Revenue
Recognition
We must make significant management judgments and estimates to
determine revenue to be recognized in any accounting period.
Material differences may result in the amount and timing of our
revenue for any period if our management makes different
judgments or utilizes different estimates. These estimates
affect the deferred revenue line item on our
consolidated balance sheets and the net revenue line
item on our consolidated statements of income and comprehensive
income.
Our revenue, which is presented net of sales taxes, is derived
primarily from two sources: (i) service, support and
subscription revenue, which includes maintenance, training and
consulting revenue as well as revenue from product licenses
under subscription arrangements, and (ii) product revenue,
which includes hardware and perpetual license revenue.
We apply software revenue recognition guidance to all
transactions involving the sale of software products and
hardware products that include software. The application of this
guidance requires judgment, including whether a software
arrangement includes multiple elements, and if so, whether VSOE
exists for these elements. For arrangements with multiple
elements, including software licenses, maintenance
and/or
services, we allocate and defer revenue equivalent to the VSOE
of fair value for the undelivered elements and recognize the
difference between the total arrangement fee and the amount
deferred for the undelivered elements as product revenue. VSOE
35
of fair value is based upon the price for which the undelivered
element is sold separately or upon substantive renewal rates
stated in a contract. We determine fair value of the undelivered
elements based on historical evidence of stand-alone sales of
these elements to our customers. When VSOE does not exist for
undelivered elements such as maintenance and support, the entire
arrangement fee is recognized ratably over the performance
period generally as service, support and subscription revenue.
We apply software revenue recognition guidance to all
transactions except those where no software is involved or
software is incidental. We recognize revenue from the sale of
software licenses when persuasive evidence of an arrangement
exists, the product or service has been delivered, the fee is
fixed or determinable, and collection of the resulting
receivable is reasonably assured. For hardware transactions
where software is not incidental, we do not separate the license
fee and we do not apply separate accounting guidance to the
hardware and software elements.
We enter into perpetual and subscription software license
agreements through direct sales to customers and indirect sales
with partners, distributors and resellers. We recognize revenue
from the indirect sales channel upon sell-through by the partner
or distributor. The license agreements generally include service
and support agreements, for which the related revenue is
deferred and recognized ratably over the performance period. All
revenue derived from our online subscription products is
deferred and recognized ratably over the performance period.
Professional services revenue is generally recognized as
services are performed or if required, upon customer acceptance.
In these situations, we defer the direct costs of the
subscription software licensing and professional services
arrangements, and amortize those costs over the same period as
the related revenue is recognized. These costs are identified as
cost of service, support and subscription revenue on the
consolidated statements of income and comprehensive income.
Changes to the elements in a software arrangement, the ability
to identify VSOE for those elements, the fair value of the
respective elements and the degree of flexibility in contractual
arrangements could materially impact the amount recognized in
the current period and deferred over time.
We also identify the direct and incremental costs associated
with product revenues that have been deferred due to lack of
VSOE on fair value on an undelivered element. These costs are
primarily hardware platform and other hardware component costs.
We defer these costs at the time of delivery and recognize them
as cost of service, support and subscription revenue on the
consolidated statements of income and comprehensive income, in
proportion to the product revenue in services and support as it
is recognized over the service period.
We reduce revenue for estimates of sales incentives and sales
returns. We offer sales incentives, including channel rebates,
marketing funds and end-user rebates for products in our
corporate and consumer product lines. Additionally, end users
may return our products, subject to varying limitations, through
distributors and resellers or to us directly for a refund within
a reasonably short period from the date of purchase. We estimate
and record reserves for sales incentives and sales returns based
on our historical experience. In each accounting period, we must
make judgments and estimates of sales incentives and potential
future sales returns related to current period revenue. These
estimates affect our net revenue line item on our
consolidated statements of income and comprehensive income and
affect our accounts receivable, net, deferred
revenue or other accrued liabilities line
items on our consolidated balance sheets.
At December 31, 2009, our allowance for sales returns and
incentives was $68.8 million compared to $61.2 million
at December 31, 2008. If our allowance for sales returns
and incentives were to increase by 10%, or $6.9 million,
our net revenue would decrease by $1.5 million and our
deferred revenue would decrease by $5.4 million for the
year ended December 31, 2009.
Deferred
Costs of Revenue and Prepaid Expenses
We defer costs of revenue primarily related to revenue-sharing
and royalty arrangements and recognize these costs over the
service period of the related revenue. Prepaid expenses consist
primarily of revenue sharing costs that have been paid in
advance of the anticipated renewal transactions and royalty
costs paid in advance of revenue transactions. We evaluate the
remaining value of these prepaid expenses in comparison to
estimates of future revenues. Our estimates of future revenue
are based on assumptions considering our historical experience
and other relevant facts and circumstances. We have not
accelerated the expense of any material prepaid amounts for any
periods presented in our statements of income and comprehensive
income.
36
Stock-based
Compensation Expense
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), RSUs, RSAs, PSUs and employee stock
purchase rights issued pursuant to our Employee Stock Purchase
Plan (ESPP grants). See Note 13 to the
consolidated financial statements for additional information.
We use the Black-Scholes pricing model to estimate the fair
value of our options and ESPP grants. The Black-Scholes pricing
model requires estimates of the expected life of the option, as
well as future volatility, risk-free interest rate and dividend
yield. We derive the expected life of our options through a
lattice model that factors in historical data on exercise and
post-vesting service termination behavior. The risk-free
interest rate for periods within the expected life of the option
is based on the U.S. Treasury yield curve in effect at the
time of grant. We use the implied volatility of options traded
on our stock with a term of one year or more to calculate the
expected volatility of our option grants. We have not declared
any dividends on our stock in the past and do not expect to do
so in the foreseeable future.
The assumptions that we have made represent our
managements best estimate, but they are highly subjective
and inherently uncertain. If management had made different
assumptions, our calculation of the options fair value and
the resulting stock-based compensation expense could differ,
perhaps materially, from the amounts recognized in our financial
statements. For example, if we increased the assumption
regarding our stocks volatility for options granted during
2009 by 10%, our stock-based compensation expense would increase
by $4.2 million, net of expected forfeitures. Likewise, if
we increased our assumption of the expected lives of options
granted during 2009 by one year, our stock-based compensation
expense would increase by $1.7 million. These notional
increased expense amounts would be amortized over the
options weighted average 3.9 year vesting period.
In addition to the assumptions used to calculate the fair value
of our options, we are required to estimate the expected
forfeiture rate of all stock-based awards and only recognize
expense for those awards we expect to vest. The stock-based
compensation expense recognized in our consolidated statements
of income and comprehensive income for the year ended
December 31, 2009 has been reduced for estimated
forfeitures. If we were to change our estimate of forfeiture
rates, the amount of stock-based compensation expense could
differ, perhaps materially, from the amount recognized in our
financial statements. For example, if we had decreased our
estimate of expected forfeitures by 50%, our stock-based
compensation expense for the year ended December 31, 2009
would have increased by $5.4 million. This decrease in our
estimate of expected forfeitures would increase the amount of
expense for all unvested awards that have not yet been
recognized by $24.5 million, amortized over a
weighted-average period of 2.3 years.
Estimation
of Restructuring Accrual and Litigation
Restructuring accrual. To determine our
restructuring charges and the corresponding liabilities, we make
a number of assumptions. These assumptions included estimated
sublease income over the remaining lease period, estimated term
of subleases, estimated utility and real estate broker fees, as
well as estimated discount rates for use in calculating the
present value of our liability. We develop these assumptions
based on our understanding of the current real estate market in
the respective locations as well as current market interest
rates. The assumptions used are our managements best
estimate at the time of the accrual, and adjustments are made on
a periodic basis if better information is obtained. If, at
December 31, 2009, our estimated sublease income were to
decrease 10%, the restructuring reserve and related expense
would have increased by $0.2 million.
The estimates regarding our restructuring accruals affect our
other accrued liabilities and accrued taxes
and other long-term liabilities line items in our
consolidated balance sheets, since these liabilities will be
settled each year through 2015. These estimates affect our
consolidated statements of income and comprehensive income in
the restructuring charges (benefits) line item.
Litigation. Managements current
estimated range of liability related to litigation that is
brought against us from time to time is based on claims for
which our management can estimate the probability of an
unfavorable
37
outcome and the range of loss. We recorded the minimum estimated
liability related to those claims where there is a range of
loss, as there is no better point of estimate. Due to the
uncertainties related to an unfavorable outcome of litigation,
and the amount and range of loss on pending litigation,
management is often unable to make a reasonable estimate of the
liability that could result from an unfavorable outcome. As
litigation progresses, we continue to assess our potential
liability and revise our estimates. Such revisions in our
estimates could materially impact our results of operations and
financial position. Estimates of litigation liability affect our
other accrued liabilities line item on our
consolidated balance sheets and our general and
administrative expense line item on our consolidated
statements of income and comprehensive income. See Note 18
in our Notes to the Consolidated Financial Statements.
Accounting
for Income Taxes
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process involves
estimating our actual current tax expense together with
assessing temporary differences resulting from differing
treatment of items, such as deferred revenue, for tax and
accounting purposes. These differences result in deferred tax
assets and liabilities, which are included within our
consolidated balance sheets. We must then assess and make
significant estimates regarding the likelihood that our deferred
tax assets will be recovered from future taxable income and to
the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a
valuation allowance or increase this allowance in a period, we
must include an expense within the tax provision in the
consolidated statements of income and comprehensive income.
Estimates related to income taxes affect the deferred
income taxes, other accrued liabilities and
accrued taxes and other long-term liabilities line
items in our consolidated balance sheets and our provision
for income taxes line item in our consolidated statements
of income and comprehensive income.
Our deferred tax asset is presented net of a valuation
allowance. The valuation allowance is recorded due to the
uncertainty of our ability to utilize some of the deferred tax
assets related to foreign tax credits and net operating losses
of acquired companies. The valuation allowance is based on our
historical experience and estimates of taxable income by
jurisdiction in which we operate and the period over which our
deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or we adjust these
estimates in future periods, we may need to establish an
additional valuation allowance, which could materially impact
our financial position and results of operations. The valuation
allowance increased in 2009, which included an increase of
$9.9 million related to recording valuation allowance on
certain acquired net operating losses.
Tax returns are subject to examination by various taxing
authorities. Although we believe that adequate accruals have
been made each period for unsettled issues, additional benefits
or expenses could occur in future years from resolution of
outstanding matters. We record additional expenses each period
relating to the expected interest and penalties we would be
required to pay a tax authority if we do not prevail. We
continue to assess our potential tax liability included in
accrued taxes in the consolidated financial statements and
revise our estimates. Such revisions in our estimates could
materially impact our results of operations and financial
position. We have classified a portion of our tax liability as
non-current in the consolidated balance sheets based on the
expected timing of cash payments to settle contingencies with
taxing authorities.
Valuation
of Goodwill, Intangibles, Long-lived Assets and Contingent
Consideration
When we acquire businesses, we allocate the purchase price to
tangible assets and liabilities and identifiable intangible
assets acquired. Any residual purchase price is recorded as
goodwill. We must also estimate the fair value of contingent
consideration. The allocation of the purchase price and
valuation of contingent consideration requires management to
make significant estimates in determining fair values,
especially with respect to intangible assets and contingent
consideration. These estimates are based on historical
experience, information obtained from the management of the
acquired companies and relevant market and industry data. These
estimates can include, but are not limited to, the cash flows
that an asset is expected to generate in the future, the
appropriate discount rate, the useful lives of intangible assets
and probabilities of achievement of financial targets under
contingent consideration arrangements. These estimates are
inherently uncertain and unpredictable. In addition,
unanticipated events and circumstances may occur, which may
affect the accuracy or validity of such estimates.
38
Goodwill. We make estimates regarding the fair
value of our reporting units when testing for potential
impairment. We estimate the fair value of our reporting units
using an equal weighting of the income approach and the market
approach. Under the income approach, we calculate the fair value
of a reporting unit based on the present value of estimated
future cash flows. Under the market approach, we estimate the
fair value based on market multiples of revenue or earnings for
comparable companies. We estimate cash flows for these purposes
using internal financial projections based on recent and
historical trends and relevant market and industry data. We base
these estimates on assumptions we believe to be reasonable, but
which are unpredictable and inherently uncertain. We also make
certain judgments about the selection of comparable companies
used in the market approach in valuing our reporting units. If
an impairment were present, these estimates would affect the
impairment of marketable securities line item on our
consolidated statements of income and comprehensive income and
would affect the goodwill line item in our
consolidated balance sheets. As goodwill is allocated to all of
our reporting units, any impairment could potentially affect our
operating geographies. The fair values of our reporting units
were substantially in excess of the respective carrying amounts
in our most recent goodwill impairment test.
Intangibles and Long-lived Assets. We will
record an impairment charge on finite-lived intangibles or
long-lived assets to be held and used when we determine that the
carrying value of intangibles and long-lived assets may not be
recoverable. Based upon the existence of one or more indicators
of impairment, we measure any impairment of intangibles or
long-lived assets based on a projected discounted cash flow
method using a discount rate determined by our management to be
commensurate with the risk inherent in our current business
model. Our estimates of cash flows require significant judgment
based on our historical and anticipated results and are subject
to many of the other factors, which could change and cause a
material impact to our operating results.
Contingent Consideration. Our acquisitions may
include contingent consideration payments based on future
financial measures or product development and integration
milestones of an acquired company. We make estimates regarding
the fair value of contingent consideration liabilities at the
acquisition date and at each reporting date until the
contingency is resolved. We estimate the fair value of these
liabilities based on financial projection of the acquired
companies and estimated probabilities of achievement. We believe
our estimates and assumptions are reasonable, however, there is
significant judgment involved. Changes in the fair value of
contingent consideration liabilities subsequent to the
acquisition are recorded in general and administrative expense
in our consolidated statements of income and comprehensive
income, and could cause a material impact to our operating
results.
Impairment
of Marketable Securities
All marketable securities are classified as
available-for-sale
securities. We assess our
available-for-sale
marketable securities on a regular basis for
other-than-temporary
impairment. Pursuant to accounting guidance effective
April 1, 2009, if we have a security with a fair value less
than its amortized cost and we intend to sell the security or it
is more likely than not we will be required to sell the security
before it recovers, other-than temporary impairment has occurred
and we must record the entire amount of the impairment in
earnings. If we do not intend to sell the security or it is not
more likely than not we will be required to sell the security
before it recovers, we must estimate the net present value of
cash flows expected to be collected. If the amortized cost
exceeds the net present value of cash flows, such excess is
considered a credit loss and
other-than-temporary
impairment has occurred. The credit loss component is recognized
in earnings and the residual portion of the
other-than-temporary
impairment is recorded in other comprehensive income. The
determination of credit losses requires significant judgment and
actual results may be materially different than our estimate. We
consider the likely reason for the decline in value, the period
of time the fair value was below amortized cost, changes in and
performance of the underlying collateral, the ability of the
issuer to meet payment obligations, changes in ratings and
market trends and conditions. Prior to April 1, 2009,
other-than-temporary
impairment was recorded based on similar factors, as well as our
intent and ability to hold until recovery of loss. Any decline
deemed
other-than-temporary
was recognized in earnings.
We have not recorded any
other-than-temporary
impairment since April 1, 2009. In 2009, we recorded
other-than-temporary
impairment of $0.7 million. In 2008, we recorded
other-than-temporary
impairment of $18.5 million, which consisted of
$12.2 million related to corporate bonds and asset-backed
and mortgage-backed securities that suffered significant
declines in fair value, $5.0 million related to a single
corporate bond that had a significant decline in fair value due
to the issuers bankruptcy and $1.3 million related to
securities for which we did not have the intent and ability to
hold until recovery (due to our funding of the Secure Computing
acquisition). We
39
had no
other-than-temporary
impairment of marketable securities in 2007. At
December 31, 2009, gross unrealized losses totaled
$1.8 million.
Results
of Operations
Years
Ended December 31, 2009, 2008 and 2007
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
consolidated financial statements in Part IV, Item 15.
Net
Revenue
The following table sets forth, for the periods indicated, a
year-over-year
comparison of the key components of our net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, support and subscription
|
|
$
|
1,739,081
|
|
|
$
|
1,467,092
|
|
|
$
|
271,989
|
|
|
|
19
|
%
|
|
$
|
1,226,427
|
|
|
$
|
240,665
|
|
|
|
20
|
%
|
Product
|
|
|
188,251
|
|
|
|
132,973
|
|
|
|
55,278
|
|
|
|
42
|
|
|
|
81,793
|
|
|
|
51,180
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,927,332
|
|
|
$
|
1,600,065
|
|
|
$
|
327,267
|
|
|
|
20
|
%
|
|
$
|
1,308,220
|
|
|
$
|
291,845
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue by Geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,091,857
|
|
|
$
|
844,937
|
|
|
$
|
246,920
|
|
|
|
29
|
%
|
|
$
|
678,227
|
|
|
$
|
166,710
|
|
|
|
25
|
%
|
EMEA
|
|
|
531,763
|
|
|
|
502,876
|
|
|
|
28,887
|
|
|
|
6
|
|
|
|
426,966
|
|
|
|
75,910
|
|
|
|
18
|
|
Japan
|
|
|
138,624
|
|
|
|
116,567
|
|
|
|
22,057
|
|
|
|
19
|
|
|
|
102,272
|
|
|
|
14,295
|
|
|
|
14
|
|
APAC
|
|
|
96,277
|
|
|
|
81,109
|
|
|
|
15,168
|
|
|
|
19
|
|
|
|
60,913
|
|
|
|
20,196
|
|
|
|
33
|
|
Latin America
|
|
|
68,811
|
|
|
|
54,576
|
|
|
|
14,235
|
|
|
|
26
|
|
|
|
39,842
|
|
|
|
14,734
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,927,332
|
|
|
$
|
1,600,065
|
|
|
$
|
327,267
|
|
|
|
20
|
%
|
|
$
|
1,308,220
|
|
|
$
|
291,845
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 43%, 47%, and
48% of net revenue for 2009, 2008 and 2007, respectively. Net
revenue from North America and EMEA has historically comprised
between 80% and 90% of our business.
The increase in net revenue in North America during 2009 was
primarily related to (i) a $205.8 million increase in
corporate revenue and (ii) a $41.1 million increase in
consumer revenue. The
year-over-year
increase in corporate revenue was due to a $142.4 million
increase in revenue from our network security offerings, which
includes $115.2 million increase from our Secure Computing
acquisition and $17.5 million from our MX Logic
acquisition, a $41.9 million increase in revenue from our
end point solutions offerings, a $15.2 million increase in
revenue primarily from our services offerings and a
$6.4 million increase in revenue from our vulnerability and
risk management services. In 2009, we experienced an increase in
the sale of our hardware solutions, which resulted in
40
higher upfront revenue recognition. The
year-over-year
increase in consumer revenue was due to an increase in our
customer base and increased percentage of suite sales from
lower-priced suites to higher-priced suites.
The increase in net revenue in North America during 2008 was
primarily related to (i) a $103.8 million increase in
corporate revenue in North America due to increased revenue from
our network security offerings, our end point solutions and our
services offerings and (ii) a $62.9 million increase
in consumer revenue due to an increase in our customer base and
increased percentage of suite sales from lower-priced suites to
higher-priced suites. Corporate revenue was also impacted by an
increase in U.S. government spending on our product
offerings and larger transactions sold to customers through a
solution selling approach.
The increase in net revenue in EMEA during 2009 was attributable
to revenue growth from both our consumer and corporate
offerings, offset by the negative impact of the U.S. Dollar
strengthening against the Euro on an average exchange basis in
2009 compared to 2008. The
year-over-year
increase was primarily attributable to $46.1 million
increase from new revenue attributable to our Secure Computing
acquisition and $23.0 million in consumer revenue due to an
increase in our customer base, offset by the negative foreign
exchange impact of approximately $36.4 million in 2009
compared to 2008.
The increase in net revenue in EMEA during 2008 was attributable
to (i) a $59.2 million increase in corporate revenue
due to increased revenue from our network security offerings,
our end point solutions, and our vulnerability and risk
management offerings and (ii) a $16.7 million increase
in consumer revenue due to an increase in our customer base,
expansion to additional countries and an increased percentage of
suite sales from lower-priced suites to higher-priced suites.
Net revenue from EMEA was also positively impacted by the
strengthening Euro against the U.S. Dollar, which resulted
in an approximate $45.1 million impact to EMEA net revenue
in 2008 compared to 2007 and is included in the corporate and
consumer business increases above.
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. In both 2009 and 2008, net
revenue in Japan was positively impacted by the weakening
U.S. Dollar against the Japanese Yen, which resulted in an
approximate $13.4 million and $12.0 million
contribution to Japan net revenue in 2009 compared to 2008 and
in 2008 compared to 2007, respectively. The increase in net
revenue from Japan, APAC and Latin America during 2009 compared
to 2008 was primarily attributable to increased revenue from our
corporate offerings in all geographic regions and increased
revenue from our consumer offerings in both Japan and Latin
America.
Service,
Support and Subscription Revenue
The increase in service, support and subscription revenue in
2009 compared 2008 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. In addition, we have expanded our support
offerings to include premium-level services. Revenue from
consulting increased due to growth in integration and
implementation services.
The increase in service, support and subscription revenue in
2008 compared 2007 was attributable to (i) amortization of
previously deferred revenue from support and subscription
arrangements, (ii) an increase in sales of support and
subscription renewals (iii) increases in our online
subscription arrangements due to our continued relationships
with strategic partners such as Acer, Dell, Sony Computer and
Toshiba and (iv) increases in royalties from sales by our
strategic channel. In addition, revenue from consulting
increased due to more consultants providing 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.
41
Product
Revenue
The increase in product revenue in 2009 compared to 2008 was
attributable to (i) increased revenue from our Secure
Computing acquisition, (ii) increased revenue from our
network security solutions which 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.
The increase in product revenue in 2008 compared to 2007 was
attributable to (i) increased revenue from our network
security solutions which have a higher hardware content and,
therefore, more upfront revenue realization and
(ii) increased revenue from our data protection solutions
and upgrade initiatives related to our total protection
solutions.
Cost
of Net Revenue
The following table sets forth, for the periods indicated, a
comparison of cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, support and subscription
|
|
$
|
308,222
|
|
|
$
|
254,083
|
|
|
$
|
54,139
|
|
|
|
21
|
%
|
|
$
|
214,582
|
|
|
$
|
39,501
|
|
|
|
18
|
%
|
Product
|
|
|
100,204
|
|
|
|
72,634
|
|
|
|
27,570
|
|
|
|
38
|
|
|
|
55,872
|
|
|
|
16,762
|
|
|
|
30
|
|
Amortization of purchased technology
|
|
|
77,961
|
|
|
|
56,811
|
|
|
|
21,150
|
|
|
|
37
|
|
|
|
35,290
|
|
|
|
21,521
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
$
|
486,387
|
|
|
$
|
383,528
|
|
|
$
|
102,859
|
|
|
|
27
|
%
|
|
$
|
305,744
|
|
|
$
|
77,784
|
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, support and subscription
|
|
$
|
1,430,859
|
|
|
$
|
1,213,009
|
|
|
|
|
|
|
|
|
|
|
$
|
1,011,845
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
88,047
|
|
|
|
60,339
|
|
|
|
|
|
|
|
|
|
|
|
25,921
|
|
|
|
|
|
|
|
|
|
Amortization of purchased technology
|
|
|
(77,961
|
)
|
|
|
(56,811
|
)
|
|
|
|
|
|
|
|
|
|
|
(35,290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
1,440,945
|
|
|
$
|
1,216,537
|
|
|
|
|
|
|
|
|
|
|
$
|
1,002,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin percentage
|
|
|
75
|
%
|
|
|
76
|
%
|
|
|
|
|
|
|
|
|
|
|
77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2009
compared to 2008 due to increased costs related to customer and
technical support primarily attributable to the acquisition of
Secure Computing, and increased professional services costs
related to consulting services. The cost of service, support and
subscription revenue as a percentage of service, support and
subscription revenue increased slightly compared to 2008
primarily attributable to the addition of Secure Computing
customer support, training and consulting personnel, offset by
increased service contracts and support renewals.
The increase in service, support and subscription costs for 2008
compared to 2007 was primarily attributable to (i) an
increase in the volume of online subscription arrangements and
royalties paid to our online strategic partners, (ii) first
time costs related to delivering annotation, scanning and search
services associated with ScanAlert, Inc. (ScanAlert)
and SiteAdvisor and (iii) increased professional services
costs related to consulting services. The cost
42
of service, support and subscription revenue as a percentage of
service, support and subscription revenue for 2008 remained
consistent when compared to 2007.
We anticipate the cost of service, support and subscription
revenue will increase in absolute dollars during 2010 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 and
(iii) 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 for 2009 increased from 2008 due
primarily to additional hardware transactions as a result of the
acquisition of Secure Computing. The cost of product revenue as
a percentage of product revenue for 2009 decreased compared to
2008 primarily due to an increase in both the number and size of
higher margin corporate transactions sold to customers through a
solution selling approach.
The cost of product revenue for 2008 increased from 2007 due
primarily to increased sales of network security solutions. Cost
of product revenue for 2008 decreased as a percentage of product
revenue compared to 2007 due primarily to increased margins on
corporate revenue resulting from an increase in both the number
and size of larger transactions sold to customers through a
solution selling approach.
We anticipate that cost of product revenue will increase or
decrease in absolute dollars during 2010 depending on the mix
and size of certain corporate-related transactions.
Amortization
of Purchased Technology
The increase in amortization of purchased technology in 2009
compared to 2008 was primarily attributable to our acquisition
of Secure Computing in November 2008. Amortization for the
purchased technology related to this acquisition was
$27.7 million in 2009.
The increase in amortization of purchased technology in 2008
compared to 2007 was driven by the acquisitions of Secure
Computing in November 2008, Reconnex Corporation
(Reconnex) in August 2008, ScanAlert in January 2008
and SafeBoot in November 2007. Amortization for the purchased
technology and patents related to these acquisitions was
$31.3 million in 2008.
We expect amortization of purchased technology to increase in
absolute dollars during 2010 as a result of our recent
acquisitions.
Gross
Margin
Our gross margin decreased slightly in 2009 compared to 2008 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) amortization of purchased technology related to
acquisitions made during the year. Our gross margins decreased
slightly for 2008 compared to 2007 due mostly to the increase in
amortization of purchased technology related to acquisitions.
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.
43
The following table sets forth, for the periods indicated, a
comparison of our stock-based compensation expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
2008 vs. 2007
|
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
2007
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Stock-based compensation expense
|
|
$
|
109,094
|
|
|
$
|
76,881
|
|
|
$
|
32,213
|
|
|
|
42
|
%
|
|
$
|
59,017
|
|
|
$
|
17,864
|
|
|
|
30
|
%
|
The $32.2 million increase in stock-based compensation
expense during 2009 compared to 2008 was primarily attributable
to (i) a $22.7 million increase in expense relating to
increased grants of RSUs, PSUs and options and assumed RSAs and
RSUs from the 2008 acquisition of Secure Computing, (ii) a
$6.4 million increase in expense relating to the cash
settlement of certain expired options and (iii) a
$3.7 million increase in expense related to reinstating our
Employee Stock Purchase Plan (ESPP) in June 2008.
The $17.9 million increase in stock-based compensation
expense during 2008 compared to 2007 was primarily attributable
to (i) a $21.0 million increase in expense relating to
increased grants of PSUs, of which a significant portion were
granted in February 2008, (ii) a $4.9 million increase
in expense relating to increased grants of RSUs and assumed RSAs
and RSUs from the 2008 acquisition of Secure Computing,
(iii) a $3.4 million increase in expense relating to
ESPP grants due to reinstating our ESPP in June 2008,
(iv) a $3.0 million increase in expense relating to
assumed options from the 2007 acquisition of SafeBoot and
(v) increases in various other expenses associated with
stock-based awards, partially offset by a $17.3 million
decrease in expense relating to the extension of
post-termination exercise period and cash settlement of options.
See Note 13 to the 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.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
2008 vs. 2007
|
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
2007
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Research and development(1)
|
|
$
|
324,368
|
|
|
$
|
252,020
|
|
|
$
|
72,348
|
|
|
|
29
|
%
|
|
$
|
217,934
|
|
|
$
|
34,086
|
|
|
|
16
|
%
|
Percentage of net revenue
|
|
|
17
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense of $27.0 million,
$18.5 million and $14.0 million in 2009, 2008 and
2007, 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 enhancement of existing
products and services and development of new products and
services. The increase in research and development expenses in
2009 compared to 2008 was primarily attributable to (i) a
$44.5 million increase in salary and benefit expense for
individuals performing research and development activities due
to an increase in headcount primarily related to our Secure
Computing acquisition, (ii) an $8.5 million increase
in stock-based compensation expense, (iii) a
$7.8 million increase in equipment and depreciation expense
and (iv) increases in various other expenses associated
with research and development activities. The overall increase
in research and development expenses in 2009 compared to 2008
included a net decrease of $10.0 million due to the net
impact of foreign exchange rates, primarily driven by the
average U.S. Dollar exchange rate strengthening against
foreign currencies.
The increase in research and development expenses in 2008
compared to 2007 was primarily attributable to (i) a
$20.3 million increase in salary and benefit expense for
individuals performing research and development activities due
to an increase in average headcount and salary increases,
(ii) a $4.5 million increase in stock-based
compensation expense and (iii) increases in the use of
third-party contractors and in various other expenses associated
with research and development activities.
44
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 2010.
Sales and
Marketing
The following table sets forth, for the periods indicated, a
comparison of our sales and marketing expenses.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
2008 vs. 2007
|
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
2007
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Sales and marketing(1)
|
|
$
|
642,026
|
|
|
$
|
536,944
|
|
|
$
|
105,082
|
|
|
|
20
|
%
|
|
$
|
397,629
|
|
|
$
|
139,315
|
|
|
|
35
|
%
|
Percentage of net revenue
|
|
|
33
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense of $47.7 million,
$33.1 million and $22.0 million in 2009, 2008 and
2007, 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 2009 compared to 2008 reflected
(i) a $63.9 million increase in salary and benefit
expense, including commissions, for individuals performing sales
and marketing activities due to an increase in headcount
primarily related to our Secure Computing acquisition and
increased commissions, (ii) a $24.0 million increase
related to agreements with certain PC OEM partners, (iii) a
$14.6 million increase in stock-based compensation expense
and (iv) increases in various other expenses associated
with sales and marketing activities. The increase in sales and
marketing expenses during 2009 compared to 2008 included a net
decrease of $14.0 million due to the net impact of foreign
exchange rates, primarily driven by the average U.S. Dollar
exchange rate strengthening against foreign currencies.
The increase in sales and marketing expenses during 2008
compared to 2007 reflected (i) a $72.6 million
increase in salary and benefit expense, including commissions,
for individuals performing sales and marketing activities due to
an increase in average headcount and salary increases,
(ii) a $34.7 million increase related to agreements
with certain PC OEM partners, (iii) a $11.1 million
increase in stock-based compensation expense, (iv) a
$9.0 million increase in travel expense primarily
attributable to increased average headcount and
(v) increases in marketing and promotion expenses, the use
of third-party contractors and in various other expenses
associated with sales and marketing activities. The change in
sales and marketing expenses during 2008 compared to 2007
included a net increase of $9.3 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 2010 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.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
2008 vs. 2007
|
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
2007
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
General and administrative(1)
|
|
$
|
197,696
|
|
|
$
|
193,784
|
|
|
$
|
3,912
|
|
|
|
2
|
%
|
|
$
|
204,748
|
|
|
$
|
(10,964
|
)
|
|
|
(5
|
)%
|
Percentage of net revenue
|
|
|
10
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense of $28.3 million,
$21.6 million and $19.9 million in 2009, 2008 and
2007, respectively. |
45
General and administrative expenses consist principally 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 2009 compared to 2008 reflected
(i) a $6.7 million increase in stock-based
compensation expense, (ii) a $5.5 million benefit
recognized in 2008 related to the change in fair value of
certain stock options, (iii) a $3.4 million increase
in salary and benefits for individuals performing general and
administrative activities due to an increase in average
headcount and (iv) increases in various other expenses
associated with general and administrative activities, offset by
$13.0 million decrease in legal expenses and settlement
costs, primarily related to decreases in costs associated with
indemnification of our current and former officers and
directors, as well as a $6.5 million reimbursement from an
insurance carrier for legal fees incurred related to cost of
defense incurred in connection with our investigation of
historical stock option granting practices that concluded in
2007.
The decrease in general and administrative expenses during 2008
compared to 2007 reflected (i) a $27.0 million
decrease in costs arising as a result of our completed
investigation into our historical stock option granting
practices as the investigation was completed prior to the
restatement of our historical financial results in December 2007
and (ii) a $14.2 million benefit related to the change
in fair value of certain stock options accounted for as
liability awards, partially offset by (i) a
$13.6 million increase in salary and benefit expense for
individuals performing general and administrative activities due
to an increase in average headcount and salary increases,
(ii) a $6.2 million increase in the use of third-party
contractors and (iii) increases in expense due to
acquisition-related costs, legal costs and various other
expenses associated with general and administrative activities.
We anticipate that general and administrative expenses will
increase in absolute dollars during 2010.
Amortization
of Intangibles
The following table sets forth, for the periods indicated, a
comparison of the amortization of intangibles.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
2008 vs. 2007
|
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
2007
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Amortization of intangibles
|
|
$
|
40,718
|
|
|
$
|
26,470
|
|
|
$
|
14,248
|
|
|
|
54
|
%
|
|
$
|
13,583
|
|
|
$
|
12,887
|
|
|
|
95
|
%
|
Intangibles consist primarily of customer-related intangible
assets. The increase in amortization of intangibles during 2009
compared to 2008 was primarily attributable to our acquisition
of Secure Computing in November 2008, in which we acquired
$51.2 million of customer-related intangible assets. The
increase in amortization of intangibles during 2008 compared to
2007 was primarily attributable to our 2008 and 2007
acquisitions of ScanAlert and SafeBoot, in which we acquired
$14.5 million and $41.8 million of intangible assets,
respectively.
Assuming no new acquisitions, we expect amortization of
intangibles will be flat or decrease slightly in absolute
dollars during 2010 as a result of certain intangibles acquired
in previous acquisitions becoming fully amortized in the fourth
quarter of 2009.
Restructuring
Charges (Benefits)
The following table sets forth, for the periods indicated, a
comparison of our restructuring charges.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Restructuring charges (benefits)
|
|
$
|
13,830
|
|
|
$
|
(1,752
|
)
|
|
$
|
15,582
|
|
|
|
*
|
|
|
$
|
8,769
|
|
|
$
|
(10,521
|
)
|
|
|
|
*
|
|
|
|
* |
|
Calculation not meaningful |
Restructuring charges in 2009 totaled $13.8 million, of
which $11.3 million primarily related to the realignment of
our sales and marketing workforce and staffing across various
other departments and an accrual over the service period for our
elimination of certain positions related to acquisitions,
$3.1 million primarily related to additional accrual over
the service period for our 2008 elimination of certain positions
at Secure Computing and
46
accretion of lease exit costs and $1.7 million primarily
related to our 2009 restructuring of two facilities. These
charges were partially offset by a $2.4 million
restructuring benefit related to the termination of the final
sublease agreement and extinguishment of the remaining 2004 and
2003 restructurings.
Restructuring benefit in 2008 totaled $1.8 million. We
recorded an $8.4 million benefit, net of accretion, related
primarily to changes in previous estimates of base rent and
sublease income for the Santa Clara lease, which was
restructured in 2003 and 2004 offset by a charge of
$6.6 million related to the elimination of certain
positions at SafeBoot and Secure Computing that were redundant
to positions at McAfee, the realignment of our sales force, and
the realignment of staffing across all departments. See
Note 8 to our consolidated financial statements for a
description of restructuring activities.
In-process
Research and Development
During 2008, we recorded $19.5 million for in-process
research and development related to the acquisition of Secure
Computing in November 2008, which was fully expensed upon
purchase because technological feasibility had not been achieved
and there was no alternative use for the projects under
development. The in-process research and development included
our Firewall Sidewinder, Webwasher and Mail products, and the
fair value at acquisition was $7.6 million,
$9.5 million and $2.4 million, respectively. The
Webwasher and Mail products were completed in 2009. The Firewall
Sidewinder product was 90% complete as of December 31,
2009. The fair values were determined using the excess earnings
method under the income approach using a discount rate
reflective of the risk associated with the stage of completion
and financial risk of the projects. Due to the implementation of
new accounting guidance in 2009, in-process research and
development is no longer immediately expensed upon closing of an
acquisition. See Note 3 to the consolidated financial
statements for additional information.
Interest
and Other Income, Net
The following table sets forth, for the periods indicated, a
comparison of our interest and other income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
2008 vs. 2007
|
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
2007
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Interest and other income, net
|
|
$
|
2,202
|
|
|
$
|
45,687
|
|
|
$
|
(43,485
|
)
|
|
|
(95
|
)%
|
|
$
|
68,287
|
|
|
$
|
(22,600
|
)
|
|
|
(33
|
)%
|
Interest and other income 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
income in 2009 compared to 2008 was primarily due to (i) a
lower average rate of return on our investments from
approximately 4% in 2008 to 1% in 2009 and (ii) a decrease
in our average cash, cash equivalents and marketable securities
of approximately $200 million in 2009 compared to 2008.
The decrease in interest income in 2008 compared to 2007 was
partially due to (i) a lower average rate of return on our
investments from approximately 5% in 2007 to approximately 4% in
2008 and (ii) a decrease in our average cash, cash
equivalents and marketable securities of approximately
$300 million in 2008 compared to 2007.
During 2009, we recorded net foreign currency transaction losses
of $2.4 million. During 2008 and 2007, we recorded net
foreign currency transaction gains of $6.4 million and
$1.0 million, respectively.
Interest expense is primarily related to the interest and
amortization of our debt issuance costs related to our
$100.0 million unsecured term loan and a
$100.0 million unsecured revolving credit facility.
Interest expense was $4.9 million in 2009. We had no
interest expense in 2008 or 2007.
We anticipate that interest and other income, net will decrease
during 2010 as a result of lower cash balances due to
acquisitions and our stock repurchase program, 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.
47
Impairment
of Marketable Securities
During 2009 and 2008, we recorded an expense for
other-than-temporary
impairments on certain of our marketable securities of
$0.7 million and $18.5 million, respectively. Current
economic conditions have had widespread negative effects on the
markets for debt securities in 2009 and 2008. The 2009 and 2008
other-than-temporary
impairments were recorded on certain of our asset-backed and
mortgage-backed securities, which had significant declines in
fair value, as well as one corporate debt security due to the
issuer declaring bankruptcy. We currently hold some asset-backed
and mortgage-backed securities purchased in prior periods, but
do not plan to acquire these types of securities in future
periods. Pursuant to accounting guidance effective in the second
quarter of 2009,
other-than-temporary
impairment on our marketable securities is now based on our
determination of whether the security will be sold prior to
recovery or if our cost basis in the securities will be
recovered. Further deterioration in the underlying collateral of
our asset-backed and collateralized mortgage securities could
result in additional impairment charges, as will collectability
issues on our corporate debt securities. We did not have any
impairments of securities in 2007.
Gain on
Sale of Investments, net
In 2009, 2008 and 2007, we recognized net gains on the sale of
marketable securities of $0.4 million, $5.5 million
and $1.1 million, respectively. Our investments are
classified as
available-for-sale,
and we may sell securities from time to time to move funds into
investments with more lucrative yields for liquidity purposes
or, in the case of 2008, given the current economic environment,
into investments that are considered more conservative, thus
resulting in gains and losses on sale.
Provision
for Income Taxes
The following table sets forth, for the periods indicated, a
year-over-year
comparison of our provision for income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
2008 vs. 2007
|
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
2007
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Provision for income taxes
|
|
$
|
50,803
|
|
|
$
|
49,997
|
|
|
$
|
806
|
|
|
|
2
|
%
|
|
$
|
62,224
|
|
|
$
|
(12,227
|
)
|
|
|
(20
|
)%
|
Effective tax rate
|
|
|
23
|
%
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
Tax expense was 23% of income before income taxes in both 2009
and 2008 and 27% of income before income taxes in 2007. The
effective tax rate for 2009 differs from the U.S. federal
statutory rate (statutory rate) due to the benefits
of foreign tax credits, research and development credits and
lower tax rates in certain jurisdictions. These benefits are
partially offset by tax effects of stock compensation, deemed
repatriations of earnings from foreign subsidiaries and
adjustments to tax exposures and valuation allowances. The tax
rate was unchanged from 2008 to 2009 as we had a tax benefit of
a shift in jurisdictional earnings in 2009 and a benefit of the
release of valuation allowance against income in higher tax
jurisdictions in 2008.
The effective tax rate for 2008 differs from the statutory rate
due to the benefits of releasing valuation allowance on our
foreign tax credits, research and development credits and lower
tax rates in certain jurisdictions. These benefits were
partially offset by tax on deemed repatriations of earnings from
foreign subsidiaries, the tax effects of stock compensation, and
the expensing of $19.5 million in-process research and
development related to the Secure Computing acquisition. The
decrease in the 2008 tax rate as compared to 2007 is primarily
related to release of valuation allowance in 2008 offset by the
tax effect of a shift in jurisdictional earnings.
The effective tax rate for 2007 differs from the statutory rate
generally due to the benefits of research and development tax
credits, foreign tax credits, lower tax rates in certain foreign
jurisdictions and valuation allowance adjustments. These
benefits are partially offset by adjustments to tax exposures,
tax effects of stock compensation and deemed repatriations of
earnings from foreign subsidiaries.
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
48
cannot reasonably estimate the impact to our future effective
tax rates for possible changes in earnings or tax laws and
regulations.
The earnings from our foreign operations in India are subject to
a tax holiday. In August 2009, the Indian government extended
the period through which the holiday would be effective 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 December 31, 2009.
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 and in
Germany for the years 2002 to 2007. We cannot reasonably
determine if these examinations will have a material impact on
our financial statements. We concluded pre-filing discussions
with the Dutch tax authorities with respect to the 2004 tax year
in January 2009. As a result, a tax benefit of approximately
$2.2 million is reflected in the first quarter 2009. In
addition, the statue of limitations related to various domestic
and foreign jurisdictions expired in 2009, resulting in a tax
benefit of approximately $13.7 million.
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) (13) below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP operating income
|
|
$
|
222,307
|
|
|
$
|
189,571
|
|
|
$
|
159,813
|
|
Stock-based compensation expense(1)
|
|
|
109,094
|
|
|
|
77,263
|
|
|
|
56,132
|
|
Amortization of purchased technology(2)
|
|
|
77,961
|
|
|
|
56,811
|
|
|
|
35,290
|
|
Amortization of intangibles(2)
|
|
|
40,718
|
|
|
|
26,470
|
|
|
|
13,583
|
|
Acquisition-related costs(3)
|
|
|
34,448
|
|
|
|
7,430
|
|
|
|
8,295
|
|
Restructuring charges (benefits)(4)
|
|
|
13,830
|
|
|
|
(1,752
|
)
|
|
|
8,769
|
|
Legal settlements(5)
|
|
|
3,200
|
|
|
|
9,000
|
|
|
|
|
|
Investigation-related and other costs(6)
|
|
|
2,325
|
|
|
|
5,989
|
|
|
|
32,952
|
|
Loss on sale/disposal of assets and technology(7)
|
|
|
474
|
|
|
|
193
|
|
|
|
41
|
|
In-process research and development(8)
|
|
|
|
|
|
|
19,500
|
|
|
|
|
|
Acquired intangible asset expensed to research and development(9)
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
Change in fair value of stock-based liability awards(10)
|
|
|
|
|
|
|
(5,483
|
)
|
|
|
8,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP operating income
|
|
$
|
504,357
|
|
|
$
|
386,992
|
|
|
$
|
323,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income
|
|
$
|
173,420
|
|
|
$
|
172,209
|
|
|
$
|
166,980
|
|
Stock-based compensation expense(1)
|
|
|
109,094
|
|
|
|
77,263
|
|
|
|
56,132
|
|
Amortization of purchased technology(2)
|
|
|
77,961
|
|
|
|
56,811
|
|
|
|
35,290
|
|
Amortization of intangibles(2)
|
|
|
40,718
|
|
|
|
26,470
|
|
|
|
13,583
|
|
Acquisition-related costs(3)
|
|
|
34,448
|
|
|
|
7,430
|
|
|
|
8,295
|
|
Restructuring charges (benefits)(4)
|
|
|
13,830
|
|
|
|
(1,752
|
)
|
|
|
8,769
|
|
Legal settlements(5)
|
|
|
3,200
|
|
|
|
9,000
|
|
|
|
|
|
Investigation-related and other costs(6)
|
|
|
2,325
|
|
|
|
5,989
|
|
|
|
32,952
|
|
Loss on sale/disposal of assets and technology(7)
|
|
|
474
|
|
|
|
193
|
|
|
|
41
|
|
In-process research and development(8)
|
|
|
|
|
|
|
19,500
|
|
|
|
|
|
Acquired intangible asset expensed to research and development(9)
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
Change in fair value of stock-based liability awards(10)
|
|
|
|
|
|
|
(5,483
|
)
|
|
|
8,739
|
|
Marketable securities impairment, net of accretion(11)
|
|
|
60
|
|
|
|
18,533
|
|
|
|
|
|
Provision for income taxes(12)
|
|
|
50,803
|
|
|
|
49,997
|
|
|
|
62,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP income before provision for income taxes
|
|
|
506,333
|
|
|
|
438,160
|
|
|
|
393,005
|
|
Non-GAAP provision for income taxes(13)
|
|
|
121,520
|
|
|
|
118,303
|
|
|
|
106,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income
|
|
$
|
384,813
|
|
|
$
|
319,857
|
|
|
$
|
286,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted *:
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income per share diluted
|
|
$
|
1.09
|
|
|
$
|
1.08
|
|
|
$
|
1.02
|
|
Stock-based compensation expense per share(1)
|
|
|
0.69
|
|
|
|
0.48
|
|
|
|
0.34
|
|
Other adjustments per share (2-13)
|
|
|
0.64
|
|
|
|
0.44
|
|
|
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income per share diluted*
|
|
$
|
2.42
|
|
|
$
|
2.01
|
|
|
$
|
1.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute non-GAAP net income per share
diluted
|
|
|
158,988
|
|
|
|
159,406
|
|
|
|
164,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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. |
|
|
|
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, acquisition-related costs,
restructuring charges (benefits), legal settlement, in-process
research and development, investigation-related and other costs,
loss on sale/disposal of assets and technology, change in fair
value of stock-based liability awards, marketable securities
impairment, net of accretion, 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 |
50
|
|
|
|
|
operating results. The amounts in 2008 and 2009 excludes amounts
paid to settle certain options held by terminated employees
which expired as they could not be exercised during the
90-day
period subsequent to termination during the period from July
2006 through December 21, 2007, the date we became current
on our reporting obligations under the Securities Exchange Act
of 1934, as amended. The amount in 2008 includes expense of
$0.6 million related to our tender offer that amended the
exercise price on certain options. |
|
(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) |
|
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. |
|
(4) |
|
Restructuring charges (benefits) 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. |
|
(5) |
|
Legal settlements represent the cost of settlement for
certain significant legal matters, including patent litigation.
Our management excludes this charge when evaluating our ongoing
performance and/or predicting earnings trends, and therefore
excludes this amount when presenting non-GAAP financial measures. |
|
(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) |
|
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. |
|
(8) |
|
In-process research and development constitute non-cash
charges that vary significantly in size and amount depending on
the business combination and, therefore, are disregarded by our
management when evaluating our ongoing performance and/or
predicting our earnings trends. We believe it is useful to
investors to understand the specific impact of these charges on
our operating results. |
|
(9) |
|
Acquired intangible asset expensed to research and
development is related to the purchase of an intangible
asset, which, similar to in-process research and development
costs, was expensed immediately. Our management excludes this
cost when evaluating our ongoing performance and/or predicting
our earnings trends, and therefore excludes this cost when
presenting non-GAAP financial measures. Further, we believe it
is useful to investors to understand the specific impact of this
cost on our operating results. Under accounting guidance
effective in 2009, such costs are no longer immediately expensed
upon closing of an acquisition. |
51
|
|
|
(10) |
|
Change in fair value of stock-based liability awards
constitutes the expense or benefit associated with the
change in fair value of stock-based liability awards at the end
of the each reporting period. Our management excludes these
(benefits) costs when evaluating our ongoing performance and/or
predicting our earnings trends, and therefore excludes these
amounts when presenting non-GAAP financial measures. |
|
(11) |
|
Marketable securities impairment, net of accretion
includes other than temporary declines in the
fair value of our
available-for-sale
securities and subsequent recoveries of these losses when the
securities are redeemed. 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. |
|
(12) |
|
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. |
|
(13) |
|
Non-GAAP provision for income taxes reflects a 24%
non-GAAP effective tax rate in 2009 and a 27% non-GAAP effective
tax rate in 2008 and 2007 which is used by our management to
calculate non-GAAP net income. Management believes that the 24%
and 27% effective tax rate in each respective period 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 $117.4 million increase in non-GAAP operating income in
2009 compared to 2008 was primarily attributable to the overall
growth of the company, including a $327.3 million increase
in revenue, offset by a $109.6 million increase in salaries
and benefits, a $24.0 million increase related to
agreements with certain PC OEM partners and increases in various
other expenses.
Non-GAAP Net
Income
The $65.0 million increase in non-GAAP net income in 2009
compared to 2008 was primarily attributable to items discussed
above under operating income offset by a $43.5 million
decrease in interest and other income primarily attributable to
lower yields and lower cash and marketable securities balances,
decreased foreign currency transaction gains, and increased
interest expense associated with our credit facility.
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. The MX Logic purchase agreement provided
for earn-out payments totaling up to $30 million contingent
upon the achievement of certain MX Logic revenue targets. 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.
Secure
Computing
In November 2008, we acquired Secure Computing for
$490.1 million. With this acquisition, we deliver a
complete network security portfolio covering intrusion
prevention, firewall, web security, email security and data
protection, and network access control to organizations of all
sizes. The results of operations for Secure Computing have been
included in our results of operations since the date of
acquisition.
SafeBoot
In November 2007, we acquired SafeBoot, an enterprise security
software vendor for data protection via encryption and access
control, for $346.6 million, of which $6.0 million was
paid in 2008. With this acquisition, we provide our customers
with comprehensive data protection, including endpoint, network,
web, email and data
52
security, as well as risk and compliance solutions. The results
of operations of SafeBoot have been included in our results of
operations since the date of acquisition.
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net cash provided by operating activities
|
|
$
|
496,384
|
|
|
$
|
308,322
|
|
|
$
|
393,415
|
|
Net cash (used in) provided by investing activities
|
|
$
|
(387,832
|
)
|
|
$
|
200,226
|
|
|
$
|
(436,770
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
70,114
|
|
|
$
|
(371,962
|
)
|
|
$
|
10,689
|
|
Overview
At December 31, 2009, our cash, cash equivalents and
marketable securities totaled $950.2 million. Our principal
sources of liquidity were our existing cash, cash equivalents
and short-term marketable securities of $893.0 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.
During 2009, we used $171.6 million for the acquisitions of
Endeavor Security, Inc. (Endeavor), Solidcore and MX
Logic, net of cash acquired, and $4.9 million for payment
of a portion of the accrued purchase price for Securify, Inc.,
which we assumed in the acquisition of Secure Computing in 2008.
We also used $158.2 million for the net purchase of
marketable securities, $60.5 million for purchases of
property and equipment and $25.3 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.
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 currently hold some asset-backed securities and CMO
securities purchased in prior periods but do not plan to acquire
these types of securities in future periods. 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 by and
among us, McAfee Ireland Holdings Limited, certain of our
subsidiaries as guarantors, the lenders from time to time party
thereto and Bank of America, N.A., as administrative agent and
letter of credit issuer (Credit Facility). The
Credit Facility provides for a $100.0 million unsecured
term loan and a $100.0 million unsecured revolving credit
facility with a $25.0 million letter of credit sublimit.
The Credit Facility also contains an expansion option permitting
us to arrange up to an aggregate of $200.0 million in
additional commitments from existing lenders
and/or new
lenders at the lenders discretion. 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 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.
53
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 2009, 2008 and 2007
was primarily the result of our net income of
$173.4 million, $172.2 million and
$167.0 million, respectively, net of non-cash related
expenses. During 2009, our primary working capital sources were
increased deferred revenue, which was attributable to growing
sales of maintenance renewals from our expanding customer base
and increased sales of subscription-based offerings and
decreased accounts receivable due to significant collection
efforts. Our primary working capital use of cash was 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 consolidated
statements of cash flows reflect adjustments to exclude certain
asset items that have not been paid in the current period.
During 2008, our primary working capital source was increased
deferred revenue, which was attributable to growing sales of
maintenance renewals from our expanding customer base and
increased sales of subscription-based offerings. Working capital
uses of cash included increased accounts receivable primarily
due to increased invoicing over collections at the end of the
year, increased prepaid expenses, deferred costs of revenue and
other assets, and decreased accrued taxes and other liabilities
primarily due to a tax settlement payment of approximately
$30.0 million. In addition, during 2008, payments to our
partners for distribution-related agreements were higher than in
2007.
During 2007, primary working capital sources were increases in
deferred revenue, accrued taxes and other liabilities and
accounts payable. The increase in deferred revenue in 2007 was
due to increased sales of subscription and support contracts.
The increase in accrued liabilities is primarily due to
additional accruals for legal settlements. Primary working
capital uses were increases in accounts receivable primarily
attributable to increased invoicing over collections at the end
of the year and increases in prepaid expenses and other assets
primarily attributable to prepayments to our partners.
Our cash and marketable securities balances are held in numerous
locations throughout the world, including substantial amounts
held outside the United States. As of December 31, 2009 and
2008, $580.6 million and $364.5 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. We expect to meet our
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 18 to the
consolidated financial statements.
Investing
Activities
Net cash used in investing activities was $387.8 million in
2009 compared to net cash provided by investing activities of
$200.2 million in 2008.
In 2009, the primary uses of cash in investing activities
included $171.6 million for acquisitions,
$158.2 million of net purchases of marketable securities
and $60.5 million for purchases of property and equipment.
Our cash used for acquisitions decreased to $171.6 million
in 2009 compared to $550.6 million in 2008. During 2009, we
paid $137.9 million, $31.2 million and
$2.5 million, net of cash acquired, to purchase MX Logic,
Solidcore and Endeavor, respectively. During 2008, we paid
$447.4 million, $46.2 million, and $49.0 million,
net of cash acquired, to purchase Secure Computing, Reconnex,
and ScanAlert, respectively.
54
Our cash used for purchases of property and equipment increased
to $60.5 million in 2009 compared to $48.7 million in
2008. The property and equipment purchased during both 2009 and
2008 was primarily for upgrades of our existing systems and
purchases of computers, equipment and software and for leasehold
improvements at various offices.
Net cash used in investing activities was $436.8 million in
2007. In 2007, including the amount placed in escrow, we paid
$328.9 million, net of the $9.8 million cash acquired,
for the purchase of SafeBoot. In addition, during 2007, we
purchased $33.6 million of property and equipment and
purchased patents for $9.3 million.
We expect to continue to have slight increases in capital
expenditures compared to the prior year.
Financing
Activities
Net cash provided by financing activities was $70.1 million
in 2009 compared to net cash used in financing activities of
$372.0 million in 2008. During 2009 and 2008, we used
$25.3 million and $16.6 million, respectively, to
repurchase shares of our 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. 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 stock
option plans and ESPP. In 2009, we received proceeds of
$90.1 million compared to $130.0 million in 2008 and
$9.8 million in 2007 from issuance of stock under such
plans. Proceeds from the issuance of common stock under our
stock option plans and ESPP were significantly lower in 2007 as
compared to 2008 and 2009 as employees were prohibited from
exercising stock options until after we became current on our
reporting obligations under the Securities Exchange Act of 1934,
as amended, in December 2007.
We had no repurchases of our common stock in the open market
during 2009 and 2007. During 2008, we used $500.0 million
to repurchase approximately 14.5 million shares of our
common stock in the open market, including commissions paid on
these transactions. As of December 31, 2009, we did not
have authorization for repurchases of our common stock. 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.
While we expect to continue to receive proceeds from our stock
option plans and ESPP 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 (Credit Facility).
The Credit Facility provided for a $100.0 million unsecured
term loan and a $100.0 million unsecured revolving credit
facility with a $25.0 million letter of credit sublimit. In
February 2010, we entered into an amendment to our Credit
Facility. The aggregate commitments of the lenders for revolving
loans were increased from $100.0 million to
$450.0 million. Subject to the satisfaction of certain
conditions, we may further increase the revolving loan
commitments to an aggregate of $600.0 million. The
amendment extended the maturity date of the Credit Facility by
one year to December 22, 2012.
Loans may be made in U.S. Dollars, Euros or other
currencies agreed to by the lenders. Commitment fees range from
0.25% to 0.45% of the unused portion on the Credit Facility
depending on our consolidated leverage ratio. 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
55
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 and
2008, we had $1.5 million and $3.0 million of
restricted cash deposited at one of our lenders. Restricted cash
decreased $1.5 million when the term loan was repaid in
full. The $1.5 million deposit will be restricted until the
expiration of the revolving credit facility. At
December 31, 2009 and December 31, 2008, we were in
compliance with all covenants in the Credit Facility.
In December 2008, we paid $2.0 million of debt issuance
costs related to the Credit Facility. In January 2009, we
borrowed $100.0 million under the term loan portion of the
Credit Facility. The loan bore interest at our election of an
adjusted LIBOR rate plus a 2.0% margin. The principal together
with accrued interest were paid in December 2009. Under the
amendment to the Credit Facility, 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. 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. No balances were outstanding under the Credit Facility as
of December 31, 2009 and December 31, 2008.
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
December 31. 2009 or December 31, 2008.
Contractual
Obligations
A summary of our fixed contractual obligations and commitments
at December 31, 2009 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Operating leases(1)
|
|
$
|
101,786
|
|
|
$
|
27,201
|
|
|
$
|
40,368
|
|
|
$
|
18,800
|
|
|
$
|
15,417
|
|
Other commitments(2)
|
|
|
185,281
|
|
|
|
115,593
|
|
|
|
69,229
|
|
|
|
459
|
|
|
|
|
|
Purchase obligations(3)
|
|
|
12,459
|
|
|
|
12,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued taxes(4)
|
|
|
9,910
|
|
|
|
9,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
309,436
|
|
|
$
|
165,163
|
|
|
$
|
109,597
|
|
|
$
|
19,259
|
|
|
$
|
15,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating leases are for office space and office equipment. The
operating lease commitments above reflect contractual and
reasonably assured rent escalations under the lease
arrangements. The most significant of our lease contractual
obligations relate to the following five leases:
$22.2 million for the Santa Clara, California facility
lease, $19.8 million for two St. Paul, Minnesota facility
leases, $10.5 million for the Slough, United Kingdom
facility lease and $4.2 million for the Cork, Ireland
facility lease. |
|
(2) |
|
Other commitments are minimum contractual commitments including
distribution, telecom, software licensing and royalty agreements. |
|
(3) |
|
Purchase obligations consist of purchase orders to our contract
manufacturers and suppliers, based on our defined criteria, in
order to manage manufacturing lead times and help ensure
adequate component supply. |
|
(4) |
|
Accrued taxes are tax liabilities, including interest and
penalties, related to uncertain tax positions. |
56
As of December 31, 2009, we had approximately
$103.7 million of tax liabilities, including interest and
penalties, related to uncertain tax positions. Due to the high
degree of uncertainty regarding the settlement of these
liabilities, we are unable to estimate the years in which future
cash outflows may occur other than the amount included in the
table above.
In addition to the contractual obligations above and as
permitted under Delaware law, we have agreements whereby we
indemnify our officers and directors for certain events or
occurrences while the officer or director is, or was, serving at
our request in such capacity. 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.
Off-Balance
Sheet Arrangements
We do not have off-balance sheet arrangements or special purpose
entities.
Financial
Risk Management
The following discussion about our risk management activities
includes forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those
projected in the forward-looking statements.
Foreign
Currency Risk
As a global concern, we face exposure to movements in foreign
currency exchange rates. Our functional currency is typically
the currency of the local country. Our primary exposures are
related to non U.S. Dollar-denominated sales and operating
expenses in Europe, Latin America and Asia. At the present time,
we hedge only those currency exposures associated with certain
assets and liabilities denominated in nonfunctional currencies
and do not generally hedge anticipated foreign currency cash
flows or transact in foreign currencies for trading or other
speculative purposes. The success of this activity depends upon
estimates of transaction activity denominated in various
currencies, primarily the Euro, the British Pound and the
Canadian Dollar. To the extent that these estimates are
incorrect, we could experience unanticipated currency gains or
losses.
To reduce exposures associated with certain nonfunctional
monetary assets and liabilities, we enter into forward
contracts. Our foreign exchange contracts typically range from
one to three months in original maturity. 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 consolidated
statements of income and comprehensive income as interest and
other income.
During 2009 net realized losses arising from the settlement
of our forward foreign exchange contracts was $2.3 million.
During 2008 and 2007, net realized gains arising from the
settlement of our forward foreign exchange contracts were
$2.0 million and $1.0 million, respectively.
Forward contracts outstanding at December 31, 2009 are
presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Notional U.S.
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Asset
|
|
|
Liability
|
|
|
|
Equivalent
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Euro
|
|
$
|
46,165
|
|
|
$
|
35
|
|
|
$
|
(193
|
)
|
British Pound
|
|
|
9,422
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,587
|
|
|
$
|
181
|
|
|
$
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A sensitivity analysis performed on our hedging portfolio as of
December 31, 2009 indicated that a hypothetical 5% and 10%
appreciation of the U.S. Dollar from its value at
December 31, 2009 would decrease the fair value of our
forward contracts by $1.9 million and $3.8 million,
respectively. A 5% and 10% depreciation of the U.S. Dollar
from its value at December 31, 2009 would increase the fair
value of our forward contracts by $1.9 million and
$3.8 million, respectively.
57
Interest
Rate Risk
We maintain balances in cash, cash equivalents and investment
securities. Our investments are made with a policy of capital
preservation and liquidity as the primary objectives. We
maintain our investment securities in portfolio holdings of
various issuers, types and maturities including money market,
U.S. government fixed income, U.S. government agency
fixed income and investment grade corporate fixed income
securities. We currently hold some asset-backed and
mortgage-backed securities purchased in prior periods but do not
plan to acquire these types of securities in future periods. 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. These securities are
classified as
available-for-sale
and consequently are recorded on the consolidated balance sheets
at fair value with unrealized gains and losses reported as a
separate component of accumulated other comprehensive income.
These securities are not leveraged and are held for purposes
other than trading.
During 2008, there were significant disruptions in the financial
markets. A number of large financial institutions failed, were
supported by the U.S. government or were merged into other
organizations. The market disruption has resulted in a lack of
liquidity in the credit markets and a decline in the market
value of debt securities. As a result of these effects, during
2008 we recorded an
other-than-temporary
impairment charge of $18.5 million related to marketable
securities. In 2009, we recorded additional
other-than-temporary
impairment on previously impaired marketable securities totaling
$0.7 million for continued declines in fair value. Of the
$18.5 million
other-than-temporary
impairment recorded in 2008, $12.2 million related to
corporate bonds and asset-backed and mortgage-backed securities,
which suffered declines in fair value, $5.0 million related
to a single corporate bond that had a significant decline in
fair value due to the issuers bankruptcy and
$1.3 million related to impairment recorded because we no
longer had the intent and ability to hold these securities for a
period of time sufficient for the fair values to recover due to
funding our acquisition of Secure Computing, which was a
one-time event. We had no
other-than-temporary
impairment of marketable securities in 2007. We had a net
unrealized gain of $1.8 million on marketable securities at
December 31, 2009, compared with a net unrealized gain of
$0.6 million at December 31, 2008.
The following tables present the hypothetical changes in fair
values in the securities held at December 31, 2009 that are
sensitive to changes in interest rates. The modeling technique
used measures the change in fair values arising from
hypothetical parallel shifts in the yield curve of plus or minus
50 basis points (BPS), 100 BPS and 150 BPS over
a twelve-month time horizon. Beginning fair values represent the
market principal plus accrued interest and dividends at
December 31, 2009. Ending fair values are the market
principal plus accrued interest, dividends and reinvestment
income over a twelve-month time horizon.
The following table estimates the fair value of the portfolio at
a twelve-month time horizon (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of Securities
|
|
|
|
|
|
Valuation of Securities
|
|
|
|
Given an Interest Rate
|
|
|
|
|
|
Given an Interest Rate
|
|
|
|
Decrease of
|
|
|
No
|
|
|
Increase of
|
|
|
|
X Basis Points
|
|
|
Change in
|
|
|
X Basis Points
|
|
Issuer
|
|
150 BPS
|
|
|
100 BPS
|
|
|
50 BPS
|
|
|
Interest Rate
|
|
|
50 BPS
|
|
|
100 BPS
|
|
|
150 BPS
|
|
|
Cash equivalents
|
|
$
|
9.6
|
|
|
$
|
9.6
|
|
|
$
|
9.6
|
|
|
$
|
9.6
|
|
|
$
|
9.6
|
|
|
$
|
9.6
|
|
|
$
|
9.6
|
|
United States treasury and agency securities
|
|
|
96.8
|
|
|
|
96.7
|
|
|
|
96.6
|
|
|
|
96.5
|
|
|
|
96.3
|
|
|
|
96.1
|
|
|
|
95.9
|
|
Foreign government securities
|
|
|
34.0
|
|
|
|
33.9
|
|
|
|
33.9
|
|
|
|
33.8
|
|
|
|
33.7
|
|
|
|
33.7
|
|
|
|
33.6
|
|
Certificates of deposit and time deposits
|
|
|
40.0
|
|
|
|
40.0
|
|
|
|
39.9
|
|
|
|
39.9
|
|
|
|
39.8
|
|
|
|
39.7
|
|
|
|
39.7
|
|
Corporate debt securities
|
|
|
101.0
|
|
|
|
100.9
|
|
|
|
100.8
|
|
|
|
100.7
|
|
|
|
100.5
|
|
|
|
100.4
|
|
|
|
100.2
|
|
Mortgage-backed securities
|
|
|
21.1
|
|
|
|
21.1
|
|
|
|
21.1
|
|
|
|
21.1
|
|
|
|
21.1
|
|
|
|
21.1
|
|
|
|
21.1
|
|
Asset-backed securities
|
|
|
18.3
|
|
|
|
18.3
|
|
|
|
18.3
|
|
|
|
18.3
|
|
|
|
18.3
|
|
|
|
18.3
|
|
|
|
18.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
320.8
|
|
|
$
|
320.5
|
|
|
$
|
320.2
|
|
|
$
|
319.9
|
|
|
$
|
319.3
|
|
|
$
|
318.9
|
|
|
$
|
318.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Newly
Adopted and Recently Issued Accounting Pronouncements
See Note 2 of the consolidated financial statements for a
full description of recent accounting pronouncements, including
the expected dates of adoption and effects on financial
condition, results of operations and cash flows.
58
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
Quantitative and qualitative disclosure about market risk is set
forth at Managements Discussion and Analysis of
Financial Condition and Results of Operations
Financial Risk Management under Item 7.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Annual
Financial Statements
The consolidated financial statements and supplementary date
included in Part IV, Item 15(a) of this annual report
are incorporated by reference into this Item 8.
Selected
Quarterly Operating Results (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
525,666
|
|
|
$
|
485,271
|
|
|
$
|
468,686
|
|
|
$
|
447,709
|
|
|
$
|
423,987
|
|
|
$
|
409,679
|
|
|
$
|
396,758
|
|
|
$
|
369,641
|
|
Gross profit
|
|
|
394,327
|
|
|
|
358,501
|
|
|
|
353,464
|
|
|
|
334,653
|
|
|
|
318,637
|
|
|
|
311,170
|
|
|
|
307,025
|
|
|
|
279,705
|
|
Income from operations
|
|
|
72,156
|
|
|
|
42,505
|
|
|
|
55,876
|
|
|
|
51,770
|
|
|
|
32,564
|
|
|
|
49,363
|
|
|
|
54,397
|
|
|
|
53,247
|
|
Net income
|
|
|
54,522
|
|
|
|
36,789
|
|
|
|
28,653
|
|
|
|
53,456
|
|
|
|
45,406
|
|
|
|
48,808
|
|
|
|
47,826
|
|
|
|
30,169
|
|
Net income per share basic(1)
|
|
|
0.35
|
|
|
|
0.23
|
|
|
|
0.18
|
|
|
|
0.35
|
|
|
|
0.30
|
|
|
|
0.32
|
|
|
|
0.30
|
|
|
|
0.19
|
|
Net income per share diluted(1)
|
|
|
0.34
|
|
|
|
0.23
|
|
|
|
0.18
|
|
|
|
0.34
|
|
|
|
0.29
|
|
|
|
0.31
|
|
|
|
0.30
|
|
|
|
0.18
|
|
|
|
|
(1) |
|
Net income per share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net
income per share may not equal the annual net income per share
due to rounding differences. |
We believe that
period-to-period
comparisons of our financial results should not be relied upon
as an indication of future performance.
Our revenue and results of operations have been subject to
significant fluctuations, particularly on a quarterly basis, and
our revenue and results of operations could fluctuate
significantly quarter to quarter and year to year. Causes of
such fluctuations may include the volume and timing of new
orders and renewals, the sales cycle for our products, the
introduction of new products, return rates, product upgrades or
updates by us or our competitors, changes in product mix,
changes in product prices and pricing models, the portion of our
licensing fees and product revenue deferred or recognized as
support and maintenance revenue, seasonality, trends in the
computer industry, general economic conditions, events such as
acquisitions and sales of business or litigation, the occurrence
of unexpected events, amortization of purchased technology and
intangibles, restructurings and
other-than-temporary
impairment of marketable securities. Significant quarterly
fluctuations in revenue will cause significant fluctuations in
our cash flows and cash and cash equivalents, accounts
receivable and deferred revenue accounts on our consolidated
balance sheet. In addition, the operating results of many
software companies reflect seasonal trends, and our business,
financial condition and results of operations may be affected by
such trends in the future. These trends may include higher net
revenue in the third and fourth quarter as many customers
complete annual budgetary cycles, and lower net revenue in the
summer months when many businesses experience lower sales,
particularly in the European market.
59
|
|
Item 9.
|
Changes
In and Disagreements With Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Our management, with the participation of our chief executive
officer and our chief financial officer, has 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 as of December 31, 2009.
A control system, no matter how well conceived and operated, can
provide only reasonable assurance that the objectives of the
control system are met. Our management, including our chief
executive officer and chief financial officer, does not expect
that our disclosure controls and procedures or internal control
over financial reporting will prevent all errors and fraud.
Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Due to the
inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues
within our company have been detected.
Managements
Annual Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
of the Securities Exchange Act. We have designed our internal
controls to provide reasonable, but not absolute, assurance that
our financial statements are prepared in accordance with
generally accepted accounting principles in the United States of
America. We assess the effectiveness of our internal controls
based on the criteria set forth in the Internal
Control Integrated Framework developed by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Our management has concluded that, as of December 31, 2009,
our internal control over financial reporting was effective
based on these criteria.
Deloitte & Touche LLP, as auditor of our consolidated
financial statements for the year ended December 2009, has
issued an attestation report dated February 26, 2010,
concerning our internal control over financial reporting, which
is included in Part IV, Item 15(a) of this annual
report.
Changes
in Internal Control over Financial Reporting
We have had no changes in our internal control over financial
reporting during the year ended December 31, 2009 that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
60
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of McAfee, Inc.
Santa Clara, California
We have audited the internal control over financial reporting of
McAfee, Inc. and subsidiaries (the Company) as of
December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2009, of
the Company and our report dated February 26, 2010
expressed an unqualified opinion on those financial statements
and financial statement schedule.
/s/ Deloitte &
Touche LLP
San Jose, California
February 26, 2010
61
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2010 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the year ended December 31, 2009.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2010 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the year ended December 31, 2009.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2010 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the year ended December 31, 2009.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2010 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the year ended December 31, 2009.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2010 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the year ended December 31, 2009.
62
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Consolidated Financial Statements
|
|
|
|
|
|
|
Page
|
|
|
Number
|
|
|
|
|
64
|
|
|
|
|
65
|
|
|
|
|
66
|
|
|
|
|
67
|
|
|
|
|
68
|
|
|
|
|
69
|
|
(a)(2) Consolidated Financial Statement
Schedule
The following financial statement schedule of McAfee, Inc. for
the years ended December 31, 2009, 2008, and 2007 is filed
as part of this
Form 10-K
and should be read in conjunction with McAfee, Inc.s
Consolidated Financial Statements.
Schedule II Valuation and Qualifying Accounts
for the years ended December 31, 2009, 2008 and 2007
Schedules not listed above have been omitted because they are
not applicable or are not required or because the required
information is included in the Consolidated Financial Statements
or Notes thereto.
(a)(3) Exhibits See Index to Exhibits on
Page 97. The Exhibits listed on the accompanying Index of
Exhibits are filed or incorporated by reference as part of this
report.
63
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of McAfee, Inc.
Santa Clara, California
We have audited the accompanying consolidated balance sheets of
McAfee, Inc. and subsidiaries (the Company) as of
December 31, 2009 and 2008, and the related consolidated
statements of income and comprehensive income,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2009. Our audits
also included the consolidated financial statement schedule
listed in the Index at Item 15(a)(2). These financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
McAfee, Inc. and subsidiaries as of December 31, 2009 and
2008, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2009, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 26, 2010 expressed
an unqualified opinion on the Companys internal control
over financial reporting.
/s/ Deloitte &
Touche LLP
San Jose, California
February 26, 2010
64
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands,
|
|
|
|
except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
677,137
|
|
|
$
|
483,302
|
|
Short-term marketable securities
|
|
|
215,894
|
|
|
|
27,449
|
|
Accounts receivable, net
|
|
|
294,315
|
|
|
|
322,986
|
|
Deferred income taxes
|
|
|
312,080
|
|
|
|
310,870
|
|
Prepaid expenses and deferred costs of revenue
|
|
|
228,102
|
|
|
|
221,900
|
|
Other current assets
|
|
|
35,789
|
|
|
|
38,281
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,763,317
|
|
|
|
1,404,788
|
|
Long-term marketable securities
|
|
|
57,137
|
|
|
|
82,974
|
|
Property and equipment, net
|
|
|
133,016
|
|
|
|
114,435
|
|
Deferred income taxes
|
|
|
292,657
|
|
|
|
303,937
|
|
Intangible assets, net
|
|
|
292,583
|
|
|
|
315,803
|
|
Goodwill
|
|
|
1,284,574
|
|
|
|
1,169,616
|
|
Other assets
|
|
|
139,902
|
|
|
|
66,328
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,963,186
|
|
|
$
|
3,457,881
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
55,104
|
|
|
$
|
41,529
|
|
Accrued compensation and benefits
|
|
|
108,332
|
|
|
|
82,648
|
|
Other accrued liabilities
|
|
|
203,967
|
|
|
|
215,355
|
|
Deferred revenue
|
|
|
1,068,682
|
|
|
|
989,096
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,436,085
|
|
|
|
1,328,628
|
|
Deferred revenue, less current portion
|
|
|
338,791
|
|
|
|
304,014
|
|
Accrued taxes and other long-term liabilities
|
|
|
70,772
|
|
|
|
72,751
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,845,648
|
|
|
|
1,705,393
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 9, 10 and 18)
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
Preferred stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized: 5,000,000 shares; Issued and outstanding: none
in 2009 and 2008
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized: 300,000,000 shares; Issued:
186,700,719 shares at December 31, 2009 and
181,133,439 shares at December 31, 2008
|
|
|
|
|
|
|
|
|
Outstanding: 158,286,352 shares at December 31, 2009
and 153,534,594 shares at December 31, 2008
|
|
|
1,868
|
|
|
|
1,812
|
|
Treasury stock, at cost: 28,414,367 shares at
December 31, 2009 and 27,598,845 shares at
December 31, 2008
|
|
|
(845,118
|
)
|
|
|
(819,861
|
)
|
Additional paid-in capital
|
|
|
2,251,916
|
|
|
|
2,053,245
|
|
Accumulated other comprehensive loss
|
|
|
(3,291
|
)
|
|
|
(18,992
|
)
|
Retained earnings
|
|
|
712,163
|
|
|
|
536,284
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,117,538
|
|
|
|
1,752,488
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,963,186
|
|
|
$
|
3,457,881
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, support and subscription
|
|
$
|
1,739,081
|
|
|
$
|
1,467,092
|
|
|
$
|
1,226,427
|
|
Product
|
|
|
188,251
|
|
|
|
132,973
|
|
|
|
81,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
1,927,332
|
|
|
|
1,600,065
|
|
|
|
1,308,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, support and subscription
|
|
|
308,222
|
|
|
|
254,083
|
|
|
|
214,582
|
|
Product
|
|
|
100,204
|
|
|
|
72,634
|
|
|
|
55,872
|
|
Amortization of purchased technology
|
|
|
77,961
|
|
|
|
56,811
|
|
|
|
35,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
|
486,387
|
|
|
|
383,528
|
|
|
|
305,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
324,368
|
|
|
|
252,020
|
|
|
|
217,934
|
|
Sales and marketing
|
|
|
642,026
|
|
|
|
536,944
|
|
|
|
397,629
|
|
General and administrative
|
|
|
197,696
|
|
|
|
193,784
|
|
|
|
204,748
|
|
Amortization of intangibles
|
|
|
40,718
|
|
|
|
26,470
|
|
|
|
13,583
|
|
Restructuring charges (benefits)
|
|
|
13,830
|
|
|
|
(1,752
|
)
|
|
|
8,769
|
|
In-process research and development
|
|
|
|
|
|
|
19,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs
|
|
|
1,218,638
|
|
|
|
1,026,966
|
|
|
|
842,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
222,307
|
|
|
|
189,571
|
|
|
|
159,813
|
|
Interest and other income, net
|
|
|
2,202
|
|
|
|
45,687
|
|
|
|
68,287
|
|
Impairment of marketable securities
|
|
|
(710
|
)
|
|
|
(18,533
|
)
|
|
|
|
|
Gain on sale of investments, net
|
|
|
424
|
|
|
|
5,481
|
|
|
|
1,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
224,223
|
|
|
|
222,206
|
|
|
|
229,204
|
|
Provision for income taxes
|
|
|
50,803
|
|
|
|
49,997
|
|
|
|
62,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
173,420
|
|
|
$
|
172,209
|
|
|
$
|
166,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities, net
|
|
$
|
3,187
|
|
|
$
|
(215
|
)
|
|
$
|
1,257
|
|
Foreign currency translation gain (loss)
|
|
|
14,973
|
|
|
|
(51,275
|
)
|
|
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
191,580
|
|
|
$
|
120,719
|
|
|
$
|
168,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$
|
1.11
|
|
|
$
|
1.10
|
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted
|
|
$
|
1.09
|
|
|
$
|
1.08
|
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation basic
|
|
|
156,144
|
|
|
|
156,205
|
|
|
|
159,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation diluted
|
|
|
158,988
|
|
|
|
159,406
|
|
|
|
164,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Loss) Income
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Adjusted balances, January 1, 2007
|
|
|
159,915
|
|
|
$
|
1,726
|
|
|
|
12,597
|
|
|
$
|
(303,074
|
)
|
|
$
|
1,629,068
|
|
|
$
|
31,472
|
|
|
$
|
197,095
|
|
|
$
|
1,556,287
|
|
Issuance of common stock under our employee stock plans
|
|
|
636
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
12,811
|
|
|
|
|
|
|
|
|
|
|
|
12,817
|
|
Repurchase of common stock
|
|
|
(6
|
)
|
|
|
|
|
|
|
6
|
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(196
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,118
|
|
|
|
|
|
|
|
|
|
|
|
42,118
|
|
Stock-based compensation related to option extension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,014
|
|
|
|
|
|
|
|
|
|
|
|
14,014
|
|
Cash payable in excess of exercise price related to exchange of
McAfee.com options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
|
(154
|
)
|
Reduction of prior tax benefit from stock option activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(820
|
)
|
|
|
|
|
|
|
|
|
|
|
(820
|
)
|
Recognition of tax benefit related to acquisition accounted for
as a pooling of interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,379
|
|
|
|
|
|
|
|
|
|
|
|
123,379
|
|
Fair value of options assumed in acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,611
|
|
|
|
|
|
|
|
|
|
|
|
3,611
|
|
Modification of stock options reclassification from
equity to liability awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,272
|
)
|
|
|
|
|
|
|
|
|
|
|
(18,272
|
)
|
Exercise of stock options reclassification from
liability to equity awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,535
|
|
|
|
|
|
|
|
|
|
|
|
4,535
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(231
|
)
|
|
|
|
|
|
|
(231
|
)
|
Net increase in unrealized gains on marketable securities, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,257
|
|
|
|
|
|
|
|
1,257
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,980
|
|
|
|
166,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007
|
|
|
160,545
|
|
|
|
1,732
|
|
|
|
12,603
|
|
|
|
(303,270
|
)
|
|
|
1,810,290
|
|
|
|
32,498
|
|
|
|
364,075
|
|
|
|
1,905,325
|
|
Issuance of common stock under our employee stock plans and
employee stock purchase plan
|
|
|
7,986
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
127,238
|
|
|
|
|
|
|
|
|
|
|
|
127,318
|
|
Repurchase of common stock
|
|
|
(14,974
|
)
|
|
|
|
|
|
|
14,974
|
|
|
|
(516,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(516,591
|
)
|
Forfeiture of restricted stock awards
|
|
|
(22
|
)
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,662
|
|
|
|
|
|
|
|
|
|
|
|
76,662
|
|
Reclassification of fair value charge as liability for tender
offer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,223
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,223
|
)
|
Fair value of options assumed in prior year acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,672
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,672
|
)
|
Cash payable in excess of exercise price related to exchange of
McAfee.com options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(984
|
)
|
|
|
|
|
|
|
|
|
|
|
(984
|
)
|
Fair value of RSAs and RSUs assumed in acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,211
|
|
|
|
|
|
|
|
|
|
|
|
2,211
|
|
Tax benefits from stock-based awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,729
|
|
|
|
|
|
|
|
|
|
|
|
23,729
|
|
Exercise of stock options reclassification from
liability to equity awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,994
|
|
|
|
|
|
|
|
|
|
|
|
16,994
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,275
|
)
|
|
|
|
|
|
|
(51,275
|
)
|
Net increase in unrealized losses on marketable securities, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(215
|
)
|
|
|
|
|
|
|
(215
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,209
|
|
|
|
172,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2008
|
|
|
153,535
|
|
|
|
1,812
|
|
|
|
27,599
|
|
|
|
(819,861
|
)
|
|
|
2,053,245
|
|
|
|
(18,992
|
)
|
|
|
536,284
|
|
|
|
1,752,488
|
|
Issuance of common stock under our employee stock plans and
employee stock purchase plan
|
|
|
5,566
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
90,230
|
|
|
|
|
|
|
|
|
|
|
|
90,286
|
|
Repurchase of common stock
|
|
|
(780
|
)
|
|
|
|
|
|
|
780
|
|
|
|
(25,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,257
|
)
|
Forfeiture of restricted stock awards
|
|
|
(35
|
)
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,036
|
|
|
|
|
|
|
|
|
|
|
|
103,036
|
|
Cash payable in excess of exercise price related to exchange of
McAfee.com options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(493
|
)
|
|
|
|
|
|
|
|
|
|
|
(493
|
)
|
Fair value of options assumed in acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
123
|
|
Tax benefits from stock-based awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,775
|
|
|
|
|
|
|
|
|
|
|
|
5,775
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,973
|
|
|
|
|
|
|
|
14,973
|
|
Net increase in unrealized gains on marketable securities, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,187
|
|
|
|
|
|
|
|
3,187
|
|
Cumulative effect adjustment for non-credit component of
other-than-temporary
impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,459
|
)
|
|
|
2,459
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173,420
|
|
|
|
173,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2009
|
|
|
158,286
|
|
|
$
|
1,868
|
|
|
|
28,414
|
|
|
$
|
(845,118
|
)
|
|
$
|
2,251,916
|
|
|
$
|
(3,291
|
)
|
|
$
|
712,163
|
|
|
$
|
2,117,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
173,420
|
|
|
$
|
172,209
|
|
|
$
|
166,980
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
172,280
|
|
|
|
123,894
|
|
|
|
84,427
|
|
Stock-based compensation expense
|
|
|
103,036
|
|
|
|
76,662
|
|
|
|
56,132
|
|
Excess tax benefit from stock-based awards
|
|
|
(10,215
|
)
|
|
|
(17,693
|
)
|
|
|
(1,092
|
)
|
Deferred income taxes
|
|
|
11,900
|
|
|
|
(10,724
|
)
|
|
|
151
|
|
Non-cash restructuring charge (benefit)
|
|
|
1,861
|
|
|
|
(7,471
|
)
|
|
|
6,035
|
|
Impairment of marketable securities
|
|
|
710
|
|
|
|
18,533
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
19,500
|
|
|
|
|
|
(Decrease) increase in fair value of options accounted for as
liabilities
|
|
|
|
|
|
|
(5,483
|
)
|
|
|
8,745
|
|
Other non-cash items
|
|
|
6,185
|
|
|
|
(3,688
|
)
|
|
|
(5,076
|
)
|
Changes in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
33,216
|
|
|
|
(68,208
|
)
|
|
|
(33,295
|
)
|
Prepaid expenses, deferred costs of revenue and other assets
|
|
|
(98,608
|
)
|
|
|
(77,300
|
)
|
|
|
(34,655
|
)
|
Accounts payable
|
|
|
11,212
|
|
|
|
(7,775
|
)
|
|
|
6,769
|
|
Accrued compensation and benefits and other liabilities
|
|
|
(10,370
|
)
|
|
|
(33,493
|
)
|
|
|
47,413
|
|
Deferred revenue
|
|
|
101,757
|
|
|
|
129,359
|
|
|
|
90,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
496,384
|
|
|
|
308,322
|
|
|
|
393,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(448,117
|
)
|
|
|
(252,031
|
)
|
|
|
(927,257
|
)
|
Proceeds from maturities of marketable securities
|
|
|
239,323
|
|
|
|
466,101
|
|
|
|
458,142
|
|
Proceeds from sales of marketable securities
|
|
|
50,623
|
|
|
|
587,587
|
|
|
|
404,106
|
|
Acquisitions, net of cash acquired
|
|
|
(171,618
|
)
|
|
|
(550,648
|
)
|
|
|
(333,377
|
)
|
Purchase of property and equipment
|
|
|
(60,535
|
)
|
|
|
(48,747
|
)
|
|
|
(33,568
|
)
|
Other investing activities
|
|
|
2,492
|
|
|
|
(2,036
|
)
|
|
|
(4,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(387,832
|
)
|
|
|
200,226
|
|
|
|
(436,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock under our employee stock
plans and employee stock purchase plan
|
|
|
90,105
|
|
|
|
129,990
|
|
|
|
9,793
|
|
Excess tax benefit from stock-based awards
|
|
|
10,215
|
|
|
|
17,693
|
|
|
|
1,092
|
|
Repurchase of common stock
|
|
|
(25,257
|
)
|
|
|
(516,591
|
)
|
|
|
(196
|
)
|
Bank borrowings
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
Repayment of bank borrowings
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
Other financing activities
|
|
|
(4,949
|
)
|
|
|
(3,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
70,114
|
|
|
|
(371,962
|
)
|
|
|
10,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash
|
|
|
15,169
|
|
|
|
(47,442
|
)
|
|
|
37,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
193,835
|
|
|
|
89,144
|
|
|
|
4,531
|
|
Cash and cash equivalents at beginning of period
|
|
|
483,302
|
|
|
|
394,158
|
|
|
|
389,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
677,137
|
|
|
$
|
483,302
|
|
|
$
|
394,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities, net
|
|
$
|
3,187
|
|
|
$
|
(215
|
)
|
|
$
|
1,257
|
|
Fair value of assets acquired in business combinations and asset
acquisitions, excluding cash acquired
|
|
$
|
260,678
|
|
|
$
|
758,836
|
|
|
$
|
384,287
|
|
Liabilities assumed in business combinations
|
|
$
|
55,813
|
|
|
$
|
226,328
|
|
|
$
|
46,794
|
|
Fair value of earn-out liabilities and accrued purchase price
|
|
$
|
33,732
|
|
|
$
|
1,268
|
|
|
$
|
|
|
Accrual for purchase of property, equipment and leasehold
improvements
|
|
$
|
10,788
|
|
|
$
|
2,953
|
|
|
$
|
4,133
|
|
Modification of stock options reclassification from
equity to liability awards
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,272
|
|
Exercise of stock options reclassification from
liability to equity awards
|
|
$
|
|
|
|
$
|
16,994
|
|
|
$
|
4,535
|
|
Issuance of common stock under stock option plans
|
|
$
|
181
|
|
|
$
|
(2,672
|
)
|
|
$
|
3,024
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
38,468
|
|
|
$
|
60,494
|
|
|
$
|
27,320
|
|
Cash received from income tax refunds
|
|
$
|
8,435
|
|
|
$
|
5,072
|
|
|
$
|
11,964
|
|
Interest expense paid
|
|
$
|
2,391
|
|
|
$
|
|
|
|
$
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
68
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
|
Basis
of Presentation
The accompanying consolidated financial statements include our
accounts and the accounts of our wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reported
period. Estimates are based upon historical factors, current
circumstances and the experience and judgment of management.
Significant estimates include those required in allocation of
revenues between recognized and deferred amounts, fair value of
financial instruments, the valuation of intangible assets
acquired and contingent consideration issued in business
acquisitions, impairment analysis of goodwill and intangible
assets, the estimated useful life of property and equipment and
intangible assets, allowances for doubtful accounts, sales
returns and allowances, vendor specific objective evidence
(VSOE) of the fair value of the various undelivered
elements of our multiple element software transactions,
projections of future cash flows related to certain revenue
share agreements, stock-based compensation expense,
restructuring and litigation accruals and valuation allowances
for deferred tax assets and tax accruals. Although we believe
that adequate accruals have been made for unsettled issues,
additional gains or losses could occur in future periods from
resolution of outstanding matters. Actual results could differ
materially from original estimates.
Certain
Risks and Concentrations
We derive a majority of our net revenue from our system security
and network security solutions. The market in which we operate
is highly competitive and rapidly changing. Significant
technological changes, changes in customer requirements, or the
emergence of competitive products with new capabilities or
technologies could adversely affect operating results.
We sell a significant amount of our products through
intermediaries such as distributors, resellers and others. Our
top ten distributors represented 30% to 45% of net sales during
2009, 2008 and 2007.
A significant portion of our net revenue and net income is
derived from international sales. Fluctuations of the
U.S. dollar against foreign currencies, changes in local
regulatory or economic conditions, piracy, or nonperformance by
distributors or partners could adversely affect operating
results.
We regularly review the collectability and creditworthiness of
our distributors to determine an appropriate allowance for
doubtful accounts. Our uncollectible accounts could exceed our
current or future allowances. Accounts receivable are written
off on a case by case basis, considering the probability that
any amounts can be
69
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
collected. At December 31, 2009 and 2008, our allowance for
doubtful accounts was $6.5 million and $3.9 million,
respectively.
We maintain a significant majority of cash balances and all of
our short-term investments with four financial institutions. We
invest with financial institutions believed to have high quality
credit and, by policy, limit the amount of deposit exposure to
any one financial institution.
We receive certain of our critical components from sole
suppliers. Additionally, we rely on a limited number of contract
manufacturers and suppliers to provide manufacturing services
for our products. The inability of any contract manufacturer or
supplier to fulfill supply requirements could materially impact
future operating results.
Cash
and Cash Equivalents
Cash equivalents are comprised of highly liquid debt instruments
with original maturities or remaining maturities at date of
purchase of 90 days or less.
Restricted
Cash
Current restricted cash of $7.6 million at
December 31, 2009 and $9.1 million at
December 31, 2008 is included in the other current
assets line item on the consolidated balance sheets. At
December 31, 2009 and December 31, 2008, we had
$7.6 million placed in an escrow account pursuant to Secure
Computing Corporations (Secure Computing)
divestiture of a product line in September 2008. The remaining
balance at December 31, 2008 related to restricted cash
deposited at one of our lenders. This amount was released from
restricted cash when we repaid the outstanding balance on our
term loan in December 2009.
Non-current restricted cash of $2.1 million at
December 31, 2009 and $3.0 million at
December 31, 2008 is included in the other
assets line item on the consolidated balance sheets and
consists primarily of restricted cash deposited at one of our
lenders that will be released on the expiration of the revolving
credit facility and cash collateral related to leases in the
United States and India.
Marketable
Securities
All marketable securities are classified as
available-for-sale
securities.
Available-for-sale
securities are carried at fair value with resulting unrealized
gains and losses, including the non-credit component of
other-than-temporary
impairments, reported net of tax as a component of accumulated
other comprehensive loss. Premium and discount on debt
securities recorded at the date of purchase are amortized and
accreted, respectively, to interest income using the effective
interest method. All proceeds received from the sale and
maturity of our marketable securities are reflected in investing
activities in the consolidated statements of cash flows,
including amounts related to discounts and premiums recorded at
the time of purchase. Short-term marketable securities are those
with remaining maturities at the balance sheet date of less than
one year. Long-term marketable securities have remaining
maturities at the balance sheet date of one year or greater.
Realized gains and losses on sales of all such investments are
reported in earnings and are computed using the specific
identification cost method.
In April 2009, new accounting guidance revised the impairment
model for debt securities by modifying the current intent and
ability indicator in determining whether a debt security is
other-than-temporarily
impaired. For debt securities in an unrealized loss position, we
are required to assess whether (i) we have the intent to
sell the debt security or (ii) it is more likely than not
that we will be required to sell the debt security before its
anticipated recovery. If either of these conditions is met, an
other-than-temporary
impairment on the security must be recognized in earnings equal
to the entire difference between its fair value and amortized
cost basis.
For debt securities in an unrealized loss position which are
deemed to be
other-than-temporary
where neither of the criteria in the paragraph above are
present, the difference between the securitys then-current
amortized cost basis and fair value is separated into
(i) the amount of the impairment related to the credit loss
(i.e., the credit loss
70
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
component) and (ii) the amount of the impairment related to
all other factors (i.e., the non-credit loss component). The
credit loss component is recognized in earnings. The non-credit
loss component is recognized in accumulated other comprehensive
loss. The credit loss component is the excess of the amortized
cost of the security over the best estimate of the present value
of the cash flows expected to be collected from the debt
security. The non-credit loss component is the residual amount
of the
other-than-temporary
impairment. Prior to the new accounting guidance, in all cases,
if an impairment was determined to be
other-than-temporary,
then an impairment loss was recognized in earnings in an amount
equal to the entire difference between the securitys
amortized cost basis and its fair value.
When calculating the present value of expected cash flows to
determine the credit loss component of the
other-than-temporary
impairment, we estimate the amount and timing of projected cash
flows on a
security-by-security
basis. These calculations reflect our expectations of the
performance of the underlying collateral and the ability of the
issuer to meet payment obligations as applicable. The expected
cash flows are discounted using the effective interest rate of
the security prior to any impairment. The amortized cost basis
of a debt security is adjusted for credit losses recorded to
earnings. The difference between the cash flows expected to be
collected and the new cost basis is accreted to investment
income over the remaining expected life of the security.
Pursuant to the April 2009 accounting guidance, we were required
to separate
other-than-temporary
impairments recognized in earnings prior to April 1, 2009,
between the credit loss and the non-credit loss components, and
record a cumulative effect adjustment to retained earnings for
the non-credit loss component. Upon adoption on April 1,
2009, we recorded an increase to retained earnings and a
corresponding decrease to accumulated other comprehensive loss
of $2.5 million, net of $1.6 million in tax benefits.
Periods prior to April 1, 2009, have not been restated for
this new accounting policy and, therefore, current period and
prior period financial statements may not be comparable.
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 VSOE of fair value on an undelivered
element. At December 31, 2009, our deferred costs were
$107.4 million compared to $93.1 million at
December 31, 2008. 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 consolidated balance
sheets. At December 31, 2009 and 2008, deferred costs of
revenue are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Short-term deferred costs of revenue
|
|
$
|
89,618
|
|
|
$
|
78,971
|
|
Long-term deferred costs of revenue
|
|
|
17,739
|
|
|
|
14,164
|
|
|
|
|
|
|
|
|
|
|
Total deferred costs of revenue
|
|
$
|
107,357
|
|
|
$
|
93,135
|
|
|
|
|
|
|
|
|
|
|
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.
At December 31, 2009, our prepaid expenses associated with
revenue-sharing and royalty arrangements were
$164.5 million compared to $91.4 million at
December 31, 2008. 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 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 which
give rise to revenue sharing or royalty obligations. These
estimates rely on forecasted
71
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
future revenues which are subject to adjustment as forecasts are
revised. At December 31, 2009 and 2008, prepaid expenses
associated with revenue-sharing and royalty arrangements are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Short-term prepaid expenses
|
|
$
|
71,388
|
|
|
$
|
73,729
|
|
Long-term prepaid expenses
|
|
|
93,069
|
|
|
|
17,700
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses
|
|
$
|
164,457
|
|
|
$
|
91,429
|
|
|
|
|
|
|
|
|
|
|
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 consolidated balance sheets and were
$11.4 million at December 31, 2009 and
$10.2 million at December 31, 2008.
Property
and Equipment
Property and equipment are presented at cost less accumulated
depreciation and amortization (see Note 6). Depreciation
and amortization of property and equipment are computed using
the straight-line method over the estimated useful lives as
follows:
|
|
|
|
|
building interior seven years;
exterior twenty years;
|
|
|
|
office furniture and equipment three to five years;
|
|
|
|
computer hardware, networking hardware and software
three to five years; and
|
|
|
|
leasehold improvements the shorter of the lease
term, including assumed lease renewal periods that are
reasonably assured, or the estimated useful life of the asset.
|
The costs associated with projects eligible for capitalization
are accumulated on the consolidated balance sheets until the
project is substantially complete and is placed into service.
When assets are disposed, we remove the asset and accumulated
depreciation from our records and recognize the related gain or
loss in earnings.
Repairs and maintenance expenditures, which are not considered
improvements and do not extend the useful life of property and
equipment, are expensed as incurred.
Internal
Use Software
Software development costs, including costs incurred to purchase
third-party software, are capitalized beginning when we have
determined factors are present, including among others, that
indicate technology exists to achieve the performance
requirements, buy versus internal development decisions have
been made and our management has authorized the funding for the
project. Capitalization of software costs ceases when the
software is substantially complete and is ready for its intended
use and capitalized costs are amortized over their estimated
useful life of three to five years using the straight-line
method. When events or circumstances indicate the carrying value
of internal use software might not be recoverable, we assess the
recoverability of these assets by determining whether the
amortization of the asset balance over its remaining life can be
recovered through undiscounted future operating cash flows.
72
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Finite-Lived
Intangibles, Long-Lived Assets and Assets Held for
Sale
Purchased technology and other identifiable intangible assets
are carried at cost less accumulated amortization. We amortize
purchased technology and other identifiable intangibles on a
straight-line or accelerated basis over their estimated useful
lives, depending on the pattern in which the economic benefits
are obtained or used. The range of estimated useful lives of our
identifiable intangibles is one to eight years (see Note 7).
We will record an impairment charge on finite-lived intangibles
or long-lived assets to be held and used when we determine that
the carrying value of intangibles and long-lived assets may not
be recoverable. Based upon the existence of one or more
indicators of impairment, we measure any impairment of
intangibles or long-lived assets based on a projected discounted
cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our
current business model. No impairment has been recognized for
any periods presented in our statements of income and
comprehensive income.
Goodwill
and Other Intangible Assets
Goodwill and identifiable intangible assets with indefinite
useful lives are tested for impairment at least annually. We
perform our annual goodwill impairment review as of October 1 of
each fiscal year and earlier if indicators of impairment exist.
The goodwill impairment test is a two-step process performed at
the reporting unit level, which are our five geographic
operating segments. First, the value of each reporting unit is
compared with its respective carrying amount, including
goodwill. The estimated fair value of each reporting unit is
determined using the average of the present value of estimated
future cash flows and of the market multiple approaches. The
assumptions used in the estimate of fair value, including future
growth rates, terminal values, discount rates, comparable
companies and market multiples, require significant judgment.
The assumptions used consider historical performance and are
consistent with the assumptions used in financial projections
prepared by management, market share information, industry
trends, peer group statistics and relevant economic indicators.
We perform sensitivity analysis of estimated future cash flows,
discount rates and market multiples to assess the impact on the
fair value for each reporting unit under various scenarios. If
the first step results in the carrying value exceeding the fair
value of any reporting unit, then a second step must be
completed to determine the amount of goodwill impairment. The
fair values of our reporting units were substantially in excess
of the respective carrying amounts in our most recent goodwill
impairment test, and no goodwill impairment charges were
recorded for any periods presented in our statements of income
and comprehensive income.
Foreign
Currency Translation
The assets and liabilities of subsidiaries that are denominated
in functional currencies other than the U.S. Dollar are
translated using the exchange rate on the balance sheet date.
Revenue and expenses are translated at average exchange rates
prevailing during the period. Translation adjustments resulting
from this process are charged or credited to accumulated other
comprehensive loss.
Occasionally, a subsidiary enters into transactions that are
denominated in currencies other than its functional currency. In
these cases, the assets and liabilities and revenue and expenses
related to the transactions are translated into the functional
currency and any resulting gains or losses are recorded in the
consolidated statements of income and comprehensive income.
During 2009, we recorded a net foreign currency transaction loss
of $2.4 million. In 2008 and 2007, we recorded net foreign
currency transaction gains of $6.4 million and
$1.0 million, respectively.
Revenue
Recognition
We must make significant management judgments and estimates to
determine revenue to be recognized in any accounting period.
Material differences may result in the amount and timing of our
revenue for any period if our management makes different
judgments or utilizes different estimates. These estimates
affect the deferred
73
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
revenue line item on our consolidated balance sheets and
the net revenue line item on our consolidated
statements of income and comprehensive income.
Our revenue, which is presented net of sales taxes, is derived
primarily from two sources: (i) service, support and
subscription revenue, which includes maintenance, training and
consulting revenue and revenue from product licenses under
subscription arrangements, and (ii) product revenue, which
includes hardware and perpetual license revenue.
We apply software revenue recognition guidance to all
transactions except those where no software is involved or
software is incidental. Revenue is recognized when persuasive
evidence of an arrangement exists, the product or service has
been delivered, the fee is fixed or determinable, and
collectibility is reasonably assured. For hardware transactions
where software is not incidental, we do not separate the license
fee and we do not apply separate accounting guidance to the
hardware and software elements. For hardware transactions where
no software is involved or software is incidental, we apply the
guidance for product revenue recognition.
Persuasive evidence is generally a binding purchase order or
license agreement. Delivery generally occurs when product is
delivered to a common carrier or upon delivery of a grant letter
and license key, if applicable. If a significant portion of a
fee is due after our normal payment terms of typically 30 to
90 days, we recognize revenue as the fees become due. If we
determine that collection of a fee is not reasonably assured, we
defer the fees and recognize revenue upon cash receipt, provided
all other revenue recognition criteria are met.
We enter into perpetual and subscription software license
agreements through direct sales to customers and indirect sales
with partners, distributors and resellers. We recognize revenue
from the indirect sales channel upon sell-through by the partner
or distributor. The license agreements generally include service
and support agreements, for which the related revenue is
deferred and recognized ratably over the performance period. All
revenue derived from our online subscription products is
deferred and recognized ratably over the performance period.
Professional services revenue is recognized as services are
performed or if required, upon customer acceptance. In these
situations, we defer the direct costs of the subscription
software licensing and professional services arrangements, and
amortize those costs over the same period the related revenue is
recognized. These costs are identified as cost of service,
support and subscription revenue on the consolidated statements
of income and comprehensive income.
For arrangements with multiple elements, including software
licenses, maintenance
and/or
services, we allocate and defer revenue equivalent to the VSOE
of fair value for the undelivered elements and recognize the
difference between the total arrangement fee and the amount
deferred for the undelivered elements as product revenue. VSOE
of fair value is based upon the price for which the undelivered
element is sold separately. We determine fair value of the
undelivered elements based on historical evidence of stand-alone
sales of these elements to our customers or upon substantive
renewal rates stated in a contract. When VSOE does not exist for
undelivered elements such as maintenance and support, the entire
arrangement fee is recognized ratably over the performance
period generally as services, support and subscription revenue.
Our deferred revenue consists primarily of the unamortized
balance of enterprise product maintenance, consumer product
content updates and arrangements where VSOE does not exist.
We also identify the direct and incremental costs associated
with product revenues that have been deferred due to lack of
VSOE on fair value on an undelivered element. These costs are
primarily hardware platform and other hardware component costs.
We defer these costs at the time of delivery and recognize them
as cost of service, support and subscription revenue on the
consolidated statements of income and comprehensive income, in
proportion to the product revenue as it is recognized over the
service period.
We reduce revenue for estimates of sales incentives and sales
returns. We offer channel rebates and marketing funds and
end-user rebates for products in our corporate and consumer
product lines. Additionally, end users may return our products,
subject to varying limitations, through distributors and
resellers or to us directly for a refund within a reasonably
short period from the date of purchase. We estimate and record
reserves for promotional and rebate programs and sales returns
based on our historical experience.
74
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Research
and Development
Costs incurred in the research and development of new software
products are expensed as incurred until technological
feasibility is established. Research and development costs
include salaries and benefits of researchers, supplies and other
expenses incurred with research and development efforts.
Development costs are capitalized beginning when a
products technological feasibility has been established
and ending when the product is available for general release to
customers. Technological feasibility is reached when the product
reaches the working model stage. To date, products and
enhancements have generally reached technological feasibility
and have been released for sale at substantially the same time
and all research and development costs have been expensed.
Advertising
Costs
Advertising costs are expensed as incurred. Media (television
and print) placement costs are expensed in the period the
advertising appears. Total advertising expenses were
$13.2 million, $16.6 million and $18.0 million
for 2009, 2008 and 2007, respectively.
Stock-based
Compensation Expense
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). The estimated fair value underlying our
calculation of stock-based compensation expense for options and
ESPP grants is based on the Black-Scholes pricing model. See
Note 13 for additional information.
Accounting
for Income Taxes
We account for income taxes under the asset and liability method
which includes the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events
that have been included in the financial statements. Under this
method, deferred assets and liabilities are determined based on
the differences between the financial statements and the tax
basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse. The effect of a change in tax rates on deferred tax
assets and liabilities is recognized in income in the period
that includes the enactment date. The provision for income taxes
is comprised of the current tax expense and the change in
deferred tax assets and liabilities. We establish a valuation
allowance to the extent that it is more likely than not that
deferred tax assets will not be recoverable against future
taxable income.
Reclassifications
During the fourth quarter of 2009, we determined that a limited
number of Stock Keeping Units (SKUs) were
incorrectly classified as service and support net revenue
instead of subscription net revenue. In 2008 and 2007, service
and support net revenue should have been $767.1 million and
$667.3 million, a decrease of $38.5 million and
$7.0 million, respectively, from the amounts previously
reported. In 2008 and 2007, subscription net revenue should have
been $700.0 million and $559.1 million, an increase of
$38.5 million and $7.0 million, respectively, from the
amounts previously reported. Total net revenue, gross profit and
net income in all years presented were not impacted by these
reclassifications. We have combined service and support net
revenue and subscription net revenue in our 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.
75
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In the consolidated statements of income and comprehensive
income for the years ended December 31, 2008 and 2007, we
reclassified sales order operation department expenses to
conform to our current period presentation. Expenses of
$11.0 million and $9.4 million for the years ended
December 31, 2008 and 2007, respectively, including
$0.5 million and $0.2 million, of stock-based
compensation expense, respectively, previously reported in
general and administrative expenses are now included in sales
and marketing expenses. This reclassification improves the
transparency of the cost of our sales process and does not
affect our total operating costs, income from operations or net
income for the years ended December 31, 2008 or 2007.
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.
For 2009, 2008 and 2007 other comprehensive income (loss) is
comprised of the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
|
|
|
|
|
|
Net of
|
|
|
|
Income Tax
|
|
|
Income Tax
|
|
|
Income Tax
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable securities, net
|
|
$
|
5,026
|
|
|
$
|
(2,011
|
)
|
|
$
|
3,015
|
|
Reclassification adjustment for net loss on marketable
securities recognized during the period
|
|
|
286
|
|
|
|
(114
|
)
|
|
|
172
|
|
Foreign currency translation gain
|
|
|
14,973
|
|
|
|
|
|
|
|
14,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
$
|
20,285
|
|
|
$
|
(2,125
|
)
|
|
$
|
18,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on marketable securities, net
|
|
$
|
(13,410
|
)
|
|
$
|
5,364
|
|
|
$
|
(8,046
|
)
|
Reclassification adjustment for net loss on marketable
securities recognized during the period
|
|
|
13,052
|
|
|
|
(5,221
|
)
|
|
|
7,831
|
|
Foreign currency translation loss
|
|
|
(51,275
|
)
|
|
|
|
|
|
|
(51,275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
$
|
(51,633
|
)
|
|
$
|
143
|
|
|
$
|
(51,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable securities, net
|
|
$
|
3,198
|
|
|
$
|
(1,279
|
)
|
|
$
|
1,919
|
|
Reclassification adjustment for net gain on marketable
securities recognized during the period
|
|
|
(1,104
|
)
|
|
|
442
|
|
|
|
(662
|
)
|
Foreign currency translation loss
|
|
|
(231
|
)
|
|
|
|
|
|
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
$
|
1,863
|
|
|
$
|
(837
|
)
|
|
$
|
1,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss is comprised of the
following items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Unrealized gain on
available-for-sale
securities
|
|
$
|
1,092
|
|
|
$
|
364
|
|
Cumulative translation adjustment
|
|
|
(4,383
|
)
|
|
|
(19,356
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(3,291
|
)
|
|
$
|
(18,992
|
)
|
|
|
|
|
|
|
|
|
|
76
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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.
Accounting
for Uncertainty in Income Taxes
In September 2009, the FASB issued authoritative guidance which
provides additional implementation guidance on accounting for
uncertainty in income taxes. This guidance was effective
beginning July 1, 2009. This guidance did not have a
material impact on our consolidated financial position, results
of operations or cash flows.
Business
Combinations
In December 2007, the FASB revised their guidance on business
combinations. The new guidance requires an acquiring entity to
measure and recognize identifiable assets acquired and
liabilities assumed at the acquisition date fair value with
limited exceptions. The changes also include the treatment of
acquisition related transaction costs, the valuation of any
noncontrolling interest at the acquisition date fair value, the
recognition of capitalized in-process research and development,
the accounting for acquisition-related restructuring cost
accruals subsequent to the acquisition date and the recognition
of changes in the acquirers income tax valuation allowance
(see Note 3). In April 2009, the FASB further revised their
guidance regarding the accounting for assets acquired and
liabilities assumed in a business combination that arise from
contingencies. It amended the provisions in the December 2007
guidance for the recognition, measurement and disclosures of
asset and liabilities arising from contingencies in business
combinations, and carries forward most of the previous
provisions for acquired contingencies. This new guidance was
effective for us beginning January 1, 2009.
77
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2009
Acquisitions
In 2009, we acquired 100% of the outstanding shares of Endeavor
Security, Inc. (Endeavor), Solidcore Systems, Inc.
(Solidcore) and MX Logic, Inc. (MX
Logic). These acquisitions were accounted for under the
revised guidance on business combinations (see Note 2). The
purchase price for these acquisitions consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
Endeavor
|
|
|
Solidcore
|
|
|
MX Logic
|
|
|
Acquisitions
|
|
|
Acquisition date
|
|
|
January 2009
|
|
|
|
June 2009
|
|
|
|
September 2009
|
|
|
|
|
|
Cash paid to shareholders and employees, including escrow
deposits
|
|
$
|
2,500
|
|
|
$
|
32,134
|
|
|
$
|
138,241
|
|
|
$
|
172,875
|
|
Fair value of contingent consideration liabilities
|
|
|
732
|
|
|
|
8,400
|
|
|
|
24,600
|
|
|
|
33,732
|
|
Fair value of assumed options
|
|
|
|
|
|
|
|
|
|
|
123
|
|
|
|
123
|
|
Reduction in our historical net assets from MX Logic due to
acquisition
|
|
|