Business context and reporting period
This is Symantec Corporation’s Form 10-K for the fiscal year ended April 1, 2016 (fiscal 2016, 52 weeks), not a standalone 2015 fourth-quarter report. The filing reflects the company’s transition to a cybersecurity-focused business after selling its information-management business, Veritas, on January 29, 2016. Continuing operations comprise Consumer Security and Enterprise Security; Veritas is reported as discontinued operations.
Financial performance and position
| Metric | Fiscal 2016 | Prior comparable period |
|---|---|---|
| Revenue | $3.600 billion | $3.956 billion, down 9% |
| Gross profit / margin | $2.985 billion / 83% | $3.229 billion / 82% |
| Operating income / margin | $457 million / 13% | $154 million / 4% |
| Continuing operations income (loss) | $(821) million | $109 million |
| Net income | $2.488 billion | $878 million |
| Cash from continuing operations | $1.456 billion | $17 million |
- Fiscal 2016 net income included $3.309 billion of after-tax income from discontinued operations, including the Veritas divestiture. The sale generated a reported $3.0 billion net gain.
- Continuing-operations tax expense was $1.213 billion, including approximately $1.1 billion related to U.S. taxes on certain undistributed foreign earnings associated primarily with the Veritas sale. The resulting effective tax rate was 309%.
- Operating cash flow was substantially affected by increases in deferred income taxes ($1.1 billion) and income taxes payable ($693 million); it should not be read as a recurring earnings proxy.
- Cash, cash equivalents, and short-term investments totaled $6.025 billion; the company also had an unused $1.0 billion credit facility. Management reported approximately $7.0 billion of liquidity. About $4.9 billion of cash and investments was held by foreign subsidiaries.
- Debt principal was $2.250 billion ($2.207 billion carrying value). Total assets were $11.767 billion and stockholders’ equity was $3.676 billion at year-end. Total deferred revenue was approximately $2.6 billion, down from $2.9 billion.
Material changes versus the prior year
- Revenue declined $356 million, driven by $171 million of unfavorable foreign exchange, lower Consumer Security revenue, reduced OEM revenue, and the extra week in fiscal 2015.
- Consumer Security revenue fell 11% to $1.670 billion; operating income declined 6% to $924 million. Enterprise Security revenue fell 7% to $1.930 billion; operating income fell 65% to $102 million, with management citing lower sales and stranded costs following the Veritas sale.
- Consolidated operating income rose $303 million as operating expenses decreased, including lower corporate charges previously allocated to Veritas. The company said fiscal 2017 operating income would benefit from having no unallocated corporate charges, relative to fiscal 2016.
- Fiscal 2016 cash dividends totaled $3.0 billion, including a $4.00-per-share special dividend. The company also paid $1.868 billion for share repurchases, including accelerated repurchase transactions. The board planned to reduce the regular annual dividend to $0.30 per share beginning in fiscal 2017.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance is provided. Management emphasized its Unified Security strategy, enterprise sales pipeline and go-to-market capabilities, cost improvements, and returning capital to stockholders. It expected substantial continuing investment in research and development.
- After year-end, the board approved a fiscal 2017 restructuring plan expected to be completed in fiscal 2018, with estimated costs of $230 million to $280 million. The company also replaced its $1.0 billion revolving facility with a $2.0 billion facility comprising a $1.0 billion revolver and a $1.0 billion term loan.
- CEO Michael Brown announced he would step down when a successor is appointed; an Office of the President was established during the search. The filing identifies leadership turnover, employee attrition, and execution risk during the transition.
- Key disclosed risks include ongoing revenue declines and renewal-rate sensitivity; intense competition, including free or lower-priced offerings; foreign-exchange exposure; execution of the post-divestiture strategy; cloud/SaaS reliability and security; privacy and cybersecurity incidents; and customer, channel, and employee retention.
- The GSA and related government-contract investigation carries an accrued probable loss of $25 million, representing the low end of the estimated range; additional exposure is reasonably possible but the high end could not be estimated. A separate $30 million EDS/NDI class-action settlement had been paid into escrow; final approval was granted after year-end and appeals were filed.
- The company reported an $8 million patent-litigation verdict it is seeking to overturn and did not accrue a loss, stating a material loss was not probable. Goodwill was not impaired in fiscal 2016. Future results may also be affected by restructuring, separation, transition, tax, and impairment charges.
Important facts for investors to verify
- Reconcile continuing-operations performance with discontinued-operations income and the Veritas sale gain; assess the unusually large tax charge and its cash implications.
- Track Consumer and Enterprise Security revenue, margins, renewal performance, and whether Enterprise Security recovers from its operating-income decline and stranded costs.
- Assess the sustainability of operating cash flow after the significant deferred-tax and tax-payable movements, and monitor deferred revenue trends.
- Review the use of divestiture proceeds, the reduced ongoing dividend, share repurchases, and debt maturities and covenants.
- Monitor the GSA matter, EDS/NDI appeals, fiscal 2017 restructuring costs, CEO succession, and post-sale transition-service and stranded-cost effects.