Symantec Corporation — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2016, the company’s fiscal second quarter of fiscal 2017; six-month comparisons are also provided. The filing is by Symantec Corporation, not Gen Digital Inc. (the company named in the request metadata). Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
Business context and reporting period
Symantec operated Consumer Security and Enterprise Security. It completed its acquisition of Blue Coat on August 1, 2016; Blue Coat’s results are included from that date. Symantec sold its former information management business, Veritas, in January 2016, and reports it as discontinued operations.
Financial performance and position
| Metric | Three months ended September 30, 2016 | Prior-year comparable quarter | Six months ended September 30, 2016 | Prior-year comparable six months |
|---|---|---|---|---|
| Revenue | $979 | $906 | $1,863 | $1,818 |
| Gross profit / margin | $769 / 79% | $746 / 82% | $1,504 / 81% | $1,500 / 83% |
| Operating income (loss) / margin | $(12) / (1)% | $100 / 11% | $94 / 5% | $183 / 10% |
| Continuing-operations income (loss) | $(69) | $53 | $(3) | $78 |
| Net income (loss), including discontinued operations | $(144) | $156 | $(9) | $273 |
| Diluted EPS | $(0.23) | $0.23 | $(0.01) | $0.40 |
- Segments: Quarterly Consumer Security revenue was $405, down 4%; operating income was $224, down 3%. Enterprise Security revenue was $574, up 18%, while operating income was $25, down 51%. Blue Coat contributed $88 of revenue and a $105 pretax loss from August 1 through quarter-end.
- Cash flow: For the six months, continuing operating cash flow was $(564), versus $163 provided in the prior-year period. Continuing investing cash flow was $(4,534), principally reflecting the Blue Coat acquisition; continuing financing cash flow was $4,892, largely from debt issuance. Cash and cash equivalents ended at $5,610, compared with $5,983 at April 1, 2016.
- Liquidity and debt: Cash, cash equivalents, and short-term investments totaled $5.6 billion, with an undrawn $1.0 billion revolver; management reported approximately $6.6 billion of liquidity. Debt was $7.176 billion carrying value, or $7.3 billion principal, versus $2.207 billion carrying value at April 1. The filing reports $600 of current debt and $6,576 of long-term debt. The company was in compliance with credit-facility covenants.
- Other balance-sheet items: Total assets were $16,864, including $7,232 goodwill and $1,961 net intangible assets; total liabilities were $13,002. The increase in goodwill and intangibles primarily reflects Blue Coat.
Material changes versus prior comparable periods
- Quarterly revenue rose 8% and six-month revenue rose 2%, primarily from Blue Coat and favorable currency effects; these gains were partly offset by lower Consumer Security revenue. Consumer customer additions did not replace customers lost through natural attrition.
- Gross margin declined to 79% for the quarter and 81% for the six months. Management attributed the decline to Blue Coat purchase-accounting effects, including deferred-revenue fair-value adjustments, acquired-intangible amortization, and an acquired-inventory write-up.
- Operating results weakened despite higher revenue. Increased acquisition-related, amortization, and restructuring costs outweighed the benefit from the absence of prior-year corporate charges allocated to Veritas.
- Interest expense rose to $52 for the quarter and $79 for the six months, mainly because of higher debt following the acquisition. The six-month operating cash outflow was primarily driven by income-tax payments, which increased by $883 year over year, partly due to the Veritas sale gain.
- The reported net loss also reflects discontinued operations: a $75 loss for the quarter and a $6 loss for the six months. The prior-year periods included $103 and $195 of discontinued-operations income, respectively.
Outlook, risks, contingencies, and unusual items
- Outlook and capital allocation: No specific revenue or earnings guidance is provided. Management said existing cash, available credit, financing capacity, and expected operating cash flow should cover business needs for at least the next 12 months and the foreseeable future. It stated an intent to continue quarterly dividends totaling $0.30 per share annually; a $0.075-per-share dividend was declared after quarter-end.
- Restructuring: The fiscal 2017 plan is expected to cost $230–$280 in total, including approximately $50 of non-cash expense, with actions expected to be completed in fiscal 2018. At September 30, remaining cash expenditures were estimated at $110–$160.
- Acquisition and integration: Management cautioned that it may not realize expected Blue Coat synergies or growth benefits and may incur significant integration and transition costs. The preliminary purchase-price allocation includes $4,086 of goodwill and $1,608 of acquired intangibles and remains subject to refinement.
- Debt and market exposure: The filing identifies refinancing, higher variable interest rates, and debt-service flexibility as risks. A hypothetical 50-basis-point increase in variable borrowing rates would add $19 of annualized pretax interest expense. The company also has foreign-exchange exposure and uses forward contracts, but does not fully hedge it.
- Legal contingencies: For the GSA contract and related False Claims Act matter, Symantec accrued $25 as the low end of its probable loss estimate; a higher loss is reasonably possible, but the high end could not be estimated. Blue Coat’s Finjan patent case had a $40 jury award, which was accrued and assumed in the acquisition; Symantec intended to contest the judgment. A $30 settlement in the EDS/NDI class action received final court approval, while objectors appealed.
- Other unusual items: The quarter included $40 of Symantec acquisition transaction costs in general and administrative expense. The quarter’s tax provision included a $52 deferred tax expense related to loss of tax attributes following restructuring activities. The company reported effective tax rates of (38)% for the quarter and 106% for the six months, with near-break-even pretax income contributing to rate volatility.
Important facts for investors to verify
- Whether Blue Coat integration progresses and produces the expected synergies, revenue growth, and cost efficiencies.
- How much of revenue growth is sustainable apart from the acquired business and foreign-exchange benefit, particularly given continued Consumer Security customer attrition.
- Whether operating margins and cash generation recover as purchase-accounting impacts, integration costs, and restructuring charges evolve.
- The company’s capacity to service and refinance its substantially higher debt, including variable-rate exposure and covenant compliance.
- Potential outcomes and additional exposure in the GSA/False Claims Act and Finjan matters, and any material changes to accrued contingencies.
- Progress and realized costs of the restructuring plan, and whether the stated dividend remains supported by future cash flows.