What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-02 compared with 2021-02-05 · 127 added, 183 removed, 136 unchanged (70% of the section changed)

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anticipated tax rates, benefits and expenses;

the impact of the COVID-19 pandemic on our operations and financial performance, and other characterizations of future events or circumstances are forward-looking statements.

the impact of the COVID-19 pandemic on our operations and financial performance;

and other characterizations of future events or circumstances are forward-looking statements.

These statements are only predictions, based on our current expectations about future events and may not prove to be accurate.

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NortonLifeLock Inc.

is a global leader in consumer Cyber Safety, protecting and empowering people to live their digital lives safely.

We are the consumer’s trusted ally in an increasingly complex and connected world.

has the largest Consumer Cyber Safety platform in the world, empowering nearly 80 million users in more than 150 countries.

We are the trusted and number one top of mind brand in consumer Cyber Safety, according to the 2020 NortonLifeLock brand tracking study.

We help prevent, detect and restore potential damages caused by many cyber criminals.

Fiscal calendar

We have a 52/53-week fiscal year ending on the Friday closest to March 31.

The three and nine months ended January 1, 2021 consisted of 13 and 39 weeks, respectively, whereas the three and nine months ended January 3, 2020 consisted of 13 and 40 weeks, respectively.

The three months ended July 2, 2021 and July 3, 2020 each consisted of 13 weeks.

Our 2022 fiscal year consists of 52 weeks and ends on April 1, 2022.

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The following tables provide our key financial metrics for the periods presented:

Three Months Ended Nine Months Ended

(In millions, except for per share amounts) January 1, 2021 January 3, 2020 January 1, 2021 January 3, 2020

Three Months Ended

(In millions, except for per share amounts) July 2, 2021 July 3, 2020

Net revenues $ 686 $ 614

Operating income $ 287 $ 120

Income from continuing operations $ 173 $ 353 $ 488 $ 429

Income (loss) from continuing operations $ 181 $ 149

Income (loss) from discontinued operations $ — $ (31)

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Net income per share - diluted $ 0.31 $ 0.19

(In millions) January 1, 2021 April 3, 2020

Net cash provided by (used in) operating activities $ 258 $ 170

(In millions) July 2, 2021 April 2, 2021

Cash, cash equivalents and short-term investments $ 1,245 $ 951

Cash provided by operating activities $ 350 $ 905

Contract liabilities $ 1,231 $ 1,265

Below are our financial highlights for the third quarter of fiscal 2021, compared to the corresponding period in the prior year:

• Net revenues increased $21 million, due to higher sales in both our consumer security products and identity and information protection products, partially offset by the loss of sales of ID analytics solutions, which were divested in the fourth quarter of fiscal 2020.

• Operating income increased $218 million, primarily due to lower compensation expense, outside services expense, and facility and IT costs that were driven by our cost reduction programs, as well as lower costs recognized in connection with our restructuring plans.

• Income from continuing operations decreased $180 million, primarily due to the absence of gain on sale of our equity method investment in DigiCert, partially offset by a higher operating income.

• Income from discontinued operations, net of tax, decreased by $2,487 million, primarily due to the absence of gain on the sale of our Enterprise Security assets and liabilities to Broadcom Inc.

on November 4, 2019 (the Broadcom sale).

• Net income and net income per share decreased, primarily due to lower income from discontinued operations and to a lesser extent, lower income from continuing operations for the reasons discussed above.

Below are our financial highlights for the first nine months of fiscal 2021, compared to the corresponding period in the prior year unless stated otherwise:

• Net revenues were relatively flat.

• Operating income increased $319 million, primarily due to lower compensation expense, outside services expense, and facility and IT costs that were driven by our cost reduction programs, partially offset by a legal accrual relating to an ongoing civil lawsuit involving a government contract with the U.S.

General Services Administration (GSA) and higher costs recognized in connection with our restructuring plans.

• Income from continuing operations increased $59 million, primarily due to higher operating income, gain on sale of our Culver City property, gain on extinguishment of debt, and lower income tax expense, partially offset by the absence of gain on sale of our equity method investment in DigiCert, which was divested in the third quarter of fiscal 2020.

• We incurred a loss from discontinued operations, net of tax, compared to a gain during the corresponding period in fiscal 2020, primarily due to the absence of gain on the Broadcom sale, the absence of operating income as a result of the Broadcom sale, and a settlement with Broadcom in the second quarter of fiscal 2021 of all outstanding payments and certain claims related to the Broadcom sale.

• Net income and net income per share decreased, primarily due to the loss from discontinued operations for the reasons discussed above, partially offset by higher income from continuing operations.

• Cash, cash equivalents and short-term investments decreased by $1,190 million compared to April 3, 2020, primarily due to repayment of debt, net of borrowings, and to a lesser extent, payments for dividends and dividend equivalents, partially offset by proceeds from sale of our Culver City property.

In May 2020, we settled the principal and conversion rights of $625 million of our 2.0% Convertible Notes for $1,179 million in cash.

• Contract liabilities increased $59 million, primarily due to higher billings than recognized revenue.

Below are our financial highlights for the first quarter of fiscal 2022, compared to the corresponding period in the prior year:

• Net revenues increased $72 million, due to higher sales in both our consumer security products and our identity and information protection products.

• Operating income increased $167 million, primarily due to the increase in revenue and the decrease in restructuring costs for which the related activities were completed in fiscal 2021.

The increase was partially offset by our investment in advertising during fiscal 2022.

• Income (loss) from continuing operations increased $32 million, primarily due to the increase in operating income partially offset by an increase in income tax expense.

• Income (loss) from discontinued operations, net of tax, decreased from a loss of $31 million, primarily due to the completion of the discontinued operations activities during fiscal 2021.

• Net income increased $63 million and net income per share increased $0.12, primarily due to the increase in income from continuing operations discussed above, partially offset by the $121 million increase in income tax expense.

COVID-19 UPDATE

The COVID-19 pandemic is having widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices.

Federal and state governments have implemented measures to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work from home, and closure of non-essential businesses.

These events have caused a deterioration of the U.S.

and global economies, creating a challenging macroeconomic environment.

To protect the health and well-being of our employees, partners and third-party service providers, we have implemented a near company-wide work-from-home requirement for most employees until further notice, made substantial modifications to employee travel policies, and cancelled or shifted our conferences and other marketing events to virtual-only for the foreseeable future.

While we continue to monitor the situation and may adjust our current policies as more information and public health guidance become available, such precautionary measures over the long-term could negatively affect our customer success efforts, sales and marketing efforts, or create operational or other challenges, such as a reduction in employee productivity because of the work from home requirement, any of which could harm our business and results of operations.

Further, if the COVID-19 pandemic has a substantial impact on our employees, partners or third-party service providers’ health, attendance or productivity, our results of operations and overall financial performance may be adversely impacted.

Additionally, if employees, partners or third-party services providers return to work during the COVID-19 pandemic, the risk of inadvertent transmission of COVID-19 through human contact could still occur and result in litigation .

Although we have not yet experienced a material

increase in customer cancellations or a material reduction in our retention rate in fiscal 2021, a prolonged economic downturn or recession could adversely affect demand for our offerings, retention rates and harm our business and results of operations, particularly in light of the fact that our solutions are discretionary purchases and thus may be more susceptible to macroeconomic pressures , as well impact the value of our common stock, our ability to refinance our debt, and our access to capital.

The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately forecasted at this time, such as the severity and transmission rate of the disease and new variants of the disease, the extent and effectiveness of containment actions, including vaccination programs, and the impact of these and other factors on our employees, customers, partners and third-party service providers.

To protect the health and well-being of our employees, partners and third-party service providers, we implemented a near company-wide work-from-home requirement for most employees, made substantial modifications to employee travel policies and cancelled or shifted our conferences and other marketing events to virtual-only.

We continue to monitor the situation and plan to adjust our current policies as recommendations and public health guidance is changing.

To date, we have not seen any meaningful negative impact on our customer success efforts, sales and marketing efforts or employee productivity.

Nevertheless, as employees, partners or third-party services providers return to work during the COVID-19 pandemic, the risk of inadvertent transmission of COVID-19 through human contact could still occur and result in litigation.

and global economies have experienced a recession due to the economic impacts of the COVID-19 pandemic.

Although we did not experience a material increase in cancellations by customers or a material reduction in our retention rate in 2021, we may experience such an increase or reduction in the future, especially in the event of a prolonged recession as a result of the COVID-19 pandemic.

A prolonged recession could adversely affect demand for our offerings, retention rates and harm our business and results of operations, particularly in light of the fact that our solutions are discretionary purchases and thus may be more susceptible to macroeconomic pressures, as well impact the value of our common stock, ability to refinance our debt and our access to capital.

The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately forecasted at this time, such as the severity and transmission rate of new variants of the disease, the extent, effectiveness and acceptance of containment actions, such as vaccination programs, and the impact of these and other factors on our employees, customers, partners and third-party service providers.

For more information on the risks associated with the COVID-19 pandemic, please see “Risk Factors” in Part II, Item 1A below.

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Our critical accounting policies and estimates were disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended April 2, 2021.

There have been no material changes in the matters for which we make critical accounting estimates in the preparation of our Condensed Consolidated Financial Statements during the nine months ended January 1, 2021.

RESULTS OF OPERATIONS

The following table sets forth our Condensed Consolidated Statements of Operations data as a percentage of net revenues for the periods indicated:

Three Months Ended Nine Months Ended

January 1, 2021 January 3, 2020 January 1, 2021 January 3, 2020

100 % 100 % 100 % 100 %

Three Months Ended

July 2, 2021 July 3, 2020

Net revenues 100 % 100 %

Cost of revenues 15 14

Gross profit 85 86

Operating expenses:

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Amortization of intangible assets 3 3

Restructuring and other costs — 16 8 7

Restructuring, transition and other costs 1 21

Total operating expenses 43 66

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Interest expense (5) (7)

(5) (8) (6) (8)

Other income, net 1 65 3 21

Income from continuing operations before income taxes 40 66 31 30

Income tax expense 13 9 5 7

Income from continuing operations 27 57 26 23

Other income (expense), net — 3

Income (loss) from continuing operations before income taxes 37 16

Income tax expense (benefit) 10 (8)

Income (loss) from continuing operations 26 24

Income (loss) from discontinued operations — (5)

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Percentages may not add due to rounding.

Three Months Ended Nine Months Ended

(In millions, except for percentages) January 1, 2021 January 3, 2020 Change in %

January 1, 2021 January 3, 2020 Change in %

Three Months Ended

(In millions, except for percentages) July 2, 2021 July 3, 2020 Change in %

Net revenues $ 686 $ 614 12 %

Three Months Ended January 1, 2021 Compared with Three Months Ended January 3, 2020

Net revenues increased $21 million, due to a $22 million increase in sales of our consumer security products and a $14 million increase in sales of our identity and information protection products, partially offset by a $15 million decrease as a result of the divestiture of ID Analytics solutions in January 2020.

Net revenues increased $72 million, due to a $49 million increase in sales of our consumer security products and a $23 million increase in sales of our identity and information protection products.

This was driven by an increase in our direct customer count year-over-year, stable annual retention rate and revenue attributable to Avira, which was acquired during the fourth quarter of fiscal 2021.

Performance Metrics

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Our metrics may be calculated in a manner different than similar metrics used by other companies.

The following table summarizes non-GAAP supplemental key performance metrics for our consumer solutions:

The following table summarizes supplemental key performance metrics:

Three Months Ended

(In millions, except for per user amounts) January 1, 2021 January 3, 2020

(In millions, except for per user amounts) July 2, 2021 July 3, 2020

Direct customer revenues (1)

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$ 8.84 $ 9.03

(1) Direct customer revenues in the third quarter of fiscal 2020 excludes $15 million of revenue from ID Analytics solutions, which were divested in the fourth quarter of fiscal 2020.

(1) Direct customer revenues during the three months ended July 2, 2021 excludes a $5 million reduction of revenue from a contract liability purchase accounting adjustment.

We believe that eliminating the impact of this adjustment improves the comparability of revenues between periods.

In addition, although the adjustment amounts will never be recognized in our GAAP financial statements, we do not expect the acquisitions to affect the future renewal rates of revenues excluded by the adjustments.

We define direct customer revenues as revenues from sales of our consumer solutions to direct customers, which we define as active paid users who have a direct billing relationship with the Company at the end of the reported period.

Users with multiple products or entitlements are counted for based on which solutions they are subscribed.

We exclude users on free trials and promotions and users who have indirectly purchased our product or services through partners unless such users convert or renew their subscription directly with us.

We exclude users

on free trials and users who have indirectly purchased our product or services through partners unless such users convert or renew their subscription directly with us.

Average direct customer count presents the average of the total number of direct customers at the beginning and end of the fiscal quarter.

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Net revenues by geographical region

Three Months Ended Nine Months Ended

January 1, 2021 January 3, 2020 January 1, 2021 January 3, 2020

Three Months Ended

July 2, 2021 July 3, 2020

Americas 70 % 73 %

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APJ 11 % 11 %

Percentages may not add to 100% due to rounding.

The Americas include the U.S., Canada and Latin America;

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APJ includes Asia Pacific and Japan.

Percentage of revenue by geographic region in the third quarter and the first nine months of fiscal 2021 was similar to the corresponding periods in the prior year.

Percentage of revenue by geographic region in the first three months of fiscal 2022 remains primarily in the Americas but is beginning to shift into the international markets, which is consistent with our stated strategy.

Cost of revenues

Three Months Ended Nine Months Ended

(In millions, except for percentages) January 1, 2021 January 3, 2020 Change in %

January 1, 2021 January 3, 2020 Change in %

Three Months Ended

(In millions, except for percentages) July 2, 2021 July 3, 2020 Change in %

Cost of revenues $ 102 $ 86 19 %

$ 87 $ 103 (16) % $ 263 $ 296 (11) %

Three Months Ended January 1, 2021 Compared with Three Months Ended January 3, 2020

Our cost of revenues decreased $16 million, primarily due to decreases in technical support costs and royalty charges, partially offset by an increase in commissions, reflecting higher investments in affiliate marketing programs.

Nine Months Ended January 1, 2021 Compared with Nine Months Ended January 3, 2020

Our cost of revenues decreased $33 million, primarily due to decreases in technical support costs and royalty charges, partially offset by an increase in commissions, reflecting higher investments in affiliate marketing programs.

Our cost of revenues increased $16 million, primarily due to higher revenue share costs, payment processing fees and technical support costs associated with year-over-year business growth.

Operating expenses

Three Months Ended Nine Months Ended

(In millions, except for percentages) January 1, 2021 January 3, 2020 Change in %

January 1, 2021 January 3, 2020 Change in %

Three Months Ended

(In millions, except for percentages) July 2, 2021 July 3, 2020 Change in %

Sales and marketing $ 156 $ 145 8 %

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Total operating expenses $ 297 $ 408 (27) %

Three Months Ended January 1, 2021 Compared with Three Months Ended January 3, 2020

Sales and marketing expense decreased $38 million, due to a $33 million de crease in shared facility and IT costs coupled with a $5 million decrease in other cost reduction activities.

Research and development expense remained relatively flat.

General and administrative expense decreased $43 million, primarily due to a $33 million decrease in compensation expense and shared facility and IT costs and a $6 million decrease in outside services expense.

The overall decreases in our sales and marketing, research and development and general and administrative expenses were driven by our cost reduction initiatives.

Amortization of intangible assets remained relatively flat.

Restructuring and other costs decreased $97 million, primarily due to a $67 million decrease in contract cancellation charges, $11 million decrease in severance costs, $10 million decrease in asset write-offs, and a $5 million decrease in stock-based compensation charges, in connection with the November 2019 restructuring plan (the November 2019 Plan), which was substantially completed in the second quarter of fiscal 2021.

Nine Months Ended January 1, 2021 Compared with Nine Months Ended January 3, 2020

Sales and marketing expense decreased $123 million, primarily due to a $126 million decrease in shared facility and IT costs, partially offset by a $4 million increase in advertising and promotional expense.

Research and development expense decreased $59 million, due to a $59 million decrease in compensation expense and shared facility and IT costs.

General and administrative expense decreased $108 million, primarily due to a $105 million decrease in compensation expense and shared facility and IT costs, and a $24 million decrease in outside services expense, partially offset by a legal accrual of $25 million in the first nine months of fiscal 2021 relating to an ongoing civil lawsuit involving a government contract with the GSA.

The overall decreases in our sales and marketing, research and development and general and administrative expenses were driven by our cost reduction initiatives.

Amortization of intangible assets remained relatively flat.

Restructuring and other costs increased $14 million, primarily due to a $48 million increase in assets write-offs, partially offset by a $21 million decrease in severance costs and a $18 million decrease in contract cancellation charges, in connection with our November 2019 restructuring plan (the November 2019 Plan).

Sales and marketing expense increased $11 million, primarily due to a $19 million increase in advertising and promotional expenses as a result of increased investment in advertising.

This is partially offset by a $10 million decrease in IT costs from corporate restructuring and cost reduction efforts in fiscal 2021.

Research and development expense increased $3 million, primarily due to an increase in compensation and benefits as a result of the Avira acquisition.

General and administrative expense decreased $8 million, primarily due to IT asset restructuring and write-offs in connection with our November 2019 restructuring plan (the November 2019 Plan).

Amortization of intangible assets increased by $3 million as a result of the Avira acquisition.

Restructuring and other costs decreased $120 million, due to a $47 million decrease in contract cancellation charges, $11 million decrease in severance costs, $55 million decrease in asset write-offs and a $7 million decrease in stock-based compensation charges, in connection with the November 2019 Plan, which was substantially completed in the second quarter of fiscal 2021.

Non-operating income (expense), net

Three Months Ended Nine Months Ended

(In millions) January 1, 2021 January 3, 2020 January 1, 2021 January 3, 2020

Three Months Ended

(In millions) July 2, 2021 July 3, 2020

Interest expense $ (32) $ (40)

Interest income — 2

Loss from equity interest — (9) — (31)

Foreign exchange gain (loss) 2 (5) 3 (7)

Gain on sale of equity investment method — 379 — 379

Gain on early extinguishment of debt — — 20 —

Gain on sale of property — — 35 —

Other 3 (4) 1 —

Foreign exchange gain 1 1

Gain (loss) on early extinguishment of debt (5) 20

Transition service expense, net — (8)

Total non-operating income (expense), net $ (35) $ (21)

Three Months Ended January 1, 2021 Compared with Three Months Ended January 3, 2020

Non-operating income, net, decreased $375 million, primarily due to the absence of gain on sale of our equity method investment in DigiCert, which was divested in the third quarter of fiscal 2020.

Nine Months Ended January 1, 2021 Compared with Nine Months Ended January 3, 2020

Non-operating income, net, decreased $298 million, primarily due to the absence of gain on sale of our equity method investment in DigiCert, which was divested in the third quarter of fiscal 2020.

The decrease was partially offset by the absence of loss from our equity interest in DigiCert, gain on sale of our Culver City property in the second quarter of fiscal 2021, and the gain on extinguishment of debt due to the repayment of our 2.0% Convertible Notes in the first quarter of fiscal 2021.

Non-operating income (expense), net, increased by $14 million in expense, primarily due to the absence of gain on early extinguishment of debt of $20 million during the first quarter of fiscal 2021, which was partially offset by a $3 million loss on the amendment and extension of our credit facility and a $2 million loss on early extinguishment of our $250 million New 2.5% Convertible Notes during the first quarter of fiscal 2022.

Provision for income taxes

Three Months Ended Nine Months Ended

(In millions, except for percentages) January 1, 2021 January 3, 2020 January 1, 2021 January 3, 2020

Income from continuing operations before income taxes $ 253 $ 410 $ 583 $ 562

Income tax expense $ 80 $ 57 $ 95 $ 133

Three Months Ended

(In millions, except for percentages) July 2, 2021 July 3, 2020

Income (loss) from continuing operations before income taxes $ 252 $ 99

Income tax expense (benefit) $ 71 $ (50)

Effective tax rate 28 % (51) %

Our effective tax rate for income from continuing operations for the three months ended January 1, 2021 differs from the federal statutory income tax rate primarily due to taxes in foreign jurisdictions in excess of the federal statutory rate, and state taxes, partially offset by the benefits of lower-tax international earnings and stock-based compensation.

Our effective tax rate for income from continuing operations for the nine months ended January 1, 2021 differs from the federal statutory income tax rate primarily due to the gain on selling a building, taxes in foreign jurisdictions in excess of the federal statutory rate, and state taxes, partially offset by the benefits of lower-tax international earnings, a favorable withholding tax ruling in Japan, and stock-based compensation.

Our effective tax rate for income from continuing operations for the three and nine ended months January 3, 2020 differs from the federal statutory income tax rate primarily due to tax expense related to the Ninth Circuit's holding in Altera Corp.

Commissioner (which the Supreme Court declined to review in June 2020), a discrete tax charge recorded to account for the sale of our equity investment in DigiCert, various permanent differences, and state taxes, partially offset by the benefits of lower-tax international earnings and the research and development tax credit.

Our effective tax rate for income for the three months ended July 2, 2021 differs from the federal statutory income tax rate primarily due to state taxes, partially offset by the benefits of lower-tax international earnings and various permanent differences.

Our effective tax rate for the three ended months July 3, 2020 differs from the federal statutory income tax rate primarily due to a tax benefit related to a favorable tax ruling, the benefits of lower-taxed international earnings and the research and development tax credit, partially offset by state taxes and various permanent differences.

We are a U.S.-based multinational company subject to tax in multiple U.S.

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Our results of operations would be adversely affected to the extent that our geographical mix of income becomes more weighted toward jurisdictions with higher tax rates and would be favorably affected to the extent the relative geographic mix shifts to lower tax jurisdictions.

Any change in our mix of earnings is dependent upon many factors and is therefore difficult to predict.

Any change in our mix of earnings is dependent upon many factors and therefore, is difficult to predict.

The timing of the resolution of income tax examinations is highly uncertain and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.

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LIQUIDITY, CAPITAL RESOURCES AND CASH REQUIREMENTS

Liquidity and Capital Resources

We have historically relied on cash generated from operations, borrowings under credit facilities, issuances of debt and proceeds from divestitures for our liquidity needs.

As of January 1, 2021, we had cash, cash equivalents and short-term investments of $1,073 million, of which $399 million was held by our foreign subsidiaries.

Our principal cash requirements are primarily to meet our working capital needs, support on-going business activities, including payment of taxes and cash dividends, funding capital expenditures, servicing existing debt, repurchasing shares of our common stock and investing in business acquisitions.

Our capital allocation strategy is to balance driving stockholder returns, managing financial risk and preserving our flexibility to pursue strategic options, including acquisitions.

Historically, this has included a quarterly cash dividend, the repayment of debt and the repurchase of shares of our common stock.

Cash and cash equivalents

As of July 2, 2021, we had cash, cash equivalents and short-term investments of $1,245 million, of which $473 million was held by our foreign subsidiaries.

Our cash, cash equivalents and short-term investments are managed with the objective to preserve principal, maintain liquidity and generate investment returns.

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without incurring additional U.S.

federal tax, however these distributions may be subject to applicable state or non-U.S.

We have not recognized deferred income taxes for local country income and withholding taxes that could be incurred on distributions of certain non-U.S.

earnings or for outside basis differences in our subsidiaries, because we plan to indefinitely reinvest such earnings and basis differences.

We also have an undrawn revolving credit facility of $1 billion which expires in November 2024.

Our capital allocation strategy is to balance driving stockholder returns, managing financial risk, and preserving our flexibility to pursue strategic options, including acquisitions.

Historically, this has included a quarterly cash dividend, the repayment of debt, and the repurchase of shares of our common stock.

Divestiture of Enterprise Security business

In fiscal 2020, we completed the sale of certain assets and the assumption of certain liabilities of our Enterprise Security business to Broadcom.

In the nine months ended January 1, 2021, we paid approxi mately $70 million of U.S.

and foreign income taxes as a result of the transaction, and we expect to pay additional income taxes of $2 million i n fiscal 2021 as a result of the transactions.

On October 1, 2020, we entered into multiple agreements with Broadcom for an aggregate amount of $200 million.

We licensed Broadcom’s enterprise software, multiple security engines and related telemetry for 5.6 years.

In addition, we resolved all outstanding payments and certain claims related to the asset purchase and transition services agreements.

In May 2020, we settled the $625 million principal and conversion rights of our 2.0% Convertible Notes for $1,179 million in cash.

In September 2020, we borrowed $750 million under the Delayed Draw Term Loan, which will mature in November 2024, and used the entire amount of the proceeds to repay in full the principal and accrued interest under our 4.2% Senior Notes due September 2020.

federal tax, however these distributions may be subject to applicable state or foreign taxes.

We have an undrawn revolving credit facility of $1 billion, which expires in May 2026.

On May 7, 2021, we entered into the first amendment to our credit agreement (the First Amendment), which provided for an incremental increase under the Initial Term Loan, and extended the maturity date of the Initial Term Loan, the Delayed Draw Term Loan, and revolving credit facility from November 2024 to May 2026.

We borrowed $525 million under the First Amendment of our Initial Term Loan.

For additional discussion on the amendment, see Note 10 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

On May 20, 2021, we settled the $250 million principal and conversion rights of our New 2.5% Convertible Notes in cash.

The aggregate settlement amount of $364 million was based on $24.40 per underlying share into which the New 2.5% Convertible Notes were convertible.

In addition, we paid $1 million of accrued and unpaid interest through the date of settlement and $1 million of cash dividends that we declared on May 10, 2021.

Sale of certain assets

On July 27, 2020, we completed the sale of certain assets, which were previously classified as held for sale, for cash consideration of $118 million, net of selling costs.

On July 14, 2021, we completed the sale of certain land and buildings in Mountain View, which were previously classified as held for sale, for cash consideration of $358 million.

The following summarizes our cash flow activities:

Nine Months Ended

(In millions) January 1, 2021 January 3, 2020

Three Months Ended

(In millions) July 2, 2021 July 3, 2020

Net cash provided by (used in):

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Financing activities $ 44 $ (1,305)

See Note 3 to the Condensed Consolidated Financial Statements for additional cash flow information associated with our discontinued operations.

See Note 7 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for our supplemental cash flow information.

Cash from operating activities

Our cash flows for the first nine months of fiscal 2021 reflected net income of $360 million, adjusted by non-cash items, consisting primarily of amortization and depreciation of $113 million, impairments of current and long-lived assets of $88 million, stock-based compensation expense of $66 million, deferred income taxes of $47 million, and gain on sale of property of $35 million.

Our cash flows for the first nine months of fiscal 2020 reflected net income of $3,656 million adjusted by non-cash items, consisting primarily of gain on sale of Enterprise Security assets of $5,422 million, gain on sale of equity method investment of $379 million, amortization and depreciation of $307 million, and stock-based compensation expense of $270 million.

Changes in operating assets and liabilities in the first nine months of fiscal 2021 consisted primarily of the following:

Accounts receivable increased $1 million, compared to $537 million in the first nine months of fiscal 2020, primarily due to the absence of Enterprise Security billings after the close of the Broadcom sale and the collection of those receivables thereafter.

Contract liabilities increased $21 million, compared to a decrease of $163 million in the first nine months of fiscal 2020, primarily due to higher billings than recognized revenue.

Accrued compensation and benefits decreased $25 million, compared to $99 million in the first nine months of fiscal 2020, primarily due to a reduction in headcount in connection with our November 2019 Plan, which was substantially completed in the second quarter of fiscal 2021.

Income tax payable decreased by $348 million, compared to an increase of $2,096 million in the first nine months of fiscal 2020, primarily due to tax payments made in the first nine months of fiscal 2021, including payments related to Broadcom sale, payments of federal and foreign income taxes, and a decrease in unrecognized tax benefits as a result of a favorable tax ruling.

Our cash flows from operating activities increased by $88 million, primarily due to higher profit before taxes adjusted by non-cash items and an increase in accounts payable as a result of the timing of payments and an increase in income taxes payable as a result of a higher pre-tax income and subsequent tax provision during the first three months of fiscal 2022.

Cash from investing activities

Our cash flows from investing activities in the first nine months of fiscal 2021 consisted primarily of proceeds from the sale of our Culver City property of $118 million and proceeds from maturities and sales of short-term investments of $60 million.

Our investing activities in the first nine months of fiscal 2020 consisted primarily of cash proceeds from the Broadcom sale, net of transaction costs, of $10,572 million, proceeds from sale of equity method investment in DigiCert of $378 million, and proceeds from maturities and sales of short-term investments of $135 million, partially offset by capital expenditures of $86 million.

Our cash flows from investing activities decreased $24 million, primarily due to a decrease in proceeds from maturities and sales of short-term investments.

Cash from financing activities

Our cash flows from financing activities in the first nine months of fiscal 2021 consisted primarily of repayments of debt of $1,929 million in connection with the settlement of our 2.0% Convertible Notes and repayments of our 4.2% Senior Notes, payment of dividends and dividend equivalents of $300 million, and common stock repurchases of $138 million, partially offset by proceeds from issuance of debt of $750 million under our Delayed Draw Term Loan.

Our financing activities in the first nine months of fiscal 2020 consisted primarily of common stock repurchases of $904 million, repayment of debt of $302 million, and payment of dividends and dividend equivalents of $177 million, partially offset by proceeds from issuance of debt, net of issuance costs, of $300 million and net proceeds from sales of common stock under employee stock incentive plans of $109 million.

Our cash flows from financing activities increased $1,349 million, primarily due to $512 million of proceeds from the issuance of our Initial Term Loan and decreases in repayments of debt and payments of dividends and dividend equivalents.

The first three months of fiscal 2022 reflects the settlement of our New 2.5% Convertible Notes of $364 million and payment of dividends and dividend equivalents of $84 million, compared to the settlement of our 2.0% Convertible Notes of $1,179 million and payment of dividends and dividend equivalents of $105 million during the first three months of fiscal 2021.

Dividend equivalents paid during the first three months of fiscal 2021 included a larger portion of awards released that were entitled to the special $12 dividend declared in fiscal 2020.

Cash Requirements

Debt - As of January 1, 2021, our total outstanding principal amount of indebtedness is summarized as follows.

See Note 9 to the Condensed Consolidated Financial Statements for further information on our debt.

(In millions) January 1, 2021

As of July 2, 2021, our total outstanding principal amount of indebtedness is summarized as follows.

See Note 10 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information on our debt.

(In millions) July 2, 2021

Term Loans $ 1,741

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Convertible Senior Notes 625

Mortgage Loans 10

Total debt $ 3,876

Debt covenant compliance .

The credit agreement we entered into in November 2019 contains customary representations and warranties, non-financial covenants for financial reporting, and affirmative and negative covenants, including compliance with specified financial ratios .

See Note 9 to the Condensed Consolidated Financial Statements for additional information regarding financial ratios and debt covenant compliance.

As of January 1, 2021 , we were in compliance with all debt covenants.

On February 4, 2021, we announced the declaration of a cash dividend of $0.125 per share of common stock to be paid in March 2021.

The credit agreement we entered into in November 2019, which was amended and extended through May 2026 on May 7, 2021, contains customary representations and warranties, non-financial covenants for financial reporting and affirmative and negative covenants, including compliance with specified financial ratios .

As of July 2, 2021 , we

were in compliance with all debt covenants.

See Note 10 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information regarding financial ratios and debt covenant compliance

On July 27, 2021, we announced the declaration of a cash dividend of $0.125 per share of common stock to be paid in September 2021.

Any future dividends and dividend equivalents will be subject to the approval of our Board of Directors.

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Under our stock repurchase program, we may purchase shares of our outstanding common stock through accelerated stock repurchase transactions, open market transactions (including through trading plans intended to qualify under Rule 10b5-1 under the Exchange Act) and privately-negotiated transactions.

As of January 1, 2021, the remaining balance of our stock repurchase authorization was $420 million and does not have an expiration date.

On May 4, 2021, our Board of Directors approved an incremental share repurchase authorization of $1,500 million.

No shares were repurchased during the three months ended July 2, 2021.

As of July 2, 2021, the remaining balance of our stock repurchase authorization was $1,774 million and does not have an expiration date.

The timing and actual number of shares repurchased will depend on a variety of factors, including price, general business and market conditions and other investment opportunities.

Restructuring.

Under our restructuring plan approved by our Board of Directors in November 2019, we have incurred cash expenditures for severance and termination benefits and contract terminations.

As of January 1, 2021, we have incurred total costs of $503 million in connection with the November 2019 Plan, excluding stock-based compensation expense.

During the first nine months of fiscal 2021, we made $134 million in cash payments related to the November 2019 Plan.

These actions were substantially completed by September 2020.

See Note 11 to the Condensed Consolidated Financial Statements for additional cash flow information associated with our restructuring activities.

Under our restructuring plans approved by our Board of Directors in December 2020, we have incurred cash expenditures primarily for severance and termination benefits.

As of July 2, 2021, we estimate remaining costs of up to $5 million in connection with the December 2020 Plan.

During the three months ended July 2, 2021, we made $4 million in cash payments related to the December 2020 Plan.

Actions under the December 2020 Plan are expected to be completed in fiscal 2022.

See Note 12 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further cash flow information associated with our restructuring activities.

Contractual obligations.

The following is a schedule of our significant contractual obligations as of January 1, 2021.

The expected timing of payments of the obligations in the following table is estimated based on current information.

Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations.

Payments Due by Period

(In millions) Total Less than 1 Year 1 - 3 Years 3 - 5 Years Thereafter

Debt $ 3,625 $ 62 $ 1,400 $ 2,163 $ —

Interest payments on debt (1)

384 111 174 99 —

Purchase obligations (2)

343 287 33 20 3

Deemed repatriation taxes (3)

585 68 196 321 —

Operating leases (4)

106 29 45 21 11

Total $ 5,043 $ 557 $ 1,848 $ 2,624 $ 14

(1) Interest payments were calculated based on the contractual terms of the related Senior Notes, Convertible Senior Notes and Term Loans.

Interest on variable rate debt was calculated using the interest rate in effect as of January 1, 2021.

See Note 9 to the Condensed Consolidated Financial Statements for further information on the Senior Notes, Convertible Senior Notes and Term loans.

(2) These amounts are associated with agreements for purchases of goods or services generally including agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased;

fixed, minimum, or variable price provisions;

and the approximate timing of the transaction.

The table above also includes agreements to purchase goods or services that have cancellation provisions requiring little or no payment.

The amounts under such contracts are included in the table above, because management believes that cancellation of these contracts is unlikely, and we expect to make future cash payments according to the contract terms or in similar amounts for similar materials.

(3) These amounts represent the transition tax on previously untaxed foreign earnings of foreign subsidiaries under the Tax Cuts and Jobs Act, which may be paid in installments through July 2025.

(4) We have entered into various non-cancelable operating lease agreements that expire on various dates through fiscal 2028.

See Note 8 to the Condensed Consolidated Financial Statements for further information on leases.

Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits and other long-term taxes as of January 1, 2021, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

Therefore, $580 million in long-term income taxes payable has been excluded from the contractual obligations table.

See Note 12 to the Condensed Consolidated Financial Statements for further information.

Our principal commitments consist of principal and interest payments related to our debt instruments, obligations under our purchase agreements, repatriation tax payments under the Tax Cuts and Jobs Acts and obligations under various non-cancellable leases.

Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits and other long-term taxes as of July 2, 2021, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

Therefore, $563 million in long-term income taxes payable has been excluded from our quarterly review of timing of contractual obligations.

Commitments related to the principal payments of our debt instruments increased $256 million from our Annual Report on Form 10-K for the fiscal year ended April 2, 2021 primarily due to additional borrowings under our Initial Term Loan, partially offset by the repayment of our New 2.5% Convertible Notes.

There have been no other material changes, outside the ordinary course of business, to the contractual obligations reported in our Annual Report.

For additional information about our debt obligations and certain other contingencies, see Note 10 and Note 18, respectively, of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Based on past performance and current expectations, we believe that our existing cash and cash equivalents, together with cash generated from operations and amounts available under our credit facility, will be sufficient to meet our working capital needs and support on-going business activities through at least the next 12 months and to meet our known long-term contractual obligations.

However, our future liquidity and capital requirements may vary materially from those as of July 2, 2021 depending on several factors, including, but not limited to, economic conditions;

the expansion of sales and marketing activities;

the costs to acquire or invest in businesses;

and the risks and uncertainties discussed in “Risk Factors” in Part II, Item 1A below.

Indemnifications

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In connection with the sale of Veritas and the sale of our Enterprise Security business to Broadcom, we assigned several leases to Veritas Technologies LLC or Broadcom and/or their related subsidiaries.

See Note 17 to the Condensed Consolidated Financial Statements for further information on our indemnifications.

See Note 18 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information on our indemnifications.

Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes to our market risk exposures during the first nine months of fiscal 2021, as compared to those discussed in Quantitative and Qualitative Disclosures About Market Risk, set forth in Part II, Item 7A, of our Annual Report on Form 10-K for the fiscal year ended April 3, 2020.

There have been no significant changes to our market risk exposures during the first three months of fiscal 2022, as compared to those discussed in Quantitative and Qualitative Disclosures About Market Risk, set forth in Part II, Item 7A, of our Annual Report on Form 10-K for the fiscal year ended April 2, 2021.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis