What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-09 compared with 2022-08-05 · 193 added, 134 removed, 145 unchanged (69% of the section changed)

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Forward-looking statements and factors that may affect future results

The discussion below contains forward-looking statements, which are subject to safe harbors under the Securities Act of 1933, as amended (the Securities Act) and the Exchange Act of 1934, as amended (the Exchange Act).

The discussion below contains forward-looking statements, which are subject to safe harbors under the Securities Act of 1933, as amended (the Securities Act) and the Exchange Act.

Forward-looking statements include references to our ability to utilize our deferred tax assets, as well as statements including words such as “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “goal,” “intent,” “momentum,” “projects,” and similar expressions.

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anticipated growth and trends in our businesses and in our industries;

the consummation of or anticipated impacts of acquisitions (including the recent acquisition of Avira and the Proposed Merger with Avast and related financing), divestitures, restructurings, stock repurchases, and investment activities;

the consummation of or anticipated impacts of acquisitions (including the recent Merger with Avast and related financing), divestitures, restructurings, stock repurchases, and investment activities;

the outcome or impact of pending litigation, claims or disputes;

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We do not undertake any obligation to update these forward-looking statements to reflect events occurring or circumstances arising after the date of this report.

These forward-looking statements involve risks and uncertainties, and our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements on the basis of several factors, including those that we discuss in Part II Item 1A, of this Quarterly Report on Form 10-Q.

These forward-looking statements involve risks and uncertainties, and our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements on the basis of several factors, including economic recessions, inflationary pressures and those other factors that we discuss in Part II Item 1A, of this Quarterly Report on Form 10-Q.

We encourage you to read that section carefully.

NortonLifeLock Inc.

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 2022 NortonLifeLock brand tracking study.

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

Gen is a global, leading provider of consumer Cyber Safety solutions, empowering over 500 million users in more than 150 countries.

Our portfolio provides protection across three Cyber Security categories:

security, identity protection and online privacy.

We help customers protect their computer and mobile devices from online threats, safeguard their identity and personal information and strengthen online privacy capabilities and functionalities.

Merger with Avast

On September 12, 2022, we completed the Merger with Avast with the issuance of 94,201,233 shares of our common stock to Avast shareholders and cash consideration of $6,913 million, which includes repayment of Avast’s outstanding debt.

As a result, we have changed our corporate name to Gen Digital Inc.

and have become dual headquartered in Tempe, Arizona and Prague, Czech Republic.

Avast is a global leader in consumer cybersecurity, offering a comprehensive range of digital security and privacy products and services that protect and enhance users’ online experiences.

Combining Avast’s strength in privacy and our strength in identity will create a broad and complementary consumer product portfolio beyond core security and towards adjacent trust-based solutions.

This Merger will provide greater geographic diversification and access to a larger user base and will accelerate the transformation of global consumer cyber safety.

All financial information related to Avast that is discussed below in key financial metrics, results of operations and liquidity and capital resources is inclusive as of the Closing Date.

Fiscal calendar

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

The three months ended July 1, 2022 and July 2, 2021 each consisted of 13 and 13 weeks, respectively.

The three and six months ended September 30, 2022 and October 1, 2021 each consisted of 13 and 26 weeks, respectively.

Our 2023 fiscal year consists of 52 weeks and ends on March 31, 2023.

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

Three Months Ended

(In millions, except for per share amounts) July 1, 2022 July 2, 2021

Three Months Ended Six Months Ended

(In millions, except for per share amounts) September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

Net revenues $ 748 $ 692 $ 1,455 $ 1,378

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Net cash provided by (used in) operating activities $ (88) $ 60 $ 127 $ 318

(In millions) July 1, 2022 April 1, 2022

(In millions) September 30, 2022 April 1, 2022

Cash, cash equivalents and short-term investments $ 1,095 $ 1,891

Contract liabilities $ 1,684 $ 1,306

Below are our financial highlights for the first quarter of fiscal 2023, 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 our identity and information protection products.

• Net income increased $19 million, primarily due to a decrease in income tax expense.

• Net income per share - diluted increased $0.02, due to the increase in net income, offset by the adoption of ASU 2020-06.

• Cash, cash equivalents and short-term investments decreased by $600 million compared to April 1, 2022, primarily due to the repayment of our Senior 3.95% Senior Notes and repurchases of common stock during the first three months of fiscal 2023.

• Contract liabilities decreased $86 million compared to April 1, 2022, primarily due to a decline in billings due to seasonality and fluctuations in foreign currency rates.

Proposed Merger with Avast

On August 10, 2021, we announced a transaction under which we intend to acquire the entire issued and to be issued ordinary share capital of Avast plc, a public company incorporated in England and Wales and a global leader of digital security and privacy headquartered in Prague, Czech Republic (Avast and such transaction, the Proposed Merger).

The Proposed Merger will be implemented by means of a court-sanctioned scheme of arrangement under the UK Companies Act 2006, as amended (the Scheme), and remains subject to a certain number of conditions.

Under the terms of the Proposed Merger, Avast shareholders will be entitled to elect to receive, for each ordinary share of Avast held, in respect of their entire holding of Avast shares, either:

(i) $7.61 in cash and 0.0302 of a new share of our common stock (such option, the Majority Cash Option);

or (ii) $2.37 in cash and 0.1937 of a new share of our common stock (such option, the Majority Stock Option).

Based on our undisturbed closing share price of $27.20 on July 13, 2021, and depending on the Avast shareholder elections, the estimated purchase price range for the Avast shares under the Proposed Merger is $8.1 billion to $8.6 billion.

Each of the directors of Avast who holds shares has undertaken to elect for the Majority Stock Option in respect of their entire beneficial holdings of Avast shares.

We plan to finance the Proposed Merger with existing cash, cash to be generated by operations and new debt financing.

In conjunction with the Proposed Merger, on August 10, 2021, we entered into an agreement (as amended, the Interim Facilities Agreement) with certain financial institutions, in which they agreed to provide us with (i) a $3,600 million term loan interim facility B (the Interim Facility B), (ii) $750 million term loan interim facility A1 (the Interim Facility A1) and $3,500 million term loan interim facility A2 (the Interim Facility A2), and (iii) a $1,500 million interim revolving facility (the Interim Revolving Facility) (collectively, the Interim Facilities) and a commitment letter (as amended, the Commitment Letter) with certain financial institutions, in which they agreed to provide us with financing no less than the financing available under the Interim Facilities (the Definitive Facilities and, together with the Interim Facilities, the Facilities) to finance the cash consideration payable in connection with the Proposed Merger.

The Definitive Facilities will be financed by a syndicate of lenders led by Bank of America, N.A.

and Wells Fargo Bank N.A.

On January 28, 2022, Bank of America, N.A.

and Wells Fargo Bank N.A.

agreed to arrange, on a best efforts basis, additional term loans under the Definitive Facilities in an amount up to $500 million.

The Interim Facilities Agreement contains, and any definitive financing documentation for the Definitive Facilities entered into in connection with the Commitment Letter (the Facilities Agreement) will contain, customary representations and warranties, events of default and covenants for transactions of this type.

The Facilities Agreement will replace the existing credit facility agreement upon the close of the transaction.

In conjunction with the Proposed Merger, on August 10, 2021, we entered into a Co-operation Agreement (the Co-operation Agreement) with Nitro Bidco Limited, our wholly-owned subsidiary (Bidco), and Avast, pursuant to which we and Bidco agreed to, among other things, use all reasonable endeavors for the purposes of obtaining any regulatory authorizations which are required to implement the Proposed Merger, and we, Bidco and Avast agreed to cooperate with each other in preparing required transaction documents and certain other matters in connection with the Proposed Merger.

The Co-operation Agreement also contains certain termination rights.

The Co-operation Agreement also provides that, if we fail to receive approval from the U.K Competition and Markets Authority and cannot consummate the Proposed Merger, we may be required to pay Avast a break fee of up to $200 million.

The Proposed Merger was approved by our Board of Directors and by our shareholders, the Board of Directors and shareholders of Avast and regulators including the Federal Trade Commission under the U.S.

Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act) and in Europe, the German Federal Cartel Office and the Spanish National Markets and Competition Commission.

On August 3, 2022, the U.K.

Competition and Markets Authority (CMA) provisionally cleared the Proposed Merger.

Subject to final approval by the CMA and changes based on operational considerations mutually agreed upon by the parties and other requirements, the closing is anticipated to be between mid-September to early October 2022, given the CMA’s published schedule and the currently scheduled U.K.

Court Hearing to approve the scheme.

Below are our financial highlights for the second quarter of fiscal 2023, compared to the corresponding period in the prior year:

• Net revenues increased $56 million, due to revenue attributable to Avast and higher sales in our identity and information protection products.

• Operating income decreased $46 million, primarily due to the increase in transaction and integration costs related to the Merger.

We anticipate an initial increase in our operating costs, which we expect to decrease as we realize synergies as a combined company.

• Net income decreased $264 million and Net income per share - diluted decreased 0.44, primarily due to the increases in operating costs, non-operating other expense and income tax expense.

Below are our financial highlights for the first six months of fiscal 2023, compared to the corresponding period in the prior year:

• Net revenues increased $77 million, due to revenue attributable to Avast and higher sales in our identity and information protection products.

• Operating income decreased $72 million, primarily due to the increase in transaction and integration costs related to the Merger.

We anticipate an initial increase in our operating costs, which we expect to decrease as we realize synergies as a combined company.

• Net income decreased $245 million and Net income per share - diluted decreased $0.42, primarily due to the increases in operating costs, non-operating other expense and income tax expense.

• Cash, cash equivalents and short-term investments decreased by $796 million compared to April 1, 2022, primarily due to the completion of the Merger and repurchases of our common stock, offset by proceeds from the issuance of the senior credit facilities and the two senior unsecured notes.

• Contract liabilities increased $378 million compared to April 1, 2022, primarily due to contract liabilities assumed as part of the Merger, partially offset by seasonally lower billings than recognized revenue during the period.

The Merger has altered the size and scope of our operations, impacting our assets, liabilities, obligations, capital requirements and performance measures.

We expect the key financial metrics and results of operations of the combined company to be materially different than the trends experienced during the three and six months ended September 30, 2022.

As a combined company, we expect to achieve synergies, rapidly launch a broad and innovative product portfolio, expand into new and diversified sales channels and enhance customer experience and retention.

Refer to Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information about this business combination.

COVID-19 UPDATE

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

At the onset of the pandemic, to protect the health and well-being of our employees, partners and third-party service providers, we facilitated a work-from-home requirement for most employees and established site-specific COVID-19 prevention protocols.

We continue to monitor the situation and over the past several months have adjusted our policies and protocols to reflect changes to public health regulations and guidance.

Our offices are now open to employees on a voluntary basis.

To date, we have not seen any meaningful negative impact on our employee productivity.

Nevertheless, as more 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.

While the COVID-19 pandemic has negatively impacted many sectors of the U.S.

and global economies, the consumer Cyber Safety market experienced increased demand as the pandemic greatly accelerated the digital lives of people around the world.

However, with the extended duration of the pandemic and the easing of prevention protocols and restrictions, we are seeing decreasing demand and increased competition.

In addition, while we did not experience a material increase in cancellations by customers or a material reduction in retention rate in fiscal 2022 or in the first quarter of fiscal 2023, should the negative macroeconomic impacts of the COVID-19 pandemic persist or worsen, we may experience continued slowdowns in our business activity and an increase in cancellations by customers or a material reduction in our retention rate in the future, especially in the event of a prolonged recession.

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.

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.

RUSSIA-UKRAINE CONFLICT

Due to the ongoing conflict between Russia and Ukraine and the related sanctions and other penalties imposed on Russia and Belarus by the United States, the European Union, the United Kingdom and other countries, we suspended our business operations in Russia commencing in the fourth quarter of fiscal 2022.

We do not have operations or employees in Ukraine.

The suspension of our business operations in Russia has not had a material impact on our business, financial condition, or results of operations as our operations in Russia and our sales to customers in Russia and Belarus do not constitute a material portion of our business.

Further, unless and until the U.S.

government lifts its sanctions on Russia and Belarus, which are restricting the export of a broad range of U.S.

technologies to those countries, we will continue to be unable to ship such technologies or provide support to anyone in Russia or Belarus.

We are actively monitoring the Russia-Ukraine conflict and the potential impact it could have on our business, employees and our ability to sell our products and services to our customers.

See Part II, Item 1A, Risk Factors for further discussion of the possible impact of the Russia-Ukraine Conflict on our business, operations and financial condition.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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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 1, 2022.

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 three months ended July 1, 2022.

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

July 1, 2022 July 2, 2021

Three Months Ended Six Months Ended

September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

Net revenues 100 % 100 % 100 % 100 %

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Percentages may not add due to rounding.

Three Months Ended

(In millions, except for percentages) July 1, 2022 July 2, 2021 Change in %

Three Months Ended Six Months Ended

(In millions, except for percentages) September 30, 2022 October 1, 2021 Change in % September 30, 2022 October 1, 2021 Change in %

Net revenues $ 748 $ 692 8 % $ 1,455 $ 1,378 6 %

Net revenues increased $21 million, primarily due to a $20 million increase in sales of our identity and information protection products.

Three Months Ended September 30, 2022 Compared with Three Months Ended October 1, 2021

Net revenues increased $56 million, primarily due to $48 million of revenue attributable to Avast and an increase in sales of our identity and information protection products.

Net revenues were impacted by $31 million of foreign exchange headwinds, primarily in our consumer security solutions.

Six Months Ended September 30, 2022 Compared with Six Months Ended October 1, 2021

Net revenues increased $77 million, primarily due to $48 million of revenue attributable to Avast and an increase in sales of our identity and information protection products.

Net revenues were impacted by $58 million of foreign exchange headwinds, primarily in our consumer security solutions.

Performance Metrics

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Three Months Ended (2)

(In millions, except for per user amounts) July 1, 2022 July 2, 2021

(In millions, except for per user amounts) September 30, 2022 (3)

October 1, 2021

Direct customer revenues (1)

Partner revenues $ 74 $ 64

Average direct customer count 23.4 23.0

Total Cyber Safety revenues $ 734 $ 683

Legacy revenues $ 14 $ 12

Direct customer count (at quarter end)

Direct average revenue per user (ARPU) $ 6.98 $ 8.63

$ 8.82 $ 8.84

(1) Direct customer revenues during the three months ended July 1, 2022 and July 2, 2021 excludes a $1 million and $5 million reduction of revenue, respectively, from a contract liability purchase accounting adjustment.

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

(1) Direct customer revenues during the three months ended October 1, 2021 excludes a $3 million reduction of revenue, from contract liability purchase accounting adjustments.

We believe that eliminating the impact of these adjustments 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.

(2) From time to time, changes in our product hierarchy cause changes to the revenue channels above.

When changes occur, we recast historical amounts to match the current revenue channels.

Direct revenues currently includes Mobile App Store customers, and legacy revenues includes revenues from products or solutions that are no longer in operations in exited markets, have been discontinued or identified to be discontinued, or remain in maintenance mode as a result of integration and product portfolio decisions.

As such, the changes to historical revenue amounts and the other performance metrics, including direct customer count and ARPU, are reflected for all periods presented above.

(3) The performance metrics for the three months ended September 30, 2022 include the revenues earned and customers acquired through our Merger with Avast.

ARPU is based on average customer count and assumes full quarter of revenue for both companies.

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.

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, or sign up for a paid membership through our web store.

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

July 1, 2022 July 2, 2021

Three Months Ended Six Months Ended

September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

Americas 71 % 70 % 71 % 70 %

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APJ includes Asia Pacific and Japan.

Percentage of revenue by geographic region in the three months ended July 1, 2022 remained consistent with the corresponding period in the prior year.

Percentage of revenue by geographic region in the three and six months ended September 30, 2022 remained consistent with the corresponding period in the prior year.

Cost of revenues

Three Months Ended

(In millions, except for percentages) July 1, 2022 July 2, 2021 Change in %

Three Months Ended Six Months Ended

(In millions, except for percentages) September 30, 2022 October 1, 2021 Change in % September 30, 2022 October 1, 2021 Change in %

Cost of revenues $ 119 $ 100 19 % $ 221 $ 202 9 %

Our cost of revenues remained relatively flat.

Three Months Ended September 30, 2022 Compared with Three Months Ended October 1, 2021

Our cost of revenues increased $19 million, primarily due to higher revenue share costs and payment processing fees associated with year-over-year business growth and costs incurred by Avast subsequent to the completion of the Merger.

Six Months Ended September 30, 2022 Compared with Six Months Ended October 1, 2021

Operating expenses

Three Months Ended

(In millions, except for percentages) July 1, 2022 July 2, 2021 Change in %

Three Months Ended Six Months Ended

(In millions, except for percentages) September 30, 2022 October 1, 2021 Change in % September 30, 2022 October 1, 2021 Change in %

Sales and marketing $ 167 $ 150 11 % $ 323 $ 306 6 %

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Total operating expenses $ 388 $ 305 27 % $ 732 $ 602 22 %

Sales and marketing expense, research and development expense and amortization of intangible assets remained relatively flat.

General and administrative expense increased $59 million, primarily due to a $52 million increase of a legal accrual, of which $45 million was prejudgment interest, relating to an ongoing patent infringement lawsuit and the corresponding legal fees.

See Note 18 of the Notes to the Condensed Consolidated Financial Statements for further information.

Restructuring and other costs decreased $5 million, in connection with the December 2020 Plan, which was completed in the fourth quarter of fiscal 2022 .

See Note 12 of the Notes to the Condensed Consolidated Financial Statements for details of our restructuring activities.

Three Months Ended September 30, 2022 Compared with Three Months Ended October 1, 2021

Sales and marketing expense increased $17 million, primarily due an increase in stock-based compensation charges and the additional expenses incurred by Avast subsequent to the completion of the Merger.

General and administrative expense increased $47 million, primarily due to transaction and integration costs incurred in connection with the Merger, which consisted of legal and professional services and other regulatory closing fees.

Research and development, amortization of intangible assets and restructuring and other costs remained relatively flat.

Six Months Ended September 30, 2022 Compared with Six Months Ended October 1, 2021

General and administrative expense increased $106 million, primarily due to transaction and integration costs incurred in connection with the Merger and a $54 million legal accrual, of which $47 million was prejudgment interest, relating to an ongoing patent infringement lawsuit and the corresponding legal fees.

Research and development, amortization of intangible assets and restructuring and other costs remained relatively flat.

Non-operating income (expense), net

Three Months Ended

(In millions) July 1, 2022 July 2, 2021

Three Months Ended Six Months Ended

(In millions) September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

Interest expense $ (48) $ (31) $ (79) $ (63)

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Gain (loss) on early extinguishment of debt (9) — (9) (5)

Gain on sale of properties — 175 — 175

Other 6 1 4 2

Total non-operating income (expense), net $ (46) $ 146 $ (78) $ 111

Non-operating income (expense), net, remained relatively flat.

Three Months Ended September 30, 2022 Compared with Three Months Ended October 1, 2021

Non-operating income (expense), net, increased by $192 million in expense, primarily due to the $175 million gain on sale of certain land and buildings in Mountain View, California during the second quarter of fiscal 2022 and an increase in interest expense during the second quarter of fiscal 2023 associated with our new senior credit facilities and two unsecured senior notes.

Six Months Ended September 30, 2022 Compared with Six Months Ended October 1, 2021

Non-operating income (expense), net, increased by $189 million in expense, primarily due to the absence of the $175 million gain on sale of certain land and buildings in Mountain View, California during the second quarter of fiscal 2022 and an increase in interest expense during the second quarter of fiscal 2023 associated with our new senior credit facilities and two unsecured senior notes.

Provision for income taxes

Three Months Ended

(In millions, except for percentages) July 1, 2022 July 2, 2021

Three Months Ended Six Months Ended

(In millions, except for percentages) September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

Income (loss) before income taxes $ 195 $ 433 $ 424 $ 685

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Effective tax rate 65 % 23 % 37 % 25 %

Our effective tax rate for income for the three months ended July 1, 2022 differs from the federal statutory income tax rate primarily due to tax benefits related to the foreign currency remeasurement of an Irish deferred tax asset and discrete legal expenses booked during the quarter, partially offset by state taxes.

Our effective tax rate 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.

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

Our effective tax rate for income for the three and six months ended September 30, 2022 differs from the federal statutory income tax rate primarily due to state taxes and the U.S.

taxation on foreign earnings, and certain discrete items this quarter including the tax impacts of internal restructuring, deductibility of transaction costs from the Merger, and the limitations of foreign taxes due to the increase of interest expense.

Our effective tax rate for the three and six months ended October 1, 2021 differs from the federal statutory income tax rate primarily due to state taxes and U.S.

taxation on foreign earnings.

We are a multinational company dual headquartered in the U.S.

and Czech Republic, subject to tax in multiple U.S.

and international tax jurisdictions.

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.

Our results can also be impacted by the costs incurred and the potential deductibility of the expenses.

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

In connection with the Merger, we established $345 million of net deferred tax liabilities primarily related to the excess of book basis over the tax basis of acquired identified intangible assets.

The net deferred tax liabilities are based upon certain assumptions underlying our preliminary purchase price allocation.

Upon finalization of the purchase price allocation, additional adjustments to the amount of our net deferred taxes may be required.

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

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 Revolving Facility, will be sufficient to meet our working capital needs, support on-going business activities and finance the expected synergy costs related to the Merger through at least the next 12 months and to meet our known long-term contractual obligations.

We are currently not aware of any trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months.

However, our future liquidity and capital requirements may vary materially from those as of September 30, 2022 depending on several factors, including, but not limited to, economic conditions;

political climate;

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.

The following summarizes our cash flow activities:

Three Months Ended

(In millions) July 1, 2022 July 2, 2021

Six Months Ended

(In millions) September 30, 2022 October 1, 2021

Net cash provided by (used in):

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Cash from operating activities

Our cash flows provided by operating activities decreased by $43 million, primarily due to a decrease in accounts payable as a result of higher cash payments and a decrease in contract liabilities reflecting higher revenue recognized than billings compared to the first three months of fiscal 2022.

Our cash flows provided by operating activities decreased by $191 million, primarily due to an increase of cash payments during the first six months of fiscal 2023, including payments of federal income taxes, debt interest, and transaction costs and other regulatory closing fees in connection with the Merger, all of which was partially offset by collections of receivables.

Cash from investing activities

Our cash flows provided by investing activities remained relatively flat.

Our cash flows used in investing activities increased by $6,859 million, primarily due to the $6,550 million total cash consideration paid for the Avast Merger, net of $363 million cash acquired and $2,141 million non-cash consideration transferred, as well as the absence of $355 million in proceeds from the sale of certain Mountain View, California properties during the first six months of fiscal 2022.

Cash from financing activities

Our cash flows used in financing activities decreased $851 million, primarily due to the absence of proceeds from issuance of debt and the continuation of our stock repurchase program.

The first three months of fiscal 2023 reflects the $400 million repayment of our 3.95% Senior Notes and $300 million of repurchases of common stock, compared to the $512 million of proceeds from the issuance of our Initial Term Loan which was partially offset by the $364 million settlement of our New 2.5% Convertible Notes during the first three months of fiscal 2022.

Our cash flows provided by financing activities increased $5,682 million, primarily due to proceeds from the issuance of debt, partially offset by repayment of debt and the continuation of our stock repurchase program.

The first six months of fiscal 2023 reflects $8,954 million of aggregate proceeds:

$3,910 million from Term Facility A, $3,690 million from Term Facility B, $900 million from the 6.75% Senior Notes and $600 million from the 7.125% Senior Notes, net of $146 million of debt issuance costs.

This was partially offset by the $400 million repayment of our 3.95% Senior Notes, $1,010 million repayment of our Initial Draw Term Loan, $703 million repayment of our Delayed Draw Term Loan and the settlement of the $525 million principal and $100 million equity rights associated with our New 2.0% Convertible Notes.

In contrast, the first three months of fiscal 2022 reflects $512 million of proceeds from the issuance of our Initial Term Loan, partially offset by the $364 million settlement of our New 2.5% Convertible Notes.

Cash and cash equivalents

As of July 1, 2022, we had cash, cash equivalents and short-term investments of $1,291 million, of which $694 million was held by our foreign subsidiaries.

As of September 30, 2022, we had cash, cash equivalents and short-term investments of $1,095 million, of which $451 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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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 June 1, 2022, we fully repaid the principal and accrued interest under the 3.95% Senior Notes due June 2022, which had an aggregate principal amount outstanding of $400 million.

In addition, we paid $7 million of accrued and unpaid interest through the redemption date.

Cash Requirements

On August 15, 2022, we settled the $525 million principal and conversion rights of our New 2.0% Convertible Notes in cash.

The aggregate settlement amount of $630 million was based on $20.41 per underlying share into which the New 2.0% Convertible Notes were convertible.

In addition, we paid $5 million of accrued and unpaid interest through the date of settlement.

On September 12, 2022, upon close of the Merger with Avast, we entered into the Amended and Restated Credit Agreement (Credit Agreement) with certain financial institutions, in which they agreed to provide us with (i) a $1,500 million revolving credit facility (Revolving Facility), a $3,910 million term loan A facility (Term A Facility), (iii) a $3,690 million term loan B facility (Term B Facility) and (iv) a $750 million tranche A bridge loan (Bridge Loan) (collectively, the senior credit facilities).

The Bridge Loan was undrawn and immediately terminated upon the Merger’s close.

We drew down the aggregate principal amounts of the Term A Facility and Term B Facility to finance the cash consideration payable for the transaction and to fully repay the outstanding principal of $1,703 million and accrued and unpaid interest of $3 million under the Initial Term Loan and Delay Draw Term Loan from the existing credit facilities.

The Credit Agreement replaced the existing credit facilities upon the close of the transaction.

During three and six months ended September 30, 2022, we paid an aggregate $145 million in debt issuance costs associated with the senior credit facilities.

O n September 19, 2022, we issued two series of senior notes, consisting of 6.75% Senior Notes due 2027 and 7.125% Senior Notes due 2030, for an aggregate principal of $1,500 million.

They are senior unsecured obligations that rank equally in right of payment with all of our existing and future senior, unsecured, unsubordinated obligations and may be redeemed at any time, subject to the make-whole provisions contained in the applicable indenture relating to such series of notes.

Interest on these series of notes is payable semi-annually in arrears on March 31 and September 30 for both the 6.75% Senior Notes and 7.125% Senior Notes, commencing on March 31, 2023.

During three and six months ended September 30, 2022, we paid an aggregate $14 million in debt issuance costs associated with the two senior notes.

In connection with the financing provided for Term B Facility, we incurred customary ticking fees with respect to the undrawn commitments that began accruing on the 61st day post-syndication.

The ticking fees were accrued at the per annum rate of (i) 50% of the interest rate margin for adjusted SOFR (or applicable replacement rate) loans for 61-90 days from January 28, 2022, the syndication date, and (ii) 100% of the interest rate margin for adjusted SOFR (or applicable replacement rate) loans on and after 91 days from the syndication date.

Ticking fees were payable on the closing date of the transaction.

During three and six months ended September 30, 2022, we paid $31 million in ticking fees.

Share repurchases

During the three months ended September 30, 2022, we executed repurchases of 17 million shares of our common stock under our existing share repurchase program for an aggregate amount of $404 million.

Merger with Avast

On September 12, 2022, we completed the Merger with Avast for a total cash consideration of approximately $6,550 million, net $363 million of cash acquired and $2,141 million non-cash consideration transferred.

The cash consideration included repayment of outstanding Avast debt totaling $942 million.

See Note 4 of the Notes to the Condensed Consolidated Financial Statements for further information about this business combination.

Material Cash Requirements

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

Proposed Merger with Avast

On August 10, 2021, the Company announced a transaction under which we intend to acquire the entire issued and to be issued ordinary share capital of Avast plc, a public company incorporated in England and Wales and a global leader of digital security and privacy headquartered in Prague, Czech Republic (Avast and such transaction, the Proposed Merger).

B ased on our undisturbed closing share price of $27.20 on July 13, 2021, and depending on the Avast shareholder elections, the estimated purchase price range for the Avast shares under the Proposed Merger is $8.1 billion to $8.6 billion .

In conjunction with the Proposed Merger, we and certain financial institution parties entered into an Interim Facilities Agreement, under which Bank of America, N.A.

and Wells Fargo Bank N.A., as interim lenders, agreed to provide us with certain term loan and revolving facilities in order to finance the cash consideration payable and based on the terms and conditions set forth in a commitment letter.

The Interim Facilities Agreement includes (i) the Interim Facility B, (ii) the Interim Facility A1 and the Interim Facility A2, and (iii) the Interim Revolving Facility which, on or before the final repayment date, are to be repaid/replaced in full by loans made under the definitive financing documentation for the Definitive Facilities (the Facilities Agreement).

The obligations under the Facilities Agreement will be guaranteed, jointly and severally, by all of our present and future domestic subsidiaries, with certain exceptions, as applicable.

The Facilities Agreement will replace the existing credit facility agreement upon the close of the transaction.

Debt instruments

As of July 1, 2022, our total outstanding principal amount of indebtedness is summarized as follows.

As of September 30, 2022, 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 1, 2022

(In millions) September 30, 2022

Term Loans $ 7,600

Senior Notes 2,600

Convertible Senior Notes 525

Mortgage Loans 7

Total debt $ 10,207

Our credit agreement maturing in May 2026 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 1, 2022, we were in compliance with all debt covenants.

Our Credit Agreement contains customary representations and warranties and affirmative and negative covenants, including compliance with specified financial ratios .

As of September 30, 2022, 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 August 4, 2022, we announced a cash dividend of $0.125 per share of common stock to be paid in September 2022.

On November 8, 2022, we announced a cash dividend of $0.125 per share of common stock to be paid in December 2022.

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 on the open market (including through trading plans intended to qualify under Rule 10b5-1 under the Exchange Act) and through accelerated stock repurchase transactions.

As of July 1, 2022, the remaining balance of our stock repurchase authorization was $1,474 million and does not have an expiration date.

As of September 30, 2022, the remaining balance of our stock repurchase authorization was $1,370 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.

Subsequent to September 30, 2022, we executed repurchases of $14 million shares of our common stock for an aggregate amount of $308 million.

As a result, we have $1,062 million remaining under our existing share repurchase program.

Restructuring

In connection with the Merger, our Board of Directors approved a restructuring plan (the September 2022 Plan) to realize cost savings and operational synergies, which became effective upon the close of the Merger on September 12, 2022.

We have incurred or expect to incur cash expenditures for severance and termination benefits, contract terminations, facilities closures, and the sale of underutilized facilities.

As of September 30, 2022, we expect that we will incur total costs up to $280 million, with $180 million and $100 million estimated to be incurred within the first and second full years, respectively, following the completion of the Merger.

These actions are expected to be completed by fiscal 2024.

Contractual obligations

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 1, 2022, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

The following is a schedule of our significant contractual obligations and commitments as of September 30, 2022, including those associated with our Merger with Avast.

The expected timing and amount of short-term and long-term 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 certain obligations.

Short-Term Payments Long-Term Payments Total

(In millions)

Contractual obligations:

Debt (principal payments) (1)

$ 175 $ 10,032 $ 10,207

Interest payments on debt (2)

588 2,573 3,161

Purchase obligations (3)

Deemed repatriation taxes (4)

Operating leases (5)

Total $ 1,233 $ 13,079 $ 14,312

(1) As of September 30, 2022, our total outstanding principal amount of indebtedness is comprised of $7,600 million in Term Loans, $2,600 million in Senior Notes and $7 million in Mortgage Loans.

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

The Credit Agreement contains customary representations and warranties and affirmative and negative covenants, including a covenant that we maintain a consolidated leverage ratio of not more than 5.25 to 1.0, or 5.75 to 1.0 if we acquire assets or business in an aggregate amount greater than $250 million, and restrictions on indebtedness, liens, investments, stock repurchases, and dividends (with exceptions permitting our regular quarterly dividend and other specific capital returns).

As of September 30, 2022 , we were in compliance with all debt covenants.

(2) Interest payments calculated based on the contractual terms of the related debt instruments.

Interest on variable rate debt was calculated using the interest rate in effect as of September 30, 2022.

See Note 10 of the Notes to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information on the Term Loans and Senior Notes.

(3) Agreements for purchases of goods or services, with terms that are enforceable and legally binding and 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.

These amounts include agreements to purchase goods or services that have cancellation provisions requiring little or no payment.

The amounts under such contracts are included 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.

(4) Transition tax payments on previously untaxed foreign earnings of foreign subsidiaries under the Tax Cuts and Jobs Act, which may be paid through July 2025.

(5) Payments for various non-cancelable operating lease agreements that expire on various dates through fiscal 2028.

The amounts in the table above exclude expected sublease income.

See Note 9 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q 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 September 30, 2022, we are unable to make reasonably reliable estimates of the period of cash settlement

with the respective taxing authorities.

Therefore, $595 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 decreased $411 million from our Annual Report on Form 10-K for the fiscal year ended April 1, 2022 primarily due to the repayment of our 3.95% Senior 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.

Under the terms of the Proposed Merger, we expect to pay a purchase price for the Avast shares ranging from $8.1 billion to $8.6 billion upon the completion of the transaction in late calendar year 2022.

In conjunction with the Proposed Merger, we have secured debt under the Interim Facilities which will be available upon the close of the transaction.

If the Proposed Merger is completed, our debt obligations will include principal and interest payments related to these credit facilities.

See Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information regarding this business combination and the related debt instruments.

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.

We plan to finance the cash consideration payable to Avast primarily with borrowings under our Interim Facilities.

We believe that our existing cash and cash to be generated by operations, along with amounts available under the new credit facility, will satisfy our long-term cash requirements for this transaction.

However, our future liquidity and capital requirements may vary materially from those as of July 1, 2022 depending on several factors, including, but not limited to, economic conditions;

political climate;

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

In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, subsidiaries and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements or representations and warranties made by us.

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 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 three months of fiscal 2023, 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 1, 2022.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis