e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal
year ended December 31,
2010
|
Or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to
|
Commission file number:
001-31216
McAfee, Inc.
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
|
|
77-0316593
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S. Employer
Identification Number)
|
|
|
|
2821 Mission College Boulevard
Santa Clara, California
(Address of principal
executive offices)
|
|
95054
(Zip
Code)
|
Registrants telephone number, including area code:
(408) 988-3832
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
|
Common stock, par value $0.01 per share
|
|
New York Stock Exchange
|
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated
filer þ
|
|
Accelerated
filer o
|
|
Non-accelerated
filer o
|
|
Smaller reporting
company o
|
|
|
(Do not check if a smaller reporting
company)
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the issuer as of the last business day of the
Registrants most recently completed second fiscal quarter
(June 30, 2010) as reported on the New York Stock
Exchange was approximately $5.0 billion. As of
February 22, 2011, Registrant had outstanding approximately
157.6 million shares of common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
None
MCAFEE,
INC. AND SUBSIDIARIES
FORM 10-K
For the
fiscal year ended December 31, 2010
TABLE OF
CONTENTS
2
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements are statements that look to
future events and consist of, among other things, statements
about our pending acquisition by Intel Corporation
(Intel) including the timing of the close, our
anticipated future income including the amount and mix of
revenue among type of product, category of customer, geographic
region and distribution method and our anticipated future
expenses and tax rates. Forward-looking statements include our
business strategies and objectives and include statements about
the expected benefits of our strategic alliances and
acquisitions, our plans for the integration of acquired
businesses, our continued investment in complementary
businesses, products and technologies, our expectations
regarding product acceptance, product and pricing competition,
cash requirements and the amounts and uses of cash and working
capital that we expect to generate, as well as statements
involving trends in the security risk management market and
statements including such words as may,
believe, plan, expect,
anticipate, could, estimate,
predict, goals, continue,
project, and similar expressions or the negative of
these terms or other comparable terminology. These
forward-looking statements speak only as of the date of this
Annual Report on
Form 10-K
and are subject to business and economic risks, uncertainties
and assumptions that are difficult to predict, including those
identified below in Item 1A, Risk Factors
as well as in Item 1, Business and
Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations in
this Annual Report on
Form 10-K.
Therefore, our actual results may differ materially and
adversely from those expressed in any forward-looking
statements. We cannot assume responsibility for the accuracy and
completeness of forward-looking statements, and we undertake no
obligation to revise or update publicly any forward-looking
statements for any reason.
TRADEMARKS
AND TRADE NAMES
This report includes registered trademarks and trade names of
McAfee and other corporations. Trademarks or trade names owned
by McAfee
and/or its
affiliates include, but are not limited to: McAfee,
ePolicy Orchestrator, McAfee ePO,
Global Threat Intelligence, VirusScan,
IntruShield, Foundstone,
SiteAdvisor, Security Innovation
Alliance, McAfee Security,
SafeBoot, ScanAlert, McAfee
SECURE, McAfee Family Protection, McAfee
Total Protection for Server, McAfee Labs,
EMM, WaveSecure, Policy
Auditor, and TrustedSource. Any other
non-McAfee related products, registered
and/or
unregistered trademarks contained herein are only by reference
and are the sole property of their respective owners.
3
PART I
Overview
We are the worlds largest dedicated security technology
company. We deliver proactive and proven solutions and services
that help secure systems and networks around the world, allowing
users to safely connect to the internet, browse and shop the web
more securely. Backed by
McAfee®
Global Threat
Intelligencetm,
we create innovative products that empower home users,
businesses, the public sector and service providers by enabling
them to prove compliance with regulations, protect data, prevent
disruptions, identify vulnerabilities and continuously monitor
and improve their security. We help secure the digital world.
Business
Developments and Highlights
During 2010, we took the following actions, among others, to
enhance our business:
|
|
|
|
|
We entered into a definitive agreement with Intel pursuant to
which Intel will acquire all of our common stock, through a
merger, for $48 per share in cash and we will become a wholly
owned subsidiary of Intel. We anticipate that the acquisition
will close in the first quarter of 2011. The proposed
combination of Intel and McAfee brings software and silicon
together and we believe this combination will create the next
generation of security technology.
|
|
|
|
We acquired TD Security, Inc. d/b/a Trust Digital, Inc.
(Trust Digital), tenCube Pte. Ltd.
(tenCube) and InternetSafety.com, Inc.
(InternetSafety.com).
|
|
|
|
|
|
Trust Digital created leading technology for enterprise
mobility management and security software. With this acquisition
we extended our endpoint market, addressing a wide range of
mobile operating systems including iPhone OS, Android, Web OS,
Windows Mobile, and Symbian.
|
|
|
|
tenCube developed the
WaveSecuretm
mobile security service. Adding
WaveSecuretm
softwares locate, lock,
back-up and
wipe technology to Trust Digitals enterprise mobility
management software and our mobile security technology gives us
the capability to deliver the industrys most complete next
generation mobility platform. We now have a single platform,
from the consumer to the enterprise, to address the management
and security of all devices types, to all markets and with the
most robust feature set.
|
|
|
|
InternetSafety.com provides parental web control solutions.
|
|
|
|
|
|
We developed and launched several new products and integrated
enhanced feature functionality into new versions of our products
across our offerings, including, but not limited to the
following:
|
|
|
|
|
|
We released our next generation firewall,
McAfee®
Firewall Enterprise version 8 that expands existing application
protection giving security administrators visibility,
recognition and policy enforcement over thousands of
applications that are invisible to conventional firewall
technology. By integrating with McAfees real-time,
cloud-based global threat intelligence,
McAfee®
Firewall Enterprise and
McAfee®
Firewall Enterprise Profiler provide increased visibility into
external and internal threats and vulnerabilities, protecting
customers more efficiently and reducing both compliance and
operational costs.
|
|
|
|
We released
McAfee®
Family Protection iPhone, iPod touch and iPad Edition, providing
strong parental controls to keep children safe when they are
browsing the Internet on an Apple mobile device.
|
|
|
|
We launched
McAfee®
Internet Security for Mac and
McAfee®
Family Protection for Mac.
McAfee®
Internet Security empowers consumers to surf the web safely,
while
McAfee®
Family Protection allows parents to filter inappropriate content
from their children.
|
|
|
|
We launched
McAfee®
Identity Protection, one of the most comprehensive and easy to
use identity protection services on the market.
|
4
|
|
|
|
|
We released
McAfee®
Enterprise Mobility Management
(McAfee®
EMMtm)
9.0 platform that is based on the Trust Digital platform we
acquired during the year. The
McAfee®
EMMtm
platform delivers a fully McAfee-branded and enhanced enterprise
mobility solution, increases support for iPhone and other iOS
devices, increases Android support and provides greater control
for administrators.
|
|
|
|
As part of our Security Connected initiative, we released
McAfee®
Endpoint Security 9 providing strong endpoint and data
protection for any device, to secure corporate assets without
impeding critical systems and processes. Many organizations
deploy security solutions from multiple vendors, which increase
the cost of security and negatively impacts effectiveness.
McAfee®
Endpoint Security 9 delivers
faster-time-to-protection through intelligent
connected security allowing businesses to experience the full
benefits of consumerization of IT, virtualization through McAfee
Management Optimized for Virtualized Environments AntiVirus
(MOVE), a security solution specifically designed for virtual
environments, and optimized performance with faster scanning and
less memory requirements.
|
|
|
|
|
|
We formed strategic relationships with numerous new partners
including, but not limited to, the following:
|
|
|
|
|
|
We entered into a partnership with Facebook, Inc.
(Facebook). Under the terms of the partnership,
McAfee is Facebooks exclusive provider of consumer
security software, and Facebook users will be eligible for a
six-month subscription of the
McAfee®
Internet Security Suite software. Following the six-month
period, Facebook users will be eligible for special discount
subscription pricing. McAfee Internet Security Suite software
protects users PCs from online threats, viruses, spyware,
hackers, online scammers, identity thieves and other
cybercriminals, and includes award-winning
McAfee®
SiteAdvisor®
site rating technology.
|
|
|
|
We entered into a partnership with Crossbeam Systems, Inc.
(Crossbeam). Our partnership with Crossbeam combines
our next-generation firewall,
McAfee®
Firewall Enterprise, with Crossbeams latest X-Series
family of network security platforms to deliver carrier-class
performance scalability and built-in redundancy that large
enterprises and carriers need to secure their networks.
|
|
|
|
We have also partnered with Citrix Systems, Inc.
(Citrix) to jointly develop solutions that leverage
the McAfee Optimized Virtual Environment (MOVE) platform to
enable enterprises to realize enterprise class security
optimized for their virtualized environments deployed using
Citrix XenDesktop, XenClient and XenServer technology.
|
|
|
|
We launched new major ISP consumer partnerships with Verizon in
the United States and Yahoo in Japan. We also partnered with SK
Telecom, which marks the first time we have provided McAfee
Virus Scan Mobile as an Android application download.
|
|
|
|
|
|
Jonathan Chadwick joined us as our Chief Financial Officer.
|
|
|
|
We moved into our new corporate headquarters in
Santa Clara, California, and opened a new facility in Cork,
Ireland and opened a new McAfee Labs facility in Santiago, Chile.
|
Our
Business and Products
We have one business and operate in one industry: developing,
marketing, distributing and supporting computer security
solutions for large enterprises, governments, small and
medium-sized businesses and consumers either directly or through
a network of qualified distribution partners. We operate our
business in five geographic regions: North America; Europe,
Middle East and Africa; Japan; Asia-Pacific, excluding Japan;
and Latin America.
Customers
We categorize our customers as:
|
|
|
|
|
consumer and small business;
|
|
|
|
mid-market; and
|
|
|
|
corporate and enterprise.
|
5
We develop products and services specific to each customer group
and deliver these solutions through various routes to markets
based on customer group requirements. Customer groups are
supported by designated sales and marketing resources and go to
market partners as described below in Sales and
Marketing. Our consumer products and services provide an
overall safe consumer experience on the internet or mobile
networks. Our corporate products and services include our small
and mid-market business products and services as well as our
corporate and enterprise products and services. For financial
information about the amount of net revenue contributed by
product group, customer category and key components of net
revenue, see Item 7 Managements Discussion
and Analysis of Financial Condition and Results of
Operations.
Geographic
Theatres
We divide our markets into five geographic theaters:
|
|
|
|
|
North America;
|
|
|
|
Europe, Middle East and Africa (EMEA);
|
|
|
|
Japan;
|
|
|
|
Asia-Pacific, excluding Japan (APAC); and
|
|
|
|
Latin America.
|
Each geographic theater is supported by corporate resources and
local sales and marketing resources. We develop products and
services specific to customer groups as well as geographic
location, including internationalization and localization for
some of our offerings, theater price lists and specific routes
to market. For financial information about our foreign and
domestic segment operations, including net revenue, operating
income and total assets by geographic area, see Note 18 to
our consolidated financial statements. For information about
risks associated with our foreign operations, see Item 1A,
Risk Factors.
Products
We manage our products under business units that enable us to be
entrepreneurial and responsive within a specific market, moving
quickly to seize emerging opportunities and fostering focus and
customer-centricity within a particular market and our
customers. Our products are offered in software, hardware,
software as a service (SaaS) or a combination of these delivery
methods, depending on the needs of the customer. Our products
address security in the following key areas: endpoint, network,
content, risk and compliance, and mobile.
Endpoint
Security Products
Our endpoint security products secure corporate and consumer
computer systems, including servers, desktop and laptop
computers, handhelds, mobile devices and IP enabled devices that
are connected to corporate systems and networks. Our endpoint
security products include our system security products and our
endpoint encryption products. Our system security products
include anti-virus, anti-spyware and anti-spam, desktop
firewall, host intrusion prevention, and host network access
control. Our endpoint encryption products use strong encryption
to safeguard vital information residing on various devices.
Network
Security Products
Our network security products apply to corporate networks of all
sizes and provide the same type of security measures that
endpoint protection provides but are tailored to protect network
systems, servers, laptops and other network devices as well as
users and data. Network security encompasses enterprise-class
firewall, intrusion detection and prevention, network access
control, network behavior analysis, and network threat response.
Network security appliances provide network-class policy
enforcement and threat detection and prevention across network
boundaries as well as visibility and control of user access and
behavior.
6
Content
Security Products
Our content security products include web, email and data loss
prevention security appliances and solutions. Our web protection
products block malicious websites and content at the network
gateway and data loss protection discovers, detects and blocks
the loss of confidential and restricted data. Email protection
includes spam filtering, virus, spyware and worm protection and
content encryption for email traffic. Our data loss prevention
products prevent malicious or unintentional data loss that
occurs through unauthorized transmission or through theft or
loss of devices that contain sensitive information. Content
solutions also available as SaaS offerings include email
security service and web protection service.
Our content security products include our McAfee SECURE
standard, an aggregate of industry best practices, separate from
the Payment Card Industry (PCI) Data Security
Standard, designed to provide a level of security that an online
merchant can reasonably achieve to help provide consumers with
better protection when interacting with websites and shopping
online. Merchants who comply with the McAfee SECURE standard can
promote their certification by publicly displaying the McAfee
SECURE trustmark. When consumers see this trustmark, they feel
more secure when they shop online. Merchants displaying the
McAfee SECURE trustmark benefit by gaining consumer confidence.
Risk and
Compliance Products
Our risk and compliance solutions provide real-time insight into
risk, vulnerabilities and compliance profile. We enable
customers to direct security and resource investments where they
minimize the most significant risks, for compliance and business
availability. Customers are able to demonstrate more control in
audits and reviews by easily indentifying and resolving security
policy and regulatory issues in a measureable and sustainable
manner. Our risk management solutions risk advisor,
vulnerability manager and remediation manager
proactively correlate threat vulnerability and countermeasure
information to pinpoint assets at risk and provides the tools
necessary to remediate those risks. Our vulnerability management
service is also available as a SaaS offering.
Our compliance and availability solutions change
control, application control, policy auditor and PCI
compliance assess, monitor, enforce and report on
customer IT policies in order to give customers both a real-time
view of their governance and compliance profiles as well as
continuous control of those configurations and policies to
prevent unwanted or unauthorized changes. Our risk and
compliance solutions are integrated into ePolicy Orchestrator to
provide a single security, risk and compliance management
platform.
Mobile
Security Products
Spanning all of our customer categories, our mobile security
solutions protect consumers, businesses, and mobile operators by
safeguarding mobile devices such as internet-enabled smart
phones and computing tablets, corporate networks, and personal
and corporate data. Our mobile security offerings enable
businesses to securely manage mobile devices and the corporate
data on them, consumers to protect their mobile devices and
personal data from theft or loss, and mobile operators to
protect their users and networks against mobile threats such as
malware.
Consumer
Security Products
Our consumer security products, which we manage under a business
unit that also includes our mobile and small business solutions,
shield consumers from identity theft, phishing scams, spyware,
malicious web sites and other threats that endanger the online
experience. Our consumer products are typically distributed
through partner, direct and retail channels, providing access
wherever consumers choose to purchase. We offer consumer
products that are compatible with Windows and Apple computers
and Android, Blackberry, Symbian, Java, and Windows Mobile
platforms.
Product
Licensing
We typically license our software products to corporate and
government customers using our perpetual-plus licensing
arrangements, which provide a perpetual license coupled with an
initial support period of one year. We
7
also sell perpetual licenses in connection with sales of our
hardware-based products in which software is bundled with the
hardware platform. Most of our licenses are sold with renewable
annual maintenance contracts.
For our online subscription services, customers rent
or subscribe to use our security services for a defined period
of time by downloading our software to their personal computers.
Some products or product features are also available under a
SaaS offering, under which we offer our software applications to
customers for their use over the internet. This allows customers
to purchase and use applications and modules on a subscription
basis, without the need for individual client installations or
additional maintenance costs. Because our online subscription
services and our SaaS offerings are versionless, or
self-updating,
customers subscribing to these services can use the most recent
version of the software without having to purchase product
updates or upgrades.
Our online subscription products and services are available to
customers and small businesses through various channel
relationships with internet service providers and original
equipment manufacturers (OEMs). Generally these
internet service providers and OEMs offer our McAfee
subscription services as either a stand-alone feature in the
service or as a premium service. We also make our online
subscription products and services available over the internet
as a managed environment. Unlike our online subscription service
solutions, these managed service provider solutions are
customized, monitored and updated by networking professionals
for a specific customer. Our online subscription consumer
products and services are found at our web site where customers
can download our applications.
Support
and Services
Our technical support provides our customers worldwide
continuous comprehensive coverage through online,
telephone-based and
on-site
technical support services and proactive protection for our
product offerings. These services extend the value of our
customers security investment. We offer core support for
our corporate products as well as premium support that tailors
our support to the needs of the customer, from the smallest
businesses to the largest multi-nationals and government
departments.
|
|
|
|
|
Our core support capabilities are standard with all corporate
support offerings and include a suite of tools that provide
preventive, responsive and analytical resources to our
customers. Our customers benefit from daily and real-time
malware protection updates, proactive alerting and product
upgrades, an online product evaluation lab, automated diagnostic
tools and a
state-of-the-art
knowledgebase backed up by rapid access to our support experts
around the clock.
|
|
|
|
Our premium support offerings, which we call Gold Enhanced
Business and Platinum Enterprise, deliver expert resources that
offer flexible levels of enhanced support coverage
specialist support for escalated technical assistance,
personalized management through support account managers,
dedicated coverage from assigned technical experts, and onsite
support through a security specialist co-located at the
customers site.
|
Our corporate solutions services consultants help customers to
improve the
time-to-value
of their security investment by helping speed up deployment,
optimize configurations to our customers specific needs
and provide guidance on areas of risk. Customers can also choose
from a comprehensive array of online and classroom training
courses to maximize the value of their products.
Our consumer support provides both free and fee based support
offerings. Customers are guided first to self resolution tools,
including McAfee Virtual Technician, McAfee Community Forums and
a library of solutions to common problems. Free chat based
support is provided and new customers can use phone support free
for the first
30-days
following product installation. Fee based support options
include phone based support supplemented by remote control
technology. In 2010, we expanded our premium consumer support
offerings to include a new offering called PC
Set-up &
Security, in which we assist buyers of new PCs in the
set-up of
their PC from the moment they open the box. This new service
allows us to leverage our support staff for additional
revenue-generating services beyond basic product support.
McAfee Foundstone Practice provides corporate and enterprise
customers with strategic and technical consulting services to
help customers identify where they are at risk and build
effective solutions to remediate security vulnerabilities. Our
McAfee Foundstone Practice security consultants assess network
vulnerabilities, evaluate gaps in information security programs,
offer strategies that meet compliance goals, and help develop
8
programs to prepare for security emergencies. McAfee Strategic
Security Education provides a range of classroom-based training
and education courses.
Research
and Development, Investments and Acquisitions
The market for computer software has low barriers to entry, is
subject to rapid technological change and is highly competitive
with respect to timely product introductions. We believe that
our ability to maintain our competitiveness depends in large
part upon our ability to develop, acquire, integrate and launch
new products and solutions, and to enhance existing offerings.
Our research and development efforts support all of our
offerings. They refine our security risk management processes,
improve our product design and usability and keep us at the
forefront of threat research. Most importantly, our research
helps us better protect our customers. In addition to developing
new offerings and solutions, our development staff focuses on
upgrades and updates to existing products and on enhancement and
integration of acquired technology. Future upgrades and updates
may include additional functionality to respond to market needs,
while also assuring compatibility with new systems and
technologies.
We are committed to providing leading global threat intelligence
through McAfee Labs. McAfee Labs provides precise and predictive
intelligence about global threats through a team of 350
multidisciplinary researchers in 30 countries around the world
who conduct research in the areas of host intrusion prevention,
network intrusion prevention, wireless intrusion prevention,
malicious code defense, security policy and management,
high-performance assurance and forensics and threats, attacks,
vulnerabilities and architectures. McAfee Labs follows a
complete range of threats in real time, identifying application
vulnerabilities, analyzing and correlating risks, and enabling
remediation through the use of McAfee solutions.
For 2010, 2009 and 2008, we expensed $346.1 million,
$324.4 million and $252.0 million, respectively, on
research and development, excluding in-process research and
development. Technical leadership is essential to our success
and we expect to continue devoting substantial resources to
research and development.
As part of our growth strategy, we have also made and expect to
continue to make acquisitions of, or investments in,
complementary businesses, products and technologies. See
Note 3 to our consolidated financial statements included
elsewhere in this report for more information about our recent
business combination activities.
Sales and
Marketing
We market our brand, business solutions and offerings directly
to commercial and government customers through traditional
demand generation programs and events as well as indirectly
through resellers and distributors. Our two largest
distributors, Ingram Micro Inc. and Tech Data Corp., together
accounted for 22% of our net revenue in 2010. See Note 18
to our consolidated financial statements included elsewhere in
this report for more information about the percentage of net
revenue from sales to each of these distributors. We market our
consumer solutions and offerings to individual consumers
directly through online distribution methods and indirectly
through various distribution channels, such as retail, OEMs and
service providers. Our consumer business is responsible for
online distribution of our products sold to individual consumers
over the internet, including products distributed by our online
partners, and for licensing of technology to strategic
distribution partners for sale to individual consumers, with
certain exceptions.
Sales in
North America
Our North American sales force is organized by product offerings
and customer type. Our customers are served primarily through
our reseller partners with a channel marketing organization
assisting with lead generation and a channel enablement team
responsible for partner training and support. Although members
of our sales team are a necessary part of the sales process, the
majority of our ordering and fulfillment for our commercial
customers is handled by our distribution partners.
9
Sales
Outside of North America
Outside of North America, we have sales and support operations
in EMEA, Japan, APAC and Latin America. In 2010, 2009 and 2008,
net revenue outside of North America accounted for 42%, 43% and
47% of our net revenue, respectively. Within our global
geographies, our sales resources are organized by country, and
the larger markets may further allocate their sales resources by
product line
and/or
customer types. As in North America, the majority of our
ordering and fulfillment is handled by our distribution partners.
Resellers
and Distributors
Substantially all of our sales come through our network of
resellers, distributors and retailers. Our SecurityAlliance
Global Partner Program is a global sales and marketing
enablement program designed to meet the needs of our reseller
partners in supporting end-user customers. We currently utilize
corporate resellers and network and systems integrators who
offer our solutions to corporate, small and medium-business and
government customers.
Our largest independent software distributors who currently
supply our products include Ingram Micro Inc., Tech Data Corp.
and Arrow, Inc. These distributors supply our products primarily
to large retailers, value-added resellers (VARs),
mail order and telemarketing companies. We also sell our retail
packaged products through several of the larger
computer/software retailers and broader-based retailers,
including Office Depot, Wal-Mart, Costco, Staples, Media
Mart/Saturn, and PC Depot Japan. Our sales and marketing teams
work closely with our major reseller and distributor accounts to
manage demand generating activities, training, order flow and
affiliate relationships.
Our top ten distributors represented 30% to 45% of net sales
during 2010, 2009 and 2008. Our agreements with our distributors
are not exclusive and may be terminated by either party without
cause. Terminated distributors may not continue to sell our
products. If one of our significant distributors terminated its
relationship with us, we could experience a significant
disruption in the distribution of our products and a decline in
our net revenue.
We use a sell-through revenue recognition model for
distributors, under which we recognize revenue at the time our
distributors sell the products to their customers. Under this
model, our distributors are permitted to purchase software
licenses from us at the same time they fill customer orders and
to pay for hardware and retail products only when they sell
these products to their customers. In addition, prior to selling
our products to their customers, our distributors are permitted
rights of return subject to varying limitations. After a
distributor sells a product to its customer, the distributor
generally has no right to return the product to us, unless we
approve the return from the final customer to the distributor.
Strategic
Channel Partners
Our channel efforts include strategic alliances with
complementary manufacturers to expand our reach and scale. We
license our technology to hardware and software OEMs, device
manufacturers and internet service providers (ISPs)
for resale to end users
and/or
integration with their products/services for a combined offering
that is then sold to end users. Strategic channel partners
include Acer, AOL, AT&T, Biglobe, China Telecom, Dell,
Hewlett Packard, Lenovo, Sony Corporation, Telecom Italia
S.p.A., Toshiba America Information Systems, Telefonica S.A.,
and Verizon among others. Depending on the arrangement, these
OEMs may sell our software bundled with the PC or related
services, pre-install our software and allow us to complete the
sale, or sublicense a single version of our products to end
users who must register the product with us in order to receive
updates. OEMs, such as fixed function device manufacturers,
embed our technologies into devices such as retail devices
(ATMs, POS and Kiosks), medical equipment, office products,
industrial control systems, gaming systems, and network and
network security systems. Some of our strategic OEM device
manufacturers include NCR, Siemens, Bridgestone, AT&T,
Toshiba Medical and NEC-I.
Strategic
Alliances
From time to time, we enter into strategic alliances with third
parties to produce innovative technology solutions and support
our future growth plans. These relationships may include joint
technology development and
10
integration, research cooperation, co-marketing activities
and/or
sell-through arrangements. For example, McAfee has teamed with
Riverbed Technology, Inc. (Riverbed) to enable our
McAfee®
Enterprise Firewall and
McAfee®
Web Gateway solutions to be deployed on Riverbeds
Steelhead wide area network (WAN) optimization appliance,
providing customers with the ability to combine WAN
optimization, firewall and Web 2.0 security capabilities into a
single package and further minimize their hardware
infrastructure footprint at the branch office. We have also
partnered with Citrix Systems to jointly develop solutions that
leverage the McAfee Optimized Virtual Environment (MOVE)
platform to enable enterprises to realize enterprise class
security optimized for their virtualized environments deployed
using Citrix XenDesktop, XenClient and XenServer technology. Our
Security Innovation Alliance program is a technology partnering
program that is designed to accelerate the development of
interoperable security products that can be integrated in
complex customer environments. Members of the alliance can
develop products that will integrate with ePolicy Orchestrator
and market them as McAfee-compatible. Our customers benefit from
faster and less costly deployment and a partner ecosystem that
delivers comprehensive solutions.
Marketing
Activities
Our marketing approach involves a collaborative planning process
to develop global marketing campaigns aligned to corporate goals
and objectives. Global marketing campaigns drive awareness,
demand generation and enablement for cross-sell, up-sell and net
new customer acquisition activity in support of our business
model across our major product lines, five regional theaters and
three customer types. One of the principal means of marketing
our brand, products and services is online via the internet. Our
web site, www.mcafee.com, supports marketing activities to our
key customers and prospects, including home and home office
users, small and medium-sized businesses, large enterprises and
our partner community. Our web site contains various marketing
materials and information about our products and services. Our
customers can download and purchase some products directly
online.
In 2010 we launched our new www.mcafee.com web site. Our new web
site delivers content to customers and prospects in ten
languages and includes links to McAfee trials, sales, chat,
reseller search, and our Small and Medium Business Store. We
designed our new web site to improve our customers
purchasing experience through improved systems integration and
an improved registration process that includes progressive
profiling and lead scoring. We also installed new analytical
tools and custom dashboards to help us track what current and
potential customers are visiting, reading, and watching, which
we believe will help improve the effectiveness of our
communications and our ability to capture sales leads and
consummate sales. In 2010 we also introduced our new threat
intelligence web site that displays our threat data using a
combination of user-friendly graphics and analytics.
We also promote the McAfee brand, our products and services
through marketing activities in trade publications, direct mail
campaigns, television, billboards and strategic arrangements, as
well as, online through key word and search-based marketing. In
2010 we hosted C-level executives in seventeen countries to
collaborate on our vision of security connected and held our
third annual FOCUS user conference where customers, prospects
and partners joined together to learn about McAfee Security
Connected platform and how to secure their business from the
growing sophistication of targeted cyber attacks. We attend
trade shows and industry conferences, publish periodic channel
and customer newsletters, and generate sales leads through email
marketing campaigns.
We also market our products through the use of rebate programs
and marketing development funds. Within most countries, we
typically offer incentive rebates to channel partners based on
sales and promotional rebates to end users. We use channel
marketing to market, promote, train and provide incentives to
our resellers and distributors and to promote our offerings to
their end-user customers. We offer our resellers and
distributors technical and sales training classes, online
training resources and sales and marketing demand generation
assistance kits. We also provide specific cooperative marketing
programs for end-user seminars, catalogs, demand creation
programs, sales events and other items.
Competition
The markets for our products are intensely competitive and are
subject to rapid changes in technology. We expect both product
and pricing competitive pressures to increase in the near-term
as the industry continues to
11
consolidate and our competitors grow rapidly through
acquisitions. Many of our competitors have longer operating
histories, greater brand recognition, stronger relationships
with strategic channel partners, larger technical staffs,
established relationships with hardware vendors
and/or
greater financial, technical and marketing resources and other
market advantages. Increasingly, commoditized security
protection is offered by third parties at significant discounts
to our prices or, in some cases is bundled for free. Potential
customers may perceive our products as less valuable or even
unnecessary if similar functionality is available at a
significant discount or free. If our competitors gain market
share in the markets for our products, our sales could grow more
slowly or decline. Competitive pressures could also lead to
increases in competition-driven expenses such as advertising
expenses, product rebates and marketing funds provided to our
channel partners. See Risk Factors We face
intense competition and we expect competitive pressures to
increase in the future. This competition could have a negative
impact on our business and financial results.
Corporate
Market
We believe that the principal competitive factors affecting the
market for our corporate products include, but are not limited
to, the following: performance; functionality and features;
brand name recognition; breadth of product group; integration of
products; time to market; price; the effectiveness of
distributor promotion programs; sales and marketing efforts;
geographic preferences; quality of customer support and
financial stability. We believe that we generally compete
favorably against our competitors in these areas. However, lack
of name recognition may be a concern with potential new
customers and in certain geographic regions. Competitor
solutions may be more attractive than ours to the extent they
are integrated with a larger product solution such as networking
equipment, operating software and data storage. In addition, our
pricing may be less competitive, particularly compared to
smaller competitors trying to enter the market.
Our principal competitors in the corporate market are set forth
below:
Endpoint Security. Our principal competitors
in this market are AVG Technologies CZ s.r.o., Kaspersky Lab,
Inc., Sophos, Inc., Symantec Corp., and Trend Micro, Inc.
Network Security. Our principal competitors in
this market are Check Point Software Technologies Ltd., Cisco
Systems, Inc., Fortinet, Inc., International Business Machines,
Corp., Juniper Networks, Inc., and Palo Alto Networks, Inc.
Content Security. Our principal competitors in
this market are Barracuda Networks, Inc., Blue Coat, Inc., Cisco
Systems, Inc., Microsoft, Inc., Symantec Corp., Trend Micro,
Inc., and Websense, Inc.
Risk and Compliance. Our principal competitors
in this market are EMC Corp., Hewlett Packard Company,
International Business Machines, Corp., NetIQ Corporation,
Qualys, Inc., Rapid7, Inc., and Tripwire, Inc.
Security Software-as-a-Service (SaaS). Our
principal competitors in this market are Google, Inc., Microsoft
Corp., Symantec Corp., and Websense, Inc.
Mobile Security. Our principal competitors in
this market are Airwatch, Inc., Good Technology, Inc., Juniper
Networks, Inc., and MobileIron, Inc.
Other Competitors. In addition to competition
from large technology companies such as Cisco Systems, Inc., EMC
Corp., International Business Machines, Corp., Microsoft Corp.,
and Symantec Corp., we also face competition from smaller
companies and shareware authors that may develop competing
products.
Consumer
Market
In the consumer market, we believe that the principal
competitive factors include, but are not limited to, the
following: brand name recognition and reputation; convenience of
purchase; price; breadth of functionality and features; ease of
use; and frequency of upgrades and updates. We believe that we
generally compete effectively in each of these areas. However,
if it is more convenient for consumers to use a competitive
product (for example, when they purchase computers that are
prebundled with a competitors product), we could be at a
competitive disadvantage. Our prices are also at a competitive
disadvantage compared to free solutions or when competitors
offer significant discounts. Our principal competitors are AVG
Technologies CZ s.r.o., F-Secure Corporation,
12
Kaspersky Lab, Inc., Symantec Corp. with its Norton product
line, and Trend Micro, Inc. There are also several smaller
regional security companies that we compete against primarily in
the EMEA and APAC regions.
Our
Proprietary Technology
Our success depends to a great extent on our proprietary
software technology. We rely on a combination of patents,
trademarks, trade secrets and copyrights to establish and
protect proprietary rights to our software. We enforce our
intellectual property rights in the U.S. and abroad. The
duration of our trademark registrations varies from country to
country, and in the U.S. we generally are able to maintain
our trademark rights and renew any trademark registrations for
as long as the trademarks are in use. We have a number of
U.S. and foreign issued patents and pending patent
applications, including patents and rights to patent
applications acquired through strategic transactions, which
relate to various aspects of our products and technology. The
duration of our patents is determined by the laws of the country
of issuance and for the U.S. is typically 17 years
from the date of issuance of the patent or 20 years from
the date of filing of the patent application resulting in the
patent, which we believe is adequate relative to the expected
lives of our products. Our products are protected under
U.S. and international copyright laws and laws related to
the protection of intellectual property and proprietary
information. We take measures to label such products with the
appropriate proprietary rights notices, and we actively enforce
such rights in the U.S. and abroad. We generally enter into
non-disclosure agreements with our employees, distributors and
partners, and we enter into license agreements with our
customers with respect to our software and other proprietary
information. However, the steps taken by us to protect our
proprietary software technology may be inadequate to deter
misuse or theft of this technology. Often, we do not obtain
signed license agreements from customers who license products
from us. In these cases, we include an electronic version of an
end-user license in all of our electronically distributed
software and a printed license with our products that are
distributed in a box. Although this is common practice for
software companies that sell
off-the-shelf
products to have licenses that are not signed by the licensee,
certain legal authorities believe that such licenses may not be
enforceable under the laws of many states and foreign
jurisdictions. In addition, the laws of some foreign countries
either do not protect these rights at all or offer only limited
protection for these rights. Furthermore, we are aware that many
users of our anti-virus products have not paid any license or
support fees to us. See Risk Factors We
face numerous risks relating to the enforceability of our
intellectual property rights and our use of third-party
intellectual property, many of which could result in the loss of
our intellectual property rights as well as other material
adverse impacts on our business and financial results and
condition below.
Seasonality
As is typical for many large software companies, our business is
seasonal. Software license and maintenance orders are generally
higher in our third and fourth quarters and lower in our first
and second quarters. A significant decline in license and
maintenance orders is typical in the first quarter of our year
as compared to license and maintenance orders in the fourth
quarter of the prior year. In addition, we generally receive a
higher volume of software license and maintenance orders in the
last month of a quarter, with orders concentrated in the later
part of that month. We believe that this seasonality primarily
reflects customer spending patterns and budget cycles, as well
as the impact of compensation incentive plans for our sales
personnel. Revenue generally reflects similar seasonal patterns
but to a lesser extent than orders because revenue is not
recognized until an order is shipped or services are performed
and other revenue recognition criteria are met and a large
portion of our in period revenues are recognized ratably from
our deferred revenue balance.
OUR
EMPLOYEES
As of December 31, 2010, we employed approximately 6,300
individuals worldwide, with approximately 48% in the
U.S. Less than 2% of our employees are represented by a
labor union or work council. Competition for qualified
management and technical personnel is intense in the software
industry.
Company
Information
We were incorporated in the state of Delaware in 1992 under the
name of McAfee Associates, Inc. In conjunction with our 1997
merger with Network General Corporation, we changed our name to
Network
13
Associates, Inc. In 2004, we changed our name to McAfee, Inc.
and began trading on the New York Stock Exchange under the
symbol MFE. We are headquartered at 2821 Mission College
Boulevard, Santa Clara, California, 95054, and the
telephone number at that location is
(408) 988-3832.
Our internet address is www.mcafee.com. Other than the
information expressly set forth in this annual report, the
information contained, or referred to, on our website is not
part of this annual report.
Additional
Information
We file registration statements, periodic and current reports,
proxy statements, and other materials with the Securities and
Exchange Commission (SEC). You may read and copy any
materials we file with the SEC at the SECs Office of
Public Reference at 100 F Street, NE,
Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains a web site at www.sec.gov that contains
reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC,
including our filings. We make available, free of charge,
through the investor relations section of our web site
(investor.mcafee.com), our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K,
and any amendments to those reports filed pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after they
are electronically filed with or furnished to the SEC. Except as
expressly set forth in this
Form 10-K
annual report, the contents of our web site are not incorporated
into, or otherwise to be regarded as part of this report.
Investing in our common stock involves a high degree of risk.
Some but not all of the risks we face are described below. Any
of the following risks could materially adversely affect our
business, operating results, financial condition and cash flows
and reduce the value of an investment in our common stock.
The
pendency of our agreement to be acquired by Intel could have an
adverse effect on our
business.
On August 18, 2010, we entered into an Agreement and Plan
of Merger (the Merger Agreement) with Intel and
Jefferson Acquisition Corporation, a wholly-owned subsidiary of
Intel (Merger Sub), pursuant to which, subject to
the satisfaction or waiver of certain conditions, Merger Sub
will merge with and into McAfee and we will continue as the
surviving corporation and a wholly owned subsidiary of Intel.
Upon the consummation of the merger, subject to certain
exceptions, each share of our common stock issued and
outstanding immediately prior to the merger will be converted
into the right to receive $48.00 in cash, without interest.
The announcement and pendency of the acquisition by Intel could
cause disruptions in our business. For example, customers may
delay, reduce or even cease making purchases from us until they
determine whether the merger will affect our products and
services, including, but not limited to pricing, performance or
support. Third-party intermediaries such as distributors,
value-added resellers, PC OEMs, ISPs and other distribution
channel partners may give greater priority to products of our
competitors until they determine whether the merger will affect
our products and services or our relationship with them. In
addition, key personnel may depart for a variety of reasons
including perceived uncertainty as to the affect of the merger
on their employment. The loss of key personnel could adversely
affect our relationships with our customers, vendors and other
employees. These disruptions may increase over time until the
closing of the merger, and we cannot provide assurance that the
merger will close by the end of the first quarter of 2011, if at
all.
The Merger Agreement generally requires us to operate our
business in the ordinary course pending consummation of the
merger, but includes certain contractual restrictions on the
conduct of our business that could affect our ability to execute
on our business strategies and attain our financial goals, and
the pendency of the acquisition by Intel and the completion of
the conditions to closing could divert the time and attention of
our management.
All of the matters described above, alone or in combination,
could materially and adversely affect our business, financial
condition, results of operations and stock price.
14
The
failure to complete the merger with Intel could adversely affect
our
business.
We cannot provide assurance that the pending acquisition by
Intel will be completed. If the pending acquisition is not
completed, the share price of our common stock may drop to the
extent that the current market price of our common stock
reflects an assumption that a transaction will be completed. On
August 18, 2010, the day before the announcement of the
pending merger, our stocks closing price was $29.93. On
August 19, 2010, following the announcement of the pending
merger, our stocks closing price was $47.01 and from
August 19, 2010 through February 22, 2011 our
stocks closing price has ranged between $46.05 and $47.96.
In addition, under certain circumstances specified in the Merger
Agreement, we may be required to pay Intel a termination fee of
approximately $230.0 million. Further, a failed transaction
may result in negative publicity and a negative impression of us
in the investment community. Further, any disruptions to our
business resulting from the announcement and pendency of the
acquisition by Intel and from intensifying competition from our
competitors, including any adverse changes in our relationships
with our customers, vendors and employees, could continue or
accelerate in the event of a failed transaction. There can be no
assurance that our business, these relationships or our
financial condition will not be adversely affected, as compared
to the condition prior to the announcement of the acquisition
merger, if the acquisition merger is not consummated.
Adverse
conditions in the national and global economies and financial
markets may adversely affect our business and financial
results.
National and global economies and financial markets have
experienced a prolonged downturn stemming from a multitude of
factors, including adverse credit conditions impacted by the
sub-prime
mortgage crisis, slower or receding economic activity, concerns
about inflation and deflation, fluctuating energy costs, high
unemployment, decreased consumer confidence, reduced corporate
profits and capital spending, adverse business conditions and
liquidity concerns and other factors. The U.S. and many
other countries have been experiencing or recently have
experienced slowed or receding economic growth and disruptions
in the financial markets. These conditions have been heightened
recently by increased volatility in the European capital
markets. The severity or length of time these economic and
financial market conditions may persist is unknown. During
challenging economic times, periods of heightened volatility in
the capital markets, periods of high unemployment and in tight
credit markets, many customers may delay or reduce technology
purchases. This could result in reductions in sales of our
products, longer sales cycles, difficulties in collection of
accounts receivable, slower adoption of new technologies, lower
renewal rates, and increased price competition. These results
may persist even when certain economic conditions have improved.
In addition, weakness in the end-user market could negatively
affect the cash flow of our distributors and resellers who
could, in turn, delay paying their obligations to us. This would
increase our credit risk exposure and cause delays in our
recognition of revenue on future sales to these customers.
Specific economic trends, such as declines in the demand for
PCs, servers, and other computing devices, or softness in
corporate information technology spending, could have a more
direct impact on our business. Any of these events would likely
harm our business, operating results, cash flows and financial
condition.
If
our products do not work properly, we could experience negative
publicity, damage to our reputation, legal liability, declining
sales and increased
expenses.
Failure to protect against security
breaches. Because of the complexity of our
products, we have in the past found errors in versions of our
products that were not detected before first introduced, or in
new versions or enhancements, and we may find such errors in the
future. Because of the complexity of the environments in which
our products operate, our products may have errors or defects
that customers identify after deployment. Failures, errors or
defects in our products could result in security breaches or
compliance violations for our customers, disruption or damage to
their networks or other negative consequences and could result
in negative publicity, damage to our reputation, declining
sales, increased expenses and customer relation issues. Such
failures could also result in product liability damage claims
against us by our customers, even though our license agreements
with our customers typically contain provisions designed to
limit our exposure to potential product liability claims.
Furthermore, the correction of defects could divert the
attention of engineering personnel from our product development
efforts. A major security breach at one of our customers that is
attributable to or not preventable by our products could be very
damaging to our business. Any actual or perceived breach of
network or computer security at
15
one of our customers, regardless of whether the breach is
attributable to our products, could adversely affect the
markets perception of our security products and our stock
price.
False alarms or false positives. Our system
protection software products have in the past, and these
products and our intrusion protection products may at times in
the future, falsely detect viruses or computer threats that do
not actually exist. These false alarms or false positives, while
typical in the security industry, can damage or impair the
affected computers or network, for example causing the affected
computers or network to slow or even shut down, which may have
adverse economic consequences to our customers. Our license
agreements typically contain provisions, such as disclaimers of
warranty and limitations of liability, which seek to limit our
exposure to potential product liability claims. However, these
provisions may not be enforceable on statutory, public policy or
other grounds. In addition, these false alarms or false
positives could impair the perceived reliability of our products
and could therefore adversely impact market acceptance of our
products. We may be subject to litigation claiming damages
related to a false alarm or false positive. Damage to our
reputation or product liability or related claims brought
against us could materially adversely affect our sales or
subject us to significant liabilities, including litigation
damages. On April 21, 2010, we released a signature file
that caused some of our customers computers to be rendered
inoperable or significantly impacted. Our financial condition,
results of operations and cash flows were adversely affected in
the second quarter of 2010 by the signature file update release
and remediation actions we took.
Our email and web solutions (anti-spam, anti-spyware, web
categorization, and safe search products) may falsely identify
emails, programs or web sites as unwanted spam,
potentially unwanted programs or unsafe.
They may also fail to properly identify unwanted emails,
programs or unsafe web sites, particularly because spam emails,
spyware or malware are often designed to circumvent anti-spam or
spyware products and to incorrectly identify legitimate web
sites as unsafe. Parties whose emails or programs are
incorrectly blocked by our products, or whose web sites are
incorrectly identified as unsafe or as utilizing phishing
techniques, may seek redress against us for labeling them as
spammers or unsafe
and/or for
interfering with their businesses. In addition, false
identification of emails or programs as unwanted spam or
potentially unwanted programs may discourage potential customers
from using or continuing to use these products.
Customer misuse of products. Our products may
also not work properly if they are misused or abused by
customers or non-customer third parties who obtain access and
use of our products. These situations may arise where an
organization uses our products in a manner that impacts their
end users or employees privacy or where our products
are misappropriated to censor private access to the internet.
Any of these situations could impact the perceived reliability
of our products, result in negative press coverage, negatively
affect our reputation and adversely impact our financial results.
We
face intense competition and we expect competitive pressures to
increase in the future. This competition could have a negative
impact on our business and financial
results.
The markets for our products are intensely competitive and we
expect both product and pricing competition to increase. If our
competitors gain market share in the markets for our products,
our sales could grow more slowly or decline. Competitive
pressures could also lead to increases in expenses such as
advertising expenses, product rebates, product placement fees,
and marketing funds provided to our channel partners.
Advantages of larger competitors. Our
principal competitors in each of our product categories are
described in Business Competition
above. Our competitors include some large enterprises such
as Microsoft, Cisco Systems, Symantec, IBM and Google. In
addition, smaller current or potential competitors may be
acquired by third parties with greater financial resources or
other competitive advantages. For example, Hewlett-Packard
recently acquired 3Com Corporation. Large vendors of hardware or
operating system software increasingly incorporate system and
network security functionality into their products, and enhance
that functionality either through internal development or
through strategic alliances or acquisitions. Some of our current
and potential competitors may have competitive advantages such
as longer operating histories, more extensive international
operations, greater name recognition, larger technical staffs,
established relationships with more distributors and hardware
vendors, significantly greater product development and
acquisition budgets,
and/or
greater financial, technical and marketing resources than we do.
16
Consumer business competition. More than 35%
of our revenue comes from our consumer business. Our growth of
this business relies on direct sales and sales through
relationships with ISPs such as AOL, Cox, Verizon and AT&T;
PC OEMs, such as Acer, Dell, Sony Computer, Hewlett Packard and
Toshiba; and OEM partners such as Adobe. As competition in this
market increases, we have and will continue to experience
pricing pressures that could have a negative effect on our
ability to sustain our revenue, operating margin and market
share growth. Further, as penetration of the consumer anti-virus
market through the ISP model increases, we expect that pricing
and competitive pressures in this market will become even more
acute.
Low-priced or free competitive
products. Security protection is increasingly
being offered by third parties at significant discounts to our
prices or, in some cases is bundled for free. The widespread
inclusion of lower-priced or free products that perform the same
or similar functions as our products within computer hardware or
other companies software products could reduce the
perceived need for our products or render our products
unmarketable even if these incorporated products are
inferior or more limited than our products. It is possible that
a major competitor may offer a free anti-malware enterprise
product. Purchasers of mini notebooks or netbooks, which
generally are sold at a lower price than laptops, may place a
greater emphasis on price in making their security purchasing
decision as they did in making their computer purchasing
decision. The expansion of these competitive trends could have a
significant negative impact on our sales and financial results.
We also face competition from numerous smaller companies,
shareware and freeware authors and open source projects that may
develop competing products, as well as from future competitors,
currently unknown to us, who may enter the markets because the
barriers to entry are fairly low. Smaller
and/or newer
companies often compete aggressively on price.
We
face product development risks due to rapid changes in our
industry. Failure to keep pace with these changes could harm our
business and financial
results.
The markets for our products are characterized by rapid
technological developments, continually-evolving industry trends
and standards and ongoing changes in customer requirements. Our
success depends on our ability to timely and effectively keep
pace with these developments.
Keeping pace with industry trends, new technologies and
threat landscape changes. We must enhance and
expand our product offerings to reflect industry trends, new
technologies and new operating environments as they become
increasingly important to customer deployments. For example, we
must expand our offerings for virtual computer environments; we
must continue to expand our security technologies for mobile
environments to support a broader range of mobile devices such
as mobile phones, smart phones and tablets, and the networks
which increasingly are being accessed remotely or from home by
these mobile devices; we must expand our security offerings for
the proliferation of
IP-connected
embedded systems and devices; we must extend the security
provided by our products to protect against the vulnerabilities
present in new internet applications that are being released; we
must develop products that are compatible with new or otherwise
emerging operating systems, while remaining compatible with
popular operating systems such as Linux, Oracles Solaris,
UNIX, Macintosh OS_X, and Windows XP, NT, Vista and 7; and we
must continue to expand our business models beyond traditional
software licensing and subscription models, specifically,
software-as-a- service is becoming an increasingly important
method and business model for the delivery of applications. We
must also continuously work to ensure that our products meet
changing industry certifications and standards. In addition,
internet threats such as malware have grown significantly in the
last two years, we expect these threats to continue to increase
both in numbers and in complexity, and we must continuously work
to ensure our products protect against the increased volume and
complexity. We may invest in complementary or competitive
businesses, products or technologies to help us keep pace with
industry changes but these investments may not result in
products that are important to our customers or we may not
realize the benefits of these investments. Failure to keep pace
with technological changes in our industry and changes in the
threat landscape could adversely affect our ability to protect
against security breaches, which cause us to lose customers and
could have a negative impact on our business and financial
results. Failure to keep pace with changes that are important to
our customers could also cause us to lose customers and could
have a negative impact on our business and financial results.
Impact of product development delays or competitive
announcements. Our ability to adapt to changes
can be hampered by product development delays. We may experience
delays in product development as we have at times in
17
the past. Complex products like ours may contain undetected
errors or version compatibility problems, particularly when
first released, which could delay or adversely impact market
acceptance. We may also experience delays or unforeseen costs
related to integrating products we acquire with products we
develop, because we may be unfamiliar with errors or
compatibility issues of products we did not develop ourselves.
We may choose not to deliver a partially-developed product,
thereby increasing our development costs without a corresponding
benefit. This could negatively impact our business.
We
face risks associated with past and future
acquisitions.
We may buy or make investments in complementary or competitive
companies, products and technologies. We may not realize the
anticipated benefits from these acquisitions. Future
acquisitions could result in significant acquisition-related
charges and dilution to our stockholders. In addition, we face a
number of risks relating to our acquisitions, including the
following, any of which could harm our ability to achieve the
anticipated benefits of our past or future acquisitions.
Integration. Integration of an acquired
company or technology is a complex, time consuming and expensive
process. The successful integration of an acquisition requires,
among other things, that we integrate and retain key management,
sales, research and development and other personnel; integrate
the acquired products into our product offerings from both an
engineering and sales and marketing perspective; integrate and
support pre-existing suppliers, distribution and customer
relationships; coordinate research and development efforts; and
consolidate duplicate facilities and functions and integrate
back-office accounting, order processing and support functions.
If we do not successfully integrate an acquired company or
technology, we may not achieve the anticipated revenue or cost
reduction synergies.
The geographic distance between the companies, the complexity of
the technologies and operations being integrated and the
disparate corporate cultures being combined may increase the
difficulties of integrating an acquired company or technology.
Managements focus on the integration of operations may
distract attention from our
day-to-day
business and may disrupt key research and development, marketing
or sales efforts. In addition, it is common in the technology
industry for aggressive competitors to attract customers and
recruit key employees away from companies during the integration
phase of an acquisition. If integration of our acquired
businesses or assets is not successful, we may experience
adverse financial or competitive effects.
Internal controls, policies and
procedures. Acquired companies or businesses are
likely to have different standards, controls, contracts,
procedures and policies, making it more difficult to implement
and harmonize company-wide financial, accounting, billing,
information and other systems. Acquisitions of privately held
and/or
non-US companies are particularly challenging because their
prior practices in these areas may not meet the requirements of
the Sarbanes-Oxley Act, generally accepted accounting principles
in the United States of America (GAAP) and
U.S. export regulations.
Use of cash and securities. Our available cash
and securities may be used to acquire or invest in companies or
products. Moreover, when we acquire a company, we may have to
incur or assume that companys liabilities, including
liabilities that may not be fully known at the time of
acquisition. To the extent we continue to make acquisitions, we
will require additional cash
and/or
shares of our common stock as payment. The use of securities
would cause dilution for our existing stockholders.
Key employees from acquired companies may be difficult to
retain and assimilate. The success of many
acquisitions depends to a great extent on our ability to retain
key employees from the acquired company. This can be
challenging, particularly in the highly competitive market for
technical personnel. Retaining key executives for the long-term
can also be difficult due to other opportunities available to
them. Disputes that may arise out of earn-outs, escrows and
other arrangements related to an acquisition of a company in
which a key employee was a principal may negatively affect the
morale of the employee and make retaining the employee more
difficult. It could be difficult, time consuming and expensive
to replace any key management members or other critical
personnel that do not accept employment with McAfee following
the acquisition. In addition to retaining key employees, we must
integrate them into our company, which can be difficult and
costly. Changes in management or other critical personnel may be
disruptive to our business and might also result in our loss of
some unique skills and the departure of existing employees
and/or
customers.
18
Accounting charges. Acquisitions may result in
substantial accounting charges for restructuring and other
expenses, amortization of purchased technology and intangible
assets and stock-based compensation expense, any of which could
materially adversely affect our operating results.
Unknown tax liabilities. We may inherit from
acquired companies tax liabilities unknown to us and unaccounted
for by us at the time of acquisition. In certain instances, we
have contractual indemnification rights that may enable us to
recover these tax liabilities from prior owners of the acquired
companies. If we are unable to recover, in whole or part, or if
we do not have contractual indemnification rights or other
rights enabling us to recover these tax liabilities from prior
owners of the acquired companies, these liabilities could
adversely affect our operating results. We may also incur legal
expenses related to the recovery of these tax liabilities, which
could further adversely affect our operating results.
Potential goodwill, intangible asset and purchased technology
impairment. We perform an impairment analysis on
our goodwill balances on an annual basis or whenever events
occur that may indicate impairment. If the fair value of a
reporting unit is less than the carrying amount, then we must
write down goodwill to its estimated fair value. We perform an
impairment analysis on our intangible assets and purchased
technologies whenever events occur that may indicate impairment.
If the undiscounted cash flows expected to be derived from the
intangible asset or purchased technology are less than its
carrying amount, then we must write down the intangible asset or
purchased technology to its estimated fair value. We cannot be
certain that a future downturn in our business, changes in
market conditions or a long-term decline in the quoted market
price of our stock will not result in an impairment of goodwill,
intangible assets or purchased technologies and the recognition
of resulting expenses in future periods, which could adversely
affect our results of operations for those periods.
Establishment of Vendor Specific Objective Evidence
(VSOE). Following an acquisition, we
may be required to defer the recognition of revenue that we
receive from the sale of products that we acquired, or from the
sale of a bundle of products that includes products that we
acquired, if we have not established VSOE for the undelivered
elements in the arrangement. A delay in the recognition of
revenue from sales of acquired products or bundles that include
acquired products may cause fluctuations in our quarterly
financial results and may adversely affect our operating
margins. Similarly, companies that we acquire may operate with
different cost and margin structures, which could further cause
fluctuations in our operating results and adversely affect our
operating margins. If our quarterly financial results or our
predictions of future financial results fail to meet the
expectations of securities analysts and investors, our stock
price could be negatively affected.
Our
international operations involve risks that could divert the
time and attention of management, increase our expenses and
otherwise adversely impact our business and financial
results.
Our international operations increase our risks in several
aspects of our business, including but not limited to risks
relating to revenue, legal and compliance, currency exchange and
interest rate, and general operating. Net revenue in our
operating regions outside of North America represented 42% of
total net revenue in 2010 compared to 43% in 2009 and 47% in
2008. The risks associated with our international operations
could adversely affect our business and financial results.
Revenue risks. Revenue risks include, among
others, longer payment cycles, greater difficulty in collecting
accounts receivable, tariffs and other trade barriers,
seasonality, currency fluctuations, and the high incidence of
software piracy and fraud in some countries. The primary product
development risk to our revenue is our ability to deliver new
products in a timely manner and to successfully localize our
products for a significant number of international markets in
different languages.
Legal and compliance risks. We face a variety
of legal and compliance risks. For example, international
operations pose a compliance risk with the Foreign Corrupt
Practices Act (FCPA) and the UK Bribery Act 2010.
Some countries have a reputation for businesses to engage in
prohibited practices with government officials to consummate
transactions. Although we have implemented training along with
policies and procedures designed to ensure compliance with this
and similar laws, there can be no assurance that all employees
and third-party intermediaries (including our contractors,
agents, resellers, distributors and strategic channel partners)
will comply with anti-corruption laws. Any such violation could
have a material adverse effect on our business.
19
Another legal risk is compliance with data privacy laws. The
U.S., Europe and other jurisdictions have adopted and continue
to adopt privacy-related or data protection laws and
regulations. Any failure by us to comply with these
privacy-related or data protection laws and regulations could
lead to legal proceedings against us by governmental entities or
customers resulting in additional costs or other harm to our
business, operating results and financial condition. It is
possible that these laws may be interpreted and applied in a
manner that is inconsistent with our data practices. If so, in
addition to the possibility of fines and penalties, a
governmental order requiring that we change our data practices
could result, which in turn could harm our business, operating
results and financial condition. Compliance with these
regulations may involve significant costs or require changes in
business practices that result in reduced revenue. Noncompliance
could result in penalties being imposed on us or orders that we
cease conducting the noncompliant activity.
Another legal risk is that some of our computer security
solutions incorporate encryption technology that is governed by
U.S. export regulations. The cost of compliance with those
regulations can affect our ability to sell certain products in
certain markets and could have a material adverse effect on our
international revenue and expense. If we, or our resellers, fail
to comply with applicable laws and regulations, we may become
subject to penalties and fines or restrictions that may
adversely affect our business.
Increasingly, the United States Congress (Congress)
is taking a more active interest in information and
communications technology companies doing business in China and
other countries whose governments pressure businesses to comply
with domestic laws and policies in ways that may conflict with
the internationally recognized human rights of freedom of
expression and privacy. Congress has not prohibited companies
from doing business in many of these countries, however,
Congress could change the export laws and regulations to
prohibit or restrict the sale of products in many of these
countries, which could have a material adverse effect upon our
international revenue.
Other legal risks include international labor laws and our
relationship with our employees and regional work councils;
unexpected changes in regulatory requirements; and compliance
with our code of conduct and other internal policies.
Currency exchange and interest rate risks. A
significant portion of our transactions outside of the
U.S. are denominated in foreign currencies. We translate
revenues and costs from these transactions into
U.S. dollars for reporting purposes. As a result, our
future operating results will continue to be subject to
fluctuations in foreign currency rates. This combined with
economic instability, such as higher interest rates in the
U.S. and inflation, could reduce our customers
ability to obtain financing for software products, or could make
our products more expensive or could increase our costs of doing
business in certain countries. During 2010 and 2009, we recorded
net foreign currency transaction losses of $4.1 million and
$2.4 million, respectively. In 2008 we recorded a net
foreign currency transaction gain of $6.4 million. We may
be positively or negatively affected by fluctuations in foreign
currency rates in the future, especially if international sales
continue to grow as a percentage of our total sales.
Additionally, fluctuations in currency exchange rates will
impact our deferred revenue balance, which is a key financial
metric at each period end. The risk associated with fluctuation
in foreign currency exchange rates may be heightened due to
volatility in the European capital markets.
Research and development risks. We employ
engineers in a number of jurisdictions outside the U.S. In many
of these jurisdictions the laws relating to the protection of
intellectual property are less strict than the laws in the U.S.
or not enforced to the same extent as they are enforced in the
U.S. As a result in some foreign jurisdictions we may be
subject to heightened attempts to gain unauthorized access to
our information technology systems or surreptitiously introduce
software into our products. These attempts may be the result of
hackers or others seeking to harm us, our products, or
customers. We have implemented various measures to manage our
risks related to these disruptions, but these measures may be
insufficient and a system failure or security breach could
negatively impact our operations and financial results. The
theft and/or unauthorized use or publication of our trade
secrets and other confidential business information as a result
of such an incident could negatively impact our competitive
position. In addition, we may incur additional costs to remedy
the damages caused by these disruptions or security breaches.
General operating risks. More general risks of
international business operations include the increased costs of
establishing, managing and coordinating the activities of
geographically dispersed and culturally diverse
20
operations (particularly sales and support and shared service
centers) located on multiple continents in a wide range of time
zones.
We
face a number of risks related to our product sales through
distributors and other third
parties.
We sell substantially all of our products through third-party
intermediaries such as distributors, value-added resellers, PC
OEMs, ISPs and other distribution channel partners (referred to
collectively as distributors). Reliance on third parties for
distribution exposes us to a variety of risks, some of which are
described below, which could have a material adverse impact on
our business and financial results.
Limited control over timing of product
delivery. We have limited control over the timing
of the delivery of our products to customers by third-party
distributors. We generally do not require our resellers and OEM
partners to meet minimum sales volumes, so their sales may vary
significantly from period to period. For example, the volume of
our products shipped by our OEM partners depends on the volume
of computers shipped by the PC OEMs, which is outside of our
control. These factors can make it difficult for us to forecast
our revenue accurately and they also can cause our revenue to
fluctuate unpredictably.
Competitive aspects of distributor
relationships. Our distributors may sell other
vendors products that compete with our products. Although
we offer our distributors incentives to focus on sales of our
products, they often give greater priority to products of our
competitors, for a variety of reasons. In order to maximize
sales of our products rather than those of our competitors, we
must effectively support these partners with, among other
things, appropriate financial incentives to encourage them to
invest in sales tools, such as online sales and technical
training and product collateral needed to support their
customers and prospects and technical expertise through local
sales engineers. If we do not properly support our partners,
they may focus more on our competitors products, and their
sales of our products would decline.
A significant portion of our consumer revenue is derived from
sales through our OEM partners that bundle our products with
their products. Our reliance on this sales channel is
significantly affected by our partners sales of new
products into which our products are bundled. Our revenue from
sales through our OEM partners is affected by the number of
personal computers on which our products are bundled and the
rate at which consumers purchase or subscribe for the bundled
products. Adverse developments in global economic conditions,
competitive risks and other factors may adversely affect
personal computer sales and could adversely affect our sales and
financial results. In addition, decreases in the rate at which
consumers purchase or subscribe for our bundled products would
adversely affect our sales and financial results. For example,
if our PC OEM partners begin selling a greater percentage of
netbooks and the conversion rate on netbooks is lower than the
conversion rate on laptops, our sales would be adversely
affected.
Our PC OEM partners are also in a position to exert competitive
pricing pressure. Competition for OEMs business continues
to increase, and it gives the OEMs leverage to demand lower
product prices or other financial concessions from us in order
to secure their business. Even if we negotiate what we believe
are favorable pricing terms when we first establish a
relationship with an OEM, at the time of the renewal of the
agreement, we may be required to renegotiate our agreement with
them on less favorable terms. Lower net prices for our products
or other financial concessions would adversely impact our
operating margins.
Our agreements with our PC OEM partners generally have customary
termination rights pursuant to which these agreements may be
terminated prior to the expiration of their term. If any
significant PC OEM partner terminates its agreements with us, we
could experience a significant interruption in the distribution
of our consumer products through this sales channel and our
revenue in future periods could be materially adversely affected.
Reliance on a small number of distributors. A
significant portion of our net revenue is attributable to a
fairly small number of distributors. Our top ten distributors
represented 38% of our net revenue in 2010, 34% in 2009 and 38%
in 2008. Reliance on a relatively small number of third parties
for a significant portion of our distribution exposes us to
significant risks to net revenue and net income if our
relationship with one or more of our key distributors is
terminated for any reason.
Risk of loss of distributors. We invest
significant time, money and resources to establish and maintain
relationships with our distributors, but we have no assurance
that any particular relationship will continue for any
21
specific period of time. The agreements we have with our
distributors can generally be terminated by either party without
cause with no or minimal notice or penalties. If any significant
distributor terminates its agreement with us, we could
experience a significant interruption in the distribution of our
products and our revenue could decline. We could also lose the
benefit of our investment of time, money and resources in the
distributor relationship.
Although a distributor can terminate its relationship with us
for any reason, one factor that may lead to termination is a
divergence of our business interests and those of our
distributors and potential conflicts of interest. For example,
our acquisition activity has resulted in the termination of
distributor relationships that no longer fit with our or the
distributors business priorities. Future acquisition
activity could cause similar termination of, or disruption in,
our distributor relationships, which could adversely impact our
revenue.
Credit risk. Some of our distributors may
experience financial difficulties, which could adversely impact
our collection of accounts receivable. Our allowance for
doubtful accounts was approximately $5.9 million as of
December 31, 2010. We regularly review the collectability
and credit-worthiness of our distributors to determine an
appropriate allowance for doubtful accounts. Our uncollectible
accounts could exceed our current or future allowances, which
could adversely impact our financial results.
Other. We also face legal and compliance risks
with respect to our use of third party intermediaries operating
outside the United States. As described above in Our
international operations involve risks that could divert the
time and attention of management, increase our expenses and
otherwise adversely impact our business and financial
results, any violations by such third party
intermediaries of FCPA or similar laws could have a material
adverse effect on our business.
If we fail to manage our growing distribution channels
successfully, these channels may fail to perform as we
anticipate, which could reduce our sales and increase our
expenses as well as weaken our competitive position.
We
face risks related to sales to government entities, including
the risk of early termination.
We derive a portion of our revenues from sales to U.S. and
foreign federal, state and local governments and their
respective agencies. Most of our sales to government entities
are of commercial items and have been made indirectly through
third-party prime contractors that resell our products.
Government entities may have contractual or other legal rights
to terminate contracts with our resellers for convenience or due
to a default, and any such termination may adversely impact our
future results of operations. In addition, government demand and
payment for our products may be affected by public sector
budgetary cycles and funding authorizations, with funding
reductions or delays adversely affecting public sector demand
for our products. Additionally, government prime contracts are
generally subject to government oversight which can result in
various civil and criminal penalties and administrative
sanctions, including termination of contracts, fines and
suspensions or debarment from future government business.
We
face numerous risks relating to the enforceability of our
intellectual property rights and our use of third-party
intellectual property, many of which could result in the loss of
our intellectual property rights as well as other material
adverse impacts on our business and financial results and
condition.
Limited protection of our intellectual property rights
against potential infringers. We rely on a
combination of contractual rights, trademarks, trade secrets,
patents and copyrights to establish and protect proprietary
rights in our technology. However, the steps we have taken to
protect our proprietary technology may not deter its misuse,
theft or misappropriation. Competitors may independently develop
technologies or products that are substantially equivalent or
superior to our products or that inappropriately incorporate our
proprietary technology into their products. Competitors may hire
our former employees who may misappropriate our proprietary
technology. If unauthorized disclosure of our source code occurs
through security breach or attack, or otherwise, we could
potentially lose future trade secret protection for that source
code. The loss of future trade secret protection could make it
easier for third-parties to compete with our products by copying
functionality. If as a result of theft, misuse or
misappropriation our competitors are able to inappropriately
incorporate or copy our functionality into their technology, our
revenue and operating margins may be adversely affected. We are
aware that there are users of our security products that have
not paid license, technical support, or subscription fees to us.
Certain jurisdictions may not provide adequate legal
infrastructure for effective protection of our intellectual
property rights. We employ engineers in the development of
22
our technology that are located in jurisdictions outside the
United States. If the governments, corporations and legal
infrastructure in those jurisdictions do not support the
protection of intellectual property rights, it will be more
difficult to enforce our rights and protect our proprietary
technology from misuse, theft and misappropriation, which could
harm our business. Changing legal interpretations of liability
for unauthorized use of our software or lessened sensitivity by
corporate, government or institutional users to refraining from
intellectual property piracy or other infringements of
intellectual property could also harm our business.
Frequency, expense and risks of intellectual property
litigation in the network and system security
market. Litigation may be necessary to enforce
and protect our trade secrets, patents and other intellectual
property rights. Similarly, we may be required to defend against
claimed infringement by others.
The security technology industry has increasingly been subject
to patent and other intellectual property rights litigation,
particularly from special purpose entities that seek to monetize
their intellectual property rights by asserting claims against
others. We expect this trend to continue and that in the future
as we become a larger and more profitable company, we can expect
this trend to accelerate and that we will be required to defend
against this type of litigation. The litigation process is
subject to inherent uncertainties, so we may not prevail in
litigation matters regardless of the merits of our position. In
addition to the expense and distraction associated with
litigation, adverse determinations could cause us to lose our
proprietary rights, prevent us from manufacturing or selling our
products, require us to obtain licenses to patents or other
intellectual property rights that our products are alleged to
infringe (licenses may not be available on reasonable commercial
terms or at all), and subject us to significant liabilities.
If we acquire technology to include in our products from third
parties, our exposure to infringement actions may increase
because we must rely upon these third parties to verify the
origin and ownership of such technology. Similarly, we face
exposure to infringement actions if we hire software engineers
who were previously employed by competitors and those employees
inadvertently or deliberately incorporate proprietary technology
of our competitors into our products despite efforts by our
competitors and us to prevent such infringement.
Litigation may be necessary to enforce and protect our trade
secrets, patents and other intellectual property rights.
Potential risks of using open source
software. Like many other software companies, we
use and distribute open source software in order to
expedite development of new products. Open source software is
generally licensed by its authors or other third parties under
open source licenses, including, for example, the GNU General
Public License. These license terms may be ambiguous, in many
instances have not been interpreted by the courts and could be
interpreted in a manner that results in unanticipated
obligations regarding our products. Depending upon how the open
source software is deployed by our developers, we could be
required to offer our products that use the open source software
for no cost, or make available the source code for modifications
or derivative works. Any of these obligations could have an
adverse impact on our intellectual property rights and revenue
from products incorporating the open source software.
Our use of open source code could also result in us developing
and selling products that infringe third-party intellectual
property rights. It may be difficult for us to accurately
determine the developers of the open source code and whether the
code incorporates proprietary software. We have processes and
controls in place that are designed to address these risks and
concerns, including a review process for screening requests from
our development organizations for the use of open source.
However, we cannot be sure that all open source is submitted for
approval prior to use in our products.
We also have processes and controls in place to review the use
of open source in the products developed by companies that we
acquire. Despite having conducted appropriate due diligence
prior to completing the acquisition, products or technologies
that we acquire may nonetheless include open source software
that was not identified during the initial due diligence. Our
ability to commercialize products or technologies of acquired
companies that incorporate open source software or to otherwise
fully realize the anticipated benefits of any acquisition may be
restricted for the reasons described in the preceding two
paragraphs.
23
Pending
or future litigation could have a material adverse impact on our
results of operation, financial condition and
liquidity.
In addition to intellectual property litigation, from time to
time, we have been, and may be in the future, subject to other
litigation including stockholder derivative actions or actions
brought by current or former employees. If we continue to make
acquisitions in the future, we are more likely to be subject to
acquisition related shareholder derivative actions and actions
resulting from the use of earn-outs, purchase price escrow
holdbacks and other similar arrangements. Where we can make a
reasonable estimate of the liability relating to pending
litigation and determine that an adverse liability resulting
from such litigation is probable, we record a related liability.
As additional information becomes available, we assess the
potential liability and revise estimates as appropriate.
However, because of the inherent uncertainties relating to
litigation, the amount of our estimates could be wrong. In
addition to the related cost and use of cash, pending or future
litigation could cause the diversion of managements
attention. Managing, defending and indemnity obligations related
to these actions have caused significant diversion of
managements and the board of directors time and
resulted in material expense to us. See Note 19 to the
consolidated financial statements for additional information
with respect to certain currently pending legal matters.
Our
financial results can fluctuate significantly, making it
difficult for us to accurately estimate operating
results.
Impact of fluctuations. Over the years our
revenue, gross margins and operating results, which we disclose
from time to time on a GAAP and non-GAAP basis, have fluctuated
significantly from quarter to quarter and from year to year, and
we expect this to continue in the future. Thus, our operating
results for prior periods may not be effective predictors of our
future performance. These fluctuations make it difficult for us
to accurately forecast operating results. We try to adjust
expenses based in part on our expectations regarding future
revenue, but in the short term expenses are relatively fixed.
This makes it difficult for us to adjust our expenses in time to
compensate for any unexpected revenue shortfall in a given
period.
Volatility in our quarterly financial results may make it more
difficult for us to raise capital in the future or pursue
acquisitions that involve issuances of our stock. If our
quarterly financial results or our predictions of future
financial results fail to meet the expectations of securities
analysts and investors, our stock price could be negatively
affected.
Factors that may cause our revenue, gross margins and other
operating results to fluctuate significantly from period to
period, include, but are not limited to, the following:
Fluctuations in demand for or pricing of our
products. We are subject to fluctuations in
demand for our products due to a variety of factors, including
general economic conditions, competition, product obsolescence,
technological change, shifts in buying patterns, financial
difficulties and budget constraints of our current and potential
customers, and other factors. In addition, we are subject to
competitive pricing pressures. Reduced demand for our products
or competitive pricing pressure that affects our pricing may
cause fluctuations in our revenues and may adversely affect our
gross margins.
Establishment of VSOE. We may in the future
sell products in an arrangement for which we have not
established VSOE for the undelivered elements in the arrangement
and would be required to delay the recognition of revenue. A
delay in the recognition of revenue from sales of products may
cause fluctuations in our quarterly financial results and may
adversely affect our operating margins.
Timing of product orders. A significant
portion of our revenue in any quarter comes from previously
deferred revenue, which is a somewhat predictable component of
our quarterly revenue. However, a meaningful part of revenue
depends on contracts entered into or orders booked and shipped
in the current quarter. Typically we generate the most orders in
the last month of each quarter and significant new orders
generally close at the end of the quarter. Some customers
believe they can enhance their bargaining power by waiting until
the end of our quarter to place their order. Personnel
limitations and system processing constraints could adversely
impact our ability to process the large number of orders that
typically occur near the end of a quarter, which could adversely
affect our results for the quarter. Any failure or delay in
closing significant new orders in a given quarter also could
have a material adverse impact on our results for that quarter.
24
Reliability and timeliness of expense data. We
increasingly rely upon third-party manufacturers to manufacture
our hardware-based products; therefore, our reliance on their
ability to provide us with timely and accurate product cost
information exposes us to risk, negatively impacting our ability
to accurately and timely report our operating results.
Issues relating to third-party distribution, manufacturing
and fulfillment relationships. We rely heavily on
third parties to manufacture and distribute our products. Any
changes in the performance of these relationships can impact our
operating results. Changes in our supply chain could result in
product fulfillment delays that contribute to fluctuations in
operating results from period to period. We have in the past and
may in the future make changes in our product delivery network,
which may disrupt our ability to timely and efficiently meet our
product delivery commitments, particularly at the end of a
quarter. As a result, we may experience increased costs in the
short term as temporary delivery solutions are implemented to
address unanticipated delays in product delivery. In addition,
product delivery delays may negatively impact our ability to
recognize revenue if shipments are delayed at the end of a
quarter.
Product and geographic mix. Another source of
fluctuations in our operating results and, in particular, gross
profit margins, is the mix of products we sell and services we
offer, as well as the mix of countries in which our products and
services are sold, including the mix between corporate versus
consumer products; hardware-based compared to software-based
products; perpetual licenses versus subscription licenses; and
maintenance and support services compared to consulting services
or product revenue. Product and geographic mix can impact
operating expenses as well as the amount of revenue and the
timing of revenue recognition, so our profitability can
fluctuate significantly.
Timing of new products and customers. The
timing of the introduction and adoption of new products, product
upgrades or updates can have a significant impact on revenue
from period to period. For example, revenue tends to be higher
in periods shortly after we introduce new products compared to
periods without new products. Our revenue may decline after new
product introductions by competitors. In addition, the volume,
size, and terms of new customer licenses can cause fluctuations
in our revenue.
Currency exchange fluctuations. A significant
portion of our transactions outside of the United States are
denominated in foreign currencies. We translate revenues and
costs from these transactions into U.S. dollars for
reporting purposes. As a result, our future operating results
will continue to be subject to fluctuations in foreign currency
rates.
Potential acceleration of prepaid expenses and deferred
costs. We defer costs of revenue primarily
related to revenue sharing and royalty arrangements and
recognize these costs over the service period of the related
revenue. Prepaid expenses consist primarily of revenue sharing
costs that have been paid in advance of the anticipated customer
renewal transactions and royalty costs paid in advance of
revenue transactions. We evaluate quarterly and upon contract
expiration the remaining value of these prepaid expenses in
comparison to estimates of future revenues. If the estimated
future revenues are less than the prepaid expenses, then we must
accelerate the expense of prepaid amounts that exceed the
estimated future revenues. We cannot be certain that a future
downturn in the business of parties with whom we have entered
into revenue sharing and royalty arrangements or changes in
market conditions will not result in the acceleration of prepaid
expenses from future periods to current periods, which could
adversely affect our results of operations.
We also defer costs related to our
revenue-sharing
and royalty arrangements and recognize those costs ratably as
revenue is recognized. Currently proposed changes in the
accounting for these deferred costs, if adopted, may require us
to recognize these costs on a current rather than deferred
basis, which could cause our revenue, gross margins and other
operating results to fluctuate significantly from period to
period.
Additional cash and non-cash sources of
fluctuations. A number of other factors that are
peripheral to our core business operations also contribute to
variability in our operating results. These include, but are not
limited to, changes in foreign exchange rates for the Japanese
Yen and the Euro (which may be more volatile due to the recent
volatility in the European capital markets), international sales
become a greater percentage of our total sales, repurchases
under our stock repurchase program, expenses related to our
acquisition and disposition activities, arrangements with
minimum contractual commitments including royalty and
distribution-related agreements, stock-based compensation
expense, unanticipated costs associated with litigation or
investigations, costs related to Sarbanes-Oxley compliance
efforts, costs and charges related to certain unusual events
such as restructurings, substantial declines in estimated values
of long-lived assets below the value at which they are reflected
in our financial statements, impairment of goodwill, intangible
assets or purchased technologies and changes in GAAP, such as
increased use of fair value
25
measures, new guidance relating to GAAP, such as the guidance
issued by the Financial Accounting Standards Board in October
2009 (Accounting Standards Update
No. 2009-13
ratifying
EITF 08-01)
on software revenue recognition and on revenue arrangements with
multiple deliverables that applies to us beginning with our
fiscal year ending December 31, 2011, changes in tax laws
and the potential requirement that U.S. registrants prepare
financial statements in accordance with International Financial
Reporting Standards (IFRS).
Material
weaknesses in our internal control and financial reporting
environment may impact the accuracy, completeness and timeliness
of our external financial
reporting.
Section 404 of the Sarbanes-Oxley Act requires that
management report annually on the effectiveness of our internal
control over financial reporting and identify any material
weaknesses in our internal control and financial reporting
environment. If management identifies any material weaknesses,
their correction could require remedial measures that could be
costly and time-consuming. In addition, the presence of material
weaknesses could result in financial statement errors that in
turn could require us to restate our operating results. This in
turn could damage investor confidence in the accuracy and
completeness of our financial reports, which could affect our
stock price and potentially subject us to litigation. As well
this could result in governmental inquiries that could require
us to incur significant accounting, legal or other expenses.
Our
strategic alliances and our relationships with manufacturing
partners expose us to a range of business risks and
uncertainties that could have a material adverse impact on our
business and financial
results.
Uncertainty of realizing anticipated benefit of strategic
alliances. We have entered into strategic
alliances with numerous third parties to support our future
growth plans. For example, these relationships may include
technology licensing, joint technology development and
integration, research cooperation, co-marketing activities and
sell-through arrangements. We face a number of risks relating to
our strategic alliances, including those described below. These
risks may prevent us from realizing the desired benefits from
our strategic alliances on a timely basis or at all, which could
have a negative impact on our business and financial results.
Challenges relating to integrated products from strategic
alliances. Strategic alliances require
significant coordination between the parties involved,
particularly if an alliance requires that we integrate their
products with our products. This could involve significant time
and expenditure by our technical staff and the technical staff
of our strategic partner. The integration of products from
different companies may be more difficult than we anticipate,
and the risk of integration difficulties, incompatible products
and undetected programming errors or defects may be higher than
that normally associated with new products. The marketing and
sale of products that result from strategic alliances might also
be more difficult than that normally associated with new
products. Sales and marketing personnel may require special
training, as the new products may be more complex than our other
products.
We invest significant time, money and resources to establish and
maintain relationships with our strategic partners, but we have
no assurance that any particular relationship will continue for
any specific period of time. Generally, our strategic alliance
agreements are terminable without cause with no or minimal
notice or penalties. If we lose a significant strategic partner,
we could lose the benefit of our investment of time, money and
resources in the relationship. In addition, we could be required
to incur significant expenses to develop a new strategic
alliance or to determine and implement an alternative plan to
pursue the opportunity that we targeted with the former partner.
We rely on a limited number of third parties to manufacture our
hardware-based network security and system protection products
and to replicate and package our boxed software products. Many
of our products are manufactured and supplied by a single,
although not the same, source. This reliance on third parties
involves a number of risks that could have a negative impact on
our business and financial results.
Less control of the manufacturing process and outcome with
third party manufacturing relationships. Our use
of third-party manufacturers results in a lack of control over
the quality and timing of the manufacturing process, limited
control over the cost of manufacturing, and the potential
absence or unavailability of adequate manufacturing capacity.
Risk of inadequate capacity with third party manufacturing
relationships. If any of our third-party
manufacturers fails for any reason to manufacture products of
acceptable quality, in required volumes, and in a
26
cost-effective and timely manner, it could be costly as well as
disruptive to product shipments. We might be required to seek
additional manufacturing capacity, which might not be available
on commercially reasonable terms or at all. Even if additional
capacity was available, the process of qualifying a new vendor
could be lengthy and could cause significant delays in product
shipments and could strain partner and customer relationships.
In addition, supply disruptions or cost increases could increase
our costs of goods sold and negatively impact our financial
performance. Our risk is relatively greater in situations where
our hardware products are manufactured by, or contain critical
components supplied by, a single or a limited number of third
parties. Any significant shortage of our products or components
could lead to cancellations of customer orders or delays in
placement of orders, which would adversely impact revenue.
Risk of hardware obsolescence and excess inventory with third
party manufacturing relationships. Hardware-based
products may face greater obsolescence risks than software
products. We could incur losses or other charges in disposing of
obsolete hardware inventory. In addition, to the extent that our
third-party manufacturers upgrade or otherwise alter their
manufacturing processes, our hardware-based products could face
supply constraints or risks associated with the transition of
hardware-based products to new platforms. This could increase
the risk of losses or other charges associated with obsolete
inventory. We determine the quantities of our products that our
third-party manufacturers produce and we base these orders upon
our expected demand for our products. Although we order products
as close in time to the actual demand as we can, if actual
demand is not what we project, we may accumulate excess
inventory, which may adversely affect our financial results.
Our
global operations may expose us to tax
risk.
We are generally required to account for taxes in each
jurisdiction in which we operate. This process may require us to
make assumptions, interpretations and judgments with respect to
the meaning and application of promulgated tax laws and related
administrative and judicial interpretations. The positions that
we take and our interpretations of the tax laws may differ from
the positions and interpretations of the tax authorities in the
jurisdictions in which we operate. An adverse outcome in any
examination could have a significant negative impact on our cash
position and net income. Although we have established reserves
for examination contingencies in accordance with published
guidance, there can be no assurance that the reserves will be
sufficient to cover our ultimate liabilities.
Our provision for income taxes is subject to volatility and can
be adversely affected by a variety of factors, including but not
limited to: unanticipated decreases in the amount of revenue or
earnings in countries with low statutory tax rates, changes in
tax laws and the related regulations and interpretations
(including various proposals currently under consideration),
changes in accounting principles (including accounting for
uncertain tax positions), and changes in the valuation of our
deferred tax assets. Significant judgment is required to
determine the recognition and measurement attributes prescribed
in certain accounting guidance. This guidance applies to all
income tax positions, including the potential recovery of
previously paid taxes, which if settled unfavorably could
adversely impact our provision for income taxes.
Critical
personnel may be difficult to attract, assimilate and
retain.
Our success depends in large part on our ability to attract and
retain senior management personnel, as well as technically
qualified and highly-skilled sales, consulting, technical,
finance and marketing personnel. Other than members of executive
management who have at will employment agreements,
our employees are not typically subject to an employment
agreement or non-competition agreement. It could be difficult,
time consuming and expensive to locate, replace and integrate
any key management member or other critical personnel. Changes
in management or other critical personnel may be disruptive to
our business and might also result in our loss of unique skills
and the departure of existing employees
and/or
customers.
Other personnel related issues that we may encounter include:
Competition for personnel; need for competitive pay
packages. Competition for qualified individuals
in our industry is intense and we must provide competitive
compensation packages, including equity awards. Increases in
shares available for issuance under our equity incentive plans
require stockholder approval, and there may be times, as we have
seen in the past, where we may not obtain the necessary
approval. If we are unable to attract and retain qualified
individuals, our ability to compete in the markets for our
products could be adversely affected, which would have a
negative impact on our business and financial results.
27
Risks relating to senior management changes and new
hires. From 2006 to 2008, we experienced
significant changes in our senior management team as a number of
officers resigned or were terminated and several key management
positions were vacant for a significant period of time. In the
second quarter of 2010, we experienced a change in our chief
financial officer. We may continue to experience changes in
senior management going forward.
We continue to hire in key areas and have added a number of new
employees in connection with our acquisitions. For new
employees, including senior management, there may be reduced
levels of productivity as it takes time for new hires to be
trained or otherwise assimilated into the company.
Increased
customer demands on our technical support services may adversely
affect our relationships with our customers and negatively
impact our financial
results.
We offer technical support services with many of our products.
We may be unable to respond quickly enough to accommodate
short-term increases in customer demand for support services. We
also may be unable to modify the format of our support services
to compete with changes in support services provided by
competitors or successfully integrate support for our customers.
Further customer demand for these services, without
corresponding revenue, could increase costs and adversely affect
our operating results.
We have outsourced a substantial portion of our worldwide
consumer support functions to third-party service providers. If
these companies experience financial difficulties, service
disruptions, do not maintain sufficiently skilled workers and
resources to satisfy our contracts, or otherwise fail to perform
at a sufficient level under these contracts, the level of
support services to our customers may be significantly
disrupted, which could materially harm our relationships with
these customers.
We
face risks related to customer outsourcing to system
integrators.
Some of our customers have outsourced the management of their
information technology departments to large system integrators.
If this trend continues, our established customer relationships
could be disrupted and our products could be displaced by
alternative system and network security solutions offered by
system integrators that do not bundle our solutions. Significant
product displacements could negatively impact our revenue and
have a material adverse effect on our business.
If
we fail to effectively upgrade or modify our information
technology systems, we may not be able to accurately report our
financial results or prevent
fraud.
As our information technology systems age or need to be upgraded
or replaced to meet our changing business needs, we may
experience difficulties in transitioning to new or upgraded
information technology systems and in applying maintenance
patches to existing systems, including loss of data and
decreases in productivity as personnel become familiar with new,
upgraded or modified systems. Our management information systems
will require modification and refinement as we grow and as our
business needs change, which could prolong the difficulties we
experience with systems transitions, and we may not always
employ the most effective systems for our purposes. If we
experience difficulties in implementing new or upgraded
information systems or experience significant system failures,
or if we are unable to successfully modify our management
information systems and respond to changes in our business
needs, our operating results could be harmed or we may fail to
meet our reporting obligations. We may also experience similar
results if we have difficulty applying routine maintenance
patches to existing systems in a timely manner.
Computer
hackers may damage our products, services and
systems.
Due to our high profile in the network and system protection
market, we have been a target of computer hackers who have,
among other things, created viruses to sabotage or otherwise
attack our products and services, including our various web
sites. For example, we have seen the spread of viruses, or
worms, which intentionally delete anti-virus and firewall
software. Similarly, hackers may attempt to penetrate our
network security and gain access to our network and our data
centers, misappropriate our or our customers proprietary
information, which may include personally identifiable
information, or cause interruptions of our internal systems and
services. Also, a number of web sites have been subject to
denial of service attacks, where a web site is bombarded with
information requests eventually causing the web site to
overload, resulting in a delay or disruption of service. If
successful, any of these events could damage users or our
own computer systems, materially damage our relationship with
28
customers that are affected, subject us to claims and additional
expense and result in negative publicity, damage to our
reputation and a decline in sales. In addition, since we do not
control disk duplication by distributors or our independent
agents, media containing our software may be infected with
viruses.
Business
interruptions may impede our operations and the operations of
our
customers.
We are continually updating or modifying our accounting and
other internal and external facing business systems.
Modifications of these types of systems are often disruptive to
business and may cause us to incur higher costs than we
anticipate. Failure to properly manage this process could
materially harm our business operations.
In addition, we and our customers face a number of potential
business interruption risks that are beyond our respective
control. Natural disasters or other events could interrupt our
business or the business of our customers, and each of us is
reliant on external infrastructure that may be antiquated. Our
corporate headquarters in California is located near a major
earthquake fault. The potential impact of a major earthquake on
our facilities, infrastructure and overall operations is not
known, but could be quite severe. Despite business interruption
and disaster recovery programs that have been implemented, an
earthquake could seriously disrupt our entire business process.
We are largely uninsured for losses and business disruptions
caused by an earthquake and other natural disasters.
Our
investment portfolio is subject to volatility, losses and
liquidity limitations. Continued negative conditions in the
global credit markets could impair the value of or limit our
access to our
investments.
Historically, investment income has been a significant component
of our net income. The ability to achieve our investment
objectives is affected by many factors, some of which are beyond
our control. We invest our cash, cash equivalents and marketable
securities in a variety of investment vehicles in a number of
countries with and in the custody of financial institutions with
high credit ratings. While our investment policy and strategy
attempt to manage interest rate risk, limit credit risk, and
only invest in what we view as very high-quality debt
securities, the outlook for our investment holdings is dependent
on general economic conditions, interest rate trends and
volatility in the financial marketplace, which can all affect
the income that we receive, the value of our investments, and
our ability to sell them. Current economic conditions have had
widespread negative effects on the financial markets and global
economies. These conditions have been heightened recently by
increased volatility in the European capital markets. During
these challenging markets, we are investing new cash in time
deposits and liquidity funds and also in instruments with short
to medium-term maturities of highly-rated issuers, including
U.S. government guaranteed investments. We do not hold any
auction rate securities or structured investment vehicles. The
underlying collateral for certain of our mortgage-backed and
asset-backed securities is comprised of some
sub-prime
mortgages, as well as prime and Alt-A mortgages. We are no
longer purchasing mortgage-backed or asset-backed securities.
The outlook for our investment income is dependent on the amount
of any acquisitions that we effect, the amount of cash flows
from operations and historically from the timing of our stock
repurchases under our stock repurchase program that are
available for investment. Our investment income is also affected
by the yield on our investments and our recent shift to a larger
percentage of our investment portfolio to shorter-term and
U.S. government guaranteed investments. This shift has
negatively impacted our income from our investment portfolio in
light of declining yields. Continued decline in our investment
income or the value of our investments will have an adverse
effect on our results of operations or financial condition.
During 2009, we recorded additional impairment on previously
impaired marketable securities totaling $0.7 million. We
believe that our investment securities are carried at fair
value. However, over time the economic and market environment
may provide additional insight regarding the fair value and the
expected recoverability of certain securities, which could
change our judgment regarding impairment. This could result in
realized losses being charged against future income. Given the
current market conditions involved, there is continuing risk
additional impairments may be charged to income in future
periods. At December 31, 2010, gross unrealized losses
totaled $0.5 million.
Most of our cash and investments held outside the U.S. are
subject to fluctuations in currency exchange rates. A
repatriation of these
non-U.S. investment
holdings to the U.S. under current law could be subject to
foreign and U.S. federal income and withholding taxes, less
any applicable foreign tax credits. Local regulations and
potential further capital market turmoil could limit our ability
to utilize these offshore funds. As of December 31, 2010,
$755.0 million was held outside the United States.
29
Our
charter documents and Delaware law may impede or discourage a
takeover, which could lower our stock
price.
Under our certificate of incorporation, our board of directors
has the authority to issue up to 5.0 million shares of
preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those
shares without any further vote or action by our stockholders.
However, under the merger agreement with Intel, the board of
directors is not permitted to issue any shares unless required
by law. The issuance of preferred stock could have the effect of
making it more difficult for a third party to acquire a majority
of our outstanding voting stock and could have the effect of
discouraging a change of control of the company or changes in
management.
Delaware law and other provisions of our certificate of
incorporation and bylaws could also delay or make a merger,
tender offer or proxy contest involving us or changes in our
board of directors and management more difficult. For example,
any stockholder wishing to make a stockholder proposal
(including director nominations) at an annual meeting of our
stockholders must meet the qualifications and follow the
procedures specified under both the Securities Exchange Act of
1934 and our bylaws. In addition, we have a classified board of
directors; however, our certificate of incorporation provides
that our board of directors will be declassified over the three
year period ending with the annual meeting of our stockholders
in 2012.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Our worldwide headquarters is located in Santa Clara,
California. We conduct our business on a worldwide basis with
facilities totaling approximately 1.8 million square feet.
Our primary domestic and international facilities are as follows
(square feet in thousands):
|
|
|
|
|
|
|
|
|
|
|
Square
|
|
|
Leased/
|
|
|
Location
|
|
Feet
|
|
|
Owned
|
|
Primary Activities
|
|
Santa Clara, California, USA(1)
|
|
|
242
|
|
|
Leased
|
|
Sales, Support, Legal, IT, Training, Human Resources, Finance
|
Plano, Texas, USA(2)
|
|
|
170
|
|
|
Owned
|
|
Sales, Support, Legal, IT, Training, Human Resources, Finance
|
St. Paul, Minnesota, USA
|
|
|
107
|
|
|
Leased
|
|
Support, Manufacturing
|
Beaverton, Oregon, USA
|
|
|
60
|
|
|
Leased
|
|
Research and Development
|
Bangalore, India
|
|
|
177
|
|
|
Leased
|
|
Research and Development, Sales, Support, IT, Finance
|
Cork, Ireland
|
|
|
47
|
|
|
Leased
|
|
Sales, Finance, Research and Development
|
Aylesbury, United Kingdom
|
|
|
40
|
|
|
Leased
|
|
Research and Development, Support
|
Slough, United Kingdom
|
|
|
31
|
|
|
Leased
|
|
Sales, Support, Human Resources, IT
|
Tokyo, Japan
|
|
|
28
|
|
|
Leased
|
|
Sales, Finance, Human Resources
|
Waterloo, Ontario, Canada
|
|
|
25
|
|
|
Leased
|
|
Research and Development
|
Sydney, Australia
|
|
|
20
|
|
|
Leased
|
|
Sales, Finance, Human Resources, IT
|
|
|
|
(1) |
|
We also lease but do not occupy approximately 208,000 square
feet in Santa Clara, California that formerly was our corporate
headquarters. |
|
(2) |
|
Our regional office located in Plano, Texas is located on
21.0 acres of owned land. |
We believe that our existing facilities are adequate for the
present and that additional space will be available as needed.
|
|
Item 3.
|
Legal
Proceedings
|
Information with respect to this item is incorporated by
reference to Note 19 to our consolidated financial
statements included in this
Form 10-K,
which information is incorporated into this Part IV,
Item 15 by reference.
30
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Price
Range of Common Stock
Our common stock is traded on the New York Stock Exchange
(NYSE), under the symbol MFE. The following table
sets forth, for the period indicated, the high and low sales
prices for our common stock for the last eight quarters, all as
reported by NYSE. The prices appearing in the table below do not
reflect retail
mark-up,
mark-down or commission.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
42.00
|
|
|
$
|
36.51
|
|
Second Quarter
|
|
|
41.72
|
|
|
|
30.63
|
|
Third Quarter
|
|
|
47.38
|
|
|
|
29.53
|
|
Fourth Quarter
|
|
|
47.44
|
|
|
|
45.92
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
34.90
|
|
|
$
|
26.65
|
|
Second Quarter
|
|
|
42.57
|
|
|
|
32.93
|
|
Third Quarter
|
|
|
45.52
|
|
|
|
38.64
|
|
Fourth Quarter
|
|
|
45.68
|
|
|
|
37.15
|
|
The annual certification to the NYSE attesting to our compliance
with the NYSEs corporate governance listing standards was
submitted for 2009 by our chief executive officer to the NYSE in
July 2010.
Dividend
Policy
We have not paid any cash dividends since our reorganization
into a corporate form in October 1992. We intend to retain
future earnings for use in our business and do not anticipate
paying cash dividends in the foreseeable future. Our credit
agreement with Bank of America, N.A., as administrative agent
contains restrictions regarding the payment of dividends.
31
Stock
Performance
The following Performance Graph and related information shall
not be deemed soliciting material or to be
filed with the SEC, nor shall such information be
incorporated by reference into any future filing under the
Securities Act of 1933 or Securities Exchange Act of 1934, each
as amended, except to the extent that we specifically
incorporate it by reference into such filing.
The following graph shows a five-year comparison of cumulative
total returns for our common stock, the NYSE Market Index,
S&P Information Technology Index and S&P 500 Index
each of which assumes an initial value of $100 and reinvestment
of dividends. The information presented in the graph and table
is as of the end of each fiscal year ended December 31. The
comparisons in the graph below are based on historical data and
are not intended to forecast the possible future performance of
our common stock.
Comparison
of Five-Year Cumulative Total Returns
COMPARISON OF
5-YEAR
CUMULATIVE RETURN
FOR MCAFEE, INC., NYSE MARKET INDEX,
S&P 500 INDEX AND S&P INFORMATION TECHNOLOGY
INDEX
ASSUMES
$100 INVESTED ON JAN. 01, 2006
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec-05
|
|
Dec-06
|
|
Dec-07
|
|
Dec-08
|
|
Dec-09
|
|
Dec-10
|
|
McAfee, Inc.
|
|
|
100.0
|
|
|
|
104.6
|
|
|
|
138.2
|
|
|
|
127.4
|
|
|
|
149.5
|
|
|
|
170.7
|
|
NYSE Market Index
|
|
|
100.0
|
|
|
|
120.5
|
|
|
|
131.2
|
|
|
|
79.7
|
|
|
|
102.2
|
|
|
|
115.9
|
|
S&P Information Technology Index
|
|
|
100.0
|
|
|
|
108.4
|
|
|
|
126.1
|
|
|
|
71.7
|
|
|
|
116.0
|
|
|
|
127.8
|
|
S&P 500 Index
|
|
|
100.0
|
|
|
|
115.8
|
|
|
|
122.2
|
|
|
|
77.0
|
|
|
|
97.3
|
|
|
|
112.0
|
|
Performance for 2010 reflects the December 31, 2010 closing
price of our common stock on the NYSE of $46.31.
32
Holders
of Common Stock
As of February 22, 2011, there were 875 record owners of
our common stock.
Common
Stock Repurchases
In February 2010, our board of directors authorized the
repurchase of up to $500.0 million of our common stock from
time to time in the open market or through privately negotiated
transactions through December 2011, depending upon market
conditions, share price and other factors. During 2010, we
repurchased approximately 8.3 million shares of our common
stock in the open market for approximately $300.0 million.
We do not expect to repurchase additional shares of our common
stock in the open market while the acquisition by Intel remains
pending.
During 2010, 2009 and 2008, we repurchased approximately
0.7 million, 0.8 million and 0.5 million shares
of our common stock, respectively, for approximately
$28.5 million, $25.3 million and $16.6 million,
respectively, in connection with our obligation to holders of
restricted stock units (RSUs), restricted stock
awards (RSAs) and restricted stock units with
performance-based vesting (PSUs) to withhold the
number of shares required to satisfy the holders tax
liabilities in connection with the vesting of such shares. These
shares were not part of the publicly announced repurchase
program. During 2009, we had no repurchases of our common stock
in the open market. During 2008, we repurchased approximately
14.5 million shares of our common stock in the open market
for approximately $499.7 million, excluding commissions
paid.
The table below sets forth all repurchases by us of our common
stock during the three months ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Approximate Dollar
|
|
|
|
Total
|
|
|
|
|
|
Shares Purchased as
|
|
|
Value of Shares That
|
|
|
|
Number of
|
|
|
Average
|
|
|
Part of Publicly
|
|
|
may yet be Purchased
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Announced Plan or
|
|
|
Under Our Stock
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Repurchase Program
|
|
|
Repurchase Program
|
|
|
|
(In thousands, except price per share)
|
|
|
October 1, 2010 through October 31, 2010
|
|
|
11
|
|
|
$
|
47.28
|
|
|
|
|
|
|
$
|
200,008
|
|
November 1, 2010 through November 30, 2010
|
|
|
66
|
|
|
|
47.22
|
|
|
|
|
|
|
|
200,008
|
|
December 1, 2010 through December 31, 2010
|
|
|
4
|
|
|
|
46.91
|
|
|
|
|
|
|
|
200,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
81
|
|
|
$
|
47.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
Item 6.
|
Selected
Financial Data
|
You should read the following selected financial data with our
consolidated financial statements and related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations. Historical
results may not be indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008(1)
|
|
2007
|
|
2006
|
|
|
(In thousands, except for per share amounts)
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
2,064,807
|
|
|
$
|
1,927,332
|
|
|
$
|
1,600,065
|
|
|
$
|
1,308,220
|
|
|
$
|
1,145,158
|
|
Income from operations
|
|
|
229,422
|
|
|
|
222,307
|
|
|
|
189,571
|
|
|
|
159,813
|
|
|
|
139,028
|
|
Income before provision for income taxes
|
|
|
229,640
|
|
|
|
224,223
|
|
|
|
222,206
|
|
|
|
229,204
|
|
|
|
183,781
|
|
Net income
|
|
|
184,112
|
|
|
|
173,420
|
|
|
|
172,209
|
|
|
|
166,980
|
|
|
|
137,471
|
|
Net income per share basic
|
|
$
|
1.19
|
|
|
$
|
1.11
|
|
|
$
|
1.10
|
|
|
$
|
1.04
|
|
|
$
|
0.85
|
|
Net income per share diluted
|
|
$
|
1.17
|
|
|
$
|
1.09
|
|
|
$
|
1.08
|
|
|
$
|
1.02
|
|
|
$
|
0.84
|
|
Shares used in per share calculation basic
|
|
|
154,936
|
|
|
|
156,144
|
|
|
|
156,205
|
|
|
|
159,819
|
|
|
|
160,945
|
|
Shares used in per share calculation diluted
|
|
|
157,385
|
|
|
|
158,988
|
|
|
|
159,406
|
|
|
|
164,126
|
|
|
|
163,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
738,419
|
|
|
$
|
677,137
|
|
|
$
|
483,302
|
|
|
$
|
394,158
|
|
|
$
|
389,627
|
|
Working capital
|
|
|
512,446
|
|
|
|
327,232
|
|
|
|
76,160
|
|
|
|
230,145
|
|
|
|
146,253
|
|
Total assets
|
|
|
4,232,352
|
|
|
|
3,963,186
|
|
|
|
3,457,881
|
|
|
|
3,386,524
|
|
|
|
2,760,834
|
|
Deferred revenue, current and long-term
|
|
|
1,536,266
|
|
|
|
1,407,473
|
|
|
|
1,293,110
|
|
|
|
1,044,513
|
|
|
|
897,525
|
|
Accrued taxes and other long-term liabilities
|
|
|
57,517
|
|
|
|
70,772
|
|
|
|
72,751
|
|
|
|
88,241
|
|
|
|
149,924
|
|
Total equity
|
|
|
2,224,097
|
|
|
|
2,117,538
|
|
|
|
1,752,488
|
|
|
|
1,905,325
|
|
|
|
1,427,249
|
|
|
|
|
(1) |
|
In 2008, we expensed $19.5 million for in-process research
and development related to the acquisition of Secure Computing
Corporation. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements and Factors That May Affect Future Results
This Managements Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking
statements that involve known and unknown risks, uncertainties
and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different
from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking
statements. Please see Special Note Regarding
Forward-Looking Statements.
Overview
and Executive Summary
We are a global dedicated security technology company that
delivers proactive and proven solutions and services that help
secure systems and networks around the world, allowing users to
safely connect to the internet, browse and shop the web more
securely. We create innovative products that empower home users,
businesses, the
34
public sector, and service providers by enabling them to prove
compliance with regulations, protect data, prevent disruptions,
identify vulnerabilities and continuously monitor and improve
their security.
We have one business and operate in one industry: developing,
marketing, distributing and supporting computer security
solutions for large enterprises, governments, small and
medium-sized businesses and consumers either directly or through
a network of qualified distribution partners. We derive our
revenue from two sources: (i) service, support and
subscription revenue, which includes maintenance, training and
consulting revenue as well as revenue from licenses under
subscription arrangements and (ii) product revenue, which
includes revenue from perpetual licenses (those with a one-time
license fee) and from hardware product sales. In 2010, service,
support and subscription revenue accounted for 89% of net
revenue and product revenue accounted for 11% of net revenue.
Pending
Acquisition by Intel
On August 18, 2010, we entered into a definitive agreement
under which Intel will acquire all of our common stock, through
a merger, for $48 per share in cash and we will become a wholly
owned subsidiary of Intel. The definitive agreement related to
the acquisition was approved and adopted by our stockholders on
November 2, 2010. The definitive agreement related to the
acquisition provides that the acquisition is subject to
regulatory approvals and other customary closing conditions. On
December 20, 2010, we received notification from the United
States Federal Trade Commission that the waiting period had
expired under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976 with respect to the proposed
acquisition. On January 26, 2011, the European Commission
announced that it had granted conditional antitrust clearance of
the proposed acquisition. We anticipate that the acquisition
will close in the first quarter of 2011.
Operating
Results and Trends
We evaluate our consolidated financial performance utilizing a
variety of indicators. Five of the primary indicators that we
utilize to evaluate the growth and health of our business are
total net revenue, operating income, net income, net cash
provided by operating activities and deferred revenue. In
addition, our management considers certain non-GAAP
metrics (derived by adjusting net revenue, operating income and
net income for certain items) when evaluating our ongoing
performance
and/or
predicting our earnings trends. These items include the impact
of signature file update, stock-based compensation expense,
amortization of purchased technology and intangibles,
restructuring charges (benefits), acquisition-related costs,
litigation-related and other costs, acquired intangible asset
expensed to research and development, loss on sale/disposal of
assets and technology, in-process research and development,
change in fair value of stock-based liability awards, marketable
securities (accretion) impairment, income taxes and certain
other items. In addition, on April 21, 2010, we released a
signature file update that caused some of our customers
computers to be rendered inoperable or significantly impacted.
We have assisted our customers to resolve their computer
problems and have taken steps to prevent a similar problem from
recurring. We have adjusted our 2010 net revenue, operating
income and net income for impacts of the signature file update
for non-GAAP metrics as our management does not
consider these impacts when evaluating our ongoing performance,
predicting our earnings
and/or when
managing our daily business. See the Reconciliation of
GAAP to Non-GAAP Financial Measures below.
Net Revenue. As discussed more fully below,
our net revenue in 2010 grew by $137.5 million, or 7%, to
$2,064.8 million from $1,927.3 million in 2009. Our
net revenue is directly impacted by corporate information
technology, and government and consumer spending levels. Net
revenue was positively impacted by $72.9 million from our
2010 and 2009 acquisitions. Changes in the U.S. Dollar
compared to foreign currencies negatively impacted our revenue
growth by $28.8 million in 2010.
Operating Income. Operating income increased
$7.1 million in 2010 compared to 2009 primarily due to the
increase in our gross margin, offset by increases in operating
costs. The increase in expenses included: (i) a
$38.7 million increase in salaries and benefits due to
headcount and salary increases, (ii) a $27.9 million
increase in restructuring charges due to vacating facilities and
realigning our staffing across all departments, (iii) a
$10.4 million increase in stock-based compensation expense
discussed more fully in Stock-based Compensation
Expense below, (iv) $7.0 million of costs
incurred in 2010 associated with our pending acquisition by
Intel and (v) increases in costs of revenues primarily
related to infrastructure costs and costs
35
related to our online subscription arrangements. Due to the
release of the signature file update on April 21, 2010 and
remediation actions we took, our net revenue in the second
quarter of 2010 was negatively impacted by approximately
$6.1 million, our cost of net revenue was negatively
impacted by $0.7 million and our operating costs were
negatively impacted by $1.1 million. Changes in the
U.S. Dollar compared to foreign currencies negatively
impacted our operating income by $32.2 million in 2010.
The $28.5 million increase in non-GAAP operating income
(which is adjusted for certain items excluded by management when
evaluating our ongoing performance
and/or
predicting our earnings trends) for 2010 compared to 2009
resulted from a $143.6 million increase in non-GAAP net
revenue that exceeded (i) the $68.8 million increase
in non-GAAP costs of net revenue primarily related to increased
costs related to our online subscription arrangements and
(ii) the $46.3 million increase in non-GAAP operating
expenses that was primarily related to an increase in salaries
and benefits due to an increase in headcount and increased legal
expense included in the calculation of non-GAAP operating income
in 2010 compared to 2009 due to a benefit in 2009 from a
$6.5 million insurance reimbursement. See the
Reconciliation of GAAP to Non-GAAP Financial
Measures below.
Net Income. The $10.7 million increase in
net income in 2010 compared to 2009 was primarily attributable
to the $7.1 million increase in income from operations
discussed above and a decrease in our effective tax rate
discussed more fully in Provision for Income Taxes
below.
The $19.2 million increase in non-GAAP net income (which is
adjusted for certain items excluded by management when
evaluating our ongoing performance
and/or
predicting our earnings trends) in 2010 compared to 2009
resulted from the increases in non-GAAP operating income
described above. See the Reconciliation of GAAP to
Non-GAAP Financial Measures below.
Net cash provided by operating activities. The
$98.3 million increase in net cash provided by operating
activities in 2010 compared to 2009 was primarily attributable
to the growth of our business and managements focus on
operating cash flows. The $98.3 million increase in 2010
compared to 2009 was due to increased collections on accounts
receivable and decreased partner payments, offset by increased
payments for salary and benefits due to increased headcount and
salary increases and increased payments on accounts payable. See
Liquidity and Capital Resources below.
Deferred Revenue. Our deferred revenue balance
at December 31, 2010 increased 9% to $1,536.3 million,
compared to $1,407.5 million at December 31, 2009.
Excluding acquired deferred revenue and the negative impact of
the U.S. strengthening against the Euro during 2010, our
deferred revenue increased $155.9 million as a result of
growing sales of maintenance renewals from our expanding
customer base and increased sales of subscription-based
products. We receive up-front payments for maintenance and
subscriptions, but we recognize revenue over the service or
subscription term. We monitor our deferred revenue balance
because it represents a significant portion of revenue to be
recognized in future periods. Approximately 75 to 85% of our
total net revenue during both 2010 and 2009 came from
prior-period deferred revenue. We believe that deferred revenue
is a key indicator of the growth and health of our business.
Acquisitions. We continue to focus our efforts
on building a full line of system and network protection
solutions and technologies that support our multi-platform
strategy of personal computer, internet and mobile security
solutions. In 2010, we acquired InternetSafety.com for
$10.7 million, tenCube for $10.6 million and
Trust Digital for $32.5 million. In 2009, we acquired
MX Logic, Inc. (MX Logic), for $163.1 million
and Solidcore Systems, Inc. (Solidcore) for
$40.5 million. We do not expect that our 2010 acquisitions
will have a significant impact on net income in 2011. See the
Reconciliation of GAAP to Non-GAAP Financial
Measures below for such items excluded by management.
Net Revenue by Product Groups and Customer
Category. Transactions from our corporate
business include the sale of product offerings intended for
enterprise, mid-market and small business use. Net revenue from
our corporate products increased $61.1 million, or 5%, to
$1,275.0 million in 2010 from $1,213.9 million in
2009. The increase in revenue was primarily due to a
$60.6 million increase in revenue from our networks
security solutions, which includes increased revenue from our
Secure Computing Corporation (Secure) acquisition
along with our Intrusion Prevention System (IPS)
offerings. These increases were offset in part by
$6.1 million of prior-period deferred revenue from our
system security solutions that was originally scheduled to be
recognized in 2010 but was
36
deferred until future periods due to the effects of the
signature file update released on April 21, 2010 and the
remediation actions we took. Included in the overall increase in
net revenue is a $28.8 million negative foreign exchange
impact.
Transactions from our consumer business include the sale of
product offerings primarily intended for consumer use, as well
as any revenue or activities associated with providing an
overall safe consumer experience on the internet or cellular
networks. Net revenue from our consumer security market
increased $76.3 million, or 11%, to $789.8 million in
2010 from $713.5 million in 2009. The increase in revenue
from our consumer market was primarily attributable to our
continued relationships with strategic partners, such as Acer,
Adobe, Dell, Sony Computer and Toshiba. The impact of the
signature file update released on April 21, 2010 was
minimal to our net revenue from our consumer security market.
Net revenue from our corporate products increased
$250.1 million, or 26%, to $1,213.9 million during
2009 from $963.8 million in 2008. The
year-over-year
increase in revenue was due to (i) a $141.3 million
increase in revenue from our content security solutions, which
includes approximately $102.0 million increase from our
Secure acquisition, (ii) a $68.9 million increase in
revenue from our network security solutions, primarily from our
Secure acquisition, (iii) an $18.7 million increase in
revenue from our services offerings, (iv) a
$15.8 million increase in revenue from our system security
offerings and (v) a $5.4 million increase in revenue
from our governance, risk and compliance offerings. In 2009, we
experienced an increase in the sale of our hardware solutions,
which resulted in higher upfront revenue recognition. During
2009, we also experienced an increase in both the number and
size of larger transactions sold to customers through a solution
selling approach, which bundles multiple products and services
into suite offerings. This positively impacted revenue and
deferred.
Transactions from our consumer business include the sale of
product offerings primarily intended for consumer use, as well
as any revenue or activities associated with providing an
overall safe consumer experience on the internet or cellular
networks. Net revenue from sales of our consumer products
increased $77.1 million, or 12%, to $713.5 million in
2009 from $636.4 million in 2008. The increase was
primarily due to (i) an increase in our online customer
base, (ii) increased online renewal subscriptions from a
larger customer base and (iii) increased up-sell to higher
level suites with higher price points.
Foreign Exchange Fluctuations. The Euro and
Japanese Yen are the two predominant
non-U.S. currencies
that affect our financial statements. As the U.S. Dollar
strengthens against foreign currencies, our revenues from
transactions outside the U.S. and operating income may be
negatively impacted. As the U.S. Dollar weakens against
foreign currencies, our revenues outside the U.S. and
operating income may be positively impacted.
During 2010, on an average exchange basis, the U.S. Dollar
strengthened against the Euro and the British Pound and weakened
against the Japanese Yen and all other major currencies that we
do business in compared to 2009. Overall, the U.S. Dollar
strengthening against the Euro had the most significant impact
to our revenue, resulting in decreased revenue in our
consolidated statements of income and comprehensive income in
2010 compared to 2009. The U.S. Dollar weakening against
various other foreign currencies had the most significant impact
to expenses, resulting in an overall net increase in our
expenses in our consolidated statements of income and
comprehensive income in 2010 compared to 2009.
Critical
Accounting Policies and Estimates
In preparing our consolidated financial statements, we make
estimates, assumptions and judgments that can have a significant
impact on our net revenue, income from operations and net
income, as well as the value of certain assets and liabilities
on our consolidated balance sheets. To apply critical accounting
policies we must evaluate a number of complex criteria and make
significant accounting judgments. Management bases its estimates
on historical experience and on various other assumptions that
they believe to be reasonable under the circumstances. These
estimates form the basis for making judgments about the carrying
values of assets and liabilities. We evaluate our estimates on a
regular basis and make changes accordingly.
Senior management has discussed the development, selection and
disclosure of these estimates with the audit committee of our
board of directors. Actual results may materially differ from
these estimates under different assumptions or conditions. If
actual results were to differ from these estimates materially,
the resulting changes
37
could have a material effect on the consolidated financial
statements. We believe our significant accounting policies,
which are discussed in Note 2, Summary of Significant
Accounting Policies in the Notes to Consolidated Financial
Statements, involve a high degree of judgment and complexity.
Accordingly, we believe the following policies are the most
critical to aid in fully understanding and evaluating our
financial condition and operating results.
Revenue
Recognition
We must make significant management judgments and estimates to
determine revenue to be recognized in any accounting period.
Material differences may result in the amount and timing of our
revenue for any period if our management makes different
judgments or utilizes different estimates. These estimates
affect the deferred revenue line item on our
consolidated balance sheets and the net revenue line
item on our consolidated statements of income and comprehensive
income.
Our revenue, which is presented net of sales taxes, is derived
primarily from two sources: (i) service, support and
subscription revenue, which includes maintenance, training and
consulting revenue as well as revenue from product licenses
under subscription arrangements, and (ii) product revenue,
which includes hardware and perpetual software license revenue.
We apply software revenue recognition guidance to all
transactions involving the sale of software products and
hardware products that include software. The application of this
guidance requires judgment, including whether a software
arrangement includes multiple elements, and if so, whether VSOE
exists for these elements. For arrangements with multiple
elements, including software licenses, maintenance
and/or
services, we allocate and defer revenue equivalent to the VSOE
of fair value for the undelivered elements and recognize the
difference between the total arrangement fee and the amount
deferred for the undelivered elements as product revenue. VSOE
of fair value is based upon the price for which the undelivered
element is sold separately or upon substantive renewal rates
stated in a contract. We determine fair value of the undelivered
elements based on historical evidence of stand-alone sales of
these elements to our customers. When VSOE does not exist for
undelivered elements such as maintenance and support, the entire
arrangement fee is recognized ratably over the performance
period generally as service, support and subscription revenue.
We apply software revenue recognition guidance to all
transactions except those where no software is involved or
software is incidental. We recognize revenue from the sale of
software licenses when persuasive evidence of an arrangement
exists, the product or service has been delivered, the fee is
fixed or determinable, and collection of the resulting
receivable is reasonably assured. For hardware transactions
where software is not incidental, we do not separate the license
fee and we do not apply separate accounting guidance to the
hardware and software elements.
We enter into perpetual and subscription software license
agreements through direct sales to customers and indirect sales
with partners, distributors and resellers. We recognize revenue
from the indirect sales channel upon sell-through by the partner
or distributor. The license agreements generally include service
and support agreements, for which the related revenue is
deferred and recognized ratably over the performance period. All
revenue derived from our online subscription products is
deferred and recognized ratably over the performance period.
Professional services revenue is generally recognized as
services are performed or if required, upon customer acceptance.
When customer acceptance is required, we defer the direct costs
of the subscription software licensing and professional services
arrangements, and amortize those costs over the same period as
the related revenue is recognized. These costs are identified as
cost of service, support and subscription revenue on the
consolidated statements of income and comprehensive income.
Changes to the elements in a software arrangement, the ability
to identify VSOE for those elements, the fair value of the
respective elements and the degree of flexibility in contractual
arrangements could materially impact the amount recognized in
the current period and deferred over time.
We also identify the direct and incremental costs associated
with product revenues that have been deferred due to lack of
VSOE on fair value on an undelivered element. These costs are
primarily hardware platform and other hardware component costs.
We defer these costs at the time of delivery and recognize them
as cost of service, support and subscription revenue on the
consolidated statements of income and comprehensive income over
the service period.
38
We reduce revenue for estimates of sales incentives and sales
returns. We offer sales incentives, including channel rebates,
marketing funds and end-user rebates for products in our
corporate and consumer product lines. Additionally, end users
may return our products, subject to varying limitations, through
distributors and resellers or to us directly for a refund within
a reasonably short period from the date of purchase. We estimate
and record reserves for sales incentives and sales returns based
on our historical experience. In each accounting period, we must
make judgments and estimates of sales incentives and potential
future sales returns related to current period revenue. These
estimates affect our net revenue line item on our
consolidated statements of income and comprehensive income and
affect our accounts receivable, net, deferred
revenue or other accrued liabilities line
items on our consolidated balance sheets.
At December 31, 2010, our allowance for sales returns and
incentives was $86.7 million compared to $68.8 million
at December 31, 2009. If our allowance for sales returns
and incentives were to increase by 10%, or $8.7 million,
our net revenue would decrease by $1.9 million and our
deferred revenue would decrease by $6.8 million for the
year ended December 31, 2010.
Deferred
Costs of Revenue and Prepaid Expenses
We defer costs of revenue primarily related to revenue-sharing
and royalty arrangements and recognize these costs over the
service period of the related revenue. Prepaid expenses consist
primarily of revenue sharing costs that have been paid in
advance of the anticipated customer renewal transactions and
royalty costs paid in advance of revenue transactions. We
evaluate the remaining value of these prepaid expenses in
comparison to estimates of future revenues. Our estimates of
future revenue are based on assumptions considering our
historical experience and other relevant facts and
circumstances. We have not accelerated the expense of any
material prepaid amounts for any periods presented in our
statements of income and comprehensive income.
Stock-based
Compensation Expense
We record compensation expense for stock-based awards issued to
employees and outside directors in exchange for services
provided based on the estimated fair value of the awards on
their grant dates. Stock-based compensation expense is
recognized over the required service or performance period of
the awards. Our stock-based awards include stock options
(options), RSUs, RSAs, PSUs and employee stock
purchase rights issued pursuant to our Employee Stock Purchase
Plan (ESPP). See Note 14 to the consolidated
financial statements for additional information.
We use the Black-Scholes pricing model to estimate the fair
value of our options and ESPP grants. The Black-Scholes pricing
model requires estimates of the expected life of the option, as
well as future volatility, risk-free interest rate and dividend
yield. We derive the expected life of our options through a
lattice model that factors in historical data on exercise and
post-vesting service termination behavior. The risk-free
interest rate for periods within the expected life of the option
is based on the U.S. Treasury yield curve in effect at the
time of grant. We use the implied volatility of options traded
on our stock with a term of one year or more to calculate the
expected volatility of our option grants. We have not declared
any dividends on our stock in the past and do not expect to do
so in the foreseeable future.
The assumptions that we have made represent our
managements best estimate, but they are highly subjective
and inherently uncertain. If management had made different
assumptions, our calculation of the options fair value and
the resulting stock-based compensation expense could differ,
perhaps materially, from the amounts recognized in our financial
statements. For example, if we increased the assumption
regarding our stocks volatility for options granted during
2010 by 10%, our stock-based compensation expense would increase
by $4.1 million, net of expected forfeitures. Likewise, if
we increased our assumption of the expected lives of options
granted during 2010 by one year, our stock-based compensation
expense would increase by $1.6 million. These notional
increased expense amounts would be amortized over the
options weighted-average 3.9 year vesting period.
In addition to the assumptions used to calculate the fair value
of our options, we are required to estimate the expected
forfeiture rate of all stock-based awards and only recognize
expense for those awards we expect to vest. The stock-based
compensation expense recognized in our consolidated statements
of income and comprehensive income for the year ended
December 31, 2010 has been reduced for estimated
forfeitures. If we were to change our
39
estimate of forfeiture rates, the amount of stock-based
compensation expense could differ, perhaps materially, from the
amount recognized in our financial statements. For example, if
we had decreased our estimate of expected forfeitures by 50%,
our stock-based compensation expense for the year ended
December 31, 2010 would have increased by
$5.3 million. This decrease in our estimate of expected
forfeitures would increase the amount of expense for all
unvested awards that have not yet been recognized by
$22.8 million, amortized over a weighted-average period of
1.9 years.
Estimation
of Restructuring Accrual and Litigation
Restructuring accrual. To determine our
restructuring charges and the corresponding liabilities, we make
a number of assumptions. These assumptions included estimated
sublease income over the remaining lease period, estimated term
of subleases, estimated utility and real estate broker fees, as
well as estimated discount rates for use in calculating the
present value of our liability. We develop these assumptions
based on our understanding of the current real estate market in
the respective locations as well as current market interest
rates. The assumptions used are our managements best
estimate at the time of the accrual, and adjustments are made on
a periodic basis if better information is obtained. If at
December 31, 2010 our estimated sublease income were to
decrease 10%, the restructuring reserve and related expense
would have increased by $1.0 million.
The estimates regarding our restructuring accruals affect our
other accrued liabilities and accrued taxes
and other long-term liabilities line items in our
consolidated balance sheets, since these liabilities will be
settled each year through 2018. These estimates affect our
consolidated statements of income and comprehensive income in
the restructuring charges (benefits) line item.
Litigation. Managements current
estimated range of liability related to litigation that is
brought against us from time to time is based on claims for
which our management can estimate the probability of an
unfavorable outcome and the range of loss. We recorded the
minimum estimated liability related to those claims where there
is a range of loss, as there is no better point of estimate. Due
to the uncertainties related to an unfavorable outcome of
litigation, and the amount and range of loss on pending
litigation, management is often unable to make a reasonable
estimate of the liability that could result from an unfavorable
outcome. As litigation progresses, we continue to assess our
potential liability and revise our estimates. Such revisions in
our estimates could materially impact our results of operations
and financial position. Estimates of litigation liability affect
our other accrued liabilities line item on our
consolidated balance sheets and our general and
administrative expense line item on our consolidated
statements of income and comprehensive income. See Note 19
in our Notes to the Consolidated Financial Statements.
Accounting
for Income Taxes
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process involves
estimating our actual current tax expense together with
assessing temporary differences resulting from differing
treatment of items, such as deferred revenue, for tax and
accounting purposes. These differences result in deferred tax
assets and liabilities, which are included within our
consolidated balance sheets. We must then assess and make
significant estimates regarding the likelihood that our deferred
tax assets will be recovered from future taxable income and to
the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a
valuation allowance or increase this allowance in a period, we
must include an expense within the tax provision in the
consolidated statements of income and comprehensive income.
Estimates related to income taxes affect the deferred
income taxes, other accrued liabilities and
accrued taxes and other long-term liabilities line
items in our consolidated balance sheets and our provision
for income taxes line item in our consolidated statements
of income and comprehensive income.
Our deferred tax asset is presented net of a valuation
allowance. The valuation allowance is recorded due to the
limitations on our ability to utilize certain credit
carryforwards and net operating losses of acquired companies.
The valuation allowance is based on tax law limitations on the
future utilization of acquired attributes as well as on our
historical experience and estimates of taxable income by
jurisdiction in which we operate and the period over which our
deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or we adjust
40
these estimates in future periods, we may need to establish an
additional valuation allowance, which could materially impact
our financial position and results of operations. The valuation
allowance decreased in 2010 primarily due to the change in
judgment regarding the ability to utilize foreign tax credits in
future years prior to their expiration. This change in judgment
was based on several factors, including reduced net operating
losses available in future years and expectations of future
earnings in various jurisdictions.
Tax returns are subject to examination by various taxing
authorities. Although we believe that adequate accruals have
been made each period for unsettled issues, additional benefits
or expenses could occur in future years from resolution of
outstanding matters. We record additional expenses each period
relating to the expected interest and penalties we would be
required to pay a tax authority if we do not prevail. We
continue to assess our potential tax liability included in
accrued taxes in the consolidated financial statements and
revise our estimates. Such revisions in our estimates could
materially impact our results of operations and financial
position. We have classified a portion of our tax liability as
non-current in the consolidated balance sheets based on the
expected timing of cash payments to settle contingencies with
taxing authorities.
Valuation
of Goodwill, Intangibles, Long-lived Assets and Contingent
Consideration
When we acquire businesses, we allocate the purchase price to
tangible assets and liabilities and identifiable intangible
assets acquired. Any residual purchase price is recorded as
goodwill. We must also estimate the fair value of contingent
consideration. The allocation of the purchase price and
valuation of contingent consideration requires management to
make significant estimates in determining fair values,
especially with respect to intangible assets and contingent
consideration. These estimates are based on historical
experience, information obtained from the management of the
acquired companies and relevant market and industry data. These
estimates can include, but are not limited to, the cash flows
that an asset is expected to generate in the future, the
appropriate discount rate, the useful lives of intangible assets
and probabilities of achievement of financial targets under
contingent consideration arrangements. These estimates are
inherently uncertain and unpredictable. In addition,
unanticipated events and circumstances may occur, which may
affect the accuracy or validity of such estimates.
Goodwill. We make estimates regarding the fair
value of our reporting units when testing for potential
impairment. We estimate the fair value of our reporting units
using an equal weighting of the income approach and the market
approach. Under the income approach, we calculate the fair value
of a reporting unit based on the present value of estimated
future cash flows. Under the market approach, we estimate the
fair value based on market multiples of revenue or earnings for
comparable companies. We estimate cash flows for these purposes
using internal financial projections based on recent and
historical trends and relevant market and industry data. We base
these estimates on assumptions we believe to be reasonable, but
which are unpredictable and inherently uncertain. We also make
certain judgments about the selection of comparable companies
used in the market approach in valuing our reporting units. If
an impairment were present, these estimates would affect the
impairment of goodwill line item which we would add
on our consolidated statements of income and comprehensive
income and would affect the goodwill line item in
our consolidated balance sheets. As goodwill is allocated to all
of our reporting units, any impairment could potentially affect
our operating geographies. The fair values of our reporting
units were substantially in excess of the respective carrying
amounts in our most recent goodwill impairment test.
Intangibles and Long-lived Assets. We will
record an impairment charge on finite-lived intangibles or
long-lived assets to be held and used when we determine that the
carrying value of intangibles and long-lived assets may not be
recoverable. Based upon the existence of one or more indicators
of impairment, we measure any impairment of intangibles or
long-lived assets based on a projected discounted cash flow
method using a discount rate determined by our management to be
commensurate with the risk inherent in our current business
model. Our estimates of cash flows require significant judgment
based on our historical and anticipated results and are subject
to many of the other factors, which could change and cause a
material impact to our operating results.
Contingent Consideration. Our acquisitions may
include contingent consideration payments based on future
financial measures or product development and integration
milestones of an acquired company. We make estimates regarding
the fair value of contingent consideration liabilities at the
acquisition date and at each reporting date until the
contingency is resolved. We estimate the fair value of these
liabilities based on financial projection of the acquired
companies and estimated probabilities of achievement. We believe
our estimates and assumptions are
41
reasonable, however, there is significant judgment involved.
Changes in the fair value of contingent consideration
liabilities subsequent to the acquisition are recorded in
general and administrative expense in our consolidated
statements of income and comprehensive income, and could cause a
material impact to our operating results.
Impairment
of Marketable Securities
All marketable securities are classified as
available-for-sale
securities. We assess our
available-for-sale
marketable securities on a regular basis for
other-than-temporary
impairment. Pursuant to accounting guidance effective
April 1, 2009, if we have a security with a fair value less
than its amortized cost and we intend to sell the security or it
is more likely than not we will be required to sell the security
before it recovers, other-than temporary impairment has occurred
and we must record the entire amount of the impairment in
earnings. If we do not intend to sell the security or it is not
more likely than not we will be required to sell the security
before it recovers, we must estimate the net present value of
cash flows expected to be collected. If the amortized cost
exceeds the net present value of cash flows, such excess is
considered a credit loss and
other-than-temporary
impairment has occurred. The credit loss component is recognized
in earnings and the residual portion of the
other-than-temporary
impairment is recorded in other comprehensive income. The
determination of credit losses requires significant judgment and
actual results may be materially different than our estimate. We
consider the likely reason for the decline in value, the period
of time the fair value was below amortized cost, changes in and
performance of the underlying collateral, the ability of the
issuer to meet payment obligations, changes in ratings and
market trends and conditions. Prior to April 1, 2009,
other-than-temporary
impairment was recorded based on similar factors, as well as our
intent and ability to hold until recovery of loss. Any decline
deemed
other-than-temporary
was recognized in earnings.
We have not recorded any
other-than-temporary
impairment since April 1, 2009. In 2009, we recorded
other-than-temporary
impairment of $0.7 million. In 2008, we recorded
other-than-temporary
impairment of $18.5 million, which consisted of
$12.2 million related to corporate bonds and asset-backed
and mortgage-backed securities that suffered significant
declines in fair value, $5.0 million related to a single
corporate bond that had a significant decline in fair value due
to the issuers bankruptcy and $1.3 million related to
securities for which we did not have the intent and ability to
hold until recovery (due to our funding of the Secure
acquisition). At December 31, 2010, gross unrealized losses
totaled $0.5 million.
42
Results
of Operations
Years
Ended December 31, 2010, 2009 and 2008
Net
Revenue
The following table sets forth, for the periods indicated, a
year-over-year
comparison of the key components of our net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, support and subscription
|
|
$
|
1,839,437
|
|
|
$
|
1,739,081
|
|
|
$
|
100,356
|
|
|
|
6
|
%
|
|
$
|
1,467,092
|
|
|
$
|
271,989
|
|
|
|
19
|
%
|
Product
|
|
|
225,370
|
|
|
|
188,251
|
|
|
|
37,119
|
|
|
|
20
|
|
|
|
132,973
|
|
|
|
55,278
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
2,064,807
|
|
|
$
|
1,927,332
|
|
|
$
|
137,475
|
|
|
|
7
|
%
|
|
$
|
1,600,065
|
|
|
$
|
327,267
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue by Geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,193,614
|
|
|
$
|
1,091,857
|
|
|
$
|
101,757
|
|
|
|
9
|
%
|
|
$
|
844,937
|
|
|
$
|
246,920
|
|
|
|
29
|
%
|
EMEA
|
|
|
527,651
|
|
|
|
531,763
|
|
|
|
(4,112
|
)
|
|
|
(1
|
)
|
|
|
502,876
|
|
|
|
28,887
|
|
|
|
6
|
|
Japan
|
|
|
149,713
|
|
|
|
138,624
|
|
|
|
11,089
|
|
|
|
8
|
|
|
|
116,567
|
|
|
|
22,057
|
|
|
|
19
|
|
APAC
|
|
|
115,129
|
|
|
|
96,277
|
|
|
|
18,852
|
|
|
|
20
|
|
|
|
81,109
|
|
|
|
15,168
|
|
|
|
19
|
|
Latin America
|
|
|
78,700
|
|
|
|
68,811
|
|
|
|
9,889
|
|
|
|
14
|
|
|
|
54,576
|
|
|
|
14,235
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
2,064,807
|
|
|
$
|
1,927,332
|
|
|
$
|
137,475
|
|
|
|
7
|
%
|
|
$
|
1,600,065
|
|
|
$
|
327,267
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net revenue in a specific period is an aggregation of
thousands of transactions ranging from high-volume, low-dollar
transactions to high-dollar, multiple-element transactions that
are individually negotiated. The impact of pricing and volume
changes on revenue is complex as substantially all of our
transactions contain multiple elements, primarily software
licenses and post-contract support. Additionally, approximately
75 to 85% of our revenue in a specific period is derived from
prior-period transactions for which revenue has been deferred
and is being amortized into income over the period of the
arrangement. Therefore, the impact of pricing and volume changes
on revenue in a specific period results from transactions in
multiple prior periods.
Net
Revenue by Geography
Net revenue outside of North America accounted for 42%, 43% and
47% of net revenue for 2010, 2009 and 2008, respectively. Net
revenue from North America and EMEA has historically comprised
between 80% and 90% of our business.
The increase in net revenue in North America during 2010 was
primarily related to (i) an $83.9 million increase in
corporate revenue and (ii) a $17.8 million increase in
consumer revenue. The increase in corporate revenue was
primarily attributable to a $55.0 million increase in
revenue from our network security offerings due to increased
revenue from our Secure acquisition along with our IPS offerings
and a $12.9 million increase in revenue from our content
security offerings due to increased revenue from our MX Logic
acquisition. The increase in revenue from our consumer market
was primarily attributable to our continued relationships with
strategic channel partners, such as Acer, Adobe, Dell, Sony
Computer and Toshiba.
The increase in net revenue in North America during 2009 was
primarily related to (i) a $205.8 million increase in
corporate revenue and (ii) a $41.1 million increase in
consumer revenue. The
year-over-year
increase in corporate revenue was due to a $103.1 million
increase in revenue from our content security offerings, which
includes approximately $60.9 million increase from our
Secure acquisition, a $46.4 million increase in revenue
from our network security offerings, primarily due to our Secure
acquisition, a $34.8 million increase in revenue from our
system security offerings, a $15.2 million increase in
revenue from our services offerings and a $6.4 million
increase in revenue from our governance, risk and compliance
offerings. In 2009, we experienced an increase in the
43
sale of our hardware solutions, which resulted in higher upfront
revenue recognition. The increase in consumer revenue was due to
an increase in our customer base and increased percentage of
suite sales from lower-priced suites to higher-priced suites.
The decrease in net revenue in EMEA in 2010 compared to 2009 was
attributable to a decline in revenue from our corporate
offerings and the negative impact of the U.S. Dollar
strengthening against the Euro on an average exchange basis for
the period, offset in part by the revenue growth from our
consumer offerings. Corporate revenue decreased
$30.7 million due to a $30.4 million decrease in
revenue from our system security offerings, including a
$2.9 million decrease from the effects of the signature
file update released on April 21, 2010. Consumer revenue
increased $26.6 million due to an increase in our customer
base and our continued relationships with strategic channel
partners, such as Acer, Adobe, Dell, Sony Computer, and Toshiba.
Included in the increase in corporate revenue and decrease in
consumer revenue in EMEA is a negative foreign exchange impact
of approximately $37.2 million in 2010 compared to 2009.
The increase in net revenue in EMEA during 2009 was attributable
to revenue growth from both our consumer and corporate
offerings, offset by the negative impact of the U.S. Dollar
strengthening against the Euro on an average exchange basis in
2009 compared to 2008. The
year-over-year
increase was primarily attributable to $46.1 million
increase from new revenue attributable to our Secure acquisition
and $23.0 million in consumer revenue due to an increase in
our customer base, offset by the negative foreign exchange
impact of approximately $36.4 million in 2009 compared to
2008.
Our Japan, APAC and Latin America operations combined have
historically comprised less than 20% of our total net revenue
and we expect this trend to continue. In both 2010 and 2009, net
revenue in Japan was positively impacted by the weakening
U.S. Dollar against the Japanese Yen, which resulted in an
approximate $8.1 million and $13.4 million
contribution to Japan net revenue in 2010 compared to 2009 and
in 2009 compared to 2008, respectively. The increase in net
revenue from Japan, APAC and Latin America during 2010 compared
to 2009 was primarily attributable to increased revenue from our
consumer offerings in all geographic regions and increased
revenue from our corporate offerings in both APAC and Latin
America.
Service,
Support and Subscription Revenue
The increase in service, support and subscription revenue in
2010 compared 2009 was attributable to (i) an increase in
sales of support and subscription renewals to existing and new
customers, (ii) amortization of previously deferred revenue
from support arrangements, (iii) increases in our online
subscription arrangements due to our continued relationships
with strategic partners such as Acer, Adobe, Dell, Sony Computer
and Toshiba and (iv) increases in royalties from sales by
our strategic channel partners. In addition, we have expanded
our support offerings to include premium-level services. Revenue
from consulting increased due to growth in integration and
implementation services.
The increase in service, support and subscription revenue in
2009 compared 2008 was attributable to (i) an increase in
sales of support and subscription renewals to existing and new
customers, (ii) amortization of previously deferred revenue
from support arrangements, (iii) increases in our online
subscription arrangements due to our continued relationships
with strategic partners such as Acer, Dell, Sony Computer and
Toshiba, (iv) increases in revenue from our McAfee Total
Protection Service for small and mid-market businesses and
(v) increases in royalties from sales by our strategic
channel partners. In addition, we have expanded our support
offerings to include premium-level services. Revenue from
consulting increased due to growth in integration and
implementation services.
Although we expect our service, support and subscription revenue
to continue to increase, our growth rate and net revenue depend
significantly on renewals of support arrangements as well as our
ability to respond successfully to the pace of technological
change and expand our customer base. If our renewal rate or our
pace of new customer acquisition slows, our net revenue and
operating results would be adversely affected.
44
Product
Revenue
The increase in product revenue in 2010 compared to 2009 was
attributable to (i) increased revenue from our Secure
acquisition, (ii) increased revenue from our network
security solutions, primarily our IPS offerings, that have a
higher hardware content and, therefore, more upfront revenue
realization and (iii) increased revenue from our data
protection solutions and upgrade initiatives related to our
total protection solutions.
The increase in product revenue in 2009 compared to 2008 was
attributable to (i) increased revenue from our Secure
acquisition, (ii) increased revenue from our network
security solutions which have higher hardware content and,
therefore, more upfront revenue realization,
(iii) increased revenue from our data protection solutions
and upgrade initiatives related to our total protection
solutions.
Cost
of Net Revenue
The following table sets forth, for the periods indicated, a
comparison of cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, support and subscription
|
|
$
|
358,542
|
|
|
$
|
308,222
|
|
|
$
|
50,320
|
|
|
|
16
|
%
|
|
$
|
254,083
|
|
|
$
|
54,139
|
|
|
|
21
|
%
|
Product
|
|
|
118,264
|
|
|
|
100,204
|
|
|
|
18,060
|
|
|
|
18
|
|
|
|
72,634
|
|
|
|
27,570
|
|
|
|
38
|
|
Amortization of purchased technology
|
|
|
80,742
|
|
|
|
77,961
|
|
|
|
2,781
|
|
|
|
4
|
|
|
|
56,811
|
|
|
|
21,150
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
$
|
557,548
|
|
|
$
|
486,387
|
|
|
$
|
71,161
|
|
|
|
15
|
%
|
|
$
|
383,528
|
|
|
$
|
102,859
|
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, support and subscription
|
|
$
|
1,480,895
|
|
|
$
|
1,430,859
|
|
|
|
|
|
|
|
|
|
|
$
|
1,213,009
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
107,106
|
|
|
|
88,047
|
|
|
|
|
|
|
|
|
|
|
|
60,339
|
|
|
|
|
|
|
|
|
|
Amortization of purchased technology
|
|
|
(80,742
|
)
|
|
|
(77,961
|
)
|
|
|
|
|
|
|
|
|
|
|
(56,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
1,507,259
|
|
|
$
|
1,440,945
|
|
|
|
|
|
|
|
|
|
|
$
|
1,216,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin percentage
|
|
|
73
|
%
|
|
|
75
|
%
|
|
|
|
|
|
|
|
|
|
|
76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Service, Support and Subscription Revenue
Cost of service, support and subscription revenue consists
primarily of costs related to the sale of online subscription
arrangements and the costs of providing customer support,
training, and consulting services which include salaries,
benefits, and stock-based compensation for employees and fees
related to professional service subcontractors. The costs
related to the sale of online subscription arrangements include
revenue-share arrangements and royalties paid to our strategic
partners as well as the costs of media, manuals and packaging
related to our subscription-based product offerings. The cost of
service, support and subscription revenue increased in 2010
compared to 2009 due to (i) increased infrastructure costs,
(ii) increased costs related to our revenue share
arrangements and (iii) increased cost related to customer
and technical support.
The cost of service, support and subscription revenue increased
in 2009 compared to 2008 due to (i) increased costs related
to customer and technical support primarily attributable to the
acquisition of Secure, and (ii) increased professional
services costs related to consulting services. The cost of
service, support and subscription revenue as a percentage of
service, support and subscription revenue increased slightly
compared to 2008 primarily attributable to the addition of
Secure customer support, training and consulting personnel,
offset by increased service contracts and support renewals.
45
We anticipate the cost of service, support and subscription
revenue will increase in absolute dollars during 2011 driven
primarily by (i) increased demand for our
subscription-based products with associated revenue-sharing
costs, (ii) increased costs attributable to providing
customer and technical support to existing and new customers and
(iii) increased infrastructure costs.
Cost of
Product Revenue
Cost of product revenue consists primarily of the cost of media,
manuals and packaging for products distributed through
traditional channels and, with respect to hardware-based
security products, the cost of computer platforms, other
hardware and embedded third-party components and technologies.
The cost of product revenue for 2010 increased from 2009 due
primarily to (i) increased transactions associated with our
network security solutions, primarily our IPS offerings and
(ii) increased freight charges.
The cost of product revenue for 2009 increased from 2008 due
primarily to additional hardware transactions as a result of the
acquisition of Secure. The cost of product revenue as a
percentage of product revenue for 2009 decreased compared to
2008 primarily due to an increase in both the number and size of
higher margin corporate transactions sold to customers through a
solution selling approach.
We anticipate that cost of product revenue will increase in
absolute dollars during 2011 due to mix and size of certain
enterprise-related transactions.
Amortization
of Purchased Technology
The increase in amortization of purchased technology in 2010
compared to 2009 was primarily attributable to our acquisition
of Solidcore in June 2009 and MX Logic in September 2009, offset
by purchased technology that became fully amortized during 2009.
Amortization for purchased technology related to both Solidcore
and MX Logic was $10.1 million in 2010 compared to
$4.1 million in 2009.
The increase in amortization of purchased technology in 2009
compared to 2008 was primarily attributable to our acquisition
of Secure in November 2008. Amortization for the purchased
technology related to this acquisition was $27.7 million in
2009.
We expect amortization of purchased technology to decrease in
absolute dollars during 2011 as a result of certain purchased
technology acquired in previous acquisitions becoming fully
amortized in 2011.
Gross
Margin
Our gross margin decreased as a percentage of revenue in 2010
compared to 2009 due primarily to (i) our product mix and
(ii) an increase in the cost of service, support and
subscription revenue as a percentage of service, support and
subscription revenue. Our gross margin decreased as a percentage
of revenue slightly in 2009 compared to 2008 due primarily to
(i) our product mix, (ii) the increase in the cost of
service, support and subscription revenue as a percentage of
service, support and subscription revenue, and
(iii) amortization of purchased technology related to
acquisitions made during the year.
Stock-based
Compensation Expense
Stock-based compensation expense consists of expense associated
with all stock-based awards made to our employees and outside
directors. Our stock-based awards include options, RSUs, RSAs,
PSUs and ESPP grants.
The following table sets forth, for the periods indicated, a
comparison of our stock-based compensation expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
|
|
2009 vs. 2008
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
2008
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Stock-based compensation expense
|
|
$
|
119,481
|
|
|
$
|
109,094
|
|
|
$
|
10,387
|
|
|
|
10
|
%
|
|
$
|
76,881
|
|
|
$
|
32,213
|
|
|
|
42
|
%
|
The $10.4 million increase in stock-based compensation
expense during 2010 compared to 2009 was primarily attributable
to (i) a (i) a $9.4 million increase in expense
relating to increased grants of RSUs and (ii) a
$6.9 million
46
increase in expense related to increased grants of PSUs, offset
by a $6.1 million decrease in expense relating to the cash
settlement of certain expired options in 2009.
The $32.2 million increase in stock-based compensation
expense during 2009 compared to 2008 was primarily attributable
to (i) a $22.7 million increase in expense relating to
increased grants of RSUs, PSUs and options and assumed RSAs and
RSUs from the 2008 acquisition of Secure, (ii) a
$6.4 million increase in expense relating to the cash
settlement of certain expired options and (iii) a
$3.7 million increase in expense related to reinstating our
ESPP in June 2008.
See Note 14 to the consolidated financial statements for
additional information.
Operating
Costs
Research
and Development
The following table sets forth, for the periods indicated, a
comparison of our research and development expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
|
|
2009 vs. 2008
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
2008
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Research and development(1)
|
|
$
|
346,083
|
|
|
$
|
324,368
|
|
|
$
|
21,715
|
|
|
|
7
|
%
|
|
$
|
252,020
|
|
|
$
|
72,348
|
|
|
|
29
|
%
|
Percentage of net revenue
|
|
|
17
|
%
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense of $32.4 million,
$27.0 million and $18.5 million in 2010, 2009 and
2008, respectively. |
Research and development expenses consist primarily of salary,
benefits, and stock-based compensation for our development and a
portion of our technical support staff, contractors fees
and other costs associated with the enhancement of existing
products and services and development of new products and
services. The increase in research and development expenses in
2010 compared to 2009 was primarily attributable to (i) a
$6.1 million increase in salary and benefit expense for
individuals performing research and development activities due
to an increase in headcount and salary increases, (ii) a
$5.4 million increase in stock-based compensation expense,
(iii) a $2.6 million acquired intangible asset
expensed in 2010, (iv) a $2.1 million increase in the
use of third-party contractors for research and development
activities and (v) increases in various other expenses
associated with research and development activities, including
increased equipment and depreciation costs. The overall increase
in research and development expenses in 2010 compared to 2009
included a net increase of $2.1 million due to the net
impact of foreign exchange rates, primarily driven by the
average U.S. Dollar exchange rate weakening against many of
the foreign currencies in which we do business.
The increase in research and development expenses in 2009
compared to 2008 was primarily attributable to (i) a
$44.5 million increase in salary and benefit expense for
individuals performing research and development activities due
to an increase in headcount primarily related to our Secure
acquisition, (ii) an $8.5 million increase in
stock-based compensation expense, (iii) a $7.8 million
increase in equipment and depreciation expense and
(iv) increases in various other expenses associated with
research and development activities. The overall increase in
research and development expenses in 2009 compared to 2008
included a net decrease of $10.0 million due to the net
impact of foreign exchange rates, primarily driven by the
average U.S. Dollar exchange rate strengthening against
foreign currencies.
We believe that continued investment in product development is
critical to attaining our strategic objectives. We expect
research and development expenses will increase in absolute
dollars during 2011.
47
Sales and
Marketing
The following table sets forth, for the periods indicated, a
comparison of our sales and marketing expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
|
|
2009 vs. 2008
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
2008
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Sales and marketing(1)
|
|
$
|
656,646
|
|
|
$
|
642,026
|
|
|
$
|
14,620
|
|
|
|
2
|
%
|
|
$
|
536,944
|
|
|
$
|
105,082
|
|
|
|
20
|
%
|
Percentage of net revenue
|
|
|
32
|
%
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense of $48.9 million,
$47.7 million and $33.1 million in 2010, 2009 and
2008, respectively. |
Sales and marketing expenses consist primarily of salary,
commissions, stock-based compensation and benefits and costs
associated with travel for sales and marketing personnel,
advertising and marketing promotions. The increase in sales and
marketing expenses during 2010 compared to 2009 reflected
(i) a $29.6 million increase in salary and benefit
expense, including commissions, for individuals performing sales
and marketing activities due to an increase in headcount and
salary increases and (ii) increases in various other
expenses associated with sales and marketing activities, offset
by an $21.7 million decrease driven by renegotiated
agreements with certain PC OEM partners. The increase in sales
and marketing expenses during 2010 compared to 2009 included a
net increase of $5.1 million due to the net impact of
foreign exchange rates, primarily driven by the average
U.S. Dollar exchange rate weakening against many of the
foreign currencies in which we do business.
The increase in sales and marketing expenses during 2009
compared to 2008 reflected (i) a $63.9 million
increase in salary and benefit expense, including commissions,
for individuals performing sales and marketing activities due to
an increase in headcount primarily related to our Secure
acquisition and increased commissions, (ii) a
$24.0 million increase related to agreements with certain
PC OEM partners, (iii) a $14.6 million increase in
stock-based compensation expense and (iv) increases in
various other expenses associated with sales and marketing
activities. The increase in sales and marketing expenses during
2009 compared to 2008 included a net decrease of
$14.0 million due to the net impact of foreign exchange
rates, primarily driven by the average U.S. Dollar exchange
rate strengthening against foreign currencies.
We anticipate that sales and marketing expenses will increase in
absolute dollars during 2011 primarily due to our planned
branding initiatives and our additional investment in sales
capacity.
General
and Administrative
The following table sets forth, for the periods indicated, a
comparison of our general and administrative expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
|
|
2009 vs. 2008
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
2008
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
|
|
General and administrative(1)
|
|
$
|
203,682
|
|
|
$
|
197,696
|
|
|
$
|
5,986
|
|
|
|
3
|
%
|
|
$
|
193,784
|
|
|
$
|
3,912
|
|
|
|
2
|
%
|
Percentage of net revenue
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense of $30.5 million,
$28.3 million and $21.6 million in 2010, 2009 and
2008, respectively. |
General and administrative expenses consist principally of
salary, stock-based compensation and benefit costs for executive
and administrative personnel, professional services and other
general corporate activities. The increase in general and
administrative expenses during 2010 compared to 2009 was
primarily attributable to (i) $7.0 million of costs in
2010 associated with our pending acquisition by Intel,
(ii) a benefit in 2009 of $6.5 million due to a
reimbursement from an insurance carrier for legal fees incurred
related to the cost of defense in connection with our
investigation of historical stock option granting practices that
concluded in 2007, and (iii) increases in various expenses
associated with general and administrative activities, including
increased
48
salary and benefit costs for executive and administrative
personnel, offset by a $12.2 million decrease in legal
expenses primarily associated with patent infringement lawsuits.
The increase in general and administrative expenses during 2009
compared to 2008 reflected (i) a $6.7 million increase
in stock-based compensation expense, (ii) a
$5.5 million benefit recognized in 2008 related to the
change in fair value of certain stock options, (iii) a
$3.4 million increase in salary and benefits for
individuals performing general and administrative activities due
to an increase in average headcount and (iv) increases in
various other expenses associated with general and
administrative activities, offset by $13.0 million decrease
in legal expenses and settlement costs, primarily related to
decreases in costs associated with indemnification of our
current and former officers and directors, as well as a
$6.5 million reimbursement from an insurance carrier for
legal fees incurred related to cost of defense incurred in
connection with our investigation of historical stock option
granting practices that concluded in 2007.
We anticipate that general and administrative expenses will
decrease in absolute dollars during 2011 primarily due to a
decrease in acquisition-related expenses.
Amortization
of Intangibles
The following table sets forth, for the periods indicated, a
comparison of the amortization of intangibles.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
2008 vs. 2007
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
2008
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Amortization of intangibles
|
|
$
|
29,743
|
|
|
$
|
40,718
|
|
|
$
|
(10,975
|
)
|
|
|
(27
|
)%
|
|
$
|
26,470
|
|
|
$
|
14,248
|
|
|
|
54
|
%
|
Intangibles consist primarily of customer-related intangible
assets. The decrease in amortization of intangibles during 2010
compared to 2009 was due to (i) decreased amortization of
Secures customer-related intangible assets that are being
amortized using an accelerated method and (ii) certain
intangibles acquired in previous acquisitions becoming fully
amortized in the fourth quarter of 2009, offset by the
acquisitions of Solidcore in June 2009 and MX Logic in September
2009, in which we acquired $38.0 million of
customer-related intangible assets The increase in amortization
of intangibles during 2009 compared to 2008 was primarily
attributable to our acquisition of Secure in November 2008, in
which we acquired $51.2 million of customer-related
intangible assets.
Assuming no new acquisitions, we expect amortization of
intangibles will decrease in absolute dollars during 2011 as a
result of certain intangibles acquired in previous acquisitions
becoming fully amortized in 2011.
Restructuring
Charges (Benefits)
The following table sets forth, for the periods indicated, a
comparison of our restructuring charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
|
|
2009 vs. 2008
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
2008
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Restructuring charges (benefits)
|
|
$
|
41,683
|
|
|
$
|
13,830
|
|
|
$
|
27,853
|
|
|
|
*
|
|
|
$
|
(1,752
|
)
|
|
$
|
15,582
|
|
|
|
*
|
|
|
|
|
* |
|
Calculation not meaningful |
Restructuring charges in 2010 totaled $41.7 million, of
which $27.5 million related to nine facilities that were
vacated in 2010 including our previous Santa Clara
headquarters, $14.0 million related to the elimination of
certain positions and $0.2 million primarily related to
accretion on facilities vacated in previous years.
Restructuring charges in 2009 totaled $13.8 million, of
which $11.3 million primarily related to the realignment of
our sales and marketing workforce and staffing across various
other departments and an accrual over the service period for our
elimination of certain positions related to acquisitions,
$3.1 million primarily related to additional accrual over
the service period for our 2008 elimination of certain positions
at Secure and accretion of lease exit costs and
$1.7 million primarily related to our 2009 restructuring of
two facilities. These charges were partially offset by a
$2.4 million restructuring benefit related to our
re-occupying previously vacated space in our Santa Clara
facility and terminating sublease agreements for that facility
that we had previously restructured in 2003 and 2004.
49
Restructuring benefit in 2008 totaled $1.8 million. We
recorded an $8.4 million benefit, net of accretion, related
primarily to changes in previous estimates of base rent and
sublease income for the Santa Clara lease, which was
restructured in 2003 and 2004 offset by a charge of
$6.6 million related to the elimination of certain
positions at SafeBoot and Secure that were redundant to
positions at McAfee, the realignment of our sales force, and the
realignment of staffing across all departments. See Note 8
to our consolidated financial statements for a description of
restructuring activities.
In-process
Research and Development
During 2008, we recorded $19.5 million for in-process
research and development related to the acquisition of Secure in
November 2008, which was fully expensed upon purchase because
technological feasibility had not been achieved and there was no
alternative use for the projects under development. The 2008
in-process research and development included our Firewall
Sidewinder, Webwasher and Mail products, which have all been
completed as of December 31, 2010. Due to the
implementation of new accounting guidance in 2009, in-process
research and development is no longer immediately expensed upon
closing of an acquisition.
Interest
and Other Income, Net
The following table sets forth, for the periods indicated, a
comparison of our interest and other income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
|
|
2009 vs. 2008
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
2008
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Interest and other income, net
|
|
$
|
68
|
|
|
$
|
2,202
|
|
|
$
|
(2,134
|
)
|
|
|
(97
|
)%
|
|
$
|
45,687
|
|
|
$
|
(43,485
|
)
|
|
|
(95
|
)%
|
Interest and other income, net includes interest earned on
investments and interest expense related to our credit facility,
as well as net foreign currency transaction gains or losses and
net forward contract gains or losses. The decrease in interest
and other income, net in 2010 compared to 2009 was primarily due
to an increase in net foreign currency transaction losses of
$1.7 million and a decrease in interest income of
$2.8 million, offset by decreased interest expense of
$2.1 million. The decrease in interest income was primarily
due to a lower average rate of annualized return on the
investments in 2010 compared to 2009. Interest expense in 2009
included interest on our outstanding bank term loan during the
period. During 2010, interest expense included commitment fees
on our unused credit facility. See additional information
regarding our credit facilities in Liquidity and Capital
Resources below.
The decrease in interest and other income, net in 2009 compared
to 2008 was primarily due to a decrease in interest income of
$30.3 million, interest expense in 2009 of
$4.9 million and net foreign currency transaction losses of
$2.4 million in 2009 compared to net foreign currency
transaction gains of $6.4 million in 2008. The decrease in
interest income in 2009 compared to 2008 was primarily due to
(i) a lower average rate of return on our investments from
approximately 4% in 2008 to 1% in 2009 and (ii) a decrease
in our average cash, cash equivalents and marketable securities
of approximately $200 million in 2009 compared to 2008.
Interest expense in 2009 included interest on our outstanding
bank term loan during the period.
We anticipate that interest and other income, net will be flat
in 2011 compared to 2010.
Impairment
of Marketable Securities
We did not have any impairment of securities in 2010. During
2009 and 2008, we recorded an expense for
other-than-temporary
impairments on certain of our marketable securities of
$0.7 million and $18.5 million, respectively. Economic
conditions had widespread negative effects on the markets for
debt securities in 2009 and 2008. The 2009 and 2008
other-than-temporary
impairments were recorded on certain of our asset-backed and
mortgage-backed securities, which had significant declines in
fair value, as well as one corporate debt security due to the
issuer declaring bankruptcy. We currently hold some asset-backed
and mortgage-backed securities purchased in prior periods, but
do not plan to acquire these types of securities in future
periods. Pursuant to accounting guidance effective in the second
quarter of 2009,
other-than-temporary
impairment on our marketable securities is now based on our
determination of whether the security will be sold prior to
recovery or if our cost basis in the securities will be
recovered. Further deterioration in the underlying collateral of
our asset-backed and collateralized mortgage securities could
result in additional impairment charges, as will collectability
issues on our corporate debt securities.
50
Gain on
Sale of Investments, net
In 2010, 2009 and 2008, we recognized net gains on the sale of
marketable securities of $0.2 million, $0.4 million
and $5.5 million, respectively. Our investments are
classified as
available-for-sale,
and we may sell securities from time to time to move funds into
investments with more lucrative yields for liquidity purposes
or, in the case of 2008, given the current economic environment,
into investments that are considered more conservative, thus
resulting in gains and losses on sale.
Provision
for Income Taxes
The following table sets forth, for the periods indicated, a
year-over-year
comparison of our provision for income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
|
|
2009 vs. 2008
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
2008
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Provision for income taxes
|
|
$
|
45,528
|
|
|
$
|
50,803
|
|
|
$
|
(5,275
|
)
|
|
|
(10
|
)%
|
|
$
|
49,997
|
|
|
$
|
806
|
|
|
|
2
|
%
|
Effective tax rate
|
|
|
20
|
%
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
Tax expense was 20% of income before taxes in 2010 and 23% of
income before income taxes in both 2009 and 2008. The effective
tax rate for 2010 differs from the U.S. federal statutory
rate (statutory rate) due to benefits of foreign tax
credits, research and development credits, lower tax rates in
certain jurisdictions, and adjustments to tax exposures. In
addition, the company recognized a net benefit related to the
change in judgment regarding our ability to utilize certain
foreign tax credits in future years. These benefits were
partially offset by tax effects of stock compensation and deemed
repatriations of earnings from foreign subsidiaries. The
decrease in the 2010 tax rate as compared to 2009 is primarily
related to release of valuation allowance on the foreign tax
credit in 2010 as well as benefits related to refunds of
withholding taxes due to changes in law or resolution of tax
exams.
During the fourth quarter of 2010, the company recognized a net
tax benefit as a result of the reenactment of the
U.S. federal research and development credit, beneficial
adjustments related to return filings, and release of the
valuation allowance on foreign tax credits.
The effective tax rate for 2009 differs from the statutory rate
due to the benefits of foreign tax credits, research and
development credits and lower tax rates in certain
jurisdictions. These benefits are partially offset by tax
effects of stock compensation, deemed repatriations of earnings
from foreign subsidiaries and adjustments to tax exposures and
valuation allowances. The tax rate was unchanged from 2008 to
2009 as we had a tax benefit of a shift in jurisdictional
earnings in 2009 and a benefit of the release of valuation
allowance against income in higher tax jurisdictions in 2008.
The effective tax rate for 2008 differs from the statutory rate
due to the benefits of releasing valuation allowance on our
foreign tax credits, research and development credits and lower
tax rates in certain jurisdictions. These benefits were
partially offset by tax on deemed repatriations of earnings from
foreign subsidiaries, the tax effects of stock compensation, and
the expensing of $19.5 million in-process research and
development related to the Secure acquisition.
Our future tax rates could be adversely affected if pretax
earnings are proportionally less than amounts in prior years in
countries where we have lower statutory rates or by unfavorable
changes in tax laws and regulations. We cannot reasonably
estimate the impact to our future effective tax rates for
possible changes in earnings or tax laws and regulations.
The earnings from our foreign operations in India are subject to
a tax holiday. In August 2009, the Indian government extended
the period through which the holiday would be effective to
March 31, 2011. The tax holiday provides for zero percent
taxation on certain classes of income and requires certain
conditions to be met. We were in compliance with these
conditions as of December 31, 2010.
In 2010, we concluded the examinations in the United States for
the calendar years 2006 and 2007, in Germany for the years 2002
to 2007 and in Japan for the years 2007 to 2009. The conclusion
of these examinations did not have a material impact on the
financial statements. We continue to be under audit in the
United States and other
51
jurisdictions. The Internal Revenue Service is presently
conducting an examination of our federal income tax returns for
the calendar years 2008 and 2009. We are also currently under
examination by the State of California for the years 2004 to
2007.
Reconciliation
of GAAP to Non-GAAP Financial Measures
The following presentation includes non-GAAP measures. Our
non-GAAP measures are not meant to be considered in isolation or
as a substitute for comparable GAAP measures. For a detailed
explanation of the adjustments made to comparable GAAP measures,
the reasons why management uses these measures, the usefulness
of these measures and the material limitation of these measures,
see items (1) (13) below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP operating income
|
|
$
|
229,422
|
|
|
$
|
222,307
|
|
|
$
|
189,571
|
|
Impact of signature file update(1)
|
|
|
7,923
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense(2)
|
|
|
119,481
|
|
|
|
109,094
|
|
|
|
77,263
|
|
Amortization of purchased technology(3)
|
|
|
80,742
|
|
|
|
77,961
|
|
|
|
56,811
|
|
Amortization of intangibles(3)
|
|
|
29,743
|
|
|
|
40,718
|
|
|
|
26,470
|
|
Restructuring charges (benefits)(4)
|
|
|
41,683
|
|
|
|
13,830
|
|
|
|
(1,752
|
)
|
Acquisition-related costs(5)
|
|
|
16,598
|
|
|
|
34,448
|
|
|
|
7,430
|
|
Litigation-related and other costs(6)
|
|
|
4,250
|
|
|
|
5,525
|
|
|
|
14,989
|
|
Acquired intangible asset expensed to research and development(7)
|
|
|
2,582
|
|
|
|
|
|
|
|
2,000
|
|
Loss on sale/disposal of assets and technology(8)
|
|
|
414
|
|
|
|
474
|
|
|
|
193
|
|
In-process research and development(9)
|
|
|
|
|
|
|
|
|
|
|
19,500
|
|
Change in fair value of stock-based liability awards(10)
|
|
|
|
|
|
|
|
|
|
|
(5,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP operating income
|
|
$
|
532,838
|
|
|
$
|
504,357
|
|
|
$
|
386,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income
|
|
$
|
184,112
|
|
|
$
|
173,420
|
|
|
$
|
172,209
|
|
Impact of signature file update(1)
|
|
|
7,923
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense(2)
|
|
|
119,481
|
|
|
|
109,094
|
|
|
|
77,263
|
|
Amortization of purchased technology(3)
|
|
|
80,742
|
|
|
|
77,961
|
|
|
|
56,811
|
|
Amortization of intangibles(3)
|
|
|
29,743
|
|
|
|
40,718
|
|
|
|
26,470
|
|
Restructuring charges (benefits)(4)
|
|
|
41,683
|
|
|
|
13,830
|
|
|
|
(1,752
|
)
|
Acquisition-related costs(5)
|
|
|
16,598
|
|
|
|
34,448
|
|
|
|
7,430
|
|
Litigation-related and other costs(6)
|
|
|
4,250
|
|
|
|
5,525
|
|
|
|
14,989
|
|
Acquired intangible asset expensed to research and development(7)
|
|
|
2,582
|
|
|
|
|
|
|
|
2,000
|
|
Loss on sale/disposal of assets and technology(8)
|
|
|
414
|
|
|
|
474
|
|
|
|
193
|
|
In-process research and development(9)
|
|
|
|
|
|
|
|
|
|
|
19,500
|
|
Change in fair value of stock-based liability awards(10)
|
|
|
|
|
|
|
|
|
|
|
(5,483
|
)
|
Marketable securities (accretion) impairment(11)
|
|
|
(1,499
|
)
|
|
|
60
|
|
|
|
18,533
|
|
Provision for income taxes(12)
|
|
|
45,528
|
|
|
|
50,803
|
|
|
|
49,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP income before provision for income taxes
|
|
|
531,557
|
|
|
|
506,333
|
|
|
|
438,160
|
|
Non-GAAP provision for income taxes(13)
|
|
|
127,574
|
|
|
|
121,520
|
|
|
|
118,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income
|
|
$
|
403,983
|
|
|
$
|
384,813
|
|
|
$
|
319,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted *:
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income per share diluted
|
|
$
|
1.17
|
|
|
$
|
1.09
|
|
|
$
|
1.08
|
|
Stock-based compensation expense per share(2)
|
|
|
0.76
|
|
|
|
0.69
|
|
|
|
0.48
|
|
Other adjustments per share(1),(3)-(13)
|
|
|
0.64
|
|
|
|
0.64
|
|
|
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income per share diluted*
|
|
$
|
2.57
|
|
|
$
|
2.42
|
|
|
$
|
2.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute non-GAAP net income per share
diluted
|
|
|
157,385
|
|
|
|
158,988
|
|
|
|
159,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
* |
|
Non-GAAP net income per share is computed independently for each
period presented. The sum of GAAP net income per share and
non-GAAP adjustments may not equal non-GAAP net income per share
due to rounding differences. |
|
|
|
The non-GAAP financial measures are non-GAAP operating income,
non-GAAP net income and non-GAAP net income per
share diluted, which adjust for the following items:
the impact of signature file update, stock-based compensation
expense, amortization of purchased technology and intangibles,
restructuring charges (benefits), acquisition-related costs,
litigation-related and other costs, acquired intangible asset
expensed to research and development, loss on sale/disposal of
assets and technology, in-process research and development,
change in fair value of stock-based liability awards, marketable
securities (accretion) impairment, income taxes and certain
other items. We believe that the presentation of these non-GAAP
financial measures is useful to investors, and such measures are
used by our management, for the reasons associated with each of
the adjusting items as described below: |
|
(1) |
|
Impact of signature file update primarily reflects the
negative impact during the three months ended June 30,
2010, related to prior-period deferred revenue and additional
costs incurred. The deferred revenue was originally scheduled to
be recognized from the balance sheet and was delayed into future
periods due to actions we took when providing customer care
packages to our customers related to our release in April of an
anti-virus signature file update that impacted some of our
customers. We consider our operating results without this impact
when evaluating our ongoing performance as we believe that the
exclusion allows for more accurate comparisons of our financial
results to previous periods. In addition, we believe it is
useful to investors to understand the specific impact of the
signature file update on our operating results. |
|
(2) |
|
Stock-based compensation expense consists of expense
relating to stock-based awards issued to employees and outside
directors including stock options, restricted stock awards and
units, restricted stock units with performance-based vesting and
our Employee Stock Purchase Plan. Because of varying available
valuation methodologies, subjective assumptions and the variety
of award types, we believe that the exclusion of stock-based
compensation expense allows for more accurate comparisons of our
operating results to our peer companies, and for a more accurate
comparison of our financial results to previous periods. In
addition, we believe it is useful to investors to understand the
specific impact of stock-based compensation expense on our
operating results. |
|
(3) |
|
Amortization of purchased technology and intangibles are
non-cash charges that can be impacted by the timing and
magnitude of our acquisitions. We consider our operating results
without these charges when evaluating our ongoing performance
and/or predicting our earnings trends, and therefore exclude
such charges when presenting non-GAAP financial measures. We
believe the assessment of our operations excluding these costs
is relevant to our assessment of internal operations and
comparisons to the performance of other companies in our
industry. |
|
(4) |
|
Restructuring charges (benefits) include excess facility
and asset-related restructuring charges and severance costs
resulting from reductions of personnel driven by modifications
to our business strategy, such as acquisitions or divestitures.
These costs may vary in size based on our restructuring plan. In
addition, our assumptions are continually evaluated, which may
increase or reduce the charges in a specific period. Our
management excludes these costs when evaluating our ongoing
performance and/or predicting our earnings trends, and therefore
excludes these charges when presenting non-GAAP financial
measures. |
|
(5) |
|
Acquisition-related costs include direct costs of the
acquisition and expenses related to acquisition integration
activities. Examples of costs directly related to an acquisition
include transactions fees, due diligence costs, acquisition
retention bonuses and severance, fair value adjustments related
to contingent consideration, amounts or recoveries subject to
escrow provisions, and certain legal costs related to acquired
litigation. Additionally, we have included direct costs related
to our pending acquisition by Intel. These expenses vary
significantly in size and amount and are disregarded by our
management when evaluating and predicting earnings trends
because these charges are unique to specific acquisitions, and
are therefore excluded by us when presenting non-GAAP financial
measures. |
|
(6) |
|
Litigation-related and other costs are charges related to
discrete and unusual events where we have incurred significant
costs which, in our view, are not incurred in the ordinary
course of operations. Examples of such |
53
|
|
|
|
|
charges include litigation and investigation-related charges.
Our management excludes these costs when evaluating our ongoing
performance and/or predicting our earnings trends, and therefore
excludes these charges when presenting non-GAAP financial
measures. Further, we believe it is useful to investors to
understand the specific impact of these charges on our operating
results. |
|
(7) |
|
Acquired intangible asset expensed to research and
development is related to the purchase of an intangible
asset which was expensed to research and development. Our
management excludes this cost when evaluating our ongoing
performance and/or predicting our earnings trends, and therefore
excludes this cost when presenting non-GAAP financial measures.
Further, we believe it is useful to investors to understand the
specific impact of this cost on our operating results. |
|
(8) |
|
Loss on sale/disposal of assets and technology relate to
the sale or disposal of our assets. These losses or gains can
vary significantly in size and amount. Our management excludes
these losses or gains when evaluating our ongoing performance
and/or predicting our earnings trends, and therefore excludes
these items when presenting non-GAAP financial measures. In
addition, in periods where we realize gains or incur losses on
the sale of assets and/or technology, we believe it is useful to
investors to highlight the specific impact of these amounts on
our operating results. |
|
(9) |
|
In-process research and development constitute non-cash
charges that vary significantly in size and amount depending on
the business combination and, therefore, are disregarded by our
management when evaluating our ongoing performance and/or
predicting our earnings trends. We believe it is useful to
investors to understand the specific impact of these charges on
our operating results. |
|
(10) |
|
Change in fair value of stock-based liability awards
constitutes the expense or benefit associated with the
change in fair value of stock-based liability awards at the end
of the each reporting period. Our management excludes these
(benefits) costs when evaluating our ongoing performance and/or
predicting our earnings trends, and therefore excludes these
amounts when presenting non-GAAP financial measures. |
|
(11) |
|
Marketable securities (accretion) impairment includes
other than temporary declines in the fair value of
our
available-for-sale
securities and subsequent recoveries of these losses. Our
management excludes this loss/income when evaluating our ongoing
performance and/or predicting our earnings trends, and therefore
excludes this loss/income when presenting non-GAAP financial
measures. |
|
(12) |
|
Provision for income taxes is our GAAP provision that
must be added back to GAAP net income to reconcile to non-GAAP
income before taxes. |
|
(13) |
|
Non-GAAP provision for income taxes reflects a 24%
non-GAAP effective tax rate in 2010 and 2009 and a 27% non-GAAP
effect tax rate in 2008 which is used by our management to
calculate non-GAAP net income. Management believed that the 24%
and 27% effective tax rate in each respective period is
reflective of a long-term normalized tax rate under the global
McAfee legal entity and operating structure as of the respective
period end. |
Non-GAAP Operating
Income
The $28.5 million increase in non-GAAP operating income
(which is adjusted for certain items excluded by management when
evaluating our ongoing performance
and/or
predicting our earnings trends) for 2010 compared to 2009
resulted from a $143.6 million increase in non-GAAP net
revenue that exceeded (i) the $68.8 million increase
in non-GAAP costs of net revenue primarily related to increased
costs related to our online subscription arrangements and
(ii) the $46.3 million increase in non-GAAP operating
expenses that was primarily related to an increase in salaries
and benefits due to an increase in headcount and increased legal
expense included in the calculation of non-GAAP operating income
in 2010 compared to 2009 due to a benefit in 2009 from a
$6.5 million insurance reimbursement.
The $117.4 million increase in non-GAAP operating income in
2009 compared to 2008 was primarily attributable to the overall
growth of the company, including a $327.3 million increase
in revenue, offset by a $109.6 million increase in salaries
and benefits, a $24.0 million increase related to
agreements with certain PC OEM partners and increases in various
other expenses.
54
Non-GAAP Net
Income
The $19.2 million increase in non-GAAP net income in 2010
compared to 2009 resulted from the increases in non-GAAP
operating income described above.
The $65.0 million increase in non-GAAP net income in 2009
compared to 2008 was primarily attributable to items discussed
above under operating income offset by a $43.5 million
decrease in interest and other income primarily attributable to
lower yields and lower cash and marketable securities balances,
decreased foreign currency transaction gains, and increased
interest expense associated with our credit facility.
Acquisitions
Trust Digital
In June 2010, we acquired 100% of the outstanding shares of
Trust Digital, a provider of enterprise management and
security software for mobile devices for a total purchase price
of $32.5 million. With this acquisition, we plan to deliver
a comprehensive mobile security solution. The results of
operations for Trust Digital have been included in our
results of operations since the date of acquisition.
MX
Logic
In September 2009, we acquired 100% of the outstanding shares of
MX Logic, a Software-as-a-Service provider of on-demand email,
web security and archiving solutions for a total purchase price
of $163.1 million. The MX Logic purchase agreement provided
for earn-out payments totaling up to $30.0 million
contingent upon the achievement of certain MX Logic revenue
targets. With this acquisition, we plan to deliver a
comprehensive, cloud-based security portfolio. The results of
operations for MX Logic have been included in our results of
operations since the date of acquisition.
Secure
In November 2008, we acquired Secure for $490.1 million.
With this acquisition, we deliver a complete network security
portfolio covering intrusion prevention, firewall, web security,
email security and data protection, and network access control
to organizations of all sizes. The results of operations for
Secure have been included in our results of operations since the
date of acquisition.
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Net cash provided by operating activities
|
|
$
|
594,640
|
|
|
$
|
496,384
|
|
|
$
|
308,322
|
|
Net cash (used in) provided by investing activities
|
|
$
|
(298,754
|
)
|
|
$
|
(387,832
|
)
|
|
$
|
200,226
|
|
Net cash (used in) provided by financing activities
|
|
$
|
(215,640
|
)
|
|
$
|
70,114
|
|
|
$
|
(371,962
|
)
|
Overview
At December 31, 2010, our cash, cash equivalents and
marketable securities totaled $1,183.5 million. Our
principal sources of liquidity were our existing cash, cash
equivalents and short-term marketable securities of
$1,098.5 million and our operating cash flows. Our
principal uses of cash were operating costs, which consist
primarily of employee-related expenses, such as compensation and
benefits, as well as other general operating expenses, partner
and OEM arrangements, acquisitions, and purchases of marketable
securities.
During 2010, we used $300.0 million to repurchase common
stock in the open market, $170.4 million for the net
purchase of marketable securities, $86.9 million for
purchases of property and equipment and $28.5 million to
repurchase shares of common stock in connection with our
obligation to holders of RSUs, RSAs and PSUs to withhold the
number of shares required to satisfy the holders tax
liabilities in connection with the vesting of such shares. We
also used $51.9 million for the acquisitions of
Trust Digital, tenCube and InternetSafety.com, net of cash
55
acquired. In addition, during 2010, our cash was negatively
impacted by $19.0 million, primarily due to the
U.S. Dollar strengthening against the Euro. Approximately
61% of our cash is held in European markets.
We classify our investment portfolio as
available-for-sale,
and our investments are made with a policy of capital
preservation and liquidity as the primary objectives. We
generally hold investments in money market, U.S. government
fixed income, U.S. government agency fixed income and
investment grade corporate fixed income securities to maturity.
We may sell an investment at any time if the quality rating of
the investment declines, the yield on the investment is no
longer attractive or we are in need of cash. We expect to
continue our investing activities, including holding investment
securities of a short-term and long-term nature. During the
current challenging markets, we are investing cash in
instruments with short to medium-term maturities of highly-rated
issuers, including U.S. government and FDIC guaranteed
investments.
In December 2008, we entered into a credit agreement with a
group of financial institutions, which we amended in February
2010 (Credit Facility). The Credit Facility provides
for a $450.0 million unsecured revolving credit facility
with a $25.0 million letter of credit sublimit. Subject to
the satisfaction of certain conditions, we may further increase
the revolving loan commitments to an aggregate of
$600.0 million. We borrowed $100.0 million under the
term loan portion of the Credit Facility in January 2009 and
paid the principal and accrued interest on our term loan in
December 2009. We had no amounts outstanding under the Credit
Facility as of December 31, 2009. We had no amounts
outstanding under the Credit Facility at any point during 2010.
Our management continues to monitor the financial markets and
general global economic conditions as a result of the recent
distress in the financial markets. As we monitor market
conditions, our liquidity position and strategic initiatives, we
may seek either short-term or long-term financing from external
credit sources in addition to the credit facilities discussed
herein. Our ability to raise funds may be adversely affected by
a number of factors, including factors beyond our control, such
as the current weakness in the economic conditions in the
markets in which we operate and into which we sell our products,
and increased uncertainty in the financial, capital and credit
markets. There can be no assurance that additional financing
would be available on terms acceptable to us, if at all.
Our management plans to use our cash and cash equivalents for
future operations, potential acquisitions and earn-out payments
related to current acquisitions. We may in the future repurchase
our common stock on the open market though we do not expect this
to occur while the acquisition by Intel remains pending. We
believe that our cash and cash equivalent balances and cash that
we generate over time from operations, along with amounts
available for borrowing under the Credit Facility, will be
sufficient to satisfy our anticipated cash needs for working
capital and capital expenditures for at least the next
12 months and the foreseeable future.
Operating
Activities
Net cash provided by operating activities in 2010, 2009 and 2008
was primarily the result of our net income of
$184.1 million, $173.4 million and
$172.2 million, respectively, net of non-cash related
expenses. During 2010, our primary working capital sources were
increased deferred revenue, which was attributable to growing
sales of maintenance renewals from our expanding customer base
and increased sales of subscription-based offerings and
increased accrued compensation and benefits and other
liabilities. Our primary working capital uses of cash were
increased accounts receivable due to increased invoicing over
collections at the end of the year and increased prepaid
expenses, deferred costs of revenue and other assets. The
amounts for changes in assets and liabilities presented in the
consolidated statements of cash flows reflect adjustments to
exclude certain asset items that have not been paid in the
current period.
During 2009, our primary working capital sources were increased
deferred revenue, which was attributable to growing sales of
maintenance renewals from our expanding customer base and
increased sales of subscription-based offerings and decreased
accounts receivable due to significant collection efforts. Our
primary working capital use of cash was prepaid expenses,
deferred costs of revenue and other assets primarily
attributable to prepayments to our partners. The amounts for
changes in assets and liabilities presented in the consolidated
statements of cash flows reflect adjustments to exclude certain
asset items that have not been paid in the current period.
During 2008, our primary working capital source was increased
deferred revenue, which was attributable to growing sales of
maintenance renewals from our expanding customer base and
increased sales of subscription-
56
based offerings. Working capital uses of cash included increased
accounts receivable primarily due to increased invoicing over
collections at the end of the year, increased prepaid expenses,
deferred costs of revenue and other assets, and decreased
accrued taxes and other liabilities primarily due to a tax
settlement payment of approximately $30.0 million
Our cash and marketable securities balances are held in numerous
locations throughout the world, including substantial amounts
held outside the United States. As of December 31, 2010 and
2009, $755.0 million and $580.6 million, respectively,
were held outside the United States. We utilize a variety of
operational and financing strategies to ensure that our
worldwide cash is available in the locations in which it is
needed.
In the ordinary course of business, we enter into various
agreements with minimum contractual commitments including
telecom contracts, advertising, software licensing, royalty and
distribution-related agreements. We expect to meet our
obligations as they become due through available cash,
borrowings under the Credit Facility, and internally generated
funds. We expect to continue generating positive working capital
through our operations. However, we cannot predict whether
current trends and conditions will continue or what the effect
on our business might be from the competitive environment in
which we operate. In addition, we currently cannot predict the
outcome of the litigation described in Note 19 to the
consolidated financial statements.
Investing
Activities
Net cash used in investing activities was $298.8 million in
2010 and $387.8 million in 2009. In 2010, the primary uses
of cash included $170.4 million of net purchases of
marketable securities, $86.9 million for purchases of
property and equipment and $51.9 million for acquisitions.
In 2009, the primary uses of cash in investing activities
included $171.6 million for acquisitions,
$158.2 million of net purchases of marketable securities
and $60.5 million for purchases of property and equipment.
Our cash used for acquisitions decreased to $51.9 million
in 2010 compared to $171.6 million in 2009. During 2010, we
paid $32.5 million for Trust Digital,
$10.0 million for tenCube and $9.4 million for
InternetSafety.com. During 2009, we paid $137.9 million,
$31.2 million and $2.5 million, net of cash acquired,
to purchase MX Logic, Solidcore and Endeavor Security, Inc.,
respectively.
Our cash used for purchases of property and equipment increased
to $86.9 million in 2010 compared to $60.5 million in
2009. The increase is primarily related to capital expenditures
for our new corporate headquarters.
Our cash provided by investing activities was
$200.2 million in 2008. During 2008, we had
$801.7 million of net proceeds from marketable securities.
During 2008, we used $550.6 million for acquisitions and
$48.7 million for property and equipment. During 2008, we
paid $447.4 million, $46.2 million, and
$49.0 million, net of cash acquired, to purchase Secure,
Reconnex Corporation, and ScanAlert, Inc., respectively.
The property and equipment purchased during both 2008 was
primarily for upgrades of our existing systems and purchases of
computers, equipment and software and for leasehold improvements
at various offices.
We expect to continue to have slight decreases in capital
expenditures compared to the prior year.
Financing
Activities
Net cash used in financing activities was $215.6 million
compared to net cash provided by financing activities of
$70.1 million in 2009 and net cash used in financing
activities of $372.0 million in 2008. In February 2010, our
board of directors authorized the repurchase of up to
$500.0 million of our common stock from time to time in the
open market or through privately negotiated transactions through
December 2011, depending upon market conditions, share price and
other factors. During 2010 and 2008, we used $300.0 million
and $500.0 million, respectively, to repurchase
approximately 8.3 million shares and 14.5 million
shares of our common stock in the open market, including
commissions paid on these transactions. We had no repurchases of
our common stock in the open market during 2009. We do not
expect to repurchase additional shares of our common stock in
the open market while the acquisition by Intel remains pending.
During 2010, 2009 and 2008, we used $28.5 million,
$25.3 million and $16.6 million, respectively, to
repurchase shares of our common stock in connection with our
obligation to holders of RSUs, RSAs and PSUs to withhold the
number of shares required to satisfy the holders tax
liabilities in
57
connection with the vesting of such shares. These shares were
not part of the publicly announced repurchase program.
The primary source of cash provided by financing activities is
proceeds from the issuance of common stock under our employee
stock benefit plans. In 2010, we received proceeds of
$125.4 million compared to $90.1 million in 2009 and
$130.0 million in 2008.
During 2010, we paid $19.0 million of contingent
consideration related to our 2009 acquisitions. During both 2010
and 2009, we paid $4.9 million of accrued purchase price
related to a 2008 acquisition.
While we expect to continue to receive proceeds from our
employee stock benefit plans in future periods, the timing and
amount of such proceeds are difficult to predict and are
contingent on a number of factors including the type of equity
awards granted to our employees, the price of our common stock,
the number of employees participating in the plans and general
market conditions.
Credit
Facilities
In December 2008, we entered into a credit agreement with a
group of financial institutions, which we amended in February
2010. The Credit Facility provides a $450.0 million
unsecured revolving credit facility with a $25.0 million
letter of credit sublimit. Subject to the satisfaction of
certain conditions, we may further increase the revolving loan
commitments to an aggregate of $600.0 million. Loans may be
made in U.S. Dollars, Euros or other currencies agreed to
by the lenders. Commitment fees range from 0.38% to 0.63% of the
unused portion on the Credit Facility depending on our
consolidated leverage ratio. Loans bear interest at our election
at the prime rate (a prime rate loan) or at an
adjusted LIBOR rate plus a margin (ranging from 2.5% to 3.0%)
that varies with our consolidated leverage ratio (a
eurocurrency loan). Interest on the loans is payable
quarterly in arrears with respect to prime rate loans and at the
end of an interest period (or at each three month interval in
the case of loans with interest periods greater than three
months) in the case of eurocurrency loans. No balances were
outstanding under the Credit Facility at December 31, 2010
and 2009, respectively.
The Credit Facility contains financial covenants, measured at
the end of each of our quarters, providing that our consolidated
leverage ratio (as defined in the Credit Facility) cannot exceed
2.0 to 1.0 and our consolidated interest coverage ratio (as
defined in the Credit Facility) cannot be less than 3.0 to 1.0.
Additionally, the Credit Facility contains affirmative
covenants, including covenants regarding the payment of taxes,
maintenance of insurance, reporting requirements and compliance
with applicable laws. The Credit Facility contains negative
covenants, among other things, limiting our ability and our
subsidiaries ability to incur debt, liens, make
acquisitions, make certain restricted payments and sell assets.
The events of default under the Credit Facility include payment
defaults, cross defaults with certain other indebtedness,
breaches of covenants, judgment defaults, bankruptcy events and
the occurrence of a change in control (as defined in the Credit
Facility). At December 31, 2010 and December 31, 2009,
we were in compliance with all covenants in the Credit Facility.
At December 31, 2009, we had $1.5 million of
restricted cash deposited at one of our lenders. The
$1.5 million deposit was released in 2010 when we amended
the Credit Facility
The credit facility terminates on December 22, 2012, on
which date all outstanding principal of, together with accrued
interest on, any revolving loans will be due. We may prepay the
loans and terminate the commitments at any time, without premium
or penalty, subject to reimbursement of certain costs in the
case of eurocurrency loans. We have elected to terminate the
Credit Facility upon closing of our acquisition by Intel.
In addition, we have a 14.0 million Euro credit facility
with a bank (Euro Credit Facility). The Euro Credit
Facility is available on an offering basis, meaning that
transactions under the Euro Credit Facility will be on such
terms and conditions, including interest rate, maturity,
representations, covenants and events of default, as mutually
agreed between us and the bank at the time of each specific
transaction. The Euro Credit Facility is intended to be used for
short-term credit requirements, with terms of one year or less.
The Euro Credit Facility can be canceled at any time. No
balances were outstanding under the Euro Credit Facility at any
point during 2010 and 2009.
58
Contractual
Obligations
A summary of our fixed contractual obligations and commitments
at December 31, 2010 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Operating leases(1)
|
|
$
|
138,871
|
|
|
$
|
28,475
|
|
|
$
|
43,558
|
|
|
$
|
27,661
|
|
|
$
|
39,177
|
|
Other commitments(2)
|
|
|
158,620
|
|
|
|
86,461
|
|
|
|
63,228
|
|
|
|
8,931
|
|
|
|
|
|
Purchase obligations(3)
|
|
|
16,994
|
|
|
|
16,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued taxes(4)
|
|
|
3,973
|
|
|
|
3,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
318,458
|
|
|
$
|
135,903
|
|
|
$
|
106,786
|
|
|
$
|
36,592
|
|
|
$
|
39,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating leases are for office space and office equipment. The
operating lease commitments above reflect contractual and
reasonably assured rent escalations under the lease
arrangements. The most significant of our lease contractual
obligations relate to the following leases: $49.2 million
for our new corporate headquarters in Santa Clara,
California, $15.7 million for our former corporate
headquarters in Santa Clara, California, $17.6 million
for two St. Paul, Minnesota facility leases, $8.8 million
for the Slough, United Kingdom facility lease and
$4.0 million for the Cork, Ireland facility lease. |
|
(2) |
|
Other commitments are minimum contractual commitments including
distribution, telecom, software licensing and royalty agreements. |
|
(3) |
|
Purchase obligations consist of purchase orders to our contract
manufacturers and suppliers, based on our defined criteria, in
order to manage manufacturing lead times and help ensure
adequate component supply. |
|
(4) |
|
Accrued taxes are tax liabilities, including interest and
penalties, related to uncertain tax positions. |
As of December 31, 2010, we had approximately
$66.5 million of tax liabilities, including interest and
penalties, related to uncertain tax positions. Due to the high
degree of uncertainty regarding the settlement of these
liabilities, we are unable to estimate the years in which future
cash outflows may occur other than the amount included in the
table above.
In addition to the contractual obligations above and as
permitted under Delaware law, we have agreements whereby we
indemnify our officers and directors for certain events or
occurrences while the officer or director is, or was, serving at
our request in such capacity. Our maximum potential liability
under these indemnification agreements is not limited; however,
we have director and officer insurance coverage that we believe
will enable us to recover a portion or all of any future amounts
paid.
Off-Balance
Sheet Arrangements
We do not have off-balance sheet arrangements or special purpose
entities.
Financial
Risk Management
The following discussion about our risk management activities
includes forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those
projected in the forward-looking statements.
Foreign
Currency Risk
As a global concern, we face exposure to movements in foreign
currency exchange rates. Our functional currency is typically
the currency of the local country. Our primary exposures are
related to non U.S. Dollar-denominated sales and operating
expenses in Europe, Latin America and Asia. At the present time,
we hedge only those currency exposures associated with certain
assets and liabilities denominated in nonfunctional currencies
and do not generally hedge anticipated foreign currency cash
flows or transact in foreign currencies for trading or other
speculative purposes. The success of this activity depends upon
estimates of transaction activity denominated in
59
various currencies, primarily the Euro, the British Pound and
the Japanese Yen. To the extent that these estimates are
incorrect, we could experience unanticipated currency gains or
losses.
To reduce exposures associated with certain nonfunctional
monetary assets and liabilities, we enter into forward
contracts. Our foreign exchange contracts typically range from
one to three months in original maturity. The forward contracts
do not qualify for hedge accounting and accordingly are marked
to market at the end of each reporting period with any
unrealized gain or loss being recognized in the consolidated
statements of income and comprehensive income as interest and
other income.
During 2010 and 2009, net realized losses arising from the
settlement of our forward foreign exchange contracts were
$7.0 million and $2.3 million, respectively. During
2008, net realized gains arising from the settlement of our
forward foreign exchange contracts was $2.0 million.
Forward contracts outstanding at December 31, 2010 are
presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
Notional U.S.
|
|
|
|
|
|
|
Dollar
|
|
Asset
|
|
Liability
|
|
|
Equivalent
|
|
Fair Value
|
|
Fair Value
|
|
Forward exchange contracts
|
|
$
|
153,876
|
|
|
$
|
936
|
|
|
$
|
(682
|
)
|
A sensitivity analysis performed on our hedging portfolio as of
December 31, 2010 indicated that a hypothetical 5% and 10%
appreciation of the U.S. Dollar from its value at
December 31, 2010 would decrease the fair value of our
forward contracts by $2.7 million and $5.7 million,
respectively. A 5% and 10% depreciation of the U.S. Dollar
from its value at December 31, 2010 would increase the fair
value of our forward contracts by $3.2 million and
$6.2 million, respectively.
Interest
Rate Risk
We maintain balances in cash, cash equivalents and investment
securities. Our investments are made with a policy of capital
preservation and liquidity as the primary objectives. We
maintain our investment securities in portfolio holdings of
various issuers, types and maturities including money market,
U.S. government fixed income, U.S. government agency
fixed income and investment grade corporate fixed income
securities. We currently hold some asset-backed and
mortgage-backed securities purchased in prior periods but do not
plan to acquire these types of securities in future periods. We
may sell an investment at any time if the quality rating of the
investment declines, the yield on the investment is no longer
attractive or we are in need of cash. These securities are
classified as
available-for-sale
and consequently are recorded on the consolidated balance sheets
at fair value with unrealized gains and losses reported as a
separate component of accumulated other comprehensive income.
These securities are not leveraged and are held for purposes
other than trading.
During 2008, there were significant disruptions in the financial
markets. A number of large financial institutions failed, were
supported by the U.S. government or were merged into other
organizations. The market disruption resulted in a lack of
liquidity in the credit markets and a decline in the market
value of debt securities. As a result of these effects, during
2008 we recorded an
other-than-temporary
impairment charge of $18.5 million related to marketable
securities. In 2009, we recorded additional
other-than-temporary
impairment on previously impaired marketable securities totaling
$0.7 million for continued declines in fair value. We had
no impairments in 2010. Of the $18.5 million
other-than-temporary
impairment recorded in 2008, $12.2 million related to
corporate bonds and asset-backed and mortgage-backed securities,
which suffered declines in fair value, $5.0 million related
to a single corporate bond that had a significant decline in
fair value due to the issuers bankruptcy and
$1.3 million related to impairment recorded because we no
longer had the intent and ability to hold these securities for a
period of time sufficient for the fair values to recover due to
funding our acquisition of Secure, which was a one-time event.
We had a net unrealized gain of $3.1 million and
$1.8 million on marketable securities at December 31,
2010 and 2009, respectively.
The following tables present the hypothetical changes in fair
values in the securities held at December 31, 2010 that are
sensitive to changes in interest rates. The modeling technique
used measures the change in fair values arising from
hypothetical parallel shifts in the yield curve of plus or minus
50 basis points (BPS), 100 BPS and 150 BPS over
a twelve-month time horizon. Beginning fair values represent the
market principal plus accrued
60
interest and dividends at December 31, 2010. Ending fair
values are the market principal plus accrued interest, dividends
and reinvestment income over a twelve-month time horizon.
The following table estimates the fair value of the portfolio at
a twelve-month time horizon (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of Securities
|
|
|
|
|
|
Valuation of Securities
|
|
|
|
Given an Interest Rate
|
|
|
|
|
|
Given an Interest Rate
|
|
|
|
Decrease of
|
|
|
No
|
|
|
Increase of
|
|
|
|
X Basis Points
|
|
|
Change in
|
|
|
X Basis Points
|
|
Issuer
|
|
150 BPS
|
|
|
100 BPS
|
|
|
50 BPS
|
|
|
Interest Rate
|
|
|
50 BPS
|
|
|
100 BPS
|
|
|
150 BPS
|
|
|
Cash equivalents
|
|
$
|
9.7
|
|
|
$
|
9.7
|
|
|
$
|
9.7
|
|
|
$
|
9.8
|
|
|
$
|
9.8
|
|
|
$
|
9.8
|
|
|
$
|
9.8
|
|
United States treasury securities
|
|
|
121.5
|
|
|
|
121.5
|
|
|
|
121.4
|
|
|
|
121.0
|
|
|
|
120.5
|
|
|
|
120.1
|
|
|
|
119.6
|
|
United States agency securities
|
|
|
138.6
|
|
|
|
138.5
|
|
|
|
138.4
|
|
|
|
138.2
|
|
|
|
138.1
|
|
|
|
138.0
|
|
|
|
137.8
|
|
Foreign government securities
|
|
|
17.7
|
|
|
|
17.7
|
|
|
|
17.7
|
|
|
|
17.6
|
|
|
|
17.5
|
|
|
|
17.4
|
|
|
|
17.4
|
|
Certificates of deposit and time deposits
|
|
|
63.6
|
|
|
|
63.6
|
|
|
|
63.5
|
|
|
|
63.5
|
|
|
|
63.6
|
|
|
|
63.6
|
|
|
|
63.7
|
|
Corporate debt securities
|
|
|
150.1
|
|
|
|
149.9
|
|
|
|
149.8
|
|
|
|
149.7
|
|
|
|
149.6
|
|
|
|
149.4
|
|
|
|
149.3
|
|
Mortgage-backed securities
|
|
|
10.4
|
|
|
|
10.4
|
|
|
|
10.4
|
|
|
|
10.4
|
|
|
|
10.4
|
|
|
|
10.4
|
|
|
|
10.4
|
|
Asset-backed securities
|
|
|
7.8
|
|
|
|
7.8
|
|
|
|
7.8
|
|
|
|
7.8
|
|
|
|
7.8
|
|
|
|
7.8
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
519.4
|
|
|
$
|
519.1
|
|
|
$
|
518.7
|
|
|
$
|
518.0
|
|
|
$
|
517.3
|
|
|
$
|
516.5
|
|
|
$
|
515.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Newly
Adopted and Recently Issued Accounting Pronouncements
See Note 2 of the consolidated financial statements for a
full description of recent accounting pronouncements, including
the expected dates of adoption and effects on financial
condition, results of operations and cash flows.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
Quantitative and qualitative disclosure about market risk is set
forth at Managements Discussion and Analysis of
Financial Condition and Results of Operations
Financial Risk Management under Item 7.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Annual
Financial Statements
The consolidated financial statements and supplementary date
included in Part IV, Item 15(a) of this annual report
are incorporated by reference into this Item 8.
Selected
Quarterly Operating Results (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
|
2010
|
|
2010
|
|
2010
|
|
2010
|
|
2009
|
|
2009
|
|
2009
|
|
2009
|
|
|
(In thousands, except per share data)
|
|
Statement of Operations and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
549,564
|
|
|
$
|
523,259
|
|
|
$
|
489,239
|
|
|
$
|
502,745
|
|
|
$
|
525,666
|
|
|
$
|
485,271
|
|
|
$
|
468,686
|
|
|
$
|
447,709
|
|
Gross profit
|
|
|
397,475
|
|
|
|
381,176
|
|
|
|
358,438
|
|
|
|
370,170
|
|
|
|
394,327
|
|
|
|
358,501
|
|
|
|
353,464
|
|
|
|
334,653
|
|
Income from operations
|
|
|
58,728
|
|
|
|
64,050
|
|
|
|
55,090
|
|
|
|
51,554
|
|
|
|
72,156
|
|
|
|
42,505
|
|
|
|
55,876
|
|
|
|
51,770
|
|
Net income
|
|
|
60,572
|
|
|
|
46,560
|
|
|
|
39,404
|
|
|
|
37,576
|
|
|
|
54,522
|
|
|
|
36,789
|
|
|
|
28,653
|
|
|
|
53,456
|
|
Net income per share
basic(1)
|
|
|
0.39
|
|
|
|
0.30
|
|
|
|
0.26
|
|
|
|
0.24
|
|
|
|
0.35
|
|
|
|
0.23
|
|
|
|
0.18
|
|
|
|
0.35
|
|
Net income per share
diluted(1)
|
|
|
0.38
|
|
|
|
0.30
|
|
|
|
0.25
|
|
|
|
0.23
|
|
|
|
0.34
|
|
|
|
0.23
|
|
|
|
0.18
|
|
|
|
0.34
|
|
|
|
|
(1) |
|
Net income per share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net
income per share may not equal the annual net income per share
due to rounding differences. |
61
We believe that
period-to-period
comparisons of our financial results should not be relied upon
as an indication of future performance.
Our revenue and results of operations have been subject to
significant fluctuations, particularly on a quarterly basis, and
our revenue and results of operations could fluctuate
significantly quarter to quarter and year to year. Causes of
such fluctuations may include the volume and timing of new
orders and renewals, the sales cycle for our products, the
introduction of new products, return rates, product upgrades or
updates by us or our competitors, changes in product mix,
changes in product prices and pricing models, the portion of our
licensing fees and product revenue deferred or recognized as
support and maintenance revenue, seasonality, trends in the
computer industry, general economic conditions, events such as
acquisitions and sales of business or litigation, the occurrence
of unexpected events, amortization of purchased technology and
intangibles, restructurings and
other-than-temporary
impairment of marketable securities. Significant quarterly
fluctuations in revenue will cause significant fluctuations in
our cash flows and cash and cash equivalents, accounts
receivable and deferred revenue accounts on our consolidated
balance sheet. In addition, the operating results of many
software companies reflect seasonal trends, and our business,
financial condition and results of operations may be affected by
such trends in the future. These trends may include higher net
revenue in the third and fourth quarter as many customers
complete annual budgetary cycles, and lower net revenue in the
summer months when many businesses experience lower sales,
particularly in the European market.
|
|
Item 9.
|
Changes
In and Disagreements With Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Our management, with the participation of our chief executive
officer and our chief financial officer, has evaluated the
effectiveness of our disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended) and
concluded that our disclosure controls and procedures were
effective as of December 31, 2010.
A control system, no matter how well conceived and operated, can
provide only reasonable assurance that the objectives of the
control system are met. Our management, including our chief
executive officer and chief financial officer, does not expect
that our disclosure controls and procedures or internal control
over financial reporting will prevent all errors and fraud.
Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Due to the
inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues
within our company have been detected.
Managements
Annual Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
of the Securities Exchange Act. We have designed our internal
controls to provide reasonable, but not absolute, assurance that
our financial statements are prepared in accordance with
generally accepted accounting principles in the United States of
America. We assess the effectiveness of our internal controls
based on the criteria set forth in the Internal
Control Integrated Framework developed by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Our management has concluded that, as of December 31, 2010,
our internal control over financial reporting was effective
based on these criteria.
Deloitte & Touche LLP, as auditor of our consolidated
financial statements for the year ended December 2010, has
issued an attestation report dated February 25, 2011,
concerning our internal control over financial reporting, which
is included in Part IV, Item 15(a) of this annual
report.
Changes
in Internal Control over Financial Reporting
We have had no changes in our internal control over financial
reporting during the fourth quarter of 2010 that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
62
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of McAfee, Inc.
Santa Clara, California
We have audited the internal control over financial reporting of
McAfee, Inc. and subsidiaries (the Company) as of
December 31, 2010, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2010, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2010, of
the Company and our report dated February 25, 2011
expressed an unqualified opinion on those financial statements
and financial statement schedule.
/s/ Deloitte & Touche LLP
San Jose, California
February 25, 2011
63
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The names of our current directors and executive officers and
related biographical information are set forth below.
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
Principle
|
|
Committee
|
|
Term
|
|
|
Director
|
|
Name
|
|
Age
|
|
|
Occupation
|
|
Memberships
|
|
Expires
|
|
|
Since
|
|
|
Class I Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carl Bass
|
|
|
53
|
|
|
President, chief executive officer and director, Autodesk, Inc.
|
|
Governance and Nominations Committee
|
|
|
2011
|
|
|
|
2008
|
|
Jeffrey A. Miller
|
|
|
60
|
|
|
President and chief executive officer, JAMM Ventures
|
|
Compensation Committee
|
|
|
2011
|
|
|
|
2008
|
|
Anthony Zingale
|
|
|
55
|
|
|
Chief executive officer and director, Jive Software, Inc.
|
|
Compensation Committee Governance and Nominations Committee
|
|
|
2011
|
|
|
|
2008
|
|
Class II Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leslie G. Denend
|
|
|
69
|
|
|
Director, Exponent, Inc. and Verifone, Inc.
|
|
Compensation Committee, Chairman
|
|
|
2012
|
|
|
|
1995
|
|
David G. DeWalt
|
|
|
45
|
|
|
President and chief executive officer, McAfee, Inc.; Director,
Polycom, Inc.
|
|
|
|
|
2012
|
|
|
|
2007
|
|
Lorrie M. Norrington
|
|
|
51
|
|
|
Private Investor and Consultant
|
|
N/A
|
|
|
2012
|
|
|
|
2009
|
|
Charles J. Robel
|
|
|
61
|
|
|
Director, Autodesk, Inc., DemandTec, Inc. and Informatica
Corporation
|
|
Non-Executive Chairman of the Board
Governance and Nominations Committee, Chairman
Audit Committee
Classified Matters Committee
|
|
|
2012
|
|
|
|
2006
|
|
Class III Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas E. Darcy
|
|
|
60
|
|
|
Executive vice president, chief financial officer and director,
Tocagen Inc.
|
|
Audit Committee, Chairman Classified Matters Committee
|
|
|
2012
|
|
|
|
2008
|
|
Denis J. OLeary
|
|
|
54
|
|
|
Managing partner, Encore Financial Partners, Inc.; Director,
Fiserv, Inc.
|
|
Compensation Committee
|
|
|
2012
|
|
|
|
2003
|
|
Robert W. Pangia
|
|
|
59
|
|
|
Partner, Ivy Capital Partners, LLC; Director, Biogen Idec Inc.
|
|
Audit Committee
|
|
|
2012
|
|
|
|
2001
|
|
64
Executive
Officers
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
David G. DeWalt
|
|
|
45
|
|
|
President and chief executive officer
|
Jonathan C. Chadwick
|
|
|
45
|
|
|
Executive vice president and chief financial officer
|
Mark D. Cochran
|
|
|
52
|
|
|
Executive vice president, chief legal officer/general counsel
|
Michael P. DeCesare
|
|
|
45
|
|
|
Executive vice president, worldwide sales operations
|
Todd W. Gebhart
|
|
|
56
|
|
|
Executive vice president and general manager, consumer, small
and mobile business
|
Keith S. Krzeminski
|
|
|
49
|
|
|
Senior vice president, finance and chief accounting officer
|
Gerhard Watzinger
|
|
|
50
|
|
|
Executive vice president, worldwide strategy and business
development and general manager, data protection
|
Director
Biographies
The following paragraphs provide information as of the date of
this annual report about each director. The information
presented includes information each director has given us about
all positions he or she holds, his or her principal occupation
and business experience for the past five years, and the names
of other publicly-held companies of which he or she currently
serves as a director or has served as a director during the past
five years. In addition to the information presented below
regarding each directors specific experience,
qualifications, attributes and skills that led our board to the
conclusion that he or she should serve as a director, we also
believe that all of our directors have a reputation for
integrity, honesty and adherence to high ethical standards. They
each have demonstrated knowledge of the software industry and an
ability to exercise sound judgment, as well as a commitment to
our company and our board of directors. Finally, we value their
significant experience on other public company boards of
directors and board committees.
Carl Bass has been a director of our company since
January 2008. Mr. Bass joined Autodesk, Inc, a design
innovation technology company, in 1993 and currently serves as
its chief executive officer, president and director. From 2004
to 2006, Mr. Bass served as chief operating officer. From
2002 to 2004, Mr. Bass served as senior executive vice
president, design solutions group. From 2001 to 2002,
Mr. Bass served as executive vice president, emerging
business and chief strategy officer. Mr. Bass
experience as chief executive officer and in various other
executive roles at Autodesk has provided him with broad
leadership and executive experience. Mr. Bass
expertise contributes business operational knowledge and
strategic planning skills, along with knowledge important to our
corporate development and mergers and acquisitions activities.
Jeffrey A. Miller has been a director of our company
since May 2008. He has served as president of JAMM Ventures
Inc., a consulting and venture capital firm, since 2002. From
2002 to 2007, Mr. Miller also served as a venture partner
with Redpoint Ventures, a venture capital firm focused on
investments in information technology. Prior to his tenure at
Redpoint, Mr. Miller served as chief executive officer of
Documentum, Inc., a provider of content and storage management
software, from 1993 to 2001. Mr. Miller served on the board
of directors of Data Domain, Inc. from October 2006 until it was
acquired by EMC Corp. in July 2009. His considerable experience
in venture capital and extended tenure as chief executive
officer of Documentum have provided him with a deep
understanding of the software and technology industry.
Mr. Miller also has significant experience in joint venture
and mergers and acquisition transactions, which is experience
that is valuable to our board of directors.
Anthony Zingale has been a director of our company since
May 2008. Mr. Zingale currently serves as chief executive
officer for Jive Software, Inc., where he has served on the
board of directors since October 2007. He served as president,
chief executive officer and director of Mercury Interactive, a
provider of business technology optimization (BTO) solutions
that included the quality, performance, availability and
governance of enterprise software applications, from 2004 until
it was acquired by Hewlett Packard at the end of 2006.
Mr. Zingale joined the board of directors of Mercury
Interactive in 2002. Mr. Zingale was a private investor
from 2001 to 2004. From 2000 to 2001, Mr. Zingale served as
president of Nortel Networks billion-dollar eBusiness
Solutions Group. Prior to that, Mr. Zingale served as
president and chief executive officer of Clarify Inc., a
customer relationship management (CRM) provider, from 1997 until
it was acquired by Nortel Networks in 2000. Mr. Zingale has
a deep understanding
65
of the software and technology industry. His experience as chief
executive officer of Clarify, Mercury Interactive and Jive
Software has provided him with broad leadership and executive
abilities. Mr. Zingales outside board experience as
director of several public companies enables him to provide
valuable insight and guidance to our management team and board
of directors.
Leslie G. Denend has been a director of our company since
June 1995. From December 1997 to April 1998, Mr. Denend was
president of our company. From 1993 to 1997, Mr. Denend was
chief executive officer and president of Network General
Corporation, which merged with McAfee Associates to
form McAfee, Inc. Mr. Denend serves on the board of
directors of Exponent, Inc. and Verifone, Inc. Mr. Denend
served on the board of directors of United Services Automobile
Association (USAA) from May 1996 until November 2010.
Mr. Denends service on several other boards of
directors over his career, and his service on our board since
1995, has provided him with significant board-level experience,
as well as valuable insight and institutional knowledge of our
history and development. As a result, Mr. Denend is able to
provide our management team and board of directors with
essential strategic, operational and corporate governance
guidance.
David G. DeWalt has served as our president and chief
executive officer, and as a director, since April 2007. Prior to
joining McAfee, Mr. DeWalt served as executive vice
president and president customer operations and content
management software, at EMC Corporation from 2005 to 2007 and as
its executive vice president, EMC Software Group from 2003 to
2005. EMC is a provider of information infrastructure technology
and solutions. Mr. DeWalt joined EMC in 2003 upon its
acquisition of Documentum, Inc., where he served as its chief
executive officer and president from 2001 to 2003. Prior to
joining Documentum, Mr. DeWalt was founding principal and
vice president of Eventus Software, a web content software
company, where he was responsible for marketing and sales,
consulting services and support, product management and business
development. Mr. DeWalt currently serves on the board of
directors of Polycom, Inc., a provider of telepresence, voice
and video conferencing solutions. As our chief executive
officer, Mr. DeWalt has superior knowledge of our business
and brings to our board of directors unique insight and
knowledge of our operations and strategic opportunities.
Mr. DeWalts extensive executive experience with other
publicly-traded software companies also enables him to provide
critical guidance with respect to our mergers and acquisition
transactions.
Lorrie M. Norrington has been a director of our company
since December 2009. Ms. Norrington held various positions at
eBay Inc., a provider of online marketplaces for the sale of
goods and services and online payment services, from 2005 to
2010. She started as president of eBay international in Europe
and Asia-Pacific and then took on the position of president of
global operations, and later president of eBay marketplaces
before stepping down in September 2010. Ms. Norrington
previously served as chief executive officer of Shopping.com
Inc., an online shopping comparison site acquired by eBay in
2005. Prior to that, Ms. Norrington was an officer at
Intuit, a provider of business and financial management software
solutions, where as senior vice president she led the Quicken
and QuickBooks brands and later became executive vice president
in the office of the chief executive officer. She also led a
variety of businesses at General Electric Company (GE) over a
twenty-year period in a broad range of industries, including her
last position as an officer of GE and chief executive officer of
GE Fanuc. Ms. Norrington is a business executive with
substantial experience in publicly-traded companies, consumer
businesses, and significant international experience.
Ms. Norrington has a strong understanding of the issues we
face as a global corporation expanding into new territories, and
provides valuable insight to our management team and board of
directors.
Charles J. Robel has been a director of our company since
June 2006 and has served as the non-executive chairman of our
board of directors since October 2006. He served as a managing
member and chief operating officer at Hummer Winblad Venture
Partners, a venture capital fund, from 2000 to 2005.
Mr. Robel began his career at PricewaterhouseCoopers LLP,
from which he retired as a partner in 2000. Mr. Robel
currently serves on the board of directors of Autodesk, Inc.,
DemandTec, Inc., a provider of optimization services for
retailers and consumer products companies, and Informatica
Corporation, a provider of enterprise data integration software.
Mr. Robel served on the board of directors of Adaptec,
Inc., a provider of innovative data storage hardware and
software solutions, from March 2006 until December 2007, and
Borland Software Corporation, a provider of open application
lifecycle management solutions, from March 2003 until December
2006. Mr. Robels extensive service as a board member
of several other technology and software companies enables him
to provide essential strategic and corporate governance
leadership to our management team and board of directors. In
addition, Mr. Robel brings to our board of directors
substantial financial expertise that includes extensive
66
knowledge of the complex financial and operational issues facing
large publicly-traded companies, and a deep understanding of
accounting principles and financial reporting rules and
regulations. Our board of directors has determined that
simultaneous service by Mr. Robel on more than three public
company audit committees does not impair his ability to serve on
our audit committee.
Thomas E. Darcy has been a director of our company since
January 2008. Since August 2007, Mr. Darcy has served as
executive vice president, chief financial officer and director
of Tocagen Inc., a biopharmaceutical company. Mr. Darcy
previously served as executive vice president for strategic
projects at Science Applications International Corporation, a
provider of scientific, engineering, systems integration and
technical services and solutions, since November 2005, and
retired in April 2007. Prior to that, Mr. Darcy served
Science Applications International as corporate executive vice
president beginning in December 2003, executive vice president
beginning in October 2000, and as chief financial officer from
October 2000 through November 2005. Prior to joining Science
Applications International, Mr. Darcy was with the
accounting firm currently known as PricewaterhouseCoopers LLP
from 1973 to 2000, where he served as partner from 1985 to 2000.
Mr. Darcy brings to our board of directors substantial
financial expertise that includes extensive knowledge of the
complex financial and operational issues facing large companies,
and a deep understanding of accounting principles and financial
reporting rules and regulations. Additionally,
Mr. Darcys experience as an independent auditor
provides our board with significant insight into the preparation
of financial statements and knowledge of audit procedures.
Denis J. OLeary has been a director of our company
since July 2003. Mr. OLeary has served as managing
partner of Encore Financial Partners, Inc., a firm specializing
in the acquisition and management of
U.S.-based
banking organizations, since August 2009. From 1993 to 2003,
Mr. OLeary was executive vice president of
J.P. Morgan Chase & Co., having joined the bank
in June 1978. During his career at J.P. Morgan
Mr. OLeary held a number of senior positions
including director of finance, chief information officer, and
head of retail branch banking. From 2003 to 2009,
Mr. OLeary was active in private equity and
consulting in the areas of technology and financial services.
Mr. OLeary currently serves on the board of directors
of Fiserv, Inc. Mr. OLeary is a business executive
with significant expertise in finance and private investment.
Mr. OLearys long-term service on our board has
provided him with valuable insight and institutional knowledge
of our history and development.
Robert W. Pangia has been a director of our company since
April 2001. Since 2003, Mr. Pangia has been a general
partner and a managing member of Ivy Capital Partners, LLC, a
private equity fund. From October 2007 to December 2009,
Mr. Pangia served as chief executive officer of Highlands
Acquisition Corp., an AMEX-traded special purpose acquisition
company. Prior to 2003, Mr. Pangia was self-employed as a
private investor. From 1987 to 1996, Mr. Pangia held a
number of senior level management positions at PaineWebber
Incorporated, including director of investment banking.
Mr. Pangia currently serves on the board of directors of
Biogen Idec Inc. Mr. Pangia served on the board of
directors of ICOS Corporation from April 1991 until
February 2007. Mr. Pangias service on other public
company boards has provided him with valuable experience.
Through Mr. Pangias private equity and investment
banking experience, he brings extensive expertise in analyzing
numerous aspects of a companys business, including
strategy, organizational design and planning as well as
formulating and driving strategic direction and change.
Executive
Officer Biographies
Information pertaining to Mr. DeWalt, who is both a
director and an executive officer, may be found in the section
above entitled Director Biographies.
Jonathan C. Chadwick has served as our executive vice
president and chief financial officer since June 2010.
Mr. Chadwick joined us from Cisco Systems, Inc., a
networking technology company, where he spent 13 years in
various finance roles. Most recently, Mr. Chadwick served
as Ciscos senior vice president and chief financial
officer, global customer markets. From 2006 to 2009,
Mr. Chadwick served as senior vice president, corporate
controller and chief accounting officer. Mr. Chadwick
served as vice president, corporate finance and planning and
mergers and acquisitions from 2003 to 2006. Prior to joining
Cisco in 1997, Mr. Chadwick was a senior manager with
Coopers & Lybrand, LLP (now PricewaterhouseCoopers).
Mark D. Cochran has served as our executive vice
president, chief legal officer/general counsel since September
2007. Prior to joining McAfee, Mr. Cochran served as vice
president and general counsel of Hyperion Solutions Corporation,
a provider of business performance management software, from
2005 to 2007. Prior to
67
joining Hyperion, Mr. Cochran was vice president, general
counsel and secretary of Brocade Communications Systems, Inc., a
storage networking company, from 2003 to 2004. From 1999 to
2003, he served as vice president and general counsel at
AvantGo, a provider of mobile enterprise software and now
subsidiary of Sybase Inc.
Michael P. DeCesare was appointed executive vice
president, worldwide sales operations in October 2007. Prior to
that, Mr. DeCesare served as senior vice president,
worldwide field operations of EMC Corporation, from 2004 to
2007, and as executive vice president of worldwide field
operations for Documentum (then a division of EMC), from 2002
until 2004. Prior to joining Documentum, Mr. DeCesare
served as executive vice president, worldwide sales and
alliances, at Asera Inc., a provider of
e-business
infrastructure that accelerates implementation of enterprise
software applications, from 2001 to 2002.
Todd W. Gebhart has served as our executive vice
president and general manager, consumer, small and mobile
business since 2008. Mr. Gebhart joined us in 1999 to lead
our OEM, service provider and outsider sales teams.
Mr. Gebhart assumed responsibility for our consumer
business in 2002, our mobile business in 2004 and our small
business in 2007. Prior to joining us, Mr. Gebhart was vice
president of sales at Alaris, a provider of online video
compression technology. Mr. Gebhart began his career at IBM
where he held a variety of sales and management positions.
Keith S. Krzeminski has served as our chief accounting
officer since March 2008. Mr. Krzeminski has also served as
our senior vice president, finance since joining us in March
2007. Prior to that, Mr. Krzeminski served as senior vice
president and chief financial officer of Home
Interiors & Gifts, Inc., a marketer and manufacturer
of home décor products, from 2005 to 2006. Before joining
Home Interiors & Gifts, Mr. Krzeminski worked for
Electronic Data Systems Corporation (EDS), a global
information technology services company, where he served in
several capacities during his six-year tenure. From 2004 to
2005, he served as vice president of planning and financial
analysis. Mr. Krzeminski served as chief financial officer
of EDS product lifecycle management software and services
business, from 2003 to 2004. From 2002 to 2003,
Mr. Krzeminski served as global finance director of
EDS applications and information technology consulting
business. Mr. Krzeminski joined EDS in 1999 as chief
accounting officer, where he served until 2002.
Gerhard Watzinger has served as our executive vice
president, worldwide strategy and business development and
general manager, data protection, since 2008. Prior to that,
Mr. Watzinger served as our senior vice president and
general manager of our data protection business unit.
Mr. Watzinger joined us in November 2007 upon our
acquisition of SafeBoot, a provider of data protection software,
where Mr. Watzinger served as chief executive officer from
2004 to 2007. From 2003 to 2004, Mr. Watzinger was the
chief executive officer of Mascot Systems, a subsidiary of iGATE
focused on offshore information technology operations. From 1998
to 2003, Mr. Watzinger served as senior vice president of
iGATEs staffing and solutions operations.
Mr. Watzinger currently serves on the board of directors of
Mastech, an information technology consulting and outsourcing
company.
Our executive officers serve at the discretion of our board of
directors. There are no family relationships among any of our
directors and executive officers.
Board of
Directors and Board Committees
Our governance and nominations committee has determined that
each of our board members, other than Mr. DeWalt, is
independent as defined under the New York Stock
Exchange corporate governance standards, and has no material
relationship with us.
Ms. Norrington served as President of eBay Marketplaces
until September 2010. In the ordinary course of business we
entered into agreements with eBay, Inc. and its subsidiary
PayPal, Inc. prior to the time she joined our board. During
2010, we paid PayPal a total of approximately $392,000 and eBay
less than $1,000. Mr. Zingale is the chief executive
officer of Jive Software, Inc. In the ordinary course of
business we entered into agreements with Jive Software, pursuant
to which we paid Jive Software a total of approximately $321,000
in 2010. Based upon the quantitative and qualitative
characteristics of these arrangements, we do not believe that
either Ms. Norrington or Mr. Zingale has a material
relationship with us.
Our board of directors has a standing audit committee,
compensation committee, governance and nominations committee and
recently added a classified matters committee. Each of the
audit, compensation, and governance and
68
nominations committees has a written charter, which is available
on our investor relations website at investor.mcafee.com
under Governance Documents, or by calling or
writing our corporate secretary at our corporate headquarters.
Audit
Committee
The audit committee reviews, acts and reports to our board of
directors on various auditing, accounting and finance matters,
including the appointment of our independent accountants, the
scope of our annual audits, fees to be paid to the independent
accountants, the approval of services to be performed by our
independent accountants, the performance of our independent
accountants and our accounting practices. Messrs. Darcy,
Pangia and Robel served as members of the audit committee during
2010, with Mr. Darcy serving as chairman. Each of the
current members of the audit committee has been designated by
our governance and nominations committee as an audit committee
financial expert (as defined under the SEC rules
implementing Section 404 of The Sarbanes-Oxley Act of 2002).
Compensation
Committee
The compensation committee is primarily responsible for
reviewing and approving all executive officer compensation
programs and decisions, administering our various equity
compensation plans, and providing advice to our board of
directors and management regarding other compensation and
benefit programs. Messrs. Denend, Miller, OLeary, and
Zingale served as members of the compensation committee during
2010, with Mr. Denend serving as chairman.
Governance
and Nominations Committee
The governance and nominations committee addresses issues
relating to our board of directors and its committees, including
identifying prospective director nominees, developing and
recommending governance principles applicable to us, overseeing
the evaluation of our board of directors and management,
recommending nominees for our board committees and reviewing and
approving all non-employee director compensation. The committee
also reviews and provides guidance relating to broader corporate
governance practices and initiatives. Messrs. Bass, Robel,
and Zingale served as members of the committee during 2010, with
Mr. Robel serving as chairman.
Classified
Matters Committee
Our board of directors recently formed a classified matters
committee. We expect the classified matters committee to be
responsible for assisting our board of directors in overseeing
management relating to business activities which, for purposes
of national security, have been designated as classified by the
United States government. We expect these responsibilities to
include reviewing with management our policies and practices
with respect to risk management in the area of classified
business activities. Messrs. Darcy and Robel serve as
members of the committee.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and
directors, and persons who own more than ten percent of a
registered class of our equity securities, to file certain
reports of ownership with the SEC. Such officers, directors and
stockholders are also required by SEC rules to furnish us with
copies of all Section 16(a) forms they file. We believe
that all reports required to be filed during 2010 pursuant to
Section 16(a) of the Exchange Act by directors, executive
officers and 10% beneficial owners were filed on timely basis.
We filed a Form 5 with the SEC on behalf of Mr. DeWalt
in February 2011 to report his indirect ownership of
100 shares of our common stock that was inadvertently
omitted from his Form 3 filing in April 2007.
Other
Corporate Governance Matters
Our board of directors has adopted corporate governance
guidelines, a code of business conduct and ethics, and a
separate code of ethics that applies to our chief executive
officer, chief financial officer, corporate controller and
69
other senior finance organization employees (CEO/Finance
Code). These guidelines and codes establish minimum
standards of professional responsibility and ethical conduct.
They can be viewed at investor.mcafee.com under
Governance Documents or may be obtained without
charge by writing our corporate secretary at our corporate
headquarters. If we make any substantive amendments to the
CEO/Finance Code or grant any waiver, including any implicit
waiver, from a provision of the code to our chief executive
officer, chief financial officer, corporate controller, or other
senior finance organization employee subject to the CEO/Finance
Code, we will disclose the amendment or waiver on that website
or in a report on
Form 8-K.
|
|
Item 11.
|
Executive
Compensation
|
COMPENSATION
DISCUSSION AND ANALYSIS
This compensation discussion and analysis explains our 2010
executive compensation programs and compensation paid under
those programs. This discussion principally relates to the
following named executive officers for 2010:
|
|
|
Name
|
|
Position
|
|
David G. DeWalt
|
|
President and chief executive officer
|
Jonathan Chadwick
|
|
Executive vice president, chief financial officer
|
Michael P. DeCesare
|
|
Executive vice president, worldwide sales operations
|
Todd W. Gebhart
|
|
Executive vice president and general manager, consumer, small
and mobile business
|
Gerhard Watzinger
|
|
Executive vice president, worldwide strategy and business
development and general manager data protection
|
Former Employee Named Executive Officers
|
|
|
Albert A. Rocky Pimentel(1)
|
|
Former chief financial officer and chief operating officer
|
|
|
|
(1) |
|
Mr. Pimentel served as our chief financial officer and
chief operating officer until June 14, 2010. |
All significant executive compensation decisions are approved by
the compensation committee of our board of directors. This
committee consists of four non-employee directors who meet the
independence requirements established by the SEC and the New
York Stock Exchange.
Our success largely depends on our ability to attract and retain
a talented and dedicated executive team, and competition for top
talent in our market is fierce. We established cash and equity
compensation targets for our named executive officers based on
market comparables among our peer companies, scope of
responsibility, individual executive performance against
key performance metrics and relative compensation
comparison among our own executives.
In 2010, cash compensation targets for our named executive
officers were generally held flat, with the exception of a
market-based increase in Mr. Watzingers base salary
commensurate with his executive role and related performance. We
linked their cash bonuses to company
and/or
individual performance against key performance metrics related
to our strategic imperatives. Based upon the compensation
committees assessment of these factors, we paid cash
bonuses to named executive officers that ranged in the aggregate
from approximately 84 to 103% of the target bonus opportunities.
In 2010, we also set non-GAAP earnings per share targets for the
vesting of shares underlying performance based equity awards in
the form of performance stock units (PSUs). Our
non-GAAP earnings per share results met the target required for
all of the shares allocated to the 2010 performance period from
the PSUs granted in 2008 to vest, and approximately 92% of the
maximum
70
number of shares allocated to the 2010 performance period from
the PSUs granted in 2009 and 2010 to vest. The PSUs granted
during 2009 and 2010 (but not the PSUs granted during
2008) adjust downward as to the number of PSUs earned if
performance achievement is below the maximum target level.
|
|
B.
|
Executive
Compensation Design
|
|
|
1.
|
Compensation
Objectives and Philosophy
|
Our executive compensation programs have three primary
objectives:
|
|
|
|
|
Attract, reward and retain talented and dedicated executives;
|
|
|
|
Link cash and equity incentives to individual and corporate
performance; and
|
|
|
|
Align executive incentives with stockholder value creation.
|
The compensation committee reviews total compensation for each
named executive officer annually, and determines the appropriate
amount and mix of compensation based on the following principles:
|
|
|
|
|
Use simple and reasonable measures of performance;
|
|
|
|
Provide cash compensation with a significant variable (bonus)
compensation component, so that cash compensation has a
significant link to performance;
|
|
|
|
Provide total compensation that is primarily weighted toward
equity compensation (performance stock units, restricted stock
units and stock options) rather than cash, to reflect the
executives greater influence on overall corporate results
and stockholder return;
|
|
|
|
Use multi-year vesting for equity compensation to ensure that
the executives hold sufficient unvested equity value to provide
a meaningful retention incentive;
|
|
|
|
Use market data for comparable companies to assess the
competitive market position of our compensation (as described in
Section C3 below);
|
|
|
|
Use an external compensation consultant to validate market
practices and trends for our industry; and
|
|
|
|
Minimize the use of executive perquisites.
|
|
|
2.
|
Elements
of Compensation
|
The compensation committee evaluates executive compensation with
a goal of establishing a total compensation package that is
competitive both in terms of structure and opportunity to that
provided to executives in comparable companies. Accordingly, our
executive officers compensation has three primary
components:
|
|
|
|
|
Base salary;
|
|
|
|
Cash bonuses; and
|
|
|
|
Equity compensation in the form of PSUs, restricted stock units
(RSUs) and stock options.
|
Base salaries are generally established based on market
comparables among our peer companies. Performance-based cash
bonuses and equity awards are linked to company
and/or
individual executive performance against key performance metrics
that are established at least annually for each executive. The
compensation committee also considers the competitive market
position of our executive compensation and other factors, such
as leadership effectiveness, integrity, innovation, and work
ethic in determining bonus and equity awards. The size and
timing of equity awards are determined based on all of these
factors. Vesting is based on continued service and, for certain
equity awards, on the achievement of performance metrics. When
it makes executive compensation decisions, the compensation
committee focuses on total direct compensation (the
total compensation to be paid if all performance goals are fully
met) as well as on specific elements of compensation.
71
The compensation committee relies primarily on performance-based
compensation and equity to attract, reward and retain a talented
and dedicated executive team and to ensure a strong connection
between executive compensation and our financial performance.
Base salaries, as the primary fixed compensation element,
represent only a portion of total compensation, and perquisites
are generally minimal, so these elements are not sufficient to
attract or retain executives without using other compensation
vehicles.
In addition to the primary components described above, in 2007
and 2008, the compensation committee, assisted by its
compensation consultant and legal counsel, conducted a
comprehensive review of change of control and retention
compensation for our named executive officers and other
executive officers in order to standardize terms within the
executive team and to provide competitive-market based change of
control and severance compensation. The compensation committee
discussed industry best practices in designing the change of
control and retention program described below and later in this
annual report. The ultimate program was developed through
numerous meetings of the compensation committee both in
executive session and with the input of members of management.
Because the change of control and retention agreements were
designed to expire approximately every two years, the
compensation committee evaluates the necessity for such
agreements each year. In February 2010, we renewed our change of
control and retention agreements for an additional two-year
period with each of our named executive officers, except with
respect to Mr. Pimentel who retired in 2010.
|
|
3.
|
Key
Performance Metrics (KPMs) and Other Performance
Criteria
|
Cash bonuses and equity compensation for executives are linked
to performance assessments of actual performance against
quarterly
and/or
annual key performance metrics (KPMs). Typically,
KPMs include a combination of financial metrics, including
revenue-related and profit-related objectives reflected in our
internal business plan, because they are the most direct
indicators of stockholder value creation. Financial metrics are
drawn from our internal business plan, but may differ from the
GAAP line items. These non-GAAP metrics exclude items that are
not, in the compensation committees view, related to
ongoing operating performance, such as restructuring charges,
amortization expenses associated with purchased intangible
assets, and non-cash stock-based compensation expense.
Although performance against KPMs is the primary determinant of
cash bonus and equity compensation, the compensation committee
also evaluates certain subjective factors, including the
following, when making its final compensation decisions:
|
|
|
|
|
Leadership style and effectiveness, including teamwork;
|
|
|
|
Innovation;
|
|
|
|
Integrity;
|
|
|
|
Work ethic; and
|
|
|
|
Employee retention.
|
Base salaries are intended to provide a fixed amount of cash
compensation for services rendered during the year. Typically,
we set base salaries to approximate the median base salaries at
our peer companies to assist us in hiring and retaining
individuals in a competitive environment. In determining
individual base salaries, the compensation committee also
considers the scope of job responsibilities, individual
contribution, business performance, overall job market
conditions, current compensation levels, the Radford Executive
Survey, and other relevant third-party compensation data
provided by its compensation consultant. As discussed below, in
hiring several of our current named executive officers, base
salaries above the market median were used to attract qualified
individuals during a different environment for the company.
Our executive cash bonus program provides cash bonus
opportunities to executive officers. At the beginning of the
year the compensation committee establishes target cash bonus
opportunities for each executive officer,
72
designated as a percentage of base salary or as a variable
target amount. The compensation committee also establishes
objective financial performance criteria that must be satisfied
in order for the executive officers to be eligible to receive
the maximum amount of their cash bonus opportunity. The
compensation committee determines the cash bonus payout each
executive earns using the following process. To ensure that the
deductibility of bonuses paid to our executive officers is not
limited by Section 162(m) of the Internal Revenue Code and
as a condition to the payment of any bonus amounts, the
compensation committee first determines if the financial
performance criteria are satisfied. If so, the executive
officers are eligible to receive the maximum amount of their
cash bonus opportunity (subject to the compensation
committees discretion to reduce these bonus amounts). For
2010, the financial performance measure consisted solely of
non-GAAP earnings per share. Once eligibility is determined
based on the financial performance criteria, the compensation
committee assesses a number of factors to determine whether to
reduce (or eliminate) the cash bonus payout. As described in
greater detail below, these factors include, among other things,
certain company
and/or
individual performance KPMs approved by the compensation
committee.
During 2010, KPMs were generally set as quarterly targets, and
performance against them was assessed on a quarterly basis.
These quarterly checkpoints served as preliminary indicators of
potential bonus payouts. Each quarter, 12.5% of each executive
officers target annual bonus opportunity was eligible to
be earned. The remaining 50% of the annual bonus opportunity was
eligible to be earned after the completion of the year based on
full-year performance against objectives.
|
|
6.
|
Equity
Compensation in General
|
We regard equity compensation as a key compensation component,
particularly for our executive officers, for whom equity
compensation generally represents a majority of total direct
compensation. Equity awards with multi-year vesting or
performance measurement periods allow us to:
|
|
|
|
|
Strengthen the link between stockholder value creation and
long-term executive compensation;
|
|
|
|
Provide an opportunity for increased equity ownership by
executives;
|
|
|
|
Provide long-term retention incentives to executives; and
|
|
|
|
Maintain competitive levels of total direct compensation.
|
We grant a significant equity award to each executive when the
executive is initially hired. In subsequent years, we grant
annual refresher awards to supplement the initial award. The
annual awards are generally granted during the first quarter, as
part of our annual performance and compensation review process.
The size of initial and follow-on awards varies among executives
based on equity award practices among our peer group, the scope
of their responsibilities, their performance against their KPMs
and relative comparison of awards among our own executives.
|
|
7.
|
Stock
Options, Restricted Stock Units and Performance Stock
Units
|
Since 2006, we have been granting restricted stock units
(RSUs) to our executive officers and certain other
key employees. In 2008, we began to use performance stock units
(PSUs), which are RSUs with performance-based
vesting, on a more widespread basis. We continued this practice
in 2009 using a combination of PSUs and RSUs for executive
officers and certain other key employees. In 2010, we granted a
combination of RSUs, PSUs and stock options to our executive
officers and certain other key employees. Management and the
compensation committee believe that it is appropriate to use
more performance-based awards for senior executives and key
employees because they have a more direct ability to drive
performance that leads to increased stockholder value creation.
By granting such individuals performance-based awards we
expected to heighten their incentive to create stockholder
value, further aligning their interests with our stockholders.
RSUs give an executive officer the right to receive a specified
number of shares of our common stock, without cost, if the
executive remains employed with us for a specified period.
Vesting of PSUs is contingent on the achievement of one or more
pre-established performance objectives. For additional
information of the terms and conditions of the PSUs and RSUs
granted to our named executive officers, see the descriptions of
individual change
73
of control and severance arrangements for each named executive
below and Severance and Change of Control Benefits
below.
Because full-value equity awards, such as RSUs and PSUs, do not
require future share price appreciation to have value or that
the recipient purchase the underlying shares upon vesting,
full-value equity awards provide immediate, meaningful and
measurable economic value as of the grant date and an incentive
to remain with us at least through the vesting period. Moreover,
these types of awards retain value, and encourage continued
employment, regardless of short-term stock price fluctuations.
In contrast, the entire economic value of stock options depends
on future stock price appreciation, so stock options have less
perceived value if the stock price declines after the grant
date. Because of these differences, full-value equity awards can
deliver more immediate tangible value to executive officers than
stock options, with significantly fewer shares and potentially
less dilution for our stockholders.
The compensation committee typically determines the number of
shares of stock subject to RSU, PSU and stock option awards
after taking into account peer company data on the value of
annual equity awards. We generally seek to provide awards that
have a value between the market median and 75th percentile, but
individual award value may vary from this range based on the
subjective determination of the compensation committee. In
addition, the compensation committee assesses the total
holding power of an executive officers
outstanding equity awards when making decisions regarding
additional equity awards. Total holding power measures the total
unvested equity compensation held by an executive officer and
allows the compensation committee to determine whether the
current equity holdings of an executive are a meaningful factor
for executive retention.
Recent RSU awards generally vest over three years, with the
award vesting as to one-third of the underlying shares at the
end of each year. These infrequent but sizable vesting tranches
create a strong incentive to continue employment with us over
the vesting period. Although vesting of the awards is based
solely on continued service, the size of the award to each
executive officer is linked to the compensation committees
subjective assessment of the performance of each recipient. In
addition, because our stock price is key to the value of the
RSUs (a higher stock price makes the shares issued in settlement
of RSUs more valuable) part of the value of the RSUs will depend
on the performance of the executive team and our company during
the vesting period.
PSU awards to our executive officers vest up to a maximum of
one-third of the underlying shares on an annual basis based upon
continued service and meeting pre-established performance
metrics during the year. PSUs are generally granted in February
with a certification by the compensation committee of the units
earned and vested occurring each following January or February.
Stock option awards generally vest based upon continued service
over four years, with one-fourth of the shares subject to the
option vesting one year from the date of grant and the remaining
shares subject to the option vesting at a rate of
1/36th per month for the remaining 36 months of the
vesting period.
|
|
8.
|
Change
of Control and Retention Arrangements
|
As described above, in 2008, we entered into individual change
of control and retention agreements or change of control
protection plans with our executive officers to provide
severance payments and other change of control benefits in the
event of a termination of employment in specified situations.
The compensation committee believes these arrangements are
essential to attract and retain executive officers and promote
stability and continuity in our senior management team. We
believe that the stability and continuity provided by these
arrangements are in the best interests of our stockholders.
Since these arrangements were scheduled to expire in February
2010, the compensation committee determined that it was
appropriate to renew them for another two years until February
2012. This decision was made based on their assessment, as
advised by their compensation consultant, that such arrangements
remain prevalent in the marketplace. For a summary of the terms
and conditions of these change of control and retention
agreements and the change in control protection plan, see
Severance and Change of Control Benefits below.
74
|
|
9.
|
Perquisites
and Other Benefits
|
We do not view perquisites as a significant component of our
executive compensation programs. As frequent travelers, all
named executive officers are provided upgraded air travel
because it results in them arriving at their destinations more
rested and able to work. We did not provide any other
perquisites to our named executive officers during 2010. The
compensation committee has occasionally approved perquisites in
the past to accommodate specific, and usually temporary,
circumstances of executive officers who do not reside near their
work locations. See the Summary Compensation Table
below for more details.
Our executive officers are eligible to participate in our
benefit plans on the same terms as other full-time employees.
These plans include medical and dental insurance, life
insurance, vision insurance, short-term disability insurance, a
Section 401(k) plan, employee stock purchase plan and
discounts on our products. In addition our executive officers
receive long-term disability insurance benefits that are
commensurate with the market for executive officers of
comparable companies.
|
|
C.
|
Executive
Compensation-Setting Process
|
|
|
1.
|
Independent
Compensation Committee Determines Executive Compensation with
Input from the Chief Executive Officer
|
The compensation committee determines compensation for our named
executive officers and sets compensation policy for all
executive officers. Executive compensation is reviewed annually
by the compensation committee in connection with executive
performance evaluations. During the first quarter of each year,
the compensation committee typically conducts an evaluation of
our chief executive officers performance, utilizing formal
individual input from each of our independent directors. The
compensation committee also reviews the performance of our other
named executive officers with input from our chief executive
officer. The compensation committee then evaluates total current
compensation to determine if any changes are appropriate based
on the considerations explained throughout this compensation
discussion and analysis. The compensation committee reviews and
gives considerable weight to our chief executive officers
compensation recommendations for our other named executive
officers because of his direct knowledge of each of the
individuals performance and contributions. Our human
resources and finance staff provide the compensation committee
with information related to performance against KPMs and the
financial accounting impact of compensation decisions. Although
decisions are influenced by input received from its compensation
consultant and management, the compensation committee members
make independent decisions based on their collective judgment.
|
|
2.
|
The
Role of Consultants
|
During 2010, the compensation committee directly engaged the
services of Compensia, Inc., a national executive compensation
consulting firm. No member of the compensation committee or any
named executive officer has any affiliation with Compensia.
Compensia reported directly to the chairman of the compensation
committee on executive compensation matters.
In connection with specific compensation decisions, the
compensation committee sought input from Compensia on a range of
external market factors, including appropriate comparison
companies for assessing our competitive market position, market
survey data, and best practices for executive compensation
arrangements. Although Compensia provided extensive data to the
compensation committee, it does not determine the amount or form
of compensation for any executive officers. During 2010,
Compensia attended most compensation committee meetings and was
available for consultation with compensation committee members
at other times.
In addition to the work that Compensia directly performed for
the compensation committee, pursuant to the direction of the
compensation committee it provided limited advice to management
on bonus plan design for individuals who are not executive
officers and with respect to equity grant guidelines for
non-executive officers.
75
|
|
3.
|
The
Role of Peer Groups and Competitive Data
|
With the assistance of Compensia, the compensation committee
developed a group of peer companies in the technology sector to
assess the competitive market position of our executive
compensation. Peer companies were selected to include
(i) our most direct business competitors;
(ii) companies with whom we compete for talent; and
(iii) software companies that are roughly comparable to us
in terms of market capitalization
and/or
revenue. We seek to maintain stability in the peer group from
year to year but make adjustments based on industry
consolidation and our growth as a company. In 2010, we
eliminated CIBER and Mentor Graphics from the listed peer
companies primarily because of the increasing differences
between our revenue performance and market capitalization and
theirs. We also make occasional changes to ensure that the peer
group continues to meet the selection criteria described above.
The following table identifies our peer companies, as used by
the compensation committee in February 2010 for purposes of
assessing the competitiveness of our compensation policies and
practices, and provides information with respect to the revenue,
net income, number of employees, and market capitalization of
each of the peer companies, as compared to us. The information
presented below is based on the four fiscal quarters ending
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Last Four
|
|
|
|
|
|
|
|
|
|
|
|
Last Four
|
|
|
Quarters
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
Net
|
|
|
|
|
|
Market Cap
|
|
|
|
|
|
Revenue
|
|
|
Income
|
|
|
Employees
|
|
|
($MM) as of
|
|
|
|
Company
|
|
($MM)
|
|
|
($MM)
|
|
|
at FYE
|
|
|
12/31/09
|
|
|
Headquarters
|
|
Activision Blizzard
|
|
$
|
4,279.0
|
|
|
$
|
113.0
|
|
|
|
7,000
|
|
|
$
|
13,704.7
|
|
|
California
|
Adobe Systems
|
|
$
|
2,945.9
|
|
|
$
|
386.5
|
|
|
|
8,660
|
|
|
$
|
19,223.3
|
|
|
California
|
Autodesk
|
|
$
|
1,713.7
|
|
|
$
|
58.0
|
|
|
|
6,800
|
|
|
$
|
5,751.7
|
|
|
California
|
BMC Software
|
|
$
|
1,899.2
|
|
|
$
|
370.6
|
|
|
|
5,800
|
|
|
$
|
7,406.5
|
|
|
Texas
|
CA
|
|
$
|
4,285.0
|
|
|
$
|
742.0
|
|
|
|
13,200
|
|
|
$
|
11,463.6
|
|
|
New York
|
Cadence Design Systems
|
|
$
|
852.6
|
|
|
$
|
(149.9
|
)
|
|
|
4,400
|
|
|
$
|
1,609.2
|
|
|
California
|
Citrix Systems
|
|
$
|
1,614.1
|
|
|
$
|
191.0
|
|
|
|
4,816
|
|
|
$
|
7,598.4
|
|
|
Florida
|
EA
|
|
$
|
3,535.0
|
|
|
$
|
(749.0
|
)
|
|
|
9,100
|
|
|
$
|
5,730.4
|
|
|
California
|
Intuit
|
|
$
|
3,194.2
|
|
|
$
|
431.2
|
|
|
|
7,800
|
|
|
$
|
9,918.6
|
|
|
California
|
NetApp
|
|
$
|
3,502.7
|
|
|
$
|
147.0
|
|
|
|
7,976
|
|
|
$
|
11,415.8
|
|
|
California
|
Novell
|
|
$
|
862.2
|
|
|
$
|
(212.7
|
)
|
|
|
3,600
|
|
|
$
|
1,440.4
|
|
|
Massachusetts
|
Parametric Technology
|
|
$
|
938.2
|
|
|
$
|
31.5
|
|
|
|
5,165
|
|
|
$
|
1,894.6
|
|
|
Massachusetts
|
salesforce.com
|
|
$
|
1,305.6
|
|
|
$
|
80.7
|
|
|
|
3,969
|
|
|
$
|
9,062.6
|
|
|
California
|
Sybase
|
|
$
|
1,170.6
|
|
|
$
|
164.0
|
|
|
|
3,819
|
|
|
|
NA
|
|
|
California
|
Symantec
|
|
$
|
5,921.6
|
|
|
$
|
273.6
|
|
|
|
17,400
|
|
|
$
|
14,615.7
|
|
|
California
|
Synopsys
|
|
$
|
1,360.0
|
|
|
$
|
167.7
|
|
|
|
5,928
|
|
|
$
|
3,273.9
|
|
|
California
|
VeriSign
|
|
$
|
1,030.6
|
|
|
$
|
245.6
|
|
|
|
2,328
|
|
|
$
|
4,443.2
|
|
|
California
|
VMware
|
|
$
|
2,023.9
|
|
|
$
|
197.1
|
|
|
|
7,100
|
|
|
$
|
17,070.0
|
|
|
California
|
75th Percentile
|
|
$
|
3,425.6
|
|
|
$
|
266.6
|
|
|
|
7,932
|
|
|
$
|
11,463.6
|
|
|
|
60th Percentile
|
|
$
|
2,208.3
|
|
|
$
|
192.2
|
|
|
|
7,020
|
|
|
$
|
9,576.2
|
|
|
|
50th Percentile
|
|
$
|
1,806.4
|
|
|
$
|
165.8
|
|
|
|
6,364
|
|
|
$
|
7,598.4
|
|
|
|
Average
|
|
$
|
2,357.4
|
|
|
$
|
138.2
|
|
|
|
6,937
|
|
|
$
|
8,566.0
|
|
|
|
25th Percentile
|
|
$
|
1,204.3
|
|
|
$
|
63.7
|
|
|
|
4,504
|
|
|
$
|
4,443.2
|
|
|
|
McAfee
|
|
$
|
1,927.3
|
|
|
$
|
173.4
|
|
|
|
6,100
|
|
|
$
|
6,421.7
|
|
|
California
|
On an annual basis, Compensia provides reports to the
compensation committee comparing compensation of our most senior
executive officers to that of the most senior executive officers
at our peer companies. Peer company data is derived from the
Radford Executive Survey (which is focused on compensation in
the technology sector), as adjusted by Compensia in its
reasonable judgment based on changes to market conditions since
the date of the
76
survey data, and SEC filings by our peer companies. The
compensation committee generally references total direct
compensation between the market median and 75th percentile
for purposes of understanding the competitive market for
executive compensation. Rather than relying solely on this peer
data, the compensation committee makes individual decisions
based on what it believes is necessary and appropriate to
attract, motivate
and/or
retain the executive officers under the particular circumstances
in which the decision is made. These circumstances include but
are not limited to the external competitive landscape.
All of the equity awards granted since 2008 to our employees,
including our named executive officers, have been approved by
our compensation committee, pursuant to a formal equity granting
policy that includes the following policies and procedures:
|
|
|
|
|
All new-hire, promotional and retention awards are aggregated
for approval on predetermined dates (typically once per quarter
following our earnings announcements);
|
|
|
|
No individual or committee other than the compensation committee
or the board of directors is authorized to approve awards;
|
|
|
|
All awards are approved at a meeting of the compensation
committee or the board of directors, and not by written consent;
|
|
|
|
We determine the exercise price of a stock option based on the
fair market value of our common stock on the grant date (unless
otherwise legally required for grants of awards to non-US
individuals); and
|
|
|
|
There are detailed written procedures in place for grant
approvals and documentation.
|
|
|
D.
|
2010
Executive Compensation Decisions
|
This section describes the executive compensation decisions made
by our compensation committee for 2010. Except with respect to
Mr. Watzinger, none of our executive officers received a
base salary increase in 2010. In February 2010, we granted a
combination of stock options, PSUs and RSUs to our executive
officers.
|
|
2.
|
PSU
Vesting Criteria for 2010 Performance Period
|
With respect to the PSUs granted to our named executive officers
during 2009 and 2010, the vesting of the maximum number of PSUs
allocated to the 2010 performance period was contingent upon the
company achieving 2010 non-GAAP earnings per share of $2.85
(based upon target level adjustments described below). The
number of PSUs earned adjust downward if performance achievement
is below the maximum target level. Based on our 2010 non-GAAP
earnings per share performance, the compensation committee
certified that approximately 92% of the maximum number of PSUs
allocated to the 2010 performance period for the awards made to
our named executive officers were earned.
With respect to the PSUs granted to our named executive officers
during 2008, the vesting of the PSUs allocated to the 2010
performance period was contingent upon the company achieving
2010 non-GAAP earnings per share of $2.59 (based upon target
level adjustments described below). In contrast to the PSUs
granted during 2009 and 2010, the PSUs granted during 2008 do
not adjust downward as to the number of PSUs earned if
performance achievement is below the target level. Based on our
2010 non-GAAP earnings per share performance, the compensation
committee certified that the PSUs allocated to the 2010
performance period were fully earned.
In judging the companys achievement against the non-GAAP
earnings per share target levels the compensation committee may
adjust the target levels for fluctuations in currency exchange
rates, mergers and acquisitions and certain one-time charges, as
appropriate. In 2010, the compensation committee adjusted the
financial target levels for fluctuations in currency exchange
rates and also to exclude the financial impact of our
acquisitions of Trust Digital, tenCube and InternetSafety.com.
The compensation committee did not otherwise adjust the non-GAAP
earnings per share financial target levels.
77
|
|
3.
|
Key
Performance Metrics and Cash Bonuses for 2010
|
Our board of directors approved the companys strategic
imperatives for 2010. The compensation committee then
established 2010 KPMs for overall company performance as well as
individual performance objectives for our chief executive
officer based on the companys strategic imperatives for
2010. The compensation committee also identified specific
measurement methods for each KPM. Our chief executive officer
established 2010 KPMs for the individual performance objectives
for our other executive officers, in consultation with those
executives, based primarily on the companys strategic
imperatives for 2010 and those KPMs are reviewed and approved by
the compensation committee. Our chief executive officer also
identified specific measurement methods for each KPM.
As described above, the compensation committee determines the
amount of the cash bonus each executive earns using the
following process. To ensure that the deductibility of bonuses
paid to our executive officers is not limited by
Section 162(m) of the Internal Revenue Code and as a
condition to the payment of any bonus amounts, the compensation
committee first determines if the financial performance criteria
are satisfied. In January 2010, the compensation committee
established financial performance criteria triggering
eligibility for maximum cash bonus opportunities for our
executive officers with respect to each quarter in 2010 as well
as for the full year. The maximum cash bonus opportunities for
our executive officers equaled 175% of the individual target
cash bonus opportunities. The 2010 financial criteria triggering
eligibility to receive the maximum cash bonus opportunities for
our executive officers were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1-2010
|
|
Q2-2010
|
|
Q3-2010
|
|
Q4-2010
|
|
Full Year 2010
|
|
Non-GAAP Earnings Per Share
|
|
$
|
0.48
|
|
|
$
|
0.52
|
|
|
$
|
0.55
|
|
|
$
|
0.58
|
|
|
$
|
2.13
|
|
In accordance with Section 162(m), achievement of the
objective financial performance criteria was substantially
uncertain at the time the compensation committee established the
criteria, in particular because of the uncertainty around the
severity or length of time that adverse national and global
economic and financial market conditions would persist. Our
non-GAAP earnings per share performance for each quarter in 2010
as well as for the full year exceeded the performance criteria
established by the compensation committee in order to trigger
eligibility for the maximum cash bonus opportunities.
Once the compensation committee determined that the executive
officers were eligible for the maximum cash bonus opportunity,
the compensation committee assessed other financial and
operational factors at company-wide and individual levels to
determine whether to reduce (or eliminate) the cash bonus awards
that each executive officer was eligible to receive. The
financial and operational factors considered by the compensation
committee included:
|
|
|
|
|
Analysis of revenue and change in deferred revenue, non-GAAP
earnings per share and operating cash flow; and
|
|
|
|
Performance against company-wide and individual KPMs as
determined by the compensation committee (with input from our
chief executive officer regarding other the executive officers).
|
Following its review of these factors, the compensation
committee decided to reduce the bonus payouts to our executive
officers to amounts that ranged in the aggregate from 84 to 103%
of the individual target cash bonus opportunities. The primary
reason for reducing the bonus payouts was to align the bonuses
to our financial performance in each measurement period based
upon our achievement in revenue and change in deferred revenue,
non-GAAP earnings per share and operating cash flow as compared
to our internal business plan in each measurement period.
As previously discussed with respect to financial targets for
PSUs, in judging the companys achievement against the
non-GAAP earnings per share target levels the compensation
committee may adjust the target levels for fluctuations in
currency exchange rates, mergers and acquisitions and certain
one-time charges, as appropriate. In 2010, the compensation
committee adjusted the target levels for fluctuations in
currency exchange rates and also to exclude the financial impact
of our acquisitions of Trust Digital, tenCube and
InternetSafety.com. The compensation committee did not otherwise
adjust the non-GAAP earnings per share target levels.
78
|
|
4.
|
Compensation
for David G. DeWalt
|
Mr. DeWalt was hired as our president and chief executive
officer in April 2007. Mr. DeWalt did not receive a base
salary increase in 2010. The compensation committee believed his
2009 base salary of $950,000 was still appropriate based upon
market comparables among our peer companies and because of the
uncertainty around the severity or length of time that adverse
national and global economic and financial market conditions
would persist. For the same reasons, Mr. DeWalts
target cash bonus opportunity remained unchanged at 111% of his
base salary. Based on our achievement of our 2010 financial
metrics described above and the compensation committees
assessment of his individual performance against agreed upon
KPMs, Mr. DeWalt received a cash bonus of $990,969, equal
to approximately 94% of his individual target cash bonus
opportunity.
In February 2010 Mr. DeWalt was granted 193,000 stock
options, 25,150 RSUs, and 97,500 PSUs. The PSUs are eligible to
vest in equal tranches in February 2011, 2012 and 2013, subject
to achievement of designated performance criteria for the
designated performance period. The vesting of the PSUs allocated
to the 2010 performance period was based upon achievement of
certain 2010 non-GAAP earnings per share targets established by
the compensation committee. The size of these awards were based
on market comparables among our peer companies, the scope of
Mr. DeWalts responsibilities, his individual
executive performance against KPMs and relative compensation
comparison among our other executive officers. Based on our 2010
non-GAAP earnings per share performance, the compensation
committee certified that all of Mr. DeWalts PSUs
granted in 2008 that were allocated to the 2010 performance
period were earned, and approximately 92% of the maximum number
of Mr. DeWalts PSUs granted in 2009 and 2010 that
were allocated to the 2010 performance period were earned. As a
result, Mr. DeWalt vested as to 108,413 PSUs allocated to
the 2010 performance period.
In addition to his letter agreement Mr. DeWalt entered into
a change of control and retention agreement with us in December
2008, as amended in January 2009. As noted above, on
February 16, 2010 we renewed this agreement for an
additional two-year period through February 29, 2012. For a
summary of the terms and conditions of this change of control
and retention agreement, see Severance and Change of
Control Benefits below. In connection with the pending
acquisition of McAfee by Intel, Mr. DeWalt entered into an
employment agreement with Intel and us. For a summary of the
terms and conditions of this employment agreement, see
Employment Agreements and Retention Letters with
Intel below.
|
|
5.
|
Compensation
for Jonathan C. Chadwick
|
Jonathan C. Chadwick was hired as our executive vice president
and chief financial officer on June 14, 2010.
Mr. Chadwicks initial compensation was set by the
compensation committee after receiving advice from Compensia
regarding compensation based on market comparables among our
peer companies in light of the scope of Mr. Chadwicks
responsibilities so that his total compensation was competitive
with the market and was sufficient to compel Mr. Chadwick
to join the company.
Pursuant to the terms of his offer letter, Mr. Chadwick
received an annual base salary of $600,000 and is eligible for a
target cash bonus equal to 100% of his base salary. Based on our
achievement of our 2010 financial metrics described above and
the compensation committees assessment of his individual
performance against agreed upon KPMs, Mr. Chadwick received
a prorated cash bonus of $299,803, equal to approximately 95% of
his individual target cash bonus opportunity.
Pursuant to the terms of his offer letter, Mr. Chadwick
received initial stock option, RSU and PSU grants generally as
described below. Mr. Chadwick received 75,000 stock options
subject to our standard four-year vesting terms.
Mr. Chadwick also received 125,000 RSUs, 75,000 of which
are subject to our standard three-year vesting terms and the
remaining 50,000 are scheduled to vest in full in August 2011.
In addition, Mr. Chadwick received 97,500 PSUs, which are
eligible to vest in equal tranches in February 2011, 2012 and
2013, subject to achievement of designated performance criteria
for the designated performance period. Based on our 2010
non-GAAP earnings per share performance, the compensation
committee certified that approximately 92% of the maximum number
of Mr. Chadwicks PSUs that were allocated to the 2010
performance period were earned. As a result, Mr. Chadwick
vested as to 30,012 PSUs allocated to the 2010 performance
period.
79
On June 14, 2010 Mr. Chadwick entered into a change of
control and retention agreement with us. For a summary of the
terms and conditions of this agreement, see Severance and
Change of Control Benefits below. In connection with the
pending acquisition of McAfee by Intel, Mr. Chadwick
entered into an employment agreement with Intel and us. For a
summary of the terms and conditions of this employment
agreement, see Employment Agreements and Retention Letters
with Intel below.
|
|
6.
|
Compensation
for Michael P. DeCesare
|
Mr. DeCesare was hired as our executive vice president,
worldwide sales operations in October 2007. Mr. DeCesare
did not receive a base salary increase in 2010. The compensation
committee believed his 2009 base salary of $600,000 was still
appropriate based upon market comparables among our peer
companies and because of the uncertainty around the severity or
length of time that adverse national and global economic and
financial market conditions would persist. For the same reasons,
Mr. DeCesares target cash bonus opportunity remained
unchanged from 2009 at 100% of his base salary. Based on our
achievement of our 2010 financial metrics described above and
the compensation committees assessment of his individual
performance against agreed upon KPMs, Mr. DeCesare received
a cash bonus of $504,195, equal to approximately 84% of his
individual target cash bonus opportunity.
In February 2010, Mr. DeCesare was granted 43,700 stock
options, 4,300 RSUs, and 22,100 PSUs. The PSUs are eligible to
vest in equal tranches in February 2011, 2012 and 2013, subject
to achievement of designated performance criteria for the
designated performance period. The vesting of the PSUs allocated
to the 2010 performance period was based upon achievement of
certain 2010 non-GAAP earnings per share targets established by
the compensation committee. The size of these awards were based
on market comparables among our peer companies, the scope of
Mr. DeCesares responsibilities, his individual
executive performance against KPMs and relative compensation
comparison among our other executive officers. Based on our 2010
non-GAAP earnings per share performance, the compensation
committee certified that all of Mr. DeCesares PSUs
granted in 2008 that were allocated to the 2010 performance
period were earned, and approximately 92% of the maximum number
of Mr. DeCesares PSUs granted in 2009 and 2010 that
were allocated to the 2010 performance period were earned. As a
result, Mr. DeCesare vested as to 40,407 PSUs allocated to
the 2010 performance period.
Additionally, on December 12, 2008 Mr. DeCesare
entered into a change of control and retention agreement with
us. As noted above, on February 16, 2010 we renewed this
agreement for an additional two-year period through
February 29, 2012. For a summary of the terms and
conditions of this change of control and retention agreement,
see Severance and Change of Control Benefits below.
In connection with the pending acquisition of McAfee by Intel,
Mr. DeCesare entered into a retention agreement with Intel
and us. For a summary of the terms and conditions of this
retention agreement, see Employment Agreements and
Retention Letters with Intel below.
|
|
7.
|
Compensation
for Todd W. Gebhart
|
Mr. Gebhart has served as our executive vice president and
general manager, consumer, small and mobile business since 2008.
Mr. Gebhart did not receive a base salary increase in 2010.
The compensation committee believed his 2009 base salary of
$350,000 was still appropriate based upon market comparables
among our peer companies and because of the uncertainty around
the severity or length of time that adverse national and global
economic and financial market conditions would persist. For the
same reasons, Mr. Gebharts target cash bonus
opportunity remained unchanged from 2009 at 100% of his base
salary. Based on our achievement of our 2010 financial metrics
described above and the compensation committees assessment
of his individual performance against agreed upon KPMs,
Mr. Gebhart received a cash bonus of $359,734, equal to
approximately 103% of his individual target cash bonus
opportunity.
In February 2010, Mr. Gebhart was granted 28,500 stock
options, 3,900 RSUs, and 14,430 PSUs. The PSUs are eligible to
vest in equal tranches in February 2011, 2012 and 2013, subject
to achievement of designated performance criteria for the
designated performance period. The vesting of the PSUs allocated
to the 2010 performance period was based upon achievement of
certain 2010 non-GAAP earnings per share targets established by
the compensation committee. The sizes of these awards were based
on market comparables among our peer companies, the scope of
Mr. Gebharts responsibilities, his individual
executive performance against KPMs and relative compensation
comparison among our other executive officers. Based on our 2010
non-GAAP earnings per
80
share performance, the compensation committee certified that all
of Mr. Gebharts PSUs granted in 2008 that were
allocated to the 2010 performance period were earned, and
approximately 92% of the maximum number of
Mr. Gebharts PSUs granted in 2009 and 2010 that were
allocated to the 2010 performance period were earned. As a
result, Mr. Gebhart vested as to 14,176 PSUs allocated to
the 2010 performance period.
Additionally, on December 12, 2008 Mr. Gebhart entered
into a participation agreement which is subject to a change of
control and retention plan. On February 16, 2010 we renewed
this agreement and plan for an additional two-year period
through February 29, 2012. For a summary of the terms and
conditions of this change of control and retention arrangement,
see Severance and Change of Control Benefits below.
In connection with the pending acquisition of McAfee by Intel,
Mr. Gebhart entered into a retention agreement with Intel
and us. For a summary of the terms and conditions of this
retention agreement, see Employment Agreements and
Retention Letters with Intel below.
|
|
8.
|
Compensation
for Gerhard Watzinger
|
Gerhard Watzinger joined us in November 2007 as part of our
acquisition of SafeBoot Holding BV and serves as our executive
vice president, worldwide strategy and business development and
general manager data protection. Mr. Watzingers 2010
base salary was $400,000, which reflected a $50,000 increase
from 2009. The compensation committee adjusted
Mr. Watzingers base salary because, unlike the other
members of the executive team, Mr. Watzingers base
salary was below the market median as reflected by our peer
companies. Mr. Watzingers performance since joining
McAfee had been strong and as a result the compensation
committee increased his base salary to between the market median
and 75th percentile. Mr. Watzingers target cash
bonus opportunity remained unchanged from 2010 at 100% of his
base salary. Based on our achievement of our 2010 financial
metrics described above and the compensation committees
assessment of his individual performance against agreed upon
KPMs, Mr. Watzinger received a cash bonus of $356,965,
equal to approximately 89% of his individual target cash bonus
opportunity. In addition to his annual cash bonus, in October
2010 the compensation committee authorized a special cash bonus
payment to Mr. Watzinger in the amount of $50,000 in
recognition of his leadership and extensive time devoted in
connection with the pending acquisition of McAfee by Intel.
In February 2010, Mr. Watzinger was granted 40,000 stock
options and 26,000 PSUs. The PSUs are eligible to vest in equal
tranches in February 2011, 2012 and 2013, subject to achievement
of designated performance criteria for the designated
performance period. The vesting of the PSUs allocated to the
2010 performance period was based upon achievement of certain
2010 non-GAAP earnings per share targets established by the
compensation committee. The size of these awards were based on
market comparables among our peer companies, the scope of
Mr. Watzingers responsibilities, his individual
executive performance against KPMs and relative compensation
comparison among our other executive officers. Based on our 2010
non-GAAP earnings per share performance, the compensation
committee certified that all of Mr. Watzingers PSUs
granted in 2008 that were allocated to the 2010 performance
period were earned, and approximately 92% of the maximum number
of Mr. Watzingers PSUs granted in 2009 and 2010 that
were allocated to the 2010 performance period were earned. As a
result, Mr. Watzinger vested as to 20,019 PSUs allocated to
the 2010 performance period.
Additionally, on December 12, 2008 Mr. Watzinger
entered into a change of control and retention agreement with
us. As noted above, on February 16, 2010 we renewed this
agreement for an additional two-year period through
February 29, 2012. For a summary of the terms and
conditions of this change of control and retention agreement,
see Severance and Change of Control Benefits below.
In connection with the pending acquisition of McAfee by Intel,
Mr. Watzinger entered into a retention agreement with Intel
and us. For a summary of the terms and conditions of this
retention agreement, see Employment Agreements and
Retention Letters with Intel below.
|
|
9.
|
Compensation
for Albert A. Rocky Pimentel
|
Albert A. Rocky Pimentel served as our chief
financial officer and chief operating officer until
June 14, 2010 and served as special advisor to
Mr. Chadwick until August 9, 2010.
Mr. Pimentels $500,000 base salary and target cash
bonus at 100% of his base salary remained unchanged from 2009.
Based on our achievement of our 2010 financial metrics described
above and the compensation committees assessment of his
individual performance
81
against agreed upon KPMs, Mr. Pimentel received a prorated
cash bonus of $52,188, equal to approximately 42% of his
individual target cash bonus opportunity.
|
|
E.
|
Tax,
Accounting and Other Considerations
|
Tax Deductibility of Compensation
Expense. Section 162(m) of the Internal
Revenue Code places a limit of $1,000,000 on the amount of
compensation to certain executives that we may deduct as a
business expense in any tax year unless, among other things, the
compensation is performance-based and it is paid under a
compensation plan that has been approved by our stockholders.
During 2010, we designed our incentive compensation plans so
that they qualify as performance-based compensation that is
deductible under Section 162(m). We expect that all
compensation payments under the bonus plan will be exempt from
Section 162(m) and will therefore be tax deductible.
Mr. Denend does not qualify as an outside director under
Section 162(m) because he is a former executive officer of
McAfee (although he is independent from the company under the
New York Stock Exchange listing requirements and SEC rules).
Mr. Denend abstains from making decisions with respect to
compensation that could qualify as exempt from Section
162(m)s limits. With respect to those decisions, the
remaining independent members of the compensation committee act.
From time to time, the compensation committee may approve
compensation that will not meet these requirements for
deductibility to ensure competitive levels of total compensation
for its executive officers.
Tax Implications for
Executives. Section 409A of the Internal
Revenue Code imposes additional income taxes on our employees
who receive certain types of deferred compensation if the
compensation does not meet the qualification requirements of
Section 409A. We generally do not offer deferred compensation
programs subject to Section 409A.
Section 4999 of the Internal Revenue Code imposes an excise
tax on payments to executives of severance or change of control
compensation that exceed the levels specified in
Section 280G of the Code. Our named executive officers
could potentially receive amounts that exceed the
Section 280G limits as severance or change in control
payments, but the compensation committee does not consider this
potential impact in compensation program design.
Accounting Considerations. The compensation
committee also considers the accounting expense and cash flow
implications of various forms of executive compensation. For
base salary and cash bonuses, we record or accrue compensation
expense in our financial statements in an amount equal to the
dollar amount of the cash payment. Accounting standards also
require us to record an expense in our financial statements for
equity awards as well, even though equity awards are not paid to
employees in cash. All equity awards (stock options, PSUs and
RSUs) result in compensation expense. The compensation committee
believes that the advantages of equity awards, as described
throughout this compensation discussion and analysis, more than
outweigh the non-cash accounting expense associated with them.
Compensation
Committee Report on Compensation Discussion and
Analysis
The compensation committee of our board of directors has
furnished the following report:
The compensation committee has reviewed and discussed the
foregoing compensation discussion and analysis with management.
Based on that review and discussion, the compensation committee
has recommended to our board of directors that the compensation
discussion and analysis be included in this annual report.
THE COMPENSATION COMMITTEE
Leslie G. Denend, Chairman
Denis J. OLeary
Jeffrey A. Miller
Anthony Zingale
82
Compensation
Committee Interlocks and Insider Participation
No member of our compensation committee, other than
Mr. Denend as described above, during 2010 has ever been an
officer or employee of McAfee or of any of our subsidiaries or
affiliates. During 2010, none of our executive officers served
on the board of directors or on the compensation committee of
any other entity, any officers of which served either on our
board of directors or on our compensation committee.
Compensation
Policies and Practices as They Relate to Risk
Management
In 2010, our management conducted a review of our compensation
policies and practices to assess whether such policies and
practices as they relate to our employees are reasonably likely
to have a material adverse effect on us. This process included
the following:
|
|
|
|
|
A review of our compensation programs;
|
|
|
|
The identification of program features that could potentially
encourage excessive or imprudent risk taking of a material
nature; and
|
|
|
|
The identification of factors that mitigate these risks.
|
We paid particular attention to programs that allow for variable
payouts where an employee might be able to influence payout
factors and programs that involve our executives. During the
course of our assessment, we consulted with various persons,
including our senior human resources executives, our internal
and external legal counsel and the compensation consultant
retained by the compensation committee.
Overall, we believe that our compensation programs are designed
to create appropriate incentives for employee performance
without encouraging excessive risk taking. In this regard, our
compensation structure contains the following features intended
to mitigate risk.
|
|
|
|
|
We use a balanced compensation structure designed to link an
appropriate portion of compensation to our long-term performance.
|
|
|
|
We periodically compare our compensation programs and overall
compensation structure with our peer companies to assess the
competitive market position of our compensation and align with
industry practices.
|
|
|
|
Cash bonuses are based on multiple performance metrics,
including company-wide metrics as well as customer and employee
success measures, which are consistent with our short and
long-term goals.
|
|
|
|
In many cases, management or the compensation committee has
discretion to decrease cash bonuses for quality of performance
or other negative factors.
|
|
|
|
Equity compensation is largely subject to multi-year vesting to
provide meaningful retention incentive.
|
|
|
|
We have established internal controls and standards of ethics
and business conduct, many of which help to support our
compensation goals and mitigate compensation risk.
|
|
|
|
The compensation committee oversees our compensation policies
and practices and is responsible for reviewing and approving
executive compensation, incentive compensation plans applicable
to senior management employees and other compensation plans.
|
|
|
|
In 2009, our board adopted a clawback policy that
allows our board of directors to seek to recover bonuses or
other incentive-based or equity-based compensation to certain
executives in certain circumstances where there has been a
restatement of previously issued financial statements.
|
Based on the assessment described above, we concluded that our
compensation policies and practices are not reasonably likely to
have a material adverse effect on us. We reviewed the assessment
process and our conclusions with the compensation committee.
83
SUMMARY
COMPENSATION TABLE
This table summarizes the compensation earned by our current
named executive officers during 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation/
|
|
Stock
|
|
Option
|
|
All Other
|
|
|
Name and Principal Position
|
|
Year
|
|
Salary(1)
|
|
Bonus(2)
|
|
Awards(4)
|
|
Awards(4)
|
|
Compensation(6)
|
|
Total
|
|
David G. DeWalt
|
|
|
2010
|
|
|
$
|
950,000
|
|
|
$
|
990,969
|
|
|
$
|
4,047,062
|
|
|
$
|
2,646,551
|
|
|
$
|
1,710
|
|
|
$
|
8,636,292
|
|
President and chief executive
|
|
|
2009
|
|
|
|
950,000
|
|
|
|
577,501
|
|
|
|
6,539,799
|
|
|
|
|
|
|
|
5,310
|
|
|
|
8,072,610
|
|
officer
|
|
|
2008
|
|
|
|
950,000
|
|
|
|
1,000,000
|
|
|
|
12,833,666
|
(5)
|
|
|
1,124,498
|
|
|
|
34,224
|
|
|
|
15,942,388
|
|
Jonathan C. Chadwick
|
|
|
2010
|
|
|
|
600,000
|
|
|
|
299,803
|
|
|
|
6,598,750
|
|
|
|
764,228
|
|
|
|
665
|
|
|
|
8,263,446
|
|
Executive vice president and chief financial officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael P. DeCesare
|
|
|
2010
|
|
|
|
600,000
|
|
|
|
504,195
|
|
|
|
860,733
|
|
|
|
599,245
|
|
|
|
1,710
|
|
|
|
2,565,883
|
|
Executive vice president
|
|
|
2009
|
|
|
|
600,000
|
|
|
|
331,875
|
|
|
|
2,131,960
|
|
|
|
|
|
|
|
4,740
|
|
|
|
3,068,575
|
|
of worldwide sales operations
|
|
|
2008
|
|
|
|
600,000
|
|
|
|
592,575
|
|
|
|
3,938,500
|
(5)
|
|
|
|
|
|
|
1,045
|
|
|
|
5,132,120
|
|
Todd W. Gebhart
|
|
|
2010
|
|
|
|
350,000
|
|
|
|
359,734
|
|
|
|
606,150
|
|
|
|
390,812
|
|
|
|
4,902
|
|
|
|
1,711,598
|
|
Executive vice president and general manager, consumer, small
and mobile business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gerhard Watzinger
|
|
|
2010
|
|
|
|
400,000
|
|
|
|
406,965
|
(3)
|
|
|
808,200
|
|
|
|
548,508
|
|
|
|
2,622
|
|
|
|
2,166,295
|
|
Executive vice president, worldwide strategy and business
development and general manager, data protection
|
|
|
2009
|
|
|
|
350,000
|
|
|
|
208,906
|
|
|
|
1,360,692
|
|
|
|
|
|
|
|
5,310
|
|
|
|
1,924,908
|
|
|
|
|
(1) |
|
Salary includes amounts deferred under our Section 401(k)
plan. |
|
(2) |
|
The amounts reported consist of cash incentive compensation
earned for services rendered in the respective fiscal years
under our executive bonus plan. A description of our executive
bonus plan may be found in the Compensation Discussion and
Analysis Executive Compensation Design above. |
|
(3) |
|
The amount reported includes a special cash bonus payment to
Mr. Watzinger in the amount of $50,000 in recognition of
his leadership and extensive time devoted in connection with the
pending acquisition of McAfee by Intel. |
|
(4) |
|
The amounts reported do not reflect the actual economic value
realized by the named executive officer. This column reflects
the grant date fair values which have been determined based on
assumptions described in Note 14 to our consolidated
financial statements included in this annual report. For PSUs,
the grant date fair value is based on the probable outcome of
the performance conditions as of the grant date. |
|
(5) |
|
The stock unit awards made by us during 2008 to each of
Messrs. DeWalt and DeCesare include awards that would have
been made during 2007 in accordance with the terms of their
respective 2007 offer letter agreements with us, but for the
fact that we were unable to grant equity awards (other than
stock options) during 2007 because we were not current in our
financial reporting obligations for substantially all of 2007. |
84
|
|
|
(6) |
|
The amounts reported in the All Other Compensation column
consisted of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gifts,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Family
|
|
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Travel
|
|
Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
Life
|
|
Company
|
|
|
|
|
|
|
|
|
Commuting
|
|
Living
|
|
Matching
|
|
Insurance
|
|
Contributions
|
|
Tax
|
|
|
Name
|
|
Year
|
|
Expense
|
|
Allowance
|
|
Gifts(1)
|
|
Coverage
|
|
To 401(k)
|
|
Gross-ups(2)
|
|
Total
|
|
David G. DeWalt
|
|
|
2010
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,710
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,710
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,710
|
|
|
|
3,600
|
|
|
|
|
|
|
|
5,310
|
|
|
|
|
2008
|
|
|
|
11,128
|
|
|
|
8,013
|
|
|
|
3,365
|
|
|
|
540
|
|
|
|
|
|
|
|
11,178
|
|
|
|
34,224
|
|
Jonathan C. Chadwick
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
665
|
|
|
|
|
|
|
|
|
|
|
|
665
|
|
Michael P. DeCesare
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,710
|
|
|
|
|
|
|
|
|
|
|
|
1,710
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,140
|
|
|
|
3,600
|
|
|
|
|
|
|
|
4,740
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
341
|
|
|
|
540
|
|
|
|
|
|
|
|
164
|
|
|
|
1,045
|
|
Todd W. Gebhart
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,902
|
|
|
|
|
|
|
|
|
|
|
|
4,902
|
|
Gerhard Watzinger
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,622
|
|
|
|
|
|
|
|
|
|
|
|
2,622
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,710
|
|
|
|
3,600
|
|
|
|
|
|
|
|
5,310
|
|
|
|
|
(1) |
|
Represents the cost of spousal travel to McAfee events, the cost
of token gifts received at McAfee events and company-matching
charitable contributions. |
|
(2) |
|
The tax
gross-up
payments reported in this column relate to taxes imposed on our
reimbursements of living and commuting expenses (in the case of
Mr. DeWalt) and taxes imposed on token gifts received at
McAfee events and the cost of spousal travel to McAfee events. |
GRANTS OF
PLAN-BASED AWARDS
This table shows grants of plan-based awards made by us to our
current named executive officers during 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
All Other
|
|
|
|
|
|
|
|
|
Estimated Future
|
|
Estimated Future
|
|
Stock
|
|
Stock
|
|
|
|
Grant Date
|
|
|
|
|
Payouts Under
|
|
Payouts Under
|
|
Awards:
|
|
Awards:
|
|
Exercise or
|
|
Fair
|
|
|
|
|
Non-Equity
|
|
Equity Incentive
|
|
Number of
|
|
Number of
|
|
Base
|
|
Value of
|
|
|
|
|
Incentive
|
|
Plan Awards
|
|
Shares of
|
|
Securities
|
|
Price of
|
|
Stock and
|
|
|
|
|
Plan Awards
|
|
(Threshold/Target/
|
|
Stock
|
|
Underlying
|
|
Option
|
|
Option
|
Name
|
|
Grant Date
|
|
(Target/Maximum)(1)
|
|
Maximum)(2)
|
|
or Units
|
|
Options(9)
|
|
Awards
|
|
Awards(10)
|
|
David G. DeWalt
|
|
|
2/16/2010
|
|
|
|
|
|
|
|
10,000 / 25,000 / 32,500(3
|
)
|
|
|
65,000(3
|
)
|
|
|
|
|
|
$
|
|
|
|
$
|
3,030,750(11
|
)
|
|
|
|
2/16/2010
|
|
|
|
|
|
|
|
|
|
|
|
25,150(8
|
)
|
|
|
|
|
|
|
|
|
|
|
1,016,312
|
|
|
|
|
2/16/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193,000
|
|
|
|
40.41
|
|
|
|
2,646,551
|
|
|
|
|
1/15/2010
|
|
|
$
|
1,050,000 / $1,837,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jonathan C. Chadwick
|
|
|
8/6/2010
|
|
|
|
|
|
|
|
10,000 / 25,000 / 32,500(4
|
)
|
|
|
65,000(4
|
)
|
|
|
|
|
|
|
|
|
|
|
2,441,250(12
|
)
|
|
|
|
8/6/2010
|
|
|
|
|
|
|
|
|
|
|
|
75,000(8
|
)
|
|
|
|
|
|
|
|
|
|
|
2,494,500
|
|
|
|
|
8/6/2010
|
|
|
|
|
|
|
|
|
|
|
|
40,000(8
|
)
|
|
|
|
|
|
|
|
|
|
|
1,330,400
|
|
|
|
|
8/6/2010
|
|
|
|
|
|
|
|
|
|
|
|
10,000(8
|
)
|
|
|
|
|
|
|
|
|
|
|
332,600
|
|
|
|
|
8/2/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
33.26
|
|
|
|
764,228
|
|
|
|
|
6/14/2010
|
|
|
|
600,000 / 1,050,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael P. DeCesare
|
|
|
2/16/2010
|
|
|
|
|
|
|
|
2,267 / 5,667 / 7,367(5
|
)
|
|
|
14,733(5
|
)
|
|
|
|
|
|
|
|
|
|
|
686,970(13
|
)
|
|
|
|
2/16/2010
|
|
|
|
|
|
|
|
|
|
|
|
4,300(8
|
)
|
|
|
|
|
|
|
|
|
|
|
173,763
|
|
|
|
|
2/16/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,700
|
|
|
|
40.41
|
|
|
|
599,245
|
|
|
|
|
1/15/2010
|
|
|
|
600,000 / 1,050,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Todd W. Gebhart
|
|
|
2/16/2010
|
|
|
|
|
|
|
|
1,480 / 3,700 / 4,810(6
|
)
|
|
|
9,620(6
|
)
|
|
|
|
|
|
|
|
|
|
|
448,551(14
|
)
|
|