mcfe-10q_20200926.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 26, 2020

OR

 

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: 001-39651

 

McAfee Corp.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

84-2467341

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

6220 America Center Drive,

San Jose, CA

95002

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (866) 622-3911

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Class A Common Stock, $0.001 par value

 

MCFE

 

The Nasdaq Stock Market LLC

 

 

 

 

 

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  ☐    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  

As of November 12, 2020, there were 157,324,990 shares of the Registrant’s Class A common stock, $0.001 par value per share, outstanding and 267,065,127 shares of the Registrant’s Class B Common Stock, par value $0.001 per share, outstanding.

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

1

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4.

Controls and Procedures

42

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

43

Item 1A.

Risk Factors

43

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 3.

Defaults Upon Senior Securities

43

Item 4.

Mine Safety Disclosures

44

Item 5.

Other Information

44

Item 6.

Exhibits

44

 

Signatures

47

 


i


Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, as well as information included in oral statements or other written statements made or to be made by us, contain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate,” and other similar expressions, although not all forward-looking statements contain these identifying words.

We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not rely on our forward-looking statements in making your investment decision. Actual results or events could differ materially from the plans, intentions, and expectations disclosed in the forward-looking statements we make. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include, among others, the following:

 

plans to develop and offer new products and services and enter new markets;

 

our expectations with respect to the continued stability and growth of our customer base;

 

anticipated trends, growth rates, and challenges in our business and in domestic and international markets;

 

our financial performance, including changes in and expectations with respect to revenues, and our ability to maintain profitability in the future;

 

investments or potential investments in new or enhanced technologies;

 

market acceptance of our solutions;

 

the success of our business strategy, including the growth in the market for cloud-based security solutions, acceptance of our own cloud-based solutions, and changes in our business model and operations;

 

our ability to cross-sell and up-sell to our existing customers;

 

our ability to maintain and expand our relationships with partners and on commercially acceptable terms, including our channel and strategic partners;

 

the effectiveness of our sales force, distribution channel, and marketing activities;

 

the growth and development of our direct and indirect channels of distribution;

 

our response to emerging and future cybersecurity risks;

 

our ability to continue to innovate and enhance our solutions;

 

our ability to develop new solutions and bring them to market in a timely manner;

 

our ability to prevent serious errors, defects, or vulnerabilities in our solutions;

 

our ability to develop solutions that interoperate with our customers’ existing systems and devices;

 

our ability to maintain, protect, and enhance our brand and intellectual property;

 

our continued use of open source software;

 

our ability to compete against established and emerging cybersecurity companies;

 

risks associated with fluctuations in exchange rates of the foreign currencies in which we conduct business;

 

past and future acquisitions, investments, and other strategic investments;

 

 

our ability to remain in compliance with laws and regulations that currently apply or become applicable to our business both domestically and internationally;

 

the attraction, transition, and retention of management and other qualified personnel;

 

economic and industry trend analysis;

 

litigation, investigations, regulatory inquiries, and proceedings;

 

the increased expenses associated with being a public company;

 

our estimated total addressable market;

ii


 

the impact of macroeconomic conditions on our business, including the impact of the COVID-19 on economic activity and financial markets;

 

our expectation regarding the impact of the COVID-19 pandemic, including its geographic spread and severity, and the related responses by governments and private industry on our business and financial condition, as well as the businesses and financial condition of our customers and partners;

 

the adequacy of our capital resources to fund operations and growth;

 

TPG Global LLC’s (“TPG”), Thoma Bravo L.P.’s (“Thoma Bravo”), and Intel Americas, Inc’s (“Intel”) significant influence over us and our status as a “controlled company” under the rules of the Exchange;

 

risks relating to our corporate structure, tax rates, and tax receivable agreement (“TRA”); and

 

the other factors identified under the heading “Risk Factors” in our Registration Statement on Form S-1 (File No. 333-249101).

The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Report. We undertake no obligation to update any forward-looking statements whether as a result of new information, future developments or otherwise.

 

iii


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MCAFEE CORP.

UNAUDITED BALANCE SHEETS

 

 

 

As of September 26, 2020

 

 

As of December 28, 2019

 

Assets

 

$

 

 

$

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Common Stock, par value $0.01 per share, 100 shares authorized, none

   issued and outstanding as of September 26, 2020 and December 28,

   2019, respectively

 

 

 

 

 

 

Total stockholders' equity

 

$

 

 

$

 

 

See accompanying notes to balance sheets.


1


MCAFEE CORP.

NOTES TO THE UNAUDITED BALANCE SHEETS

 

NOTE 1: ORGANIZATION

McAfee Corp. (the “Corporation”) was incorporated in Delaware on July 19, 2019. The Corporation was formed for the purpose of completing an initial public offering (the “IPO”) and related transactions in order to carry on the business of Foundation Technology Worldwide LLC (“FTW”) and its subsidiaries (the “Company”). On October 21, 2020, the Corporation became the sole managing member and holder of 100% of the voting power of the Company due to the reorganization transactions described in Note 4 (the “Reorganization Transactions”). Foundation Technology Worldwide LLC is a leading-edge cybersecurity company that provides advanced security solutions to consumers, small and medium-sized businesses, large enterprises, and governments. With respect to the Corporation and the Company, each entity owns nothing other than the respective entities below it in the corporate structure and each entity has no other material operations, assets, or liabilities.

In October, 2020, the Corporation completed the IPO pursuant to which the Corporation and selling stockholders sold an aggregate of 37.0 million shares of Class A common stock par value $0.001 per share (“Class A common stock”) at a public offering price of $20.00 per share. The Corporation received $586 million in proceeds, net of underwriting discounts and commissions, of which $553 million was used to purchase newly-issued limited liability company units (“LLC Units”) and $33 million was used to purchase LLC Units from existing holders (“Continuing LLC Owners”) of interests in the Company, at a purchase price per unit equal to the public offering price per share of Class A common stock, less underwriting discounts and commissions (Note 4).

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The balance sheet as of September 26, 2020 is unaudited. The balance sheets have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Separate statements of operations, comprehensive income, changes in stockholder's equity and cash flows have not been presented in the financial statements because there have been no activities in this entity since its inception through September 26, 2020. The unaudited balance sheets, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair statement of the Corporation’s financial information. The balance sheet as of December 28, 2019, has been derived from the audited balance sheet as of that date, but it does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These interim balance sheets should be read in conjunction with the audited balance sheet as of December 28, 2019 and related notes included in the final prospectus for the Corporation's IPO dated October 21, 2020 filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”) with the U.S. Securities and Exchange Commission (the “SEC”) (the “Prospectus”). Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.

NOTE 3: STOCKHOLDERS’ EQUITY

As of September 26, 2020 and December 28, 2019, the Corporation was authorized to issue 100 shares of Common Stock, par value $0.01 per share, none of which were issued and outstanding at September 26, 2020 and at December 28, 2019. On September 27, 2020, the Board of Directors of the Corporation approved and ratified certain organizational activities related to the Corporation including issuance of 100 shares of Common Stock, par value $0.01 per share, to the Company and other activities.

NOTE 4: SUBSEQUENT EVENTS

In October 2020, the Corporation completed its IPO and consummated the following transactions.

The Reorganization Transactions

Reorganization

In connection with the closing of the IPO, the following Reorganization Transactions were consummated:

 

a new limited liability company operating agreement (“New LLC Agreement”) was adopted for the Company making the Corporation the sole managing member of the Company;

 

the Corporation’s certificate of incorporation was amended and restated to, among other things, (i) provide for Class A common stock and Class B common stock and (ii) issue shares of Class B common stock to the holders of LLC Units following the IPO, other than Management Owners (as defined below), the Corporation and its subsidiaries, (“Continuing Owners”) and the members of the Company’s management who hold LLC Units following the closing of the offering or are to receive Class A common stock in satisfaction of the incentive awards, (“Management Owners”), on a one-to-one basis

2


 

with the number of LLC Units they own (except that Management Owners will not receive shares of Class B common stock in connection with their exchange of Management Incentive Units (“MIUs”)), the exchange of which will be settled in shares of Class A Common Stock, for nominal consideration;

 

the Corporation (i) issued 126.3 million shares of its Class A common stock to certain of the Continuing Owners in exchange for their contribution of LLC units or the equity of certain other entities, which pursuant to the Reorganization Transactions, became its direct or indirect subsidiaries and (ii) will issue up to 5.7 million shares of its Class A common stock upon settlement of certain existing awards held by certain Management Owners, which were satisfied in connection with the Reorganization Transactions; and

 

the Corporation entered into (i) a tax receivable agreement with the TRA Beneficiaries and (ii) a stockholders agreement and a registration rights agreement with investment funds affiliated with or advised by TPG Global, LLC (“TPG”) and Thoma Bravo, L.P. (“Thoma Bravo”), respectively, and Intel Americas, Inc. (“Intel”.)

Exchange Mechanics

In connection with the IPO, the New LLC Agreement was adopted, allowing the Continuing LLC Owners (or certain permitted transferees), subject to certain restrictions, to exchange their LLC Units for shares of Class A common stock on a one-for-one basis (and cancels an equal number of shares of Class B common stock of the exchanging member), subject to customary conversion rate adjustments for stock splits, stock dividends, reclassifications and other similar transactions. The holders of MIUs also have the right, from time to time and subject to certain restrictions, to exchange their MIUs for LLC Units, which will then be immediately redeemed for shares of Class A Common Stock, based on the value of such MIUs relative to their applicable distribution threshold.

Consolidation

Subsequent to the Reorganization Transactions and IPO, the Corporation is a holding company, and its sole material asset held directly or through wholly-owned subsidiaries is its equity interest in FTW. After the Reorganization Transactions, the Corporation, as the sole managing member of FTW, exclusively operates and controls the business and affairs of FTW and will then consolidate FTW, with FTW considered the predecessor for accounting purposes. As the Continuing LLC Owners control both the Corporation and FTW, before and after the Reorganization Transactions, The Reorganization Transactions will be accounted for as a reorganization of entities under common control. Following the Reorganization Transactions, the consolidated financial statements of the Corporation will recognize the assets and liabilities received in the Reorganization Transactions at their historical carrying amounts, as reflected in the historical consolidated financial statements of FTW.

The Corporation will report a noncontrolling interest related to the LLC Units held by the Continuing LLC Owners. The decision whether to tender LLC Units to FTW will be made solely at the discretion of the Continuing LLC Owners. Accordingly, the LLC Units owned by the Continuing LLC Owners will be treated as redeemable noncontrolling interests as the holders have the option to exchange their LLC Units for cash or for shares of the Corporation’s Class A common stock.

Income Taxes and Tax Receivable Agreement

The Corporation is subject to U.S. federal and state income taxes and will file consolidated income tax returns for U.S. federal and certain state jurisdictions and is subject to U.S. federal income taxes, in addition to state and local taxes, with respect to its allocable share of any net taxable income of FTW following the Reorganization Transactions. FTW continues to be classified as a partnership for U.S. federal income tax purposes.

The contribution by the Continuing Owners to the Corporation of certain corporate entities in connection with the IPO (including the Reorganization Transactions) and future exchanges of LLC Units for shares of the Corporation’s Class A common stock are expected to produce or otherwise deliver to the Corporation favorable tax attributes that can reduce its taxable income. Prior to the completion of the IPO, the Corporation entered into a tax receivable agreement, under which generally will require it to pay to the TRA Beneficiaries 85% of the applicable cash savings, if any, in U.S. federal, state, and local income tax that the Corporation actually realizes or, in certain circumstances, is deemed to realize as a result of (i) all or a portion of the Corporation’s allocable share of existing tax basis in the assets of FTW (and its subsidiaries) acquired in connection with the Reorganization Transactions, (ii) increases in the Corporation’s allocable share of existing tax basis in the assets of FTW (and its subsidiaries) and tax basis adjustments in the assets of FTW (and its subsidiaries) as a result of sales or exchanges of LLC Units after the IPO, (iii) certain tax attributes of the corporations acquired by McAfee Corp. in connection with the Reorganization Transactions (including their allocable share of existing tax basis in the assets of FTW (and its subsidiaries)), and (iv) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. The Corporation generally will retain the benefit of the remaining 15% of the applicable tax savings.

3


Pursuant to the exchange mechanics described above, the Corporation may be required to acquire LLC Units of FTW from the holders for shares of the Corporation’s Class A common stock. An exchange of LLC Units is treated as a purchase of such LLC Units for U.S. federal income tax purposes. FTW and certain of its subsidiaries are treated as a partnership for U.S federal income tax purposes and through which FTW owns its interests in the assets of the McAfee business has or will have an election under Section 754 of the Internal Revenue Code of 1986 in effect for taxable years in which sales or exchanges of LLC Units occur. Pursuant to the Section 754 election, sales of LLC Units result in an increase in the tax basis of tangible and intangible assets of FTW and certain of its subsidiaries. When the Corporation acquires LLC Units from the Continuing LLC Owners, both the existing basis for certain assets and the anticipated basis adjustments will increase depreciation and amortization deductions allocable to the Corporation for tax purposes from FTW, and therefore reduce the amount of income tax the Corporation would otherwise be required to pay in the future to various tax authorities. This increase in tax basis may also decrease gain (or increase loss) on future dispositions of certain assets of FTW and its subsidiaries to the extent increased tax basis is allocated to those capital assets.

Stockholders Agreement

In connection with the IPO, the Corporation entered into a stockholders agreement with investment funds affiliated with TPG, Thoma Bravo, Intel, and certain other stockholders. Under the stockholders agreement, the Corporation is required to take all necessary action to cause the board of directors and its committees to include director candidates designated by TPG and Intel in the slate of director nominees recommended by the board of directors for election by the Corporation’s stockholders. Pursuant to the stockholders agreement, TPG, Intel, and Thoma Bravo also agreed to certain standstill provisions pursuant to which each is restricted from, among other things, acquiring the Corporation’s securities if that would result in it owning more than 49% of the Corporation’s outstanding voting power without the Corporation’s consent.

Registration Rights Agreement

The Corporation entered into a registration rights agreement with TPG, Thoma Bravo, Intel, certain other stockholders, and the Corporation’s Chief Executive Officer in connection with the IPO. The registration rights agreement provides TPG, Thoma Bravo, and Intel certain registration rights whereby, at any time following the IPO and the expiration of any related lock-up period, TPG, Thoma Bravo, and Intel can require the Corporation to register under the Securities Act shares of Class A common stock, including shares issuable to them upon exchange of their equity ownership in FTW.

The IPO

In connection with the completion of the IPO, the Corporation issued 31.0 million Class A common stock to the purchasers in the IPO. The Corporation used the net proceeds to purchase (directly or indirectly through shares of subsidiaries) (i) newly issued LLC Units from FTW and (ii) 1.7 million issued and outstanding LLC Units and an equal number of shares of Class B common stock from certain Continuing LLC Owners at a purchase price per unit equal to the IPO price of Class A common stock, less underwriting discounts and commissions. The Corporation purchased 29.3 million newly issued LLC Units from FTW at a price per unit equal to the public offering price, less underwriting discounts and commissions, an aggregate of $553 million, collectively representing 6.8% of the FTW’s outstanding LLC Units. FTW used the proceeds contributed to it to repay all of its outstanding principal obligations with respect to its Second Lien Term Loan in an amount of $525 million and made a payment of $22 million due upon termination of its Management Services Agreement. FTW will incur or reimburse the Corporation for all of the expenses of the IPO. Following the IPO, the Corporation holds (directly or indirectly through subsidiaries) 157.3 million LLC Units that is equal to the number of shares of Class A common stock outstanding. 

 


4


 

FOUNDATION TECHNOLOGY WORLDWIDE LLC

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions)

 

 

 

As of September 26, 2020

 

 

As of December 28, 2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

348

 

 

$

167

 

Accounts receivable, net

 

 

311

 

 

 

409

 

Deferred costs

 

 

216

 

 

 

187

 

Other current assets

 

 

77

 

 

 

68

 

Total current assets

 

 

952

 

 

 

831

 

Property and equipment, net

 

 

154

 

 

 

171

 

Goodwill

 

 

2,431

 

 

 

2,428

 

Identified intangible assets, net

 

 

1,748

 

 

 

2,071

 

Deferred tax assets

 

 

59

 

 

 

55

 

Other long-term assets

 

 

209

 

 

 

232

 

Total assets

 

$

5,553

 

 

$

5,788

 

Liabilities, redeemable units, and deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and other current liabilities

 

$

195

 

 

$

196

 

Accrued compensation and benefits

 

 

150

 

 

 

209

 

Accrued marketing

 

 

105

 

 

 

94

 

Income taxes payable

 

 

13

 

 

 

15

 

Long-term debt, current portion

 

 

44

 

 

 

43

 

Lease liabilities, current portion

 

 

22

 

 

 

29

 

Deferred revenue

 

 

1,605

 

 

 

1,574

 

Total current liabilities

 

 

2,134

 

 

 

2,160

 

Long-term debt, net

 

 

4,698

 

 

 

4,669

 

Deferred tax liabilities

 

 

165

 

 

 

160

 

Other long-term liabilities

 

 

218

 

 

 

175

 

Deferred revenue, less current portion

 

 

661

 

 

 

718

 

Total liabilities

 

 

7,876

 

 

 

7,882

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Redeemable units (Note 5)

 

 

41

 

 

 

 

Deficit:

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

(137

)

 

 

(62

)

Members’ deficit

 

 

(873

)

 

 

(647

)

Accumulated deficit

 

 

(1,354

)

 

 

(1,385

)

Total deficit

 

 

(2,364

)

 

 

(2,094

)

Total liabilities, redeemable units, and deficit

 

$

5,553

 

 

$

5,788

 

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

5


FOUNDATION TECHNOLOGY WORLDWIDE LLC

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in millions except per unit data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 26, 2020

 

 

September 28, 2019

 

 

September 26, 2020

 

 

September 28, 2019

 

Net revenue

 

$

728

 

 

$

662

 

 

$

2,129

 

 

$

1,953

 

Cost of sales

 

 

209

 

 

 

203

 

 

 

619

 

 

 

632

 

Gross profit

 

 

519

 

 

 

459

 

 

 

1,510

 

 

 

1,321

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

186

 

 

 

184

 

 

 

534

 

 

 

567

 

Research and development

 

 

88

 

 

 

96

 

 

 

274

 

 

 

289

 

General and administrative

 

 

62

 

 

 

72

 

 

 

200

 

 

 

195

 

Amortization of intangibles

 

 

55

 

 

 

55

 

 

 

165

 

 

 

168

 

Restructuring charges (Note 7)

 

 

 

 

 

(1

)

 

 

9

 

 

 

14

 

Total operating expenses

 

 

391

 

 

 

406

 

 

 

1,182

 

 

 

1,233

 

Operating income

 

 

128

 

 

 

53

 

 

 

328

 

 

 

88

 

Interest expense and other, net

 

 

(73

)

 

 

(76

)

 

 

(223

)

 

 

(219

)

Foreign exchange gain (loss), net

 

 

(43

)

 

 

43

 

 

 

(49

)

 

 

44

 

Income (loss) before income taxes

 

 

12

 

 

 

20

 

 

 

56

 

 

 

(87

)

Provision for income tax expense

 

 

12

 

 

 

29

 

 

 

25

 

 

 

68

 

Net income (loss)

 

$

 

 

$

(9

)

 

$

31

 

 

$

(155

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on interest rate cash flow

   hedges, net of tax (Note 12)

 

$

6

 

 

$

(12

)

 

$

(75

)

 

$

(75

)

Total comprehensive income (loss)

 

$

6

 

 

$

(21

)

 

$

(44

)

 

$

(230

)

Net income (loss) per unit, basic

 

$

 

 

$

(0.02

)

 

$

0.08

 

 

$

(0.41

)

Net income (loss) per unit, diluted

 

$

 

 

$

(0.02

)

 

$

0.08

 

 

$

(0.41

)

Weighted-average units outstanding, basic

 

 

379.3

 

 

 

377.0

 

 

 

378.4

 

 

 

376.4

 

Weighted-average units outstanding, diluted

 

 

379.3

 

 

 

377.0

 

 

 

388.3

 

 

 

376.4

 

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

6


FOUNDATION TECHNOLOGY WORLDWIDE LLC

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

 

 

Nine Months Ended September 26, 2020

 

 

Nine Months Ended September 28, 2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

31

 

 

$

(155

)

Adjustments to reconcile net income (loss) to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

372

 

 

 

400

 

Equity-based compensation

 

 

25

 

 

 

19

 

Deferred taxes

 

 

3

 

 

 

13

 

Foreign exchange (gain) loss, net

 

 

49

 

 

 

(44

)

Other operating activities

 

 

40

 

 

 

37

 

Change in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

94

 

 

 

71

 

Deferred costs

 

 

(29

)

 

 

(12

)

Other assets

 

 

(10

)

 

 

(61

)

Other current liabilities

 

 

(12

)

 

 

(27

)

Deferred revenue

 

 

(26

)

 

 

20

 

Other liabilities

 

 

(73

)

 

 

24

 

Net cash provided by operating activities

 

 

464

 

 

 

285

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

(5

)

 

 

(2

)

Additions to property and equipment

 

 

(32

)

 

 

(37

)

Other investing activities

 

 

(3

)

 

 

(3

)

Net cash used in investing activities

 

 

(40

)

 

 

(42

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from the issuance of Member units

 

 

2

 

 

 

 

Payment for the long-term debt due to third party

 

 

(33

)

 

 

(56

)

Proceeds from long-term debt

 

 

 

 

 

685

 

Payment for debt issuance costs

 

 

 

 

 

(6

)

Distributions to Members

 

 

(200

)

 

 

(1,081

)

Other financing activities

 

 

(14

)

 

 

(11

)

Net cash used in financing activities

 

 

(245

)

 

 

(469

)

Effect of exchange rate fluctuations on cash and cash equivalents

 

 

2

 

 

 

(2

)

Net increase (decrease) in cash and cash equivalents

 

 

181

 

 

 

(228

)

Cash and cash equivalents, beginning of period

 

 

167

 

 

 

468

 

Cash and cash equivalents, end of period

 

$

348

 

 

$

240

 

Supplemental disclosures of noncash investing and financing activities and cash flow

   information:

 

 

 

 

 

 

 

 

Acquisition of property and equipment included in current liabilities

 

$

(2

)

 

$

(6

)

Distributions to Members included in liabilities

 

 

(5

)

 

 

(4

)

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest, net of cash flow hedges

 

 

(210

)

 

 

(209

)

Income taxes, net of refunds

 

 

(35

)

 

 

(35

)

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

7


FOUNDATION TECHNOLOGY WORLDWIDE LLC

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY (DEFICIT)

(in millions)

 

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Members’

Equity

(Deficit)

 

 

Accumulated

Deficit

 

 

Total Deficit

 

As of June 27, 2020

 

$

(143

)

 

$

(785

)

 

$

(1,354

)

 

$

(2,282

)

Distributions to Members

 

 

 

 

 

(70

)

 

 

 

 

 

(70

)

Other comprehensive income, net of tax (Note 12)

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Equity-based awards expense, net of equity

   withheld to cover taxes

 

 

 

 

 

5

 

 

 

 

 

 

5

 

Unit issuance

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Reclassification of redeemable units (Note 5)

 

 

 

 

 

(24

)

 

 

 

 

 

(24

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

As of September 26, 2020

 

$

(137

)

 

$

(873

)

 

$

(1,354

)

 

$

(2,364

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 29, 2019

 

$

(61

)

 

$

(359

)

 

$

(1,295

)

 

$

(1,715

)

Distributions to Members

 

 

 

 

 

(46

)

 

 

 

 

 

(46

)

Other comprehensive loss, net of tax (Note 12)

 

 

(12

)

 

 

 

 

 

 

 

 

(12

)

Equity-based awards expense, net of equity

   withheld to cover taxes

 

 

 

 

 

6

 

 

 

 

 

 

6

 

Unit repurchases

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Net loss

 

 

 

 

 

 

 

 

(9

)

 

 

(9

)

As of September 28, 2019

 

$

(73

)

 

$

(400

)

 

$

(1,304

)

 

$

(1,777

)

 

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Members’

Equity

(Deficit)

 

 

Accumulated

Deficit

 

 

Total Deficit

 

As of December 28, 2019

 

$

(62

)

 

$

(647

)

 

$

(1,385

)

 

$

(2,094

)

Distributions to Members

 

 

 

 

 

(201

)

 

 

 

 

 

(201

)

Other comprehensive loss, net of tax (Note 12)

 

 

(75

)

 

 

 

 

 

 

 

 

(75

)

Equity-based awards expense, net of equity

   withheld to cover taxes

 

 

 

 

 

22

 

 

 

 

 

 

22

 

Unit issuances

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Unit repurchases (Note 5)

 

 

 

 

 

(10

)

 

 

 

 

 

(10

)

Reclassification of redeemable units (Note 5)

 

 

 

 

 

(41

)

 

 

 

 

 

(41

)

Net income

 

 

 

 

 

 

 

 

31

 

 

 

31

 

Other

 

 

 

 

 

2

 

 

 

 

 

 

2

 

As of September 26, 2020

 

$

(137

)

 

$

(873

)

 

$

(1,354

)

 

$

(2,364

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 29, 2018

 

$

2

 

 

$

675

 

 

$

(1,148

)

 

$

(471

)

Cumulative effect adjustments from adoption of

   ASC Topic 842

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

Distributions to Members

 

 

 

 

 

(1,085

)

 

 

 

 

 

(1,085

)

Other comprehensive loss, net of tax (Note 12)

 

 

(75

)

 

 

 

 

 

 

 

 

(75

)

Equity-based awards expense, net of equity

   withheld to cover taxes

 

 

 

 

 

12

 

 

 

 

 

 

12

 

Unit repurchases

 

 

 

 

 

(2

)

 

 

 

 

 

(2

)

Net loss

 

 

 

 

 

 

 

 

(155

)

 

 

(155

)

As of September 28, 2019

 

$

(73

)

 

$

(400

)

 

$

(1,304

)

 

$

(1,777

)

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

 

8


 

FOUNDATION TECHNOLOGY WORLDWIDE LLC

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

Background

Foundation Technology Worldwide LLC is a Delaware limited liability company (“FTW”), which, as of September 26, 2020, was primarily owned by Manta Holdings L.P. (“Manta”) and a subsidiary of Intel Corporation (“Intel”), which through ownership in various subsidiaries, wholly owns McAfee, LLC, a Delaware limited liability company, (“McAfee, LLC”) and its consolidated subsidiaries (collectively “McAfee”, the “Company”, “we”, “our” or “us”).

McAfee is a leading-edge cybersecurity company that provides advanced security solutions to consumers, small and medium-sized businesses, large enterprises, and governments. Security technologies from McAfee use a unique, predictive capability that is powered by McAfee Global Threat Intelligence, which enables home users and businesses to stay one step ahead of the next wave of fileless attacks, viruses, malware, and other online threats.

McAfee Corp. (the “Corporation”) was formed as a Delaware corporation on July 19, 2019 for the purpose of facilitating an initial public offering and other related transactions in order to carry on the business of the Company and its subsidiaries. In October 2020, the Corporation completed an IPO pursuant to which the Corporation and selling stockholders sold an aggregate of 37.0 million shares of Class A common stock at a public offering price of $20.00 per share. The Corporation received $586 million in proceeds, net of underwriting discounts and commissions, of which $553 million was used to purchase newly-issued limited liability company units (“LLC Units”) and $33 million was used to purchase LLC Units from existing holders (“Continuing LLC Owners”) of interests in the Company, at a purchase price per unit equal to the public offering price per share of Class A common stock, less underwriting discounts and commissions. Subsequent to the IPO and related Reorganization Transactions (as defined in Note 15) that occurred in connection with the IPO, the Corporation is the sole managing member of the Company and, although it has a minority economic interest in the Company, it has the sole voting power in, and controls the management of, the Company. The Corporation has no other material operations, assets, or liabilities.

In October 2020, the Board of FTW approved and effected a four-for-one unit split of our member units. All unit and per unit data included in these condensed consolidated financial statements give effect to the unit split and have been retroactively adjusted for all periods.

Principles of Consolidation

All intercompany balances and transactions within McAfee have been eliminated in consolidation. Any transactions between McAfee and Intel, Manta or Manta’s owners are considered transactions with Members. These unaudited condensed consolidated financial statements, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair statement of our financial information. The condensed consolidated balance sheet as of December 28, 2019, has been derived from the audited financial statements as of that date, but it does not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the period ended December 28, 2019 and related notes included in our final prospectus for the Corporation's IPO dated October 21, 2020 filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”) with the SEC (the “Prospectus”). Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.

Our functional currency for all of our subsidiaries is the U.S. dollar (“USD”).

9


 

Use of Estimates

The preparation of the condensed consolidated financial statements required us to make certain estimates and judgments that affect the amounts reported. Actual results may differ materially from our estimates. The accounting estimates that required our most significant and subjective judgments include:

 

determining the nature and timing of satisfaction of performance obligations, assessing any associated material rights and determining the standalone selling price (“SSP”) of performance obligations;

 

determining our technology constrained customer life;

 

projections of future cash flows related to revenue share and related agreements with our personal computer original equipment manufacturer partners;

 

fair value estimates for assets and liabilities acquired in business combinations;

 

the valuation and recoverability of identified intangible assets and goodwill;

 

recognition and measurement of foreign current and deferred income taxes as well as our uncertain tax positions;

 

determining our discount rates;

 

fair value of our equity awards; and

 

fair value of long-term debt and related swaps.

The effect of the novel coronavirus (“COVID-19”) pandemic on our business, operations, and financial results is dependent upon future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are unknown at this time. As a result, some of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, several of our estimates and assumptions may change materially in future periods due to the impact of the COVID-19 pandemic.

Fiscal Calendar

We maintain a 52- or 53-week fiscal year that ends on the last Saturday in December. The year ending December 26, 2020 is a 52-week year starting on December 29, 2019. These condensed consolidated financial statements are presented as of September 26, 2020, and December 28, 2019 and for the three and nine months ended September 26, 2020 and three and nine months ended September 28, 2019. Three and nine months ended September 26, 2020 consisted of 13 and 39 weeks, respectively, whereas the three and nine months ended September 28, 2019 consisted of 13 and 39 weeks, respectively.

NOTE 2: RECENT ACCOUNTING STANDARDS

Recently Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial instruments (ASU 2016-13) and also issued subsequent amendments to the initial guidance (collectively, “Topic 326”). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. We adopted Topic 326 on December 29, 2019 and it had an immaterial impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which clarifies the accounting for implementation costs in cloud computing arrangements. We adopted ASU 2018-15 on December 29, 2019 prospectively, which had an immaterial impact on our consolidated financial statements and related disclosures.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The standard provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. We adopted ASU 2020-04 on June 27, 2020 and it had no impact on our consolidated financial statements and related disclosures. The guidance is potentially applicable when we modify the current reference rate of LIBOR to another reference rate on our 1st Lien USD Term Loan and 2nd Lien Term Loan (Note 9) and related interest rate swaps (Note 11).

10


 

Recent Accounting Standards Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. ASU 2019-12 also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for us in the first quarter of fiscal year 2021. We are currently evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes and systems.

NOTE 3: REVENUE FROM CONTRACTS WITH CUSTOMERS

Deferred Revenue

During the nine months ended September 26, 2020, we recognized $1,346 million from our deferred revenue balance as of December 28, 2019. During the nine months ended September 28, 2019, we recognized $1,239 million in revenue from our deferred revenue balance as of December 29, 2018.

Transaction Price Allocated to the Remaining Performance Obligations

As of September 26, 2020, we have $2,414 million in estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied), which includes deferred revenue and amounts that will be billed and recognized as revenue in future periods. We expect to recognize revenue on approximately 71% over the next 12 months, 26% in next 13 to 36 months, with the remaining balance recognized thereafter.

NOTE 4: LEASES

As of September 26, 2020, we have operating leases primarily for corporate offices and data centers and no significant finance leases. Information related to operating leases was as follows:

 

 

 

Nine Months Ended

 

(in millions)

 

September 26, 2020

 

 

September 28, 2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

$

29

 

 

$

29

 

Right-of-use assets obtained in exchange for operating lease obligations

 

 

16

 

 

 

45

 

 

NOTE 5: TRANSACTIONS WITH MEMBERS AND RELATED PARTIES

We declared cash distributions to our Members during the three and nine months ended September 26, 2020 in the aggregate amount of $70 million and $201 million, respectively. We declared cash distributions to our Members during the three and nine months ended September 28, 2019 in the aggregate amount of $46 million and $1,085 million, respectively.

In October 2020, we declared cash distributions to our Members in the amount of $75 million.

In February 2020, we entered into an agreement with our former President and Chief Executive Officer to repurchase equity units for an aggregate repurchase price of $10 million during the three months ended June 27, 2020. We also agreed to repurchase his remaining outstanding equity units, which is classified as temporary equity within Redeemable units, in April 2021 at fair market value, contingent on the satisfaction of certain terms and conditions. Upon a sale of the company or an IPO prior to the repurchase date, the unit would no longer be repurchased. As of September 26, 2020, the estimated value of the April 2021 repurchase was $41 million. Subsequent to the IPO in October 2020, we are no longer required to repurchase the outstanding equity units.

Subsequent to the IPO in October 2020, we also paid $22 million to certain affiliates of TPG, Thoma Bravo and Intel upon the termination of the Management Services Agreement.

11


 

Our Intel receivable, net consisted of the following:

 

 

 

As of

 

(in millions)

 

September 26, 2020

 

 

December 28, 2019

 

Intel receivable(1)

 

 

 

 

 

 

 

 

Tax indemnity

 

$

8

 

 

$

10

 

Total

 

 

8

 

 

 

10

 

Intel payable(1)

 

 

 

 

 

 

 

 

Tax indemnity

 

 

(2

)

 

 

(4

)

Total

 

 

(2

)

 

 

(4

)

Total, net(2)

 

$

6

 

 

$

6

 

 

(1)

We have the contractual right of offset of our receivables and payables with Intel.

(2)

As of December 28, 2019, $2 million and $4 million are recorded in Other current assets and Other long-term assets, respectively, on the condensed consolidated balance sheet. As of September 26, 2020, $3 million and $3 million are recorded in Other current assets and Other long-term assets, respectively, on the condensed consolidated balance sheet.

We had these additional transactions with companies who partially own Manta (“Manta Owners”) and companies owned or partially owned by the Manta Owners (“Manta Affiliates”) or Intel (“Intel Affiliates”) and therefore qualify as related parties. These transactions include sales of our products and purchases of various goods or services. Revenue from the sales transactions are recognized in accordance with our revenue recognition policy.

Other transactions with related parties are as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in millions)

 

September 26, 2020

 

 

September 28, 2019

 

 

September 26, 2020

 

 

September 28, 2019

 

Sales with related parties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intel

 

$

1

 

 

$

 

 

$

1

 

 

$

 

Manta Owners

 

 

1

 

 

 

 

 

 

1

 

 

 

 

Manta Affiliates

 

 

 

 

 

1

 

 

 

2

 

 

 

4

 

Other

 

 

1

 

 

 

1

 

 

 

2

 

 

 

2

 

Total

 

$

3

 

 

$

2

 

 

$

6

 

 

$

6

 

Payments to related parties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intel

 

$

 

 

$

1

 

 

$

2

 

 

$

4

 

Manta Owners

 

 

1

 

 

 

2

 

 

 

6

 

 

 

7

 

Manta Affiliates

 

 

8

 

 

 

7

 

 

 

27

 

 

 

25

 

Other

 

 

 

 

 

3

 

 

 

5

 

 

 

11

 

Total

 

$

9

 

 

$

13

 

 

$

40

 

 

$

47

 

 

NOTE 6: OPERATING SEGMENTS

We have two operating segments, which also represent our reportable segments and reporting units:

 

Enterprise – Includes security solutions for large enterprises, governments, small and medium-sized businesses.

 

Consumer – Includes security solutions for consumers.

We manage our business activities primarily on a product-segmentation basis and whether they serve consumers or enterprises. The Chief Operating Decision Maker (“CODM”) allocates resources to and assesses the performance of each operating segment primarily using information about its operating income (loss), net revenue, and depreciation and amortization.

12


 

The CODM does not evaluate operating segments using discrete asset information. We allocate all shared expenses to the operating segments. Significant information by segment is as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in millions)

 

September 26, 2020

 

 

September 28, 2019

 

 

September 26, 2020

 

 

September 28, 2019

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

$

395

 

 

$

322

 

 

$

1,132

 

 

$

956

 

Enterprise

 

 

333

 

 

 

340

 

 

 

997