10-Q
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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 March 27, 2021

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 April 27, 2021, there were 165,321,497 shares of the Registrant’s Class A common stock, $0.001 par value per share, outstanding and 265,737,919 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

39

Item 4.

Controls and Procedures

40

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

41

Item 1A.

Risk Factors

41

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3.

Defaults Upon Senior Securities

42

Item 4.

Mine Safety Disclosures

42

Item 5.

Other Information

42

Item 6.

Exhibits

43

 

Signatures

44

 

 


 

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:

our ability to consummate the pending sale of our Enterprise business, and the timing, costs and any benefits of such sale;
the impact of our operations as a standalone Consumer cybersecurity business following consummation of the pending sale of our Enterprise business, and our ability to execute on our Consumer strategy going forward;
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 renew existing customer relationships and sell additional products and services to 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;
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 Annual Report on Form 10-K (File No. 001-39651).

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.

 

 


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

 

MCAFEE CORP.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share amounts)

 

 

 

March 27, 2021

 

 

December 26, 2020

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

346

 

 

$

231

 

Accounts receivable, net

 

 

76

 

 

 

72

 

Deferred costs

 

 

155

 

 

 

137

 

Other current assets

 

 

44

 

 

 

42

 

Current assets of discontinued operations

 

 

312

 

 

 

432

 

Total current assets

 

 

933

 

 

 

914

 

Property and equipment, net

 

 

111

 

 

 

115

 

Goodwill

 

 

1,018

 

 

 

1,018

 

Identified intangible assets, net

 

 

666

 

 

 

729

 

Deferred tax assets

 

 

24

 

 

 

24

 

Other long-term assets

 

 

86

 

 

 

68

 

Long-term assets of discontinued operations

 

 

2,524

 

 

 

2,560

 

Total assets

 

$

5,362

 

 

$

5,428

 

Liabilities, redeemable noncontrolling interests and deficit

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and other current liabilities

 

$

239

 

 

$

227

 

Accrued compensation and benefits

 

 

118

 

 

 

179

 

Accrued marketing

 

 

108

 

 

 

118

 

Income taxes payable

 

 

9

 

 

 

14

 

Long-term debt, current portion

 

 

44

 

 

 

44

 

Lease liabilities, current portion

 

 

10

 

 

 

10

 

Deferred revenue

 

 

915

 

 

 

823

 

Current liabilities of discontinued operations

 

 

947

 

 

 

970

 

Total current liabilities

 

 

2,390

 

 

 

2,385

 

Long-term debt, net

 

 

3,893

 

 

 

3,943

 

Deferred tax liabilities

 

 

6

 

 

 

5

 

Other long-term liabilities

 

 

134

 

 

 

153

 

Deferred revenue, less current portion

 

 

92

 

 

 

80

 

Long-term liabilities of discontinued operations

 

 

630

 

 

 

662

 

Total liabilities

 

 

7,145

 

 

 

7,228

 

Commitments and contingencies (Note 17)

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

6,177

 

 

 

4,840

 

Equity (deficit):

 

 

 

 

 

 

Class A common stock, $0.001 par value - 1,500,000,000 shares authorized,
     
162,372,554 shares issued and outstanding as of March 27, 2021 and
     
161,267,412 shares issued and outstanding as of December 26, 2020

 

 

 

 

 

 

Class B common stock, $0.001 par value - 300,000,000 shares authorized,
     
267,065,127 shares issued and outstanding as of March 27, 2021 and
     as of December 26, 2020

 

 

 

 

 

 

Additional paid-in capital

 

 

(7,835

)

 

 

(6,477

)

Accumulated deficit

 

 

(88

)

 

 

(118

)

Accumulated other comprehensive income (loss)

 

 

(37

)

 

 

(45

)

Total deficit

 

 

(7,960

)

 

 

(6,640

)

Total liabilities, redeemable noncontrolling interests and deficit

 

$

5,362

 

 

$

5,428

 

 

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

 

1


 

MCAFEE CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

 

 

 

Three Months Ended

 

 

 

March 27, 2021

 

 

March 28, 2020

 

Net revenue

 

$

442

 

 

$

354

 

Cost of sales

 

 

116

 

 

 

99

 

Gross profit

 

 

326

 

 

 

255

 

Operating expenses:

 

 

 

 

 

 

Sales and marketing

 

 

85

 

 

 

60

 

Research and development

 

 

44

 

 

 

38

 

General and administrative

 

 

48

 

 

 

58

 

Amortization of intangibles

 

 

36

 

 

 

36

 

Restructuring charges (Note 9)

 

 

8

 

 

 

1

 

Total operating expenses

 

 

221

 

 

 

193

 

Operating income

 

 

105

 

 

 

62

 

Interest expense and other, net

 

 

(60

)

 

 

(75

)

Foreign exchange gain (loss), net

 

 

35

 

 

 

11

 

Income (loss) from continuing operations before income taxes

 

 

80

 

 

 

(2

)

Provision for income tax expense (benefit)

 

 

(3

)

 

 

(10

)

Income from continuing operations

 

 

83

 

 

 

8

 

Income from discontinued operations, net of taxes

 

 

11

 

 

 

1

 

Net income

 

$

94

 

 

$

9

 

Less: Net income attributable to redeemable noncontrolling interests

 

 

64

 

 

 N/A

 

Net income attributable to McAfee Corp.

 

$

30

 

 

 N/A

 

 

 

 

 

 

 

Net income attributable to McAfee Corp.:

 

 

 

 

 

 

Income from continuing operations attributable to McAfee Corp.

 

$

27

 

 

 N/A

 

Income from discontinued operations attributable to McAfee Corp.

 

 

3

 

 

 N/A

 

Net income attributable to McAfee Corp.

 

$

30

 

 

 N/A

 

 

 

 

 

 

 

Earnings per share attributable to McAfee Corp., basic:

 

 

 

 

 

 

Continuing operations

 

$

0.17

 

 

 N/A

 

Discontinued operations

 

$

0.02

 

 

 N/A

 

Earnings per share, basic(1)

 

$

0.18

 

 

 N/A

 

 

 

 

 

 

 

Earnings per share attributable to McAfee Corp., diluted:

 

 

 

 

 

 

Continuing operations

 

$

0.16

 

 

 N/A

 

Discontinued operations

 

$

0.02

 

 

 N/A

 

Earnings per share, diluted(1)

 

$

0.18

 

 

 N/A

 

 

 

 

 

 

 

Weighted-average shares outstanding, basic

 

 

162.4

 

 

 N/A

 

Weighted-average shares outstanding, diluted

 

 

176.3

 

 

 N/A

 

 

(1)
Basic and diluted earnings per share of Class A common stock are not applicable prior to the initial public offering (“IPO”) and related Reorganization Transactions (as defined in Note 1 to the unaudited condensed consolidated financial statements). See Note 15 Earnings Per Share in the notes to the unaudited condensed consolidated financial statements for the number of shares used in the computation of earnings per share of Class A common stock and the basis for the computation of earnings per share.

 

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

 

2


 

MCAFEE CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)

 

 

 

Three Months Ended

 

 

 

March 27, 2021

 

 

March 28, 2020

 

Net income

 

$

94

 

 

$

9

 

Other comprehensive income (loss):

 

 

 

 

 

 

Interest rate cash flow hedges:

 

 

 

 

 

 

Gain (loss) on interest rate cash flow hedges, net of tax

 

 

9

 

 

 

(79

)

Reclassification adjustments for gain on interest rate cash flow hedges

 

 

12

 

 

 

4

 

Pension and postretirement benefits gain, net of tax

 

 

1

 

 

 

 

Total comprehensive income (loss)

 

$

116

 

 

$

(66

)

Less: Comprehensive income attributable to redeemable noncontrolling interests

 

 

78

 

 

 N/A

 

Total comprehensive income attributable to McAfee Corp.

 

$

38

 

 

 N/A

 

 

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

 

3


 

MCAFEE CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

 

 

Three Months Ended

 

 

 

March 27, 2021

 

 

March 28, 2020

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

94

 

 

$

9

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

110

 

 

 

132

 

Equity-based compensation

 

 

26

 

 

 

15

 

Deferred taxes

 

 

1

 

 

 

1

 

Foreign exchange (gain) loss, net

 

 

(35

)

 

 

(11

)

Other operating activities

 

 

4

 

 

 

17

 

Change in assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

118

 

 

 

168

 

Deferred costs

 

 

(20

)

 

 

(9

)

Other assets

 

 

(34

)

 

 

(13

)

Other current liabilities

 

 

(2

)

 

 

(21

)

Deferred revenue

 

 

45

 

 

 

(18

)

Other liabilities

 

 

(48

)

 

 

(99

)

Net cash provided by operating activities

 

 

259

 

 

 

171

 

Cash flows from investing activities:

 

 

 

 

 

 

Additions to property and equipment

 

 

(11

)

 

 

(20

)

Other investing activities

 

 

 

 

 

(1

)

Net cash used in investing activities

 

 

(11

)

 

 

(21

)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from revolving credit facility

 

 

 

 

 

300

 

Payment for the long-term debt

 

 

(11

)

 

 

(11

)

Distributions to members of FTW

 

 

(79

)

 

 

(50

)

Payment of dividends

 

 

(14

)

 

 

 

Payment of tax withholding for shares and units withheld

 

 

(23

)

 

 

 

Payment of IPO related expenses

 

 

(3

)

 

 

 

Net cash provided by (used in) financing activities

 

 

(130

)

 

 

239

 

Effect of exchange rate fluctuations on cash and cash equivalents

 

 

(3

)

 

 

(4

)

Change in cash and cash equivalents

 

 

115

 

 

 

385

 

Cash and cash equivalents, beginning of period

 

 

231

 

 

 

167

 

Cash and cash equivalents, end of period

 

$

346

 

 

$

552

 

Supplemental disclosures of noncash investing and financing activities and
   cash flow information:

 

 

 

 

 

 

Acquisition of property and equipment included in current liabilities

 

$

(3

)

 

$

(4

)

Distributions to members of FTW included in liabilities

 

 

(35

)

 

 

 

Dividends payable included in liabilities

 

 

(19

)

 

 

 

Liability for equity units repurchase

 

 

 

 

 

(10

)

Other

 

 

(3

)

 

 

2

 

Cash paid during the period for:

 

 

 

 

 

 

Interest, net of cash flow hedges

 

 

(50

)

 

 

(71

)

Income taxes, net of refunds

 

 

(14

)

 

 

(14

)

 

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

 

4


 

MCAFEE CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)

AND REDEEMABLE NONCONTROLLING INTERESTS

(in millions, except per share amounts)

 

 

 

Foundation Technology Worldwide, LLC
(prior to Reorganization Transactions)

 

 

 

McAfee Corp. Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

 

Class B Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Members’
Equity
(Deficit)

 

 

Accumulated
Deficit

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Additional
Paid-in
Capital

 

 

Accumulated
Deficit

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Total
Deficit

 

 

 

Redeemable
Noncontrolling
Interests

 

 

Total

 

Balance at December 26, 2020

 

$

 

 

$

 

 

$

 

 

 

 

161,267,412

 

 

$

 

 

 

267,065,127

 

 

$

 

 

$

(6,477

)

 

$

(118

)

 

$

(45

)

 

$

(6,640

)

 

 

$

4,840

 

 

$

(1,800

)

Distributions to RNCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(87

)

 

 

(87

)

Dividend declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19

)

 

 

 

 

 

 

 

 

(19

)

 

 

 

 

 

 

(19

)

Other comprehensive loss,
   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

8

 

 

 

 

14

 

 

 

22

 

Stock-based awards
   expense, net of equity
   withheld to cover taxes

 

 

 

 

 

 

 

 

 

 

 

 

1,105,142

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

7

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

 

 

 

 

 

 

30

 

 

 

 

64

 

 

 

94

 

Impact of change in ownership in RNCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

 

 

 

 

 

 

(4

)

 

 

 

4

 

 

 

 

Fair value adjustment for RNCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,342

)

 

 

 

 

 

 

 

 

(1,342

)

 

 

 

1,342

 

 

 

 

Balance at March 27, 2021

 

$

 

 

$

 

 

$

 

 

 

 

162,372,554

 

 

$

 

 

 

267,065,127

 

 

$

 

 

$

(7,835

)

 

$

(88

)

 

$

(37

)

 

$

(7,960

)

 

 

$

6,177

 

 

$

(1,783

)

 

 

 

 

Foundation Technology Worldwide, LLC
(prior to Reorganization Transactions)

 

 

 

McAfee Corp. Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

 

Class B Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Members’
Equity
(Deficit)

 

 

Accumulated
Deficit

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Additional
Paid-in
Capital

 

 

Accumulated
Deficit

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Total
Deficit

 

 

 

Redeemable
Noncontrolling
Interests

 

 

Total

 

Balance at December 28, 2019

 

$

(62

)

 

$

(647

)

 

$

(1,385

)

 

 

 

 

 

$

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

 

$

 

 

$

(2,094

)

Distributions to Members

 

 

 

 

 

(50

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(50

)

Other comprehensive loss,
   net of tax

 

 

(75

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(75

)

Equity-based awards
   expense, net of equity
   withheld to cover taxes

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15

 

Unit repurchases (Note 6)

 

 

 

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10

)

Reclassification of redeemable
   units (Note 6)

 

 

 

 

 

(17

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17

)

Net income

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

Other

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

Balance at March 28, 2020

 

$

(137

)

 

$

(707

)

 

$

(1,376

)

 

 

 

 

 

$

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

 

$

 

 

$

(2,220

)

 

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

 

5


 

MCAFEE CORP.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

Background

McAfee is a leading-edge cybersecurity company that provides advanced security solutions to consumers. Security technologies from McAfee use a unique, predictive capability that is powered by McAfee Global Threat Intelligence, which enables home users 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 (“IPO”) and related transactions in order to carry on the business of Foundation Technology Worldwide LLC (“FTW”) and its subsidiaries (the Corporation, FTW and its subsidiaries are collectively the “Company,” “we,” “us” or “our”). On October 21, 2020, the Corporation became the sole managing member and holder of 100% of the voting power of FTW due to the reorganization transactions described below. With respect to the Corporation and FTW, each entity owns only 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 an 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 issued 31 million shares and 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 FTW, at a purchase price per unit equal to the public offering price per share of Class A common stock, less underwriting discounts and commissions.

We refer to the holders of management incentive units of FTW (“MIUs”) as well as members of management who hold LLC Units following the closing of the offering or are to receive Class A common stock in satisfaction of existing incentive awards as “Management Owners.” We refer to those of our pre-IPO investors and certain of their affiliates who received shares of Class A common stock in connection with the Reorganization Transactions (as defined below) and who do not hold LLC Units as “Continuing Corporate Owners,” and together with the Continuing LLC Owners, as “Continuing Owners.”

 

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 FTW making the Corporation the sole managing member of FTW;
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 Continuing Owners and Management Owners, on a one-to-one basis 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 cash or shares of Class A common stock, at the option of the Company, 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) settled 5.7 million restricted stock units (“RSUs”) with shares of its Class A common stock, net of tax withholding, held by certain employees, which were satisfied in connection with the Reorganization Transactions; and
the Corporation entered into (i) a tax receivable agreement (“TRA”) with certain of our Continuing Owners and certain Management Owners (collectively “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”).

 

 

6


 

Planned Divestiture of Enterprise Business

On March 6, 2021, we entered into a definitive agreement with a consortium led by Symphony Technology Group (“STG”) under which STG agreed to purchase certain of our Enterprise assets together with certain of our Enterprise liabilities (“Enterprise Business”), representing substantially all of our Enterprise segment, for an all cash purchase price of $4.0 billion with an expected closing date by the end of 2021, subject to certain closing conditions. The divestiture of our Enterprise Business will allow us to shift our operational focus to our Consumer business and represents a strategic shift in our operations. As a result, the results of our Enterprise Business were classified as discontinued operations in our condensed consolidated statements of operations and excluded from both continuing operations and segment results for all periods presented. Starting in the first quarter of fiscal 2021, we operate in one reportable segment as the Enterprise Business was substantially all of our Enterprise segment. Results of discontinued operations include all revenues and expenses directly derived from our Enterprise Business, with the exception of general corporate overhead which were previously allocated to our Enterprise segment but are not allocated to discontinued operations. The Enterprise Business, as specified in the March 6, 2021 definitive agreement, was classified as discontinued operations in our condensed consolidated balance sheets, subject to changes set forth in the agreement. See Note 3 for additional information about the divestiture of our Enterprise Business.

 

Principles of 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. The Corporation, as the sole managing member of FTW, exclusively operates and controls the business and affairs of FTW. The Corporation consolidates the financial results of FTW and reports a redeemable noncontrolling interest (“RNCI”) related to the LLC Units held by the Continuing LLC Owners and vested MIUs held by Management Owners (Note 14 and 16).

As the Continuing LLC Owners control both the Corporation and FTW, before and after the Reorganization Transactions, the Reorganization Transactions were accounted for as a reorganization of entities under common control. As a result, the financial statements for periods prior to the IPO and the Reorganization Transactions are the financial statements of FTW as the predecessor to the Corporation for accounting and reporting purposes.

Financial information includes the accounts of the Company and was prepared in accordance with U.S. GAAP. All intercompany balances and transactions within the Company have been eliminated in consolidation. We have reclassified certain prior period amounts to conform to our current period presentation. 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 26, 2020, 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 unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying Notes thereto included in our Annual Report on Form 10-K for the year ended December 26, 2020. The results of operations for the three months ended March 27, 2021 are not necessarily indicative of the results expected for the entire fiscal year.

We consolidate entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. We also consider for consolidation certain interests where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary of a VIE is considered to possess the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the rights to receive benefits from the VIE that are significant to it (Note 16).

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

 

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:

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