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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 September 25, 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 November 2, 2021, there were 182,658,495 shares of the Registrant’s Class A common stock, $0.001 par value per share, outstanding and 254,297,067 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

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

Item 4.

Controls and Procedures

47

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

49

Item 1A.

Risk Factors

49

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

82

Item 3.

Defaults Upon Senior Securities

82

Item 4.

Mine Safety Disclosures

82

Item 5.

Other Information

82

Item 6.

Exhibits

83

 

Signatures

85

 

 


 

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 proposed Merger (as defined herein), and the timing, costs and any benefits of such transaction;
the efficiency and success of our transition to a pure-play Consumer cybersecurity company following the sale of our Enterprise Business;
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 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 pandemic 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 Nasdaq Global Select Market (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 Item 1A of this Quarterly Report on Form 10-Q.

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.

 

SUMMARY OF RISKS ASSOCIATED WITH OUR BUSINESS

 

The announcement and pendency of the proposed Merger may adversely affect our business, financial condition and results of operations.
Failure to consummate the proposed Merger within the expected timeframe or at all could have a material adverse impact on our business, financial condition and results of operations.
The COVID-19 pandemic has affected how we are operating our business, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.
If we are unsuccessful at executing our business plan and necessary transition activities as a standalone consumer cybersecurity company following the recent sale of our Enterprise Business (as defined herein), our business and results of operations may be adversely affected and our ability to invest in and grow our business could be limited.
We may not achieve the intended benefits of the sale of our Enterprise Business.
Our future results of operations are dependent solely on the operations of our pure play consumer cybersecurity business and will differ materially from our previous results.
The cybersecurity market is rapidly evolving and becoming increasingly competitive in response to continually evolving cybersecurity threats from a variety of increasingly sophisticated cyberattackers. If we fail to anticipate changing customer requirements or industry and market developments, or we fail to adapt our business model to keep pace with evolving market trends, our financial performance will suffer.
We operate in a highly competitive environment, and we expect competitive pressures to increase in the future, which could cause us to lose market share.
Our results of operations can be difficult to predict and may fluctuate significantly, which could result in a failure to meet investor expectations.
As a multinational corporation, forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and there may be material differences between our forecasted and actual tax rates.
We face risks associated with past and future investments, acquisitions, and other strategic transactions.
Over the last several years, we have pursued a variety of strategic initiatives designed to optimize and reinforce our cybersecurity platform. If the benefits of these initiatives are less than we anticipate, or if the realization of such benefits is delayed, our business and results of operations may be harmed.

 


 

If our solutions have or are perceived to have defects, errors, or vulnerabilities, or if our solutions fail or are perceived to fail to detect, prevent, or block cyberattacks, including in circumstances where customers may fail to take action on attacks identified by our solutions, our reputation and our brand could suffer, which would adversely impact our business, financial condition, results of operations, and cash flows.
If the protection of our proprietary technology is inadequate, we may not be able to adequately protect our innovations and brand.
We rely significantly on third-party channel partners to facilitate the sale of our products and solutions. If we fail to manage our sales and distribution channels effectively, or if our partners choose not to market and sell our solutions to their customers, our operating results could be adversely affected.
If our security measures are breached or unauthorized access to our data is otherwise obtained, our brand, reputation, and business could be harmed, and we may incur significant liabilities.
We operate globally and are subject to significant business, economic, regulatory, social, political, and other risks in many jurisdictions.
We may become involved in litigation, investigations, and regulatory inquiries and proceedings that could negatively affect us and our reputation.
Our substantial leverage could adversely affect our financial condition.
Restrictions imposed by our outstanding indebtedness and any future indebtedness may limit our ability to operate our business and to take certain actions.
Our principal asset is our interest in Foundation Technology Worldwide LLC, and we are dependent upon Foundation Technology Worldwide LLC and its consolidated subsidiaries for our results of operations, cash flows, and distributions.
We are required to pay certain Continuing Owners and certain Management Owners (in each case as defined herein) for certain tax benefits we may realize or are deemed to realize in accordance with the tax receivable agreement between us and such Continuing Owners and Management Owners, and we expect that the payments we will be required to make will be substantial.
In certain circumstances, under its limited liability company agreement, Foundation Technology Worldwide LLC will be required to make tax distributions to us, the Continuing Owners and certain Management Owners and the distributions that Foundation Technology Worldwide LLC will be required to make may be substantial.

 

 


 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

MCAFEE CORP.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share amounts)

 

 

 

September 25, 2021

 

 

December 26, 2020

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

848

 

 

$

231

 

Accounts receivable, net

 

 

124

 

 

 

102

 

Deferred costs

 

 

171

 

 

 

137

 

Receivable from Enterprise Business

 

 

116

 

 

 

 

Other current assets

 

 

36

 

 

 

42

 

Held-for-sale assets

 

 

31

 

 

 

 

Current assets of discontinued operations

 

 

 

 

 

402

 

Total current assets

 

 

1,326

 

 

 

914

 

Property and equipment, net

 

 

55

 

 

 

98

 

Goodwill

 

 

1,018

 

 

 

1,018

 

Identified intangible assets, net

 

 

595

 

 

 

729

 

Deferred tax assets

 

 

398

 

 

 

24

 

Other long-term assets

 

 

92

 

 

 

67

 

Long-term assets of discontinued operations

 

 

 

 

 

2,578

 

Total assets

 

$

3,484

 

 

$

5,428

 

Liabilities, redeemable noncontrolling interests and deficit

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and other current liabilities

 

$

303

 

 

$

235

 

Accrued compensation and benefits

 

 

66

 

 

 

179

 

Accrued marketing

 

 

101

 

 

 

118

 

Income taxes payable

 

 

207

 

 

 

14

 

Long-term debt, current portion

 

 

44

 

 

 

44

 

Deferred revenue

 

 

953

 

 

 

823

 

Payable to Enterprise Business

 

 

50

 

 

 

 

Current liabilities of discontinued operations

 

 

 

 

 

972

 

Total current liabilities

 

 

1,724

 

 

 

2,385

 

Long-term debt, net

 

 

2,889

 

 

 

3,943

 

Deferred tax liabilities

 

 

17

 

 

 

5

 

Tax receivable agreement liability, less current portion

 

 

392

 

 

 

 

Other long-term liabilities

 

 

136

 

 

 

155

 

Deferred revenue, less current portion

 

 

91

 

 

 

80

 

Long-term liabilities of discontinued operations

 

 

 

 

 

660

 

Total liabilities

 

 

5,249

 

 

 

7,228

 

Commitments and contingencies (Note 17)

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

5,836

 

 

 

4,840

 

Equity (deficit):

 

 

 

 

 

 

Class A common stock, $0.001 par value - 1,500,000,000 shares authorized,
     
179,848,875 shares issued and outstanding as of September 25, 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,
    
255,490,562 shares issued and outstanding as of September 25, 2021 and
    
267,065,127 shares issued and outstanding as of December 26, 2020

 

 

 

 

 

 

Additional paid-in capital

 

 

(7,571

)

 

 

(6,477

)

Accumulated deficit

 

 

 

 

 

(118

)

Accumulated other comprehensive income (loss)

 

 

(30

)

 

 

(45

)

Total deficit

 

 

(7,601

)

 

 

(6,640

)

Total liabilities, redeemable noncontrolling interests and deficit

 

$

3,484

 

 

$

5,428

 

 

See the accompanying notes to the condensed consolidated financial statements.

 

1


 

MCAFEE CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 25, 2021

 

 

September 26, 2020

 

 

September 25, 2021

 

 

September 26, 2020

 

Net revenue

 

$

491

 

 

$

395

 

 

$

1,400

 

 

$

1,132

 

Cost of sales

 

 

118

 

 

 

112

 

 

 

349

 

 

 

321

 

Gross profit

 

 

373

 

 

 

283

 

 

 

1,051

 

 

 

811

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

91

 

 

 

87

 

 

 

264

 

 

 

225

 

Research and development

 

 

48

 

 

 

35

 

 

 

138

 

 

 

109

 

General and administrative

 

 

51

 

 

 

43

 

 

 

143

 

 

 

141

 

Amortization of intangibles

 

 

13

 

 

 

36

 

 

 

63

 

 

 

108

 

Restructuring and transition charges (Note 9)

 

 

27

 

 

 

 

 

 

35

 

 

 

1

 

Total operating expenses

 

 

230

 

 

 

201

 

 

 

643

 

 

 

584

 

Operating income

 

 

143

 

 

 

82

 

 

 

408

 

 

 

227

 

Interest expense

 

 

(61

)

 

 

(72

)

 

 

(170

)

 

 

(222

)

Foreign exchange gain (loss), net

 

 

14

 

 

 

(43

)

 

 

29

 

 

 

(49

)

Other income (expense), net

 

 

(292

)

 

 

(1

)

 

 

(301

)

 

 

 

Income (loss) from continuing operations before income taxes

 

 

(196

)

 

 

(34

)

 

 

(34

)

 

 

(44

)

Provision for income tax expense (benefit)

 

 

(166

)

 

 

5

 

 

 

(159

)

 

 

 

Income (loss) from continuing operations

 

 

(30

)

 

 

(39

)

 

 

125

 

 

 

(44

)

Income from discontinued operations, net of taxes

 

 

2,420

 

 

 

39

 

 

 

2,467

 

 

 

75

 

Net income

 

$

2,390

 

 

$

 

 

$

2,592

 

 

$

31

 

Less: Net income attributable to redeemable noncontrolling interests

 

 

1,648

 

 

 N/A

 

 

 

1,784

 

 

 N/A

 

Net income attributable to McAfee Corp.

 

$

742

 

 

 N/A

 

 

$

808

 

 

 N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to McAfee Corp.:

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations attributable to McAfee Corp.

 

$

(92

)

 

 N/A

 

 

$

(40

)

 

 N/A

 

Income from discontinued operations attributable to McAfee Corp.

 

 

834

 

 

 N/A

 

 

 

848

 

 

 N/A

 

Net income attributable to McAfee Corp.

 

$

742

 

 

 N/A

 

 

$

808

 

 

 N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to McAfee Corp., basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.54

)

 

 N/A

 

 

$

(0.24

)

 

 N/A

 

Discontinued operations

 

 

4.90

 

 

 N/A

 

 

 

5.11

 

 

 N/A

 

Earnings per share, basic and diluted(1)

 

$

4.36

 

 

 N/A

 

 

$

4.87

 

 

 N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding, basic and diluted

 

 

170.3

 

 

 N/A

 

 

 

165.9

 

 

 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 condensed consolidated financial statements). See Note 15 Earnings Per Share in the notes to the 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 condensed consolidated financial statements.

 

2


 

MCAFEE CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 25, 2021

 

 

September 26, 2020

 

 

September 25, 2021

 

 

September 26, 2020

 

Net income

 

$

2,390

 

 

$

 

 

$

2,592

 

 

$

31

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

(7

)

 

 

9

 

 

 

(102

)

Reclassification adjustments for income on interest rate
      cash flow hedges

 

 

12

 

 

 

13

 

 

 

36

 

 

 

27

 

Pension and postretirement benefits income, net of tax

 

 

 

 

 

 

 

 

1

 

 

 

 

Total comprehensive income (loss)

 

$

2,402

 

 

$

6

 

 

$

2,638

 

 

$

(44

)

Less: Comprehensive income attributable to redeemable
noncontrolling interests

 

 

1,655

 

 

 N/A

 

 

 

1,813

 

 

 N/A

 

Total comprehensive income attributable to McAfee Corp.

 

$

747

 

 

 N/A

 

 

$

825

 

 

 N/A

 

 

See the accompanying notes to the condensed consolidated financial statements.

 

3


 

MCAFEE CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

 

 

Nine Months Ended

 

 

 

September 25, 2021

 

 

September 26, 2020

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

2,592

 

 

$

31

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

195

 

 

 

372

 

Equity-based compensation

 

 

85

 

 

 

25

 

Deferred taxes

 

 

(161

)

 

 

3

 

Foreign exchange (gain) loss, net

 

 

(29

)

 

 

49

 

Pre-tax gain on divestiture of Enterprise Business

 

 

(2,634

)

 

 

 

Tax Receivable Agreement remeasurement

 

 

310

 

 

 

 

Other operating activities

 

 

31

 

 

 

40

 

Change in assets and liabilities:

 

 

 

 

 

 

Receivable and payable from/to Enterprise Business

 

 

(36

)

 

 

 

Accounts receivable, net

 

 

108

 

 

 

94

 

Deferred costs

 

 

(34

)

 

 

(29

)

Other assets

 

 

(42

)

 

 

(10

)

Income taxes payable

 

 

193

 

 

 

(2

)

Other current liabilities

 

 

24

 

 

 

(10

)

Deferred revenue

 

 

(10

)

 

 

(26

)

Other liabilities

 

 

(54

)

 

 

(73

)

Net cash provided by operating activities

 

 

538

 

 

 

464

 

Cash flows from investing activities:

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

 

 

 

(5

)

Additions to property and equipment

 

 

(19

)

 

 

(32

)

Proceeds from divestiture of Enterprise Business, net of transaction costs (Note 3)

 

 

3,880

 

 

 

 

Other investing activities

 

 

(4

)

 

 

(3

)

Net cash provided by (used in) investing activities

 

 

3,857

 

 

 

(40

)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of equity

 

 

11

 

 

 

2

 

Payment for long-term debt

 

 

(1,027

)

 

 

(33

)

Distributions to members of FTW

 

 

(1,860

)

 

 

(200

)

Payment of dividends

 

 

(812

)

 

 

 

Payment of tax withholding for shares and units withheld

 

 

(79

)

 

 

(4

)

Other financing activities

 

 

(3

)

 

 

(10

)

Net cash used in financing activities

 

 

(3,770

)

 

 

(245

)

Effect of exchange rate fluctuations on cash and cash equivalents

 

 

(8

)

 

 

2

 

Change in cash and cash equivalents

 

 

617

 

 

 

181

 

Cash and cash equivalents, beginning of period

 

 

231

 

 

 

167

 

Cash and cash equivalents, end of period

 

$

848

 

 

$

348

 

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

 

 

 

 

 

 

Acquisition of property and equipment included in current liabilities

 

$

(4

)

 

$

(2

)

Distributions to members of FTW included in liabilities

 

 

(45

)

 

 

(5

)

Dividends payable included in liabilities

 

 

(21

)

 

 

 

Other financing activities included in liabilities

 

 

(8

)

 

 

 

Tax withholding for shares and units withheld included in liabilities

 

 

(5

)

 

 

 

Proceeds receivable related to divestiture of Enterprise Business

 

 

65

 

 

 

 

Transaction costs payable related to divestiture of Enterprise Business

 

 

(28

)

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest, net of cash flow hedges

 

 

(148

)

 

 

(210

)

Income taxes, net of refunds

 

 

(51

)

 

 

(35

)

 

See the accompanying notes to the condensed consolidated financial statements.

 

4


 

MCAFEE CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)

AND REDEEMABLE NONCONTROLLING INTERESTS

(in millions, except share amounts)