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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 January 3, 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 000-17781
nloklogoa03.jpg
 NortonLifeLock Inc.
(Exact name of the registrant as specified in its charter)
Delaware
  
77-0181864
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. employer Identification no.)
 
 
 
 
 
 
60 E. Rio Salado Parkway,
Suite 1000,
Tempe,
Arizona
  
85281
(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number, including area code:
(650527-8000
Former name or former address, if changed since last report:
Not applicable
  ________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock,
par value $0.01 per share
NLOK
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 þ   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 þ   No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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. (Check one):
Large accelerated filer
þ
  
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 þ
The number of shares of NortonLifeLock common stock, $0.01 par value per share, outstanding as of January 30, 2020 was 600,384,184 shares.
 



NORTONLIFELOCK INC.
FORM 10-Q
Quarterly Period Ended January 3, 2020
TABLE OF CONTENTS


2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NORTONLIFELOCK INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except par value per share amounts)
 
January 3, 2020
 
March 29, 2019
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
12,649

 
$
1,791

Short-term investments
119

 
252

Accounts receivable, net
171

 
708

Assets held for sale
213

 

Other current assets
411

 
286

Current assets of discontinued operations
8

 
149

Total current assets
13,571

 
3,186

Property and equipment, net
365

 
663

Operating lease assets
107

 

Intangible assets, net
1,119

 
1,202

Goodwill
2,676

 
2,677

Other long-term assets
709

 
1,160

Long-term assets of discontinued operations

 
7,050

Total assets
$
18,547

 
$
15,938

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
157

 
$
165

Accrued compensation and benefits
131

 
250

Current portion of long-term debt
749

 
491

Contract liabilities
1,019

 
1,032

Current operating lease liabilities
32

 

Other current liabilities
2,604

 
524

Current liabilities of discontinued operations
21

 
1,304

Total current liabilities
4,713

 
3,766

Long-term debt
3,719

 
3,961

Long-term contract liabilities
28

 
27

Deferred income tax liabilities
165

 
577

Long-term income taxes payable
1,086

 
1,076

Long-term operating lease liabilities
92

 

Other long-term liabilities
67

 
78

Long-term liabilities of discontinued operations

 
715

Total liabilities
9,870


10,200

Commitments and contingencies (Note 17)


 


Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value: 1 shares authorized; 0 shares issued and outstanding

 

Common stock and additional paid-in capital, $0.01 par value: 3,000 shares authorized; 614 and 630 shares issued and outstanding as of January 3, 2020 and March 29, 2019, respectively
4,853

 
4,812

Accumulated other comprehensive loss
12

 
(7
)
Retained earnings
3,812

 
933

Total stockholders’ equity
8,677

 
5,738

Total liabilities and stockholders’ equity
$
18,547

 
$
15,938


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3


NORTONLIFELOCK INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
January 3, 2020
 
December 28, 2018
 
January 3, 2020
 
December 28, 2018
Net revenues
$
618

 
$
615

 
$
1,876

 
$
1,839

Cost of revenues
103

 
110

 
296

 
331

Gross profit
515

 
505

 
1,580

 
1,508

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
178

 
166

 
551

 
537

Research and development
72

 
110

 
258

 
322

General and administrative
85

 
98

 
271

 
317

Amortization of intangible assets
20

 
19

 
61

 
59

Restructuring, transition and other costs
98

 
50

 
128

 
187

Total operating expenses
453

 
443

 
1,269

 
1,422

Operating income
62

 
62

 
311

 
86

Interest expense
(51
)
 
(53
)
 
(146
)
 
(157
)
Other income (expense), net
399

 
(18
)
 
397

 
(56
)
Income (loss) from continuing operations before income taxes
410

 
(9
)
 
562

 
(127
)
Income tax expense
57

 
10

 
133

 
20

Income (loss) from continuing operations
353

 
(19
)
 
429

 
(147
)
Income from discontinued operations
2,492

 
84

 
3,227

 
144

Net income (loss)
$
2,845

 
$
65

 
$
3,656

 
$
(3
)
 
 
 
 
 
 
 
 
Income (loss) per share - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.57

 
$
(0.03
)
 
$
0.69

 
$
(0.23
)
Discontinued operations
$
4.01

 
$
0.13

 
$
5.20

 
$
0.23

Net income (loss) per share - basic (1)
$
4.58

 
$
0.10

 
$
5.90

 
$

 
 
 
 
 
 
 
 
Income (loss) per share - diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.55

 
$
(0.03
)
 
$
0.67

 
$
(0.23
)
Discontinued operations
$
3.85

 
$
0.13

 
$
5.01

 
$
0.23

Net income (loss) per share - diluted (1)
$
4.40

 
$
0.10

 
$
5.68

 
$

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
621

 
637

 
620

 
631

Diluted
647

 
637

 
644

 
631

 
(1) Amounts may not add due to rounding.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

4


NORTONLIFELOCK INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in millions)
 
Three Months Ended
 
Nine Months Ended
 
January 3, 2020
 
December 28, 2018
 
January 3, 2020
 
December 28, 2018
Net income (loss)
$
2,845

 
$
65

 
$
3,656

 
$
(3
)
Other comprehensive income (loss), net of taxes:

 

 
 
 
 
Foreign currency translation adjustments
15

 
2

 
17

 
(21
)
Net unrealized gain on available-for-sale securities
(1
)
 
1

 
1

 
1

Other comprehensive income from equity method investee
 
 
 
 
 
 
 
Other comprehensive income from equity method investee
1

 

 
2

 
2

Reclassification adjustments for income included in net income (loss)
(1
)
 

 
(1
)
 

Net other comprehensive income from equity method investee

 

 
1

 
2

Other comprehensive income (loss), net of taxes
14

 
3

 
19

 
(18
)
Comprehensive income (loss)
$
2,859

 
$
68

 
$
3,675

 
$
(21
)
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

5


NORTONLIFELOCK INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in millions, except per share amounts)
Three months ended January 3, 2020
Common Stock and Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
 
 
Balance as of October 4, 2019
623

 
$
4,816

 
$
(2
)
 
$
1,298

 
$
6,112

Net income

 

 

 
2,845

 
2,845

Other comprehensive income

 

 
14

 

 
14

Common stock issued under employee stock incentive plans
5

 
21

 

 

 
21

Shares withheld for taxes related to vesting of restricted stock units
(1
)
 
(7
)
 

 

 
(7
)
Repurchases of common stock
(13
)
 
(110
)
 

 
(253
)
 
(363
)
Cash dividends declared ($0.125 per share of common stock) and dividend equivalents accrued

 

 

 
(78
)
 
(78
)
Stock-based compensation

 
124

 

 

 
124

Short-swing profit disgorgement

 
9

 

 

 
9

Balance as of January 3, 2020
614

 
$
4,853

 
$
12

 
$
3,812

 
$
8,677

Nine months ended January 3, 2020
Common Stock and Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
 
 
Balance as of March 29, 2019
630

 
$
4,812

 
$
(7
)
 
$
933

 
$
5,738

Net income

 

 

 
3,656

 
3,656

Other comprehensive income

 

 
19

 

 
19

Common stock issued under employee stock incentive plans
27

 
109

 

 

 
109

Shares withheld for taxes related to vesting of restricted stock units
(4
)
 
(71
)
 

 

 
(71
)
Repurchases of common stock
(39
)
 
(300
)
 

 
(604
)
 
(904
)
Cash dividends declared ($0.275 per share of common stock) and dividend equivalents accrued

 

 

 
(173
)
 
(173
)
Stock-based compensation

 
294

 

 

 
294

Short-swing profit disgorgement

 
9

 

 

 
9

Balance as of January 3, 2020
614

 
$
4,853

 
$
12

 
$
3,812

 
$
8,677


6


NORTONLIFELOCK INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in millions, except per share amounts)
Three months ended December 28, 2018
Common Stock and Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
 
 
Balance as of September 28, 2018
632

 
$
4,867

 
$
(17
)
 
$
1,100

 
$
5,950

Net income

 

 

 
65

 
65

Other comprehensive income

 

 
3

 

 
3

Common stock issued under employee stock incentive plans
13

 
2

 

 

 
2

Shares withheld for taxes related to vesting of restricted stock units
(6
)
 
(115
)
 

 

 
(115
)
Cash dividends declared ($0.075 per share of common stock) and dividend equivalents accrued

 

 

 
(49
)
 
(49
)
Stock-based compensation

 
50

 

 

 
50

Balance as of December 28, 2018
639

 
$
4,804

 
$
(14
)
 
$
1,116

 
$
5,906

Nine months ended December 28, 2018
Common Stock and Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
 
 
Balance as of March 30, 2018
624

 
$
4,691

 
$
4

 
$
328

 
$
5,023

Cumulative effect from adoption of accounting standard

 

 

 
939

 
939

Net loss

 

 

 
(3
)
 
(3
)
Other comprehensive loss

 

 
(18
)
 

 
(18
)
Common stock issued under employee stock incentive plans
23

 
8

 

 

 
8

Shares withheld for taxes related to vesting of restricted stock units
(8
)
 
(168
)
 

 

 
(168
)
Cash dividends declared ($0.225 per share of common stock) and dividend equivalents accrued

 

 

 
(148
)
 
(148
)
Stock-based compensation

 
273

 

 

 
273

Balance as of December 28, 2018
639

 
$
4,804

 
$
(14
)
 
$
1,116

 
$
5,906

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

7


NORTONLIFELOCK INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
Nine Months Ended
 
January 3, 2020
 
December 28, 2018
OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
3,656

 
$
(3
)
Adjustments:
 
 
 
Amortization and depreciation
307

 
457

Impairments of long-lived assets
32

 
8

Stock-based compensation expense
270

 
265

Deferred income taxes
14

 
(18
)
Loss from equity interest
31

 
84

Gain on sale of Enterprise Security assets
(5,422
)
 

Gain on sale of equity method investment
(379
)
 

Non-cash operating lease expense
32

 

Other
27

 
(32
)
Changes in operating assets and liabilities, net of acquisitions and divestitures:
 
 
 
Accounts receivable, net
537

 
97

Accounts payable
(21
)
 
35

Accrued compensation and benefits
(99
)
 
(26
)
Contract liabilities
(163
)
 
59

Income taxes payable
2,096

 
(17
)
Other assets
(94
)
 
1

Other liabilities
81

 
38

Net cash provided by operating activities
905

 
948

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(86
)
 
(153
)
Proceeds from sale of Enterprise Security assets, net of transaction costs
10,572

 

Payments for acquisitions, net of cash acquired

 
(41
)
Proceeds from maturities and sales of short-term investments
135

 
119

Proceeds from sale of property

 
26

Proceeds from sale of equity method investment
378

 

Other
(8
)
 
(12
)
Net cash provided by (used in) investing activities
10,991

 
(61
)
FINANCING ACTIVITIES:
 
 
 
Net proceeds from sales of common stock under employee stock incentive plans
109

 
8

Tax payments related to restricted stock units
(71
)
 
(168
)
Dividends and dividend equivalents paid
(177
)
 
(169
)
Repurchases of common stock
(904
)
 

Repayments of debt
(302
)
 

Proceeds from issuance of debt, net of issuance costs
300

 

Short-swing profit disgorgement
9

 

Other
(1
)
 

Net cash used in financing activities
(1,037
)
 
(329
)
Effect of exchange rate fluctuations on cash and cash equivalents
(1
)
 
(23
)
Change in cash and cash equivalents
10,858

 
535

Beginning cash and cash equivalents
1,791

 
1,774

Ending cash and cash equivalents
$
12,649

 
$
2,309


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

8


NORTONLIFELOCK INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1Basis of Presentation and Significant Accounting Policies
Recent Corporate Name Change
In connection with the sale of certain assets of our Enterprise Security business as disclosed in Basis of presentation below, effective November 4, 2019, we changed our corporate name from Symantec Corporation to NortonLifeLock Inc.
Basis of presentation
On August 8, 2019, we entered into a definitive agreement with Broadcom Inc. (Broadcom) under which Broadcom agreed to purchase certain of our Enterprise Security assets and assume certain liabilities for a purchase price of $10.7 billion (the Broadcom sale). On November 4, 2019, we completed the transaction. The divestiture of our Enterprise Security business allows us to shift our operational focus to our consumer business and represents a strategic shift in our operations. As a result, the majority of results of our Enterprise Security business were classified as discontinued operations in our Condensed Consolidated Statements of Operations and thus excluded from both continuing operations and segment results for all periods presented. We have operated in one reportable segment since the second quarter of fiscal 2020. The Enterprise Security business was part of our Enterprise Security segment. Results of discontinued operations include all revenues and expenses directly derived from the Enterprise Security business, with the exception of revenues and associated costs of our ID Analytics solutions, which were formerly included in the Enterprise Security segment, and general corporate overhead which were previously allocated to the Enterprise Security segment but are not allocated to discontinued operations. These revenues and expenses are now included in continuing operations. The assets acquired and liabilities to be sold to Broadcom, as specified in the August 8, 2019 definitive agreement, were classified as discontinued operations in our Condensed Consolidated Balance Sheets, subject to changes set forth in the agreement. See Notes 3 and 18 for additional information about the divestiture of our Enterprise Security business.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America (U.S.) for interim financial information. In the opinion of management, the unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting only of normal recurring items, except as otherwise noted, necessary for the fair presentation of our financial position, results of operations, and cash flows for the interim periods. 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 fiscal year ended March 29, 2019. The results of operations for the nine months ended January 3, 2020 are not necessarily indicative of the results expected for the entire fiscal year.
We have a 52/53-week fiscal year ending on the Friday closest to March 31. Unless otherwise stated, references to three and six-month periods in this report relate to fiscal periods ended January 3, 2020 and December 28, 2018. The three and nine months ended January 3, 2020 consisted of 13 and 40 weeks, respectively, whereas the three and nine months ended December 28, 2018 consisted of 13 and 39 weeks, respectively. Our 2020 fiscal year consists of 53 weeks and ends on April 3, 2020.
Use of estimates
The preparation of Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Such estimates include, but are not limited to, the determination of stand-alone selling price for performance obligations, valuation of business combinations including acquired intangible assets and goodwill, loss contingencies, valuation of stock-based compensation, and the recognition and measurement of current and deferred income taxes, including the measurement of uncertain tax positions. Management determines these estimates and assumptions based on historical experience and on various other assumptions that are believed to be reasonable. Actual results could differ significantly from these estimates, and such differences may be material to the Condensed Consolidated Financial Statements.
Significant accounting policies
There have been no material changes to our significant accounting policies as of and for the nine months ended January 3, 2020, except for those noted in Note 2 and Note 5, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended March 29, 2019.

9


Note 2. Recent Accounting Standards
Recently adopted authoritative guidance
Leases. In February 2016, the Financial Accounting Standards Board (FASB) issued new guidance on lease accounting which requires lessees to recognize assets and liabilities on their balance sheet for the rights and obligations created by operating leases and also requires disclosures designed to give users of financial statements information on the amount, timing, and uncertainty of cash flows arising from leases. Most prominent among the changes in the standard is the recognition of right-of-use (ROU) assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
On March 30, 2019, the first day of our fiscal 2020, we adopted the new guidance using the alternative modified retrospective transition method under which we continue to apply the legacy lease accounting guidance, including its disclosure requirements, in comparative periods prior to fiscal 2020. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard that allowed us not to reassess (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. We currently do not have any finance leases. We combine the lease and non-lease components in determining the operating lease assets and liabilities.
The adoption of the new lease accounting standard resulted in the recognition of ROU assets and lease liabilities of $182 million and $209 million, respectively, as of March 30, 2019 related to our operating leases. The adoption of the standard also resulted in elimination of deferred rent liabilities of $17 million, as of March 30, 2019, which are now recorded as a reduction of the ROU assets. The standard did not have an impact on our consolidated statements of operations or statements of cash flows.
Recently issued authoritative guidance not yet adopted
Credit Losses. In June 2016, the FASB issued new authoritative guidance on credit losses which changes the impairment model for most financial assets and certain other instruments. For trade receivables and other instruments, we will be required to use a new forward-looking “expected loss” model. Additionally, for available-for-sale debt securities with unrealized losses, we will measure credit losses in a manner similar to today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The standard will be effective for us in our first quarter of fiscal 2021. We are currently evaluating the impact of the adoption of this guidance on our Consolidated Financial Statements.
Internal-Use Software. In August 2018, the FASB issued new guidance that clarifies the accounting for implementation costs in a cloud computing arrangement. The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard will be effective for us in our first quarter of fiscal 2021. We are currently evaluating the impact of the adoption of this guidance on our Consolidated Financial Statements and disclosures.
Income taxes. In December 2019, the FASB issued new guidance that simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The guidance also clarifies and amends existing guidance to improve consistent application. The standard will be effective for us in our first quarter of fiscal 2023, with early adoption permitted. We are currently evaluating the adoption date and the impact of the adoption of this guidance on our Consolidated Financial Statements and disclosures.
Although there are several other new accounting pronouncements issued or proposed by the FASB that we have adopted or will adopt, as applicable, we do not believe any of these accounting pronouncements has had, or will have, a material impact on our consolidated financial position, operating results or disclosures.
Note 3. Divestiture and Discontinued Operations
Divestiture of Enterprise Security Assets
On August 8, 2019, we entered into a definitive agreement with Broadcom under which Broadcom agreed to purchase certain of our Enterprise Security assets and assume certain liabilities for a purchase price of $10.7 billion. On November 4, 2019, we completed the transaction and recognized a gain on sale of $5,422 million calculated as follows.
(In millions)
 
Cash proceeds
$
10,582

Income taxes withheld by Broadcom
109

Net assets sold
(5,225
)
Transaction costs
(38
)
Foreign exchange impact
(6
)
Total gain on sale
$
5,422


10


The carrying value of the net assets sold are as follows:
(In millions)
 
Current assets
$
157

Intangible assets, net
934

Goodwill
5,773

Other long-term assets
252

Current contract liabilities
(1,200
)
Other current liabilities
(28
)
Long-term contract liabilities
(629
)
Other long-term liabilities
(34
)
Total net assets sold
$
5,225


In connection with the Broadcom sale, we entered into a transition services agreement under which we will provide assistance to Broadcom including, but not limited to, business support services and information technology services for a period of up to six months. Income, net of dedicated direct costs, for these transition services was $5 million during the three and nine months ended January 3, 2020 and were presented as part of Other income (expense), net in the Condensed Consolidated Statements of Operations.
Discontinued Operations
The definitive agreement for the Broadcom sale provided that the selection of certain assets sold and liabilities assumed would be subject to negotiations between us and Broadcom subsequent to the signing of the agreement through the date of the close of the Broadcom sale. As a result of such negotiations, our results of operations for the six months ended October 4, 2019 and September 28, 2018 and our March 29, 2019 Condensed Consolidated Balance Sheet reflect changes in the assets and liabilities that were determined to be part of discontinued operations as reported in our previously filed Form 10-Q for the period ended October 4, 2019. These changes resulted in decreases of $6 million and $6 million to income from discontinued operations, net of tax, for the six months ended October 4, 2019 and September 28, 2018, respectively, and total assets from discontinued assets increased $58 million and total liabilities from discontinued operations increased $9 million as of March 29, 2019, as compared to the amounts reported in our previously filed Form 10-Q for the period ended October 4, 2019.
The following table presents information regarding certain components of income from discontinued operations, net of income taxes:
 
Three Months Ended
 
Nine Months Ended
(In millions)
January 3, 2020
 
December 28, 2018
 
January 3, 2020
 
December 28, 2018
Net revenues
$
193

 
$
599

 
$
1,366

 
$
1,715

Operating income (loss)
$
(118
)
 
$
110

 
$
6

 
$
198

Gain on sale
$
5,422

 
$

 
$
5,422

 
$

Income before income taxes
$
5,300

 
$
109

 
$
5,424

 
$
194

Income tax expense
$
2,808

 
$
25

 
$
2,197

 
$
50

Income from discontinued operations
$
2,492

 
$
84

 
$
3,227

 
$
144


Our discontinued operations consist of our divested Enterprise Security assets and also includes results of our previously divested Veritas information management business (Veritas). There was no income from Veritas during the three and nine months ended January 3, 2020. Revenue from Veritas was $2 million and $11 million during the three and nine months ended December 28, 2018. Income from Veritas, net of taxes was $6 million and $11 million during the three and nine months ended December 28, 2018.
We recorded an income tax expense from discontinued operations of $2,808 million for the three months ended January 3, 2020, primarily consisting of a discrete tax expense of $2,801 million related to the gain on the sale of the Enterprise Security assets, and a discrete tax expense of $39 million related to global intangible low-tax income (GILTI), compared to income tax expense from discontinued operations of $25 million during the three months ended December 28, 2018.
We recorded an income tax expense from discontinued operations of $2,197 million and $50 million for the nine months ended January 3, 2020 and December 28, 2018, respectively. The increase in tax expense is primarily driven by the discrete tax expense of $2,801 million related to the sale of the Enterprise Security assets and the discrete tax expense of $39 million related to GILTI, partially offset by a $665 million tax benefit resulting from the remeasurement of the deferred tax assets associated with the tax basis of intellectual property held by our subsidiaries organized in Ireland. We previously expected to recover the tax basis through normal operation of our Enterprise Security business, which is taxed at the Irish trading rate of 12.5%. Instead, we recovered the tax basis through the sale of certain assets of the Enterprise Security assets, which is taxed at the Irish capital gains tax rate of 33%.

11


The following table presents the aggregate carrying amounts of the classes of assets and liabilities of discontinued operations:
(In millions)
January 3, 2020
 
March 29, 2019
Assets:
 
 
 
Current assets
$
2

 
$
149

Intangible assets, net

 
1,048

Goodwill

 
5,773

Other long-term assets
6

 
229

Total assets of discontinued operations
$
8

 
$
7,199

Liabilities:
 
 
 
Current contract liabilities
$
10

 
$
1,288

Other current liabilities
3

 
16

Long-term contract liabilities
5

 
709

Other long-term liabilities
3

 
6

Total liabilities of discontinued operations
$
21

 
$
2,019

The following table presents significant non-cash items and capital expenditures of discontinued operations:
 
Nine Months Ended
(In millions)
January 3, 2020
 
December 28, 2018
Amortization and depreciation
$
130

 
$
274

Stock-based compensation expense
$
170

 
$
140

Purchases of property and equipment
$
43

 
$
45


Note 4. Revenues
Timing of revenue recognition
The following table provides our revenue disaggregated by the timing of recognition:
 
Three Months Ended
 
Nine Months Ended
(In millions)
January 3, 2020
 
December 28, 2018
 
January 3, 2020
 
December 28, 2018
Products and services transferred at a point in time
$
15

 
$
12

 
$
40

 
$
36

Products and services transferred over time
$
603

 
$
603

 
$
1,836

 
$
1,803

Contract liabilities
The amount of revenue recognized during the three and nine months ended January 3, 2020 that was included within the contract liabilities balance at October 4, 2019 and March 29, 2019 was $430 million and $951 million, respectively. The amount of revenue recognized during the three and nine months ended December 28, 2018 that was included within the contract liabilities balance at September 28, 2018 and March 31, 2018 was $440 million and $969 million, respectively.
Contract acquisition costs
We recognized amortization expense of capitalized contract acquisition costs of $2 million and $5 million during the three and nine months ended January 3, 2020, respectively, and $1 million and $3 million during the three and nine months ended December 28, 2018, respectively. There were no impairment losses recognized during the periods.
Remaining performance obligations
Remaining performance obligations represent contracted revenue that has not been recognized, which include contract liabilities and amounts that will be billed and recognized as revenue in future periods. As of January 3, 2020, we had $702 million of remaining performance obligations, which does not include customer deposit liabilities of $345 million, of which we expect to recognize approximately 96% as revenue over the next twelve months.

12


Note 5. Leases
We lease certain of our facilities, equipment, and data center co-locations under operating leases that expire on various dates through fiscal 2029. Our leases generally have terms that range from 1 year to 17 years for our facilities, 1 year to 6 years for equipment, and 1 year to 6 years for data center co-locations. Some of our leases contain renewal options, escalation clauses, rent concessions, and leasehold improvement incentives.
We determine if an arrangement is a lease at inception. We have elected to not recognize a lease liability or ROU asset for short-term leases (leases with a term of twelve months or less that do not include an option to purchase the underlying asset). Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The interest rate we use to determine the present value of future payments is our incremental borrowing rate because the rate implicit in our leases is not readily determinable. Our incremental borrowing rate is a hypothetical rate for collateralized borrowings in economic environments where the leased asset is located based on credit rating factors. Our operating lease assets also include adjustments for prepaid lease payments, lease incentives and initial direct costs.
Certain lease contracts include obligations to pay for other services, such as operations and maintenance. We elected the practical expedient whereby we record all lease components and the related minimum non-lease components as a single lease component. Cash payments made for variable lease costs are not included in the measurement of our operating lease assets and liabilities. Many of our lease terms include one or more options to renew. We do not assume renewals in our determination of the lease term unless it is reasonably certain that we will exercise that option. Lease costs for minimum lease payments for operating leases is recognized on a straight-line basis over the lease term. Our lease agreements do not contain any residual value guarantees.
The following summarizes our lease costs:
 
Three Months Ended
 
Nine Months Ended
(In millions)
January 3, 2020
 
January 3, 2020
Operating lease costs
$
6

 
$
28

Short-term lease costs
2

 
6

Variable lease costs
6

 
17

Total lease costs
$