Document

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



☐	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

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:

(650) 527-8000

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.

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NORTONLIFELOCK INC.

FORM 10-Q

Quarterly Period Ended January 3, 2020

TABLE OF CONTENTS



Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Income (Loss)	5
	Condensed Consolidated Statements of Equity	6
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39
Item 4.	Controls and Procedures	39
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	52
Item 6.	Exhibits	52
Signatures		55

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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.

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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.

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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.

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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			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders’ Equity
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			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders’ Equity
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

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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			Accumulated Other Comprehensive Loss			Retained Earnings			Total Stockholders’ Equity
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			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders’ Equity
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.

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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.

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NORTONLIFELOCK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis 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.

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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

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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%.

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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.

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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	$	14	$	51