Gen Digital - 10-Q quarterly report FY2012 Q1

 

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     Shares of Symantec common stock, $0.01 par value per share, outstanding as of July 29, 2011: 749,745,683 shares.

     The accompanying unaudited condensed consolidated financial statements of Symantec Corporation (“we,” “us,” “our,” and “the Company” refer to Symantec Corporation and all of its subsidiaries) as of July 1, 2011 and April 1, 2011, and for the three months ended July 1, 2011 and July 2, 2010, have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions on Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In accordance with those rules and regulations, we have omitted certain information and notes normally provided in our annual consolidated financial statements. 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 and results of operations for the interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended April 1, 2011. The results of operations for the three months ended July 1, 2011 are not necessarily indicative of the results expected for the entire fiscal year. All significant intercompany accounts and transactions have been eliminated.

     There have been no changes in our significant accounting policies for the three months ended July 1, 2011 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended April 1, 2011.

     In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” (“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively for reporting periods beginning on or after December 15, 2011. We anticipate that the adoption of this standard will not materially impact our Condensed Consolidated Financial Statements.

     In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively for interim and annual periods beginning after December 15, 2011. We anticipate that the adoption of this standard will not materially impact our Condensed Consolidated Financial Statements.

     In the first quarter of fiscal 2012, we adopted updated authoritative accounting guidance related to impairment testing of goodwill. The guidance modified Step 1 of the impairment test for reporting units with zero or negative carrying amounts whereby an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. We performed a Step 2 test on our Services reporting unit due to certain adverse qualitative factors within the reporting unit, which resulted in a goodwill impairment of $19 million. This impairment was recorded to beginning Accumulated deficit as a cumulative-effect adjustment upon adoption.

     For assets and liabilities measured at fair value such amounts are based on an expected exit price, representing the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair

value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:

     Assets Measured and Recorded at Fair Value on a Recurring Basis

     There have been no transfers between fair value measurement levels during the three months ended July 1, 2011. The following table summarizes our assets measured at fair value on a recurring basis, by level, within the fair value hierarchy (Level 1 and 2 inputs are defined as above):

     Asset Measured and Recorded at Fair Value on a Nonrecurring Basis

     During the three months ended July 1, 2011, we did not record any impairment loss on those assets required to be measured at fair value on a nonrecurring basis, other than the cumulative-effect adjustment recorded to beginning Accumulated deficit, See Note 4 for further information.

     On June 24, 2011, we completed the acquisition of Clearwell Systems Inc. (“Clearwell”), a privately-held provider of eDiscovery solutions. In exchange for all of the voting equity interests of Clearwell, we paid a total purchase price of $392 million, including cash acquired of $20 million and stock options assumed of $8 million. The objective of the acquisition is to enhance our eDiscovery, archiving and backup offerings to our customers. The results of operations of Clearwell are included since the date of acquisition as part of the Storage and Server Management segment. Supplemental pro forma information for Clearwell was not material to our financial results and therefore has not been included.

     The initial allocation of the purchase price was based on a preliminary valuation, and our estimates and assumptions are subject to change within the measurement period, up to one year from the acquisition date. The purchase accounting items that are not yet finalized include the valuation of intangible assets acquired, the fair value of certain tangible assets and liabilities acquired, and the calculation of certain deferred tax assets and liabilities.

     The following table presents the preliminary purchase price allocation included in our Condensed Consolidated Balance Sheets (in millions):

The changes in the carrying amount of goodwill are as follows:

     The effects of cumulative-effect application are as follows:

     We apply a fair value based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis in the fourth quarter of each fiscal year or earlier if indicators of impairment exist. As of July 1, 2011, no further indicators of impairment were identified, except as it relates to the Services reporting unit as described above.

     Intangible assets, net

     Total amortization expense for intangible assets that have finite lives was $93 million and $106 million for the three months ended July 1, 2011 and July 2, 2010, respectively. Total future amortization expense for intangible assets that have finite lives, based on our existing intangible assets and their current estimated useful lives as of July 1, 2011, is estimated as follows (in millions):

     Depreciation expense was $67 million and $59 million for the three months ended July 1, 2011 and July 2, 2010, respectively.

     The components of comprehensive income, net of tax, are as follows:

     In fiscal 2011, we issued $350 million in principal amount of 2.75% senior notes (“2.75% Notes”) due September 15, 2015 and $750 million in principal amount of 4.20% senior notes (“4.20% Notes”) due September 15, 2020, collectively referred to as the “Senior Notes”, for an aggregate principal amount of $1.1 billion. The 2.75% Notes and 4.20% Notes are senior unsecured obligations of the Company that rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations and are redeemable by us at any time, subject to a “make-whole” premium. Our proceeds were $1.1 billion, net of an issuance discount of approximately $3 million resulting from sale of the notes at a yield slightly above the stated coupons. We also incurred issuance costs of approximately $6.2 million. Both the discount and issuance costs are being amortized as incremental non-cash interest expense over the respective terms of the notes. The 2.75% Notes and 4.20% Notes bear interest at 2.75% and 4.20% per annum, respectively. Interest is payable semiannually in arrears on the 15th of March and September, beginning March 15, 2011.

     In fiscal 2007, we issued $1.1 billion in principal amount of 0.75% convertible senior notes (“0.75% Notes”) due June 15, 2011 and $1.0 billion in principal amount of 1.00% convertible senior notes (“1.00% Notes”) due June 15, 2013. In the second quarter of fiscal 2011, we repurchased $500 million aggregate principal amount of our 0.75% Notes and sold a proportionate share of the initial note hedges back to the note hedge counterparties for approximately $13 million. On June 15, 2011, the remaining principal balance on our 0.75% Notes matured and was settled by a cash payment of $600 million. Concurrent with the maturity of the 0.75% Notes, the remaining related note hedges expired. No portion of the 0.75% Notes were converted into our common shares upon maturity.

     In fiscal 2011, we entered into a four-year $1.0 billion senior unsecured revolving credit facility that expires in September 2014 (the “credit facility”). The credit facility provides that we may borrow up to $1.0 billion under revolving loans. Revolving loans under the credit facility bear interest, at our option, either at a rate equal to a) LIBOR plus a margin based on our consolidated leverage ratio, as defined in the credit facility agreement or b) the bank’s prime rate plus a margin based on our consolidated leverage ratio, as defined in the credit facility agreement. Under the terms of this credit facility, we must comply with certain financial and non-financial covenants, including a covenant to maintain a specified ratio of debt to EBITDA (earnings before interest, taxes, depreciation and amortization). As of July 1, 2011, we were in compliance with all required covenants, and there was no outstanding balance on the credit facility.

     Our restructuring costs and liabilities consist primarily of severance, benefits, and facilities costs. Severance and benefits generally include severance payments, outplacement services, health insurance coverage, effects of foreign currency exchange, and legal costs. Facilities costs generally include rent expense, less expected sublease income and lease termination costs. Restructuring expenses are included in the Other segment.

     The following restructuring plans are substantially complete:

     Largely as a result of business acquisitions, management may deem certain leased facilities to be in excess and make a plan to exit them either at the time of acquisition or after the acquisition in conjunction with our efforts to integrate and streamline our operations. As of July 1, 2011, liabilities for these excess facility obligations at several locations around the world are expected to be paid over the respective lease terms, the longest of which extends through fiscal 2018.

     As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is not limited; however, we have directors’ and officers’ insurance coverage that reduces our exposure and may enable us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

     We provide limited product warranties and the majority of our software license agreements contain provisions that indemnify licensees of our software from damages and costs resulting from claims alleging that our software infringes the intellectual property rights of a third party. Historically, payments made under these provisions have been immaterial. We monitor the conditions that are subject to indemnification to identify if a loss has occurred.

     For a discussion of our pending tax litigation with the Internal Revenue Service relating to the 2000 and 2001 tax years of Veritas, see Note 12.

     We are involved in a number of judicial and administrative proceedings that are incidental to our business. Although adverse decisions (or settlements) may occur in one or more of the cases, it is not possible to estimate the possible loss or losses from each of these cases. The final resolution of these lawsuits, individually or in the aggregate, is not expected to have a material adverse effect on our financial condition or results of operations.

     The following table summarizes our stock repurchases:

     We have had stock repurchase programs in the past and have repurchased shares on a quarterly basis since the fourth quarter of fiscal 2004 under new and existing programs. Our most recent program was authorized by our Board of Directors on January 25, 2011 to repurchase up to $1 billion of our common stock. This program does not have an expiration date and as of July 1, 2011, $679 million remained authorized for future repurchases.

     As of July 1, 2011, our five reportable segments are the same as our operating segments and are as follows:

     There were no intersegment sales for the three months ended July 1, 2011 or July 2, 2010. The following table summarizes the results of our operating segments:

     During the first quarter of fiscal year 2012, we modified our segment reporting structure to more readily match our operating structure. The following modification was made to the segment reporting structure: managed security services revenue and expenses moved to the Security and Compliance segment from the Services segment. All historical periods have been adjusted to reflect this modified reporting structure.

     The following table summarizes the total stock-based compensation expense recognized in our Condensed Consolidated Statements of Income:

The following table summarizes additional information pertaining to our stock-based compensation:

     During the first quarter of fiscal 2012, we granted 91,368 Restricted Stock Awards (“RSAs”) to members of our board of directors. Each RSA had a fair value of $19.70 and vested immediately upon grant. As a result, we recorded approximately $2 million of stock-based compensation expense for these RSAs during the first quarter of fiscal 2012.

     During the first quarter of fiscal 2012, we granted performance based restricted stock units (“PRUs”) to certain senior level employees under our 2004 Equity Incentive Plan. The PRU grants are in lieu of the stock option grants typically awarded as part of our annual compensation program. These PRUs can be earned depending upon the achievement of a company-specific performance condition and a market condition as follows: (1) our achievement of a specified company-specific performance target for fiscal 2012 and (2) our two and three year cumulative relative total shareholder return ranked against that of other companies that are included in the Standard & Poor’s 500 Index. These PRUs are also subject to a three year continued service vesting provision with earlier vesting permitted under certain conditions, such as upon a change of control of the company. The determination of the fair value of these awards takes into consideration the likelihood of achievement of the market condition, and the compensation expense for the PRUs is initially also based on the probability of achieving the target level of the company-specific performance condition, and will be adjusted for subsequent changes in the estimated or actual outcome of this performance condition. The weighted average grant date fair value of the PRUs was $23.58 per share.

     In connection with our acquisition of Clearwell, we assumed all unexercised, outstanding options to purchase Clearwell common stock. Each unexercised, outstanding option assumed was converted into an option to purchase our common stock after applying the exchange ratio of 0.40906 shares of our common stock for each share of Clearwell common stock which resulted in an allocation of approximately 1 million shares of our common stock to the assumed options. As of July 1, 2011 total unrecognized compensation cost related to the assumed, unvested Clearwell stock options was $7 million, including estimated forfeitures.

     Furthermore, all shares obtained upon early exercise of unvested Clearwell options were converted into the right to receive a cash consideration of $7.65 per share upon vesting. The total value of the early exercised, unvested Clearwell shares on the date of acquisition was approximately $4 million, assuming no forfeitures, prior to vesting. As of July 1, 2011, total unrecognized compensation cost related to early exercised, unvested Clearwell shares was approximately $4 million.

     The effective tax rate was approximately 25% and (2) % for the three months ended July 1, 2011 and July 2, 2010, respectively.

     For the three months ended July 1, 2011, the tax expense was reduced by a $7 million tax benefit primarily related to lapses of statutes of limitations. For the three months ended July 2, 2010, the tax expense was significantly reduced by the following benefits recognized in the first quarter of fiscal 2011: (1) $39 million tax benefit arising from the Veritas v. Commissioner Tax Court decision (see further discussion below) and (2) $11 million tax benefit primarily related to tax settlements and lapses of statutes of limitations.

     The provision for both three-month periods ended July 1, 2011 and July 2, 2010 otherwise reflects a forecast tax rate of 28% (excluding the tax benefit from our joint venture with Huawei). We include the tax benefit associated with the loss from our joint venture with Huawei in income tax expense rather than netting the tax benefit against our joint venture loss with Huawei. However, the effective rate applied to our joint venture loss with Huawei for purposes of determining the tax benefit is based only on our joint venture loss and its tax impact. The forecast tax rates for both periods presented reflect the benefits of lower-taxed foreign earnings, domestic manufacturing incentives, and research and development credits ( the U.S. federal R&D tax credit is currently set to expire on December 31, 2011), partially offset by state income taxes.

     On December 10, 2009, the U.S. Tax Court issued its opinion in Veritas v. Commissioner, finding that our transfer pricing methodology, with appropriate adjustments, was the best method for assessing the value of the transaction at issue between Veritas and its international subsidiary in the 2000 to 2001 tax years. The Tax Court judge provided guidance as to how adjustments would be made to correct the application of the method used by Veritas. In June 2010, we reached an agreement with the IRS concerning the amount of the adjustment related to the U.S. Tax Court decision. As a result of the agreement, we

reduced our liability for unrecognized tax benefits, resulting in a $39 million tax benefit in the first quarter of fiscal 2011. This matter has now been closed and no further adjustments to the accrued liability are expected.

     On December 2, 2009, we received a Revenue Agent’s Report from the IRS for the Veritas 2002 through 2005 tax years assessing additional taxes due. We have contested $80 million of the tax assessed and all penalties. The unresolved amounts concern a transfer pricing matter comparable to the one that was resolved in our favor in the Veritas v. Commissioner Tax Court decision. The matter is being addressed within the IRS Appeals process and remains outstanding with no scheduled date for completion. It is reasonably possible that a reduction of the reserves for unrecognized tax benefits primarily related to the matters associated with this IRS examination cycle may occur within the next 12 months.

     We continue to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected tolling of the statute of limitations in various taxing jurisdictions.

     The components of earnings per share are as follows:

     The discussion below contains forward-looking statements, which are subject to safe harbors under the Securities Act of 1933, as amended, or the Securities Act, and the Exchange Act. Forward-looking statements include references to our ability to utilize our deferred tax assets, as well as statements including words such as “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” and similar expressions. In addition, statements that refer to projections of our future financial performance, anticipated growth and trends in our businesses and in our industries, the anticipated impacts of acquisitions, and other characterizations of future events or circumstances are forward-looking statements. These statements are only predictions, based on our current expectations about future events and may not prove to be accurate. We do not undertake any obligation to update these forward-looking statements to reflect events occurring or circumstances arising after the date of this report. These forward-looking statements involve risks and uncertainties, and our actual results, performance, or achievements could differ materially from those expressed or implied by the forward-looking statements on the basis of several factors, including those that we discuss in Risk Factors, set forth in Part I, Item 1A, of our annual report on Form 10-K for the fiscal year ended April 1, 2011. We encourage you to read that section carefully.

     We have a 52/53-week fiscal accounting year ending on the Friday closest to March 31. The three months ended July 1, 2011 and July 2, 2010 both consisted of 13 weeks.

     Symantec is a global provider of security, storage, and systems management solutions that help businesses and consumers secure and manage their information. We provide customers worldwide with software and services that protect, manage and control information risks related to security, data protection, storage, compliance, and systems management. We help our customers manage cost, complexity, and compliance by protecting their IT infrastructure as they seek to maximize value from their IT investments.

     Our operating segments are significant strategic business units that offer different products and services, distinguished by customer needs. Since the fourth quarter of fiscal 2008, we have operated in five operating segments: Consumer, Security and Compliance, Storage and Server Management, Services, and Other. During the first quarter of fiscal year 2012, we modified our segment reporting structure to more readily match our operating structure. For further descriptions of our operating segments, see Note 10 of the Notes to Condensed Consolidated Financial Statements in this quarterly report. Our reportable segments are the same as our operating segments.

     Revenue increased by $220 million for the three months ended July 1, 2011 as compared to the same period last year. We experienced growth in our Security and Compliance segment primarily as a result of revenue associated with our fiscal 2011 acquisitions. We expect that these acquisitions will continue to contribute positively to our revenue in future periods in the Security and Compliance segment. Sales of both our information management and storage and availability management products experienced growth within our Storage and Server Management segment for the three months ended July 1, 2011 as compared to the same period last year. Consumer segment revenues continued to increase due to continued customer acceptance of our security products, particularly our premium security suite products.

     Fluctuations in the U.S. dollar compared to foreign currencies favorably impacted our international revenue by approximately $87 million for the three months ended July 1, 2011 as compared to the same period last year. We are unable to predict the extent to which revenue in future periods will be impacted by changes in foreign currency exchange rates. If our level of international sales and expenses increase in the future, changes in foreign exchange rates may have a potentially greater impact on our revenue and operating results.

     Our net income was $191 million for the three months ended July 1, 2011 and was positively impacted by a year-over-year decrease of $23 million in cost of revenue related to certain acquired product rights from past acquisitions becoming fully amortized during fiscal 2011.

     There have been no changes in the matters for which we make critical accounting estimates in the preparation of our Condensed Consolidated Financial Statements during the three months ended July 1, 2011 as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended April 1, 2011.

     Information with respect to Recently Adopted Authoritative Guidance is in Note 1 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q, which information is incorporated herein by reference.

     Content, subscription, and maintenance revenue increased for the three months ended July 1, 2011, as compared to the same period last year, primarily as a result of increased sales of existing products, the impact of the change in foreign currency exchange rates, and revenue associated with our fiscal 2011 acquisitions.

     License revenue increased for the three months ended July 1, 2011, as compared to the same period last year, primarily due to growth in both the information management and storage and availability management products, as well as for the reasons discussed above under “Financial Results and Trends.”

     The changes in total net revenue for the three months ended July 1, 2011 are further described in the segment discussions that follow.

     Consumer revenue increased for the three months ended July 1, 2011, as compared to the same period last year, primarily due to the continued adoption of our premium security suite products and the impact of the change in foreign currency exchange rates.

     Operating income for the Consumer segment increased for the three months ended July 1, 2011, as compared to the same period last year. Total expenses for the segment increased, primarily as a result of higher salaries and wages.

     Security and Compliance revenue and operating income increased for the three months ended July 1, 2011, as compared to the same period last year, primarily due to our fiscal 2011 acquisitions, as well as strength in sales of our data loss prevention products, and the impact of the change in foreign currency exchange rates.

     Storage and Server Management revenue increased for the three months ended July 1, 2011, as compared to the same period last year, primarily due to an increase in revenue from both the information management and storage and availability management products, as well as the impact of the change in foreign currency exchange rates.

     Operating income for the Storage and Server Management segment increased for the three months ended July 1, 2011, as compared to the same period last year, as the increase in revenues exceeded the increase in expenses. Total expenses for the segment increased, primarily as a result of higher salaries and wages.

     Services segment

     Services revenue decreased for the three months ended July 1, 2011, as compared to the same period last year, as we continue to support the transition to our partner led consulting program while we focus on our core software business.

     Services operating income increased for the three months ended July 1, 2011, as compared to the same period last year, as various cost control initiatives led to better margins.

     Revenue from our Other segment consists primarily of sunset products and products nearing the end of their life cycle. The operating loss of our Other segment includes general and administrative expenses; amortization of acquired product rights, other purchased intangible assets, and other assets; charges such as stock-based compensation and restructuring; and certain indirect costs that are not charged to the other operating segments.

     Net revenue by geographic region

     Fluctuations in the U.S. dollar compared to foreign currencies favorably impacted our international revenue by $87 million.

     Americas revenue increased for the three months ended July 1, 2011, as compared to the same period last year, primarily due to increased revenue related to our Security and Compliance, Storage and Server Management, and Consumer segments, partially offset by decreased revenue related to our Services segment.

     EMEA revenue increased for the three months ended July 1, 2011, as compared to the same period last year, primarily due to increased revenue related to our Security and Compliance segment, Storage and Server Management segment and the impact of the change in foreign currency exchange rates and for the other reasons discussed above under “Financial Results and Trends.”

     Asia Pacific Japan revenue increased for the three months ended July 1, 2011, as compared to the same period last year, primarily due to strength in our Security and Compliance, and Storage and Server Management segments, as well as the impact of the change in foreign currency exchange rates and for the other reasons discussed above under “Financial Results and Trends.”

     Our international sales are and will continue to be a significant portion of our net revenue. As a result, net revenue will continue to be affected by foreign currency exchange rates as compared to the U.S. dollar. We are unable to predict the extent to which revenue in future periods will be impacted by changes in foreign currency exchange rates. If international sales become a greater portion of our total sales in the future, changes in foreign currency exchange rates may have a potentially greater impact on our revenue and operating results.

     Cost of content, subscription, and maintenance consists primarily of fee-based technical support costs, costs of billable services, and payments to OEMs under revenue-sharing agreements. Cost of content, subscription, and maintenance increased for the three months ended July 1, 2011, as compared to the same period last year, primarily due to higher technical support costs.

     Cost of license consists primarily of royalties paid to third parties under technology licensing agreements, manufacturing and direct material costs. Cost of license increased in the three months ended July 1, 2011 compared to the same period last year as a result of increased cost of royalties.

     Acquired product rights are comprised of developed technologies and patents from acquired companies. The decrease in amortization for the three months ended July 1, 2011 as compared to the same period last year is primarily due to certain acquired product rights from our various past acquisitions becoming fully amortized during fiscal 2011.

     Operating Expenses

     Operating expenses overview

     Our operating expenses increased during the three months ended July 1, 2011, as compared to the same period last year, due to the fiscal 2011 acquisitions and the impact of the change in foreign currency exchange rates, offset by cost savings generated from our restructuring plans discussed below.

     As a percentage of revenue, sales and marketing, research and development and general and administrative expenses remained consistent during the three months ended July 1, 2011.

     Sales and marketing expense increased during the three months ended July 1, 2011, as compared to the same period last year, largely as a result of our fiscal 2011 acquisitions, as well as the impact of the change in foreign currency exchange rates.

     Research and development, and General and administrative expenses increased during the three months ended July 1, 2011, as compared to the same period last year, largely as a result of our fiscal 2011 acquisitions.

     Other purchased intangible assets are comprised of customer relationships and tradenames. The increase in amortization of other purchased intangible assets for the three months ended July 1, 2011 compared to the same period last year was primarily due to our fiscal 2011 acquisitions.

     The restructuring and transition charges for the three months ended July 1, 2011 primarily consisted of severance and charges related to the 2011 Restructuring Plan (“2011 Plan”), the 2010 Restructuring Plan (“2010 Plan”), and transition and other costs related to the outsourcing of certain back office functions. For further information on restructuring, see Note 7 of the Notes to Condensed Consolidated Financial Statements.

     Non-operating income and expense was flat during the three months ended July 1, 2011, as compared to the same period last year.

     The effective tax rate was approximately 25% and (2) % for the three months ended July 1, 2011 and July 2, 2010, respectively.

     For the three months ended July 1, 2011, the tax expense was reduced by a $7 million tax benefit primarily related to lapses of statutes of limitations. For the three months ended July 2, 2010, the tax expense was significantly reduced by the following benefits recognized in the first quarter of fiscal 2011: (1) $39 million tax benefit arising from the Veritas v. Commissioner Tax Court decision (see further discussion below) and (2) $11 million tax benefit primarily related to tax settlements and lapses of statutes of limitations.

     The provision for both three-month periods ended July 1, 2011 and July 2, 2010 otherwise reflects a forecast tax rate of 28% (excluding the tax benefit from our joint venture with Huawei). We include the tax benefit associated with the loss from our joint venture with Huawei in income tax expense rather than netting the tax benefit against our joint venture loss with Huawei. However, the effective rate applied to our joint venture loss with Huawei for purposes of determining the tax benefit is based only on our joint venture loss and its tax impact. The forecast tax rates for both periods presented reflect the benefits of lower-taxed foreign earnings, domestic manufacturing incentives, and research and development credits ( the U.S. federal R&D tax credit is currently set to expire on December 31, 2011), partially offset by state income taxes.

     On December 10, 2009, the U.S. Tax Court issued its opinion in Veritas v. Commissioner, finding that our transfer pricing methodology, with appropriate adjustments, was the best method for assessing the value of the transaction at issue between Veritas and its international subsidiary in the 2000 to 2001 tax years. The Tax Court judge provided guidance as to how adjustments would be made to correct the application of the method used by Veritas. In June 2010, we reached an agreement with the IRS concerning the amount of the adjustment related to the U.S. Tax Court decision. As a result of the agreement, we reduced our liability for unrecognized tax benefits, resulting in a $39 million tax benefit in the first quarter of fiscal 2011. This matter has now been closed and no further adjustments to the accrued liability are warranted.

     On December 2, 2009, we received a Revenue Agent’s Report from the IRS for the Veritas 2002 through 2005 tax years assessing additional taxes due. We have contested $80 million of tax assessed and all penalties. The unresolved amounts concern a transfer pricing matter comparable to the one that was resolved in our favor in the Veritas v. Commissioner Tax Court decision. The matter is being addressed within the IRS Appeals process and remains outstanding with no scheduled date for completion. It is reasonably possible that a reduction of the reserves for unrecognized tax benefits primarily related to the matters associated with this IRS examination cycle may occur within the next 12 months.

     We continue to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected tolling of the statute of limitations in various taxing jurisdictions.