UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

Form 10-Q

 

 

 

Commission file number: 001-31216

 

McAfee, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Registrant’s telephone number, including area code:

(408) 988-3832

 

 

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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of July 31, 2009, 157,199,850 shares of the registrant’s common stock, $0.01 par value, were outstanding.

 

MCAFEE, INC. AND SUBSIDIARIES

 

FORM 10-Q

 

June 30, 2009

 

 

CONTENTS

 

 

 

MCAFEE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

MCAFEE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

MCAFEE, INC. AND SUBSIDIARIES

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

MCAFEE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

McAfee, Inc. and our wholly owned subsidiaries (“we”, “us” or “our”) are a global dedicated security technology company that secures systems and networks from known and unknown threats. We empower home users, businesses, government agencies, service providers and our partners with the ability to block attacks, prevent disruptions, and continuously track and improve their security and compliance. We operate our business in five geographic regions: North America; Europe, Middle East and Africa (“EMEA”); Japan; Asia-Pacific, excluding Japan; and Latin America.

 

 

The accompanying condensed consolidated financial statements include our accounts as of June 30, 2009 and December 31, 2008 and for the three and six months ended June 30, 2009 and June 30, 2008. All intercompany accounts and transactions have been eliminated in consolidation. These condensed consolidated financial statements have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The December 31, 2008 condensed consolidated balance sheet was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. However, we believe the disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto, included in our annual report on Form 10-K for the year ended December 31, 2008.

 

In the opinion of our management, all adjustments (which consist of normal recurring adjustments, except as disclosed herein) necessary to fairly present our financial position, results of operations and cash flows for the interim periods presented have been included. The results of operations for the three and six months ended June 30, 2009 are not necessarily indicative of the results to be expected for the full year or for any future periods.

 

Significant Accounting Policies

 

Marketable Securities

 

All marketable securities are classified as available-for-sale securities. Available-for-sale securities are carried at fair value with resulting unrealized gains and losses, including the noncredit component of other-than-temporary impairments, reported net of tax as a component of accumulated other comprehensive income. Premium and discount on debt securities recorded at the date of purchase are amortized and accreted, respectively, to interest income using the effective interest method. Short-term marketable securities are those with remaining maturities at the balance sheet date of less than one year. Long-term marketable securities have remaining maturities at the balance sheet date of one year or greater. Realized gains and losses on sales of all such investments are reported in earnings and computed using the specific identification cost method.

 

In April 2009, the Financial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2 and 124-2”), which was effective for us beginning April 1, 2009. FSP 115-2 and 124-2 modifies the requirements for recognizing other-than-temporarily impaired debt securities and revises the existing impairment model for such securities by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. For debt securities in an unrealized loss position, FSP 115-2 and FSP 124-2 requires us to assess whether (i) we have the intent to sell the debt security, or (ii) it is more likely than not that we will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an other-than-temporary impairment on the security must be recognized in earnings equal to the entire difference between its fair value and amortized cost basis.

 

MCAFEE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

For debt securities in an unrealized loss position where neither of the criteria in the paragraph above are present, the difference between the security’s then-current carrying amount and its estimated fair value is separated into (i) the amount of the impairment related to the credit loss (i.e., the credit component) and (ii) the amount of the impairment related to all other factors (i.e., the noncredit component). The credit component is recognized in earnings. The noncredit component is recognized in accumulated other comprehensive income (loss). The credit loss component is the excess of the amortized cost of the security over the best estimate of the present value of the cash flows expected to be collected from the debt security. The noncredit loss component is the residual amount of the other-than-temporary impairment. Previously, in all cases, if an impairment was determined to be other-than-temporary, then an impairment loss was recognized in earnings in an amount equal to the entire difference between the security’s amortized cost basis and its fair value at the consolidated balance sheet date of the reporting period for which the assessment was made.

 

When calculating the present value of expected cash flows to determine the credit loss component of the other-than-temporary impairment, we estimate the amount and timing of projected cash flows on a security-by-security basis. These calculations reflect our expectations of the performance of the underlying collateral and the ability of the issuer to meet payment obligations as applicable. The expected cash flows are discounted using the effective interest rate of the security as of the date it was acquired. The amortized cost basis of a debt security is adjusted for any credit loss component of the impairment recorded to earnings. The difference between the cash flows expected to be collected and the new cost basis is accreted to investment income over the remaining expected life of the security.

 

FSP 115-2 and 124-2 required us to separate other-than-temporary impairments recognized in earnings through April 1, 2009, between the credit loss and the noncredit components, and record a cumulative effect adjustment to retained earnings for the noncredit component. We recorded a net after tax increase to retained earnings and a corresponding decrease to accumulated other comprehensive income of $2.5 million, net of $1.6 million in tax benefits, to reclassify the component of other-than-temporary impairments recorded in earnings in previous periods on securities in our portfolio at March 31, 2009 that are related to factors other than credit losses and would not have been recognized in earnings had the new guidance been effective for those periods. This reclassification related to 13 asset-back and collateralized mortgage obligation (“CMO”) securities. Periods prior to April 1, 2009, have not been restated for this new accounting policy and therefore, current period and prior period financial statements may not be comparable.

 

Inventory

 

Inventory, which consists primarily of finished goods held at our warehouse and other fulfillment partner locations and finished goods sold to our channel partners but not yet sold through to the end-user, is stated at lower of cost or market. Cost is computed using standard cost, which approximates actual cost on a first in, first out basis. Inventory balances are included in other current assets on our condensed consolidated balance sheets and were $17.8 million as of June 30, 2009 and $10.2 million as of December 31, 2008, net of write-offs for inventory expected to be excess or obsolete.

 

Deferred Costs of Revenue

 

Deferred costs of revenue, which consist primarily of costs related to revenue-sharing and royalty arrangements, and the direct cost of materials that are associated with product and subscription revenues deferred over a service period, including arrangements that are deferred due to lack of the vendor-specific objective evidence (“VSOE”) of fair value on an undelivered element, are included in the prepaid expenses line item and other assets line item on our condensed consolidated balance sheets. We recognize such deferred costs ratably as revenue is recognized. At June 30, 2009, our deferred costs were $207.8 million compared to $184.6 million at December 31, 2008.

 

MCAFEE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Reclassifications

 

In the condensed consolidated statement of income and comprehensive income for the three and six months ended June 30, 2008, we reclassified sales order operation department expenses to conform with our current period presentation. Expenses of $2.8 million and $5.6 million for the three and six months ended June 30, 2008, respectively, including $0.1 million and $0.3 million, respectively, of stock-based compensation expense previously reported in general and administrative expenses are now included in sales and marketing expenses. This reclassification improves the transparency of the cost of our sales process and does not affect our total operating costs, income from operations or net income for the three and six months ended June 30, 2008.

 

In the condensed consolidated statement of cash flows for the six months ended June 30, 2008, we have reclassified $35.0 million within investing activities to properly reflect partial pay downs received on asset-backed investments, calls and redemptions as “proceeds from maturities of marketable securities” rather than “proceeds from sales of marketable securities”.

 

Fair Value Measurements

 

In April 2009, the FASB issued two related Staff Positions: (i) FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”), and (ii) Statement of Financial Accounting Standards (“SFAS”) No. 107-1 and APB No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP 107-1 and APB 28-1”), which were effective for us beginning April 1, 2009. FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) when there has been a significant decline in market activity and volume and reemphasizes that the objective of a fair value measurement remains an exit price. FSP 157-4 did not have a material impact on our consolidated financial position, results of operations or cash flows in the three and six months ended June 30, 2009. FSP 107-1 and APB 28-1 enhance the disclosure of instruments under the scope of SFAS 157 for interim periods and did not impact our consolidated financial position, results of operations or cash flows in the three and six months ended June 30, 2009. Carrying amounts of our financial instruments including accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short maturities. The carrying amount of our bank term loan approximates fair value as the interest rate is consistent with current rates on similar debt. The fair values of our investments in marketable securities and derivatives are disclosed in Note 5.

 

MCAFEE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The following table presents our fair value hierarchy for our marketable debt securities, foreign currency contracts and contingent purchase consideration liabilities as of June 30, 2009 (in thousands):

 

 

 

 

Market values were determined for each individual security in the investment portfolio. For marketable securities and foreign currency contracts reported at fair value, quoted market prices or pricing services that utilize observable market data inputs are used to estimate fair value. We utilize pricing service quotes to determine the fair value of our securities for which there are not active markets for the identical security. The primary input for the pricing service quotes are recent trades in the same or similar securities, with appropriate adjustments for yield curves, prepayment speeds, default rates and subordination level for the security being measured. Similar securities

 

MCAFEE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

are selected based on the similarity of the underlying collateral for asset-backed and CMO securities, and similarity of the issuer, including credit ratings, for corporate debt securities. Adjustments to the transaction prices for similar securities are observable inputs and there are no significant unobservable inputs reflected in the fair value measurements of these securities.

 

The fair values of the foreign exchange derivatives do not reflect any adjustment for nonperformance risk as the contract terms are three months or less and the counterparties have high credit ratings.

 

In February 2008, the FASB issued Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), which delayed the effective date of SFAS 157 for all non-financial assets and non-financial liabilities that are not remeasured at fair value on a recurring basis (at least annually). FSP 157-2 was effective for us beginning January 1, 2009.

 

Recent Accounting Pronouncements

 

Subsequent Events

 

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) to establish general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS 165 establishes that we must evaluate subsequent events through the date the financial statements are issued, the circumstances under which a subsequent event should be recognized, and the circumstances for which a subsequent event should be disclosed. SFAS 165 also requires us to disclose the date through which we have evaluated subsequent events. SFAS 165 was effective for us beginning April 1, 2009 and did not have an impact on our consolidated financial position, results of operations or cash flows.

 

Instruments Granted in Share-Based Payment Transactions

 

In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are “participating securities” and shall be included in the computation of earnings per share pursuant to the two-class method in SFAS No. 128, “Earnings per Share”. FSP EITF 03-6-1 was effective for us beginning January 1, 2009.

 

Derivative Instruments and Hedging Activities

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), to expand disclosures about an entity’s derivative instruments and hedging activities, but does not change SFAS 133’s scope of accounting. SFAS 161 was effective for us beginning January 1, 2009. As a result, we have included additional disclosures for our derivative financial instruments in Note 5.

 

Business Combinations

 

In December 2007, the FASB revised SFAS No. 141, “Business Combinations” (“SFAS 141(R)”), to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects; and in April 2009 the FASB issued FSP No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP 141(R)-1”). SFAS 141(R) changes the accounting for business combinations by requiring that an acquiring entity measures and recognizes identifiable assets acquired and liabilities assumed at the acquisition date fair value with limited exceptions. The changes also include the treatment of acquisition related

 

MCAFEE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

transaction costs, the valuation of any noncontrolling interest at the acquisition date fair value, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals subsequent to the acquisition date and the recognition of changes in the acquirer’s income tax valuation allowance (see Note 4). FSP 141(R)-1 amended the provisions in SFAS 141(R) for the recognition measurement and disclosures of asset and liabilities arising from contingencies in business combinations, and carries forward most of the provisions in SFAS 141 for acquired contingencies. SFAS 141(R) and FSP 141(R)-1 were effective for us beginning January 1, 2009.

 

 

We record compensation expense for stock-based awards issued to employees and outside directors in exchange for services provided based on the estimated fair value of the awards on their grant dates. Stock-based compensation expense is recognized over the required service or performance period of the awards. Our stock-based awards include stock options (“options”), restricted stock units (“RSUs”), restricted stock awards (“RSAs”), restricted stock units with performance-based vesting (“PSUs”) and employee stock purchase rights issued pursuant to our Employee Stock Purchase Plan (“ESPP grants”).

 

The following table summarizes stock-based compensation expense in accordance with the provisions of SFAS No. 123(R), “Share-Based Payment” (“SFAS 123(R)”) (in thousands):

 

 

Amortization of fair value of options.  We recognize the fair value of options issued to employees and outside directors and assumed in acquisitions as stock-based compensation expense over the vesting period of the awards. These charges include stock-based compensation expense for options granted prior to January 1, 2006 but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and stock-based compensation expense for options granted subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).

 

Restricted stock awards and units.  We recognize the fair value of RSAs and RSUs issued to employees and outside directors and assumed in acquisitions as stock-based compensation expense over the vesting period of the awards. Fair value is determined as the difference between the closing price of our common stock on the grant date and the purchase price of the RSAs and RSUs.

 

Restricted stock units with performance-based vesting.  We recognize stock-based compensation expense for the fair value of PSUs issued to employees.

 

The PSUs can have performance-based vesting components that vest only if performance criteria are met for each respective performance period (“performance component”). Additionally, the PSUs can have service-based vesting components that have accelerated vesting provisions if performance criteria are met for each respective performance period (“service component”). The PSUs issued to employees have either performance components or service components or both.

 

MCAFEE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

If the performance criteria are not met for a performance period, then the related performance components that would have vested are forfeited and the related service components do not accelerate. Certain performance criteria allow for different vested amounts based on the level of achievement of the performance criteria.

 

For certain performance components, we do not communicate the performance criteria to the employees. For these awards, the accounting grant date does not occur until it is known whether the performance criteria are met, and such achievement or non-achievement is communicated to the employees. These awards are marked-to-market at the end of each reporting period through the accounting grant date, and recognized over the expected vesting period, provided we determine it is probable that the performance criteria will be met.

 

For performance components for which the performance criteria have been communicated to the employees, the accounting grant date is deemed to have occurred. Fair value has been measured on the grant date and is recognized over the expected vesting period, provided we determine it is probable that the performance criteria will be met.

 

For the service components, each tranche is accounted for as a separate award and the accounting grant date is the date the grant was communicated to the employees. Fair value is measured on the grant date, and is recognized over the expected vesting period for each tranche. The expected vesting period for each tranche is based on the service-based vesting period or the accelerated vesting period if the performance period has been set and we determine it is probable that the performance criteria will be met.

 

Employee Stock Purchase Plan.  We recognize stock-based compensation expense for the fair value of ESPP grants. The estimated fair value of ESPP grants is based on the Black-Scholes pricing model. Expense is recognized ratably based on contributions and the total fair value of the ESPP grants estimated to be issued.

 

Cash settlement of certain options.  We paid $6.1 million in June 2009 related to certain expired stock options.

 

The following table summarizes stock-based compensation expense recorded by condensed consolidated statements of income and comprehensive income line item (in thousands):

 

 

We had no stock-based compensation costs capitalized as part of the cost of an asset.

 

MCAFEE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

At June 30, 2009, the estimated fair value of all unvested options, RSUs, RSAs, PSUs and ESPP grants that have not yet been recognized as stock-based compensation expense was $142.9 million, net of expected forfeitures. We expect to recognize this amount over a weighted-average period of 2.2 years. This amount does not reflect stock-based compensation expense relating to 0.6 million PSUs for which the performance criteria had not been set as of June 30, 2009.

 

 

2009 Acquisitions

 

On June 1, 2009, we acquired 100% of the outstanding shares of Solidcore Systems, Inc. (“Solidcore”), a provider of whitelisting technology that controls and protects the applications installed on a computer, for $32.1 million. The Solidcore purchase agreement provides for earn-out payments totaling up to $14.0 million contingent upon the achievement of certain Solidcore financial and product delivery targets during the three-year period subsequent to the close of the acquisition. The fair value of the earn-out of $8.4 million has been accrued, for a total purchase price of $40.5 million.

 

Our management determined the purchase price allocation based on estimates of the fair values of the tangible and intangible assets acquired and liabilities assumed. These estimates were arrived at utilizing recognized valuation techniques. On the acquisition date, we recorded $18.3 million of goodwill, which is not expected to be deductible for tax purposes. Goodwill resulted primarily from our expectation that we will now be able to provide our customers with an end-to-end compliance solution that includes dynamic whitelisting and application trust technology, antivirus, antispyware, host intrusion prevention, policy auditing and firewall technologies. We intend to incorporate Solidcore’s technologies into our vulnerability and risk management business, integrating it with our McAfee ePolicy Orchestrator in 2009.

 

The preliminary allocation of the purchase price was based upon preliminary estimates and assumptions that are subject to change within the purchase price allocation period (generally one year from the acquisition date). The primary areas of the purchase price allocation that are not yet finalized are related to certain tax elections as well as the measurement of certain deferred tax assets and liabilities. Our preliminary purchase price allocation for Solidcore is as follows (in thousands):

 

 

The results of operations for Solidcore have been included in our results of operations since the date of acquisition. The financial impact of these results is not material to our condensed consolidated statements of income and comprehensive income.

 

The contingent consideration arrangement requires payments to former owners and certain former employees. Payments up to $14.0 million will be due and payable if certain criteria in relation to amounts billed to customers for

 

MCAFEE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Solidcore products are met during the three-year period subsequent to the close of the acquisition and if certain criteria in relation to product development and integration are met within eighteen months of the acquisition. The fair value of the contingent consideration arrangement of $8.4 million was determined using the income approach with significant inputs that are not observable in the market. Key assumptions include discount rates consistent with the level of risk of achievement and probability adjusted customer billing amounts. The expected outcomes were recorded at net present value using discount rates reflective of the risk associated with achievement. Subsequent changes in the fair value of the liability will be recorded in earnings.

 

In January 2009, we acquired 100% of the outstanding shares of Endeavor Security, Inc. (“Endeavor”), an intrusion prevention and detection company, for $2.5 million. The Endeavor purchase agreement provides for an earn-out payment totaling $1.0 million contingent upon the achievement of certain Endeavor financial targets during the two-year period subsequent to the close of the acquisition. The fair value of the earn-out of $0.7 million at acquisition was accrued, for a total purchase price of $3.2 million. As of June 30, 2009 the range of outcomes and the assumptions used to develop the estimates had not changed, and the amount recognized in the financial statements increased by $0.1 million. We recorded $1.4 million of goodwill, which is not deductible for tax purposes. The results of operations for Endeavor have been included in our results of operations since the date of acquisition. The financial impact of these results is not material to our condensed consolidated statements of income and comprehensive income.

 

Pro forma results of operations have not been presented for Endeavor because the effect of this acquisition was not material to our results of operations. The following unaudited pro forma financial information presents our combined results with Solidcore, and excludes the 2008 acquisitions discussed below, as if the acquisition had occurred at the beginning of each respective six-month period (in thousands, except per share data):

 

 

The above unaudited pro forma financial information includes adjustments for amortization of identifiable intangible assets that were acquired. In management’s opinion, the unaudited pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisition been consummated at the beginning of 2008 and 2009 nor are they indicative of future operations of the combined companies.

 

2008 Acquisitions

 

In 2008, we acquired ScanAlert, Inc. (“ScanAlert”) for $54.9 million, Reconnex Corporation (“Reconnex”) for $46.6 million and Secure Computing Corporation (“Secure Computing”) for $490.1 million. The results of operations for these acquisitions have been included in our results of operations since their respective acquisition dates.

 

Our management determined the purchase price allocations for these acquisitions based on estimates of the fair values of the tangible and intangible assets acquired and liabilities assumed. These estimates were developed utilizing recognized valuation techniques. We are continuing to assess uncertain tax positions as well as continuing

 

MCAFEE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

to assess measurement of certain deferred tax assets and liabilities of Secure Computing. In the six months ended June 30, 2009, we had purchase price adjustments totaling $3.7 million, primarily adjustments to preliminary deferred tax balances for Secure Computing.

 

Pro forma results of operations have not been presented for ScanAlert because the effect of this acquisition was not material to our results of operations. The following unaudited pro forma financial information presents our combined results with Secure Computing and Reconnex as if the acquisitions had occurred at the beginning of 2008 (in thousands, except per share data):

 

 

The above unaudited pro forma financial information includes adjustments for amortization of identifiable intangible assets that were acquired, adjustments to interest income, adjustments for incremental stock-based compensation expense related to the unearned portion of Secure Computing’s RSAs and RSUs assumed and converted, eliminations of intercompany transactions and related tax effects. The pro forma financial information excludes the effects of the SafeWord product line sold by Secure Computing in 2008, the effects of the in-process research and development charge for Secure Computing that was expensed immediately upon acquisition and the effects of the goodwill impairment charge recorded by Secure Computing in 2008. No effect has been given to cost reductions or synergies in this presentation. In management’s opinion, the unaudited pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisitions been consummated at the beginning of 2008, nor are they indicative of future operations of the combined companies.

 

 

Marketable Securities and Cash and Cash Equivalents

 

Marketable securities, which are classified as available-for-sale, are summarized as follows (in thousands):

 

 

 

 

MCAFEE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

At June 30, 2009, $216.4 million of marketable debt securities had scheduled maturities of less than one year and are classified as current assets. Marketable securities of $23.0 million have maturities greater than one year, virtually all of these maturities are greater than ten years, and are classified as non-current assets.

 

The following table summarizes the fair value and gross unrealized losses, related to those available-for-sale securities that have unrealized losses, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at June 30, 2009 and December 31, 2008 (in thousands):

 

 

 

 

 

We do not intend to sell the securities with unrealized losses and other-than-temporary impairments recorded in accumulated other comprehensive income and it is not more likely than not that we will be required to sell the securities before recovery of their amortized cost bases, which may be maturity. When assessing other-than-temporary impairments, we consider factors including: the likely reason for the unrealized loss, period of time and extent to which the fair value was below amortized cost, changes in the performance of the underlying collateral, changes in ratings, and market trends and conditions. We then evaluate whether amortized cost exceeds the net present value of expected future cash flows. During the three months ended June 30, 2009, we recorded no other-than-temporary impairment charges. To date, $7.5 million of previously recognized other-than-temporary

 

MCAFEE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

impairments remain in retained earnings as they represent the credit loss component of previously recognized other-than-temporary impairments.

 

Any “other-than-temporary decline” in value is reported in earnings and a new cost basis for the marketable security is established. In the six months ended June 30, 2009, we recorded additional impairment on previously impaired marketable securities totaling $0.7 million for continued declines in fair value. In the three and six months ended June 30, 2008, we recorded an impairment on a single marketable security of $2.6 million.

 

We recognized gains (losses) upon the sale of investments using the specific identification cost method. The following table summarizes the gross realized gains (losses) for the periods indicated and does not reflect other-than-temporary impairments recognized in the consolidated statements of income and comprehensive income (in thousands):

 

 

Derivative Financial Instruments

 

We conduct business globally. As a result, we are exposed to movements in foreign currency exchange rates. From time to time we enter into forward exchange contracts to reduce exposures associated with certain nonfunctional monetary assets and liabilities such as accounts receivable and accounts payable denominated in the Euro, British Pound, and Canadian Dollar. The forward contracts typically range from one to three months in original maturity. We recognize derivatives, which are included in other current assets and other accrued liabilities on the condensed consolidated balance sheet, at fair value. Both the remeasurement of the asset and liability and the change in value of the derivative are recognized in interest and other income on our condensed consolidated statements of income and comprehensive income. On the condensed consolidated statements of cash flows, the derivatives offset the increase or decrease in cash related to the underlying asset or liability. In general, we do not hedge anticipated foreign currency cash flows, nor do we enter into forward contracts for trading or speculative purposes.

 

The forward contracts do not qualify for hedge accounting and accordingly are marked to market at the end of each reporting period with any unrealized gain or loss being recognized in interest and other income on our condensed consolidated statements of income and comprehensive income.

 

Forward contracts outstanding are presented below (in thousands):

 

 

In the three months ended June 30, 2009 and 2008, we recorded a $0.1 million realized loss and a $12.1 million realized gain, respectively, on derivatives. In the six months ended June 30, 2009 and 2008, we recorded a $1.7 million realized loss and a $12.6 million realized gain, respectively, on derivatives. These amounts are recognized in interest and other income on our condensed consolidated statements of income and comprehensive income.

 

MCAFEE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

Goodwill by geographic region is as follows (in thousands):

 

 

The goodwill acquired during the six months ended June 30, 2009 is due to the acquisitions of Solidcore and Endeavor. The adjustments to goodwill are primarily a result of purchase accounting adjustments to deferred taxes for the Secure Computing acquisition.

 

The components of intangible assets are as follows (in thousands):

 

 

The aggregate amortization expenses for the intangible assets listed above totaled $28.6 million and $19.1 million in the three months ended June 30, 2009 and 2008, respectively, and $57.9 million and $38.0 million in the six months ended June 30, 2009 and 2008, respectively.

 

Expected future intangible asset amortization expense as of June 30, 2009 is as follows (in thousands):

 

 

MCAFEE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

We have initiated certain restructuring actions to reduce our cost structure and enable us to invest in certain strategic growth initiatives to enhance our competitive position.

 

During 2009 (the “2009 Restructuring”), we continued our efforts to consolidate and took the following measures: (i) realigned our sales and marketing workforce and staffing across various departments, (ii) disposed of excess facilities and (iii) eliminated redundant positions related to the Solidcore acquisition.

 

During 2008 (the “2008 Restructuring”), we took the following measures: (i) eliminated redundant positions related to the SafeBoot Holdings B.V. (“SafeBoot”) and Secure Computing acquisitions, (ii) realigned our sales force and (iii) realigned staffing across various departments.

 

During 2006 (the “2006 Restructuring”), we took the following measures: (i) reduced our workforce and (ii) continued our efforts to consolidate and dispose of excess facilities. We paid the remaining $0.2 million of lease termination costs and severance and other benefits related to the 2006 Restructuring during the six months ended June 30, 2009.

 

During 2004 and 2003 (the “2004 and 2003 Restructurings”), we took the following measures: (i) reduced our workforce, (ii) consolidated and disposed of excess facilities, (iii) moved our European headquarters to Ireland and vacated a leased facility in Amsterdam, (iv) consolidated operations formerly housed in three leased facilities in Dallas, Texas into our regional headquarters facility in Plano, Texas, (v) relocated employees from the Santa Clara, California headquarters site to our Plano facility as part of the consolidation activities and (vi) sold our Sniffer and Magic product lines in 2004. During the six months ended June 30, 2009, we recorded a $2.8 million decrease to the liability primarily related to the termination of the final sublease agreement for our Santa Clara facility which was previously included in our 2003 and 2004 restructuring activities. We have no outstanding accrual balance related to the 2004 and 2003 Restructurings as of June 30, 2009.

 

Restructuring charges in the six months ended June 30, 2009 totaled $9.2 million, consisting of $8.6 million related to the 2009 Restructuring, a $3.0 million additional accrual over the service period for our 2008 elimination of certain positions at Secure Computing, including accretion on facility restructurings, partially offset by a $2.4 million restructuring benefit related to the 2004 and 2003 Restructurings.

 

Restructuring benefits in the six months ended June 30, 2008 totaled $2.1 million, consisting of a $5.1 million benefit, net of accretion, related to 2003 and 2004 Restructuring charges partially offset by a $2.9 million charge related to 2008 Restructuring.

 

2009 Restructuring

 

Activity and liability balances related to our 2009 Restructuring are as follows (in thousands):

 

 

MCAFEE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Of the total 2009 restructuring charge, $3.3 million, $5.0 million, and $0.3 million was recorded in EMEA, North America and Asia-Pacific, respectively. Lease termination costs and severance and other benefits are expected to be paid through 2009.

 

2008 Restructuring

 

Activity and liability balances related to our 2008 Restructuring are as follows (in thousands):

 

 

Of the total 2009 restructuring charge for severance, $0.3 million and $2.7 million was recorded in EMEA and North America, respectively. In 2008, the $6.1 million accrual for lease termination costs was recorded on the opening balance sheet for Secure Computing for costs associated with permanently vacated facilities. In the six months ended June 30, 2009, we recorded a $0.8 million purchase price adjustment for additional lease related costs associated with permanently vacated facilities. The 2009 accretion relates to these lease termination costs. Lease termination costs will be paid through 2015 and severance and other benefits will be paid in 2009.

 

 

On December 22, 2008, we entered into a credit agreement with a group of financial institutions (“the Credit Facility”). The Credit Facility provides for a $100.0 million unsecured term loan and a $100.0 million unsecured revolving credit facility with a $25.0 million letter of credit sublimit. The Credit Facility also contains an expansion option permitting us to arrange up to an aggregate of $200.0 million in additional commitments from existing lenders and/or new lenders at the lenders’ discretion.

 

In January 2009, we borrowed $100.0 million against the term loan in the Credit Facility. The principal together with any accrued interest on the term loan is due on December 22, 2009.

 

Loans may be made in U.S. Dollars, Euros or other currencies agreed to by the lenders. Loans will bear interest at our election at the prime rate or at an adjusted LIBOR rate plus a margin (ranging from 2.00% to 2.50%) that varies with our consolidated leverage ratio (a “eurocurrency loan”). Our interest rate was 2.3% as of June 30, 2009. Interest on the loans is payable quarterly in arrears with respect to prime rate loans and at the end of an interest period (or at each three month interval in the case of loans with interest periods greater than three months) in the

 

MCAFEE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

case of eurocurrency loans. Commitment fees range from 0.25% to 0.45% of the unused portion on the credit facility depending on our consolidated leverage ratio.

 

The credit facility, which is subject to certain quarterly financial covenants, terminates on December 22, 2011, on which date all outstanding principal of, together with accrued interest on, any revolving loans will be due. We may prepay the loans and terminate the commitments at any time, without premium or penalty, subject to reimbursement of certain costs in the case of eurocurrency loans.

 

In addition, we have a 14 million Euro credit facility with a bank (“the Euro Credit Facility”). The Euro Credit Facility is available on an offering basis, meaning that transactions under the Euro Credit Facility will be on such terms and conditions, including interest rate, maturity, representations, covenants and events of default, as mutually agreed between us and the bank at the time of each specific transaction. The Euro Credit Facility is intended to be used for short-term credit requirements, with terms of one year or less. The Euro Credit Facility can be canceled at any time. No balances were outstanding under the Euro Credit Facility as of June 30, 2009 and December 31, 2008.

 

 

A reconciliation of the numerator and denominator of basic and diluted net income per share is provided as follows (in thousands, except per share amounts):