ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We market and license our products directly to customers, over the Web, and through systems integrators, or SIs, in addition to indirectly through value-added resellers, or VARs, value-added distributors, or VADs, original equipment manufacturers, or OEMs and service providers.
Software as a Service
Software as a Service revenue increased during 2013 when compared to 2012 primarily due to increased sales of our Collaboration products of $45.4 million and due to increased sales of our Data Sharing products of $15.9 million. Software as a Service revenue increased during 2012 compared to 2011 primarily due to increased sales of our Collaboration products of $61.0 million and increased sales of our Data Sharing products of $19.3 million. We currently target our Software as a Service revenue to increase when comparing the first quarter of 2014 to the first quarter of 2013 and when comparing the first quarter of 2014 to the fourth quarter of 2013.
License updates and maintenance
Effective February 16, 2015, we introduced Software Maintenance across all Citrix software products and discontinued our existing Premier Support offering. As a result, we have experienced declines in Subscription Advantage and Premier Support revenues, with a corresponding increase in sales of our software maintenance offerings as customers adopt the new solution. Additionally, in 2017, our customers began migrating to the new Citrix Customer Success Services offering from the Subscription Advantage and Software Maintenance programs.
License updates and maintenance revenue increased during 2013 when2016 compared to 20122015 primarily due to an increase in hardware and software maintenance revenues of $100.3$291.2 million, primarily driven by increased sales of maintenance revenues across our Workspace Services and support contracts across all of our Enterprise and Service Provider division'sDelivery Networking products, and an increasepartially offset by a decrease in sales and renewals of our Subscription Advantage product of $79.7$180.4 million and our technical and premier support of $44.6 million. License updates and maintenance revenue increased during 2012 when2015 compared to 20112014 primarily due to an increase in saleshardware and renewals of our Subscription Advantage product of $114.6 million and an increase in
software maintenance revenues of $45.2$155.5 million, primarily driven by increased sales of maintenance revenues across our Workspace Services and Delivery Networking products, partially offset by a decrease in our Subscription Advantage product of $44.0 million. The overall change when comparing 2016 to 2015 and Cloud products, led by NetScaler.2015 to 2014 is a result of customers migrating to our new Software Maintenance offerings discussed above. We currently are targetingexpect that License updates and maintenance revenue will increase when comparing the first quarter of 20142017 to the first quarter of 2013.2016.
Professional services
The decrease in Professional services revenue increased during 2013when comparedcomparing 2016 to 2012 and during 2012 when compared to 20112015 was primarily due to increases in consulting revenuesdecreased implementation services and product training and certification related to increasedour Workspace Services solutions. The decrease in Professional services revenue when comparing 2015 to 2014 was primarily due to decreased product training and certification and implementation sales ofservices related to our Enterprise and Service Provider division's products.Workspace Services solutions. These results are due to the operational initiatives as discussed in the Executive Summary above. We currently targetexpect Professional services revenue to increasedecrease when comparing the first quarter of 20142017 to the first quarter of 2013 consistent with the increase in Product2016 due to changes to our field and license revenue described above.channel strategies.
Deferred Revenue
Deferred revenues are primarily comprised of License updates and maintenance revenue from maintenance fees, which include software and hardware maintenance, our Subscription Advantage product as well as maintenanceprogram and support contracts for our software and hardware products.technical support. Deferred revenues also include SaaS revenue from annual service agreements for our SaaS productsonline services and Professional services revenue primarily related to our consulting contracts.
Deferred revenues increased approximately $213.7$139.8 million as of December 31, 20132016 compared to December 31, 20122015 primarily due to increased new and renewala net increase in sales of our Subscription Advantage productsoftware maintenance offerings of $106.2 million; increased$96.2 million and an increase in sales of our hardware and software maintenance contractsofferings of $44.4 million and increased support contracts$17.5 million. These changes were primarily related to our Mobilenew Software Maintenance offering discussed in the license updates and Desktop products of $34.8 million.maintenance revenue section above. We currently targetexpect deferred revenue, excluding the GoTo Business, to increase in 2014.2017.
While it is generally our practice to promptly ship our products upon receipt of properly finalized purchase orders, we sometimes have product license orders that have not shipped. Although the amount of such product license orders may vary, the amount, if any, of such product license orders at the end of a particular period has not been material to total revenue at the end of any reporting period. We do not believe that backlog, as of any particular date, is a reliable indicator of future performance.
International Revenues
International revenues (sales outside the United States) accounted for approximately 40.7% of our net revenues for the year ended 45.4%December 31, 2016, 43.1% of our net revenues for the year ended December 31, 20132015, and 45.3%45.2% of our net revenues for the year ended December 31, 20122014 and 43.2%. The change in our international revenues as a percentage of our net revenues for the year ended December 31, 2011.periods presented is not significant. For detailed information on international revenues, please refer to Note 11 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 20132016.
Segment Revenues
Our revenues are derived from sales of Enterprise and Service Provider division products which primarily include Mobility and DesktopWorkspace Services solutions, Delivery Networking products, Networking and Cloud Services products and related License updates and maintenance and Professional services and from oursales of the GoTo Business, which are delivered as cloud-based SaaS, division’s Collaboration and Data products.include Communications Cloud and Workflow Cloud service offerings. The Enterprise and Service Provider division and the SaaS divisionGoTo Business segment constitute our two reportable segments. As part of our continued transformation, effective January 1, 2016, we reorganized a part of our business by creating a new Cloud Services product grouping that primarily includes the ShareFile product line. Prior to 2016, the ShareFile product line was included within our Workflow Cloud products under the GoTo Business segment. Management has changed how it views the business primarily due to operational initiatives announced in 2015, which include increased
emphasis and investments in core enterprise products for secure and reliable application and data delivery. As a result, we
realigned our Cloud Services products and services to the Enterprise and Service Provider segment effective January 1, 2016 in
contemplation of the strategic shift and the separation of the GoTo Business. See Note 18 of our consolidated financial statements for additional information on the separation of the GoTo Business. We are currently evaluating our segment reporting and goodwill reporting units for 2017 as a result of these changes.
An analysis of our reportable segment net revenue is presented below:
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Revenue Growth | | Revenue Growth |
| 2013 | | 2012 | | 2011 | | 2013 to 2012 | | 2012 to 2011 |
| (In thousands) |
Enterprise and Service Provider division | $ | 2,335,562 |
| | $ | 2,074,800 |
| | $ | 1,778,646 |
| | 12.6 | % | | 16.7 | % |
SaaS division | 582,872 |
| | 511,323 |
| | 427,746 |
| | 14.0 | % | | 19.5 | % |
Consolidated net revenues | $ | 2,918,434 |
| | $ | 2,586,123 |
| | $ | 2,206,392 |
| | 12.8 | % | | 17.2 | % |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Revenue Growth | | Revenue Growth |
| 2016 | | 2015 | | 2014 | | 2016 to 2015 | | 2015 to 2014 |
| (In thousands) |
Enterprise and Service Provider | $ | 2,736,080 |
| | $ | 2,646,154 |
| | $ | 2,563,064 |
| | 3.4 | % | | 3.2 | % |
GoTo Business | 682,185 |
| | 629,440 |
| | 579,792 |
| | 8.4 | % | | 8.6 | % |
Consolidated net revenues | $ | 3,418,265 |
| | $ | 3,275,594 |
| | $ | 3,142,856 |
| | 4.4 | % | | 4.2 | % |
With respect to our segment revenues, the increase in net revenues for the comparative periods presented was due primarily to the factors previously discussed above. See Note 11 of our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 20132016 for additional information on our segment revenues.
Cost of Net Revenues
| | | Year Ended December 31, | 2013 Compared to 2012 | | 2012 Compared to 2011 | Year Ended December 31, | 2016 Compared to 2015 | | 2015 Compared to 2014 |
| 2013 | | 2012 | | 2011 | | 2016 | | 2015 | | 2014 | |
| (In thousands) | (In thousands) |
Cost of product and license revenues | $ | 114,932 |
| | $ | 96,962 |
| | $ | 74,393 |
| | $ | 17,970 |
| | $ | 22,569 |
| $ | 121,391 |
| | $ | 118,265 |
| | $ | 124,110 |
| | $ | 3,126 |
| | $ | (5,845 | ) |
Cost of services and maintenance revenues | 289,990 |
| | 227,150 |
| | 164,465 |
| | 62,840 |
| | 62,685 |
| 377,731 |
| | 364,916 |
| | 349,683 |
| | 12,815 |
| | 15,233 |
|
Amortization of product related intangible assets | 97,873 |
| | 80,025 |
| | 54,741 |
| | 17,848 |
| | 25,284 |
| 59,291 |
| | 74,912 |
| | 93,431 |
| | (15,621 | ) | | (18,519 | ) |
Impairment of product related intangible assets | | 1,128 |
| | 56,271 |
| | 52,995 |
| | (55,143 | ) | | 3,276 |
|
Total cost of net revenues | $ | 502,795 |
| | $ | 404,137 |
| | $ | 293,599 |
| | $ | 98,658 |
| | $ | 110,538 |
| $ | 559,541 |
| | $ | 614,364 |
| | $ | 620,219 |
| | $ | (54,823 | ) | | $ | (5,855 | ) |
Cost of product and license revenues consists primarily of hardware, shipping expense, royalties, product media and duplication, manuals and packaging materials. Cost of services and maintenance revenues consists primarily of compensation and other personnel-related costs of providing technical support and consulting, as well as the costs related to providing our SaaS,software as a service offerings, which includes the cost to support the voice and video offerings in our CollaborationCommunications Cloud products. Also included in Cost of net revenues is amortization of product related intangible assets and impairment of product related intangible assets.
Cost of product and license revenues increased during 20132016 when compared to 20122015 primarily due to higher sales of our Delivery Networking products, some of which contain hardware components that have a higher cost than our software products. Cost of product and license revenues decreased during 20122015 when compared to 20112014 primarily due to increasedlower sales of our Delivery Networking and Cloud products, as described above, manysome of which contain hardware components that have a higher cost than our other software products. We currently are targetingexpect cost of product and license revenues will decrease when comparing the first quarter of 2017 to the first quarter of 2016.
Cost of services and maintenance revenues increased during 2016 compared to 2015 primarily due to an increase in sales of GoTo Business products of $26.8 million and Cloud Services of $4.2 million, partially offset by a decrease in implementation services and product training and certification costs of $20.1 million related to our Workspace Services solutions. Cost of services and maintenance revenues increased during 2015 compared to 2014 primarily due to an increase in sales of our Cloud Services products of $24.7 million, GoTo Business products of $2.9 million, and support and maintenance costs related to our Workspace Services and Delivery Networking products of $2.9 million. These increases are partially offset by a decrease in implementation services and product training and certification costs of $15.6 million related to our Workspace Services solutions. We currently expect cost of services and maintenance revenues, excluding the GoTo Business, will increase when comparing the first quarter of 20142017 to the first quarter of 2013 consistent with the targeted increase in sales of our hardware products.
Cost of services and maintenance revenues increased during 2013 compared to 2012 consistent with the increase in sales of our Collaboration products and cost for infrastructure to support the voice and video offerings in our Collaboration products of $30.5 million. Also contributing to the increase in Cost of services and maintenance revenues is an increase in consulting costs of $16.8 million and maintenance and support costs of $15.1 million related to increased sales of our Enterprise and Service Provider division's products as described above. Cost of services and maintenance revenues increased during 2012 compared to 2011 consistent with the increase in sales of our Collaboration products and continuing investment in infrastructure to support the voice and video offerings in our Collaboration products of $20.0 million. Also contributing to the increase in Cost of services and maintenance revenues is an increase in maintenance and support costs of $16.6 million and consulting costs of $15.7 million related to increased sales of our Enterprise and Service Provider division's products as described above. We currently are targeting cost of services and maintenance revenues will increase when comparing the first quarter of 2014 to the first quarter of 20132016 consistent with the increase in Software as a Service revenues, excluding the GoTo Business, and Professional servicesLicense updates and maintenance revenues as discussed above.
Amortization of product related intangible assets decreased during 2016 as compared to 2015 primarily due to lower amortization of certain intangible assets becoming fully amortized as a result of impairments during 2015. Amortization of product related intangible assets decreased during 2015 as compared to 2014 primarily due to lower amortization of certain intangible assets becoming fully amortized as a result of impairments during 2015 and 2014.
Impairment of product related intangible assets decreased during 2016 as compared to 2015 primarily due to the impairments of certain acquired intangible assets in 2015. Impairment of product related intangible assets increased during 2015 as compared to 2014 primarily due to an increase in impairments related to certain acquired intangible assets in 2015.
Gross Margin
Gross margin as a percent of revenue was 82.8%83.6% for 2013, 84.4%2016, 81.2% for 20122015 and 86.7%80.3% for 2011.2014. The decreaseincrease in gross margin as a percentage of net revenue iswhen comparing 2016 to 2015 was primarily due to 2015 including the increase in salesimpairment of our Networking and Cloud products with a hardware component and increased sales of our services, both of which have a higher cost than our software products. When comparing the first quarter of 2014 to the first quarter of 2013, we expect a slight decline in gross margin, consistent with our targeted increase in sales of our hardware products and services.certain product related intangible assets.
Operating Expenses
Foreign Currency Impact on Operating Expenses
The functional currency for all of our wholly-owned foreign subsidiaries in our Enterprise and Service Provider division is the U.S. dollar. A substantial majority of our overseas operating expenses and capital purchasing activities are transacted in local currencies and are therefore subject to fluctuations in foreign currency exchange rates. In order to minimize the impact on our operating results, we generally initiate our hedging of currency exchange risks up to 12 months in advance of anticipated foreign currency expenses. When the dollar is weak, the resulting increase to foreign currency denominated expenses will be partially offset by the gain in our hedging contracts. When the dollar is strong, the resulting decrease to foreign currency denominated expenses will be partially offset by the loss in our hedging contracts. There is a risk that there will be fluctuations in foreign currency exchange rates beyond the timeframe for which we hedge our risk.
Research and Development Expenses
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2013 Compared to 2012 | | 2012 Compared to 2011 |
| 2013 | | 2012 | | 2011 | | |
| (In thousands) |
Research and development | $ | 516,338 |
| | $ | 450,571 |
| | $ | 380,674 |
| | $ | 65,767 |
| | $ | 69,897 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2016 Compared to 2015 | | 2015 Compared to 2014 |
| 2016 | | 2015 | | 2014 | | |
| (In thousands) |
Research and development | $ | 489,265 |
| | $ | 563,975 |
| | $ | 553,817 |
| | $ | (74,710 | ) | | $ | 10,158 |
|
Research and development expenses consisted primarily of personnel related costs and facility and equipment costs directly related to our research and development activities. We expensed substantially all development costs included in the research and development of our products.
Research and development expenses increaseddecreased during 20132016 as compared to 20122015 primarily due to an increasea decrease in compensation, including stock-based compensation and employee-related costs primarilymostly related to increaseda net decrease in headcount resulting from strategic hiring and acquisitions.restructuring activities initiated in 2015.
Research and development expenses increased during 20122015 as compared to 20112014 primarily due to a $35.8 million increasean increase in compensation and other employee-related costs primarily related to increased headcount due to strategic hiring and acquisitions, and an increase in stock-based compensation expense of $22.0$20.6 million primarily related to retention-focused awards granted to new and existing employees and assumed in conjunction with our acquisitions. Also contributing to thea net increase in Researchheadcount driven by our acquisition activity and continued investments in product development expenses when comparing 2012 to 2011 isand design research, partially offset by a $13.5decrease in stock-based compensation of $7.8 million increase in facilities costs and related depreciation, consistent with the increase in headcount.resulting from restructuring initiatives.
Sales, Marketing and Services Expenses
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2013 Compared to 2012 | | 2012 Compared to 2011 |
| 2013 | | 2012 | | 2011 | | |
| (In thousands) |
Sales, marketing and services | $ | 1,216,680 |
| | $ | 1,060,829 |
| | $ | 885,066 |
| | $ | 155,851 |
| | $ | 175,763 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2016 Compared to 2015 | | 2015 Compared to 2014 |
| 2016 | | 2015 | | 2014 | | |
| (In thousands) |
Sales, marketing and services | $ | 1,185,814 |
| | $ | 1,195,362 |
| | $ | 1,280,265 |
| | $ | (9,548 | ) | | $ | (84,903 | ) |
Sales, marketing and services expenses consisted primarily of personnel related costs, including sales commissions, pre-sales support, the costs of marketing programs aimed at increasing revenue, such as brand development, advertising, trade shows, public relations and other market development programs and costs related to our facilities, equipment and information systems that are directly related to our sales, marketing and services activities.
Sales, marketing and services expenses increaseddecreased during 20132016 compared to 20122015 primarily due to a $91.5decrease in compensation and other employee-related costs of $21.6 million as a result of restructuring initiatives, partially offset by an increase in variable compensation including variable and stock-based compensation and employee-related costsof $11.6 million due to additional headcount in our sales force and professional services group, as well as from our acquisitions. Also contributing to thean increase in Sales, marketing and services expense when comparing 2013 to 2012 is a $30.9 million increase in facilities costs and related depreciation, consistent with the increase in headcount and a $21.0 million increase in marketing program costs related to various marketing campaigns and events.sales.
Sales, marketing and services expenses increaseddecreased during 20122015 compared to 20112014 primarily due to a $132.9 million increasedecrease in compensation including variableand other employee-related costs of $58.5 million and stock-based compensation and employee-related costs due to additional headcount in our sales force and professional services group,of $12.6 million as well as from our acquisitions. Also contributing to the increase in Sales, marketing and services expense when comparing 2012 to 2011 is an $18.7 million increase in facilities costs and related depreciation, consistent with the increase in headcount.a result of restructuring initiatives.
General and Administrative Expenses
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2013 Compared to 2012 | | 2012 Compared to 2011 |
| 2013 | | 2012 | | 2011 | | |
| (In thousands) |
General and administrative | $ | 260,236 |
| | $ | 245,259 |
| | $ | 213,673 |
| | $ | 14,977 |
| | $ | 31,586 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2016 Compared to 2015 | | 2015 Compared to 2014 |
| 2016 | | 2015 | | 2014 | | |
| (In thousands) |
General and administrative | $ | 377,568 |
| | $ | 336,313 |
| | $ | 319,922 |
| | $ | 41,255 |
| | $ | 16,391 |
|
General and administrative expenses consisted primarily of personnel related costs and expenses related to outside consultants assisting with information systems, as well as accounting and legal fees.
General and administrative expenses increased during 20132016 compared to 20122015 primarily due to an increase in stock-based compensation and employee related costs of $11.8$29.9 million due to additional headcount, primarily in information technology
and facilities, as well as from our acquisitions. Also contributing to the increase in General and administrative expense when comparing 2013 to 2012 is an increase in stock-based compensation expenseand other employee-related costs of $10.7 million related to retention-focused stock-based awards granted to new and existing employees and assumed in connection with acquisitions.$17.4 million. These increases wereare partially offset by a decrease in professional fees of $10.8 million primarily due to fees incurred in connection with the operational and strategic review of the business in 2015 and the resulting cost reductions from operational efficiencies in 2016.
General and administrative expenses increased during 2015 compared to 2014 primarily due to an increase in professional fees of $16.8 million incurred in connection with the operational and strategic review of the business, an increase in certain facility and depreciation costs of $7.7$14.7 million dueand costs associated with the departure of our CEO of $5.2 million. Partially offsetting these increases is a charge related to a lower allocationpatent lawsuit of these costs as employees are being added at a slower rate in general and administrative functions compared to research and development and sales, marketing and services.$20.7 million during 2014.
General and administrative expenses increased during 2012 compared to 2011 primarily due to an increase in compensation and employee related costs of $20.2 million due to additional headcount, primarily in operations, as well as from our acquisitions. Also contributing to the increase in General and administrative expense when comparing 2012 to 2011 is an increase in stock-based compensation expense of $13.6 million related to retention-focused stock-based awards granted to new and existing employees and assumed in connection with acquisitions.
2014 Operating Expense Outlook
When comparing the first quarter of 2014 to the fourth quarter of 2013, we are targeting operating expenses to increase in Research and development as we continue to bring to market new technologies and improve integration of existing technologies and in Sales, marketing and services as we continue to focus on hiring to expand our go-to-market capacity and customer direct touch, as well as increasing consulting and technical support capacity.
Amortization of Other Intangible Assets
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2013 Compared to 2012 | | 2012 Compared to 2011 |
| 2013 | | 2012 | | 2011 | | |
| (In thousands) |
Amortization of other intangible assets | $ | 41,668 |
| | $ | 34,549 |
| | $ | 16,390 |
| | $ | 7,119 |
| | $ | 18,159 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2016 Compared to 2015 | | 2015 Compared to 2014 |
| 2016 | | 2015 | | 2014 | | |
| (In thousands) |
Amortization of other intangible assets | $ | 29,173 |
| | $ | 41,595 |
| | $ | 39,577 |
| | $ | (12,422 | ) | | $ | 2,018 |
|
Amortization of other intangible assets consists of amortization of customer relationships, trade names and covenants not to compete primarily related to our acquisitions.
The decrease in Amortization of other intangible assets when comparing 2016 to 2015 was primarily due to lower amortization of certain intangible assets becoming fully amortized as a result of impairments during 2015.
The increase in Amortization of other intangible assets when comparing 20132015 to 20122014 was primarily due to amortization of other intangible assets acquired in conjunction with our acquisitions, primarily Zenprise.2015 acquisitions.
The increase in Amortization of other intangible assets when comparing 2012 to 2011 was primarily due to amortization of other intangible assets acquired in conjunction with our acquisitions, primarily ByteMobile. Also contributing to the increase is a $5.2 million impairment related to our decision to contribute our CloudStack tradename acquired in conjunction with our acquisition of Cloud.com to the Apache Software Foundation in 2012.
As of December 31, 2013,2016, we had unamortized other identified intangible assets with estimable useful lives in the net amount of $260.5$135.6 million. For more information regarding our acquisitions see, “— Overview” and Note 3 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 20132016.
Impairment of Other Intangible Assets.
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| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2016 Compared to 2015 | | 2015 Compared to 2014 |
| 2016 | | 2015 | | 2014 | | |
| (In thousands) |
Impairment of other intangible assets | $ | — |
| | $ | 67,137 |
| | $ | 6,321 |
| | $ | (67,137 | ) | | $ | 60,816 |
|
Impairment of other intangible assets consists of impairment charges related to customer relationships, trade names and covenants not to compete primarily related to our acquisitions.
The decrease in Impairment of other intangible assets when comparing 2016 to 2015 was primarily due to impairments of certain intangible assets within the Enterprise and Service Provider segment related to ByteMobile during the third quarter of 2015.
The increase in Impairment of other intangible assets when comparing 2015 to 2014 was primarily due to impairments of certain intangible assets within the Enterprise and Service Provider segment related to ByteMobile during the third quarter of 2015.
Restructuring Expenses
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2016 Compared to 2015 | | 2015 Compared to 2014 |
| 2016 | | 2015 | | 2014 | | |
| (In thousands) |
Restructuring | $ | 71,122 |
| | $ | 100,411 |
| | $ | 20,424 |
| | $ | (29,289 | ) | | $ | 79,987 |
|
During the years ended December 31, 2016 and 2015, we incurred costs of $45.5 million and $29.7 million primarily related to our announced plan in November 2015 to simplify our enterprise go-to-market motion and roles while improving coverage, reflect changes in our product focus, and balance resources with demand across our marketing, general and administration areas. The charges are primarily related to employee severance, outplacement, professional service fees, and facility closing costs. The majority of the activities related to this program were substantially completed as of the end of the first quarter of 2016.
During the years ended December 31, 2016 and 2015, we also recorded charges of $24.0 million and $68.9 million related to our announced plan in January 2015 to increase strategic focus and operational efficiency. The charges primarily related to the severance and other costs directly related to the reduction of our workforce and consolidation of leased facilities. The majority of the activities related to this program were substantially completed by the end of 2015.
The amounts recorded during the year ended December 31, 2014 were primarily related to severance and other costs directly related to the reduction of our workforce pursuant to a restructuring plan initiated in 2014 to better align resources to strategic initiatives. For more information, see “—Executive Summary— Overview” and Note 17 to our consolidated financial statements included in this Annual Report on Form 10-K for the year-ended December 31, 2016.
Separation Expenses
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2016 Compared to 2015 | | 2015 Compared to 2014 |
| 2016 | | 2015 | | 2014 | | |
| (In thousands) |
Separation | $ | 56,624 |
| | $ | 6,352 |
| | $ | — |
| | $ | 50,272 |
| | $ | 6,352 |
|
We are incurring incremental costs in connection with the separation of the GoTo Business. These costs relate primarily to third-party advisory and consulting services, retention payments to certain employees, incremental stock-based compensation and other costs directly related to the separation of the GoTo Business. Costs related to employee retention or stock-based compensation are classified on a basis consistent with their regular compensation charges and included within Cost of net revenues, Research and development, Sales, marketing and services, or General and administrative expense in our consolidated statements of income as applicable. Costs other than those related to employees are included within Separation expense in our consolidated statements of income.
During the year ended December 31, 2016 and 2015, we incurred $56.6 million and $6.4 million related to the separation of the GoTo Business, primarily for professional services. We expect to incur additional separation costs in 2017 in connection with the separation of the GoTo Business, the majority of which will be incurred during the first quarter of 2017. We currently expect to incur, in the aggregate, approximately $120.0 million to $130.0 million in separation costs, although that estimate is subject to a number of assumptions and uncertainties and the actual amount of separation costs could differ materially from this estimate. These estimates do not include potential tax related charges or potential capital expenditures which may be incurred related to the transaction. These additional costs could be significant.
2017 Operating Expense Outlook
When comparing the first quarter of 2017 to the fourth quarter of 2016, excluding the GoTo Business, we expect operating expenses to increase in Sales, marketing and services related to go-to market investments to drive growth, while remaining at consistent levels across the other functional areas. We also expect to incur costs in the first quarter of 2017 related to the separation of the GoTo Business.
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| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2016 Compared to 2015 | | 2015 Compared to 2014 |
| 2016 | | 2015 | | 2014 | | |
| (In thousands) |
Interest income | $ | 16,686 |
| | $ | 11,675 |
| | $ | 9,421 |
| | $ | 5,011 |
| | $ | 2,254 |
|
Interest income primarily consists of interest earned on our cash, cash equivalents and investment balances. Interest income increased during 2016 compared to 2015 primarily due to overall higher average cash, cash equivalents and investment balances and higher yields on investments as a result of an increase in interest rates. Interest income increased during 2015 compared to 2014 primarily due to higher yields on investments as a result of an increase in interest rates. See Note 4 for investment information.
Interest Expense
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2016 Compared to 2015 | | 2015 Compared to 2014 |
| 2016 | | 2015 | | 2014 | | |
| (In thousands) |
Interest expense | $ | 44,949 |
| | $ | 44,153 |
| | $ | 28,332 |
| | $ | 796 |
| | $ | 15,821 |
|
Interest expense consists primarily of interest on our convertible senior notes and credit facility. The increase was primarily due to interest expense associated with the issuance of our convertible senior notes we entered into in April 2014 and amounts that were outstanding under our credit facility during the year ended December 31, 2015.
Other (expense) income,expense, net
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2013 Compared to 2012 | | 2012 Compared to 2011 |
| 2013 | | 2012 | | 2011 | | |
| (In thousands) |
Other (expense) income, net | $ | (1,021 | ) | | $ | 9,299 |
| | $ | (288 | ) | | $ | (10,320 | ) | | $ | 9,587 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2016 Compared to 2015 | | 2015 Compared to 2014 |
| 2016 | | 2015 | | 2014 | | |
| (In thousands) |
Other expense, net | $ | (4,131 | ) | | $ | (5,730 | ) | | $ | (7,694 | ) | | $ | 1,599 |
| | $ | 1,964 |
|
Other (expense) income,expense, net is primarily comprised of remeasurement of foreign currency transaction gains (losses), realized losses related to changes in the fair value of our investments that have a decline in fair value considered other-than-temporary and recognized gains (losses) related to our investments, and interest expense, which was not material for all periods presented.
The change in Other (expense) income,expense, net when comparing 20132016 to 20122015 is primarily driven by strategic investment activity. 2013 included a gaindecrease in losses on the remeasurement and settlements of $6.0foreign currency transactions of $5.5 million, decrease in impairment charges of $2.2 million recognized on cost method investments and 2012 includedan increase in gains recognized on available for sale investments of $1.4 million. These changes are partially offset by a gaindecrease in gains recognized on cost method investments of $16.5 million from the sales of companies we invest in.$7.0 million.
The change in Other (expense) income,expense, net when comparing 20122015 to 20112014 is primarily due to a $16.5driven by an impairment charge of $5.2 million recognized on cost method investments during 2014 and an increase in gaingains recognized on our strategiccost method investments due to the sale of companies that we invested in,$3.6 million, partially offset by a lossan increase in losses on the remeasurement and settlements of our foreign currency transactions of $7.9$5.8 million. For more information see “— Liquidity and Capital Resources” and Note 4
Income Taxes
We are required to estimate our income taxes in each of the jurisdictions in which we operate as part of the process of preparing our consolidated financial statements includedstatements. We maintain certain strategic management and operational activities in this Annual Report on Form 10-Koverseas subsidiaries and our foreign earnings are taxed at rates that are generally lower than in the United States. We do not expect to remit earnings from our foreign subsidiaries. Our effective tax rate was approximately 13.1% for the year ended December 31, 2013.2016 and (2.4)% for the year ended December 31, 2015. The increase in the effective tax rate when comparing the year ended December 31, 2016 to the year ended December 31, 2015 was primarily due to the impact of settling the Internal Revenue Service (“IRS”) examination for tax years 2011 and 2012 that closed during 2015.
As of December 31, 2016, our net unrecognized tax benefits totaled approximately $69.8 million as compared to $54.6 million as of December 31, 2015. All amounts included in this balance affect the annual effective tax rate. As of the year ended December 31, 2016, we accrued $2.8 million for the payment of interest and penalties on uncertain tax positions.
Income Taxes
We and certainone or more of our subsidiaries are subject to U.S. federal income taxes in the United States, as well as income taxes of multiple state and foreign jurisdictions. We are currently not subject to a U.S. federal income tax examination. With few exceptions, we are no longer subject to U.S., federal, state and local, or non-U.S., income tax examinations by tax authorities for years prior to 2009.2013.
In the ordinary course of global business, there are transactions for which the ultimate tax outcome is uncertain anduncertain; thus judgment is required in determining the worldwide provision for income taxes. We provide for income taxes on transactions based on our estimate of the probable liability. We adjust our provision as appropriate for changes that impact our underlying judgments. Changes that impact provision estimates include such items as jurisdictional interpretations on tax filing positions based on the results of tax audits and general tax authority rulings. Due to the evolving nature of tax rules combined with the large number of jurisdictions in which we operate, it is possible that our estimates of our tax liability and the realizability of our deferred tax assets could change in the future, which may result in additional tax liabilities and adversely affect our results of operations, financial condition and cash flows.
We are required to estimate our income taxes in eachAs of the jurisdictions in which we operate as part of the process of preparing our consolidated financial statements. At December 31, 2013,2016, we had approximately $150.4$249.8 million in net deferred tax assets. The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We review deferred tax assets periodically for recoverability and make estimates and judgments regarding the expected geographic sources of taxable income and gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance. At As of December 31, 2013,2016, we determined that $26.5a $14.2 million valuation allowance relating to deferred tax assets for net operating losses and tax credits was necessary. If the estimates and assumptions used in our determination change in the future, we could be required to revise our estimates of the valuation allowances against our deferred tax assets and adjust our provisions for additional income taxes.
We maintain certain strategic management and operational activities in overseas subsidiaries andcurrently expect our foreign earnings are taxed at rates that are generally lower than in the United States. We do not expect to remit earnings from our foreign subsidiaries. Our effective tax rate was approximately 12.5% for the year ended December 31, 2013 and 14.1% for the year ended December 31, 2012. The decreaseto increase in the effective tax rate when comparing the year ended December 31, 20132017 as compared to 2016 due to the year ended December 31, 2012 was primarily due to 2012 not includingseparation of the U.S. research and development tax credit and 2013 includingGoTo Business. See Note 18 for more information on the U.S. research and development tax credit for bothseparation of the 2012 and 2013 tax years as the law extending the credit for 2012 was not enacted until 2013.GoTo Business.
Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due primarily to lower tax rates on earnings generated by our foreign operations that are taxed primarily in Switzerland. We have not provided for U.S. taxes for those earnings because we plan to reinvest all of those earnings indefinitely outside the United States. Our effectiveFrom time to time, there
may be other items that impact the tax rate, will fluctuate based onsuch as the mix of earnings from our U.S. and foreign jurisdictions. Accordingly, earnings from the production and distribution of our products and services through our foreign headquarters in Switzerland are currently taxed at lower income tax rates than earnings from our U.S. operations.
The federal research and development credit expired on December 31, 2011. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law. Under this act, the federal research and development credit was retroactively extended for amounts paid or incurred after December 31, 2011 and before January 1, 2014. The effects of these changes in the tax law resulted in net tax benefits of approximately $10.7 million, which were recognized in 2013, the year in which the law was enacted.
We currently target our effective tax rate to increase in 2014 compared to 2013 dueitems specific to the expiration of the U.S. research and development tax credit, which has not been renewed.current period discussed above.
Liquidity and Capital Resources
During 2013, we generated operating cash flows of $928.3 million. These operating cash flows related primarily to net income of $339.5 million, adjusted for, among other things, non-cash charges, including depreciation and amortization expenses of $267.5 million and stock-based compensation expense of $183.9 million. Also contributing to these cash inflows was an aggregate increase in operating assets and liabilities of $182.3 million, net of effects of acquisitions. Our investing activities used $938.2 million of cash consisting primarily of net purchases of investments of $433.5 million, cash paid for acquisitions of $334.9 million and cash paid for the purchase of property and equipment of $162.9 million. Our financing activities used cash of $352.3 million primarily due to stock repurchases of $406.3 million. This financing cash outflow was partially offset by proceeds received from the issuance of common stock under our employee stock-based compensation plans of $73.7 million.
During 20122016, we generated operating cash flows of $818.5 million1.12 billion. These operating cash flows related primarily to net income of $352.5536.1 million, adjusted for, among other things, non-cash charges, including depreciation and amortization expenses of $214.9249.0 million and stock-based compensation expense of $149.9 million.$184.8 million. Also contributing to these cash inflows was an aggregate increasea change in operating assets and liabilities of $180.5$149.1 million,, net of the effects of acquisitions. The change in our net operating assets and liabilities was primarily a result of changes in deferred revenue of $144.4 million, and changes in income taxes, net of $49.8 million mostly due to a decrease in prepaid taxes and an increase in income taxes payable. These inflows are partially offset by an outflow in accounts receivable of $60.6 million driven by an increase in the receivable balance due to higher bookings. Our investing activities used $357.9484.2 million of cash consisting primarily of cash paid for acquisitionsnet purchases of $487.2investments of $311.6 million, cash paid for the purchase of property and equipment of $123.0$134.2 million, and $34.4 million in cash paid for licensing agreements and product related intangible assetstechnology of $26.3 million, and other investments. These investing cash outflows were partially offset by net salespaid for acquisitions of investments of $258.9$13.2 million. Our financing activities used cash of $$149.838.0 million primarily due to cash paid for tax withholding on vested stock awards of $66.6 million and stock repurchases of $251.028.7 million. This financing cash outflow was partially offset by proceeds received from the issuance of common stock under our employee stock-based compensation plans of $108.441.2 million and excess tax benefit from stock-based compensation $16.0 million.
During 2015, we generated operating cash flows of $1.03 billion. These operating cash flows related primarily to net income of $319.4 million, adjusted for, among other things, non-cash charges including depreciation, amortization and impairment expenses of $392.9 million and stock-based compensation expense of $147.4 million. Also contributing to these cash inflows was a change in operating assets and liabilities of $212.0 million, net of effects of acquisitions. The change in our net operating assets and liabilities was primarily a result of changes in deferred revenue of $107.2 million, changes in income taxes, net of $52.0 million mostly due to a decrease in prepaid taxes, and changes in accrued expenses and other liabilities $49.6 million. Our investing activities used $224.4 million of cash consisting primarily of cash paid for acquisitions of $256.9 million and cash paid for the purchase of property and equipment of $160.8 million. This investing outflow was partially offset by net proceeds from investments of $199.5 million. Our financing activities used cash of $691.5 million primarily due to stock repurchases of $755.7 millionand cash paid for tax withholding on vested stock awards of $46.3 million. This financing cash outflow was partially offset by proceeds from the issuance of common stock under our employee stock-based compensation plans of $112.3 million.
Credit Facility
On January 7, 2015, we entered into a credit agreement, or Credit Agreement with Bank of America, N.A., as Administrative Agent, and the other lenders party thereto from time to time collectively, the Lenders. The Credit Agreement provides for a $250 million unsecured revolving credit facility for a term of five years, of which we have drawn and repaid $95.0 million during the year ended December 31, 2015. As of December 31, 2016, there were no outstanding borrowings under this Credit Agreement and the entire $250 million credit line remains available for borrowing. We may elect to increase the revolving credit facility by up to $250 million if existing or new lenders provide additional revolving commitments in accordance with the terms of the Credit Agreement. The proceeds of borrowings under the Credit Agreement may be used for working capital and general corporate purposes, including acquisitions. Borrowings under the Credit Agreement will bear interest at a rate equal to either (a) a customary London interbank offered rate formula or (b) a customary base rate formula, plus the applicable margin with respect thereto, in each case as set forth in the Credit Agreement.
The Credit Agreement requires us to maintain a consolidated leverage ratio of not more than 3.5:1.0 and a consolidated interest coverage ratio of not less than 3.0:1.0. The Credit Agreement includes customary events of default, with corresponding grace periods in certain circumstances, including, without limitation, payment defaults, cross-defaults, the occurrence of a change of control and bankruptcy-related defaults. The Lenders are entitled to accelerate repayment of the loans under the Credit Agreement upon the occurrence of any of the events of default. In addition, the Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to grant liens, merge or consolidate, dispose of all or substantially all of its assets, change our business and incur subsidiary indebtedness, in each case subject to customary exceptions for a credit facility of this size and type. In addition, the Credit Agreement contains customary representations and warranties. Please see Note 13 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2016 for additional details on our Credit Agreement.
Convertible Senior Notes
In April 2014, we completed a private placement of $1.44 billion principal amount of 0.500% Convertible Senior Notes due 2019, or the Convertible Notes. The net proceeds from this offering were approximately $1.42 billion (including the proceeds from the Over-Allotment Option), after deducting the initial purchasers’ discounts and commissions and the offering expenses payable by us. We used approximately $82.6 million of the net proceeds to pay the cost of certain bond hedges entered into in connection with the offering (after such cost was partially offset by the proceeds to us from certain warrant transactions). Please see Note 12 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2016 for additional details on the Convertible Notes offering and the related bond hedges and warrant transactions.
We used the remainder of the net proceeds from the offering and a portion of our existing cash and investments to purchase an aggregate of approximately $1.5 billion of our common stock under our share repurchase program. We used approximately $101.0 million to purchase shares of our common stock from certain purchasers of the Convertible Notes in privately negotiated transactions concurrently with the closing of the offering, and the remaining $1.4 billion to purchase additional shares of our common stock through an accelerated share repurchase transaction, or the ASR, which we entered into with Citibank, N.A., or Citibank, on April 25, 2014, and which is discussed in further detail in Note 8 to our consolidated financial statements.
The conversion period for the Convertible Notes that commenced on October 10, 2016 in connection with the structure of the RMT transaction with LogMeIn, terminated as of the close of business on January 31, 2017. As a result, the Convertible Notes were reclassified to Other liabilities from Current liabilities and the amount previously recorded as Temporary equity was reclassified to permanent equity as of January 31, 2017. The Distribution also resulted in an adjustment to the conversion rate for the Convertible Notes under the terms of the Indenture. As a result of this adjustment, the conversion rate for the Convertible Notes in effect as of the opening of business on February 1, 2017 is 13.9061 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of approximately $71.91 per share of common stock. Corresponding adjustments were made to the conversion rates for the Convertible Note Hedge and Warrant Transactions as of the opening of business on February 1, 2017.
Historically, significant portions of our cash inflows were generated by our operations. We currently expect this trend to continue throughout 2014.2017. We believe that our existing cash and investments together with cash flows expected from operations will be sufficient to meet expected operating and capital expenditure requirements for the next 12 months. We continue to search for suitable acquisition candidates and could acquire or make investments in companies we believe are related to our strategic objectives. We could from time to time continue to seek to raise additional funds through the issuance of debt or equity securities for larger acquisitions.acquisitions, potential redemption of our Convertible Notes and for general corporate purposes.
Cash, Cash Equivalents and Investments
|
| | | | | | | | | | | |
| December 31, | | 2013 Compared to 2012 |
| 2013 | | 2012 | |
| (In thousands) |
Cash, cash equivalents and investments | $ | 1,590,416 |
| | $ | 1,523,944 |
| | $ | 66,472 |
|
|
| | | | | | | | | | | |
| December 31, | | 2016 Compared to 2015 |
| 2016 | | 2015 | |
| (In thousands) |
Cash, cash equivalents and investments | $ | 2,664,171 |
| | $ | 1,763,334 |
| | $ | 900,837 |
|
The increase in cash, cash equivalents and investments at December 31, 20132016 as compared to December 31, 20122015, is primarily due to cash provided by our operating activities of $928.3 million$1.12 billion and cash receivedproceeds from the issuance of common stock under our employee stock-based compensation plans of $73.7$41.2 million,, partially offset by expenditures madepurchases of property and equipment of $134.2 million, cash paid for tax withholding on vested stock awards of $66.6 million, cash paid for stock repurchases of $406.3$28.7 million,, cash paid for licensing agreements and technology of $26.3 million, and cash paid for acquisitions, net of cash acquired, of $334.9 million and purchases of property and equipment of $162.9 million.$13.2 million. As of December 31, 20132016, $1,059.9 million$2.08 billion of the $1,590.4 million$2.66 billion of cash, cash equivalents and investments was held by our foreign subsidiaries. If these funds are needed for our operations in the United States, we would be required to accrue and pay U.S. taxes to repatriate these funds. Our current plans are not expected to require repatriation of cash and investments to fund our U.S. operations and, as a result, we intend to permanently reinvest our foreign earnings. See “– Liquidity and Capital Resources.” We generally invest our cash and cash equivalents in investment grade, highly liquid securities to allow for flexibility in the event of immediate cash needs. Our short-term and long-term investments primarily consist of interest-bearing securities.
Fair Value Measurements
The authoritative guidance defines fair value as an exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing anan/ asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service, or the Service, which uses quoted market prices for identical or comparable instruments rather than direct observations of quoted prices in active markets. The Service gathers observable inputs for all of our fixed income securities from a variety of industry data providers including, for example, large custodial institutions and other third-party sources. Once the observable inputs are gathered by the Service, all data points are considered and an average price is determined. The Service’s providers utilize a variety of inputs to determine their quoted prices. These inputs may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. Substantially all of our available-for-sale investments are valued utilizing inputs obtained from the Service and accordingly are categorized as Level 2 in the table below. We periodically independently assess the pricing obtained from the Service and historically have not adjusted the Service's pricing as a result of this assessment. Available-for-sale securities are included in Level 3 when relevant observable inputs for a security are not available.
Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy. In certain instances, the inputs used to measure fair value may meet the definition of more than one level of the fair value hierarchy. The input with the lowest level priority is used to determine the applicable level in the fair value hierarchy.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Our fixed income available-for-sale security portfolio generally consists of high quality, investment grade securities from diverse issuers with a minimum credit rating of A-/A3 and a minimum weighted-average credit rating of AA-/Aa3. We values these securities based on pricing from the Service, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value, and accordingly, we classify all of our fixed income available-for-sale securities as Level 2. See Note 4 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 20132016 for more information regarding our available-for-sale investments.
We measure our cash flow hedges, which are classified as Prepaid expenses and other current assets and Accrued expenses and other current liabilities, at fair value based on indicative prices in active markets (Level 2 inputs).
Assets Measured at Fair Value on a RecurringNon-recurring Basis Using Significant Unobservable Inputs (Level 3)
We have invested in convertible debt securities of certain early-stage entities that are classified as available-for-sale investments. As quoted prices in active markets or other observable inputs were not available for these investments, in order to measure them at fair value, we utilized a discounted cash flow model using a discount rate reflecting the market risk inherent in holding securities of an early-stage enterprise, adjusted by the probability-weighted exit possibilities associated with the convertible debt securities. This methodology required us to make assumptions that were not directly or indirectly observable regarding the fair value of the convertible debt securities; accordingly they are a Level 3 valuation and included in the table below.
|
| | | |
| Investments |
| (in thousands) |
Balance at December 31, 2012 | $ | 3,341 |
|
Purchases of Level 3 securities | 9,700 |
|
Transfers out of Level 3 | (2,750 | ) |
Balance at December 31, 2013 | $ | 10,291 |
|
Transfers out of Level 3 relate to certain of our investments in convertible debt securities of early-stage entities that were classified as available-for-sale investments to cost method investments upon conversion to equity ownership, which are included in Other assets in our accompanying consolidated balance sheets.
Assets Measured at Fair Value on a Non-recurring Basis Using Significant Unobservable Inputs (Level 3)
During 2013,2016, certain cost method investments with a combined carrying value of $9.3$1.2 million were determined to be impaired and have been written down to their fair values of $5.6$0.1 million, resulting in impairment charges of $3.7$1.1 million.
During 2012,2015, certain cost method investments with a combined carrying value of $13.0$3.4 million were determined to be impaired and have been written down to their fair values of $9.5$0.1 million, resulting in impairment charges of $3.5$3.3 million.
The impairment charges are included in Other (expense) income,expense, net in the accompanying consolidated financial statements for the years ended December 31, 20132016 and 2012.2015. In determining the fair value of cost method investments, we consider many factors including but not limited to operating performance of the investee, the amount of cash that the investee has on-hand, the ability to obtain additional financing and the overall market conditions in which the investee operates. The fair value of the cost method investment represents a Level 3 valuation as the assumptions used in valuing this investment were not directly or indirectly observable. See Note 4 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 20132016 for further information regarding cost method investments.
For certain intangible assets where the unamortized balances exceeded the undiscounted future net cash flows, we measure the amount of the impairment by calculating the amount by which the carrying values exceed the estimated fair values, which are based on projected discounted future net cash flows. These non-recurring fair value measurements are categorized as Level 3 significant unobservable inputs. See Note 2 to our consolidated financial statements for detailed information related to Goodwill and Other Intangible Assets.
Additional Disclosures Regarding Fair Value Measurements
As of December 31, 2016, the fair value of the Convertible Notes, which was determined based on inputs that are observable in the market (Level 2) based on the closing trading price per $100 as of the last day of trading for the year ended December 31, 2016, and carrying value of debt instruments (carrying value excludes the equity component of our Convertible Notes classified in equity) was as follows (in thousands):
|
| | | | | | | |
| Fair Value | | Carrying Value |
Convertible Senior Notes | $ | 1,674,688 |
| | $ | 1,348,156 |
|
The carrying value of accounts receivable, accounts payable and accrued expenses and other current liabilities approximate their fair value due to the short maturity of these items.
Accounts Receivable, Net
| | | December 31, | | 2013 Compared to 2012 | December 31, | | 2016 Compared to 2015 |
| 2013 | | 2012 | | 2016 | | 2015 | |
| (In thousands) | (In thousands) |
Accounts receivable | $ | 660,175 |
| | $ | 637,403 |
| | $ | 22,772 |
| $ | 731,823 |
| | $ | 676,995 |
| | $ | 54,828 |
|
Allowance for returns | (2,062 | ) | | (2,564 | ) | | 502 |
| (1,994 | ) | | (1,438 | ) | | (556 | ) |
Allowance for doubtful accounts | (3,292 | ) | | (3,883 | ) | | 591 |
| (3,889 | ) | | (6,281 | ) | | 2,392 |
|
Accounts receivable, net | $ | 654,821 |
| | $ | 630,956 |
| | $ | 23,865 |
| $ | 725,940 |
| | $ | 669,276 |
| | $ | 56,664 |
|
The increase in accounts receivable at December 31, 20132016 compared to December 31, 20122015 was primarily due to an increase in sales, particularly inhigher bookings during the last month of 2013 compared to the last month of 2012.year ended December 31, 2016. The activity in our allowance for returns was comprised primarily of $5.0 million in credits issued for returns partially offset by $4.5$2.1 million of provisions for returns recorded during 2013.2016, partially offset by $1.5 million in credits issued for returns. The activity in our allowance for doubtful accounts was comprised primarily of $1.6$3.3 million of uncollectible accounts written off, net of recoveries, partially offset by $1.0$0.9 million in additional provisions for doubtful accounts.
From time to time, we could maintain individually significant accounts receivable balances from our distributors or customers, which are comprised of large business enterprises, governments and small and medium-sized businesses. If the financial condition of our distributors or customers deteriorates, our operating results could be adversely affected. At December 31, 2013, one distributor, Ingram Micro,2016 and December 31, 2015, there were no individual customers that accounted for over 10% of our accounts receivable. At December 31, 2012, one distributor, Ingram Micro, accounted for 11% of ourgross accounts receivable. For more information regarding significant customers see Note 11 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2013.2016.
Stock Repurchase Program
Our Board of Directors authorized an ongoing stock repurchase program with a total repurchase authority granted to us of $3.96.8 billion, of which $500.0 million was approved in October 2013.January 2017. We may use the approved dollar authority to repurchase stock at any time until the approved amounts are exhausted. The objective of our stock repurchase program is to improve stockholders’ returns. At December 31, 20132016, approximately $429.3404.0 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock in our consolidated balance sheets included in this Annual Report on Form 10-K for the year ended December 31, 20132016. A portion of the funds used to repurchase stock over the course of the program was provided by net proceeds from the Convertible Notes offering, as well as proceeds from employee stock option exercises and the related tax benefit.
We are authorized to make open market purchases of our common stock using general corporate funds through open market purchases or pursuant to a Rule 10b5-1 plan.
During the year ended December 31, 2013,2016, we expended approximately $406.3$28.7 million on open market purchases under the stock repurchase program, repurchasing 6,563,986426,300 shares of outstanding common stock at an average price of $61.90.$67.30.
During the year ended December 31, 20122015, we expended approximately $251.0755.7 million on open market purchases, repurchasing 3,550,81710,716,850 shares of outstanding common stock at an average price of $70.6970.52.
In April 2014, in connection with the $1.5 billion increase in repurchase authority granted to us under our ongoing stock repurchase program, we used approximately $101.0 million to purchase 1.7 million shares of our common stock from certain purchasers of the Convertible Notes in privately negotiated transactions concurrently with the closing of the Convertible Notes offering discussed above, and an additional $1.4 billion to purchase additional shares of our common stock through our ASR with Citibank. On April 30, 2014, under the ASR agreement, we paid approximately $1.4 billion to Citibank and received approximately 21.8 million shares of our common stock, including approximately 2.6 million shares delivered in October 2014 in final settlement in connection with Citibank's election to accelerate the ASR. The total number of shares of our common stock that we repurchased under the ASR Agreement was based on the average of the daily volume-weighted average prices of our common stock during the term of the ASR Agreement, less a discount.
See Note 12 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2016 for detailed information on our Convertible Notes offering and the transactions related thereto and Note 8 to our consolidated financial statement for detailed information on the ASR.
During the year ended December 31, 20112014, we expended approximately $424.8139.9 million on open market purchases, repurchasing 6,275,4702,046,400 shares of outstanding common stock at an average price of $67.7068.36.
Shares for Tax Withholding
During the years ended December 31, 20132016, 2015, and 2014, we withheld 444,657830,155 shares, in 2012 we withheld 269,745679,694 shares and in 2011, we withheld 182,203560,239 shares, respectively, from stock unitsequity awards that vested. Amounts withheld to satisfy minimum tax withholding obligations that arose on the vesting of stock unitequity awards was $31.066.6 million for 20132016, $20.246.3 million for 20122015 and $13.333.7 million for 20112014. These shares are reflected as treasury stock in our consolidated balance sheets included in this Annual Report on Form 10-K for the year ended December 31, 20132016 and the related cash outlays reduce our total stock repurchase authority..
Contractual Obligations and Off-Balance Sheet Arrangement
Contractual Obligations
We have certain contractual obligations that are recorded as liabilities in our consolidated financial statements. Other items, such as operating lease obligations, are not recognized as liabilities in our consolidated financial statements, but are required to be disclosed in the notes to our consolidated financial statements.
The following table summarizes our significant contractual obligations at December 31, 20132016 and the future periods in which such obligations are expected to be settled in cash. Additional details regarding these obligations are provided in the notes to our consolidated financial statements (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Payments due by period |
| | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years |
Operating lease obligations(1) | | $ | 276,590 |
| | $ | 60,982 |
| | $ | 86,123 |
| | $ | 40,600 |
| | $ | 88,885 |
|
Purchase obligations(2) | | 31,300 |
| | 31,300 |
| | — |
| | — |
| | — |
|
Total contractual obligations(3) | | $ | 307,890 |
| | $ | 92,282 |
| | $ | 86,123 |
| | $ | 40,600 |
| | $ | 88,885 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Payments due by period |
| | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years |
Operating lease obligations (1) | | $ | 367,636 |
| | $ | 55,097 |
| | $ | 95,886 |
| | $ | 74,994 |
| | $ | 141,659 |
|
Convertible senior notes (2) | | 1,437,500 |
| | — |
| | 1,437,500 |
| | — |
| | — |
|
Purchase obligations(3) | | 42,800 |
| | 42,800 |
| | — |
| | — |
| | — |
|
Total contractual obligations(4) | | $ | 1,847,936 |
| | $ | 97,897 |
| | $ | 1,533,386 |
| | $ | 74,994 |
| | $ | 141,659 |
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| |
(1) | In 2012, we entered into a lease to acquire additional office space in Santa Clara, CA. The rental commencement date will not begin until 2015 and the pricing for the lease will not be finalized until a future date. Accordingly, the future payment obligations related to this lease are not includedamounts in the table above. above include $86.4 million in exited facility costs related to restructuring activities. In addition, Citrix will remain liable to the lessor for the duration of certain GoTo Business leases of approximately $6.8 million. The future operating lease obligation in the table above excludes approximately $16.6 million related to the GoTo Business, since Citrix completed the spin-off and merger of its GoTo Business with LogMeIn, Inc. on January 31, 2017. |
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(2) | During the second quarter of 2014, we completed a private placement of $1.44 billion principal amount of 0.500% Convertible Senior Notes due 2019. The amount above represents the principal balance to be repaid. See Note 12 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2016 for detailed information on the Convertible Notes offering and the transactions related thereto. |
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(3) | Purchase obligations represent non-cancelable commitments to purchase inventory ordered before year-end 2017 of approximately $13.118.3 million and a contingent obligation to purchase inventory, which is based on amount of usage, of approximately $18.224.5 million. |
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(3)(4)
| Total contractual obligations do not include agreements where our commitment is variable in nature or where cancellations without payment provisions exist and excludes $63.8$69.8 million of liabilities related to uncertain tax positions recorded in accordance with authoritative guidance, because we could not make reasonably reliable estimates of the period or amount of cash settlement with the respective taxing authorities. See Note 10 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 20132016 for further information. |
As of December 31, 20132016, we did not have any individually material capital lease obligations or other material long-term commitments reflected on our consolidated balance sheets.
Off-Balance Sheet Arrangements
We do not have any special purpose entities or off-balance sheet financing arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk includes “forward-looking statements” that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The analysis methods we used to assess and mitigate risk discussed below should not be considered projections of future events, gains or losses.
We are exposed to financial market risks, including changes in foreign currency exchange rates and interest rates that could adversely affect our results of operations or financial condition. To mitigate foreign currency risk, we utilize derivative financial instruments. The counterparties to our derivative instruments are major financial institutions. All of the potential changes noted below are based on sensitivity analyses performed on our financial position as of December 31, 20132016. Actual results could differ materially.
Discussions of our accounting policies for derivatives and hedging activities are included in Notes 2 and 1214 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 20132016.
Exposure to Exchange Rates
A substantial majority of our overseas expense and capital purchasing activities are transacted in local currencies, including Euros, British pounds sterling, Japanese yen, Australian dollars, Swiss francs, Indian rupees, Hong Kong dollars, Canadian dollars, Singapore dollars and Chinese renminbi. To reduce the volatility of future cash flows caused by changes in currency exchange rates, we have established a hedging program. We use foreign currency forward contracts to hedge certain forecasted foreign currency expenditures. Our hedging program significantly reduces, but does not entirely eliminate, the impact of currency exchange rate movements.
At December 31, 20132016 and 2012,2015, we had in place foreign currency forward sale contracts with a notional amount of $49.7$113.8 million and $104.2$85.3 million, respectively, and foreign currency forward purchase contracts with a notional amount of $210.7$152.3 million and $252.8$169.9 million, respectively. At December 31, 2013,2016, these contracts had an aggregate fair value assetliability of $3.2$1.9 million and at December 31, 2012,2015, these contracts had an aggregate fair value assetliability of $0.4$2.6 million. Based on a hypothetical 10% appreciation of the U.S. dollar from December 31, 20132016 market rates, the fair value of our foreign currency forward contracts would decrease by $16.4$3.7 million. Conversely, a hypothetical 10% depreciation of the U.S. dollar from December 31, 20132016 market rates would increase the fair value of our foreign currency forward contracts by $16.4 million.$3.7 million, resulting in a net asset position. In these hypothetical movements, foreign operating costs would move in the opposite direction. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates quantified above, changes in exchange rates could also change the dollar value of sales and affect the volume of sales as the prices of our competitors’ products become more or less attractive. We do not anticipate any material adverse impact to our consolidated financial position, results of operations, or cash flows as a result of these foreign exchange forward contracts.
Exposure to Interest Rates
We have interest rate exposures resulting from our interest-based available-for-sale investments. We maintain available-for-sale investments in debt securities and we limit the amount of credit exposure to any one issuer or type of instrument. The securities in our investment portfolio are not leveraged. The securities classified as available-for-sale are subject to interest rate risk. The modeling technique used measures the change in fair values arising from an immediate hypothetical shift in market interest rates and assumes that ending fair values include principal plus accrued interest and reinvestment income. If market interest rates were to increase by 100 basis points from December 31, 20132016 and 20122015 levels, the fair value of the available-for-sale portfolio would decline by approximately $13.2$19.2 million and $9.2$14.4 million, respectively. If market interest rates were to decrease by 100 basis points from December 31, 20132016 and 20122015 levels, the fair value of the available-for-sale portfolio would increase by approximately $8.0$17.8 million and $5.1$12.2 million, respectively. These amounts are determined by considering the impact of the hypothetical interest rate movements on our available-for-sale and trading investment portfolios. This analysis does not consider the effect of credit risk as a result of the changes in overall economic activity that could exist in such an environment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and related financial statement schedule, together with the report of independent registered public accounting firm, appear at pages F-1 through F-36F-42 of this Annual Report on Form 10-K for the year ended December 31, 20132016.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with our independent registered public accountants on accounting or financial disclosure matters during our two most recent fiscal years.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 20132016, our management, with the participation of our President and Chief Executive Officer and our Executive Vice President, Chief Operating Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based upon that evaluation, our President and Chief Executive Officer and our Executive Vice President, Chief Operating Officer and Chief Financial Officer concluded that, as of December 31, 20132016, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our President and Chief Executive Officer and our Executive Vice President, Chief Operating Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the quarter ended December 31, 20132016, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a – 15(f). Our internal control system was designed to provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013.2016. In making this assessment, our management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, or the COSO in the 1992 Internal Control—Integrated Framework (the COSO criteria).criteria. Based on our assessment we believe that, as of December 31, 2013,2016, our internal control over financial reporting is effective based on those criteria. The effectiveness of our internal control over financial reporting as of December 31, 20132016 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which appears below.
Report of Independent Registered Certified Public Accounting Firm
The Board of Directors and Stockholders of Citrix Systems, Inc.
We have audited Citrix Systems, Inc.’s internal control over financial reporting as of December 31, 2013,2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992(2013 framework) (the COSO criteria). Citrix Systems, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Citrix Systems, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013,2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Citrix Systems, Inc. as of December 31, 20132016 and 2012,2015, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 20132016 of Citrix Systems, Inc. and our report dated February 20, 201416, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Certified Public Accountants
Boca Raton, Florida
February 20, 201416, 2017
ITEM 9B. OTHER INFORMATION
Our policy governing transactions in our securities by our directors, officers and employees permits our officers, directors and certain other persons to enter into trading plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. We have been advised that Stephen Dow, a member of our Board of Directors and Sudhakar Ramakrishna,Timothy Minahan, our Senior Vice President and General Manager Enterprise and Service Provider Division, eachChief Marketing Officer, entered into a new trading plan in the fourth quarter of 20132016 in accordance with Rule 10b5-1 and our policy governing transactions in our securities. We undertake no obligation to update or revise the information provided herein, including for revision or termination of an established trading plan.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 20132016.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 20132016.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 20132016.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 20132016.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 20132016.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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(a) | 1. Consolidated Financial Statements. |
For a list of the consolidated financial information included herein, see page F-1.
2. Financial Statement Schedules.
The following consolidated financial statement schedule is included in Item 8:
Valuation and Qualifying Accounts
3. List of Exhibits.
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Exhibit No. | | Description |
2.1 | | Agreement and Plan of Merger, dated as of July 26, 2016, among Citrix Systems, Inc., GetGo, Inc., LogMeIn, Inc. and Lithium Merger Sub, Inc. (incorporated herein by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed July 28, 2016)** |
2.2 | | Separation and Distribution Agreement, dated as of July 26, 2016, by and among Citrix Systems, Inc., GetGo, Inc. and LogMeIn, Inc. (incorporated herein by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K filed July 28, 2016)** |
2.3† | | Amended and Restated Tax Matters Agreement, dated as of September 13, 2016, by and among LogMeIn, Inc., Citrix Systems, Inc. and GetGo, Inc** |
2.4† | | Amendment No. 1, dated as of December 8, 2016, to Agreement and Plan of Merger, dated as of July 26, 2016, by and among LogMeIn, Inc., Lithium Merger Sub, Inc., Citrix Systems, Inc. and GetGo, Inc** |
3.1 | | Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on May 29, 20132013) |
3.2 | | Amended and Restated By-laws of the Company (incorporated herein by reference to Exhibit 3.23.1 to the Company's Current Report on Form 8-K filed on May 29, 2013July 31, 2015) |
4.1 | | Specimen certificate representing Common Stock (incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 33-98542), as amended) |
4.2 | | Indenture, dated as of April 30, 2014, between Citrix Systems, Inc. and Wilmington Trust, National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on April 30, 2014) |
4.3 | | Form of 0.500% Convertible Senior Notes due 2019 (included in Exhibit 4.2) |
10.1* | | Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010) |
10.2* | | First Amendment to Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated as of May 28, 2010) |
10.3* | | Second Amendment to the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated as of June 2, 2011) |
10.4* | | Third Amendment to the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated as of June 2, 2011) |
10.5* | | Fourth Amendment to the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated as of May 31, 2012) |
10.6* | | Fifth Amendment to the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013) |
10.7* | | Sixth Amendment to the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 29, 2013) |
10.8* | | Form of Global Stock Option Agreement under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011) |
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10.9* | | Form of Restricted Stock Unit Agreement For Non-Employee Directors under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011) |
10.10* | | Form of Global Restricted Stock Unit Agreement under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (Performance Based Awards) (incorporated herein by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011) |
10.11* | | Form of Global Restricted Stock Unit Agreement under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (Time Based Awards) (incorporated herein by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011) |
10.12* | | Form of Global Restricted Stock Unit Agreement under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (Long Term Incentive) (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012) |
10.13* | | Form of Long Term Incentive Agreement under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the year ended December 31, 2014) |
10.14* | | Amended and Restated 2005 Employee Stock Purchase Plan (incorporated by reference herein to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 2011) |
10.15* | | Amendment to Amended and Restated 2005 Employee Stock Purchase Plan (incorporated by reference herein to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 2012) |
10.16* | | Citrix Systems, Inc. Executive Bonus Plan (incorporated by reference herein to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013) |
10.17* | | Form of Indemnification Agreement by and between the Company and each of its Directors and executive officers (incorporated herein by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011) |
10.18* | | Citrix Systems, Inc. 2014 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 28, 2014) |
10.19 | | Form of Call Option Transaction Confirmation between Citrix Systems, Inc. and each of JPMorgan Chase Bank, National Association, London Branch; Goldman, Sachs & Co.; Bank of America, N.A.; and Royal Bank of Canada (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 30, 2014) |
10.20 | | Form of Warrants Confirmation between Citrix Systems, Inc. and each of JPMorgan Chase Bank, National Association, London Branch; Goldman, Sachs & Co.; Bank of America, N.A.; and Royal Bank of Canada (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on April 30, 2014) |
10.21 | | Form of Additional Call Option Transaction Confirmation between Citrix Systems, Inc. and each of JPMorgan Chase Bank, National Association, London Branch; Goldman, Sachs & Co.; Bank of America, N.A.; and Royal Bank of Canada (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on May 6, 2014) |
10.22 | | Form of Additional Warrants Confirmation between Citrix Systems, Inc. and each of JPMorgan Chase Bank, National Association, London Branch; Goldman, Sachs & Co.; Bank of America, N.A.; and Royal Bank of Canada (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on May 6, 2014) |
10.23 | | Master Confirmation between Citibank, N.A. and Citrix Systems, Inc., dated April 25, 2014 (incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on April 30, 2014) |
10.24 | | Credit Agreement, dated as of January 7, 2015, by and among Citrix Systems, Inc., the initial lenders named therein and Bank of America, N.A., as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on January 8, 2015) |
10.25 | | Cooperation Agreement, by and among Citrix Systems, Inc., Elliott Associates, L.P., Elliott International, L.P. and Elliott International Capital Advisors Inc., dated July 28, 2015 (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 28, 2015) |
10.26* | | 2015 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 10-Q filed on August 7, 2015) |
10.27* | | Retention Agreement, dated October 12, 2015, by and between Citrix Systems, Inc. and Mark B. Templeton (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 16, 2015) |
10.28* | | Retention Agreement, dated as of July 1, 2016, by and between Citrix Systems, Inc. and William Burley (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on November 4, 2016) |
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10.29* | | Employment Agreement, dated January 18, 2017, by and between Citrix Systems, Inc. and Robert M. Calderoni (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on January 20, 2017) |
10.30* | | Form of Executive Agreement of Citrix Systems, Inc. by and between the Company and each of David J. Henshall, Carlos E. Sartorius and Timothy Minahan (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on January 20, 2017) |
10.31 | | Letter Agreement, dated as of July 26, 2016, among Citrix Systems, Inc., GetGo, Inc., LogMeIn, Inc., Elliott Associates, L.P. and Elliott International, L.P. (incorporated herein by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed July 28, 2016) |
10.32* | | Employment Agreement, dated January 19, 2016, by and between Citrix Systems, Inc. and Kirill Tatarinov (incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed January 20, 2016) |
10.33* | | Amended and Restated Incentive Agreement, dated February 16, 2016, by and between Citrix Systems, Inc. and Christopher Hylen (incorporated herein by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed May 6, 2016) |
10.34* | | Restricted Stock Award Agreement under the Citrix Systems, Inc. 2014 Equity Incentive Plan for Kirill Tatarinov (incorporated herein by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q filed May 6, 2016) |
10.35* | | Restricted Stock Unit Agreement under the Citrix Systems, Inc. 2014 Equity Incentive Plan for Kirill Tatarinov (2016 Performance-Based Awards) (incorporated herein by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q filed May 6, 2016) |
10.36* | | Form of Restricted Stock Unit Agreement under the Citrix Systems, Inc. 2014 Equity Incentive Plan (2016 Performance-Based Awards) (incorporated herein by reference to Exhibit 10.7 of the Company’s Quarterly Report on Form 10-Q filed May 6, 2016) |
10.37 | | First Amendment to Credit Agreement, dated as of August 7, 2015, by and among Citrix Systems, Inc., the lenders named therein and Bank of America, N.A., as Administrative Agent (incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed on November 4, 2015) |
10.38* | | Form of Restricted Stock Unit Agreement under the Citrix Systems, Inc. 2014 Equity Incentive Plan for each of David J. Henshall, Timothy Minahan and Carlos E. Sartorius (Performance Based Awards) (incorporated herein by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed on November 4, 2015) |
10.39*† | | Amendment to 2015 Employee Stock Purchase Plan, dated October 27, 2016 |
21.1† | | List of Subsidiaries |
23.1† | | Consent of Independent Registered Public Accounting Firm |
24.1 | | Power of Attorney (included in signature page) |
31.1† | | Rule 13a-14(a) / 15d-14(a) Certification of Principal Executive Officer |
31.2† | | Rule 13a-14(a) / 15d-14(a) Certification of Principal Financial Officer |
32.1†† | | Section 1350 Certification of Principal Executive Officer and Principal Financial Officer |
101.INS† | | XBRL Instance Document |
101.SCH† | | XBRL Taxonomy Extension Schema Document |
101.CAL† | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF† | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB† | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE† | | XBRL Taxonomy Extension Presentation Linkbase Document |
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* | Indicates a management contract or a compensatory plan, contract or arrangement. |
** | Schedules (or similar attachments) have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby undertakes to furnish supplementally copies of any of the omitted schedules (or similar attachments) upon request by the SEC. |
† | Filed herewith. |
†† | Furnished herewith. |
(b) Exhibits.
The Company hereby files as part of this Annual Report on Form 10-K for the year ended December 31, 2016, the exhibits listed in Item 15(a)(3) above. Exhibits which are incorporated herein by reference can be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C., 20549 and at the Commission’s regional offices at 175 W. Jackson Boulevard, Suite 900, Chicago, IL 60604 and 3 World Financial Center, Suite 400, New York, NY 10281-1022.
(c) Financial Statement Schedule.
The Company hereby files as part of this Annual Report on Form 10-K for the year ended December 31, 2016 the consolidated financial statement schedule listed in Item 15(a)(2) above, which is attached hereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Fort Lauderdale, Florida on the 16th day of February, 2017.
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| | CITRIX SYSTEMS, INC. |
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| By: | /s/ KIRILL TATARINOV |
| | Kirill Tatarinov |
| | President and Chief Executive Officer |
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Citrix Systems, Inc., hereby severally constitute and appoint Kirill Tatarinovand David J. Henshall, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicated below, all amendments to this report, and generally to do all things in our names and on our behalf in such capacities to enable Citrix Systems, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below on the 16th day of February, 2017.
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Signature | | Title(s) | | |
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/S/ KIRILL TATARINOV | | President, Chief Executive Officer and Director (Principal Executive Officer) | | |
Kirill Tatarinov | | |
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/S/ DAVID J. HENSHALL | | Executive Vice President, Chief Operating Officer and Chief Financial Officer (Principal Financial Officer) | | |
David J. Henshall | | | | |
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/S/ JESSICA SOISSON | | Vice President, Controller (Principal Accounting Officer) | | |
Jessica Soisson | | | | |
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/S/ ROBERT M. CALDERONI | | Executive Chairman of the Board of Directors | | |
Robert M. Calderoni | | | | |
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/S/ NANCI CALDWELL | | Director | | |
Nanci Caldwell | | | | |
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/S/ JESSE COHN | | Director | | |
Jesse Cohn | | | | |
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/S/ ROBERT D. DALEO | | Director | | |
Robert D. Daleo | | | | |
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/S/ MURRAY J. DEMO | | Director | | |
Murray J. Demo | | | | |
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/S/ PETER J. SACRIPANTI | | Director | | |
Peter J. Sacripanti | | | | |
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/S/ GRAHAM V. SMITH | | Director | | |
Graham V. Smith | | | | |
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/S/ GODFREY R. SULLIVAN | | Director | | |
Godfrey R. Sullivan | | | | |
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CITRIX SYSTEMS, INC.
List of Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Citrix Systems, Inc. are included in Item 8:
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| Report of Independent Registered Certified Public Accounting Firm | |
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The following consolidated financial statement schedule of Citrix Systems, Inc. is included in Item 15(a): | |
| Schedule II Valuation and Qualifying Accounts | |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
Report of Independent Registered Certified Public Accounting Firm
The Board of Directors and Stockholders of Citrix Systems, Inc.
We have audited the accompanying consolidated balance sheets of Citrix Systems, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Citrix Systems, Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Citrix Systems Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 16, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boca Raton, Florida
February 16, 2017
CITRIX SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| December 31, 2016 | | December 31, 2015 |
| (In thousands, except par value) |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 956,956 |
| | $ | 368,518 |
|
Short-term investments, available-for-sale | 727,073 |
| | 502,852 |
|
Accounts receivable, net of allowances of $5,883 and $7,719 at December 31, 2016 and 2015, respectively | 725,940 |
| | 669,276 |
|
Inventories, net | 12,522 |
| | 10,521 |
|
Prepaid expenses and other current assets | 138,786 |
| | 132,784 |
|
Total current assets | 2,561,277 |
| | 1,683,951 |
|
Long-term investments, available-for-sale | 980,142 |
| | 891,964 |
|
Property and equipment, net | 343,820 |
| | 373,817 |
|
Goodwill | 1,966,810 |
| | 1,962,722 |
|
Other intangible assets, net | 227,993 |
| | 283,418 |
|
Deferred tax assets, net | 252,396 |
| | 215,196 |
|
Other assets | 57,789 |
| | 56,449 |
|
Total assets | $ | 6,390,227 |
| | $ | 5,467,517 |
|
Liabilities, Temporary Equity and Stockholders' Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 84,057 |
| | $ | 95,396 |
|
Accrued expenses and other current liabilities | 302,887 |
| | 317,468 |
|
Income taxes payable | 39,771 |
| | 18,351 |
|
Current portion of deferred revenues | 1,323,478 |
| | 1,249,754 |
|
Convertible notes, short-term | 1,348,156 |
| | — |
|
Total current liabilities | 3,098,349 |
| | 1,680,969 |
|
Long-term portion of deferred revenues | 480,359 |
| | 414,314 |
|
Convertible notes, long-term | — |
| | 1,311,071 |
|
Other liabilities | 123,297 |
| | 87,717 |
|
Commitments and contingencies |
|
| |
|
Temporary equity from Convertible notes | 79,495 |
| | — |
|
Stockholders' equity: | | | |
Preferred stock at $.01 par value: 5,000 shares authorized, none issued and outstanding | — |
| | — |
|
Common stock at $.001 par value: 1,000,000 shares authorized; 302,851 and 299,113 shares issued and outstanding at December 31, 2016 and 2015, respectively | 303 |
| | 299 |
|
Additional paid-in capital | 4,761,588 |
| | 4,566,919 |
|
Retained earnings | 4,010,737 |
| | 3,474,625 |
|
Accumulated other comprehensive loss | (28,704 | ) | | (28,527 | ) |
| 8,743,924 |
| | 8,013,316 |
|
Less - common stock in treasury, at cost (146,552 and 145,296 shares at December 31, 2016 and 2015, respectively) | (6,135,197 | ) | | (6,039,870 | ) |
Total stockholders' equity | 2,608,727 |
| | 1,973,446 |
|
Total liabilities, temporary equity and stockholders' equity | $ | 6,390,227 |
| | $ | 5,467,517 |
|
See accompanying notes.
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2016 |
| 2015 |
| 2014 |
| (In thousands, except per share information) |
Revenues: | | | | | |
Product and licenses | $ | 883,329 |
| | $ | 875,807 |
| | $ | 899,736 |
|
Software as a service | 816,436 |
| | 731,292 |
| | 651,562 |
|
License updates and maintenance | 1,587,271 |
| | 1,521,007 |
| | 1,416,017 |
|
Professional services | 131,229 |
| | 147,488 |
| | 175,541 |
|
Total net revenues | 3,418,265 |
| | 3,275,594 |
| | 3,142,856 |
|
Cost of net revenues: | | | | | |
Cost of product and license revenues | 121,391 |
| | 118,265 |
| | 124,110 |
|
Cost of services and maintenance revenues | 377,731 |
| | 364,916 |
| | 349,683 |
|
Amortization of product related intangible assets | 59,291 |
| | 74,912 |
| | 93,431 |
|
Impairment of product related intangible assets | 1,128 |
| | 56,271 |
| | 52,995 |
|
Total cost of net revenues | 559,541 |
| | 614,364 |
| | 620,219 |
|
Gross margin | 2,858,724 |
| | 2,661,230 |
| | 2,522,637 |
|
Operating expenses: | | | | | |
Research and development | 489,265 |
| | 563,975 |
| | 553,817 |
|
Sales, marketing and services | 1,185,814 |
| | 1,195,362 |
| | 1,280,265 |
|
General and administrative | 377,568 |
| | 336,313 |
| | 319,922 |
|
Amortization of other intangible assets | 29,173 |
| | 41,595 |
| | 39,577 |
|
Impairment of other intangible assets | — |
| | 67,137 |
| | 6,321 |
|
Restructuring | 71,122 |
| | 100,411 |
| | 20,424 |
|
Separation | 56,624 |
| | 6,352 |
| | — |
|
Total operating expenses | 2,209,566 |
| | 2,311,145 |
| | 2,220,326 |
|
Income from operations | 649,158 |
| | 350,085 |
| | 302,311 |
|
Interest income | 16,686 |
| | 11,675 |
| | 9,421 |
|
Interest expense | 44,949 |
| | 44,153 |
| | 28,332 |
|
Other expense, net | (4,131 | ) | | (5,730 | ) | | (7,694 | ) |
Income before income taxes | 616,764 |
| | 311,877 |
| | 275,706 |
|
Income tax expense (benefit) | 80,652 |
| | (7,484 | ) | | 23,983 |
|
Net income | $ | 536,112 |
| | $ | 319,361 |
| | $ | 251,723 |
|
Earnings per share: |
| | | | |
Basic | $ | 3.46 |
| | $ | 2.01 |
| | $ | 1.48 |
|
Diluted | $ | 3.41 |
| | $ | 1.99 |
| | $ | 1.47 |
|
Weighted average shares outstanding: | | | | | |
Basic | 155,134 |
| | 158,874 |
| | 169,879 |
|
Diluted | 157,084 |
| | 160,362 |
| | 171,270 |
|
See accompanying notes.
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | 2014 |
| (In thousands) |
| | | | | |
Net income | $ | 536,112 |
| | $ | 319,361 |
| | $ | 251,723 |
|
Other comprehensive (loss) income: | | | | | |
Change in foreign currency translation adjustment | — |
| | — |
| | (21,804 | ) |
| | | | | |
Available for sale securities: | | | | | |
Change in net unrealized gains (losses) | 996 |
| | (2,080 | ) | | (911 | ) |
Less: reclassification adjustment for net (gains) losses included in net income | (1,204 | ) | | 170 |
| | (1,317 | ) |
Net change (net of tax effect) | (208 | ) | | (1,910 | ) | | (2,228 | ) |
| | | | | |
Gain (loss) on pension liability | 906 |
| | 4,083 |
| | (6,512 | ) |
| | | | | |
Cash flow hedges: | | | | | |
Change in unrealized losses | (2,638 | ) | | (6,937 | ) | | (9,074 | ) |
Less: reclassification adjustment for net losses (gains) included in net income | 1,763 |
| | 13,027 |
| | (2,123 | ) |
Net change (net of tax effect) | (875 | ) | | 6,090 |
| | (11,197 | ) |
| | | | | |
Other comprehensive (loss) income | (177 | ) | | 8,263 |
| | (41,741 | ) |
| | | | | |
Comprehensive income | $ | 535,935 |
| | $ | 327,624 |
| | $ | 209,982 |
|
See accompanying notes.
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid In Capital | | Retained Earnings | | Accumulated Other Comprehensive (loss) income | | Common Stock in Treasury | | | Total Equity |
| Shares | | Amount | | Shares | | Amount | | |
Balance at December 31, 2013 | 291,078 |
| | $ | 291 |
| | $ | 3,974,297 |
| | $ | 2,903,541 |
| | $ | 4,951 |
| | (107,789 | ) | | $ | (3,563,273 | ) | | | $ | 3,319,807 |
|
Shares issued under stock-based compensation plans | 3,031 |
| | 3 |
| | 46,618 |
| | — |
| | — |
| | — |
| | — |
| | | 46,621 |
|
Stock-based compensation expense | — |
| | — |
| | 164,040 |
| | — |
| | — |
| | — |
| | — |
| | | 164,040 |
|
Common stock issued under employee stock purchase plan | 565 |
| | 1 |
| | 33,908 |
| | — |
| | — |
| | — |
| | — |
| | | 33,909 |
|
Tax deficiency from employer stock plans, net | — |
| | — |
| | (14,679 | ) | | — |
| | — |
| | — |
| | — |
| | | (14,679 | ) |
Stock repurchases, net | — |
| | — |
| | — |
| | — |
| | — |
| | (25,549 | ) | | (1,640,885 | ) | | | (1,640,885 | ) |
Restricted shares turned in for tax withholding | — |
| | — |
| | — |
| | — |
| | — |
| | (560 | ) | | (33,672 | ) | | | (33,672 | ) |
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (41,741 | ) | | — |
| | — |
| | | (41,741 | ) |
Convertible note tax impact | — |
| | — |
| | 8,166 |
| | — |
| | — |
| | — |
| | — |
| | | 8,166 |
|
Equity component of convertible note issuance | — |
| | — |
| | 162,869 |
| | — |
| | — |
| | — |
| | — |
| | | 162,869 |
|
Purchase of convertible note hedges | — |
| | — |
| | (184,288 | ) | | — |
| | — |
| | — |
| | — |
| | | (184,288 | ) |
Issuance of warrants | — |
| | — |
| | 101,775 |
| | — |
| | — |
| | — |
| | — |
| | | 101,775 |
|
Net income | — |
| | — |
| | — |
| | 251,723 |
| | — |
| | — |
| | — |
| | | 251,723 |
|
Balance at December 31, 2014 | 294,674 |
| | $ | 295 |
| | $ | 4,292,706 |
| | $ | 3,155,264 |
| | $ | (36,790 | ) | | (133,898 | ) | | $ | (5,237,830 | ) | | | $ | 2,173,645 |
|
Shares issued under stock-based compensation plans | 3,878 |
| | 3 |
| | 112,282 |
| | — |
| | — |
| | — |
| | — |
| | | 112,285 |
|
Stock-based compensation expense | — |
| | — |
| | 139,816 |
| | — |
| | — |
| | — |
| | — |
| | | 139,816 |
|
Common stock issued under employee stock purchase plan | 561 |
| | 1 |
| | 37,228 |
| | — |
| | — |
| | — |
| | — |
| | | 37,229 |
|
Tax deficiency from employer stock plans, net | — |
| | — |
| | (15,013 | ) | | — |
| | — |
| | — |
| | — |
| | | (15,013 | ) |
Stock repurchases, net | — |
| | — |
| | — |
| | — |
| | — |
| | (10,717 | ) | | (755,704 | ) | | | (755,704 | ) |
Restricted shares turned in for tax withholding | — |
| | — |
| | — |
| | — |
| | — |
| | (681 | ) | | (46,336 | ) | | | (46,336 | ) |
Other | — |
| | — |
| | (100 | ) | | — |
| | — |
| | — |
| | — |
| | | (100 | ) |
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | 8,263 |
| | — |
| | — |
| | | 8,263 |
|
Net income | — |
| | — |
| | — |
| | 319,361 |
| | — |
| | — |
| | — |
| | | 319,361 |
|
Balance at December 31, 2015 | 299,113 |
| | $ | 299 |
| | $ | 4,566,919 |
| | $ | 3,474,625 |
| | $ | (28,527 | ) | | (145,296 | ) | | $ | (6,039,870 | ) | | | $ | 1,973,446 |
|
Shares issued under stock-based compensation plans | 3,009 |
| | 3 |
| | 41,244 |
| | — |
| | — |
| | — |
| | — |
| | | 41,247 |
|
Stock-based compensation expense | — |
| | — |
| | 175,980 |
| | — |
| | — |
| | — |
| | — |
| | | 175,980 |
|
Temporary equity reclassification | — |
| | — |
| | (79,495 | ) | | — |
| | — |
| | — |
| | — |
| | | (79,495 | ) |
Common stock issued under employee stock purchase plan | 729 |
| | 1 |
| | 57,514 |
| | — |
| | — |
| | — |
| | — |
| | | 57,515 |
|
Tax deficiency from employer stock plans, net | — |
| | — |
| | (574 | ) | | — |
| | — |
| | — |
| | — |
| | | (574 | ) |
Stock repurchases, net | — |
| | — |
| | — |
| | — |
| | — |
| | (426 | ) | | (28,689 | ) | | | (28,689 | ) |
Restricted shares turned in for tax withholding | — |
| | — |
| | — |
| | — |
| | — |
| | (830 | ) | | (66,638 | ) | | | (66,638 | ) |
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (177 | ) | | — |
| | — |
| | | (177 | ) |
Net income | — |
| | — |
| | — |
| | 536,112 |
| | — |
| | — |
| | — |
| | | 536,112 |
|
Balance at December 31, 2016 | 302,851 |
| | $ | 303 |
| | $ | 4,761,588 |
| | $ | 4,010,737 |
| | $ | (28,704 | ) | | (146,552 | ) | | $ | (6,135,197 | ) | | | $ | 2,608,727 |
|
See accompanying notes.
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | 2014 |
| (In thousands) |
Operating Activities | | | | | |
Net income | $ | 536,112 |
| | $ | 319,361 |
| | $ | 251,723 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Amortization and impairment of intangible assets | 89,592 |
| | 239,915 |
| | 192,325 |
|
Depreciation and amortization of property and equipment | 159,446 |
| | 152,964 |
| | 137,945 |
|
Amortization of debt discount and transaction costs | 37,085 |
| | 36,013 |
| | 23,293 |
|
Stock-based compensation expense | 184,788 |
| | 147,368 |
| | 169,287 |
|
Deferred income tax benefit | (41,104 | ) | | (89,378 | ) | | (36,982 | ) |
Excess tax benefit from stock-based compensation | (16,049 | ) | | (5,873 | ) | | (6,132 | ) |
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies | 5,189 |
| | 13,416 |
| | 5,233 |
|
Other non-cash items | 11,628 |
| | 8,740 |
| | 12,419 |
|
Total adjustments to reconcile net income to net cash provided by operating activities | 430,575 |
| | 503,165 |
| | 497,388 |
|
Changes in operating assets and liabilities, net of the effects of acquisitions: | | | | | |
Accounts receivable | (60,636 | ) | | (7,226 | ) | | (30,962 | ) |
Inventories | (4,133 | ) | | 703 |
| | (1,167 | ) |
Prepaid expenses and other current assets | (12,472 | ) | | (8,057 | ) | | (8,133 | ) |
Other assets | (2,460 | ) | | (2,550 | ) | | 1,498 |
|
Income taxes, net | 49,834 |
| | 51,994 |
| | (79,119 | ) |
Accounts payable | (20,905 | ) | | 10,959 |
| | 40 |
|
Accrued expenses and other current liabilities | 33,150 |
| | 49,586 |
| | 62,195 |
|
Deferred revenues | 144,439 |
| | 107,150 |
| | 146,123 |
|
Other liabilities | 22,326 |
| | 9,463 |
| | 6,395 |
|
Total changes in operating assets and liabilities, net of the effects of acquisitions | 149,143 |
| | 212,022 |
| | 96,870 |
|
Net cash provided by operating activities | 1,115,830 |
| | 1,034,548 |
| | 845,981 |
|
Investing Activities | | | | | |
Purchases of available-for-sale investments | (2,238,784 | ) | | (2,182,831 | ) | | (2,390,950 | ) |
Proceeds from sales of available-for-sale investments | 1,294,636 |
| | 1,745,290 |
| | 1,694,886 |
|
Proceeds from maturities of available-for-sale investments | 632,517 |
| | 637,052 |
| | 406,334 |
|
Proceeds from cost method investments, net | 920 |
| | 6,476 |
| | 425 |
|
Purchases of property and equipment | (134,170 | ) | | (160,825 | ) | | (165,417 | ) |
Cash paid for acquisitions, net of cash acquired | (13,242 | ) | | (256,907 | ) | | (101,059 | ) |
Cash paid for licensing agreements and product related intangible assets | (26,342 | ) | | (11,403 | ) | | (13,676 | ) |
Other | 261 |
| | (1,267 | ) | | — |
|
Net cash used in investing activities | (484,204 | ) | | (224,415 | ) | | (569,457 | ) |
Financing Activities | | | | | |
Proceeds from issuance of common stock under stock-based compensation plans | 41,247 |
| | 112,285 |
| | 46,618 |
|
Proceeds from issuance of convertible notes, net of issuance costs | — |
| | — |
| | 1,415,717 |
|
Purchase of convertible note hedges | — |
| | — |
| | (184,288 | ) |
Proceeds from issuance of warrants | — |
| | — |
| | 101,775 |
|
Proceeds from revolving credit facility | — |
| | 95,000 |
| | — |
|
Repayments on credit facility | — |
| | (95,000 | ) | | — |
|
Repayment of acquired debt | — |
| | (7,569 | ) | | (4,065 | ) |
Excess tax benefit from stock-based compensation | 16,049 |
| | 5,873 |
| | 6,132 |
|
Stock repurchases, net | (28,689 | ) | | (755,704 | ) | | (1,640,885 | ) |
Cash paid for tax withholding on vested stock awards | (66,638 | ) | | (46,336 | ) | | (33,672 | ) |
Net cash used in financing activities | (38,031 | ) | | (691,451 | ) | | (292,668 | ) |
Effect of exchange rate changes on cash and cash equivalents | (5,157 | ) | | (10,313 | ) | | (4,447 | ) |
Change in cash and cash equivalents | 588,438 |
| | 108,369 |
| | (20,591 | ) |
Cash and cash equivalents at beginning of period | 368,518 |
| | 260,149 |
| | 280,740 |
|
Cash and cash equivalents at end of period | $ | 956,956 |
| | $ | 368,518 |
| | $ | 260,149 |
|
Supplemental Cash Flow Information | | | | | |
Cash paid for income taxes | $ | 64,361 |
| | $ | 45,827 |
| | $ | 130,502 |
|
Cash paid for interest | $ | 7,847 |
| | $ | 8,215 |
| | $ | 5,027 |
|
See accompanying notes.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Citrix Systems, Inc. ("Citrix" or the "Company"), is a Delaware corporation founded on April 17, 1989. Citrix delivers solutions to make applications secure and easy to access, anywhere, anytime and on any device or network.
Citrix markets and licenses its products directly to customers, over the Web, and through systems integrators ("SIs"), in addition to indirectly through value-added resellers ("VARs"), value-added distributors ("VADs"), original equipment manufacturers ("OEMs"), and service providers.
The Company's revenues are derived from sales of Enterprise and Service Provider products which include Workspace Services solutions, Delivery Networking products, Cloud Services products and related License updates and maintenance and Professional services and sales of the GoTo Business service offerings, which are delivered as cloud-based SaaS, and include Communications Cloud and Workflow Cloud service offerings. The Enterprise and Service Provider and the GoTo Business segment (formerly Mobility Apps) constitute the Company's two reportable segments. See Note 11 for more information on the Company's segments.
As part of the Company's continued transformation, effective January 1, 2016, the Company reorganized a part of its business by creating a new Cloud Services product grouping that primarily includes the ShareFile product line. Prior to 2016, the ShareFile product line was included within the Company's Workflow Cloud products under the GoTo Business segment. The Company's management has changed how it views the business primarily due to operational initiatives announced in 2015, which include increased emphasis and investments in core enterprise products for secure and reliable application and data delivery. As a result, the Company realigned its Cloud Services products and services to be included in the Enterprise and Service Provider segment effective January 1, 2016 in contemplation of the strategic shift and the separation of the GoTo Business. See Note 18 for more information on the Company's separation of its GoTo Business.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries in the Americas, Europe, the Middle East and Africa (“EMEA”) and Asia-Pacific. All significant transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 2016 and 2015 include marketable securities, which are primarily money market funds, commercial paper, agency, and government securities, municipal securities and corporate securities with initial or remaining contractual maturities when purchased of three months or less.
Available-for-sale Investments
Short-term and long-term investments at December 31, 2016 and 2015 primarily consist of agency securities, corporate securities, municipal securities and government securities. Investments classified as available-for-sale are stated at fair value with unrealized gains and losses, net of taxes, reported in Accumulated other comprehensive loss. The Company classifies its available-for-sale investments as current and non-current based on their actual remaining time to maturity. The Company does not recognize changes in the fair value of its available-for-sale investments in income unless a decline in value is considered other-than-temporary in accordance with the authoritative guidance.
The Company’s investment policy is designed to limit exposure to any one issuer depending on credit quality. The Company uses information provided by third parties to adjust the carrying value of certain of its investments to fair value at the end of each period. Fair values are based on a variety of inputs and may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. See Note 4 for investment information.
Accounts Receivable
The Company’s accounts receivable are attributable primarily to direct sales to end customers via the Web or through independent software vendors, or ISVs, in addition to indirectly through value-added resellers, or VARs, value-added distributors, or VADs, systems integrators, or SIs, original equipment manufacturers, or OEMs and service providers. Collateral is generally not required. The Company also maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make payments which includes both general and specific reserves. The Company
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
periodically reviews these estimated allowances by conducting an analysis of the customer's payment history and credit worthiness, the age of the trade receivable balances and current economic conditions that may affect a customer’s ability to make payments. Based on this review, the Company specifically reserves for those accounts deemed uncollectible. When receivables are determined to be uncollectible, principal amounts of such receivables outstanding are deducted from the allowance. The allowance for doubtful accounts was $3.9 million and $6.3 million as of December 31, 2016 and 2015, respectively. If the financial condition of a significant distributor or customer were to deteriorate, the Company’s operating results could be adversely affected. As of December 31, 2016 and 2015, there were no individual customers that accounted for over 10% of gross accounts receivable.
Inventory
Inventories are stated at the lower of cost or market on a standard cost basis, which approximates actual cost. The Company’s inventories primarily consist of finished goods as of December 31, 2016 and 2015.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is generally three years for computer equipment and software, the lesser of the lease term or ten years for leasehold improvements, which is the estimated useful life, seven years for office equipment and furniture and the Company’s enterprise resource planning system and 40 years for buildings.
During 2016 and 2015, the Company retired $220.8 million and $25.8 million, respectively, in property and equipment that were no longer in use. At the time of retirement, the remaining net book value of the assets retired was not material and no material asset retirement obligations were associated with them.
Property and equipment consist of the following: |
| | | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| | (In thousands) |
Buildings | | $ | 85,092 |
| | $ | 85,092 |
|
Computer equipment | | 190,887 |
| | 271,461 |
|
Software | | 538,905 |
| | 487,191 |
|
Equipment and furniture | | 83,387 |
| | 123,649 |
|
Leasehold improvements | | 199,303 |
| | 217,200 |
|
| | 1,097,574 |
| | 1,184,593 |
|
Less: accumulated depreciation and amortization | | (797,224 | ) | | (852,460 | ) |
Assets under construction | | 15,883 |
| | 14,097 |
|
Land | | 27,587 |
| | 27,587 |
|
Total | | $ | 343,820 |
| | $ | 373,817 |
|
Long-Lived Assets
The Company reviews for impairment of long-lived assets and certain identifiable intangible assets to be held and used whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss is based on the fair value of the asset compared to its carrying value. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
For the year ended December 31, 2015, the Company identified certain intangible assets that were impaired within the Enterprise and Service Provider segment and recorded non-cash impairment charges of $123.0 million. These non-recurring fair value measurements were categorized as Level 3, as significant unobservable inputs were used in the valuation analysis. The impairment charges are included in Impairment of product related intangible assets and Impairment of other intangible assets in the accompanying consolidated statements of income. See Note 3 for more information regarding the Company's acquisitions and Note 5 for more information regarding fair value measurements.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
The Company accounts for goodwill in accordance with the authoritative guidance, which requires that goodwill and certain intangible assets are not amortized, but are subject to an annual impairment test. There was no impairment of goodwill or indefinite lived intangible assets as a result of the annual impairment analysis completed during the fourth quarters of 2016 and 2015, respectively. The authoritative guidance provides entities with an option to perform a qualitative assessment to determine whether further quantitative impairment testing is necessary. The Company performed the qualitative assessment when it performed its goodwill impairment test in the fourth quarter of 2016. As a result of the qualitative analysis, no further quantitative impairment test was deemed necessary. See Note 3 for more information regarding the Company's acquisitions and Note 11 for more information regarding the Company's segments.
As part of its continued transformation, effective January 1, 2016, the Company reorganized a part of its business by creating a new Cloud Services product grouping, which resulted in a change in segment composition. In connection with this change, during the first quarter of 2016, the Company performed an assessment of its goodwill reporting units and determined that the Cloud Services reorganization resulted in the identification of three goodwill reporting units (Enterprise and Service Provider excluding Cloud Services, Cloud Services and GoTo Business). The identification of these reporting units triggered a reallocation of goodwill as of January 1, 2016 based on the relative fair value approach, however no further quantitative impairment test was deemed necessary. The Company’s reportable segments remain unchanged.
On January 31, 2017, Citrix completed the separation of the GoTo Business. As a result, the Company is reevaluating its operating segments in the first quarter of 2017.
The following table presents the change in goodwill allocated to the Company’s reportable segments during 2016 and 2015 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at January 1, 2016 | | Additions | | Other | | Balance at December 31, 2016 | | Balance at January 1, 2015 | | Additions | | Other | | Balance at December 31, 2015 |
Enterprise and Service Provider | $ | 1,581,805 |
| (1) | $ | 4,713 |
| (2) | $ | (625 | ) | (3) | $ | 1,585,893 |
| | $ | 1,434,369 |
| | $ | 61,641 |
| | $ | (740 | ) | (5) | $ | 1,495,270 |
|
GoTo Business | 380,917 |
| (1) | — |
| | — |
| | 380,917 |
| | 362,482 |
| | 104,970 |
| | — |
| | 467,452 |
|
Consolidated | $ | 1,962,722 |
| | $ | 4,713 |
| | $ | (625 | ) | | $ | 1,966,810 |
| | $ | 1,796,851 |
| | $ | 166,611 |
| (4) | $ | (740 | ) | | $ | 1,962,722 |
|
| |
(1) | Beginning balance as of January 1, 2016 adjusted to reflect the Company’s re-alignment of its reporting unit structure. The change resulted in a goodwill reallocation of $86.5 million from the GoTo Business segment into the Enterprise and Service Provider segment. |
| |
(2) | Amount relates to preliminary purchase price allocation of goodwill associated with the 2016 business combination. See Note 3 for more information regarding the Company's acquisitions. |
| |
(3) | Amount relates to goodwill associated with the sale of the Company’s CloudPlatform and CloudPortal Business Manager products and to adjustments to the preliminary purchase price allocation associated with 2015 acquisitions. See Note 3 for more information regarding the Company's acquisitions and divestitures. |
| |
(4) | Amount primarily relates to 2015 acquisitions. See Note 3 for more information regarding the Company’s acquisitions. |
| |
(5) | Amount primarily relates to adjustments to purchase price allocations for certain acquisitions. |
Intangible Assets
The Company has intangible assets which were primarily acquired in conjunction with business combinations and technology purchases. Intangible assets with finite lives are recorded at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally three to seven years, except for patents, which are amortized over the lesser of their remaining life or ten years. In-process R&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When in-process R&D projects are completed, the corresponding amount is reclassified as an amortizable intangible asset and is amortized over the asset's estimated useful life.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets consist of the following (in thousands):
|
| | | | | | | | | |
| December 31, 2016 |
| Gross Carrying Amount | | Accumulated Amortization | | Weighted-Average Life (Years) |
Product related intangible assets | $ | 602,060 |
| | $ | 509,706 |
| | 5.54 |
Other | 450,813 |
| | 315,174 |
| | 6.87 |
Total | $ | 1,052,873 |
| | $ | 824,880 |
| | 6.11 |
|
| | | | | | | | | |
| December 31, 2015 |
| Gross Carrying Amount | | Accumulated Amortization | | Weighted-Average Life (Years) |
Product related intangible assets | $ | 589,847 |
| | $ | 476,141 |
| | 5.67 |
Other | 447,816 |
| | 278,104 |
| | 6.48 |
Total | $ | 1,037,663 |
| | $ | 754,245 |
| | 6.27 |
Amortization and impairment of product related intangible assets, which consists primarily of product-related technologies and patents, was $60.4 million and $131.2 million for the year ended December 31, 2016 and 2015, respectively, and is classified as a component of Cost of net revenues in the accompanying consolidated statements of income. Amortization and impairment of other intangible assets, which consist primarily of customer relationships, trade names and covenants not to compete was $29.2 million and $108.8 million for the year ended December 31, 2016 and 2015, respectively, and is classified as a component of Operating expenses in the accompanying consolidated statements of income.
The Company monitors its intangible assets for indicators of impairment. If the Company determines that an impairment has occurred, it will write-down the intangible asset to its fair value. For certain intangible assets where the unamortized balances exceed the undiscounted future net cash flows, the Company measures the amount of the impairment by calculating the amount by which the carrying values exceed the estimated fair values, which are based on projected discounted future net cash flows. During the year ended December 31, 2015, the Company tested certain intangible assets for recoverability due to changes in facts and circumstances associated with the shift in strategic focus and reduced profitability expectations. As a result, due to disruptions in the business as a result of the announced plan to explore strategic alternatives, the Company identified certain definite-lived intangible assets, primarily customer relationships from the acquisition of ByteMobile, that were impaired within the Enterprise and Service Provider segment and recorded non-cash impairment charges of $123.0 million to write down the intangible assets to their estimated fair value of $26.8 million. Of the impairment charge, $67.1 million is included in Impairment of other intangible assets and $55.9 million is included in Impairment of product related intangible assets in the accompanying consolidated statements of income. This non-recurring fair value measurement was categorized as Level 3, as significant unobservable inputs were used in the valuation analysis. Key assumptions used in the valuation include forecasts of revenue and expenses over an extended period of time, customer retention rates, tax rates, and estimated costs of debt and equity capital to discount the projected cash flows. Certain of these assumptions involve significant judgment, are based on management’s estimate of current and forecasted market conditions and are sensitive and susceptible to change, therefore, further disruptions in the business could potentially result in additional amounts becoming impaired.
Estimated future amortization expense of intangible assets with finite lives as of December 31, 2016 is as follows (in thousands):
|
| | | |
Year ending December 31, | |
2017 | $ | 69,792 |
|
2018 | 62,291 |
|
2019 | 39,750 |
|
2020 | 21,101 |
|
2021 | 11,657 |
|
Thereafter | 23,402 |
|
Total | $ | 227,993 |
|
Software Development Costs
The authoritative guidance requires certain internal software development costs related to software to be sold to be capitalized upon the establishment of technological feasibility. The Company's software development costs incurred subsequent
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to achieving technological feasibility have not been significant and substantially all software development costs have been expensed as incurred.
Internal Use Software
In accordance with the authoritative guidance, the Company capitalizes external direct costs of materials and services and internal costs such as payroll and benefits of those employees directly associated with the development of new functionality in internal use software. The amount of costs capitalized in 2016 and 2015 relating to internal use software was $36.2 million and $46.2 million, respectively. These costs are being amortized over the estimated useful life of the software, which is generally three to seven years, and are included in property and equipment in the accompanying consolidated balance sheets. The total amounts charged to expense relating to internal use software was approximately $49.6 million, $44.6 million and $37.3 million, during the years ended December 31, 2016, 2015 and 2014, respectively.
The Company capitalized costs related to internally developed computer software to be sold as a service related to its Cloud Services products and GoTo Business offerings, incurred during the application development stage, of $48.6 million and $47.7 million, during the years ended December 31, 2016 and December 31, 2015, respectively, and is amortizing these costs over the expected lives of the related services, which is generally two years, and are included in property and equipment in the accompanying consolidated balance sheets. The total amounts charged to expense relating to internally developed computer software to be sold as a service was approximately $43.9 million, $37.2 million and $29.5 million, during the years ended December 31, 2016, 2015 and 2014, respectively.
Revenue Recognition
Net revenues include the following categories: Product and licenses, SaaS, License updates and maintenance and Professional services. Product and licenses revenues primarily represent fees related to the licensing of the Company’s software and hardware appliances. These revenues are reflected net of sales allowances, cooperative advertising agreements, partner incentive programs and provisions for returns. SaaS revenues consist primarily of fees related to online service agreements, which are recognized ratably over the contract term, which is typically 12 months. In addition, SaaS revenues may also include set-up fees, which are recognized ratably over the contract term or the expected customer life, whichever is longer. License updates and maintenance revenues consist of fees related to the Subscription Advantage program and maintenance fees, which include technical support and hardware and software maintenance. Subscription Advantage and maintenance fees are recognized ratably over the term of the contract, which is typically 12 to 24 months. The Company capitalizes certain third-party commissions related to Subscription Advantage, maintenance and support renewals. The capitalized commissions are amortized to Sales, marketing and services expense at the time the related deferred revenue is recognized as revenue. Hardware and software maintenance and support contracts are typically sold separately. Hardware maintenance includes technical support, the latest software upgrades when and if they become available, and replacement of malfunctioning appliances. Dedicated account management is available as an add-on to the program for a higher level of service. Software maintenance, including the new Customer Success Services, includes unlimited technical support, immediate access to software upgrades, enhancements and maintenance releases when and if they become available during the term of the contract and configuration and installation support along with acceleration and automation tools. Professional services revenues are comprised of fees from consulting services related to the implementation of the Company’s products and fees from product training and certification, which are recognized as the services are provided.
The Company recognizes revenue when it is earned and when all of the following criteria are met: (1) persuasive evidence of the arrangement exists; (2) delivery has occurred or the service has been provided and the Company has no remaining obligations; (3) the fee is fixed or determinable; and (4) collectability is probable.
The majority of the Company’s product and license revenue consists of revenue from the sale of software products. Software sales generally include a perpetual license to the Company’s software and is subject to the industry specific software revenue recognition guidance. In accordance with this guidance, the Company allocates revenue to license updates related to its stand-alone software and any other undelivered elements of the arrangement based on vendor specific objective evidence (“VSOE”) of fair value of each element and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria described above have been met. The balance of the revenues, net of any discounts inherent in the arrangement, is recognized at the outset of the arrangement using the residual method as the product licenses are delivered. If management cannot objectively determine the fair value of each undelivered element based on VSOE of fair value, revenue recognition is deferred until all elements are delivered, all services have been performed, or until fair value can be objectively determined.
For hardware appliance and software transactions, the arrangement consideration is allocated to stand-alone software deliverables as a group and the non-software deliverables based on the relative selling prices using the selling price hierarchy in
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the revenue recognition guidance. The selling price hierarchy for a deliverable is based on its VSOE if available, third-party evidence of selling price ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. The Company then recognizes revenue on each deliverable in accordance with its policies for product and service revenue recognition. VSOE of selling price is based on the price charged when the element is sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices fall within a reasonable range based on historical discounting trends for specific products and services. TPE of selling price is established by evaluating competitor products or services in stand-alone sales to similarly situated customers. However, as the Company’s products contain a significant element of proprietary technology and its solutions offer substantially different features and functionality, the comparable pricing of products with similar functionality typically cannot be obtained. Additionally, as the Company is unable to reliably determine what competitors products’ selling prices are on a stand-alone basis, the Company is not typically able to determine TPE. The estimate of selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies and through different sales channels and competitor pricing strategies.
The Citrix Service Provider ("CSP") program provides subscription-based services in which the CSP partners host software services to their end users. The fees from the CSP program are recognized based on usage and as the CSP services are provided to their end users.
For the Company’s non-software transactions, it allocates the arrangement consideration based on the relative selling price of the deliverables. For the Company’s hardware appliances, it uses ESP as its selling price. For the Company’s support and services, it generally uses VSOE as its selling price. When the Company is unable to establish selling price using VSOE for its support and services, the Company uses ESP in its allocation of arrangement consideration.
The Company’s GoTo Business products and a majority of the Company's Cloud Services offerings are considered hosted service arrangements per the authoritative guidance, or SaaS. Generally, the Company’s GoTo Business products are sold separately and not bundled with the Enterprise and Service Provider segment’s products and services.
In the normal course of business, the Company is not obligated to accept product returns from its distributors under any conditions, unless the product item is defective in manufacture. The Company establishes provisions for estimated returns, as well as other sales allowances, concurrently with the recognition of revenue. The provisions are established based upon consideration of a variety of factors, including, among other things, recent and historical return rates for both specific products and distributors and the impact of any new product releases and projected economic conditions. Product returns are provided for in the consolidated financial statements and have historically been within management’s expectations. Allowances for estimated product returns amounted to approximately $2.0 million and $1.4 million at December 31, 2016 and December 31, 2015, respectively. The Company also records estimated reductions to revenue for customer programs and incentive offerings including volume-based incentives. The Company could take actions to increase its customer incentive offerings, which could result in an incremental reduction to revenue at the time the incentive is offered.
Product Concentration
The Company derives a substantial portion of its revenues from its Workspace Services solutions, which include its XenDesktop and XenApp products and related services, and anticipates that these products and future derivative products and product lines based upon this technology will continue to constitute a majority of its revenue. The Company could experience declines in demand for its Workspace Services solutions and other products, whether as a result of general economic conditions, the delay or reduction in technology purchases, new competitive product releases, price competition, lack of success of its strategic partners, technological change or other factors. Additionally, the Company's Delivery Networking products generate revenues from a limited number of customers. As a result, if the Delivery Networking product grouping loses certain customers or one or more such customers significantly decreases its orders, the Company's business, results of operations and financial condition could be adversely affected.
Cost of Net Revenues
Cost of product and license revenues consists primarily of hardware, shipping expense, royalties, product media and duplication, manuals and packaging materials. In addition, the Company is a party to licensing agreements with various entities, which give the Company the right to use certain software code in its products or in the development of future products in exchange for the payment of fixed fees or amounts based upon the sales of the related product. The licensing agreements generally have terms ranging from one to five years, and generally include renewal options. However, some agreements are perpetual unless expressly terminated. Royalties and other costs related to these agreements are also included in Cost of net revenues.
Cost of services and maintenance revenues consists primarily of compensation and other personnel-related costs of providing technical support and consulting, as well as the costs related to providing the Company's software as a service
offerings, which includes the cost to support the voice and video offerings in the Company's Communications Cloud products. Also included in Cost of net revenues is amortization of product related intangible assets and impairment of product related intangible assets.
Foreign Currency
The functional currency for all of the Company’s wholly-owned foreign subsidiaries is the U.S. dollar. Monetary assets and liabilities of such subsidiaries are remeasured into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are remeasured at average rates prevailing during the year. Effective January 1, 2015, the functional currency of the Company’s wholly-owned foreign subsidiaries of its GoTo Business segment became the U.S. dollar as a result of a reorganization in the foreign subsidiaries' operations. Prior to January 1, 2015, the functional currency of the Company’s wholly-owned foreign subsidiaries of its GoTo Business segment was the currency of the country in which each subsidiary is located. The Company translated assets and liabilities of these foreign subsidiaries at exchange rates in effect at the balance sheet date and included accumulated net translation adjustments in equity as a component of Accumulated other comprehensive loss. The change in functional currency is applied on a prospective basis, therefore any gains and losses that were previously recorded in Accumulated other comprehensive loss remain unchanged from January 1, 2015. Foreign currency transaction gains and losses are the result of exchange rate changes on transactions denominated in currencies other than the functional currency, including U.S. dollars. The remeasurement of those foreign currency transactions is included in determining net income or loss for the period of exchange. See Note 11 for information on the Company's Enterprise and Service Provider and GoTo Business segments.
Derivatives and Hedging Activities
In accordance with the authoritative guidance, the Company records derivatives at fair value as either assets or liabilities on the balance sheet. For derivatives that are designated as and qualify as effective cash flow hedges, the portion of gain or loss on the derivative instrument effective at offsetting changes in the hedged item is reported as a component of Accumulated other comprehensive loss and reclassified into earnings as operating expense, net, when the hedged transaction affects earnings. Derivatives not designated as hedging instruments are adjusted to fair value through earnings as Other expense, net, in the period during which changes in fair value occur. The application of the authoritative guidance could impact the volatility of earnings.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes attributing all derivatives that are designated as cash flow hedges to floating rate assets or liabilities or forecasted transactions. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in cash flows of the hedged item. Fluctuations in the value of the derivative instruments are generally offset by changes in the hedged item; however, if it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively for the affected derivative.
The Company is exposed to risk of default by its hedging counterparties. Although this risk is concentrated among a limited number of counterparties, the Company’s foreign exchange hedging policy attempts to minimize this risk by placing limits on the amount of exposure that may exist with any single financial institution at a time.
Pension Liability
The Company provides retirement benefits to certain employees who are not U.S. based. Generally, benefits under these programs are based on an employee’s length of service and level of compensation. The majority of these programs are commonly referred to as termination indemnities, which provide retirement benefits in accordance with programs mandated by the governments of the countries in which such employees work.
The Company had accrued $13.2 million and $13.8 million for these pension liabilities at December 31, 2016 and 2015, respectively. Expenses for the programs for 2016, 2015 and 2014 amounted to $2.5 million, $3.8 million and $3.2 million, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. The Company has advertising agreements with, and purchases advertising from, online media providers to advertise its products. The Company also has cooperative advertising agreements with certain distributors and resellers whereby the Company will reimburse distributors and resellers for qualified advertising of Company products. Reimbursement is made once the distributor, reseller or provider provides substantiation of qualified expenses. The Company estimates the impact of these expenses and recognizes them at the time of product sales as a reduction
of net revenue in the accompanying consolidated statements of income. The total costs the Company recognized related to advertising were approximately $155.8 million, $144.1 million and $150.1 million, during the years ended December 31, 2016, 2015 and 2014, respectively.
Income Taxes
The Company and one or more of its subsidiaries is subject to United States federal income taxes, as well as income taxes of multiple state and foreign jurisdictions. The Company is currently not subject to a U.S. federal income tax examination. With few exceptions, the Company is no longer subject to U.S., federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2013.
In the ordinary course of global business, there are transactions for which the ultimate tax outcome is uncertain; thus, judgment is required in determining the worldwide provision for income taxes. The Company provides for income taxes on transactions based on its estimate of the probable liability. The Company adjusts its provision as appropriate for changes that impact its underlying judgments. Changes that impact provision estimates include such items as jurisdictional interpretations on tax filing positions based on the results of tax audits and general tax authority rulings. Due to the evolving nature of tax rules combined with the large number of jurisdictions in which the Company operates, estimates of its tax liability and the realizability of its deferred tax assets could change in the future, which may result in additional tax liabilities and adversely affect the Company’s results of operations, financial condition and cash flows.
The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of the process of preparing its consolidated financial statements. The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company reviews deferred tax assets periodically for recoverability and makes estimates and judgments regarding the expected geographic sources of taxable income and gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates made by management include the provision for doubtful accounts receivable, the provision to reduce obsolete or excess inventory to market, the provision for estimated returns, as well as sales allowances, the assumptions used in the valuation of stock-based awards, the assumptions used in the discounted cash flows to mark certain of its investments to market, the valuation of the Company’s goodwill, net realizable value of product related and other intangible assets, the fair value of convertible senior notes, the provision for lease losses, the provision for income taxes and the amortization and depreciation periods for intangible and long-lived assets. While the Company believes that such estimates are fair when considered in conjunction with the consolidated financial position and results of operations taken as a whole, the actual amounts of such items, when known, will vary from these estimates.
Accounting for Stock-Based Compensation Plans
The Company has various stock-based compensation plans for its employees and outside directors and accounts for stock-based compensation arrangements in accordance with the authoritative guidance, which requires the Company to measure and record compensation expense in its consolidated financial statements using a fair value method. See Note 7 for further information regarding the Company’s stock-based compensation plans.
Earnings per Share
Basic earnings per share is calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the vesting or exercise of stock awards (calculated using the treasury stock method) during the period they were outstanding. Certain shares under the Company’s stock-based compensation programs were excluded from the computation of diluted earnings per share due to their anti-dilutive effect for the respective periods in which they were outstanding. Additionally, the computation of diluted earnings per share does not include the effect of the potential outstanding common stock from the Company's convertible senior notes and warrants because the effect would have been anti-dilutive. The reconciliation of the numerator and denominator of the earnings per share calculation is presented in Note 15.
Reclassifications
Certain reclassifications of the prior years' amounts have been made to conform to the current year's presentation.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS AND DIVESTITURES
2016 Business Combination
On September 7, 2016, the Company acquired all of the issued and outstanding securities of a privately held company. The acquisition provides a software solution that cuts the cost of desktop and application virtualization and delivers workspace performance by accelerating desktop logon and application response times for any Microsoft Windows-based environment. The acquired company became part of the Company’s Enterprise and Service Provider segment. The total cash consideration for this transaction was approximately $11.5 million, net of $0.8 million cash acquired. Transaction costs of $0.4 million are presented within General and administrative expense in the accompanying consolidated statements of income. The assets related to this acquisition relate primarily to $8.2 million of product technology identifiable intangible assets with a 4 year life and goodwill of $4.7 million.
2016 Asset Acquisition
On January 8, 2016, the Company acquired certain monitoring technology assets from a privately-held company for total cash consideration of $23.6 million. The acquisition provides a monitoring solution for Citrix's products as it relates to Microsoft Windows applications and desktop delivery. The identifiable intangible assets acquired related primarily to product technologies.
2016 Divestiture
On February 29, 2016, the Company sold its CloudPlatform and CloudPortal Business Manager products to Persistent Telecom Solutions, Inc. The agreement included contingent consideration in the form of an earnout provision based on revenue for a period of five years following the closing date. Any income associated with the contingent consideration will be recognized if the earnout provisions are met. No earnout provisions were met during the year ended December 31, 2016.
2015 Acquisitions
Sanbolic
On January 8, 2015, the Company acquired all of the issued and outstanding securities of Sanbolic, Inc. (“Sanbolic”). The Company expected the Sanbolic technology would reduce the complexity of Microsoft Windows application delivery and desktop virtualization deployments. Sanbolic became part of the Company's Enterprise and Service Provider segment. The total cash consideration for this transaction was approximately $89.4 million, net of $0.2 million cash acquired. Transaction costs associated with the acquisition were $0.5 million, of which the Company expensed $0.3 million during the year ended December 31, 2015, and are included in General and administrative expense in the accompanying consolidated statements of income. In addition, in connection with the acquisition, the Company assumed non-vested stock units which were converted into the right to receive, in the aggregate, up to 37,057 shares of the Company's common stock, for which the vesting period began on the closing of the transaction. During the fourth quarter of 2015, management performed a comprehensive operational review which included an evaluation of all of the Company's products. In connection with this review, management determined that the Sanbolic technology was a non-core solution and that the related product offerings will no longer be developed. As a result, the Company impaired the remaining carrying value of the intangible assets related to this acquisition in the fourth quarter of 2015.
Grasshopper
On May 18, 2015, the Company acquired all of the membership interests of Grasshopper Group, LLC (“Grasshopper”), a leading provider of cloud-based phone solutions for small businesses. With the acquisition, the Company will expand its breadth of communication and collaboration solutions for small businesses, including GoToMeeting, GoToTraining, GoToWebinar and OpenVoice. Grasshopper became part of the GoTo Business segment. Total cash consideration for this transaction was approximately $161.5 million, net of $3.6 million cash acquired. Transaction costs associated with the acquisition were $0.3 million, all of which the Company expensed during the year ended December 31, 2015 and are included in General and administrative expense in the accompanying consolidated statements of income. In addition, in connection with the acquisition, the Company assumed non-vested stock units which were converted into the right to receive, in the aggregate, up to 105,765 shares of the Company's common stock, for which the vesting period commenced on the closing of the transaction.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENTS
Available-for-sale Investments
Investments in available-for-sale securities at fair value were as follows for the periods ended (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | December 31, 2015 |
Description of the Securities | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Agency securities | $ | 411,963 |
| | $ | 699 |
| | $ | (1,169 | ) | | $ | 411,493 |
| | $ | 530,981 |
| | $ | 757 |
| | $ | (1,216 | ) | | $ | 530,522 |
|
Corporate securities | 843,037 |
| | 193 |
| | (2,114 | ) | | 841,116 |
| | 699,210 |
| | 90 |
| | (1,929 | ) | | 697,371 |
|
Municipal securities | 9,989 |
| | 3 |
| | (4 | ) | | 9,988 |
| | 14,872 |
| | 14 |
| | (8 | ) | | 14,878 |
|
Government securities | 445,083 |
| | 135 |
| | (600 | ) | | 444,618 |
| | 152,376 |
| | 9 |
| | (340 | ) | | 152,045 |
|
Total | $ | 1,710,072 |
| | $ | 1,030 |
| | $ | (3,887 | ) | | $ | 1,707,215 |
| | $ | 1,397,439 |
| | $ | 870 |
| | $ | (3,493 | ) | | $ | 1,394,816 |
|
The change in net unrealized (losses) gains on available-for-sale securities recorded in Other comprehensive (loss) income includes unrealized (losses) gains that arose from changes in market value of specifically identified securities that were held during the period, gains (losses) that were previously unrealized, but have been recognized in current period net income due to sales, as well as prepayments of available-for-sale investments purchased at a premium. This reclassification has no effect on total comprehensive income or equity and was not material for all periods presented. See Note 16 for more information related to comprehensive income.
The average remaining maturities of the Company’s short-term and long-term available-for-sale investments at December 31, 2016 were approximately six months and two years, respectively.
Realized Gains and Losses on Available-for-sale Investments
For the years ended December 31, 2016 and 2015, the Company had realized gains on the sales of available-for-sale investments of $1.7 million and $0.8 million, respectively. For the years ended December 31, 2016 and 2015, the Company had realized losses on available-for-sale investments of $0.5 million and $1.0 million, respectively, primarily related to sales of these investments during the period. All realized gains and losses related to the sales of available-for-sale investments are included in Other expense, net, in the accompanying consolidated statements of income.
The Company continues to monitor its overall investment portfolio and if the credit ratings of the issuers of its investments deteriorate or if the issuers experience financial difficulty, including bankruptcy, the Company may be required to make adjustments to the carrying value of the securities in its investment portfolio and recognize impairment charges for declines in fair value that are determined to be other-than-temporary.
Unrealized Losses on Available-for-Sale Investments
The gross unrealized losses on the Company’s available-for-sale investments that are not deemed to be other-than-temporarily impaired were $3.9 million and $3.5 million as of December 31, 2016 and 2015, respectively. Because the Company does not intend to sell any of its investments in an unrealized loss position and it is more likely than not that it will not be required to sell the securities before the recovery of its amortized cost basis, which may not occur until maturity, it does not consider the securities to be other-than-temporarily impaired.
Cost Method Investments
The Company held direct investments in privately-held companies of approximately $19.7 million and $19.9 million as of December 31, 2016 and 2015, respectively, which are accounted for based on the cost method and are included in Other assets in the accompanying consolidated balance sheets. The Company periodically reviews these investments for impairment. If the Company determines that an other-than-temporary impairment has occurred, it will write-down the investment to its fair value. The Company determined that certain cost method investments were impaired during 2016, 2015 and 2014 and recorded a total charge of $1.1 million, $3.3 million, and $8.3 million, respectively, which is included in Other expense, net in the accompanying consolidated statements of income. During 2016, 2015 and 2014, certain companies in which the Company held direct investments were acquired by third parties and as a result of these sales transactions the Company recorded gains of $1.7 million, $8.7 million and 2.9 million, respectively, which was included in Other expense, net in the accompanying consolidated statements of income. See Note 5 for more information.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as an exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service (the “Service”) which uses quoted market prices for identical or comparable instruments rather than direct observations of quoted prices in active markets. The Service applies a four level hierarchical pricing methodology to all of the Company’s fixed income securities based on the circumstances. The hierarchy starts with the highest priority pricing source, then subsequently uses inputs obtained from other third-party sources and large custodial institutions. The Service’s providers utilize a variety of inputs to determine their quoted prices. These inputs may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. Substantially all of the Company’s available-for-sale investments are valued utilizing inputs obtained from the Service and accordingly are categorized as Level 2 in the table below. The Company periodically independently assesses the pricing obtained from the Service and historically has not adjusted the Service's pricing as a result of this assessment. Available-for-sale securities are included in Level 3 when relevant observable inputs for a security are not available.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy. In certain instances, the inputs used to measure fair value may meet the definition of more than one level of the fair value hierarchy. The input with the lowest level priority is used to determine the applicable level in the fair value hierarchy.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
|
| | | | | | | | | | | | | | | |
| As of December 31, 2016 | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) |
Assets: | | | | | | | |
Cash and cash equivalents: | | | | | | | |
Cash | $ | 649,498 |
| | $ | 649,498 |
| | $ | — |
| | $ | — |
|
Money market funds | 224,765 |
| | 224,765 |
| | — |
| | — |
|
Corporate securities | 82,693 |
| | — |
| | 82,693 |
| | — |
|
Available-for-sale securities: | | | | | | | |
Agency securities | 411,493 |
| | — |
| | 411,493 |
| | — |
|
Corporate securities | 841,116 |
| | — |
| | 839,968 |
| | 1,148 |
|
Municipal securities | 9,988 |
| | — |
| | 9,988 |
| | — |
|
Government securities | 444,618 |
| | — |
| | 444,618 |
| | — |
|
Prepaid expenses and other current assets: | | | | | | | |
Foreign currency derivatives | 2,506 |
| | — |
| | 2,506 |
| | — |
|
Total assets | $ | 2,666,677 |
| | $ | 874,263 |
| | $ | 1,791,266 |
| | $ | 1,148 |
|
Accrued expenses and other current liabilities: | | | | | | | |
Foreign currency derivatives | 4,435 |
| | — |
| | 4,435 |
| | — |
|
Total liabilities | $ | 4,435 |
| | $ | — |
| | $ | 4,435 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| As of December 31, 2015 | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) |
Assets: | | | | | | | |
Cash and cash equivalents: | | | | | | | |
Cash | $ | 261,962 |
| | $ | 261,962 |
| | $ | — |
| | $ | — |
|
Money market funds | 102,968 |
| | 102,968 |
| | — |
| | — |
|
Corporate securities | 3,588 |
| | — |
| | 3,588 |
| | — |
|
Available-for-sale securities: | | | | | | | |
Agency securities | 530,522 |
| | — |
| | 530,522 |
| | — |
|
Corporate securities | 697,371 |
| | — |
| | 695,809 |
| | 1,562 |
|
Municipal securities | 14,878 |
| | — |
| | 14,878 |
| | — |
|
Government securities | 152,045 |
| | — |
| | 152,045 |
| | — |
|
Prepaid expenses and other current assets: | | | | | | | |
Foreign currency derivatives | 1,063 |
| | — |
| | 1,063 |
| | — |
|
Total assets | $ | 1,764,397 |
| | $ | 364,930 |
| | $ | 1,397,905 |
| | $ | 1,562 |
|
Accrued expenses and other current liabilities: | | | | | | | |
Foreign currency derivatives | 3,678 |
| | — |
| | 3,678 |
| | — |
|
Total liabilities | $ | 3,678 |
| | $ | — |
| | $ | 3,678 |
| | $ | — |
|
The Company’s fixed income available-for-sale security portfolio generally consists of investment grade securities from diverse issuers with a minimum credit rating of A-/A3 and a weighted-average credit rating of AA-/Aa3. The Company values these securities based on pricing from the Service, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value, and accordingly, the Company classifies all of its fixed income available-for-sale securities as Level 2.
The Company measures its cash flow hedges, which are classified as Prepaid expenses and other current assets and Accrued expenses and other current liabilities, at fair value based on indicative prices in active markets (Level 2 inputs).
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets Measured at Fair Value on a Non-recurring Basis Using Significant Unobservable Inputs (Level 3)
During 2016, certain cost method investments with a combined carrying value of $1.2 million were determined to be impaired and written down to their fair values of $0.1 million, resulting in impairment charges of $1.1 million. During 2015, certain cost method investments with a combined carrying value of $3.4 million were determined to be impaired and have been written down to their fair values of $0.1 million resulting in impairment charges of $3.3 million. The impairment charges are included in Other expense, net in the accompanying consolidated statements of income for the years ended December 31, 2016 and 2015. In determining the fair value of cost method investments, the Company considers many factors including but not limited to operating performance of the investee, the amount of cash that the investee has on-hand, the ability to obtain additional financing and the overall market conditions in which the investee operates. The fair value of the cost method investments represent a Level 3 valuation as the assumptions used in valuing these investments were not directly or indirectly observable. See Note 4 for more information regarding cost method investments.
For certain intangible assets where the unamortized balances exceeded the undiscounted future net cash flows, the Company measures the amount of the impairment by calculating the amount by which the carrying values exceed the estimated fair values, which are based on projected discounted future net cash flows. These non-recurring fair value measurements are categorized as Level 3 significant unobservable inputs. See Note 2 to the Company's consolidated financial statements for detailed information related to Goodwill and Other Intangible Assets.
In connection with the change in segment composition, during the first quarter of 2016 the Company performed an assessment of its goodwill reporting units and determined that the recent Cloud Services reorganization resulted in the identification of three goodwill reporting units. The identification of these reporting units triggered a reallocation of goodwill as of January 1, 2016 based on the relative fair value approach. The fair value of each reporting unit was determined using a combination of the market approach and the income approach. Under the market approach, fair value is based on revenue and earnings multiples for guideline public companies and guideline transactions in the reporting unit's peer group. Specific to the income approach, key assumptions used include forecasts of revenue and expenses over an extended period of time, tax rates, long term growth rates and estimated costs of debt and equity capital to discount the projected cash flows. This non-recurring fair value measurement was categorized as Level 3, as significant unobservable inputs were used in the valuation analysis. Certain of these assumptions involve significant judgment, are based on management’s estimate of current and forecasted market conditions and are sensitive and susceptible to change. For Level 3 measurements, significant increases or decreases in long-term growth rates or discount rates in isolation or in combination could result in a significantly lower or higher fair value measurement. See Note 2 to the Company's consolidated financial statements for detailed information related to Goodwill and Other Intangible Assets.
Additional Disclosures Regarding Fair Value Measurements
The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of these items.
As of December 31, 2016, the fair value of the Convertible Notes, which was determined based on inputs that are observable in the market (Level 2) based on the closing trading price per $100 as of the last day of trading for the year ended December 31, 2016, and carrying value of debt instruments (carrying value excludes the equity component of the Company’s Convertible Notes classified in equity) was as follows (in thousands):
|
| | | | | | | |
| Fair Value | | Carrying Value |
Convertible Senior Notes | $ | 1,674,688 |
| | $ | 1,348,156 |
|
See Note 12 for more information on the Convertible Notes.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses consist of the following:
|
| | | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| | (In thousands) |
Accrued compensation and employee benefits | | $ | 170,219 |
| | $ | 184,286 |
|
Other accrued expenses | | 132,668 |
| | 133,182 |
|
Total | | $ | 302,887 |
| | $ | 317,468 |
|
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE STOCK-BASED COMPENSATION AND BENEFIT PLANS
Plans
The Company’s stock-based compensation program is a long-term retention program that is intended to attract and reward talented employees and align stockholder and employee interests. As of December 31, 2016, the Company had one stock-based compensation plan under which it was granting equity awards. The Company is currently granting stock-based awards from its 2014 Equity Incentive Plan (the "2014 Plan"). In December 2014, the Company's Board of Directors approved the 2015 Employee Stock Purchase Plan (the “2015 ESPP”), which was approved by stockholders at the Company's Annual Meeting of Stockholders held on May 28, 2015. The 2015 ESPP has replaced the Company's Amended and Restated 2005 Employee Stock Purchase Plan (as amended, the "2005 ESPP"). In connection with certain of the Company’s acquisitions, the Company has assumed certain plans from acquired companies. The Company’s Board of Directors has provided that no new awards will be granted under the Company’s acquired stock plans. The Company’s superseded and expired stock plans include the Amended and Restated 2005 Equity Incentive Plan and the 2005 ESPP.
Under the terms of the 2014 Plan, the Company is authorized to grant incentive stock options (“ISOs”), non-qualified stock options (“NSOs”), non-vested stock, non-vested stock units, stock appreciation rights (“SARs”), and performance units and to make stock-based awards to full and part-time employees of the Company and its subsidiaries or affiliates, where legally eligible to participate, as well as to consultants and non-employee directors of the Company. SARs and ISOs are not currently being granted. Currently, the 2014 Plan provides for the issuance of 29,000,000 shares of common stock. In addition, shares of common stock underlying any awards granted under the Company’s Amended and Restated 2005 Equity Incentive Plan, as amended, that are forfeited, canceled or otherwise terminated (other than by exercise) are added to its shares of common stock available for issuance under the 2014 Plan. Under the 2014 Plan, NSOs must be granted at exercise prices no less than fair market value on the date of grant. Non-vested stock awards may be granted for such consideration in cash, other property or services, or a combination thereof, as determined by the Company’s Compensation Committee of its Board of Directors. Stock-based awards are generally exercisable or issuable upon vesting. The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. As of December 31, 2016, there were 20,068,672 shares of common stock reserved for issuance pursuant to the Company’s stock-based compensation plans, including authorization under its 2014 Plan to grant stock-based awards covering 15,584,300 shares of common stock.
Under the 2015 ESPP, all full-time and certain part-time employees of the Company are eligible to purchase common stock of the Company twice per year at the end of a six-month payment period (a “Payment Period”). During each Payment Period, eligible employees who so elect may authorize payroll deductions in an amount no less than 1% nor greater than 10% of his or her base pay for each payroll period in the Payment Period. At the end of each Payment Period, the accumulated deductions are used to purchase shares of common stock from the Company up to a maximum of 12,000 shares for any one employee during a Payment Period. Shares are purchased at a price equal to 85% of the fair market value of the Company’s common stock, on either the first business day of the Payment Period or the last business day of the Payment Period, whichever is lower. Employees who, after exercising their rights to purchase shares of common stock in the 2015 ESPP, would own shares representing 5% or more of the voting power of the Company’s common stock, are ineligible to continue to participate under the 2015 ESPP. The 2015 ESPP provides for the issuance of a maximum of 16,000,000 shares of common stock. As of December 31, 2016, 3,872,661 shares had been issued under the 2005 ESPP. As of December 31, 2016, 974,830 shares have been issued under the 2015 ESPP. The Company recorded stock-based compensation costs related to its employee stock purchase plans of $8.8 million, $7.6 million and $5.2 million for the years ended December 31, 2016, 2015 and 2014, respectively.
The Company used the Black-Scholes model to estimate the fair value of its Employee Stock Purchase Plan awards with the following weighted-average assumptions:
|
| | | | |
| Year Ended | Year Ended |
| December 31, 2016 | December 31, 2015 |
Expected volatility factor | 0.27-0.41 |
| 0.35 |
|
Risk free interest rate | 0.25%-0.42% |
| 0.25 | % |
Expected dividend yield | 0 | % | 0 | % |
Expected life (in years) | 0.5 |
| 0.5 |
|
The Company determined the expected volatility factor by considering the implied volatility in six-month market-traded
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
options of the Company's common stock based on third party volatility quotes. The Company's decision to use implied volatility was based upon the availability of actively traded options on the Company's common stock and its assessment that implied volatility is more representative of future stock price trends than historical volatility. The risk-free interest rate was based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock options. The Company's expected dividend yield input was zero as it has not historically paid, nor expects in the future to pay, cash dividends on its common stock. The expected term is based on the term of the purchase period for grants made under the ESPP.
Expense Information under the Authoritative Guidance
As required by the authoritative guidance, the Company estimates forfeitures of stock awards and recognizes compensation costs only for those awards expected to vest. Forfeiture rates are determined based on historical experience. The Company also considers whether there have been any significant changes in facts and circumstances that would affect its forfeiture rate quarterly. Estimated forfeitures are adjusted to actual forfeiture experience as needed. The Company recorded stock-based compensation costs, related deferred tax assets and tax benefits of $184.8 million, $61.5 million and $66.1 million, respectively, in 2016, $147.4 million, $46.1 million and $52.7 million, respectively, in 2015 and $169.3 million, $46.9 million and $43.9 million, respectively, in 2014.
The detail of the total stock-based compensation recognized by income statement classification is as follows (in thousands):
|
| | | | | | | | | | | |
Income Statement Classifications | 2016 | | 2015 | | 2014 |
Cost of services and maintenance revenues | $ | 3,433 |
| | $ | 2,940 |
| | $ | 2,560 |
|
Research and development | 49,290 |
| | 47,723 |
| | 55,560 |
|
Sales, marketing and services | 54,785 |
| | 49,315 |
| | 61,925 |
|
General and administrative | 77,280 |
| | 47,390 |
| | 49,242 |
|
Total | $ | 184,788 |
| | $ | 147,368 |
| | $ | 169,287 |
|
Non-vested Stock Units
Performance, Market Performance and Service Condition Stock Units
In January 2016, the Company granted its Chief Executive Officer 220,235 non-vested stock units that vest based on certain target performance conditions; and in March 2016, the Company granted senior level employees 234,816 non-vested stock units that vest based on certain target performance conditions. The attainment level under the awards will be based on the Company's compound annualized total return to stockholders over a three-year performance period, with 100% of such stock units earned if the Company achieves total shareholder return of 10% over the performance period. Further, if the Company achieves annualized total shareholder return of less than 10% during the performance period, the awardees may earn all or a portion of the target award, but not in excess of 100% of such stock units, depending upon the Company’s relative total shareholder return compared to companies listed in the S&P Computer Software Select Index. If the Company's compound annualized total shareholder return is 5% or above, the number of non-vested stock units earned will be based on interpolation, with the maximum number of non-vested stock units earned capped at 200% of the target number of non-vested stock units for a compound annualized total return to stockholders of 30% over a three-year performance period as set forth in the award agreement. Within sixty days following an interim measurement period of 18 months, the Compensation Committee will determine the number of restricted stock units that would be deemed earned based on performance to date, and up to 33% of the target award may be earned based on such performance; however, any stock units that are deemed earned will remain subject to continued service vesting until the end of the three-year performance period, or a change in control, if earlier. Within sixty days following the conclusion of the performance period, the Company’s Compensation Committee will determine the number of restricted stock units that would vest upon the final day of the performance period based on the Company’s performance during the period and in accordance with the terms of the award. On the vesting date, the greater of the full period restricted stock units, or the interim earned restricted stock units, will vest in one installment.
In March 2015 and 2014, the Company granted senior level employees non-vested stock unit awards representing, in the aggregate, 393,464 and 378,022 non-vested stock units that vest based on certain target market performance and service conditions. The number of non-vested stock units underlying each award will be determined within sixty days of the calendar year following the end of a three-year performance period ending December 31, 2017 for the March 2015 awards and December 31, 2016 for the March 2014 awards. The attainment level under the award will be based on the Company's total return to stockholders over the performance period compared to the return on the Nasdaq Composite Total Return Index (the "XCMP"). If the Company's return is positive and meets or exceeds the indexed return, the number of non-vested stock units earned will be based on interpolation, with the maximum number of non-vested stock units earned pursuant to the award capped at 200% of the target number of non-vested stock units set forth in the award agreement if the Company's return exceeds
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the indexed return by 40% or more. If the Company's return over the performance period is positive but underperforms the index, a number of non-vested stock units will be issued, below the target award, based on interpolation; however, no non-vested stock units will be issued if the Company's return underperforms the index by more than 20% over the performance period. In the event the Company's return to stockholders is negative but still meets or exceeds the indexed return, only 75% of the target award shall be issued. If the awardee is not employed by the Company at the end of the performance period; the extent to which the awardee will vest in the award, if at all, is dependent upon the timing and character of the termination as provided in the award agreement. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company's common stock. The performance metric under the March 2014 award was met, therefore awards vested as of December 31, 2016.
The market condition requirements are reflected in the grant date fair value of the award, and the compensation expense for the award will be recognized assuming that the requisite service is rendered regardless of whether the market conditions are achieved. The grant date fair value of the non-vested performance stock unit awards was determined through the use of a Monte Carlo simulation model, which utilized multiple input variables that determined the probability of satisfying the market condition requirements applicable to each award as follows:
|
| | | | | | | | |
| March 2016 Grant | January 2016 Grant | March 2015 Grant | March 2014 Grant |
Expected volatility factor | 0.29 - 0.39 |
| 0.29 - 0.37 |
| 0.14 - 0.29 |
| 0.19 - 0.38 |
|
Risk free interest rate | 0.91 | % | 1.10 | % | 0.85 | % | 0.81 | % |
Expected dividend yield | 0 | % | 0 | % | 0 | % | 0 | % |
For the March 2016 and January 2016 grants, the range of expected volatilities utilized was based on the historical volatilities of the Company's common stock and the average of its peer group. The Company chose to use historical volatility to value these awards because historical stock prices were used to develop the correlation coefficients between the Company and its peer group in order to model the stock price movements. The volatilities used were calculated over a 3.00 year period, which is commensurate with the awards’ performance period at the date of grant. The risk free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the performance period. The Company does not intend to pay dividends on its common stock in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its model. The estimated fair value of each award as of the date of grant was $66.18 for the March 2016 grant and $49.68 for the January 2016 grant.
For the March 2015 and March 2014 grants, the range of expected volatilities utilized was based on the historical volatilities of the Company's common stock and the XCMP. The Company chose to use historical volatility to value these awards because historical stock prices were used to develop the correlation coefficients between the Company and the XCMP in order to model the stock price movements. The volatilities used were calculated over the most recent 2.76 year period, which is commensurate with the awards' performance period at the date of grant. The risk free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the performance period. The Company does not intend to pay dividends on its common stock in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its model. The estimated fair value of each award as of the date of grant was $61.01 for the March 2015 grant and $56.94 for the March 2014 grant.
Service Based Stock Units
The Company also awards senior level employees, certain other employees and new non-employee directors, non-vested stock units granted under the 2014 Plan that vest based on service. The majority of these non-vested stock unit awards generally vest 33.33% on each anniversary subsequent to the date of the award. The Company also assumes non-vested stock units in connection with certain of its acquisitions. The assumed awards have the same three year vesting schedule. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. In addition, the Company awards non-vested stock units to all of its continuing non-employee directors. These awards vest monthly in 12 equal installments based on service and, upon vesting, each stock unit represents the right to receive one share of the Company's common stock.
Performance Stock Units
During 2015, the Company awarded certain senior level employees non-vested performance stock units granted under the 2014 Plan. The number of non-vested stock units underlying each award will be determined within sixty days of the calendar year following completion of the one-year performance period ending December 31, 2016 and will be based on achievement of a specific corporate financial performance goal determined at the time of the award. The number of non-vested stock units
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
issued will be based on a graduated slope, with the maximum number of non-vested stock units issuable pursuant to the award capped at 100% of the base number of non-vested stock units set forth in the award agreement. The Company is required to estimate the attainment expected to be achieved related to the defined performance goals and the number of non-vested stock units that will ultimately be awarded in order to recognize compensation expense over the vesting period. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. If the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed. The financial performance goal under these awards was met as of December 31, 2016.
The following table summarizes the Company's non-vested stock unit activity for the year ended December 31, 2016:
|
| | | | | | | |
| | Number of Shares | | Weighted- Average Fair Value at Grant Date |
Non-vested stock units at December 31, 2015 | | 5,147,926 |
| | $ | 65.00 |
|
Granted | | 2,538,589 |
| | 76.27 |
|
Vested | | (2,472,217 | ) | | 66.25 |
|
Forfeited | | (822,462 | ) | | 65.59 |
|
Non-vested stock units at December 31, 2016 | | 4,391,836 |
| | 70.67 |
|
For the years ended December 31, 2016, 2015 and 2014, the Company recognized stock-based compensation expense of $166.4 million, $135.9 million and $143.1 million, respectively, related to non-vested stock units. The fair value of the non-vested stock units released in 2016, 2015, and 2014 was $163.8 million, $132.9 million and $118.3 million, respectively. As of December 31, 2016, there was $223.4 million of total unrecognized compensation cost related to non-vested stock units. The unrecognized cost is expected to be recognized over a weighted-average period of 2.06 years.
Non-vested Stock
During 2016 and 2015, the Company granted non-vested stock awards of 118,588 and 102,851 shares to certain executive officers which typically vest between one to three years from the date of grant, subject to the holder’s continued employment with the Company. Non-vested stock is issued and outstanding upon grant; however, award holders are restricted from selling the shares until they vest. If the vesting conditions are not met, the award will be forfeited.Compensation expense is measured based on the closing market price of the Company’s common stock at the date of grant and is recognized on a straight-line basis over the vesting period. For the years ended December 31, 2016 and 2015, the Company recognized $9.6 million and $1.4 millionof stock-based compensation expense related to these awards. At December 31, 2016, there was approximately $5.3 million of total unrecognized compensation expense related to these awards, which is expected to be recognized over a weighted average period of 2.00 years.
Benefit Plan
The Company maintains a 401(k) benefit plan allowing eligible U.S.-based employees to contribute up to 90% of their annual eligible earnings to the plan on a pretax and after-tax basis, including Roth contributions, limited to an annual maximum amount as set periodically by the IRS. The Company, at its discretion, may contribute up to $0.50 for each dollar of employee contribution. The Company’s total matching contribution to an employee is typically made at 3% of the employee’s annual compensation. The Company’s matching contributions were $17.9 million, $15.9 million and $14.4 million in 2016, 2015 and 2014, respectively. Prior to June 2015, the Company’s contributions vested over a four-year period at 25% per year. Effective in June 2015, all matching contributions vest immediately.
8. CAPITAL STOCK
Stock Repurchase Programs
The Company’s Board of Directors authorized an ongoing stock repurchase program with a total repurchase authority granted to the Company of $6.8 billion, of which $500.0 million was approved in January 2017. The Company may use the approved dollar authority to repurchase stock at any time until the approved amount is exhausted. The objective of the Company’s stock repurchase program is to improve stockholders’ returns. At December 31, 2016, approximately $404.0 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. A portion of the funds used to repurchase stock over the course of the program was provided by net proceeds from the Convertible Notes offering, as well as proceeds from employee stock option exercises and the related tax benefit. The Company is authorized to make open market purchases of its common stock using general corporate funds through open market purchases, pursuant to a Rule 10b5-1 plan or in privately negotiated transactions.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2016, the Company expended approximately $28.7 million on open market purchases under the stock repurchase program, repurchasing 426,300 shares of outstanding common stock at an average price of $67.30.
During the year ended December 31, 2015, the Company expended approximately $755.7 million on open market purchases under the stock repurchase program, repurchasing 10,716,850 shares of outstanding common stock at an average price of $70.52.
During the second quarter of 2014, the Company used a portion of the net proceeds from the Convertible Notes offering and existing cash and investments to repurchase an aggregate of approximately $1.5 billion of its common stock as authorized under the stock repurchase program. Of this $1.5 billion, the Company used approximately $101.0 million to purchase 1.7 million shares from certain purchasers of the Convertible Notes in privately negotiated transactions concurrently with the closing of the offering, and the remaining $1.4 billion to purchase additional shares of common stock under an Accelerated Share Repurchase ("ASR") which the Company entered into with Citibank, N.A. ("Citibank") on April 25, 2014 (the "ASR Agreement"). Under the ASR agreement, the Company paid $1.4 billion to Citibank upon consummation of the ASR and received, in the aggregate, approximately 21.8 million shares of its common stock from Citibank, including approximately 2.6 million shares delivered in October 2014 in final settlement in connection with Citibank's election to accelerate the ASR. The total number of shares of common stock that the Company repurchased under the ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the ASR Agreement, less a discount.
In addition to the repurchases described above, during the year ended December 31, 2014, the Company expended approximately $139.9 million on open market purchases under the stock repurchase program, repurchasing 2,046,400 shares of outstanding common stock at an average price of $68.36.
Shares for Tax Withholding
During the years ended December 31, 2016, 2015 and 2014, the Company withheld 830,155 shares, 679,694 shares and 560,239 shares, respectively, from equity awards that vested. Amounts withheld to satisfy minimum tax withholding obligations that arose on the vesting of equity awards was $66.6 million, $46.3 million and $33.7 million, for 2016, 2015 and 2014, respectively. These shares are reflected as treasury stock in the Company's consolidated balance sheets and the related cash outlays do not reduce the Company's total stock repurchase authority.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock, $0.01 par value per share. No shares of such preferred stock were issued and outstanding at December 31, 2016 or 2015.
9. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain office space and equipment under various operating leases. In addition to rent, the leases require the Company to pay for taxes, insurance, maintenance and other operating expenses. Certain of these leases contain stated escalation clauses while others contain renewal options. The Company recognizes rent expense on a straight-line basis over the term of the lease, excluding renewal periods, unless renewal of the lease is reasonably assured.
Rental expense for the year ended December 31, 2016 totaled approximately $94.1 million, of which $28.9 million related to charges for the consolidation of leased facilities related to restructuring activities. Rental expense for the year ended December 31, 2015 totaled approximately $97.1 million, of which $22.1 million related to charges for the consolidation of leased facilities related to restructuring activities. Rental expense for the year ended December 31, 2014 totaled approximately $77.1 million. Sublease income for the years ended December 31, 2016, 2015 and 2014 was approximately $0.3 million, $0.4 million and $0.3 million, respectively. Lease commitments under non-cancelable operating leases with initial or remaining terms in excess of one year and sublease income associated with non-cancelable subleases, are as follows:
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | |
| | Operating Leases * | | Sublease Income |
| | (In thousands) |
Years ending December 31, | | | | |
2017 | | $ | 55,097 |
| | $ | 218 |
|
2018 | | 48,952 |
| | 204 |
|
2019 | | 46,934 |
| | — |
|
2020 | | 39,959 |
| | — |
|
2021 | | 35,035 |
| | — |
|
Thereafter | | 141,659 |
| | — |
|
Total | | $ | 367,636 |
| | $ | 422 |
|
* Citrix will remain liable to the lessor for the duration of certain GoTo Business leases of approximately $6.8 million.
The future operating lease obligation in the table above excludes approximately $16.6 million related to the GoTo Business, since Citrix completed the separation of the GoTo Business on January 31, 2017.
Liabilities for Loss on Lease Obligations
The Company recognizes liabilities for costs that will continue to be incurred under operating lease obligations for their remaining terms without economic benefit to the Company. The liabilities are measured and recorded at their fair values as of the cease-use date (the date the Company vacates the leased space and no longer derives economic benefit from the leases). The liabilities are included in Accrued expenses and other current liabilities and Other long-term liabilities in the consolidated balance sheets and the related expense is included in Restructuring expenses in the consolidated statements of income.
The fair values of the liabilities are determined by discounting certain future cash flows related to the leases using a credit-adjusted risk-free interest rate as of the cease-use date (Level 3). The future cash flows that are discounted include the remaining base rentals due under the leases, reduced by the estimated sublease rentals that could be reasonably obtained for the properties even if the Company has no intention to enter into a sublease. The estimate of sublease rentals may change, which would require future changes to the liabilities for loss on lease obligations.
As of December 31, 2016, the Company's liabilities for loss on lease obligations total approximately $38.1 million, of which approximately $33.2 million relates to the Company's Santa Clara Office. The calculation of these liabilities requires judgment in estimating the timing of securing subleases for the vacant space, as well as the terms of possible subleases, including the length of the sublease periods, sublease rentals, rent concessions and other tenant incentives. While the Company believes that the assumptions used in the calculation of these liabilities are reasonable, due to the inherent uncertainties related to such assumptions, there can be no assurance that the Company will be able to secure such subleases within the timing assumed in its calculations, or at all, and with terms consistent with the assumptions used. In the Company's Santa Clara office, if the price per square foot assumption were to change by $0.50, it would impact the estimate of sublease rentals, which would result in a change of $8.6 million to the liabilities for loss on lease obligation.
Legal Matters
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made. For the Other Matters referenced below, the amount of liability is not probable or the amount cannot be reasonably estimated; and, therefore, accruals have not been made. In addition, in accordance with the relevant authoritative guidance, for matters in which the likelihood of material loss is at least reasonably possible, the Company provides disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, however, the Company will provide disclosure to that effect.
Due to the nature of the Company's business, the Company is subject to patent infringement claims, including current suits against it or one or more of its wholly-owned subsidiaries alleging infringement by various Company products and services. The Company believes that it has meritorious defenses to the allegations made in its pending cases and intends to vigorously defend these lawsuits; however, it is unable currently to determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any. In addition, the Company is a defendant in various litigation matters generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcomes of these cases, the Company
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
believes that it is not reasonably possible that the ultimate outcomes will materially and adversely affect its business, financial position, results of operations or cash flows.
Guarantees
The authoritative guidance requires certain guarantees to be recorded at fair value and requires a guarantor to make disclosures, even when the likelihood of making any payments under the guarantee is remote. For those guarantees and indemnifications that do not fall within the initial recognition and measurement requirements of the authoritative guidance, the Company must continue to monitor the conditions that are subject to the guarantees and indemnifications, as required under existing generally accepted accounting principles, to identify if a loss has been incurred. If the Company determines that it is probable that a loss has been incurred, any such estimable loss would be recognized. The initial recognition and measurement requirements do not apply to the provisions contained in the majority of the Company’s software license agreements that indemnify licensees of the Company’s software from damages and costs resulting from claims alleging that the Company’s software infringes the intellectual property rights of a third party. The Company has not made material payments pursuant to these provisions as of December 31, 2016. The Company has not identified any losses that are probable under these provisions and, accordingly, the Company has not recorded a liability related to these indemnification provisions.
Purchase Obligations
The Company has agreements with suppliers to purchase inventory and estimates its non-cancelable obligations under these agreements for the fiscal year ended December 31, 2017 to be approximately $18.3 million. The Company also has contingent obligations to purchase inventory for the fiscal year ended December 31, 2017, which are based on amount of usage, of approximately $24.5 million. The Company does not have any purchase obligations beyond December 31, 2017.
10. INCOME TAXES
The United States and foreign components of income before income taxes are as follows: |
| | | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In thousands) |
United States | | $ | 150,067 |
| | $ | (3,332 | ) | | $ | 82,032 |
|
Foreign | | 466,697 |
| | 315,209 |
| | 193,674 |
|
Total | | $ | 616,764 |
| | $ | 311,877 |
| | $ | 275,706 |
|
The components of the provision for income taxes are as follows: |
| | | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In thousands) |
Current: | | | | | | |
Federal | | $ | 58,109 |
| | $ | 27,860 |
| | $ | 22,377 |
|
Foreign | | 52,380 |
| | 43,796 |
| | 30,878 |
|
State | | 11,267 |
| | 10,238 |
| | 7,710 |
|
Total current | | 121,756 |
| | 81,894 |
| | 60,965 |
|
Deferred: | | | | | | |
Federal | | (26,886 | ) | | (75,479 | ) | | (26,922 | ) |
Foreign | | (3,621 | ) | | (2,746 | ) | | (1,023 | ) |
State | | (10,597 | ) | | (11,153 | ) | | (9,037 | ) |
Total deferred | | (41,104 | ) | | (89,378 | ) | | (36,982 | ) |
Total provision | | $ | 80,652 |
| | $ | (7,484 | ) | | $ | 23,983 |
|
The following table presents the breakdown of net deferred tax assets: |
| | | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| | (In thousands) |
Deferred tax assets | | 252,396 |
| | 215,196 |
|
Deferred tax liabilities | | (2,578 | ) | | (3,903 | ) |
Total net deferred tax assets | | $ | 249,818 |
| | $ | 211,293 |
|
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The significant components of the Company’s deferred tax assets and liabilities consisted of the following:
|
| | | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| | (In thousands) |
Deferred tax assets: | | | | |
Accruals and reserves | | $ | 44,897 |
| | $ | 36,628 |
|
Deferred revenue | | 97,294 |
| | 84,631 |
|
Tax credits | | 50,072 |
| | 41,444 |
|
Net operating losses | | 41,986 |
| | 50,466 |
|
Other | | 205 |
| | 7,527 |
|
Stock based compensation | | 42,315 |
| | 46,582 |
|
Transaction costs | | 11,712 |
| | — |
|
Valuation allowance | | (14,156 | ) | | (16,673 | ) |
Total deferred tax assets | | 274,325 |
| | 250,605 |
|
Deferred tax liabilities: | | | | |
Depreciation and amortization |
| (3,460 | ) | | (16,113 | ) |
Acquired technology | | (6,664 | ) | | (15,825 | ) |
Prepaid expenses | | (14,383 | ) | | (7,374 | ) |
Total deferred tax liabilities | | (24,507 | ) | | (39,312 | ) |
Total net deferred tax assets | | $ | 249,818 |
| | $ | 211,293 |
|
The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if it is not more likely than not that some portion or all of the deferred tax assets will be realized. At December 31, 2016, the Company determined a $14.2 million valuation allowance was necessary. The amount disclosed in the table above relates to deferred tax assets for net operating losses and tax credits that may not be realized.
At December 31, 2016, the Company retained $92.1 million of remaining net operating loss carry forwards in the United States from acquisitions. The utilization of these net operating loss carry forwards are limited in any one year pursuant to Internal Revenue Code Section 382 and begin to expire in 2020. At December 31, 2016, the Company held $58.9 million of remaining net operating loss carry forwards in foreign jurisdictions that do not expire. At December 31, 2016, the Company had research and development tax credit carry forwards of $6.1 million that begin to expire in 2018.
The Company does not expect to remit earnings from its foreign subsidiaries. All income earned abroad, except for previously taxed income for U.S. tax purposes is considered indefinitely reinvested in the Company's non-U.S. operations and no provision for U.S. taxes is provided with respect to such income. As of December 31, 2016 the undistributed earnings of the Company’s foreign subsidiaries was approximately $2.75 billion and was primarily held by a foreign subsidiary in the United Kingdom. At this time, it is not practical to determine the amount of tax that may be payable if the Company were to repatriate those earnings. Upon distribution of those earnings in the form of dividends or otherwise, the Company could be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries.
A reconciliation of the Company’s effective tax rate to the statutory federal rate is as follows:
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
Federal statutory taxes | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal tax benefit | | 1.1 |
| | 0.9 |
| | 1.2 |
|
Foreign operations | | (18.6 | ) | | (22.3 | ) | | (13.8 | ) |
Permanent differences | | 2.2 |
| | 6.1 |
| | 3.3 |
|
Change in deferred tax liability related to acquired intangibles | | (0.6 | ) | | (6.6 | ) | | (5.9 | ) |
Tax credits | | (8.4 | ) | | (13.4 | ) | | (13.7 | ) |
Stock option compensation | | 0.3 |
| | 0.5 |
| | 1.9 |
|
Change in accruals for uncertain tax positions | | 2.3 |
| | (3.2 | ) | | (0.3 | ) |
Other | | (0.2 | ) | | 0.6 |
| | 1.0 |
|
| | 13.1 | % | | (2.4 | )% | | 8.7 | % |
The Company’s effective tax rate generally differs from the U.S. federal statutory rate of 35% due primarily to lower tax rates on earnings generated by the Company’s foreign operations that are taxed primarily in Switzerland.
The Company's effective tax rate was approximately 13.1% and (2.4)% for the year ended December 31, 2016 and 2015, respectively. The increase in the effective tax rate when comparing the year ended December 31, 2016 to the year ended December 31, 2015 was primarily due to the impact of settling the Internal Revenue Service (“IRS”) examination for tax years 2011 and 2012 that closed during 2015. Specifically, during the quarter ended June 30, 2015, the IRS concluded its field examination, finalized tax adjustments primarily related to transfer pricing and the research and development tax credit, and formally closed the audit for the 2011 and 2012 tax years. Subsequently, during 2015 the Company recognized a net tax benefit of $20.3 million related to the IRS examination settlement.
The decrease in the effective tax rate when comparing the year ended December 31, 2015 to the year ended December 31, 2014 was primarily due to a change in the combination of income between the Company’s U.S. and foreign operations, the decline in reserve for uncertain tax positions, the impact of discrete tax benefits related to the extension of the 2015 federal research and development tax credit, and the impairment of certain intangible assets.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2016 and 2015 is as follows (in thousands):
|
| | | |
Balance at January 1, 2015 | $ | 66,918 |
|
Additions based on tax positions related to the current year | 6,613 |
|
Additions for tax positions of prior years | 4,675 |
|
Reductions related to the expiration of statutes of limitations | (9,521 | ) |
Settlements | (14,064 | ) |
| |
Balance at December 31, 2015 | 54,621 |
|
Additions based on tax positions related to the current year | $ | 11,588 |
|
Additions for tax positions of prior years | 4,759 |
|
Reductions related to the expiration of statutes of limitations | (1,167 | ) |
| |
Balance at December 31, 2016 | $ | 69,801 |
|
| |
As of December 31, 2016 the Company is offsetting unrecognized tax benefits of $25.1 million against long-term deferred tax assets. All amounts included in this balance affect the annual effective tax rate. The Company recognizes interest accrued related to uncertain tax positions and penalties in income tax expense. As of the year ended December 31, 2016, the Company accrued $2.8 million for the payment of interest and penalties.
The Company and one or more of its subsidiaries are subject to U.S. federal income taxes in the United States, as well as income taxes of multiple state and foreign jurisdictions. The Company is currently no longer subject to U.S. federal income tax examination. With some exceptions, the Company is generally not under examination for state and local income tax, or non-U.S. jurisdictions by tax authorities for years prior to 2013.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company expects the total amount of unrecognized tax benefits will change significantly in the first quarter of 2017 pursuant to the spin-off and subsequent merger transaction with LogMeIn. See Note 18 for more information on the Company's separation of its GoTo Business and Note 20 for more information on the R&D tax credit.
11. SEGMENT INFORMATION
The Enterprise and Service Provider and the GoTo Business segment constitute the Company’s two reportable segments. The Company does not engage in intercompany revenue transfers between segments. The Company’s chief operating decision maker (“CODM”) evaluates the Company’s performance based primarily on profitability from its Enterprise and Service Provider and GoTo Business segment products. The Company's CEO is the CODM. Segment profit for each segment includes certain research and development, sales, marketing, and services and general and administrative expenses directly attributable to the segment as well as other corporate costs allocated to the segment and excludes certain expenses that are managed outside of the reportable segments. Costs excluded from segment profit primarily consist of certain restructuring charges, stock-based compensation costs, charges or benefits related to significant litigation that are not anticipated to be ongoing costs, amortization and impairment of product related and other intangible assets, net interest and other expense, and separation costs. Accounting policies of the Company’s segments are the same as its consolidated accounting policies.
As part of its continued transformation, effective January 1, 2016, the Company reorganized a part of its business by creating a new Cloud Services product grouping that primarily includes the ShareFile product line. Prior to 2016, the ShareFile product line was included within the Company's Workflow Cloud products under the GoTo Business segment. The Company's CODM has changed how it views the business primarily due to operational initiatives announced in 2015, which include increased emphasis and investments in core enterprise products for secure and reliable application and data delivery. As a result, the Company realigned its Cloud Services products and services to the Enterprise and Service Provider segment effective January 1, 2016 in contemplation of the strategic shift and the separation of the GoTo Business. See Note 18 for more information on the Company's separation of its GoTo Business. In addition, previously reported segment results have been recasted to conform to current year presentation.
On January 31, 2017, Citrix completed the separation of the GoTo Business. As a result, the Company will reevaluate its operating segments in the first quarter of 2017.
International revenues (sales outside of the United States) accounted for approximately 40.7%, 43.1% and 45.2% of the Company’s net revenues for the year ended December 31, 2016, 2015, and 2014, respectively.
Net revenues and segment profit, classified by the Company’s two reportable segments were as follows:
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
| (In thousands) |
Net revenues: | | | | | |
Enterprise and Service Provider | $ | 2,736,080 |
| | $ | 2,646,154 |
| | $ | 2,563,064 |
|
GoTo Business | 682,185 |
| | 629,440 |
| | 579,792 |
|
Consolidated | $ | 3,418,265 |
| | $ | 3,275,594 |
| | $ | 3,142,856 |
|
Segment profit: | | | | | |
Enterprise and Services Provider | $ | 891,187 |
| | $ | 702,229 |
| | $ | 558,069 |
|
GoTo Business | 160,098 |
| | 140,920 |
| | 147,005 |
|
Unallocated expenses (1): | | | | | |
Amortization and impairment of intangible assets | (89,592 | ) | | (239,915 | ) | | (192,325 | ) |
Stock-based compensation | (184,788 | ) | | (147,368 | ) | | (169,287 | ) |
Restructuring | (71,122 | ) | | (100,411 | ) | | (20,424 | ) |
Separation costs | (56,624 | ) | | (6,352 | ) | | — |
|
Patent litigation charge | — |
| | — |
| | (20,727 | ) |
Other | — |
| | 982 |
| | — |
|
Net interest and other expense | (32,395 | ) | | (38,208 | ) | | (26,605 | ) |
Consolidated income before income taxes | $ | 616,764 |
| | $ | 311,877 |
| | $ | 275,706 |
|
| |
(1) | Represents expenses presented to management on a consolidated basis only and not allocated to the operating segments. |
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Identifiable assets classified by the Company’s reportable segments are shown below. Long-lived assets consist of property and equipment, net, and are shown below.
|
| | | | | | | |
| December 31, |
| 2016 | | 2015 |
| (In thousands) |
Identifiable assets: | | | |
Enterprise and Service Provider | $ | 5,690,343 |
| | $ | 4,805,902 |
|
GoTo Business | 699,884 |
| | 661,615 |
|
Total identifiable assets | $ | 6,390,227 |
| | $ | 5,467,517 |
|
|
| | | | | | | |
| December 31, |
| 2016 | | 2015 |
| (In thousands) |
Property and equipment, net: | | | |
United States | $ | 267,305 |
| | $ | 294,982 |
|
United Kingdom | 25,321 |
| | 28,851 |
|
Other countries | 51,194 |
| | 49,984 |
|
Total property and equipment, net | $ | 343,820 |
| | $ | 373,817 |
|
The increases in identifiable assets are primarily due to increases in the Company's available for sale investments. See Note 4 for additional information regarding the Company’s investments.
In fiscal years 2016 and 2015, there were no individual customers that accounted for over 10% of the Company's total net revenues. In fiscal year 2014, one distributor, Ingram Micro, accounted for 13% of the Company’s total net revenues. The Company’s distributor arrangements with Ingram Micro consist of several non-exclusive, independently negotiated agreements with its subsidiaries, each of which covers different countries or regions. Each of these agreements is separately negotiated and is independent of any other contract (such as a master distribution agreement), one of which was individually responsible for over 10% of the Company’s total net revenues in fiscal year 2014. Total net revenues associated with Ingram Micro are included in the Company's Enterprise and Service Provider segment.
Revenues by product grouping for the Company’s Enterprise and Service Provider and GoTo Business segments were as follows for the years ended:
|
| | | | | | | | | | | |
| December 31, |
| 2016 | | 2015 | | 2014 |
| (In thousands) |
Net revenues: | | | | | |
Enterprise and Service Provider | | | | | |
Workspace Services revenues(1) | $ | 1,690,783 |
| | $ | 1,639,072 |
| | $ | 1,600,581 |
|
Delivery Networking revenues(2) | 782,875 |
| | 749,910 |
| | 702,028 |
|
Cloud Services Revenues (3) | 130,955 |
| | 101,403 |
| | 75,569 |
|
Professional services(4) | 131,229 |
| | 147,488 |
| | 175,541 |
|
Other | 238 |
| | 8,281 |
| | 9,345 |
|
Total Enterprise and Service Provider revenues | 2,736,080 |
| | 2,646,154 |
| | 2,563,064 |
|
GoTo Business revenues | 682,185 |
| | 629,440 |
| | 579,792 |
|
Total net revenues | $ | 3,418,265 |
| | $ | 3,275,594 |
| | $ | 3,142,856 |
|
| |
(1) | Workspace Services revenues are primarily comprised of sales from XenDesktop, XenApp, XenMobile and related license updates and maintenance and support. |
| |
(2) | Delivery Networking revenues are primarily comprised of NetScaler ADC and NetScaler SD-WAN, and related license updates and maintenance and support. |
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
(3) | Cloud Services revenues primarily include ShareFile, Podio and Citrix Cloud products. |
| |
(4) | Professional services revenues are primarily comprised of revenues from consulting services and product training and certification services. |
Revenues by Geographic Location
The following table presents revenues by segment and geographic location, for the years ended:
|
| | | | | | | | | | | |
| December 31, |
| 2016 | | 2015 | | 2014 |
| (In thousands) |
Net revenues: | | | | | |
Enterprise and Service Provider | | | | | |
Americas | $ | 1,598,896 |
| | $ | 1,487,364 |
| | $ | 1,394,112 |
|
EMEA | 863,517 |
| | 873,620 |
| | 863,179 |
|
Asia-Pacific | 273,667 |
| | 285,170 |
| | 305,773 |
|
Total Enterprise and Service Provider revenues | 2,736,080 |
| | 2,646,154 |
| | 2,563,064 |
|
GoTo Business | | | | | |
Americas | 574,882 |
| | 524,520 |
| | 475,884 |
|
EMEA | 87,331 |
| | 84,481 |
| | 83,930 |
|
Asia-Pacific | 19,972 |
| | 20,439 |
| | 19,978 |
|
Total GoTo Business revenues | 682,185 |
| | 629,440 |
| | 579,792 |
|
Total net revenues | $ | 3,418,265 |
| | $ | 3,275,594 |
| | $ | 3,142,856 |
|
Export revenue represents shipments of finished goods and services from the United States to international customers, primarily in Latin America and Canada. Shipments from the United States to international customers for 2016, 2015 and 2014 were $166.9 million, $180.2 million and $193.8 million, respectively.
12. CONVERTIBLE SENIOR NOTES
Convertible Notes Offering
During 2014, the Company completed a private placement of approximately $1.44 billion principal amount of 0.500% Convertible Notes due 2019. The net proceeds from this offering were approximately $1.42 billion, after deducting the initial purchasers’ discounts and commissions and the estimated offering expenses payable by the Company. The Company used approximately $82.6 million of the net proceeds to pay the cost of the Bond Hedges described below (after such cost was partially offset by the proceeds to the Company from the Warrant Transactions described below). The Company used the remainder of the net proceeds from the offering and a portion of its existing cash and investments to purchase an aggregate of approximately $1.5 billion of its common stock, as authorized under its share repurchase program. The Company used approximately $101.0 million to purchase shares of common stock from certain purchasers of the Convertible Notes in privately negotiated transactions concurrently with the closing of the offering, and the remaining $1.4 billion to purchase additional shares of common stock through an Accelerated Share Repurchase ("ASR") which the Company entered into with Citibank, N.A. (the “ASR Counterparty”) on April 25, 2014 (the “ASR Agreement”).
The Convertible Notes are governed by the terms of an indenture, dated as of April 30, 2014 (the “Indenture”), between the Company and Wilmington Trust, National Association, as trustee (the “Trustee”). The Convertible Notes are the senior unsecured obligations of the Company and bear interest at a rate of 0.500% per annum, payable semi-annually in arrears on April 15 and October 15 of each year. The Convertible Notes will mature on April 15, 2019, unless earlier repurchased or converted. Upon conversion, the Company will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, in respect of the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted.
The conversion rate for the Convertible Notes is 11.1111 shares of common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of approximately $90.00 per share of common stock. The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of certain stock dividends on common stock, the issuance of certain rights or warrants, subdivisions, combinations,
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
distributions of capital stock, indebtedness, or assets, the payment of cash dividends and certain issuer tender or exchange offers.
The Company may not redeem the Convertible Notes prior to the maturity date and no “sinking fund” is provided for the Convertible Notes, which means that the Company is not required to periodically redeem or retire the Convertible Notes. Upon the occurrence of certain fundamental changes involving the Company, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes in principal amounts of $1,000 or an integral multiple thereof at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
In accounting for the issuance of the Convertible Notes, the Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Convertible Notes as a whole. The excess of the principal amount of the liability component over its carrying amount ("debt discount") is amortized to interest expense over the term of the Convertible Notes using the effective interest method with an effective interest rate of 3.0 percent per annum. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the Convertible Note issuance, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Issuance costs attributable to the $1.3 billion liability component are being amortized to expense over the term of the Convertible Notes, and issuance costs attributable to the equity component are included along with the equity component in stockholders' equity. Additionally, a deferred tax liability of $8.2 million related to a portion of the equity component transaction costs which are deductible for tax purposes is included in Other liabilities in the accompanying consolidated balance sheets.
As a result of the structure of the Reverse Morris Trust (RMT) transaction with LogMeIn, Inc., and the notification on October 10, 2016 to noteholders in accordance with the Indenture, the Convertible Notes became convertible until the earlier of (1) the close of business on the business day immediately preceding the ex-dividend date for the distribution of the outstanding shares of GetGo common stock to the Company’s stockholders by way of a pro rata dividend, and (2) the Company’s announcement that such distribution will not take place, even though the Convertible Notes were not otherwise convertible at December 31, 2016. The conversion rate for the Convertible Notes, Convertible Note Hedge and Warrant Transactions was also subject to adjustment as of the opening of business on the ex-dividend date for the distribution. The $1.44 billion Convertible Notes became convertible with the notice to noteholders. Accordingly, as of December 31, 2016, the carrying amount of the Convertible Notes of $1.3 billion was reclassified from Other liabilities to Current liabilities and the difference between the face value and carrying value of $79.5 million was reclassified from stockholders’ equity to temporary equity in the accompanying consolidated balance sheets. See Note 18 and Note 20 for more information on the Company's separation of its GoTo Business.
The Convertible Notes consist of the following (in thousands):
|
| | | | | | |
| December 31, 2016 | December 31, 2015 |
Liability component | | |
Principal | $ | 1,437,500 |
| $ | 1,437,500 |
|
Less: note discount and issuance costs | (89,344 | ) | (112,508 | ) |
Net carrying amount | $ | 1,348,156 |
| $ | 1,324,992 |
|
| | |
Equity component |
| |
Temporary Equity | $ | 79,495 |
| $ | — |
|
Additional paid-in-capital | 83,374 |
| 162,869 |
|
Total equity (including temporary equity) | $ | 162,869 |
| $ | 162,869 |
|
The following table includes total interest expense recognized related to the Convertible Notes (in thousands):
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | 2014 |
Contractual interest expense | $ | 7,187 |
| | $ | 7,188 |
| | $ | 4,792 |
|
Amortization of debt issuance costs | 3,863 |
| | 3,974 |
| | 2,461 |
|
Amortization of debt discount | 33,014 |
| | 32,039 |
| | 20,832 |
|
| $ | 44,064 |
| | $ | 43,201 |
| | $ | 28,085 |
|
See Note 5 to the Company's consolidated financial statements for fair value disclosures related to the Company's Convertible Notes.
Convertible Note Hedge and Warrant Transactions
In connection with the pricing of the Convertible Notes, the Company entered into convertible note hedge transactions relating to approximately 16.0 million shares of common stock (the "Bond Hedges"), with JPMorgan Chase Bank, National Association, London Branch; Goldman, Sachs & Co.; Bank of America, N.A.; and Royal Bank of Canada (the “Option Counterparties”) and also entered into separate warrant transactions (the "Initial Warrant Transactions") with each of the Option Counterparties relating to approximately 16.0 million shares of common stock.
The Bond Hedges are generally expected to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any payments in cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, that the Company is required to make in excess of the principal amount of the Convertible Notes upon conversion of any Convertible Notes, as the case may be, in the event that the market price per share of common stock, as measured under the terms of the Bond Hedges, is greater than the strike price of the Bond Hedges, which initially corresponds to the conversion price of the Convertible Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. The Warrant Transactions will separately have a dilutive effect to the extent that the market value per share of common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants issued pursuant to the Warrant Transactions (the “Warrants”). The initial strike price of the Warrants is $120.00 per share. The Warrants will expire in ratable portions on a series of expiration dates commencing after the maturity of the Convertible Notes. The Bond Hedges and Warrants are not marked to market. The value of the Bond Hedges and Warrants were initially recorded in stockholders' equity and continue to be classified within stockholders' equity. As of December 31, 2016, no warrants have been exercised.
Aside from the initial payment of a premium to the Option Counterparties under the Bond Hedges, which amount is partially offset by the receipt of a premium under the Warrant Transactions, the Company is not required to make any cash payments to the Option Counterparties under the Bond Hedges and will not receive any proceeds if the Warrants are exercised.
13. CREDIT FACILITY
Effective January 7, 2015, the Company entered into a Credit Facility with a group of financial institutions (the “Lenders”). The Credit Facility provides for a five year revolving line of credit in the aggregate amount of $250.0 million, subject to continued covenant compliance. The Company may elect to increase the revolving credit facility by up to $250.0 million if existing or new lenders provide additional revolving commitments in accordance with the terms of the Credit Agreement. A portion of the revolving line of credit (i) in the aggregate amount of $25.0 million may be available for issuances of letters of credit and (ii) in the aggregate amount of $10.0 million may be available for swing line loans, as part of, not in addition to, the aggregate revolving commitments. The Credit Facility bears interest at the LIBOR plus 1.10% and adjusts in the range of 1.00% to 1.30% above LIBOR based on the ratio of the Company’s total debt to its adjusted earnings before interest, taxes, depreciation, amortization and certain other items (“EBITDA”) as defined in the agreement. In addition, the Company is required to pay a quarterly facility fee ranging from 0.125% to 0.20% of the aggregate revolving commitments under the Credit Facility and based on the ratio of the Company’s total debt to the Company’s consolidated EBITDA. As of December 31, 2016, there were no amounts outstanding under the Credit Facility.
The Credit Agreement contains certain financial covenants that require the Company to maintain a consolidated leverage ratio of not more than 3.5:1.0 and a consolidated interest coverage ratio of not less than 3.0:1.0. In addition, the Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the ability of the Company to grant liens, merge, dissolve or consolidate, dispose of all or substantially all of its assets, pay dividends during the existence of a default under the Credit Agreement, change its business and incur subsidiary indebtedness, in each case subject to customary exceptions for a credit facility of this size and type. The Company was in compliance with these covenants as of December 31, 2016.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives Designated as Hedging Instruments
As of December 31, 2016, the Company’s derivative assets and liabilities primarily resulted from cash flow hedges related to its forecasted operating expenses transacted in local currencies. A substantial portion of the Company’s overseas expenses are and will continue to be transacted in local currencies. To protect against fluctuations in operating expenses and the volatility of future cash flows caused by changes in currency exchange rates, the Company has established a program that uses foreign exchange forward contracts to hedge its exposure to these potential changes. The terms of these instruments, and the hedged transactions to which they relate, generally do not exceed twelve months.
Generally, when the dollar is weak, foreign currency denominated expenses will be higher, and these higher expenses will be partially offset by the gains realized from the Company’s hedging contracts. Conversely, if the dollar is strong, foreign currency denominated expenses will be lower. These lower expenses will in turn be partially offset by the losses incurred from the Company’s hedging contracts. The change in the derivative component in Accumulated other comprehensive loss includes unrealized gains or losses that arose from changes in market value of the effective portion of derivatives that were held during the period, and gains or losses that were previously unrealized but have been recognized in the same line item as the forecasted transaction in current period net income due to termination or maturities of derivative contracts. This reclassification has no effect on total comprehensive income or equity.
The total cumulative unrealized loss on cash flow derivative instruments was $3.1 million at December 31, 2016 and $2.3 million at December 31, 2015, and is included in Accumulated other comprehensive loss in the accompanying consolidated balance sheets. See Note 16 for more information related to comprehensive income. The net unrealized loss as of December 31, 2016 is expected to be recognized in income over the next 12 months at the same time the hedged items are recognized in income.
Derivatives not Designated as Hedging Instruments
A substantial portion of the Company’s overseas assets and liabilities are and will continue to be denominated in local currencies. To protect against fluctuations in earnings caused by changes in currency exchange rates when remeasuring the Company’s balance sheet, it utilizes foreign exchange forward contracts to hedge its exposure to this potential volatility.
These contracts are not designated for hedge accounting treatment under the authoritative guidance. Accordingly, changes in the fair value of these contracts are recorded in Other expense, net.
Fair Values of Derivative Instruments |
| | | | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
| (In thousands) |
| December 31, 2016 | | December 31, 2015 | | December 31, 2016 | | December 31, 2015 |
Derivatives Designated as Hedging Instruments | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Foreign currency forward contracts | Prepaid expenses and other current assets | | $460 | | Prepaid expenses and other current assets | | $436 | | Accrued expenses and other current liabilities | | $3,816 | | Accrued expenses and other current liabilities | | $2,895 |
| | | | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
| (In thousands) |
| December 31, 2016 | | December 31, 2015 | | December 31, 2016 | | December 31, 2015 |
Derivatives Not Designated as Hedging Instruments | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Foreign currency forward contracts | Prepaid expenses and other current assets | | $2,046 | | Prepaid expenses and other current assets | | $627 | | Accrued expenses and other current liabilities | | $619 | | Accrued expenses and other current liabilities | | $783 |
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Effect of Derivative Instruments on Financial Performance
|
| | | | | | | | | | | | | | | | | |
| For the Year ended December 31, |
| (In thousands) |
Derivatives in Cash Flow Hedging Relationships | Amount of (Loss) Gain Recognized in Other Comprehensive (Loss) Income (Effective Portion) | | Location of Loss Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion) | | Amount of Loss Reclassified from Accumulated Other Comprehensive Loss (Effective Portion) |
| 2016 | | 2015 | | | | 2016 | | 2015 |
Foreign currency forward contracts | $ | (875 | ) | | $ | 6,090 |
| | Operating expenses | | $ | (1,763 | ) | | $ | (13,027 | ) |
There was no material ineffectiveness in the Company’s foreign currency hedging program in the periods presented.
|
| | | | | | | | | |
| For the Year ended December 31, |
| (In thousands) |
Derivatives Not Designated as Hedging Instruments | Location of (Loss) Gain Recognized in Income on Derivative | | Amount of (Loss) Gain Recognized in Income on Derivative |
| | | 2016 | | 2015 |
Foreign currency forward contracts | Other expense, net | | $ | (1,030 | ) | | $ | 1,669 |
|
Outstanding Foreign Currency Forward Contracts
As of December 31, 2016, the Company had the following net notional foreign currency forward contracts outstanding (in thousands):
|
| |
Foreign Currency | Currency Denomination |
Australian dollars | AUD 8,200 |
Brazilian Real | BRL 8,300 |
British pounds sterling | GBP 283 |
Canadian dollars | CAD 2,850 |
Chinese renminbi | CNY 48,300 |
Danish krone | DKK 21,735 |
Euro | EUR 8,307 |
Hong Kong dollars | HKD 32,500 |
Indian rupees | INR 3,875 |
Japanese yen | JPY 685,319 |
Singapore dollars | SGD 9,967 |
Swiss francs | CHF 37,700 |
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share information):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | 2014 |
Numerator: | | | | | |
Net income | $ | 536,112 |
| | $ | 319,361 |
| | $ | 251,723 |
|
Denominator: | | | | | |
Denominator for basic earnings per share - weighted-average shares outstanding | 155,134 |
| | 158,874 |
| | 169,879 |
|
Effect of dilutive employee stock awards: | | | | | |
Employee stock awards | 1,950 |
| | 1,488 |
| | 1,391 |
|
Denominator for diluted earnings per share - weighted-average shares outstanding | 157,084 |
| | 160,362 |
| | 171,270 |
|
Basic earnings per share | $ | 3.46 |
| | $ | 2.01 |
| | $ | 1.48 |
|
Diluted earnings per share | $ | 3.41 |
| | $ | 1.99 |
| | $ | 1.47 |
|
Anti-dilutive weighted-average shares from stock awards | 322 |
| | 2,151 |
| | 3,026 |
|
The weighted-average number of shares outstanding used in the computation of basic and diluted earnings per share does not include the effect of the potential outstanding common stock from the Company's Convertible Senior Notes (the "Convertible Notes") and warrants. The effects of these potentially outstanding shares were not included in the calculation of diluted earnings per share because the effect would have been anti-dilutive.
The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on its Convertible Notes on diluted earnings per share, if applicable, as upon conversion, the Company will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, in respect of the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. The conversion spread will have a dilutive impact on diluted earnings per share when the average market price of the Company’s common shares for a given period exceeds the conversion price of $90.00 per share. For the years ended December 31, 2016, 2015 and 2014, the Convertible Notes have been excluded from the computation of diluted earnings per share as the effect would be anti-dilutive since the conversion price of the Convertible Notes exceeded the average market price of the Company’s common stock. In addition, the Company uses the treasury stock method for calculating any potential dilutive effect related to the warrants. See Note 12 to the Company's consolidated financial statements for detailed information on the Convertible Notes offering.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMPREHENSIVE INCOME
The changes in Accumulated other comprehensive loss by component, net of tax, are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Foreign currency | | Unrealized loss on available-for-sale securities | | Unrealized loss on derivative instruments | | Other comprehensive loss on pension liability | | Total |
| (In thousands) |
Balance at December 31, 2015 | $ | (16,346 | ) | | $ | (2,900 | ) | | $ | (2,255 | ) | | $ | (7,026 | ) | | $ | (28,527 | ) |
Other comprehensive income (loss) before reclassifications | — |
| | 996 |
| | (2,638 | ) | | 906 |
| | (736 | ) |
Amounts reclassified from accumulated other comprehensive loss | — |
| | (1,204 | ) | | 1,763 |
| | — |
| | 559 |
|
Net current period other comprehensive (loss) income | — |
| | (208 | ) | | (875 | ) | | 906 |
| | (177 | ) |
Balance at December 31, 2016 | $ | (16,346 | ) | | $ | (3,108 | ) | | $ | (3,130 | ) | | $ | (6,120 | ) | | $ | (28,704 | ) |
Income tax expense or benefit allocated to each component of other comprehensive loss is not material.
Reclassifications out of Accumulated other comprehensive loss are as follows:
|
| | | | | | |
| | For the Twelve Months Ended December 31, 2016 |
| | (In thousands) |
Details about accumulated other comprehensive loss components | | Amount reclassified from Accumulated other comprehensive loss, net of tax | | Affected line item in the Consolidated Statements of Income |
Unrealized net gains on available-for-sale securities | | $ | (1,204 | ) | | Other expense, net |
Unrealized net losses on cash flow hedges | | 1,763 |
| | Operating expenses * |
| | $ | 559 |
| | |
* Operating expenses amounts allocated to Research and development, Sales, marketing and services, and General and administrative are not individually significant.
17. RESTRUCTURING
The Company has implemented multiple restructuring plans to reduce its cost structure, align resources with its product strategy and improve efficiency, which has resulted in workforce reductions and the consolidation of certain leased facilities.
For the years ended December 31, 2016, 2015 and 2014, restructuring charges were comprised of the following (in thousands): |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | 2014 |
Employee severance and related costs | $ | 44,909 |
| | $ | 76,629 |
| | $ | 20,424 |
|
Consolidation of leased facilities | 28,858 |
| | 22,100 |
| | — |
|
Reversal of previous charges | (2,645 | ) | | (286 | ) | | — |
|
Other | — |
| | 1,968 |
| | — |
|
Total Restructuring charges | $ | 71,122 |
| | $ | 100,411 |
| | $ | 20,424 |
|
During the years ended December 31, 2016 and 2015, the Company incurred costs of $45.5 million and $29.7 million primarily related to its announced plan in November 2015 to simplify the Company’s enterprise go-to-market motion and roles while improving coverage, reflect changes in the Company’s product focus, and balance resources with demand across the Company’s marketing, general and administration areas. The charges are primarily related to employee severance, outplacement, professional service fees, and facility closing costs. The majority of the activities related to this program were substantially completed as of the end of the first quarter of 2016. As of December 31, 2016, total charges related to this program incurred since inception were $75.2 million.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the years ended December 31, 2016 and 2015, the Company also recorded charges of $24.0 million and $68.9 million related to its announced plan in January 2015 to increase strategic focus and operational efficiency. The charges primarily related to the severance and other costs directly related to the reduction of the Company's workforce and consolidation of leased facilities. The majority of the activities related to this program were substantially completed by the end of 2015. As of December 31, 2016, total charges related to this program incurred since inception were $92.9 million.
The amounts recorded during the year ended December 31, 2014 were primarily related to severance and other costs directly related to the reduction of the Company's workforce pursuant to a restructuring plan initiated in 2014 to better align resources to strategic initiatives.
Restructuring Charges by Segment
Restructuring charges by segment consists of the following (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | 2014 |
Enterprise and Service Provider | $ | 67,401 |
| | $ | 96,952 |
| | $ | 14,092 |
|
GoTo Business | 3,721 |
| | 3,459 |
| | 6,332 |
|
Total Restructuring charges | $ | 71,122 |
| | $ | 100,411 |
| | $ | 20,424 |
|
Restructuring accruals
The activity in the Company’s restructuring accruals for the year ended December 31, 2016 is summarized as follows (in thousands):
|
| | | |
| Total |
Balance at January 1, 2016 | $ | 40,396 |
|
Restructuring charges | 71,122 |
|
Payments | (72,733 | ) |
Other | 1,158 |
|
Balance at December 31, 2016 | $ | 39,943 |
|
As of December 31, 2016, the $39.9 million in outstanding restructuring accruals primarily relate to future payments for leased facilities for the Enterprise and Service Provider segment.
18. SEPARATION
The Company announced in November 2015 that it was pursuing a plan to spinoff its GoTo Business into a separate, publicly traded company. The company established as a result of the spinoff would be made up of the following products and services: GoToAssist, GoToMeeting, GoToMyPC, GoToTraining, GoToWebinar, Grasshopper and OpenVoice. The separation of the GoTo Business, which was intended to be a tax-free spinoff to the Company's stockholders, was expected to be completed in the second half of 2016. The spinoff was subject to certain conditions, including, among others, obtaining final approval from the Company's Board of Directors, receipt of a favorable opinion and/or rulings with respect to the tax-free nature of the transaction for federal income tax purposes and the effectiveness of a Form 10 filing with the SEC.
On July 26, 2016, the Company entered into definitive agreements with GetGo, Inc., its wholly-owned subsidiary (“GetGo”), and LogMeIn, Inc., a Delaware corporation (“LogMeIn”), with respect to a RMT transaction. Subject to the terms and conditions of those agreements, (1) the Company will transfer its GoTo Business to GetGo, (2) after which, the Company will distribute to its stockholders all of the issued and outstanding shares of common stock of GetGo held by the Company, at the Company’s sole option, by way of a pro rata dividend or an exchange offer, and (3) immediately after the distribution, Lithium Merger Sub, Inc., a wholly-owned subsidiary of LogMeIn, will merge with and into GetGo, with GetGo as the surviving corporation. In connection with the merger, GetGo (which at that time will hold the GoTo Business) will become a wholly-owned subsidiary of LogMeIn, and GetGo’s stockholders will receive an aggregate of approximately 26.9 million shares of LogMeIn common stock. On August 31, 2016, pursuant to the terms of the definitive agreements, Citrix notified LogMeIn that it has elected to effect the distribution through a spin-off. On September 26, 2016, LogMeIn announced the early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act for the merger. The transaction,
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which is intended to be tax-free to the Company and its stockholders for U.S. federal income tax purposes, was completed on January 31, 2017. See Note 20 for more information on the Company's separation of its GoTo Business.
The Company has incurred significant costs in connection with the separation of its GoTo Business. These costs relate primarily to third-party advisory and consulting services, retention payments to certain employees, incremental stock-based compensation and other costs directly related to the separation of the GoTo Business. Costs related to employee retention or stock-based compensation are classified on a basis consistent with their regular compensation charges and included within Cost of net revenues, Research and development, Sales, marketing and services, or General and administrative expense in the consolidated statements of income as applicable. Costs other than those related to employees are included within Separation expense in the consolidated statements of income. During the years ended December 31, 2016 and December 31, 2015, the Company incurred approximately $56.6 million and $6.4 million related to separation costs, respectively. The Company expects to incur additional separation costs in 2017, the majority of which will be incurred during the first quarter of 2017. The Company currently expects to incur, in the aggregate, approximately $120.0 million to $130.0 million in separation costs, although that estimate is subject to a number of assumptions and uncertainties and the actual amount of separation costs could differ materially from this estimate. These estimates do not include potential tax related charges or potential capital expenditures which may be incurred related to the transaction. These additional costs could be significant.
19. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017, the Financial Accounting Standards Board issued an accounting standard update on the accounting for business combinations by clarifying the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new guidance is effective for annual and interim periods beginning after December 15, 2017. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations.
In October 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting for income taxes, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transaction occurs as opposed to deferring tax consequences and amortizing them into future periods. This update is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. A modified retrospective approach with a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption is required. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial position or results of operations.
In March 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting of stock-based compensation. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The new guidance is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations.
In February 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting of leases. The new guidance requires that lessees in a leasing arrangement recognize a right-of-use asset and a lease liability for most leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. The new guidance is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations.
In April 2015, the Financial Accounting Standards Board issued an accounting standard update on the presentation of debt issuance costs. The new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company adopted this standard effective January 1, 2016 and retroactively adjusted the long-term debt liability presented as of December 31, 2015 by reducing the long-term debt liability by the amount of the deferred financing costs of $13.9 million and reducing the deferred financing costs asset included in other assets on the consolidated balance sheets by a corresponding amount. The adoption of this standard did not have a material impact on the Company's consolidated financial position, results of operations and cash flows.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 2015, Financial Accounting Standards Board issued an accounting standard update on customer's accounting for fees paid in a cloud computing arrangement. The amendments in this update provide guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The Company adopted this standard effective January 1, 2016 on a prospective basis. Adoption of this standard did not have a material impact on the Company's financial position and results of operations.
In May 2014, the Financial Accounting Standards Board issued an accounting standard update on revenue recognition. The new guidance creates a single, principle-based model for revenue recognition and expands and improves disclosures about revenue. In July 2015, the Financial Accounting Standards Board issued an accounting standard update that defers the effective date of the new revenue recognition standard by one year. The new guidance is effective for annual reporting periods beginning on or after December 15, 2017, and must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The Company has completed its assessment of its information technology systems, data and processes related to the implementation of this accounting standard. Additionally, the Company has substantially completed its information technology system design and solution development, and will commence implementation of the solution in the first quarter of fiscal 2017. The Company expects to adopt the accounting standard update on a modified retrospective basis in the first quarter of fiscal 2018, and is currently evaluating the potential impact of this standard on its financial position and results of operations. Under the new standard the Company expects to capitalize and amortize certain commissions over the expected customer life rather than expensing them as incurred. Additionally, under the new standard, the Company would be required to recognize term license revenues upfront at time of delivery rather than ratably over the related contract period. The Company expects revenue recognition related to perpetual software, hardware, cloud offerings and professional services to remain substantially unchanged.
20. SUBSEQUENT EVENTS
On July 26, 2016, the Company entered into definitive agreements with GetGo, Inc., its wholly-owned subsidiary (“GetGo”), and LogMeIn, Inc. (“LogMeIn”), with respect to a Reverse Morris Trust transaction. Subject to the terms and conditions of those agreements, the Company transferred its GoTo Business to GetGo, and after the close of business on January 31, 2017, the Company distributed approximately 26.9 million shares of GetGo common stock to the Company’s stockholders of record as of the close of business on January 20, 2017 (the “Record Date”). Immediately following the Distribution, Lithium Merger Sub, Inc., a wholly-owned subsidiary of LogMeIn, merged with and into GetGo, with GetGo as the surviving corporation (the “Merger”). In connection with the Merger, GetGo became a wholly-owned subsidiary of LogMeIn, and each share of GetGo common stock was converted into the right to receive one share of LogMeIn common stock. As a result of these transactions, the Company’s stockholders received approximately 26.9 million shares of LogMeIn common stock in the aggregate, or 0.171844291 of a share of LogMeIn common stock for each share of the Company’s common stock held of record by such stockholders on the Record Date. No fractional shares of LogMeIn were issued, and the Company’s stockholders instead received cash in lieu of any fractional shares.
The conversion period for the Convertible Notes that commenced on October 10, 2016 in connection with the Distribution terminated as of the close of business on January 31, 2017. As a result, the Convertible Notes were reclassified to Other liabilities from Current liabilities and the amount previously recorded as Temporary equity was reclassified to permanent equity as of January 31, 2017. The Distribution also resulted in an adjustment to the conversion rate for the Convertible Notes under the terms of the Indenture. As a result of this adjustment, the conversion rate for the Convertible Notes in effect as of the opening of business on February 1, 2017 is 13.9061 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of approximately $71.91 per share of common stock. Corresponding adjustments were made to the conversion rates for the Convertible Note Hedge and Warrant Transactions as of the opening of business on February 1, 2017.
In connection with the Distribution, the Company made certain adjustments to outstanding restricted stock unit and stock option awards with the intention of preserving the intrinsic value of the awards prior to the Distribution. There was no change to the vesting terms of these awards. As a result of these adjustments, the Company currently expects to incur incremental expense in the first quarter of 2017.
As a result of the separation of the GoTo Business, the Company has evaluated its existing tax attributes to reflect the continuing operations of the Company. The Company expects to record a $45.2 million charge to income tax expense in the first quarter of 2017 as a result of changes in its expectations of realizability of state R&D credits due directly to the separation of the GoTo Business. The Company will have less income subject to taxation in California, and therefore, the R&D credits will not be able to be utilized.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2017 Acquisition
On January 3, 2017, the Company acquired all of the issued and outstanding securities of Unidesk Corporation (“Unidesk”). Unidesk is the inventor of the Microsoft Windows application packaging and management technology known as layering. Citrix acquired Unidesk to enhance and provide a demonstrable difference in application management and delivery. By incorporating the Unidesk technology into XenApp and XenDesktop, Citrix will advance its industry leadership by offering the most powerful and easy to deploy application layering solution available for delivering and managing applications and desktops in the cloud, on-premises and in hybrid deployment environments. Unidesk will become part of the Company's Enterprise and Service Provider segment. The total preliminary cash consideration for this transaction was approximately $60.5 million, net of $2.7 million cash acquired. Transaction costs associated with the acquisition are currently estimated at $0.3 million, of which the Company expensed $0.3 million during the year ended December 31, 2016, which were included in General and administrative expense in the accompanying consolidated statements of income.
CITRIX SYSTEMS, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total Year |
| | (In thousands, except per share amounts) |
2016 | | | | | | | | | | |
Net revenues | | $ | 825,678 |
| | $ | 842,980 |
| | $ | 841,251 |
| | $ | 908,356 |
| | $ | 3,418,265 |
|
Gross margin | | 686,586 |
| | 698,658 |
| | 703,276 |
| | 770,204 |
| | 2,858,724 |
|
Income from operations | | 110,954 |
| | 153,087 |
| | 153,827 |
| | 231,290 |
| | 649,158 |
|
Net income | | 83,463 |
| | 120,898 |
| | 131,901 |
| | 199,850 |
| | 536,112 |
|
Earnings per share - basic | | 0.54 |
| | 0.78 |
| | 0.85 |
| | 1.28 |
| | 3.46 |
|
Earnings per share - diluted | | 0.54 |
| | 0.77 |
| | 0.84 |
| | 1.26 |
| | 3.41 |
|
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total Year |
| | (In thousands, except per share amounts) |
2015 | | | | | | | | | | |
Net revenues | | $ | 760,802 |
| | $ | 796,759 |
| | $ | 813,270 |
| | $ | 904,763 |
| | $ | 3,275,594 |
|
Gross margin | | 628,196 |
| | 664,008 |
| | 667,016 |
| | 702,010 |
| | 2,661,230 |
|
Income from operations | | 51,732 |
| | 122,149 |
| | 63,798 |
| | 112,406 |
| | 350,085 |
|
Net income | | 28,887 |
| | 103,275 |
| | 55,925 |
| | 131,274 |
| | 319,361 |
|
Earnings per share - basic | | 0.18 |
| | 0.64 |
| | 0.35 |
| | 0.85 |
| | 2.01 |
|
Earnings per share - diluted | | 0.18 |
| | 0.64 |
| | 0.35 |
| | 0.84 |
| | 1.99 |
|
The sum of the quarterly net income per share amounts do not add to the annual earnings per share amount due to the weighting of common and common equivalent shares outstanding during each of the respective periods.
CITRIX SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Beginning of Period | | Charged to Expense | | Charged to Other Accounts | | | | Deductions | | | | Balance at End of Period |
| | (In thousands) |
2016 | | | | | | | | | | | | | | |
Deducted from asset accounts: | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 6,281 |
| | $ | 922 |
| | $ | — |
| | | | $ | 3,314 |
| | (2 | ) | | $ | 3,889 |
|
Allowance for returns | | 1,438 |
| | — |
| | 2,088 |
| | (1 | ) | | 1,532 |
| | (4 | ) | | 1,994 |
|
Valuation allowance for deferred tax assets | | 16,673 |
| | — |
| | (2,517 | ) | | (5 | ) | | — |
| | | | 14,156 |
|
2015 | | | | | | | | | | | | | | |
Deducted from asset accounts: | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 3,791 |
| | $ | 5,664 |
| | $ | — |
| | | | $ | 3,174 |
| | (2 | ) | | $ | 6,281 |
|
Allowance for returns | | 2,185 |
| | — |
| | 3,276 |
| | (1 | ) | | 4,023 |
| | (4 | ) | | 1,438 |
|
Valuation allowance for deferred tax assets | | 15,167 |
| | — |
| | 1,506 |
| | (5 | ) | | — |
| | | | 16,673 |
|
2014 | | | | | | | | | | | | | | |
Deducted from asset accounts: | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 3,292 |
| | $ | 2,861 |
| | $ | 76 |
| | (3 | ) | | $ | 2,438 |
| | (2 | ) | | $ | 3,791 |
|
Allowance for returns | | 2,062 |
| | — |
| | 5,049 |
| | (1 | ) | | 4,926 |
| | (4 | ) | | 2,185 |
|
Valuation allowance for deferred tax assets | | 26,465 |
| | — |
| | (11,298 | ) | | (5 | ) | | — |
| | | | 15,167 |
|
| |
(1) | Charged against revenues. |
| |
(2) | Uncollectible accounts written off, net of recoveries. |
| |
(3) | Adjustments from acquisitions. |
| |
(4) | Credits issued for returns. |
| |
(5) | Related to deferred tax assets on foreign tax credits, net operating loss carryforwards, and depreciation. |
EXHIBIT INDEX
|
| | |
Exhibit No. | | Description |
2.1 | | Agreement and Plan of Merger, dated as of July 26, 2016, among Citrix Systems, Inc., GetGo, Inc., LogMeIn, Inc. and Lithium Merger Sub, Inc. (incorporated herein by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed July 28, 2016)** |
2.2 | | Separation and Distribution Agreement, dated as of July 26, 2016, by and among Citrix Systems, Inc., GetGo, Inc. and LogMeIn, Inc. (incorporated herein by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K filed July 28, 2016)** |
2.3† | | Amended and Restated Tax Matters Agreement, dated as of September 13, 2016, by and among LogMeIn, Inc., Citrix Systems, Inc. and GetGo, Inc** |
2.4† | | Amendment No. 1, dated as of December 8, 2016, to Agreement and Plan of Merger, dated as of July 26, 2016, by and among LogMeIn, Inc., Lithium Merger Sub, Inc., Citrix Systems, Inc. and GetGo, Inc** |
3.1 | | Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on May 29, 2013) |
3.2 | | Amended and Restated By-laws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on July 31, 2015) |
4.1 | | Specimen certificate representing Common Stock (incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 33-98542), as amended) |
4.2 | | Indenture, dated as of April 30, 2014, between Citrix Systems, Inc. and Wilmington Trust, National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on April 30, 2014) |
4.3 | | Form of 0.500% Convertible Senior Notes due 2019 (included in Exhibit 4.2) |
10.1* | | Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010) |
10.2* | | First Amendment to Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated as of May 28, 2010) |
10.3* | | Second Amendment to the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated as of June 2, 2011) |
10.4* | | Third Amendment to the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated as of June 2, 2011) |
10.5* | | Fourth Amendment to the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated as of May 31, 2012) |
10.6* | | Fifth Amendment to the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013) |
10.7* | | Sixth Amendment to the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 29, 2013) |
10.8* | | Form of Global Stock Option Agreement under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011) |
10.9* | | Form of Restricted Stock Unit Agreement For Non-Employee Directors under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011) |
10.10* | | Form of Global Restricted Stock Unit Agreement under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (Performance Based Awards) (incorporated herein by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011) |
10.11* | | Form of Global Restricted Stock Unit Agreement under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (Time Based Awards) (incorporated herein by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011) |
10.12* | | Form of Global Restricted Stock Unit Agreement under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (Long Term Incentive) (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012) |
10.13* | | Form of Long Term Incentive Agreement under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated by reference herein to Exhibit 10.1 to10.13 of the Company's QuarterlyAnnual Report on Form 10-Q10-K for the quarteryear ended MarchDecember 31, 2009)2014) |
|
| | |
10.14* | | Amended and Restated 2005 Employee Stock Purchase Plan (incorporated by reference herein to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 2011) |
10.15* | | Amendment to Amended and Restated 2005 Employee Stock Purchase Plan (incorporated by reference herein to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 2012) |
10.16*† | | Citrix Systems, Inc. Executive Bonus Plan |
10.17* | | Change in Control Agreement dated as of August 4, 2005 by and between the Company and Mark B. Templeton (incorporated by reference herein to Exhibit 10.1110.2 to the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2010) |
2013) |
| | |
Exhibit No. | | Description |
10.18* | | Form of Change in Control Agreement by and between the Company and each of David J. Henshall, David R. Freidman, Brett M. Caine, Alvaro J. Monserrat and John Gordon Payne (incorporated by reference herein to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 2010) |
10.19*† | | Form of First Amendment to Change of Control Agreement (Chief Executive Officer) between the Company and Mark Templeton |
10.20*† | | Form of First Amendment to Change of Control Agreement between the Company and each of Brett M. Caine, David J. Henshall, David R. Friedman and Alvaro J. Monserrat (together with Mark Templeton, the “Executive Officers”) |
10.21* | | Form of Amendment to Change in Control Agreements by and between the Company and each of David J. Henshall, David R. Freidman, Brett M. Caine and Alvaro J. Monserrat (incorporated herein by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011) |
10.22*10.17* | | Form of Indemnification Agreement by and between the Company and each of its Directors and Executive Officersexecutive officers (incorporated herein by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011) |
10.23*10.18* | | Citrix Systems, Inc. 2014 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 28, 2014) |
10.19 | | Form of Change in ControlCall Option Transaction Confirmation between Citrix Systems, Inc. and each of JPMorgan Chase Bank, National Association, London Branch; Goldman, Sachs & Co.; Bank of America, N.A.; and Royal Bank of Canada (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 30, 2014) |
10.20 | | Form of Warrants Confirmation between Citrix Systems, Inc. and each of JPMorgan Chase Bank, National Association, London Branch; Goldman, Sachs & Co.; Bank of America, N.A.; and Royal Bank of Canada (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on April 30, 2014) |
10.21 | | Form of Additional Call Option Transaction Confirmation between Citrix Systems, Inc. and each of JPMorgan Chase Bank, National Association, London Branch; Goldman, Sachs & Co.; Bank of America, N.A.; and Royal Bank of Canada (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on May 6, 2014) |
10.22 | | Form of Additional Warrants Confirmation between Citrix Systems, Inc. and each of JPMorgan Chase Bank, National Association, London Branch; Goldman, Sachs & Co.; Bank of America, N.A.; and Royal Bank of Canada (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on May 6, 2014) |
10.23 | | Master Confirmation between Citibank, N.A. and Citrix Systems, Inc., dated April 25, 2014 (incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on April 30, 2014) |
10.24 | | Credit Agreement, dated as of January 7, 2015, by and among Citrix Systems, Inc., the initial lenders named therein and Bank of America, N.A., as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on January 8, 2015) |
10.25 | | Cooperation Agreement, by and among Citrix Systems, Inc., Elliott Associates, L.P., Elliott International, L.P. and Elliott International Capital Advisors Inc., dated July 28, 2015 (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 28, 2015) |
10.26* | | 2015 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 10-Q filed on August 7, 2015) |
10.27* | | Retention Agreement, dated October 12, 2015, by and between Citrix Systems, Inc. and Mark B. Templeton (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 16, 2015) |
10.28* | | Retention Agreement, dated as of July 1, 2016, by and between Citrix Systems, Inc. and William Burley (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on November 4, 2016) |
10.29* | | Employment Agreement, dated January 18, 2017, by and between Citrix Systems, Inc. and Robert M. Calderoni (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on January 20, 2017) |
10.30* | | Form of Executive Agreement of Citrix Systems, Inc. by and between the Company and each of Catherine Courage, Steve Daheb, Sudhakar RamakrishnaDavid J. Henshall, Carlos E. Sartorius and Timothy Minahan (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on January 20, 2017) |
10.31 | | Letter Agreement, dated as of July 26, 2016, among Citrix Systems, Inc., GetGo, Inc., LogMeIn, Inc., Elliott Associates, L.P. and Elliott International, L.P. (incorporated herein by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed July 28, 2016) |
10.32* | | Employment Agreement, dated January 19, 2016, by and between Citrix Systems, Inc. and Kirill Tatarinov (incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed January 20, 2016) |
|
| | |
Exhibit No. | | Description |
10.33* | | Amended and Restated Incentive Agreement, dated February 16, 2016, by and between Citrix Systems, Inc. and Christopher Hylen (incorporated herein by reference herein to Exhibit 10.2510.3 of the Company’s Quarterly Report on Form 10-Q filed May 6, 2016) |
10.34* | | Restricted Stock Award Agreement under the Citrix Systems, Inc. 2014 Equity Incentive Plan for Kirill Tatarinov (incorporated herein by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q filed May 6, 2016) |
10.35* | | Restricted Stock Unit Agreement under the Citrix Systems, Inc. 2014 Equity Incentive Plan for Kirill Tatarinov (2016 Performance-Based Awards) (incorporated herein by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q filed May 6, 2016) |
10.36* | | Form of Restricted Stock Unit Agreement under the Citrix Systems, Inc. 2014 Equity Incentive Plan (2016 Performance-Based Awards) (incorporated herein by reference to Exhibit 10.7 of the Company’s Quarterly Report on Form 10-Q filed May 6, 2016) |
10.37 | | First Amendment to Credit Agreement, dated as of August 7, 2015, by and among Citrix Systems, Inc., the lenders named therein and Bank of America, N.A., as Administrative Agent (incorporated herein by reference to Exhibit 10.3 to the Company's AnnualQuarterly Report on Form 10-K10-Q filed on November 4, 2015) |
10.38* | | Form of Restricted Stock Unit Agreement under the Citrix Systems, Inc. 2014 Equity Incentive Plan for each of David J. Henshall, Timothy Minahan and Carlos E. Sartorius (Performance Based Awards) (incorporated herein by reference to Exhibit 10.7 to the year ended December 31, 2012)Company's Quarterly Report on Form 10-Q filed on November 4, 2015) |
10.39*† | | Amendment to 2015 Employee Stock Purchase Plan, dated October 27, 2016 |
21.1† | | List of Subsidiaries |
23.1† | | Consent of Independent Registered Public Accounting Firm |
24.1 | | Power of Attorney (included in signature page) |
31.1† | | Rule 13a-14(a) / 15d-14(a) CertificationsCertification of Principal Executive Officer |
31.2† | | Rule 13a-14(a) / 15d-14(a) CertificationsCertification of Principal Financial Officer |
32.1†† | | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906Certification of the Sarbanes-Oxley Act of 2002Principal Executive Officer and Principal Financial Officer |
101†101.INS† | | XBRL (eXtensible Business Reporting Language). The following materials from Citrix Systems, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013 formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements of Equity, (v) the Consolidated Statements of Cash Flows and (vi) notes to consolidated financial statements.Instance Document |
101.SCH† | | XBRL Taxonomy Extension Schema Document |
101.CAL† | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF† | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB† | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE† | | XBRL Taxonomy Extension Presentation Linkbase Document |
|
| |
* | Indicates a management contract or a compensatory plan, contract or arrangement. |
† | Filed herewith. |
††**
| Furnished herewith. |
Schedules (or similar attachments) have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby undertakes to furnish supplementally copies of any of the omitted schedules (or similar attachments) upon request by the SEC.
(b) Exhibits.
The Company hereby files as part of this Annual Report on Form 10-K for the year ended December 31, 2013, the exhibits listed in Item 15(a)(3) above. Exhibits which are incorporated herein by reference can be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C., 20549 and at the Commission’s regional offices at 175 W. Jackson Boulevard, Suite 900, Chicago, IL 60604 and 3 World Financial Center, Suite 400, New York, NY 10281-1022.
(c) Financial Statement Schedule.
The Company hereby files as part of this Annual Report on Form 10-K for the year ended December 31, 2013 the consolidated financial statement schedule listed in Item 15(a)(2) above, which is attached hereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Fort Lauderdale, Florida on the 20th day of February, 2014.
|
| | |
| | CITRIX SYSTEMS, INC. |
| | |
| By: | /s/ MARK B. TEMPLETON |
| | Mark B. Templeton |
| | President and Chief Executive Officer |
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Citrix Systems, Inc., hereby severally constitute and appoint Mark B. Templeton and David J. Henshall, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicated below, all amendments to this report, and generally to do all things in our names and on our behalf in such capacities to enable Citrix Systems, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below on the 20th day of February, 2014.
|
| | | | |
Signature | | Title(s) | | |
| | |
/S/ MARK B. TEMPLETON
| | President, Chief Executive Officer and Director (Principal Executive Officer) | | |
Mark B. Templeton | | | |
| | |
/S/ DAVID J. HENSHALL | | Executive Vice President, Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer) | | |
David J. Henshall | | | | |
| | |
/S/ THOMAS F. BOGAN | | Chairman of the Board of Directors | | |
Thomas F. Bogan | | | | |
| | |
/S/ NANCI CALDWELL | | Director | | |
Nanci Caldwell | | | | |
| | | | |
/S/ ROBERT D. DALEO | | Director | | |
Robert D. Daleo | | | | |
| | |
/S/ MURRAY J. DEMO | | Director | | |
Murray J. Demo | | | | |
| | |
/S/ STEPHEN M. DOW | | Director | | |
Stephen M. Dow | | | | |
| | |
/S/ ASIFF S. HIRJI | | Director | | |
Asiff S. Hirji | | | | |
| | |
/S/ GARY E. MORIN | | Director | | |
Gary E. Morin | | | | |
| | |
/S/ GODFREY R. SULLIVAN | | Director | | |
Godfrey R. Sullivan | | | | |
CITRIX SYSTEMS, INC.
List of Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Citrix Systems, Inc. are included in Item 8:
|
| | |
| Report of Independent Registered Public Accounting Firm | |
| | |
| | |
| | |
| | |
| | |
| | |
The following consolidated financial statement schedule of Citrix Systems, Inc. is included in Item 15(a): | |
| Schedule II Valuation and Qualifying Accounts | |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Citrix Systems, Inc.
We have audited the accompanying consolidated balance sheets of Citrix Systems, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Citrix Systems, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Citrix Systems Inc.'s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 20, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Certified Public Accountants
Boca Raton, Florida
February 20, 2014
CITRIX SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| December 31, 2013 | | December 31, 2012 |
| (In thousands, except par value) |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 280,740 |
| | $ | 643,609 |
|
Short-term investments, available-for-sale | 453,976 |
| | 285,022 |
|
Accounts receivable, net of allowances of $5,354 and $6,448 at December 31, 2013 and 2012, respectively | 654,821 |
| | 630,956 |
|
Inventories, net | 14,107 |
| | 10,723 |
|
Prepaid expenses and other current assets | 110,981 |
| | 106,579 |
|
Current portion of deferred tax assets, net | 48,470 |
| | 36,846 |
|
Total current assets | 1,563,095 |
| | 1,713,735 |
|
Long-term investments, available-for-sale | 855,700 |
| | 595,313 |
|
Property and equipment, net | 338,996 |
| | 303,294 |
|
Goodwill | 1,768,949 |
| | 1,518,219 |
|
Other intangible assets, net | 509,595 |
| | 556,205 |
|
Long-term portion of deferred tax assets, net | 115,418 |
| | 43,097 |
|
Other assets | 60,496 |
| | 66,539 |
|
Total assets | $ | 5,212,249 |
| | $ | 4,796,402 |
|
Liabilities and Stockholders' Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 78,452 |
| | $ | 71,116 |
|
Accrued expenses and other current liabilities | 257,606 |
| | 257,135 |
|
Income taxes payable | 29,322 |
| | 49,346 |
|
Current portion of deferred revenues | 1,098,681 |
| | 965,276 |
|
Total current liabilities | 1,464,061 |
| | 1,342,873 |
|
Long-term portion of deferred revenues | 313,059 |
| | 232,719 |
|
Other liabilities | 115,322 |
| | 99,033 |
|
Commitments and contingencies |
| |
|
Stockholders' equity: | | | |
Preferred stock at $.01 par value: 5,000 shares authorized, none issued and outstanding | — |
| | — |
|
Common stock at $.001 par value: 1,000,000 shares authorized; 291,078 and 287,123 shares issued and outstanding at December 31, 2013 and 2012, respectively | 291 |
| | 287 |
|
Additional paid-in capital | 3,974,297 |
| | 3,691,111 |
|
Retained earnings | 2,903,541 |
| | 2,564,018 |
|
Accumulated other comprehensive income (loss) | 4,951 |
| | (7,705 | ) |
| 6,883,080 |
| | 6,247,711 |
|
Less - common stock in treasury, at cost (107,789 and 100,781 shares at December 31, 2013 and 2012, respectively) | (3,563,273 | ) | | (3,125,934 | ) |
Total stockholders' equity | 3,319,807 |
| | 3,121,777 |
|
Total liabilities and stockholders' equity | $ | 5,212,249 |
| | $ | 4,796,402 |
|
See accompanying notes.
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2013 |
| 2012 |
| 2011 |
| (In thousands, except per share information) |
Revenues: | | | | | |
Product and licenses | $ | 891,630 |
| | $ | 830,645 |
| | $ | 744,513 |
|
Software as a service | 582,872 |
| | 511,323 |
| | 430,213 |
|
License updates and maintenance | 1,305,053 |
| | 1,125,094 |
| | 940,181 |
|
Professional services | 138,879 |
| | 119,061 |
| | 91,485 |
|
Total net revenues | 2,918,434 |
| | 2,586,123 |
| | 2,206,392 |
|
Cost of net revenues: | | | | | |
Cost of product and license revenues | 114,932 |
| | 96,962 |
| | 74,393 |
|
Cost of services and maintenance revenues | 289,990 |
| | 227,150 |
| | 164,465 |
|
Amortization of product related intangible assets | 97,873 |
| | 80,025 |
| | 54,741 |
|
Total cost of net revenues | 502,795 |
| | 404,137 |
| | 293,599 |
|
Gross margin | 2,415,639 |
| | 2,181,986 |
| | 1,912,793 |
|
Operating expenses: | | | | | |
Research and development | 516,338 |
| | 450,571 |
| | 380,674 |
|
Sales, marketing and services | 1,216,680 |
| | 1,060,829 |
| | 885,066 |
|
General and administrative | 260,236 |
| | 245,259 |
| | 213,673 |
|
Amortization of other intangible assets | 41,668 |
| | 34,549 |
| | 16,390 |
|
Restructuring | — |
| | — |
| | 24 |
|
Total operating expenses | 2,034,922 |
| | 1,791,208 |
| | 1,495,827 |
|
Income from operations | 380,717 |
| | 390,778 |
| | 416,966 |
|
Interest income | 8,194 |
| | 10,152 |
| | 13,819 |
|
Other (expense) income, net | (1,021 | ) | | 9,299 |
| | (288 | ) |
Income before income taxes | 387,890 |
| | 410,229 |
| | 430,497 |
|
Income taxes | 48,367 |
| | 57,682 |
| | 74,867 |
|
Consolidated net income | 339,523 |
| | 352,547 |
| | 355,630 |
|
Less: Net loss attributable to non-controlling interest | — |
| | — |
| | 692 |
|
Net income attributable to Citrix Systems, Inc. | $ | 339,523 |
| | $ | 352,547 |
| | $ | 356,322 |
|
Net income per share attributable to Citrix Systems, Inc. stockholders: | | | | | |
Net income per share attributable to Citrix Systems, Inc. stockholders - basic | $ | 1.82 |
| | $ | 1.89 |
| | $ | 1.90 |
|
Net income per share attributable to Citrix Systems, Inc. stockholders - diluted | $ | 1.80 |
| | $ | 1.86 |
| | $ | 1.87 |
|
Weighted average shares outstanding: | | | | | |
Basic | 186,672 |
| | 186,722 |
| | 187,315 |
|
Diluted | 188,245 |
| | 189,129 |
| | 190,641 |
|
See accompanying notes.
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2012 | | 2011 |
| (In thousands) |
| | | | | |
Consolidated net income | $ | 339,523 |
| | $ | 352,547 |
| | $ | 355,630 |
|
Other comprehensive income (loss): | | | | | |
Change in foreign currency translation adjustment | 8,482 |
| | 2,457 |
| | (4,595 | ) |
| | | | | |
Available for sale securities: | | | | | |
Change in net unrealized gains | (985 | ) | | 3,603 |
| | 293 |
|
Less: reclassification adjustment for net (gains) losses included in net income | (203 | ) | | (3,443 | ) | | 1,343 |
|
Net change (net of tax effect) | (1,188 | ) | | 160 |
| | 1,636 |
|
| | | | | |
Gain (loss) on pension liability | 2,500 |
| | (3,925 | ) | | 634 |
|
| | | | | |
Cash flow hedges: | | | | | |
Change in unrealized gains | (67 | ) | | (653 | ) | | (2,784 | ) |
Less: reclassification adjustment for net losses (gains) included in net income | 2,929 |
| | 5,817 |
| | (8,475 | ) |
Net change (net of tax effect) | 2,862 |
| | 5,164 |
| | (11,259 | ) |
| | | | | |
Other comprehensive income (loss) | 12,656 |
| | 3,856 |
| | (13,584 | ) |
| | | | | |
Comprehensive income | 352,179 |
| | 356,403 |
| | 342,046 |
|
| | | | | |
Less: Comprehensive income attributable to non-controlling interest | — |
| | — |
| | (692 | ) |
Comprehensive income attributable to Citrix Systems, Inc. | $ | 352,179 |
| | $ | 356,403 |
| | $ | 341,354 |
|
See accompanying notes.
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (loss) | | Common Stock in Treasury | | Non-Controlling Interest | | Total Equity |
| Shares | | Amount | | Shares | | Amount | | |
Balance at December 31, 2010 | 277,992 |
| | $ | 278 |
| | $ | 3,112,186 |
| | $ | 1,855,149 |
| | $ | 2,023 |
| | (90,502 | ) | | $ | (2,416,645 | ) | | $ | 7,597 |
| | $ | 2,560,588 |
|
Shares issued under stock-based compensation plans | 4,472 |
| | 4 |
| | 125,602 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 125,606 |
|
Stock-based compensation expense | — |
| | — |
| | 89,422 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 89,422 |
|
Common stock issued under employee stock purchase plan | 310 |
| | 1 |
| | 21,098 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 21,099 |
|
Tax benefit from employer stock plans | — |
| | — |
| | 50,003 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 50,003 |
|
Stock repurchases, net | — |
| | — |
| | — |
| | — |
| | — |
| | (6,276 | ) | | (424,849 | ) | | — |
| | (424,849 | ) |
Restricted shares turned in for tax withholding | — |
| | — |
| | — |
| | — |
| | — |
| | (182 | ) | | (13,262 | ) | | — |
| | (13,262 | ) |
Purchase of non-controlling interest | — |
| | — |
| | (13,258 | ) | | — |
| | — |
| | — |
| | — |
| | (6,905 | ) | | (20,163 | ) |
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (13,584 | ) | | — |
| | — |
| | — |
| | (13,584 | ) |
Net income | — |
| | — |
| | — |
| | 356,322 |
| | — |
| | — |
| | — |
| | (692 | ) | | 355,630 |
|
Balance at December 31, 2011 | 282,774 |
| | 283 |
| | 3,385,053 |
| | 2,211,471 |
| | (11,561 | ) | | (96,960 | ) | | (2,854,756 | ) | | — |
| | 2,730,490 |
|
Shares issued under stock-based compensation plans | 3,983 |
| | 3 |
| | 108,402 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 108,405 |
|
Stock-based compensation expense | — |
| | — |
| | 145,967 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 145,967 |
|
Common stock issued under employee stock purchase plan | 366 |
| | 1 |
| | 24,888 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 24,889 |
|
Tax benefit from employer stock plans | — |
| | — |
| | 24,839 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 24,839 |
|
Stock repurchases, net | — |
| | — |
| | — |
| | — |
| | — |
| | (3,551 | ) | | (251,008 | ) | | — |
| | (251,008 | ) |
Restricted shares turned in for tax withholding | — |
| | — |
| | — |
| | — |
| | — |
| | (270 | ) | | (20,170 | ) | | — |
| | (20,170 | ) |
Other | — |
| | — |
| | 1,962 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,962 |
|
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | 3,856 |
| | — |
| | — |
| | — |
| | 3,856 |
|
Net income | — |
| | — |
| | — |
| | 352,547 |
| | — |
| | — |
| | — |
| | — |
| | 352,547 |
|
Balance at December 31, 2012 | 287,123 |
| | 287 |
| | 3,691,111 |
| | 2,564,018 |
| | (7,705 | ) | | (100,781 | ) | | (3,125,934 | ) | | — |
| | 3,121,777 |
|
Shares issued under stock-based compensation plans | 3,545 |
| | 3 |
| | 73,652 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 73,655 |
|
Stock-based compensation expense | — |
| | — |
| | 179,098 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 179,098 |
|
Common stock issued under employee stock purchase plan | 410 |
| | 1 |
| | 30,144 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 30,145 |
|
Tax deficiency from employer stock plans, net | — |
| | — |
| | (620 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (620 | ) |
Stock repurchases, net | — |
| | — |
| | — |
| | — |
| | — |
| | (6,564 | ) | | (406,326 | ) | | — |
| | (406,326 | ) |
Restricted shares turned in for tax withholding | — |
| | — |
| | — |
| | — |
| | — |
| | (444 | ) | | (31,013 | ) | | — |
| | (31,013 | ) |
Other | — |
| | — |
| | 912 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 912 |
|
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | 12,656 |
| | — |
| | — |
| | — |
| | 12,656 |
|
Net income | — |
| | — |
| | — |
| | 339,523 |
| | — |
| | — |
| | — |
| | — |
| | 339,523 |
|
Balance at December 31, 2013 | 291,078 |
| | $ | 291 |
| | $ | 3,974,297 |
| | $ | 2,903,541 |
| | $ | 4,951 |
| | (107,789 | ) | | $ | (3,563,273 | ) | | $ | — |
| | $ | 3,319,807 |
|
See accompanying notes.
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2012 | | 2011 |
| (In thousands) |
Operating Activities | | | | | |
Net income | $ | 339,523 |
| | $ | 352,547 |
| | $ | 355,630 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Amortization of intangible assets | 139,541 |
| | 114,574 |
| | 71,131 |
|
Depreciation and amortization of property and equipment | 127,959 |
| | 100,299 |
| | 88,124 |
|
Stock-based compensation expense | 183,941 |
| | 149,940 |
| | 92,909 |
|
(Gain) loss on investments | (2,441 | ) | | (14,477 | ) | | 1,343 |
|
Provision for doubtful accounts | 1,046 |
| | 1,784 |
| | 266 |
|
Provision for product returns | 4,473 |
| | 10,743 |
| | 5,541 |
|
Provision for inventory reserves | 1,905 |
| | 1,022 |
| | 1,570 |
|
Deferred income tax benefit | (51,848 | ) | | (70,791 | ) | | (16,229 | ) |
Tax effect of stock-based compensation | 8,129 |
| | 24,839 |
| | 50,003 |
|
Excess tax benefit from stock-based compensation, net | (12,552 | ) | | (35,374 | ) | | (51,659 | ) |
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies | 5,888 |
| | 1,706 |
| | 1,895 |
|
Other non-cash items | 434 |
| | 1,178 |
| | 4,733 |
|
Total adjustments to reconcile net income to net cash provided by operating activities | 406,475 |
| | 285,443 |
| | 249,627 |
|
Changes in operating assets and liabilities, net of the effects of acquisitions: | | | | | |
Accounts receivable | (22,951 | ) | | (107,628 | ) | | (95,481 | ) |
Inventories | (5,591 | ) | | (2,024 | ) | | (3,097 | ) |
Prepaid expenses and other current assets | (862 | ) | | (9,195 | ) | | 1,407 |
|
Other assets | 5,076 |
| | (1,497 | ) | | (562 | ) |
Income taxes, net | (35,316 | ) | | (4,408 | ) | | 25,180 |
|
Accounts payable | 3,092 |
| | (426 | ) | | (11,758 | ) |
Accrued expenses and other current liabilities | 22,515 |
| | 45,135 |
| | (20,996 | ) |
Deferred revenues | 201,455 |
| | 216,798 |
| | 168,994 |
|
Other liabilities | 14,927 |
| | 43,782 |
| | 10,178 |
|
Total changes in operating assets and liabilities, net of the effects of acquisitions | 182,345 |
| | 180,537 |
| | 73,865 |
|
Net cash provided by operating activities | 928,343 |
| | 818,527 |
| | 679,122 |
|
Investing Activities | | | | | |
Purchases of available-for-sale investments | (1,703,976 | ) | | (1,435,367 | ) | | (1,360,677 | ) |
Proceeds from sales of available-for-sale investments | 766,192 |
| | 1,256,295 |
| | 856,182 |
|
Proceeds from maturities of available-for-sale investments | 504,314 |
| | 437,991 |
| | 652,939 |
|
Proceeds from the sales of cost method investments | 12,067 |
| | 24,252 |
| | — |
|
Purchases of property and equipment | (162,889 | ) | | (122,958 | ) | | (111,932 | ) |
Purchases of cost method investments | (6,824 | ) | | (6,622 | ) | | (16,879 | ) |
Cash paid for acquisitions, net of cash acquired | (334,881 | ) | | (487,221 | ) | | (455,377 | ) |
Cash paid for licensing agreements and product related intangible assets | (12,153 | ) | | (27,760 | ) | | (15,437 | ) |
Other | — |
| | 3,450 |
| | — |
|
Net cash used in investing activities | (938,150 | ) | | (357,940 | ) | | (451,181 | ) |
Financing Activities | | | | | |
Proceeds from issuance of common stock under stock-based compensation plans | 73,655 |
| | 108,406 |
| | 125,606 |
|
Repayment of acquired debt | (2,061 | ) | | (24,346 | ) | | (11,561 | ) |
Excess tax benefit from stock-based compensation | 12,552 |
| | 35,374 |
| | 51,659 |
|
Purchase of non-controlling interest | — |
| | — |
| | (17,207 | ) |
Stock repurchases, net | (406,326 | ) | | (251,008 | ) | | (424,849 | ) |
Cash paid for tax withholding on vested stock awards | (31,013 | ) | | (20,170 | ) | | (13,262 | ) |
Other | 912 |
| | 1,962 |
| | (3,000 | ) |
Net cash used in financing activities | (352,281 | ) | | (149,782 | ) | | (292,614 | ) |
Effect of exchange rate changes on cash and cash equivalents | (781 | ) | | (492 | ) | | 1,807 |
|
Change in cash and cash equivalents | (362,869 | ) | | 310,313 |
| | (62,866 | ) |
Cash and cash equivalents at beginning of period | 643,609 |
| | 333,296 |
| | 396,162 |
|
Cash and cash equivalents at end of period | $ | 280,740 |
| | $ | 643,609 |
| | $ | 333,296 |
|
Supplemental Cash Flow Information | | | | | |
Cash paid for income taxes | $ | 92,672 |
| | $ | 32,355 |
| | $ | 12,195 |
|
Cash paid for interest | $ | 127 |
| | $ | 305 |
| | $ | 139 |
|
See accompanying notes.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Citrix Systems, Inc. ("Citrix" or the "Company"), is a Delaware corporation founded on April 17, 1989. Citrix is a leader in virtualization, networking and cloud infrastructure to enable new ways for people to work better. Citrix solutions help IT and service providers to build, manage and secure virtual and mobile workspaces that seamlessly deliver apps, desktops, data and services to virtually anyone, on any device, over any network or cloud.
Citrix markets and licenses its products directly to customers, over the Web, and through systems integrators ("SIs"), in addition to indirectly through value-added resellers ("VARs"), value-added distributors ("VADs"), original equipment manufacturers ("OEMs"), and service providers.
The Company’s revenues are derived from its Enterprise and Service Provider products, which primarily include its Mobile and Desktop products, Networking and Cloud products and related license updates and maintenance and professional services and from its Software as a Service ("SaaS") products, which primarily include Collaboration and Data Sharing, Remote Access and Remote IT Support products. Enterprise and Service Provider (formerly Infrastructure division) and SaaS constitute the Company's two reportable segments. See Note 11 for more information on the Company's segments.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries in the Americas, Europe, the Middle East and Africa (“EMEA”), Asia-Pacific and the SaaS division. All significant transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 2013 and 2012 include marketable securities, which are primarily money market funds, commercial paper, agency, and government securities, municipal securities and corporate securities with initial or remaining contractual maturities when purchased of three months or less.
Investments
Short-term and long-term investments at December 31, 2013 and 2012 primarily consist of agency securities, corporate securities, municipal securities and government securities. Investments classified as available-for-sale are stated at fair value with unrealized gains and losses, net of taxes, reported in Accumulated other comprehensive income (loss). The Company classifies its available-for-sale investments as current and non-current based on their actual remaining time to maturity. The Company does not recognize changes in the fair value of its available-for-sale investments in income unless a decline in value is considered other-than-temporary in accordance with the authoritative guidance.
The Company’s investment policy is designed to limit exposure to any one issuer depending on credit quality. The Company uses information provided by third parties to adjust the carrying value of certain of its investments to fair value at the end of each period. Fair values are based on a variety of inputs and may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes.
Accounts Receivable
The Company’s accounts receivable are attributable primarily to VARs, VADs and end customers. Collateral is generally not required. The Company also maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make payments. The Company periodically reviews these estimated allowances, including by conducting an analysis of the customer's payment history and creditworthiness, the age of the trade receivable balances and current economic conditions that may affect a customer’s ability to make payments. Based on this review, the Company specifically reserves for those accounts deemed uncollectible. When receivables are determined to be uncollectible, principal amounts of such receivables outstanding are deducted from the allowance. The allowance for doubtful accounts was $3.3 million and $3.8 million as of December 31, 2013 and 2012, respectively. If the financial condition of a significant distributor or customer were to deteriorate, the Company’s operating results could be adversely affected. One distributor, Ingram Micro, accounted for 10% and 11% of gross accounts receivable at December 31, 2013 and 2012, respectively.
Inventory
Inventories are stated at the lower of cost or market on a standard cost basis, which approximates actual cost. The Company’s inventories primarily consist of finished goods as of December 31, 2013 and 2012.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is generally three years for computer equipment and software, the lesser of the lease term or ten years for leasehold improvements, which is the estimated useful life, seven years for office equipment and furniture and the Company’s enterprise resource planning system and 40 years for buildings.
During 2013 and 2012, the Company retired $10.3 million and $5.3 million, respectively, in property and equipment that were no longer in use. At the time of retirement, the remaining net book value of these assets was not material and no material asset retirement obligations were associated with them.
Property and equipment consist of the following:
|
| | | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (In thousands) |
Buildings | | $ | 85,092 |
| | $ | 76,202 |
|
Computer equipment | | 204,110 |
| | 178,948 |
|
Software | | 316,902 |
| | 259,225 |
|
Equipment and furniture | | 105,145 |
| | 86,362 |
|
Leasehold improvements | | 168,990 |
| | 149,731 |
|
| | 880,239 |
| | 750,468 |
|
Less accumulated depreciation and amortization | | (597,268 | ) | | (479,460 | ) |
Assets under construction | | 28,438 |
| | 15,517 |
|
Land | | 27,587 |
| | 16,769 |
|
Total | | $ | 338,996 |
| | $ | 303,294 |
|
Long-Lived Assets
The Company reviews for impairment of long-lived assets and certain identifiable intangible assets to be held and used whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss is based on the fair value of the asset compared to its carrying value. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
For the year ended December 31, 2012, the Company decided to contribute its CloudStack tradename acquired in conjunction with its acquisition of Cloud.com to the Apache Software Foundation. As a result, the carrying value of the CloudStack tradename was written down to zero, resulting in a $5.2 million impairment, which was recorded in Amortization of other intangible assets in the accompanying consolidated statements of income. During 2013 and 2011, the Company did not recognize any impairment charges associated with its intangible assets.
Goodwill
The Company accounts for goodwill in accordance with the authoritative guidance, which requires that goodwill and certain intangible assets are not amortized, but are subject to an annual impairment test. There was no impairment of goodwill or indefinite lived intangible assets as a result of the annual impairment tests analyses completed during the fourth quarters of 2013 and 2012, respectively. The authoritative guidance provides entities with an option to perform a qualitative assessment to determine whether further quantitative impairment testing is necessary. The Company performed the qualitative assessment when it performed its goodwill impairment test in the fourth quarter of 2013. As a result of the qualitative analysis, no further quantitative impairment test was deemed necessary. See Note 3 for acquisitions and Note 11 for segment information.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the change in goodwill allocated to the Company’s reportable segments during 2013 and 2012 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at January 1, 2013 | | Additions | | Other | | Balance at December 31, 2013 | | Balance at January 1, 2012 | | Additions | | Other | | Balance at December 31, 2012 |
Enterprise and Service Provider division | $ | 1,158,580 |
| | $ | 248,800 |
| | $ | (5,224 | ) | (2) | $ | 1,402,156 |
| | $ | 956,504 |
| | $ | 257,379 |
| | $ | (55,303 | ) | (4) | $ | 1,158,580 |
|
SaaS division | 359,639 |
| | 2,668 |
| | 4,486 |
| (3) | 366,793 |
| | 282,616 |
| | 26,481 |
| | 50,542 |
| (4) | 359,639 |
|
Consolidated | $ | 1,518,219 |
| | $ | 251,468 |
| (1) | $ | (738 | ) | | $ | 1,768,949 |
| | $ | 1,239,120 |
| | $ | 283,860 |
| (1) | $ | (4,761 | ) | | $ | 1,518,219 |
|
| |
(1)
| Amount primarily relates to acquisitions. See Note 3 for more information regarding the Company’s acquisitions. |
| |
(2)
| Amount primarily relates to adjustments to the preliminary purchase price allocation for certain 2012 Acquisitions. |
| |
(3)
| Amount primarily relates to foreign currency translation. |
| |
(4)
| Amount primarily relates to reclassification of goodwill between segments. In the first quarter of 2012, the Company transferred the business acquired in its acquisition of Novell Labs, Inc. (d/b/a "ShareFile") from its Enterprise and Service Provider division to its SaaS division. Also included in the SaaS division is foreign currency translation. |
Intangible Assets
The Company has intangible assets which were primarily acquired in conjunction with business combinations and technology purchases. Intangible assets with finite lives are recorded at cost, less accumulated amortization. Amortization is recognized on a straight-line basis over the estimated useful lives of the respective assets, generally three to seven years, except for patents, which are amortized over the lesser of their remaining life or ten years. In accordance with the authoritative guidance, the Company records acquired product related intangible assets at net realizable value and reviews this technology for impairment on a periodic basis by comparing the estimated net realizable value to the unamortized cost of the technology. In-process R&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When in-process R&D projects are completed, the corresponding amount is reclassified as an amortizable purchased intangible asset and is amortized over the asset's estimated useful life.
Intangible assets consist of the following (in thousands):
|
| | | | | | | | | |
| December 31, 2013 |
| Gross Carrying Amount | | Accumulated Amortization | | Weighted-Average Life (Years) |
Product related intangible assets | $ | 677,509 |
| | $ | 428,418 |
| | 5.60 |
Other | 482,918 |
| | 222,414 |
| | 7.52 |
Total | $ | 1,160,427 |
| | $ | 650,832 |
| | 6.38 |
|
| | | | | | | | | |
| December 31, 2012 |
| Gross Carrying Amount | | Accumulated Amortization | | Weighted-Average Life (Years) |
Product related intangible assets | $ | 620,032 |
| | $ | 339,608 |
| | 5.60 |
Other | 446,601 |
| | 170,820 |
| | 7.28 |
Total | $ | 1,066,633 |
| | $ | 510,428 |
| | 6.29 |
Other intangible assets consist primarily of customer relationships, trade names, covenants not to compete and patents. Amortization of product related intangible assets includes amortization of product related technologies and patents and is reported as a Cost of net revenues in the accompanying consolidated statements of income. Amortization of other intangible assets includes amortization of customer relationships, trade names and covenants not to compete and is reported as an Operating expense in the accompanying consolidated statements of income. The Company monitors its intangible assets for indicators of impairment. If the Company determines an impairment has occurred, it will write-down the intangible asset to its fair value. There were no impairments for the year ended December 31, 2013. For the year ended December 31, 2012, Amortization of other intangible assets includes a $5.2 million impairment related to the Company's decision to contribute its CloudStack tradename acquired in conjunction with its acquisition of Cloud.com to the Apache Software Foundation. As a
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
result, the carrying value of the CloudStack tradename was written down to zero. See Note 3 for more information regarding the Company's acquisitions.
Estimated future annual amortization expense is as follows (in thousands):
|
| | | |
Year ending December 31, | |
2014 | $ | 132,956 |
|
2015 | 111,016 |
|
2016 | 88,749 |
|
2017 | 61,057 |
|
2018 | 47,618 |
|
Software Development Costs
The authoritative guidance requires certain internal software development costs related to software to be sold to be capitalized upon the establishment of technological feasibility. The Company's software development costs incurred subsequent to achieving technological feasibility have not been significant and substantially all software development costs have been expensed as incurred.
Internal Use Software
In accordance with the authoritative guidance, the Company capitalizes external direct costs of materials and services and internal costs such as payroll and benefits of those employees directly associated with the development of new functionality in internal use software and software developed related to its software as a service (“SaaS”) offerings. The amount of costs capitalized in 2013 and 2012 relating to internal use software was $62.7 million and $51.5 million, respectively. These costs are being amortized over the estimated useful life of the software, which is generally three to seven years, and are included in property and equipment in the accompanying consolidated balance sheets. The total amounts charged to expense relating to internal use software was approximately $58.6 million, $44.5 million and $37.2 million, during the years ended December 31, 2013, 2012 and 2011, respectively.
Revenue Recognition
Net revenues include the following categories: Product and licenses, Software as a service, License updates and maintenance and Professional services. Product and licenses revenues primarily represent fees related to the licensing of the Company’s software and hardware appliance products. These revenues are reflected net of sales allowances, cooperative advertising agreements, partner incentive programs and provisions for returns. Shipping charges billed to customers are included in Product and license revenue and the related shipping costs are included in Cost of product and license revenue. SaaS revenues consist primarily of fees related to online service agreements, which are recognized ratably over the contract term, which is typically 12 months. In addition, SaaS revenues may also include set-up fees, which are recognized ratably over the contract term or the expected customer life, whichever is longer. License updates and maintenance revenues consist of fees related to the Subscription Advantage program and maintenance fees, which include technical support and hardware and software maintenance. The Company licenses many of its virtualization products bundled with a one-year contract for its Subscription Advantage program. Subscription Advantage is a renewable program that provides subscribers with immediate access to software upgrades, enhancements and maintenance releases when and if they become available during the term of the contract. Subscription Advantage and maintenance fees are recognized ratably over the term of the contract, which is typically 12 to 24 months. The Company capitalizes certain third-party commissions related to Subscription Advantage renewals. The capitalized commissions are amortized to Sales, marketing and services expense at the time the related deferred revenue is recognized as revenue. Hardware and software maintenance and support contracts are typically sold separately. Hardware maintenance includes technical support, the latest software upgrades and replacement of malfunctioning appliances. Dedicated account management is available as an add-on to the program for a higher level of service. Software maintenance includes unlimited support with product version upgrades. Professional services revenues are comprised of fees from consulting services related to the implementation of the Company’s products and fees from product training and certification, which are recognized as the services are provided.
The Company recognizes revenue when it is earned and when all of the following criteria are met: persuasive evidence of the arrangement exists; delivery has occurred or the service has been provided and the Company has no remaining obligations; the fee is fixed or determinable; and collectability is probable. The Company defines these four criteria as follows:
Persuasive evidence of the arrangement exists. The Company primarily sells its software products via electronic licenses and typically requires a purchase order from the distributor, reseller or end-user (depending on the
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
arrangement) who have previously negotiated a master distribution or resale agreement and an executed product license agreement from the end-user. For appliance sales, it is the Company’s customary practice to require a purchase order from distributors and resellers who have previously negotiated a master packaged product distribution or resale agreement. The Company typically recognizes revenue upon shipment for its appliance sales. For maintenance, technical support, product training and consulting services, the Company requires a purchase order and an executed agreement. For SaaS, the Company generally requires the customer or the reseller to electronically accept the terms of an online services agreement or execute a contract.
Delivery has occurred and the Company has no remaining obligations. The Company considers delivery of licenses under electronic licensing agreements to have occurred when the related products are shipped and the end-user has been electronically provided the software activation keys that allow the end-user to take immediate possession of the product. For hardware appliance sales, the Company’s standard delivery method is free-on-board shipping point. Consequently, it considers delivery of appliances to have occurred when they are shipped pursuant to an agreement and purchase order. For SaaS, delivery occurs upon providing the users with their login id and password. For product training and consulting services, the Company fulfills its obligation when the services are performed. For license updates and maintenance, the Company assumes that its obligation is satisfied ratably over the respective terms of the agreements, which are typically 12 to 24 months. For SaaS, the Company assumes that its obligation is satisfied ratably over the respective terms of the agreements, which are typically 12 months.
The fee is fixed or determinable. In the normal course of business, the Company does not provide customers the right to a refund of any portion of their license fees or extended payment terms. The fees are considered fixed or determinable upon establishment of an arrangement that contains the final terms of the sale including description, quantity and price of each product or service purchased. For SaaS, the fee is considered fixed or determinable if it is not subject to refund or adjustment.
Collectability is probable. The Company determines collectability on a customer-by-customer basis and generally does not require collateral. The Company typically sells product licenses and license updates to distributors or resellers for whom there are histories of successful collection. New customers are typically subject to a credit review process that evaluates their financial position and ultimately their ability to pay. Customers are also subject to an ongoing credit review process. If the Company determines from the outset of an arrangement that collectability is not probable, revenue recognition is deferred until customer payment is received and the other parameters of revenue recognition described above have been achieved. Management’s judgment is required in assessing the probability of collection, which is generally based on an evaluation of customer specific information, historical experience and economic market conditions.
The majority of the Company’s product and license revenue consists of revenue from the sale of stand-alone software products. Stand-alone software sales generally include a perpetual license to the Company’s software and is subject to the industry specific software revenue recognition guidance. In accordance with this guidance, the Company allocates revenue to license updates related to its stand-alone software and any other undelivered elements of the arrangement based on vendor specific objective evidence (“VSOE”) of fair value of each element and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria described above have been met. The balance of the revenues, net of any discounts inherent in the arrangement, is recognized at the outset of the arrangement using the residual method as the product licenses are delivered. If management cannot objectively determine the fair value of each undelivered element based on VSOE of fair value, revenue recognition is deferred until all elements are delivered, all services have been performed, or until fair value can be objectively determined.
For hardware appliance and software transactions, the arrangement consideration is allocated to stand-alone software deliverables as a group and the non-software deliverables based on the relative selling prices using the selling price hierarchy in the revenue recognition guidance. The selling price hierarchy for a deliverable is based on its VSOE if available, third-party evidence of selling price ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. The Company then recognizes revenue on each deliverable in accordance with its policies for product and service revenue recognition. VSOE of selling price is based on the price charged when the element is sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices fall within a reasonable range based on historical discounting trends for specific products and services. TPE of selling price is established by evaluating competitor products or services in stand-alone sales to similarly situated customers. However, as the Company’s products contain a significant element of proprietary technology and its solutions offer substantially different features and functionality, the comparable pricing of products with similar functionality typically cannot be obtained. Additionally, as the Company is unable to reliably determine what competitors products’ selling prices are on a stand-alone basis, the Company is not typically able to determine TPE. The
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
estimate of selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies and through different sales channels and competitor pricing strategies.
For the Company’s non-software transactions, it allocates the arrangement consideration based on the relative selling price of the deliverables. For the Company’s hardware appliances, it uses ESP as its selling price. For the Company’s support and services, it generally uses VSOE as its selling price. When the Company is unable to establish selling price using VSOE for its support and services, the Company uses ESP in its allocation of arrangement consideration.
The Company’s SaaS products are considered service arrangements per the authoritative guidance; accordingly, the Company follows the provisions of Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, when accounting for these service arrangements. Generally, the Company’s SaaS products are sold separately and not bundled with the Enterprise and Service Provider division’s products and services.
In the normal course of business, the Company is not obligated to accept product returns from its distributors under any conditions, unless the product item is defective in manufacture. The Company establishes provisions for estimated returns, as well as other sales allowances, concurrently with the recognition of revenue. The provisions are established based upon consideration of a variety of factors, including, among other things, recent and historical return rates for both specific products and distributors and the impact of any new product releases and projected economic conditions. Product returns are provided for in the consolidated financial statements and have historically been within management’s expectations. Allowances for estimated product returns amounted to approximately $2.1 million and $2.6 million at December 31, 2013 and December 31, 2012, respectively. The Company also records estimated reductions to revenue for customer programs and incentive offerings including volume-based incentives. The Company could take actions to increase its customer incentive offerings, which could result in an incremental reduction to revenue at the time the incentive is offered.
Product Concentration
The Company derives a substantial portion of its revenues from its Mobile and Desktop products, which include its XenDesktop and XenApp products and related services, and anticipates that these products and future derivative products and product lines based upon this technology will continue to constitute a majority of its revenue. The Company could experience declines in demand for its Mobile and Desktop products and other products, whether as a result of general economic conditions, the delay or reduction in technology purchases, new competitive product releases, price competition, lack of success of its strategic partners, technological change or other factors.
Cost of Net Revenues
Cost of product and license revenues consists primarily of hardware, product media and duplication, manuals, packaging materials, shipping expense, server capacity costs. In addition, the Company is a party to licensing agreements with various entities, which give the Company the right to use certain software code in its products or in the development of future products in exchange for the payment of fixed fees or amounts based upon the sales of the related product. The licensing agreements generally have terms ranging from one to five years, and generally include renewal options. However, some agreements are perpetual unless expressly terminated. Royalties and other costs related to these agreements are included in cost of net revenues. Cost of services and maintenance revenue consists primarily of compensation and other personnel-related costs of providing technical support and consulting, as well as the Company’s SaaS. Also included in cost of net revenues is amortization of product related intangible assets which includes acquired core and product technology and associated patents.
Foreign Currency
The functional currency for all of the Company’s wholly-owned foreign subsidiaries in its Enterprise and Service Provider division is the U.S. dollar. Monetary assets and liabilities of such subsidiaries are remeasured into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are remeasured at average rates prevailing during the year. The functional currency of the Company’s wholly-owned foreign subsidiaries of its SaaS division is the currency of the country in which each subsidiary is located. The Company translates assets and liabilities of these foreign subsidiaries at exchange rates in effect at the balance sheet date. The Company includes accumulated net translation adjustments in equity as a component of Accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are the result of exchange rate changes on transactions denominated in currencies other than the functional currency, including U.S. dollars. The remeasurement of those foreign currency transactions is included in determining net income or loss for the period of exchange. Remeasurement and foreign currency transaction (losses) gains of approximately $(4.9) million, $(3.3) million and $4.7 million for the years ended December 31, 2013, 2012, and 2011, respectively, are included in Other (expense) income, net, in the accompanying consolidated statements of income.
Derivatives and Hedging Activities
In accordance with the authoritative guidance, the Company records derivatives at fair value as either assets or liabilities on the balance sheet. For derivatives that are designated as and qualify as effective cash flow hedges, the portion of gain or loss on the derivative instrument effective at offsetting changes in the hedged item is reported as a component of Accumulated other comprehensive income (loss) and reclassified into earnings as operating expense, net, when the hedged transaction affects earnings. Derivatives not designated as hedging instruments are adjusted to fair value through earnings as Other (expense) income, net, in the period during which changes in fair value occur. The application of the authoritative guidance could impact the volatility of earnings.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes attributing all derivatives that are designated as cash flow hedges to floating rate assets or liabilities or forecasted transactions. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in cash flows of the hedged item. Fluctuations in the value of the derivative instruments are generally offset by changes in the hedged item; however, if it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively for the affected derivative.
The Company is exposed to risk of default by its hedging counterparties. Although this risk is concentrated among a limited number of counterparties, the Company’s foreign exchange hedging policy attempts to minimize this risk by placing limits on the amount of exposure that may exist with any single financial institution at a time.
Pension Liability
The Company provides retirement benefits to certain employees who are not U.S. based. Generally, benefits under these programs are based on an employee’s length of service and level of compensation. The majority of these programs are commonly referred to as termination indemnities, which provide retirement benefits in accordance with programs mandated by the governments of the countries in which such employees work.
The Company had accrued $9.2 million and $9.8 million for these pension liabilities at December 31, 2013 and 2012, respectively. Expenses for the programs for 2013, 2012 and 2011 amounted to $3.5 million, $1.5 million and $1.8 million, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. The Company has advertising agreements with, and purchases advertising from, online media providers to advertise its SaaS. The Company also has cooperative advertising agreements with certain distributors and resellers whereby the Company will reimburse distributors and resellers for qualified advertising of Company products. Reimbursement is made once the distributor, reseller or provider provides substantiation of qualified expenses. The Company estimates the impact of these expenses and recognizes them at the time of product sales as a reduction of net revenue in the accompanying consolidated statements of income. The total costs the Company recognized related to advertising were approximately $146.5 million, $137.5 million and $130.8 million, during the years ended December 31, 2013, 2012 and 2011, respectively.
Income Taxes
The Company and one or more of its subsidiaries is subject to United States federal income taxes, as well as income taxes of multiple state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2009.
In the ordinary course of global business, there are transactions for which the ultimate tax outcome is uncertain; thus, judgment is required in determining the worldwide provision for income taxes. The Company provides for income taxes on transactions based on its estimate of the probable liability. The Company adjusts its provision as appropriate for changes that impact its underlying judgments. Changes that impact provision estimates include such items as jurisdictional interpretations on tax filing positions based on the results of tax audits and general tax authority rulings. Due to the evolving nature of tax rules combined with the large number of jurisdictions in which the Company operates, estimates of its tax liability and the realizability of its deferred tax assets could change in the future, which may result in additional tax liabilities and adversely affect the Company’s results of operations, financial condition and cash flows.
The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of the process of preparing its consolidated financial statements. The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
deferred tax assets will not be realized. The Company reviews deferred tax assets periodically for recoverability and makes estimates and judgments regarding the expected geographic sources of taxable income and gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates made by management include the provision for doubtful accounts receivable, the provision to reduce obsolete or excess inventory to market, the provision for estimated returns, as well as sales allowances, the assumptions used in the valuation of stock-based awards, the assumptions used in the discounted cash flows to mark certain of its investments to market, the valuation of the Company’s goodwill, net realizable value of product related and other intangible assets, the provision for vacant facility costs, the provision for income taxes and the amortization and depreciation periods for intangible and long-lived assets. While the Company believes that such estimates are fair when considered in conjunction with the consolidated financial position and results of operations taken as a whole, the actual amounts of such items, when known, will vary from these estimates.
Accounting for Stock-Based Compensation Plans
The Company has various stock-based compensation plans for its employees and outside directors and accounts for stock-based compensation arrangements in accordance with the authoritative guidance, which requires the Company to measure and record compensation expense in its consolidated financial statements using a fair value method. See Note 7 for further information regarding the Company’s stock-based compensation plans.
Net Income Per Share Attributable to Citrix Systems, Inc. Stockholders
Net income per share attributable to Citrix Systems, Inc. stockholders - basic is calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Net income per share attributable to Citrix Systems, Inc. stockholders - diluted is computed using the weighted-average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the vesting or exercise of stock awards (calculated using the treasury stock method) during the period they were outstanding. Certain shares under the Company’s stock-based compensation programs were excluded from the computation of diluted earnings per share due to their anti-dilutive effect for the respective periods in which they were outstanding. The reconciliation of the numerator and denominator of the earnings per share calculation is presented in Note 13.
Reclassifications
Certain reclassifications of the prior years' amounts have been made to conform to the current year's presentation. In the Property and Equipment table above, the Company determined it was more practical to present Assets under construction on a separate line as opposed to including the amounts within each asset class. Therefore, the reclassifications only resulted in changes to the amounts between asset classes.
3. ACQUISITIONS
2013 Acquisitions
Zenprise
In January 2013, the Company acquired all of the issued and outstanding securities of Zenprise, Inc. ("Zenprise"), a
privately-held leader in mobile device management. Zenprise became part of the Company's Enterprise and Service Provider division, in which Citrix has integrated the Zenprise offering for mobile device management into its XenMobile Enterprise edition. The total consideration for this transaction was approximately $324.0 million, net of $2.9 million of cash acquired, and was paid in cash. Transaction costs associated with the acquisition were approximately $0.6 million, of which the Company expensed approximately $0.1 million during the year ended December 31, 2013 and are included in General and administrative expense in the accompanying consolidated statements of income. In addition, in connection with the acquisition, the Company assumed certain stock options, which are exercisable for up to 285,817 shares of the Company's common stock, for which the vesting period reset fully upon the closing of the transaction.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2013 Other Acquisitions
During the third quarter of 2013, the Company acquired all of the issued and outstanding securities of a privately-held company. The total cash consideration for this transaction was approximately $5.3 million. The Company will pay contingent consideration of up to $3.0 million in cash upon the satisfaction of certain milestone achievements, as defined pursuant to the share purchase agreement. This business became part of the Company's SaaS division. Transaction costs associated with the acquisition were approximately $0.2 million, all of which the Company expensed during the year ended December 31, 2013, and are included in General and administrative expense in the accompanying consolidated statements of income.
During the fourth quarter of 2013, the Company acquired all of the issued and outstanding securities of a privately-held company. The total cash consideration for this transaction was approximately $5.5 million. This business became part of the Company's Enterprise and Service Provider division. Transaction costs associated with the acquisition were approximately $0.2 million,all of which the Company expensed during the year ended December 31, 2013, and are included in General and administrative expense in the accompanying consolidated statements of income.
The two acquisitions discussed in this section captioned 2013 Other Acquisitions will collectively be referred to herein as the "2013 Other Acquisitions".
Purchase Accounting for the Acquisitions in 2013
The purchase prices for the companies acquired during the year ended December 31, 2013, which include Zenprise and the 2013 Other Acquisitions (collectively, the "2013 Acquisitions"), were allocated to the acquired net tangible and intangible assets based on estimated fair values as of the date of the acquisition. The allocation of the total purchase prices are summarized below (in thousands):
|
| | | | | | | | | | | |
| Zenprise | | 2013 Other Acquisitions |
| Purchase Price Allocation | | Asset Life | | Purchase Price Allocation | | Asset Life |
Current assets | $ | 10,943 |
| | | | $ | 3,586 |
| | |
Other assets | 668 |
| | | | — |
| | |
Property and equipment | 431 |
| | Various | | — |
| | |
Deferred tax assets, non-current | 38,785 |
| | | | 3,177 |
| | |
Intangible assets | 69,200 |
| | 1-7 years | | 11,300 |
| | 5-6 years |
Goodwill | 247,273 |
| | Indefinite | | 4,195 |
| | Indefinite |
Assets acquired | 367,300 |
| | | | 22,258 |
| | |
Current liabilities assumed | (8,475 | ) | | | | (3,950 | ) | | |
Deferred tax liabilities, current | — |
| | | | (2,000 | ) | | |
Long-term liabilities assumed | (3,107 | ) | | | | (1,000 | ) | | |
Deferred tax liabilities, non-current | (28,725 | ) | | | | (1,699 | ) | | |
Net assets acquired | $ | 326,993 |
| | | | $ | 13,609 |
| | |
Current assets acquired in connection with the 2013 Acquisitions consisted primarily of cash and accounts receivable. Current liabilities assumed in connection with the 2013 Acquisitions consisted primarily of current portion of deferred revenues, short-term payables, other accrued expenses and short-term debt, which was paid in full subsequent to the respective acquisition date. Long-term liabilities assumed in connection with the 2013 Acquisitions consisted of other long-term liabilities and long-term portion of deferred revenues.
The Company continues to evaluate certain income tax assets and liabilities related to the 2013 Other Acquisitions. Goodwill from the 2013 Acquisitions was assigned to the respective segments each businesses became part of. The goodwill related to the 2013 Acquisitions is not deductible for tax purposes. See Note 11 for segment information. The goodwill amounts are comprised primarily of expected synergies from combining operations and other intangible assets that do not qualify for separate recognition.
Revenues from the 2013 Acquisitions are included in the revenues of each business's respective segment. The Company has included the effect of the 2013 Acquisitions in its results of operations prospectively from the date of acquisition.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Identifiable intangible assets acquired in connection with the 2013 Acquisitions (in thousands) and the weighted-average lives are as follows:
|
| | | | | | | | | | | |
| Zenprise | | Asset Life | | 2013 Other Acquisitions | | Asset Life |
Trade names | $ | 2,400 |
| | 3.0 years | | $ | — |
| | |
Non-compete agreements | 700 |
| | 1.0 year | | — |
| | |
Customer relationships | 18,300 |
| | 7.0 years | | 3,600 |
| | 6.0 years |
Core and product technologies | 47,800 |
| | 6.0 years | | 6,300 |
| | 5.0 years |
In-process R&D (1) | — |
| | | | 1,400 |
| | Indefinite |
Total | $ | 69,200 |
| | | | $ | 11,300 |
| | |
(1) Capitalized acquired in-process R&D costs will remain capitalized until such time as the projects are complete, at which point they will be amortized, or they will be written off when it is probable the projects will not be completed.
The following unaudited pro-forma information combines the consolidated results of the operations of the Company and the 2013 Acquisitions as if the acquisitions had occurred at the beginning of fiscal year 2012 (in thousands, except per share data):
|
| | | | | | | |
| Year Ended December 31, |
| 2013 | | 2012 |
Revenues | $ | 2,921,604 |
| | $ | 2,596,227 |
|
Income from operations | 376,936 |
| | 333,077 |
|
Net income | 336,250 |
| | 314,300 |
|
Per share - basic | 1.80 |
| | 1.68 |
|
Per share - diluted | 1.79 |
| | 1.66 |
|
2012 Acquisitions
ByteMobile
In July 2012, the Company acquired all of the issued and outstanding securities of ByteMobile, Inc. (“ByteMobile”), a privately-held provider of data and video optimization solutions for mobile network operators. ByteMobile became part of the Company's Enterprise and Service Provider division and extends the Company's industry reach into the mobile and cloud markets. The total consideration for this transaction was approximately $399.5 million, net of $5.6 million of cash acquired, and was paid in cash. Transaction costs associated with the acquisition were approximately $2.1 million, all of which the Company expensed during the year ended December 31, 2012 and are included in General and administrative expense in the accompanying consolidated statements of income. Revenues from the ByteMobile acquisition are included in the revenue of the Company's Enterprise and Service Provider division. The Company has included the effect of the ByteMobile acquisition in its results of operations prospectively from the date of acquisition.
Purchase Accounting for the ByteMobile acquisition
During the twelve months ended December 31, 2013, the Company made net adjustments to goodwill of approximately $3.3 million to the purchase price allocation associated with the ByteMobile acquisition. Goodwill from the ByteMobile acquisition was assigned to the Company's Enterprise and Service Provider division. The goodwill related to the ByteMobile acquisition is not deductible for tax purposes. See Note 2 for information on adjustments to goodwill and Note 11 for segment information. The goodwill amounts are comprised primarily of expected synergies from combining operations and other intangible assets that do not qualify for separate recognition.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The purchase price for ByteMobile was allocated to the acquired net tangible and intangible assets based on its estimated fair value as of the date of the acquisition. The allocation of the total purchase price is summarized below (in thousands):
|
| | | | | |
| ByteMobile |
| Purchase Price Allocation | | Asset Life |
Current assets | $ | 57,796 |
| | |
Other assets | 7,406 |
| | |
Property and equipment | 2,484 |
| | Various |
Deferred tax assets, non-current | 44,934 |
| | |
Intangible assets | 248,900 |
| | 1-9 years |
Goodwill | 221,914 |
| | Indefinite |
Assets acquired | 583,434 |
| | |
Current liabilities assumed | (62,313 | ) | | |
Long-term liabilities assumed | (4,083 | ) | | |
Deferred tax liabilities, non-current | (111,904 | ) | | |
Net assets acquired | $ | 405,134 |
| | |
Current assets acquired in connection with the ByteMobile acquisition consisted primarily of cash and accounts receivable. Current liabilities assumed in connection with the ByteMobile acquisition consisted primarily of current portion of deferred revenues, short-term payables, other accrued expenses and short-term debt which was paid in full subsequent to the acquisition date. Long-term liabilities assumed in connection with the ByteMobile acquisition consisted of other long-term liabilities, long-term portion of deferred revenues and long-term debt, which was paid in full subsequent to the acquisition date. Identifiable intangible assets acquired in connection with the ByteMobile acquisition included trade names of $6.0 million with a weighted-average asset life of 6.0 years, customer relationships of $141.5 million with a weighted-average life of 9.0 years, and core and product technologies of $101.4 million with a weighted-average life of 4.8 years.
Podio
In April 2012, the Company acquired all of the issued and outstanding securities of Podio ApS (“Podio”), a privately-held provider of a cloud-based collaborative work platform. Podio became part of the Company's SaaS division and expands the Company's offerings of integrated cloud-based support for team-based collaboration. The total consideration for this transaction was approximately $43.6 million, net of $1.7 million of cash acquired, and was paid in cash. Transaction costs associated with the acquisition were approximately $0.5 million, all of which the Company expensed during the year ended December 31, 2012 and are included in General and administrative expense in the accompanying consolidated statements of income. The Company recorded approximately $24.5 million of goodwill, which is not deductible for tax purposes, and acquired $24.6 million of identifiable intangible assets, of which $20.7 million is related to product related intangible assets and $3.9 million is related to other intangible assets. In addition, in connection with the acquisition, the Company assumed non-vested stock units which were converted into the right to receive up to 127,668 shares of the Company's common stock, for which the vesting period reset fully upon the closing of the transaction.
2012 Other Acquisitions
During the first quarter of 2012, the Company acquired all of the issued and outstanding securities of a privately-held company for total cash consideration of approximately $24.6 million, net of $0.6 million of cash acquired. This business became part of the Company’s Enterprise and Service Provider division. Transaction costs associated with the acquisition were approximately $0.5 million, of which the Company expensed $0.4 million and $0.1 million during the years ended December 31, 2012 and 2011, respectively, and are included in General and administrative expense in the accompanying consolidated statements of income. The Company recorded approximately $22.8 million of goodwill, which is not deductible for tax purposes, and acquired $11.0 million of identifiable intangible assets, all of which is related to product related intangible assets. In addition, in connection with this acquisition, the Company assumed non-vested stock units which were converted into the right to receive up to 13,481 shares of the Company's common stock and assumed certain stock options which are exercisable for 12,017 shares of the Company's common stock, for which the vesting period reset fully upon the closing of the transaction.
During the second quarter of 2012, the Company acquired all of the issued and outstanding securities of two privately-held companies for a total cash consideration of approximately $15.4 million, net of $0.2 million of cash acquired. The businesses became part of the Company's Enterprise and Service Provider division. Transaction costs associated with the
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
acquisitions were approximately $0.4 million, all of which the Company expensed during the year ended December 31, 2012 and are included in General and administrative expense in the accompanying consolidated statements of income. In addition, in connection with the acquisitions, the Company assumed non-vested stock units which were converted into the right to receive, in the aggregate, up to 66,459 shares of the Company's common stock, for which the vesting period reset fully upon the closing of each respective transaction.
During the third quarter of 2012, the Company acquired all of the issued and outstanding securities of two privately-held companies for a total cash consideration of approximately $5.3 million. One of the businesses became part of the Company's Enterprise and Service Provider division and the other became part of the Company's SaaS division. Transaction costs associated with the acquisitions were approximately $0.2 million, all of which the Company expensed during the year ended December 31, 2012 and are included in General and administrative expense in the accompanying consolidated statements of income. In addition, in connection with the acquisitions, the Company assumed non-vested stock units which were converted into the right to receive, in the aggregate, up to 13,487 shares of the Company's common stock, for which the vesting period reset fully upon the closing of each respective transaction.
Subsequent Events
On January 8, 2014, the Company acquired all of the issued and outstanding securities of Framehawk, Inc. ("Framehawk"). The Framehawk solution, which optimizes the delivery of virtual desktops and applications to mobile devices, will be combined with HDX technology in the Citrix XenApp and XenDesktop products to deliver an unparalleled user experience under adverse network conditions. The total preliminary consideration for this transaction was approximately $27.9 million, net of $0.3 million of cash acquired, and was paid in cash. Transaction costs associated with the acquisition are currently estimated at $0.1 million, all of which the Company expensed during the year ended December 31, 2013 and are included in General and administrative expense in the accompanying consolidated statements of income.
4. INVESTMENTS
Available-for-sale Investments
Investments in available-for-sale securities at fair value were as follows for the periods ended (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2013 | | December 31, 2012 |
Description of the Securities | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Agency securities | $ | 453,922 |
| | $ | 1,177 |
| | $ | (349 | ) | | $ | 454,750 |
| | $ | 400,365 |
| | $ | 2,347 |
| | $ | (5 | ) | | $ | 402,707 |
|
Corporate securities | 643,360 |
| | 947 |
| | (216 | ) | | 644,091 |
| | 404,546 |
| | 947 |
| | (171 | ) | | 405,322 |
|
Municipal securities | 53,698 |
| | 81 |
| | (23 | ) | | 53,756 |
| | 32,214 |
| | 114 |
| | (15 | ) | | 32,313 |
|
Government securities | 156,930 |
| | 196 |
| | (47 | ) | | 157,079 |
| | 39,863 |
| | 131 |
| | (1 | ) | | 39,993 |
|
Total | $ | 1,307,910 |
| | $ | 2,401 |
| | $ | (635 | ) | | $ | 1,309,676 |
| | $ | 876,988 |
| | $ | 3,539 |
| | $ | (192 | ) | | $ | 880,335 |
|
The change in net unrealized gains (losses) on available-for-sale securities recorded in Other comprehensive income (loss) includes unrealized gains (losses) that arose from changes in market value of specifically identified securities that were held during the period, gains (losses) that were previously unrealized, but have been recognized in current period net income due to sales, as well as prepayments of available-for-sale investments purchased at a premium. This reclassification has no effect on total comprehensive income or equity and was not material for all periods presented. See Note 14 for more information related to comprehensive income.
The average remaining maturities of the Company’s short-term and long-term available-for-sale investments at December 31, 2013 were approximately five months and three years, respectively.
Realized Gains and Losses on Available-for-sale Investments
For the years ended December 31, 2013 and 2012, the Company had realized gains on the sales of available-for-sale investments of $3.0 million and $4.1 million, respectively. For the years ended December 31, 2013 and 2012, the Company had realized losses on available-for-sale investments of $2.7 million and $0.8 million, respectively, primarily related to prepayments at par of securities purchased at a premium. All realized gains and losses related to the sales of available-for-sale investments are included in Other (expense) income, net, in the accompanying consolidated statements of income.
The Company continues to monitor its overall investment portfolio and if the credit ratings of the issuers of its investments deteriorate or if the issuers experience financial difficulty, including bankruptcy, the Company may be required to
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
make adjustments to the carrying value of the securities in its investment portfolio and recognize impairment charges for declines in fair value that are determined to be other-than-temporary.
Other-Than-Temporary Impairment on Available-for-Sale Investments
There were no other-than-temporarily impaired available-for-sale investments during the twelve months ended December 31, 2013. During 2012, one of the Company’s available-for-sale investments with a carrying amount of $5.0 million was determined to be other-than-temporarily impaired. As a result of this determination, the investment was written down to its fair value of $2.5 million, resulting in an impairment charge of $2.5 million. The impairment charge is included in Other (expense) income, net in the accompanying consolidated statements of income.
Unrealized Losses on Available-for-Sale Investments
The gross unrealized losses on the Company’s available-for-sale investments that are not deemed to be other-than-temporarily impaired were $0.6 million and $0.2 million as of December 31, 2013 and 2012, respectively. Because the Company does not intend to sell any of its investments in an unrealized loss position and it is more likely than not that it will not be required to sell the securities before the recovery of its amortized cost basis, which may not occur until maturity, it does not consider the securities to be other-than-temporarily impaired.
Cost Method Investments
The Company held direct investments in privately-held companies of approximately $24.3 million and $26.2 million as of December 31, 2013 and 2012, respectively, which are accounted for based on the cost method and are included in Other assets in the accompanying consolidated balance sheets. The Company periodically reviews these investments for impairment. If the Company determines that an other-than-temporary impairment has occurred, it will write-down the investment to its fair value. During 2013 and 2012, certain companies in which the Company held direct investments were acquired by third parties and as a result of these sales transactions the Company recorded gains of $6.0 million and $16.5 million, respectively, which was included in Other (expense) income, net in the accompanying consolidated statements of income. The Company determined that certain cost method investments were impaired during 2013, 2012 and 2011 and recorded a total charge of $3.7 million, $3.5 million, and $3.5 million, respectively, which is included in Other (expense) income, net in the accompanying consolidated statements of income. See Note 5 for more information.
5. FAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as an exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service (the “Service”) which uses quoted market prices for identical or comparable instruments rather than direct observations of quoted prices in active markets. The Service gathers observable inputs for all of the Company’s fixed income securities from a variety of industry data providers including, for example, large custodial institutions and other third-party sources. Once the observable inputs are gathered by the Service, all data points are considered and an average price is determined. The Service’s providers utilize a variety of inputs to determine their quoted prices. These inputs may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. Substantially all of the Company’s available-for-sale investments are valued utilizing inputs obtained from the Service and accordingly are categorized as Level 2 in the table below. The Company periodically independently assesses the pricing obtained from the Service and historically has not adjusted the Service's pricing as a result of this assessment. Available-for-sale securities are included in Level 3 when relevant observable inputs for a security are not available.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy. In certain instances, the inputs used to
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
measure fair value may meet the definition of more than one level of the fair value hierarchy. The input with the lowest level priority is used to determine the applicable level in the fair value hierarchy.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
|
| | | | | | | | | | | | | | | |
| As of December 31, 2013 | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) |
Assets: | | | | | | | |
Cash and cash equivalents: | | | | | | | |
Cash | $ | 227,528 |
| | $ | 227,528 |
| | $ | — |
| | $ | — |
|
Money market funds | 52,823 |
| | 52,823 |
| | — |
| | — |
|
Corporate securities | 389 |
| | — |
| | 389 |
| | — |
|
Available-for-sale securities: | | | | | | | |
Agency securities | 454,750 |
| | — |
| | 454,750 |
| | — |
|
Corporate securities | 644,091 |
| | — |
| | 633,801 |
| | 10,291 |
|
Municipal securities | 53,756 |
| | — |
| | 53,756 |
| | — |
|
Government securities | 157,079 |
| | — |
| | 157,079 |
| | — |
|
Prepaid expenses and other current assets: | | | | | | | |
Foreign currency derivatives | 4,952 |
| | — |
| | 4,952 |
| | — |
|
Total assets | $ | 1,595,368 |
| | $ | 280,351 |
| | $ | 1,304,727 |
| | $ | 10,291 |
|
Accrued expenses and other current liabilities: | | | | | | | |
Foreign currency derivatives | 1,743 |
| | — |
| | 1,743 |
| | — |
|
Total liabilities | $ | 1,743 |
| | $ | — |
| | $ | 1,743 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| As of December 31, 2012 | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) |
Assets: | | | | | | | |
Cash and cash equivalents: | | | | | | | |
Cash | $ | 503,614 |
| | $ | 503,614 |
| | $ | — |
| | $ | — |
|
Money market funds | 123,519 |
| | 123,519 |
| | — |
| | — |
|
Corporate securities | 16,476 |
| | — |
| | 16,476 |
| | — |
|
Available-for-sale securities: | | | | | | | |
Agency securities | 402,707 |
| | — |
| | 402,707 |
| | — |
|
Corporate securities | 405,322 |
| | — |
| | 401,981 |
| | 3,341 |
|
Municipal securities | 32,313 |
| | — |
| | 32,313 |
| | — |
|
Government securities | 39,993 |
| | — |
| | 39,993 |
| | — |
|
Prepaid expenses and other current assets: | | | | | | | |
Foreign currency derivatives | 4,157 |
| | — |
| | 4,157 |
| | — |
|
Total assets | $ | 1,528,101 |
| | $ | 627,133 |
| | $ | 897,627 |
| | $ | 3,341 |
|
Accrued expenses and other current liabilities: | | | | | | | |
Foreign currency derivatives | 4,162 |
| | — |
| | 4,162 |
| | — |
|
Total liabilities | $ | 4,162 |
| | $ | — |
| | $ | 4,162 |
| | $ | — |
|
The Company’s fixed income available-for-sale security portfolio generally consists of high quality, investment grade securities from diverse issuers with a minimum credit rating of A-/A3 and a minimum weighted-average credit rating of AA-/Aa3. The Company values these securities based on pricing from the Service, whose sources may use quoted prices in active
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value, and accordingly, the Company classifies all of its fixed income available-for-sale securities as Level 2.
The Company measures its cash flow hedges, which are classified as Prepaid expenses and other current assets and Accrued expenses and other current liabilities, at fair value based on indicative prices in active markets (Level 2 inputs).
Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The Company has invested in convertible debt securities of certain early-stage entities that are classified as available-for-sale investments. As quoted prices in active markets or other observable inputs were not available for these investments, in order to measure them at fair value, the Company utilized a discounted cash flow model using a discount rate reflecting the market risk inherent in holding securities of an early-stage enterprise, adjusted by the probability-weighted exit possibilities associated with the convertible debt securities. This methodology required the Company to make assumptions that were not directly or indirectly observable regarding the fair value of the convertible debt securities; accordingly they are a Level 3 valuation and included in the table below.
|
| | | |
| |
| Investments |
| (in thousands) |
Balance at December 31, 2012 | $ | 3,341 |
|
Purchases of Level 3 securities | 9,700 |
|
Transfers out of Level 3 | (2,750 | ) |
Balance at December 31, 2013 | $ | 10,291 |
|
Transfers out of Level 3 relate to certain of the Company's investments in convertible debt securities of early-stage entities that were previously classified as available-for-sale investments to cost method investments upon conversion to equity ownership, which are included in Other assets in the accompanying consolidated balance sheets.
Assets Measured at Fair Value on a Non-recurring Basis Using Significant Unobservable Inputs (Level 3)
During 2013 and 2012, certain cost method investments with a combined carrying value of $9.3 million and $13.0 million, respectively, were determined to be impaired and have been written down to their fair values of $5.6 million and $9.5 million, respectively, resulting in impairment charges of $3.7 million and $3.5 million, respectively. The impairment charges are included in Other (expense) income, net in the accompanying consolidated financial statements for the years ended December 31, 2013 and 2012. In determining the fair value of cost method investments, the Company considers many factors including but not limited to operating performance of the investee, the amount of cash that the investee has on-hand, the ability to obtain additional financing and the overall market conditions in which the investee operates. The fair value of the cost method investment represents a Level 3 valuation as the assumptions used in valuing this investment were not directly or indirectly observable. See Note 4 for more information regarding cost method investments.
Additional Disclosures Regarding Fair Value Measurements
The carrying value of accounts receivable, accounts payable and accrued expenses and other current liabilities approximate their fair value due to the short maturity of these items.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses consist of the following:
|
| | | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (In thousands) |
Accrued compensation and employee benefits | | $ | 141,065 |
| | $ | 130,835 |
|
Other accrued expenses | | 116,541 |
| | 126,300 |
|
Total | | $ | 257,606 |
| | $ | 257,135 |
|
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE STOCK-BASED COMPENSATION AND BENEFIT PLANS
Plans
The Company’s stock-based compensation program is a long-term retention program that is intended to attract and reward talented employees and align stockholder and employee interests. As of December 31, 2013, the Company had two stock-based compensation plans under which it was granting stock options and non-vested stock units. The Company is currently granting stock-based awards from its Amended and Restated 2005 Equity Incentive Plan (as amended, the “2005 Plan”) and its Amended and Restated 2005 Employee Stock Purchase Plan (as amended, the “2005 ESPP”). In February 2014, the Company's Board of Directors approved the 2014 Equity Incentive Plan, which is subject to stockholder approval at the Company Annual Meeting of Stockholders on May 22, 2014. There will be no grants under this plan until the plan is approved by the Company's stockholders. In connection with certain of the Company’s acquisitions, the Company has assumed certain plans from acquired companies. The Company’s Board of Directors has provided that no new awards will be granted under the Company’s acquired stock plans. Awards previously granted under the Company's superseded and expired stock plans that are still outstanding typically expire ten years from the date of grant and will continue to be subject to all the terms and conditions of such plans, as applicable. The Company’s superseded and expired stock plan includes the Amended and Restated 1995 Stock Plan.
Under the terms of the 2005 Plan, the Company is authorized to grant incentive stock options (“ISOs”), non-qualified stock options (“NSOs”), non-vested stock, non-vested stock units, stock appreciation rights (“SARs”), and performance units and to make stock-based awards to full and part-time employees of the Company and its subsidiaries or affiliates, where legally eligible to participate, as well as to consultants and non-employee directors of the Company. Currently, the 2005 Plan provides for the issuance of a maximum of 48,600,000 shares of common stock. Under the 2005 Plan, ISOs must be granted at exercise prices no less than fair market value on the date of grant, except for ISOs granted to employees who own more than 10% of the Company’s combined voting power, for which the exercise prices must be no less than 110% of the fair market value at the date of grant. NSOs and SARs must be granted at no less than fair market value on the date of grant, or in the case of SARs in tandem with options, at the exercise price of the related option. Non-vested stock awards may be granted for such consideration in cash, other property or services, or a combination thereof, as determined by the Company’s Compensation Committee of its Board of Directors. Stock-based awards are generally exercisable or issuable upon vesting. The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. As of December 31, 2013, there were 26,960,367 shares of common stock reserved for issuance pursuant to the Company’s stock-based compensation plans and the Company had authorization under its 2005 Plan to grant 16,605,208 additional stock-based awards.
Under the 2005 ESPP, all full-time and certain part-time employees of the Company are eligible to purchase common stock of the Company twice per year at the end of a six-month payment period (a “Payment Period”). During each Payment Period, eligible employees who so elect may authorize payroll deductions in an amount no less than 1% nor greater than 10% of his or her base pay for each payroll period in the Payment Period. At the end of each Payment Period, the accumulated deductions are used to purchase shares of common stock from the Company up to a maximum of 12,000 shares for any one employee during a Payment Period. Shares are purchased at a price equal to 85% of the fair market value of the Company’s common stock on the last business day of a Payment Period. Employees who, after exercising their rights to purchase shares of common stock in the 2005 ESPP, would own shares representing 5% or more of the voting power of the Company’s common stock, are ineligible to participate under the 2005 ESPP. The 2005 ESPP provides for the issuance of a maximum of 10,000,000 shares of common stock. As of December 31, 2013, 2,991,834 shares had been issued under the 2005 ESPP. The Company recorded stock-based compensation costs related to the 2005 ESPP of $4.9 million, $4.0 million and $3.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Expense Information under the Authoritative Guidance
As required by the authoritative guidance, the Company estimates forfeitures of stock awards and recognizes compensation costs only for those awards expected to vest. Forfeiture rates are determined based on historical experience. The Company also considers whether there have been any significant changes in facts and circumstances that would affect its forfeiture rate quarterly. Estimated forfeitures are adjusted to actual forfeiture experience as needed. The Company recorded stock-based compensation costs, related deferred tax assets and tax benefits of $183.9 million, $57.1 million and $55.7 million, respectively, in 2013, $149.9 million, $46.7 million and $65.8 million, respectively, in 2012 and $92.9 million, $28.4 million and $67.9 million, respectively, in 2011.
The detail of the total stock-based compensation recognized by income statement classification is as follows (in thousands):
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
Income Statement Classifications | 2013 | | 2012 | | 2011 |
Cost of services revenues | $ | 2,540 |
| | $ | 2,111 |
| | $ | 1,584 |
|
Research and development | 63,448 |
| | 54,616 |
| | 31,763 |
|
Sales, marketing and services | 65,549 |
| | 51,519 |
| | 31,354 |
|
General and administrative | 52,404 |
| | 41,694 |
| | 28,208 |
|
Total | $ | 183,941 |
| | $ | 149,940 |
| | $ | 92,909 |
|
Stock Options
Stock options granted under the 2005 Plan typically have a five-year life and vest over three years, with 33.3% of the shares underlying the option vesting on the first anniversary of the date of grant and the remainder of the underlying shares vesting in equal installments at a rate of 2.78% thereafter (the "Standard Vesting Rate"). The Company also assumes stock options from certain of its acquisitions for which the vesting period is typically reset to vest over three years at the Standard Vesting Rate. During the first quarter of 2013, the Company assumed in-the-money options from the Zenprise acquisition. See Note 3 for more information related to acquisitions.
A summary of the status and activity of the Company’s fixed option awards is as follows:
|
| | | | | | | | | | | | | |
Options | | Number of Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value (in thousands) |
Outstanding at December 31, 2012 | | 7,589,532 |
| | $ | 54.15 |
| | 2.70 | | |
Assumed | | 285,817 |
| | 11.85 |
| | | | |
Exercised | | (2,168,531 | ) | | 33.97 |
| | | | |
Forfeited or expired | | (299,841 | ) | | 60.90 |
| | | | |
Outstanding at December 31, 2013 | | 5,406,977 |
| | 59.64 |
| | 2.15 | | $ | 57,583 |
|
Vested or expected to vest | | 5,366,212 |
| | 59.78 |
| | 2.14 | | $ | 56,548 |
|
Exercisable at December 31, 2013 | | 4,438,465 |
| | 61.88 |
| | 1.93 | | $ | 38,167 |
|
The Company recognized stock-based compensation expense of $48.9 million, $56.4 million and $48.2 million related to options for the years ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013, there was $29.7 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 1.22 years. The total intrinsic value of stock options exercised during 2013, 2012 and 2011 was $77.7 million, $131.4 million and $169.2 million, respectively.
Stock Option Valuation Information
The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include the Company’s expected stock price, volatility over the term of the awards, actual employee exercise behaviors, risk-free interest rate and expected dividends. For purposes of valuing stock options, the Company determined the expected volatility factor by considering the implied volatility in two-year market-traded options of the Company’s common stock based on third party volatility quotes in accordance with the provisions of SAB No. 107, Share Based Payment. The Company’s decision to use implied volatility was based upon the availability of actively traded options on the Company’s common stock and its assessment that implied volatility is more representative of future stock price trends than historical volatility. The approximate risk free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the Company’s expected terms on stock options. The expected term of stock options was based on the historical employee exercise patterns. In years when a significant number of stock options are granted, the Company analyzes its historical pattern of option exercises based on certain demographic characteristics annually and has historically determined that there were no meaningful differences in option exercise activity based on demographic characteristics. The Company does not intend to pay dividends on its common stock in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its option pricing model. The weighted-average fair value of stock options granted and/or assumed during 2013, 2012 and 2011 was $56.97, $23.95 and $29.91, respectively.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The assumptions used to value options granted and/or assumed are as follows:
|
| | | | | |
| Stock options granted or assumed during |
| 2013 | | 2012 | | 2011 |
Expected volatility factor | 0.39 | | 0.38 - 0.43 | | 0.38 - 0.50 |
Approximate risk free interest rate | 0.4% | | 0.5% - 0.7% | | 0.6% - 1.1% |
Expected term (in years) | 3.35 | | 3.91 | | 3.27 - 3.91 |
Expected dividend yield | 0% | | 0% | | 0% |
Non-vested Stock Units
Market and Service Condition Stock Units
In March 2013 and 2012, the Company granted senior level employees non-vested stock unit awards representing, in the aggregate, 399,029 and 418,809 non-vested stock units, respectively, that vest based on certain target market performance and service conditions. The number of non-vested stock units underlying each award will be determined within sixty days of the calendar year following the end of a three-year performance period ending December 31, 2015 for the March 2013 awards and December 31, 2014 for the March 2012 awards. The attainment level under the award will be based on the Company's total return to stockholders over the performance period compared to the return on the Nasdaq Composite Total Return Index (the "XCMP"). If the Company's return is positive and meets or exceeds the indexed return, the number of non-vested stock units issued will be based on interpolation, with the maximum number of non-vested stock units issuable pursuant to the award capped at 200% of the target number of non-vested stock units set forth in the award agreement if the Company's return exceeds the indexed return by 40% or more. If the Company's return over the performance period is positive but underperforms the index, a number of non-vested stock units will be issued, below the target award, based on interpolation; however, no non-vested stock units will be issued if the Company's return underperforms the index by more than 20% over the performance period. In the event the Company's return to stockholders is negative but still meets or exceeds the indexed return, only 75% of the target award shall be issued. If the awardee is not employed by the Company at the end of the performance period; the extent to which the awardee will vest in the award, if at all, is dependent upon the timing and character of the termination as provided in the award agreement. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company's common stock.
The market condition requirements are reflected in the grant date fair value of the award, and the compensation expense for the award will be recognized assuming that the requisite service is rendered regardless of whether the market conditions are achieved. The grant date fair value of the non-vested performance stock unit awards was determined through the use of a Monte Carlo simulation model, which utilized multiple input variables that determined the probability of satisfying the market condition requirements applicable to each award as follows:
|
| | | | |
| March 2013 Grant |
| March 2012 Grant |
|
Expected volatility factor | 0.16 - 0.42 |
| 0.21 - 0.39 |
|
Risk free interest rate | 0.33 | % | 0.47 | % |
Expected dividend yield | 0 | % | 0 | % |
The range of expected volatilities utilized was based on the historical volatilities of the Company's common stock and the XCMP. The Company chose to use historical volatility to value these awards because historical stock prices were used to develop the correlation coefficients between the Company and the XCMP in order to model the stock price movements. The volatilities used were calculated over the most recent 2.75 year period, which was the remaining term of the performance period at the date of grant. The risk free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the remaining performance period. The Company does not intend to pay dividends on its common stock in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its model. The estimated fair value of each award as of the date of grant was $89.93 for the March 2013 grant and $89.95 for the March 2012 grant.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Service Based Stock Units
The Company also awards senior level and certain other employees non-vested stock units granted under the 2005 Plan that vest based on service. The majority of these non-vested stock unit awards vest 33.33% on each anniversary subsequent to the date of the award. The remaining awards vest 100% on the third anniversary of the grant date. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. In addition, the Company awards non-vested stock units to all of its non-employee directors. These awards vest monthly in 12 equal installments based on service and, upon vesting, each stock unit represents the right to receive one share of the Company's common stock.
The following table summarizes the Company's non-vested stock unit activity for the year ended December 31, 2013:
|
| | | | | | | |
| | Number of Shares | | Weighted- Average Fair Value at Grant Date |
Non-vested stock units at December 31, 2012 | | 3,607,561 |
| | $ | 74.70 |
|
Granted | | 2,765,386 |
| | 71.84 |
|
Vested | | (1,375,165 | ) | | 69.36 |
|
Forfeited | | (365,803 | ) | | 76.16 |
|
Non-vested stock units at December 31, 2013 | | 4,631,979 |
| | 74.47 |
|
For the years ended December 31, 2013, 2012 and 2011, the Company recognized stock-based compensation expense of $130.2 million, $89.5 million and $40.0 million, respectively, related to non-vested stock units. The fair value of the non-vested stock units released in 2013, 2012, and 2011 was $95.4 million, $50.3 million and $21.3 million, respectively. As of December 31, 2013, there was $237.8 million of total unrecognized compensation cost related to non-vested stock units. The unrecognized cost is expected to be recognized over a weighted-average period of 1.96 years.
Benefit Plan
The Company maintains a 401(k) benefit plan allowing eligible U.S.-based employees to contribute up to 60% of their annual compensation, limited to an annual maximum amount as set periodically by the IRS. The Company, at its discretion, may contribute up to $0.50 for each dollar of employee contribution. The Company’s total matching contribution to an employee is typically made at 3% of the employee’s annual compensation. The Company’s matching contributions were $12.7 million, $10.5 million and $9.1 million in 2013, 2012 and 2011, respectively. The Company’s contributions vest over a four-year period at 25% per year.
8. CAPITAL STOCK
Stock Repurchase Programs
The Company’s Board of Directors authorized an ongoing stock repurchase program with a total repurchase authority granted to the Company of $3.9 billion, of which $500.0 million was approved in October 2013. The Company may use the approved dollar authority to repurchase stock at any time until the approved amount is exhausted. The objective of the Company’s stock repurchase program is to improve stockholders’ returns. At December 31, 2013, approximately $429.3 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock in the Company's consolidated balance sheets. A portion of the funds used to repurchase stock over the course of the program was provided by proceeds from employee stock option exercises and the related tax benefit.
The Company is authorized to make open market purchases of its common stock using general corporate funds through open market purchases or pursuant to a Rule 10b5-1 plan.
During the year ended December 31, 2013, the Company expended approximately $406.3 million on open market purchases, repurchasing 6,563,986 shares of outstanding common stock at an average price of $61.90.
During the year ended December 31, 2012, the Company expended approximately $251.0 million on open market purchases, repurchasing 3,550,817 shares of outstanding common stock at an average price of $70.69.
During the year ended December 31, 2011, the Company expended approximately $424.8 million on open market purchases, repurchasing 6,275,470 shares of outstanding common stock at an average price of $67.70.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shares for Tax Withholding
During the years ended December 31, 2013, 2012 and 2011, the Company withheld 444,657 shares, 269,745 shares and 182,203 shares, respectively, from stock units that vested. Amounts withheld to satisfy minimum tax withholding obligations that arose on the vesting of stock units was $31.0 million, $20.2 million and $13.3 million, for 2013, 2012 and 2011, respectively. These shares are reflected as treasury stock in the Company's consolidated balance sheets and statements of equity and the related cash outlays reduce the Company's total stock repurchase authority.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock, $0.01 par value per share. No shares of such preferred stock were issued and outstanding at December 31, 2013 or 2012.
9. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain office space and equipment under various operating leases. In addition to rent, the leases require the Company to pay for taxes, insurance, maintenance and other operating expenses. Certain of these leases contain stated escalation clauses while others contain renewal options. The Company recognizes rent expense on a straight-line basis over the term of the lease, excluding renewal periods, unless renewal of the lease is reasonably assured.
Rental expense for the years ended December 31, 2013, 2012 and 2011 totaled approximately $70.9 million, $65.1 million and $56.5 million, respectively. Sublease income for the years ended December 31, 2013, 2012 and 2011 was approximately $0.3 million, $0.2 million and $0.2 million, respectively. Lease commitments under non-cancelable operating leases with initial or remaining terms in excess of one year and sublease income associated with non-cancelable subleases, are as follows:
|
| | | | | | | | |
| | Operating Leases | | Sublease Income |
| | (In thousands) |
Years ending December 31, | | | | |
2014 | | $ | 60,982 |
| | $ | 255 |
|
2015 | | 46,770 |
| | 260 |
|
2016 | | 39,353 |
| | 227 |
|
2017 | | 22,064 |
| | 218 |
|
2018 | | 18,536 |
| | 203 |
|
Thereafter | | 88,885 |
| | — |
|
Total | | $ | 276,590 |
| | $ | 1,163 |
|
Legal Matters
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made. For the Other Matters referenced below, the amount of liability is not probable or the amount cannot be reasonably estimated; and, therefore, accruals have not been made. In addition, in accordance with the relevant authoritative guidance, for matters in which the likelihood of material loss is at least reasonably possible, the Company provides disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, however, the Company will provide disclosure to that effect.
On April 11, 2008, SSL Services, LLC (“SSL Services”) filed a suit for patent infringement against the Company in the United States District Court for the Eastern District of Texas (the “SSL Matter”). SSL Services alleged that the Company infringed U.S. Patent Nos. 6,061,796 (the “'796 patent”) and 6,158,011 (the “'011 patent”). The Company denied infringement and asserted that the patents-in-suit were invalid. A jury trial was held on SSL Services' claims, and on June 18, 2012, the jury found that the Company does not infringe the '796 patent and found that the Company willfully infringes the '011 patent through the sale and use of certain products. The jury awarded SSL Services $10.0 million. On September 17, 2012, the court issued a final judgment confirming the jury award of $10.0 million in damages and added $5.0 million in enhanced damages
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and approximately $5.0 million in prejudgment interest on the damages award. The Company does not believe that any of its products infringe the '011 patent, and the Company believes that the '011 patent is invalid. Accordingly, no accrual has been made related to this matter. The Company has appealed the district court's judgment on the '011 patent.
In addition to the SSL Matter and due to the nature of the Company's business, the Company is subject to patent infringement claims, including current suits against it or one or more of its wholly-owned subsidiaries alleging infringement by various Company products and services (the "Other Matters"). The Company believes that it has meritorious defenses to the allegations made in its pending cases and intends to vigorously defend these lawsuits; however, it is unable currently to determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any. In addition, the Company is a defendant in various litigation matters generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcomes of these cases, the Company believes that it is not reasonably possible that the ultimate outcomes will materially and adversely affect its business, financial position, results of operations or cash flows.
Guarantees
The authoritative guidance requires certain guarantees to be recorded at fair value and requires a guarantor to make disclosures, even when the likelihood of making any payments under the guarantee is remote. For those guarantees and indemnifications that do not fall within the initial recognition and measurement requirements of the authoritative guidance, the Company must continue to monitor the conditions that are subject to the guarantees and indemnifications, as required under existing generally accepted accounting principles, to identify if a loss has been incurred. If the Company determines that it is probable that a loss has been incurred, any such estimable loss would be recognized. The initial recognition and measurement requirements do not apply to the provisions contained in the majority of the Company’s software license agreements that indemnify licensees of the Company’s software from damages and costs resulting from claims alleging that the Company’s software infringes the intellectual property rights of a third party. The Company has not made material payments pursuant to these provisions as of December 31, 2013. The Company has not identified any losses that are probable under these provisions and, accordingly, the Company has not recorded a liability related to these indemnification provisions.
Purchase Obligations
The Company has agreements with suppliers to purchase inventory and estimates its non-cancelable obligations under these agreements for the fiscal year ended December 31, 2014 to be approximately $13.1 million. The Company also has contingent obligations to purchase inventory for the fiscal year ended December 31, 2014, which are based on amount of usage, of approximately $18.2 million. The Company does not have any purchase obligations beyond December 31, 2014.
10. INCOME TAXES
The United States and foreign components of income before income taxes are as follows:
|
| | | | | | | | | | | | |
| | 2013 | | 2012 | | 2011 |
| | (In thousands) |
United States | | $ | 142,085 |
| | $ | 200,802 |
| | $ | 176,824 |
|
Foreign | | 245,805 |
| | 209,427 |
| | 253,673 |
|
Total | | $ | 387,890 |
| | $ | 410,229 |
| | $ | 430,497 |
|
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the provision for income taxes are as follows:
|
| | | | | | | | | | | | |
| | 2013 | | 2012 | | 2011 |
| | (In thousands) |
Current: | | | | | | |
Federal | | $ | 51,389 |
| | $ | 81,019 |
| | $ | 50,022 |
|
Foreign | | 37,221 |
| | 30,059 |
| | 29,169 |
|
State | | 11,605 |
| | 17,395 |
| | 11,905 |
|
Total current | | 100,215 |
| | 128,473 |
| | 91,096 |
|
Deferred: | | | | | | |
Federal | | (34,897 | ) | | (64,960 | ) | | (8,631 | ) |
Foreign | | (8,413 | ) | | 1,409 |
| | (4,792 | ) |
State | | (8,538 | ) | | (7,240 | ) | | (2,806 | ) |
Total deferred | | (51,848 | ) | | (70,791 | ) | | (16,229 | ) |
Total provision | | $ | 48,367 |
| | $ | 57,682 |
| | $ | 74,867 |
|
The following table presents the breakdown between current and non-current net deferred tax assets:
|
| | | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (In thousands) |
Deferred tax assets - current | | $ | 48,470 |
| | $ | 36,846 |
|
Deferred tax liabilities - current | | (364 | ) | | (876 | ) |
Deferred tax assets- non current | | 115,418 |
| | 43,097 |
|
Deferred tax liabilities - non current | | (13,127 | ) | | (19,756 | ) |
Total net deferred tax assets | | $ | 150,397 |
| | $ | 59,311 |
|
The significant components of the Company’s deferred tax assets and liabilities consisted of the following: |
| | | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (In thousands) |
Deferred tax assets: | | | | |
Accruals and reserves | | $ | 25,556 |
| | $ | 36,128 |
|
Deferred revenue | | 55,688 |
| | 41,820 |
|
Tax credits | | 60,519 |
| | 43,657 |
|
Net operating losses | | 103,329 |
| | 89,856 |
|
Other | | 10,537 |
| | 8,452 |
|
Stock based compensation | | 72,074 |
| | 54,852 |
|
Depreciation and amortization | | 1,675 |
| | — |
|
Valuation allowance | | (26,465 | ) | | (18,185 | ) |
Total deferred tax assets | | 302,913 |
| | 256,580 |
|
Deferred tax liabilities: | | | | |
Depreciation and amortization |
| — |
| | (40,159 | ) |
Acquired technology | | (136,258 | ) | | (140,017 | ) |
Prepaid expenses | | (16,258 | ) | | (17,093 | ) |
Total deferred tax liabilities | | (152,516 | ) | | (197,269 | ) |
Total net deferred tax assets | | $ | 150,397 |
| | $ | 59,311 |
|
The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if it is not more likely than not that some portion or all of the deferred tax assets will be realized. At December 31, 2013, the Company determined that a $26.5 million valuation allowance relating to deferred tax assets for net operating losses and tax credits was necessary.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company does not expect to remit earnings from its foreign subsidiaries. Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $1,238.0 million at December 31, 2013. Those earnings are considered to be permanently reinvested and, accordingly, no U.S. federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company could be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries. The Company maintains certain strategic management and operational activities in overseas subsidiaries and its foreign earnings are taxed at rates that are generally lower than in the United States.
At December 31, 2013, the Company had $220.0 million of remaining net operating loss carry forwards in the United States from acquisitions. The utilization of these net operating loss carry forwards are limited in any one year pursuant to Internal Revenue Code Section 382 and begin to expire in 2019. At December 31, 2013, the Company had $52.0 million of remaining net operating loss carry forwards in foreign jurisdictions that do not expire.
At December 31, 2013, the Company had research and development tax credit carry forwards of approximately $55.6 million that begin to expire in 2024.
A reconciliation of the Company’s effective tax rate to the statutory federal rate is as follows:
|
| | | | | | | | | |
| | Year Ended December 31, |
| | 2013 | | 2012 | | 2011 |
Federal statutory taxes | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal tax benefit | | 1.2 |
| | 1.9 |
| | 1.7 |
|
Foreign operations | | (14.8 | ) | | (10.2 | ) | | (14.5 | ) |
Permanent differences | | (1.1 | ) | | (2.0 | ) | | 1.2 |
|
Tax credits | | (10.9 | ) | | (4.7 | ) | | (7.1 | ) |
Stock option compensation | | 0.4 |
| | 0.1 |
| | 0.1 |
|
Change in accruals for uncertain tax positions | | 3.3 |
| | (5.3 | ) | | 1.4 |
|
Other | | (0.6 | ) | | (0.7 | ) | | (0.4 | ) |
| | 12.5 | % | | 14.1 | % | | 17.4 | % |
The Company’s effective tax rate generally differs from the U.S. federal statutory rate of 35% due primarily to lower tax rates on earnings generated by the Company’s foreign operations that are taxed primarily in Switzerland. The Company has not provided for U.S. taxes for those earnings because it plans to reinvest all of those earnings indefinitely outside the United States. It was not practicable to determine the amount of unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries.
The Company and certain of its subsidiaries are subject to U.S. federal income taxes, as well as income taxes of multiple state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2009.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2013 and 2012 is as follows (in thousands):
|
| | | |
Balance at January 1, 2012 | $ | 79,199 |
|
Additions based on tax positions related to the current year | 2,459 |
|
Additions for tax positions of prior years | 9,558 |
|
Reductions related to the expiration of statutes of limitations | (33,594 | ) |
Settlements | (13,718 | ) |
| |
Balance at December 31, 2012 | 43,904 |
|
Additions based on tax positions related to the current year | 13,694 |
|
Additions for tax positions of prior years | 10,611 |
|
Reductions related to the expiration of statutes of limitations | (2,116 | ) |
Settlements | (2,301 | ) |
| |
Balance at December 31, 2013 | $ | 63,792 |
|
| |
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's unrecognized tax benefits may change significantly over the next 12 months.
The Company recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense. During the year ended December 31, 2013, the Company recognized $0.8 million of expense related to interest and penalties. The Company has no amounts accrued for the payment of interest and penalties at December 31, 2013.
The federal research and development credit expired on December 31, 2011. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law. Under this act, the federal research and development credit was retroactively extended for amounts paid or incurred after December 31, 2011 and before January 1, 2014. The effects of these changes in the tax law will result in net tax benefits of approximately $10.7 million, which were recognized in 2013, the year in which the law was enacted.
11. SEGMENT INFORMATION
The Enterprise and Service Provider division and the SaaS division constitute the Company’s two reportable segments. The Company does not engage in intercompany revenue transfers between segments. The Company’s chief operating decision maker (“CODM”) evaluates the Company’s performance based primarily on profitability from its Enterprise and Service Provider division products and SaaS division products. Segment profit for each segment includes certain research and development, sales, marketing, general and administrative expenses directly attributable to the segment as well as other corporate costs allocated to the segment and excludes certain expenses that are managed outside of the reportable segments. Costs excluded from segment profit primarily consist of certain restructuring charges, stock-based compensation costs, amortization of product related intangible assets, amortization of other intangible assets, net interest and Other (expense) income, net. Accounting policies of the Company’s segments are the same as its consolidated accounting policies.
International revenues (sales outside of the United States) accounted for approximately 45.4%, 45.3% and 43.2% of the Company’s net revenues for the year ended December 31, 2013, 2012, and 2011, respectively. Net revenues and segment profit for 2013, 2012 and 2011 classified by the Company’s reportable segments, are presented below:
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
| (In thousands) |
Net revenues: | | | | | |
Enterprise and Service Provider division | $ | 2,335,562 |
| | $ | 2,074,800 |
| | $ | 1,778,646 |
|
SaaS division | 582,872 |
| | 511,323 |
| | 427,746 |
|
Consolidated | $ | 2,918,434 |
| | $ | 2,586,123 |
| | $ | 2,206,392 |
|
Segment profit: | | | | | |
Enterprise and Services Provider division | $ | 588,138 |
| | $ | 562,794 |
| | $ | 504,883 |
|
SaaS division | 116,061 |
| | 92,498 |
| | 76,147 |
|
Unallocated expenses (1): | | | | | |
Amortization of intangible assets | (139,541 | ) | | (114,574 | ) | | (71,131 | ) |
Restructuring | — |
| | — |
| | (24 | ) |
Net interest and other income | 7,173 |
| | 19,451 |
| | 13,531 |
|
Stock-based compensation | (183,941 | ) | | (149,940 | ) | | (92,909 | ) |
Consolidated income before income taxes | $ | 387,890 |
| | $ | 410,229 |
| | $ | 430,497 |
|
| |
(1)
| Represents expenses presented to management on a consolidated basis only and not allocated to the operating segments. |
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Identifiable assets classified by the Company’s reportable segments are shown below. Long-lived assets consist of property and equipment, net, and are shown below.
|
| | | | | | | |
| December 31, |
| 2013 | | 2012 |
| (In thousands) |
Identifiable assets: | | | |
Enterprise and Service Provider division | $ | 4,662,724 |
| | $ | 4,246,292 |
|
SaaS division | 549,525 |
| | 550,110 |
|
Total identifiable assets | $ | 5,212,249 |
| | $ | 4,796,402 |
|
|
| | | | | | | |
| December 31, |
| 2013 | | 2012 |
| (In thousands) |
Long-lived assets, net: | | | |
United States | $ | 258,114 |
| | $ | 231,812 |
|
United Kingdom | 29,382 |
| | 30,633 |
|
Other countries | 51,500 |
| | 40,849 |
|
Total long-lived assets, net | $ | 338,996 |
| | $ | 303,294 |
|
The increases in identifiable assets are primarily due to goodwill and intangible assets recorded in conjunction with the Company's 2013 Acquisitions. See Note 3 for additional information regarding the Company’s acquisitions.
In fiscal years 2013, 2012 and 2011, one distributor, Ingram Micro, accounted for 14%, 16% and 17%, respectively, of the Company’s total net revenues. The Company’s distributor arrangements with Ingram Micro consist of several non-exclusive, independently negotiated agreements with its subsidiaries, each of which cover different countries or regions. Each of these agreements is separately negotiated and is independent of any other contract (such as a master distribution agreement), one of which was individually responsible for over 10% of the Company’s total net revenues in each of the last three fiscal years. In fiscal years 2013, 2012 and 2011, there were no resellers that accounted for over 10% of the Company’s total net revenues. Total net revenues associated with Ingram Micro are included in the Company's Enterprise and Service Provider division.
Revenues by product grouping for the Company’s Enterprise and Service Provider division and SaaS division were as follows for the years ended:
|
| | | | | | | | | | | |
| December 31, |
| 2013 | | 2012 | | 2011 |
| (In thousands) |
Net revenues: | | | | | |
Enterprise and Service Provider division | | | | | |
Mobile and Desktop revenues(1) | $ | 1,549,383 |
| | $ | 1,450,850 |
| | $ | 1,278,798 |
|
Networking and Cloud revenues(2) | 634,598 |
| | 496,608 |
| | 385,518 |
|
Professional services(3) | 138,879 |
| | 119,061 |
| | 91,496 |
|
Other | 12,702 |
| | 8,281 |
| | 22,834 |
|
Total Enterprise and Service Provider division revenues | 2,335,562 |
| | 2,074,800 |
| | 1,778,646 |
|
SaaS division revenues | 582,872 |
| | 511,323 |
| | 427,746 |
|
Total net revenues | $ | 2,918,434 |
| | $ | 2,586,123 |
| | $ | 2,206,392 |
|
| |
(1)
| Mobile and Desktop revenues are primarily comprised of sales from the Company’s desktop and application virtualization products, XenDesktop and XenApp, and the Company's Mobility products, which include XenMobile and related license updates and maintenance and support. |
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
(2)
| Networking and Cloud revenues are primarily comprised of sales from the Company’s cloud networking products, which include NetScaler, CloudBridge and ByteMobile Smart Capacity, and the Company’s cloud platform products which include XenServer, CloudPlatform and CloudPortal and related license updates and maintenance and support. |
| |
(3)
| Professional services revenues are primarily comprised of revenues from consulting services and product training and certification services. |
Revenues by Geographic Location
The following table presents revenues by segment and geographic location, for the years ended:
|
| | | | | | | | | | | |
| December 31, |
| 2013 | | 2012 | | 2011 |
| (In thousands) |
Net revenues: | | | | | |
Enterprise and Service Provider division | | | | | |
Americas | $ | 1,263,673 |
| | $ | 1,106,801 |
| | $ | 993,062 |
|
EMEA | 785,862 |
| | 691,111 |
| | 576,953 |
|
Asia-Pacific | 286,027 |
| | 276,888 |
| | 208,631 |
|
Total Enterprise and Service Provider division revenues | 2,335,562 |
| | 2,074,800 |
| | 1,778,646 |
|
SaaS division | | | | | |
Americas | 488,307 |
| | 433,263 |
| | 367,260 |
|
EMEA | 73,529 |
| | 63,484 |
| | 50,711 |
|
Asia-Pacific | 21,036 |
| | 14,576 |
| | 9,775 |
|
Total SaaS division revenues | 582,872 |
| | 511,323 |
| | 427,746 |
|
Total net revenues | $ | 2,918,434 |
| | $ | 2,586,123 |
| | $ | 2,206,392 |
|
Export revenue represents shipments of finished goods and services from the United States to international customers, primarily in Latin America and Canada. Shipments from the United States to international customers for 2013, 2012 and 2011 were $215.3 million, $127.4 million and $106.0 million, respectively.
12. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives Designated as Hedging Instruments
As of December 31, 2013, the Company’s derivative assets and liabilities primarily resulted from cash flow hedges related to its forecasted operating expenses transacted in local currencies. A substantial portion of the Company’s overseas expenses are and will continue to be transacted in local currencies. To protect against fluctuations in operating expenses and the volatility of future cash flows caused by changes in currency exchange rates, the Company has established a program that uses foreign exchange forward contracts to hedge its exposure to these potential changes. The terms of these instruments, and the hedged transactions to which they relate, generally do not exceed twelve months and the maximum term is eighteen months.
Generally, when the dollar is weak, foreign currency denominated expenses will be higher, and these higher expenses will be partially offset by the gains realized from the Company’s hedging contracts. Conversely, if the dollar is strong, foreign currency denominated expenses will be lower. These lower expenses will in turn be partially offset by the losses incurred from the Company’s hedging contracts. The change in the derivative component in Accumulated other comprehensive income (loss) includes unrealized gains or losses that arose from changes in market value of the effective portion of derivatives that were held during the period, and gains or losses that were previously unrealized but have been recognized in the same line item as the forecasted transaction in current period net income due to termination or maturities of derivative contracts. This reclassification has no effect on total comprehensive income or equity.
The total cumulative unrealized gain on cash flow derivative instruments was $2.9 million and nil at December 31, 2013 and 2012, respectively, and is included in Accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets. The net unrealized gain as of December 31, 2013 is expected to be recognized in income over the next twelve months at the same time the hedged items are recognized in income.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivatives not Designated as Hedges
A substantial portion of the Company’s overseas assets and liabilities are and will continue to be denominated in local currencies. To protect against fluctuations in earnings caused by changes in currency exchange rates when remeasuring the Company’s balance sheet, it utilizes foreign exchange forward contracts to hedge its exposure to this potential volatility.
These contracts are not designated for hedge accounting treatment under the authoritative guidance. Accordingly, changes in the fair value of these contracts are recorded in Other (expense) income, net.
Fair Values of Derivative Instruments |
| | | | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
| (In thousands) |
| December 31, 2013 | | December 31, 2012 | | December 31, 2013 | | December 31, 2012 |
Derivatives Designated as Hedging Instruments | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Foreign currency forward contracts | Prepaid expenses and other current assets | | $4,559 | | Prepaid expenses and other current assets | | $4,157 | | Accrued expenses and other current liabilities | | $1,578 | | Accrued expenses and other current liabilities | | $4,162 |
| | | | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
| (In thousands) |
| December 31, 2013 | | December 31, 2012 | | December 31, 2013 | | December 31, 2012 |
Derivatives Not Designated as Hedging Instruments | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Foreign currency forward contracts | Prepaid expenses and other current assets | | $393 | | Prepaid expenses and other current assets | | $448 | | Accrued expenses and other current liabilities | | $165 | | Accrued expenses and other current liabilities | | $52 |
The Effect of Derivative Instruments on Financial Performance
|
| | | | | | | | | | | | | | | | | |
| For the Year ended December 31, |
| (In thousands) |
Derivatives in Cash Flow Hedging Relationships | Amount of Gain Recognized in Other Comprehensive Income (Loss) (Effective Portion) | | Location of Loss Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Effective Portion) | | Amount of Loss Reclassified from Accumulated Other Comprehensive Income (Loss) (Effective Portion) |
| 2013 | | 2012 | | | | 2013 | | 2012 |
Foreign currency forward contracts | $ | 2,862 |
| | $ | 5,164 |
| | Operating expenses | | $ | (2,929 | ) | | $ | (5,817 | ) |
There was no material ineffectiveness in the Company’s foreign currency hedging program in the periods presented.
|
| | | | | | | | | |
| For the Year ended December 31, |
| (In thousands) |
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income on Derivative | | Amount of Gain (Loss) Recognized in Income on Derivative |
| | | 2013 | | 2012 |
Foreign currency forward contracts | Other (expense) income, net | | $ | 3,138 |
| | $ | (1,341 | ) |
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Outstanding Foreign Currency Forward Contracts
As of December 31, 2013, the Company had the following net notional foreign currency forward contracts outstanding (in thousands):
|
| |
Foreign Currency | Currency
Denomination
|
Australian dollars | AUD 8,012 |
British pounds sterling | GBP 34,475 |
Canadian dollars | CAD 6,714 |
Chinese renminbi | CNY 81,250 |
Danish krone | DKK 1,500 |
Euro | EUR 27,820 |
Hong Kong dollars | HKD 51,063 |
Indian rupees | INR 1,201,622 |
Japanese yen | JPY 169,004 |
New Zealand dollars | NZD 300 |
Singapore dollars | SGD 12,600 |
Swiss francs | CHF 19,741 |
13. NET INCOME PER SHARE ATTRIBUTABLE TO CITRIX SYSTEMS, INC. STOCKHOLDERS
The following table sets forth the computation of basic and diluted net income per share attributable to Citrix Systems, Inc. stockholders (in thousands, except per share information):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2012 | | 2011 |
Numerator: | | | | | |
Net income attributable to Citrix Systems, Inc. stockholders | $ | 339,523 |
| | $ | 352,547 |
| | $ | 356,322 |
|
Denominator: | | | | | |
Denominator for basic earnings per share - weighted-average shares outstanding | 186,672 |
| | 186,722 |
| | 187,315 |
|
Effect of dilutive employee stock awards: | | | | | |
Employee stock awards | 1,573 |
| | 2,407 |
| | 3,326 |
|
Denominator for diluted earnings per share - weighted-average shares outstanding | 188,245 |
| | 189,129 |
| | 190,641 |
|
Net income per share attributable to Citrix Systems, Inc. stockholders - basic | $ | 1.82 |
| | $ | 1.89 |
| | $ | 1.90 |
|
Net income per share attributable to Citrix Systems, Inc. stockholders - diluted | $ | 1.80 |
| | $ | 1.86 |
| | $ | 1.87 |
|
Anti-dilutive weighted-average shares | 3,647 |
| | 3,464 |
| | 2,576 |
|
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. COMPREHENSIVE INCOME
The changes in Accumulated other comprehensive income (loss) by component, net of tax, are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Foreign currency | | Unrealized gain (loss) on available-for-sale securities | | Unrealized gain (loss) on derivative instruments | | Other comprehensive gain (loss) on pension liability | | Total |
| (In thousands) |
Balance at December 31, 2012 | $ | (3,024 | ) | | $ | 2,426 |
| | $ | (10 | ) | | $ | (7,097 | ) | | $ | (7,705 | ) |
Other comprehensive income before reclassifications | 8,482 |
| | (985 | ) | | (67 | ) | | 2,500 |
| | 9,930 |
|
Amounts reclassified from Accumulated other comprehensive income (loss) | — |
| | (203 | ) | | 2,929 |
| | — |
| | 2,726 |
|
Net current period other comprehensive income | 8,482 |
| | (1,188 | ) | | 2,862 |
| | 2,500 |
| | 12,656 |
|
Balance at December 31, 2013 | $ | 5,458 |
| | $ | 1,238 |
| | $ | 2,852 |
| | $ | (4,597 | ) | | $ | 4,951 |
|
Income tax expense or benefit allocated to each component of other comprehensive income is not material.
Reclassifications out of Accumulated other comprehensive income (loss) are as follows (in thousands):
|
| | | | | | |
| | For the Twelve Months Ended December 31, 2013 |
| | (In thousands) |
Details about Accumulated other comprehensive income (loss) components | | Amount reclassified from Accumulated other comprehensive income (loss), net of tax | | Affected line item in the Consolidated Statements of Income |
Unrealized net gain on available-for-sale securities | | $ | 203 |
| | Other (expense) income, net |
Unrealized net losses on cash flow hedges | | (2,929 | ) | | Operating expenses * |
| | $ | (2,726 | ) | | |
* Operating expenses amounts allocated to Research and development, Sales, marketing and services, and General and administrative are not individually significant.
15. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2013, the Financial Accounting Standards Board issued an accounting standard update that provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists. Under the new standard, the Company's unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry forward. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal year 2014 and applied prospectively. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
CITRIX SYSTEMS, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total Year |
| | (In thousands, except per share amounts) |
2013 | | | | | | | | | | |
Net revenues | | $ | 672,899 |
| | $ | 730,384 |
| | $ | 712,731 |
| | $ | 802,420 |
| | $ | 2,918,434 |
|
Gross margin | | 557,985 |
| | 603,144 |
| | 588,798 |
| | 665,712 |
| | 2,415,639 |
|
Income from operations | | 56,608 |
| | 75,888 |
| | 87,367 |
| | 160,854 |
| | 380,717 |
|
Net income attributable to Citrix Systems, Inc. | | 59,688 |
| | 64,461 |
| | 76,730 |
| | 138,644 |
| | 339,523 |
|
Net income per share attributable to Citrix Systems, Inc. stockholders - basic | | 0.32 |
| | 0.34 |
| | 0.41 |
| | 0.75 |
| | 1.82 |
|
Net income per share attributable to Citrix Systems, Inc. stockholders - diluted | | 0.32 |
| | 0.34 |
| | 0.41 |
| | 0.74 |
| | 1.80 |
|
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total Year |
| | (In thousands, except per share amounts) |
2012 | | | | | | | | | | |
Net revenues | | $ | 589,495 |
| | $ | 615,210 |
| | $ | 641,422 |
| | $ | 739,996 |
| | $ | 2,586,123 |
|
Gross margin | | 503,152 |
| | 520,852 |
| | 535,354 |
| | 622,628 |
| | 2,181,986 |
|
Income from operations | | 80,750 |
| | 82,192 |
| | 82,415 |
| | 145,421 |
| | 390,778 |
|
Net income attributable to Citrix Systems, Inc. | | 68,267 |
| | 92,006 |
| | 78,245 |
| | 114,029 |
| | 352,547 |
|
Net income per share attributable to Citrix Systems, Inc. stockholders - basic | | 0.37 |
| | 0.49 |
| | 0.42 |
| | 0.61 |
| | 1.89 |
|
Net income per share attributable to Citrix Systems, Inc. stockholders - diluted | | 0.36 |
| | 0.49 |
| | 0.41 |
| | 0.60 |
| | 1.86 |
|
The sum of the quarterly net income per share amounts do not add to the annual earnings per share amount due to the weighting of common and common equivalent shares outstanding during each of the respective periods.
The Consolidated Statement of Cash Flows for the year ended December 31, 2013 reflects an adjustment of approximately $17.3 million made to the captions “Excess tax benefit from stock based compensation” and “Income taxes, net” for the three months ended March 31, 2013. Accordingly, the adjusted net cash provided by operating activities and net cash used in financing activities for the three months ended March 31, 2013 is approximately $266.6 million and $28.9 million, respectively.
CITRIX SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Beginning of Period | | Charged to Costs and Expenses | | Charged to Other Accounts | | | | Deductions | | | | Balance at End of Period |
| | (In thousands) |
2013 | | | | | | | | | | | | | | |
Deducted from asset accounts: | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 3,883 |
| | $ | 1,046 |
| | $ | — |
| | | | $ | 1,637 |
| | (2 | ) | | $ | 3,292 |
|
Allowance for returns | | 2,564 |
| | — |
| | 4,473 |
| | (1 | ) | | 4,975 |
| | (4 | ) | | 2,062 |
|
Valuation allowance for deferred tax assets | | 18,185 |
| | — |
| | 8,280 |
| | (6 | ) | | — |
| | | | 26,465 |
|
2012 | | | | | | | | | | | | | | |
Deducted from asset accounts: | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 2,564 |
| | $ | 1,784 |
| | $ | 1,119 |
| | (3 | ) | | $ | 1,584 |
| | (2 | ) | | $ | 3,883 |
|
Allowance for returns | | 1,361 |
| | — |
| | 10,742 |
| | (1 | ) | | 9,539 |
| | (4 | ) | | 2,564 |
|
Valuation allowance for deferred tax assets | | 9,235 |
| | — |
| | 8,950 |
| | (6 | ) | | — |
| | | | 18,185 |
|
2011 | | | | | | | | | | | | | | |
Deducted from asset accounts: | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 3,409 |
| | $ | 266 |
| | $ | 1,468 |
| | (3 | ) | | $ | 2,579 |
| | (2 | ) | | $ | 2,564 |
|
Allowance for returns | | 850 |
| | — |
| | 5,542 |
| | (1 | ) | | 5,031 |
| | (4 | ) | | 1,361 |
|
Valuation allowance for deferred tax assets | | 13,999 |
| | — |
| | (4,764 | ) | | (5 | ) | | — |
| | | | 9,235 |
|
| |
(1)
| Charged against revenues. |
| |
(2)
| Uncollectible accounts written off, net of recoveries. |
| |
(3)
| Adjustments from acquisitions. |
| |
(4)
| Credits issued for returns. |
| |
(5)
| Related to deferred tax assets on unrealized losses and acquisitions. |
| |
(6)
| Related to deferred tax assets on foreign tax credits, net operating loss carryforwards, and depreciation. |
EXHIBIT INDEX
|
| | |
Exhibit No. | | Description |
3.1 | | Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on May 29, 2013 |
3.2 | | Amended and Restated By-laws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed on May 29, 2013 |
4.1 | | Specimen certificate representing Common Stock (incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 33-98542), as amended) |
10.1* | | Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010) |
10.2* | | First Amendment to Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated as of May 28, 2010) |
10.3* | | Second Amendment to the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated as of June 2, 2011) |
10.4* | | Third Amendment to the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated as of June 2, 2011) |
10.5* | | Fourth Amendment to the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated as of May 31, 2012) |
10.6* | | Fifth Amendment to the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013) |
10.7* | | Sixth Amendment to the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 29, 2013) |
10.8* | | Form of Global Stock Option Agreement under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011) |
10.9* | | Form of Restricted Stock Unit Agreement For Non-Employee Directors under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011) |
10.10* | | Form of Global Restricted Stock Unit Agreement under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (Performance Based Awards) (incorporated herein by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011) |
10.11* | | Form of Global Restricted Stock Unit Agreement under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (Time Based Awards) (incorporated herein by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011) |
10.12* | | Form of Global Restricted Stock Unit Agreement under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (Long Term Incentive) (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012) |
10.13* | | Form of Long Term Incentive Agreement under the Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated by reference herein to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2009) |
10.14* | | Amended and Restated 2005 Employee Stock Purchase Plan (incorporated by reference herein to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 2011) |
10.15* | | Amendment to Amended and Restated 2005 Employee Stock Purchase Plan (incorporated by reference herein to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 2012) |
10.16*† | | Citrix Systems, Inc. Executive Bonus Plan |
10.17* | | Change in Control Agreement dated as of August 4, 2005 by and between the Company and Mark B. Templeton (incorporated by reference herein to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 2010) |
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Exhibit No. | | Description |
10.18* | | Form of Change in Control Agreement by and between the Company and each of David J. Henshall, David R. Freidman, Brett M. Caine, Alvaro J. Monserrat and John Gordon Payne (incorporated by reference herein to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 2010) |
10.19*† | | Form of First Amendment to Change of Control Agreement (Chief Executive Officer) between the Company and Mark Templeton |
10.20*† | | Form of First Amendment to Change of Control Agreement between the Company and each of Brett M. Caine, David J. Henshall, David R. Friedman and Alvaro J. Monserrat (together with Mark Templeton, the “Executive Officers”) |
10.21* | | Form of Amendment to Change in Control Agreements by and between the Company and each of David J. Henshall, David R. Freidman, Brett M. Caine and Alvaro J. Monserrat (incorporated herein by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011) |
10.22* | | Form of Indemnification Agreement by and between the Company and each of its Directors and Executive Officers (incorporated herein by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011) |
10.23* | | Form of Change in Control Agreement by and between the Company and each of Catherine Courage, Steve Daheb, Sudhakar Ramakrishna and Christopher Hylen (incorporated by reference herein to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 2012) |
21.1† | | List of Subsidiaries |
23.1† | | Consent of Independent Registered Public Accounting Firm |
24.1 | | Power of Attorney (included in signature page) |
31.1† | | Rule 13a-14(a) / 15d-14(a) Certifications |
31.2† | | Rule 13a-14(a) / 15d-14(a) Certifications |
32.1†† | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101† | | XBRL (eXtensible Business Reporting Language). The following materials from Citrix Systems, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013 formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements of Equity, (v) the Consolidated Statements of Cash Flows and (vi) notes to consolidated financial statements.
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* | Indicates a management contract or a compensatory plan, contract or arrangement. |
† | Filed herewith. |
†† | Furnished herewith. |