10-Q 1 ctxs9-30x201210xq.htm FORM 10-Q CTXS 9-30-2012 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .

Commission File Number 0-27084
 
 
 
CITRIX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
    
Delaware
  
75-2275152
(State or other jurisdiction of
incorporation or organization)
  
(IRS Employer
Identification No.)
 
 
 
851 West Cypress Creek Road
Fort Lauderdale, Florida
  
33309
(Address of principal executive offices)
  
(Zip Code)
Registrant’s Telephone Number, Including Area Code:
(954) 267-3000
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x   No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
x  Large accelerated filer
  
o    Accelerated filer
o    Non-accelerated filer
  
o    Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of October 31, 2012 there were 186,715,829 shares of the registrant’s Common Stock, $.001 par value per share, outstanding.

1



CITRIX SYSTEMS, INC.
Form 10-Q
For the Quarterly Period Ended September 30, 2012
CONTENTS
 
 
 
 
 
 
Page
Number
PART I:
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II:
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

2



PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
September 30,
2012
 
December 31,
2011
 
(In thousands, except par value)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
324,127

 
$
333,296

Short-term investments — available-for-sale
358,920

 
406,461

Accounts receivable, net of allowances of $5,242 and $3,925 at September 30, 2012 and December 31, 2011, respectively
456,545

 
484,431

Inventories, net
10,961

 
8,507

Prepaid expenses and other current assets
124,723

 
95,419

Current portion of deferred tax assets, net
44,238

 
44,916

Total current assets
1,319,514

 
1,373,030

Long-term investments — available-for-sale
723,205

 
737,844

Property and equipment, net
295,934

 
277,429

Goodwill
1,504,373

 
1,239,120

Other intangible assets, net
575,024

 
343,372

Long-term portion of deferred tax assets, net
3,372

 
67,479

Other assets
67,731

 
61,267

 
$
4,489,153

 
$
4,099,541

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
68,214

 
$
58,034

Accrued expenses and other current liabilities
234,763

 
223,136

Current portion of deferred tax liabilities, net
102

 
79,318

Current portion of deferred revenues
862,795

 
818,642

Total current liabilities
1,165,874

 
1,179,130

Long-term portion of deferred revenues
190,358

 
141,241

Long-term portion of deferred tax liabilities, net
67,358

 
20,247

Other liabilities
29,525

 
28,433

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; 286,518 and 282,774 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively
287

 
283

Additional paid-in capital
3,643,127

 
3,385,053

Retained earnings
2,449,989

 
2,211,471

Accumulated other comprehensive loss
(10,133
)
 
(11,561
)
 
6,083,270

 
5,585,246

Less — common stock in treasury, at cost (99,550 and 96,960 shares at September 30, 2012 and December 31, 2011, respectively)
(3,047,232
)
 
(2,854,756
)
Total stockholders' equity
3,036,038

 
2,730,490

 
$
4,489,153

 
$
4,099,541

See accompanying notes.

3



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except per share information)
Revenues:
 
 
 
 
 
 
 
Product and licenses
$
195,690

 
$
193,880

 
$
561,971

 
$
515,466

Software as a service
129,659

 
109,558

 
375,902

 
315,809

License updates and maintenance
285,051

 
238,710

 
822,113

 
691,771

Professional services
31,022

 
23,200

 
86,141

 
63,980

Total net revenues
641,422

 
565,348

 
1,846,127

 
1,587,026

Cost of net revenues:
 
 
 
 
 
 
 
Cost of product and license revenues
24,218

 
22,345

 
63,876

 
54,834

Cost of services and maintenance revenues
58,920

 
42,665

 
166,328

 
116,745

Amortization of product related intangible assets
22,930

 
14,679

 
56,565

 
39,920

Total cost of net revenues
106,068

 
79,689

 
286,769

 
211,499

Gross margin
535,354

 
485,659

 
1,559,358

 
1,375,527

Operating expenses:
 
 
 
 
 
 
 
Research and development
114,713

 
96,676

 
328,363

 
278,598

Sales, marketing and services
263,136

 
223,967

 
773,732

 
640,907

General and administrative
65,252

 
55,907

 
186,407

 
162,970

Amortization of other intangible assets
9,838

 
4,430

 
25,499

 
11,876

Restructuring

 

 

 
24

Total operating expenses
452,939

 
380,980

 
1,314,001

 
1,094,375

Income from operations
82,415

 
104,679

 
245,357

 
281,152

Interest income
2,059

 
3,085

 
7,965

 
10,751

Other income (expense), net
6,424

 
(4,946
)
 
7,671

 
48

Income before income taxes
90,898

 
102,818

 
260,993

 
291,951

Income tax expense
12,653

 
10,642

 
22,475

 
45,020

Consolidated net income
78,245

 
92,176

 
238,518

 
246,931

Less: Net loss attributable to non-controlling interest

 

 

 
692

Net income attributable to Citrix Systems, Inc.
$
78,245

 
$
92,176

 
$
238,518

 
$
247,623

Net income per share attributable to Citrix Systems, Inc. stockholders:
 
 
 
 
 
 
 
Net income per share attributable to Citrix Systems, Inc. stockholders — basic
$
0.42

 
$
0.49

 
$
1.28

 
$
1.32

Net income per share attributable to Citrix Systems, Inc. stockholders — diluted
$
0.41

 
$
0.49

 
$
1.26

 
$
1.30

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
186,864

 
186,979

 
186,326

 
187,688

Diluted
189,671

 
189,730

 
189,282

 
191,155

See accompanying notes.

4



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
 
 
 
 
 
 
 
 
Consolidated net income
$
78,245

 
$
92,176

 
$
238,518

 
$
246,931

Other comprehensive income:
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
5,414

 
(6,222
)
 
(4,436
)
 
1,151

Available for sale securities:
 
 
 
 
 
 
 
Change in net unrealized gains
(1,037
)
 
(584
)
 
1,420

 
1,027

Less: reclassification adjustment for net losses (gains) included in net income
2,579

 
366

 
(283
)
 
1,021

Net change (net of tax effect)
1,542

 
(218
)
 
1,137

 
2,048

Cash flow hedges:
 
 
 
 
 
 
 
Change in unrealized gains
2,235

 
(7,818
)
 
(109
)
 
(1,067
)
Less: reclassification adjustment for net losses (gains) included in net income
2,530

 
(3,672
)
 
4,836

 
(9,166
)
Net change (net of tax effect)
4,765

 
(11,490
)
 
4,727

 
(10,233
)
Other comprehensive income (loss)
11,721

 
(17,930
)
 
1,428

 
(7,034
)
Comprehensive income
89,966

 
74,246

 
239,946

 
239,897

Less: Comprehensive loss attributable to non-controlling interest

 

 

 
692

Comprehensive income attributable to Citrix Systems, Inc.
$
89,966

 
$
74,246

 
$
239,946

 
$
240,589

See accompanying notes.



5



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended September 30,
 
2012
 
2011
 
(In thousands)
Operating Activities
 
 
 
Net income
$
238,518

 
$
246,931

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of intangible assets
82,064

 
51,796

Depreciation and amortization of property and equipment
71,991

 
63,798

Stock-based compensation expense
108,922

 
63,591

(Gain) loss on investments
(13,378
)
 
1,021

Provision for doubtful accounts
829

 
439

Provision for product returns
8,703

 
3,827

Provision for inventory reserves
923

 
1,396

Tax effect of stock-based compensation
30,380

 
39,771

Excess tax benefit from exercise of stock options
(31,976
)
 
(39,868
)
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies
(882
)
 
788

Other non-cash items
981

 
4,663

Total adjustments to reconcile net income to net cash provided by operating activities
258,557

 
191,222

Changes in operating assets and liabilities, net of the effects of acquisitions:
 
 
 
Accounts receivable
70,485

 
41,194

Inventories
(2,163
)
 
(1,440
)
Prepaid expenses and other current assets
(27,114
)
 
(6,703
)
Other assets
2,392

 
5,339

Deferred tax assets, net
11,142

 
(18,285
)
Accounts payable
(7,051
)
 
(12,267
)
Accrued expenses and other current liabilities
18,226

 
(21,059
)
Deferred revenues
72,816

 
46,657

Deferred tax liabilities, net
(43,733
)
 
28,854

Other liabilities
(269
)
 
9,116

Total changes in operating assets and liabilities, net of the effects of acquisitions
94,731

 
71,406

Net cash provided by operating activities
591,806

 
509,559

Investing Activities
 
 
 
Purchases of available-for-sale investments
(1,189,868
)
 
(968,184
)
Proceeds from sales of available-for-sale investments
891,008

 
545,622

Proceeds from maturities of available-for-sale investments
356,893

 
487,406

Purchases of property and equipment
(87,290
)
 
(88,855
)
Proceeds from the sales of cost method investments
21,413

 

Purchases of cost method investments
(5,149
)
 
(15,818
)
Cash paid for acquisitions, net of cash acquired
(488,347
)
 
(309,472
)
Cash paid for licensing agreements and product related intangible assets
(14,277
)
 
(13,164
)
Other
3,450

 

Net cash used in investing activities
(512,167
)
 
(362,465
)
Financing Activities
 
 
 
Proceeds from issuance of common stock under stock-based compensation plans
95,796

 
94,827

Repayment of acquired debt
(24,346
)
 
(11,561
)
Excess tax benefit from exercise of stock options
31,976

 
39,868

Purchase of non-controlling interest

 
(17,207
)
Stock repurchases, net
(174,951
)
 
(324,897
)
Cash paid for tax withholding on vested stock awards
(17,524
)
 
(12,182
)
Other
1,050

 
(3,000
)
Net cash used in financing activities
(87,999
)
 
(234,152
)
Effect of exchange rate changes on cash and cash equivalents
(809
)
 
3,026

Change in cash and cash equivalents
(9,169
)
 
(84,032
)
Cash and cash equivalents at beginning of period
333,296

 
396,162

Cash and cash equivalents at end of period
$
324,127

 
$
312,130

See accompanying notes.

6



CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Citrix Systems, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. All adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been reflected in the condensed consolidated financial statements and accompanying notes. The results of operations for the periods presented are not necessarily indicative of the results expected for the full year or for any future period partially because of the seasonality of the Company’s business. Historically, the Company’s revenue for the fourth quarter of any year is typically higher than the revenue for the first quarter of the subsequent year. The information included in these condensed consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report and the condensed consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
The condensed 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 Online Services division. All significant transactions and balances between the Company and its subsidiaries have been eliminated in consolidation. In addition, the Company presents non-controlling interests of less-than-wholly-owned subsidiaries within the equity section of its condensed consolidated financial statements in accordance with the authoritative guidance for the presentation and disclosure of non-controlling interests of a consolidated subsidiary. See Note 4 for more information regarding the Company’s non-controlling interests.
Reclassifications
During the first quarter of 2012, the Company performed a review of the historical manner of presentation of certain of its revenue categories and adopted a revised presentation, which the Company believes is more comparable to those presented by other companies in the industry and better reflects the Company's evolving product and service offerings. As a result, technical support, hardware maintenance and software updates revenues, which were previously presented in Technical services and License updates are classified together as License updates and maintenance. A corresponding change was made to rename Cost of services revenues to Cost of services and maintenance revenues; however, there was no change in classification. Product training and certification and consulting services, which were previously presented in Technical services, are classified together as Professional services. Product licenses has been renamed to Product and licenses to more appropriately describe its composition of both software and hardware, however, there was no change in classification. The composition and classification of Software as a service remained unchanged. This change in manner of presentation will not affect the Company's total net revenues, total cost of net revenues or gross margin. Conforming changes have been made for all periods presented, as follows (in thousands):
 
 
 
Three Months Ended September 30, 2011
 
 
 
As Previously Reported
 
Amount Reclassified
 
As Reported Herein
Revenues:
 
 
 
 
Revenues:
 
License updates
$
187,169

 
$
51,541

 
License updates and maintenance (2)
$
238,710

Technical services (1)
74,741

 
(51,541
)
 
Professional services (3)
23,200

Total
$
261,910

 
$

 
Total
$
261,910

 
 
 
Nine Months Ended September 30, 2011
 
 
 
As Previously Reported
 
Amount Reclassified
 
As Reported Herein
Revenues:
 
 
 
 
Revenues:
 
License updates
$
548,920

 
$
142,851

 
License updates and maintenance (2)
$
691,771

Technical services (1)
206,831

 
(142,851
)
 
Professional services (3)
63,980

Total
$
755,751

 
$

 
Total
$
755,751


7




 
 
(1)
Technical services revenue was comprised of hardware maintenance, consulting services, product training and certification and technical support.
(2)
License updates and maintenance is comprised of license updates, hardware and software maintenance and technical support.
(3)
Professional services is comprised of consulting services and product training and certification.
Additionally, during the first quarter of 2012, the Company revised its methodology for allocating certain information technology ("IT") support costs to more closely align these costs to the employees directly utilizing the related assets and services and to reflect how management assesses the cost of headcount. As a result, certain IT support costs have been reclassified from General and administrative expenses to Cost of services and maintenance revenues, Research and development expenses and Sales, marketing and services expenses based on the headcount in each of these functional areas. This change in presentation will not affect the Company's income from operations or cash flows. Conforming changes have been made for all prior periods presented, as follows (in thousands):
 
 
 
Three Months Ended September 30, 2011
 
 
 
As Previously Reported
 
Amount Reclassified
 
As Reported Herein
Cost of services revenues
$
39,711

 
$
2,954

 
Cost of services and maintenance revenues
$
42,665

Research and development
88,933

 
7,743

 
Research and development
96,676

Sales, marketing and services
212,985

 
10,982

 
Sales, marketing and services
223,967

General and administrative
77,586

 
(21,679
)
 
General and administrative
55,907

Total
$
419,215

 
$

 
Total
$
419,215

 
 
 
Nine Months Ended September 30, 2011
 
 
 
As Previously Reported
 
Amount Reclassified
 
As Reported Herein
Cost of services revenues
$
108,283

 
$
8,462

 
Cost of services and maintenance revenues
$
116,745

Research and development
254,963

 
23,635

 
Research and development
278,598

Sales, marketing and services
606,587

 
34,320

 
Sales, marketing and services
640,907

General and administrative
229,387

 
(66,417
)
 
General and administrative
162,970

Total
$
1,199,220

 
$

 
Total
$
1,199,220

2. SIGNIFICANT ACCOUNTING POLICIES
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 condensed consolidated financial statements and accompanying notes. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial statements and accompanying notes, the actual amount of such estimates, when known, will vary from these estimates.
Investments
Short-term and long-term investments at September 30, 2012 and December 31, 2011 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.

8



Inventory
Inventories are stated at the lower of cost or market on a standard cost basis, which approximates actual cost. The Company’s inventories as of September 30, 2012 and December 31, 2011 primarily consist of finished goods.
Revenue Recognition
Net revenues include the following categories: Product and licenses, Software as a service, License updates and maintenance and Professional services. Product and license 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. Software as a service 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, Software as a service 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. 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 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.
The Company’s hardware appliances contain software components that are essential to the overall functionality of the products. Effective January 1, 2011, the Company adopted amended accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of industry-specific software revenue recognition guidance on a prospective basis for new and materially modified arrangements originating after December 31, 2010.
For the Company’s non-software deliverables, it allocates the arrangement consideration based on the relative selling price of the deliverables. For the Company’s hardware appliances, it uses estimated selling price ("ESP") as its selling price. For the Company’s hardware maintenance and professional services, it generally uses VSOE as its selling price. When the Company is unable to establish selling price using VSOE for its hardware maintenance and professional services, the Company uses ESP in its allocation of arrangement consideration.
The Company’s software as service ("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 is sold separately and not bundled with the Enterprise division’s products and services.

9



In the normal course of business, the Company is not obligated to accept product returns from its distributors under any conditions, unless the product is defective in manufacture. The Company establishes provisions for estimated returns, as well as other sales allowances, concurrently with the recognition of revenue. Allowances for estimated product returns amounted to approximately $2.4 million and $1.4 million at September 30, 2012 and December 31, 2011, 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.
Foreign Currency
The functional currency for all of the Company’s wholly-owned foreign subsidiaries in its Enterprise 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 Online Services 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 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. See Note 9 for information on the Company's Enterprise and Online Services divisions.
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 condensed consolidated financial statements using a fair value method. See Note 7 for further information regarding the Company’s stock-based compensation plans.
3. 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 net income attributable to Citrix Systems, Inc. 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 exercise or settlement of stock awards (calculated using the treasury stock method) during the period they were outstanding.
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):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Numerator:
 
 
 
 
 
 
 
Net income attributable to Citrix Systems, Inc. stockholders
$
78,245

 
$
92,176

 
$
238,518

 
$
247,623

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share — weighted-average shares outstanding
186,864

 
186,979

 
186,326

 
187,688

Effect of dilutive employee stock awards
2,807

 
2,751

 
2,956

 
3,467

Denominator for diluted earnings per share — weighted-average shares outstanding
189,671

 
189,730

 
189,282

 
191,155

Net income per share attributable to Citrix Systems, Inc. stockholders — basic
$
0.42

 
$
0.49

 
$
1.28

 
$
1.32

Net income per share attributable to Citrix Systems, Inc. stockholders — diluted
$
0.41

 
$
0.49

 
$
1.26

 
$
1.30

Anti-dilutive weighted-average shares
3,355

 
3,587

 
3,336

 
2,023


10



4. ACQUISITIONS
2012 Acquisitions
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 Online Services 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 nine months ended September 30, 2012 and are included in General and administrative expense in the accompanying condensed consolidated statements of income. There were no transaction costs associated with the acquisition during the three months ended September 30, 2012. 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.
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 division and extends the Company's industry reach into the mobile and cloud markets. The total consideration for this transaction was approximately $400.7 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 nine months ended September 30, 2012 and are included in General and administrative expense in the accompanying condensed consolidated statements of income. There were no transaction costs associated with the acquisition during the three months ended September 30, 2012.
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 division. Transaction costs associated with the acquisition were approximately $0.5 million, of which the Company expensed $0.4 million during the nine months ended September 30, 2012, and are included in General and administrative expense in the accompanying condensed consolidated statements of income. There were no transaction costs associated with the acquisition during the three months ended September 30, 2012. 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 division. Transaction costs associated with the acquisitions were approximately $0.4 million, all of which the Company expensed during the nine months ended September 30, 2012 and are included in General and administrative expense in the accompanying condensed consolidated statements of income. There were no transaction costs associated with the acquisitions during the three months ended September 30, 2012. 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 division and the other became part of the Company's Online Services division. Transaction costs associated with the acquisitions were approximately $0.2 million, all of which the Company expensed during the three and nine months ended September 30, 2012 and are included in General and administrative expense in the accompanying condensed 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.
The five acquisitions discussed in this section captioned 2012 Other Acquisitions will collectively be referred to herein as the "2012 Other Acquisitions".


11



Purchase Accounting for the Acquisitions in 2012
The purchase prices for the companies acquired in the first nine months of 2012, which include Podio, Bytemobile and the 2012 Other Acquisitions (collectively, the "2012 Acquisitions"), were allocated to the respective acquired company's net tangible and intangible assets based on their estimated fair values as of the date of the acquisition. The allocations of the total purchase prices are summarized below (in thousands):
 
Podio
 
Bytemobile
 
2012 Other Acquisitions
 
Purchase Price Allocation
 
Asset Life
 
Purchase Price Allocation
 
Asset Life
 
Purchase Price Allocation
 
Asset Life
Current assets
$
1,906

 
 
 
$
62,194

 
 
 
$
2,585

 
 
Other assets
33

 
 
 
7,406

 
 
 
75

 
 
Property and equipment

 
 
 
2,464

 
Various
 
209

 
Various
Deferred tax assets, non-current

 
 
 
39,976

 
 
 

 
 
Intangible assets
24,600

 
4-5 years
 
251,400

 
1-9 years
 
29,002

 
3-5 years
Goodwill
25,503

 
Indefinite
 
202,113

 
Indefinite
 
44,794

 
Indefinite
Assets acquired
52,042

 
 
 
565,553

 
 
 
76,665

 
 
Current liabilities assumed
(609
)
 
 
 
(58,723
)
 
 
 
(7,494
)
 
 
Long-term liabilities assumed

 
 
 
(4,195
)
 
 
 
(7,760
)
 
 
Deferred tax liabilities, non-current
(6,150
)
 
 
 
(96,375
)
 
 
 
(11,039
)
 
 
Net assets acquired
$
45,283

 
 
 
$
406,260

 
 
 
$
50,372

 
 
Current assets acquired in connection with the 2012 Acquisitions consisted primarily of cash and accounts receivable. Current liabilities assumed in connection with the 2012 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 2012 Acquisitions consisted of other long-term liabilities, long-term portion of deferred revenues and long-term debt which was paid in full subsequent to the respective acquisition date. The Company continues to evaluate certain income tax assets and liabilities related to the 2012 Acquisitions. Goodwill from the Podio, Bytemobile and the 2012 Other Acquisitions was assigned to the Company's division of which each business became a part, as indicated above. The goodwill related to the 2012 Acquisitions is not deductible for tax purposes. See Note 9 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 Podio, Bytemobile and the 2012 Other Acquisitions are included in the revenue of the Company's division of which each business became a part, as indicated above. The Company has included the effect of the 2012 Acquisitions in its results of operations prospectively from the date of each acquisition.
Identifiable intangible assets acquired in connection with the 2012 Acquisitions (in thousands) and their weighted-average lives are as follows:
 
Podio
 
Asset Life
 
Bytemobile
 
Asset Life
 
2012 Other Acquisitions
 
Asset Life
Trade names
$

 

 
$
6,000

 
6.0 years
 
$

 

Customer relationships
3,900

 
4.0 years
 
144,000

 
8.8 years
 
2,100

 
3.0 years
Core and product technologies
20,700

 
5.0 years
 
98,000

 
4.9 years
 
26,112

 
4.6 years
In-process R&D1

 

 
3,400

 
Indefinite
 
790

 
Indefinite
Total
$
24,600

 
 
 
$
251,400

 
 
 
$
29,002

 
 
(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 pro-forma information combines the consolidated results of operations of the Company, Podio, Bytemobile, and the 2012 Other Acquisitions as if the acquisitions had occurred at the beginning of fiscal year 2011 (in thousands, except per share data):


12



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Revenues
$
642,392

 
$
577,060

 
$
1,862,370

 
$
1,622,147

Income from operations
79,752

 
72,562

 
193,343

 
196,561

Net income
76,166

 
70,670

 
203,930

 
191,093

Per share - basic
0.41

 
0.38

 
1.09

 
1.02

Per share - diluted
0.40

 
0.37

 
1.08

 
1.00

2011 Acquisitions
Netviewer AG
In February 2011, the Company acquired all of the issued and outstanding securities of Netviewer AG (“Netviewer”), a privately-held European SaaS vendor in collaboration and IT services. Netviewer became part of the Company’s Online Services division and the acquisition enables the extension of its Online Services business in Europe. The total consideration for this transaction was approximately $107.5 million, net of $6.3 million of cash acquired, and was paid in cash. Transaction costs associated with the acquisition were approximately $3.1 million, of which the Company expensed $0.1 million and $0.9 million during the three and nine months ended September 30, 2011, respectively, and are included in General and administrative expense in the accompanying condensed consolidated statements of income. The Company recorded approximately $98.7 million of goodwill, which is not deductible for tax purposes, and acquired $28.8 million of identifiable intangible assets, of which $3.2 million is related to product related intangible assets and $25.6 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 99,100 shares of the Company's common stock, for which the vesting period reset fully upon the closing of the transaction.
Cloud.com
In July 2011, the Company acquired all of the issued and outstanding securities of Cloud.com, Inc. ("Cloud.com"), a privately-held provider of software infrastructure platforms for cloud providers. Cloud.com became part of the Company’s Enterprise division and the acquisition further establishes the Company as a leader in infrastructure for the growing cloud provider market. The total consideration for this transaction was approximately $158.8 million, net of $5.6 million of cash acquired, and was paid in cash. Transaction costs associated with the acquisition were approximately $2.9 million, of which the Company expensed $2.3 million and $2.9 million during the three and nine months ended September 30, 2011, respectively, and are included in General and administrative expense in the accompanying condensed consolidated statements of income. The Company recorded approximately $100.6 million of goodwill, which is not deductible for tax purposes, and acquired $89.0 million of identifiable intangible assets, of which $58.0 million is related to product related intangible assets and $31.0 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 288,742 shares of the Company's common stock and assumed certain stock options which are exercisable for 183,780 shares of the Company's common stock, for which the vesting period reset fully upon the closing of the transaction.
ShareFile
In October 2011, the Company acquired all of the issued and outstanding securities of Novel Labs, Inc. (d/b/a “ShareFile”), a privately-held provider of secure data sharing and collaboration solutions. ShareFile initially became part of the Company's Enterprise division, and in the first quarter of 2012 it was transferred to the Company's Online Services division. The total consideration for this transaction was approximately $54.0 million, net of $1.7 million of cash acquired, and was paid in cash. Transaction costs associated with the acquisition were approximately $0.7 million, of which the Company expensed $0.4 million during the three and nine months ended September 30, 2011 and are included in General and administrative expense in the accompanying condensed consolidated statements of income. The Company recorded approximately $49.4 million of goodwill, which is not deductible for tax purposes, and acquired $28.2 million of identifiable intangible assets, of which $16.0 million is related to product related intangible assets and $12.2 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 180,697 shares of the Company's common stock and assumed certain stock options which are exercisable for 390,775 shares of the Company's common stock, for which the vesting period reset fully upon the closing of the transaction.
App-DNA
In November 2011, the Company acquired all of the issued and outstanding securities of App-DNA, a privately-held company that specializes in application migration and management. App-DNA became part of the Company's Enterprise division. The total consideration for this transaction was approximately $91.3 million, net of $3.2 million of cash acquired, and

13



was paid in cash. Transaction costs associated with the acquisition were approximately $1.3 million, of which the Company expensed $0.4 million during the three and nine months ended September 30, 2011 and are included in General and administrative expense in the accompanying condensed consolidated statements of income. The Company recorded approximately $58.2 million of goodwill, which is not deductible for tax purposes, and acquired $44.8 million of identifiable intangible assets, of which $36.7 million is related to product related intangible assets and $8.1 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 114,487 shares of the Company's common stock, for which the vesting period reset fully upon the closing of the transaction.
2011 Other Acquisitions
During the first quarter of 2011, the Company acquired certain assets of a wholly-owned subsidiary of a privately-held company (the "2011 Other Acquisition") for total cash consideration of approximately $10.5 million. The Company accounted for this acquisition as a business combination in accordance with the authoritative guidance and it became part of the Company’s Enterprise division.
In August 2011, the Company acquired all of the issued and outstanding securities of RingCube Technologies, Inc. (the "RingCube Acquisition" or "RingCube"), a privately-held company that specializes in user personalization technology for virtual desktops. RingCube became part of the Company’s Enterprise division and the acquisition further solidifies the Company's position in desktop virtualization. The total consideration for this transaction was approximately $32.2 million, net of $0.5 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 $0.5 million and $0.6 million during the three and nine months ended September 30, 2011, respectively, and are included in General and administrative expense in the accompanying condensed consolidated statements of income. In addition, in connection with the RingCube Acquisition, the Company assumed non-vested stock units which were converted into the right to receive up to 58,439 shares of the Company's common stock, for which the vesting period reset fully upon the closing of the transaction.
In connection with the 2011 Other Acquisition and the RingCube Acquisition, the Company recorded approximately $14.4 million of goodwill, which is not deductible for tax purposes, and acquired $30.6 million of identifiable intangible assets, of which $26.0 million is related to product related intangible assets and $4.6 million is related to other intangible assets.
The Company continues to evaluate certain tax assets and liabilities related to the acquisitions it completed during 2011. See Note 9 for more information regarding the Company's segments.
Purchase of Non-Controlling Interest
Kaviza Inc.
The Company presents non-controlling interests of less-than-wholly-owned subsidiaries within the equity section of its condensed consolidated financial statements in accordance with the authoritative guidance for the presentation and disclosure of non-controlling interests of consolidated subsidiaries. In May 2011, the Company acquired all of the non-controlling interest of Kaviza Inc. (“Kaviza”), a provider of virtual desktop infrastructure solutions, for $17.2 million. As a result of this transaction, the Company has obtained a 100% interest in this subsidiary. In accordance with the authoritative guidance, the excess of the proceeds paid over the carrying amount of the non-controlling interest of Kaviza has been reflected as a reduction of additional paid-in capital. In addition, in connection with the purchase of the non-controlling interest of Kaviza, the Company assumed non-vested stock units which were converted into the right to receive up to 88,687 shares of the Company's common stock and assumed certain stock options which are exercisable for 33,301 shares of the Company's common stock, which were assumed with existing vesting schedules.


14



5. INVESTMENTS
Available-for-sale Investments
Investments in available-for-sale securities at fair value were as follows for the periods ended (in thousands):
 
 
September 30, 2012
 
December 31, 2011
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
$
521,432

 
$
3,570

 
$
(30
)
 
$
524,972

 
$
641,997

 
$
4,506

 
$
(279
)
 
$
646,224

Corporate securities
505,156

 
1,212

 
(139
)
 
506,229

 
392,365

 
618

 
(1,190
)
 
391,793

Municipal securities
29,393

 
27

 
(1
)
 
29,419

 
80,004

 
57

 
(35
)
 
80,026

Government securities
21,368

 
137

 

 
21,505

 
26,056

 
206

 

 
26,262

Total
$
1,077,349

 
$
4,946

 
$
(170
)
 
$
1,082,125

 
$
1,140,422

 
$
5,387

 
$
(1,504
)
 
$
1,144,305

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 immaterial for all periods presented.
For the three and nine months ended September 30, 2012, the Company received proceeds from sales of available-for-sale investments of $188.3 million and $891.0 million, respectively, and for the three and nine months ended September 30, 2011, it received proceeds from the sales of available-for-sale investments of $149.9 million and $545.6 million, respectively. The Company had no realized gains on the sales of available-for-sale investments during the three months ended September 30, 2012. For the nine months ended September 30, 2012, the Company had realized gains on the sales of available-for-sale investments of $3.5 million. For the three and nine months ended September 30, 2012, the Company had realized losses on available-for-sale investments of $0.2 million and $0.8 million, respectively, primarily related to prepayments at par of securities purchased at a premium. The Company had no realized gains on the sales of available-for-sale investments during the three months ended September 30, 2011. For the nine months ended September 30, 2011, the Company had realized gains on the sales of available-for-sale investments of $0.4 million. For the three and nine months ended September 30, 2011, the Company had realized losses on available-for-sale investments of $0.4 million and $1.4 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 income (expense), net, in the accompanying condensed consolidated statements of income.
The average remaining maturities of the Company’s short-term and long-term available-for-sale investments at September 30, 2012 were approximately 6 months and 5 years, respectively.
Other-Than-Temporary Impairment on Available-for-Sale Investments
During the third quarter of 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 income (expense), net in the accompanying condensed consolidated statements of income. See Note 6 for more information.
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 $0.2 million and $1.5 million as of September 30, 2012 and December 31, 2011, respectively. The decrease in gross unrealized losses when comparing September 30, 2012 to December 31, 2011 was primarily due to changes in interest rates. 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 $27.6 million and $32.2 million as of September 30, 2012 and December 31, 2011, respectively, which are accounted for based on the cost method and are

15



included in Other assets in the accompanying condensed 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 two of its cost method investments were impaired and recorded a charge of $2.8 million during the third quarter of 2012. One of the companies in which the Company held a direct investment was acquired by a third party and as a result of such sale transaction the Company recorded a gain of $11.8 million, which was included in Other income (expense), net in the accompanying consolidated statements of income.
6. 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 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.


16



Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
As of September 30, 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:
 
 
 
 
 
 
 
Money market funds
$
73,067

 
$
73,067

 
$

 
$

Corporate securities
35,299

 

 
35,299

 

Government securities
26,500

 

 
26,500

 

Municipal securities
4,199

 

 
4,199

 

Cash
185,062

 
185,062

 

 

Available-for-sale securities:
 
 
 
 
 
 
 
Agency securities
524,972

 

 
524,972

 

Corporate securities
506,229

 

 
502,751

 
3,478

Municipal securities
29,419

 

 
29,419

 

Government securities
21,505

 

 
21,505

 

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency derivatives
4,112

 

 
4,112

 

Total assets
$
1,410,364

 
$
258,129

 
$
1,148,757

 
$
3,478

Accrued expenses and other current liabilities:
 
 
 
 
 
 
 
Foreign currency derivatives
4,624

 

 
4,624

 

Total liabilities
$
4,624

 
$

 
$
4,624

 
$

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 weighted average credit rating of AA/Aa2. 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).
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 and is included in purchases in the table below. 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. Typically the discount rate used by the Company in measuring the fair value of investments in convertible debt securities of certain early-stage entities is commensurate with the nature and size of these entities. During the third quarter of 2012, one of these investments in a convertible debt security with a carrying amount of $5.0 million was determined to be impaired based on the discounted cash flow model referenced above and has been written down to its fair value of $2.5 million, resulting in an impairment charge of $2.5 million. The valuation performed to determine the fair value of the convertible debt security required the Company to make assumptions that were not directly or indirectly observable; accordingly it is a Level 3 valuation and is included in the table below. See Note 5 for more information regarding the Company’s available-for-sale investments.


17



 
 
 
Investments
 
(in thousands)
Balance at December 31, 2011
$
3,696

Purchases of Level 3 securities
7,605

Transfers out of Level 3
(5,323
)
Total realized losses included in earnings
(2,500
)
Balance at September 30, 2012
$
3,478

Transfers out of Level 3 relate to certain of the Company's 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 the accompanying condensed consolidated balance sheets. Realized losses included in earnings for the period are reported in Other income (expense), net in the accompanying condensed consolidated statements of income.
Assets Measured at Fair Value on a Non-recurring Basis Using Significant Unobservable Inputs (Level 3)
During the third quarter of 2012, two of the Company's cost method investments with a combined carrying value of $11.0 million were determined to be impaired and have been written down to their combined fair value of $8.2 million, resulting in an impairment charge of $2.8 million. The impairment charge is included in Other income (expense), net in the accompanying condensed consolidated statements of income for the three and nine months ended September 30, 2012. The fair value of the cost method investments represents a Level 3 valuation as the assumptions used in valuing this investment were not directly or indirectly observable. See Note 5 for more information regarding cost method investments.
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.
7. STOCK-BASED COMPENSATION
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 September 30, 2012, 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 (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. 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 plans include the Amended and Restated 1995 Stock Plan, Second Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan and Second Amended and Restated 1995 Non-Employee Director Stock Option 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 September 30, 2012, there were 30,945,043 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 18,964,539 additional stock-based awards.

18



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 September 30, 2012, 2,581,202 shares had been issued under the 2005 ESPP. The Company recorded stock-based compensation costs related to the 2005 ESPP of $1.1 million and $3.0 million for the three and nine months ended September 30, 2012, respectively.
Stock-Based Compensation
The detail of the total stock-based compensation recognized by income statement classification is as follows (in thousands):
 
 
Three Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Nine Months Ended
Income Statement Classifications
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
Cost of services and maintenance revenues
$
567

 
$
448

 
$
1,524

 
$
1,112

Research and development
14,523

 
9,599

 
39,722

 
21,465

Sales, marketing and services
13,977

 
8,434

 
37,254

 
21,618

General and administrative
11,036

 
6,473

 
30,422

 
19,396

Total
$
40,103

 
$
24,954

 
$
108,922

 
$
63,591

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 monthly 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. See Note 4 for more information related to acquisitions. The Company currently 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. The Company also periodically analyzes its historical pattern of option exercises based on certain demographic characteristics and determined that there were no meaningful differences in option exercise activity based on the 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 during the three months ended September 30, 2012 was $23.07. The total intrinsic value of options exercised during the three and nine months ended September 30, 2012 was $39.8 million and $117.0 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares. As of September 30, 2012, there was $83.5 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 1.80 years.

19



The assumptions used to value option grants under the 2005 Plan are as follows:
 
 
Three Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
Expected volatility factor
0.43

 
0.50

 
0.38 - 0.43

 
0.38 - 0.50

Approximate risk free interest rate
0.52
%
 
0.64
%
 
0.52% - 0.68%

 
0.64% - 1.10%

Expected term (in years)
3.91

 
3.27

 
3.91

 
3.27

Expected dividend yield
0
%
 
0
%
 
0
%
 
0
%
Non-vested Stock Units
Performance Stock Units
The Company may award senior level employees non-vested performance stock units granted under the 2005 Plan. For 2011, as in prior years, the number of non-vested stock units underlying each award was determined following completion of the one-year performance period applicable to the award and was based on achievement of a specific corporate financial performance goal determined at the time of the award. If the performance goal was less than 90% attained, then no non-vested stock units would have been issued pursuant to the authorized award. For performance at and above 90%, the number of non-vested stock units issued was based on a graduated slope, with the maximum number of non-vested stock units issuable pursuant to the award capped at 125% of the base number of non-vested stock units set forth in the award agreement. The Company was required to estimate the attainment expected to be achieved related to the defined performance goals and the number of non-vested stock units that were ultimately to be awarded in order to recognize compensation expense over the vesting period. Upon attainment of the performance goal, the non-vested stock units vest 33.33% on each anniversary subsequent to the date of the award. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. If the performance goals were not met, no compensation cost would have been recognized in that period and any previously recognized compensation cost would have been reversed. For awards of non-vested performance stock units made in 2011, the performance goal was achieved within the range of the graduated slope and there was no material adjustment to compensation cost related to non-vested stock units granted to executives. The Company did not grant any non-vested performance stock units during the first nine months of 2012, and no performance periods are currently open for non-vested performance stock units.
Market and Service Condition Stock Units
In March 2012, the Company granted senior level employees non-vested stock unit awards representing, in the aggregate, 418,809 non-vested stock units, based on certain target market 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, 2014. 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. The extent to which the awardee will vest in the award, if at all, if the awardee is not employed by the Company at the end of the performance period 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:
Expected volatility factor
0.21 - 0.39

Risk free interest rate
0.47
%
Expected dividend yield
0
%

20



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 was $89.95 as of the date of grant.
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.
Unrecognized Compensation Related to Stock Units
As of September 30, 2012, the number of non-vested stock units outstanding, including performance awards, market and service condition awards and service-based awards, and including awards assumed in connection with acquisitions, was 3,578,361 and there was $209.4 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 2.26 years. See Note 4 for more information regarding the Company's acquisitions.
8. GOODWILL AND OTHER 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 as a result of the annual impairment test analysis completed during the fourth quarter of 2011. There were no indicators of impairment during the three and nine months ended September 30, 2012. Excluding goodwill, the Company has no intangible assets deemed to have indefinite lives. See Note 4 for more information regarding the Company's acquisitions and Note 9 for more information regarding the Company's segments.
The following table presents the change in goodwill allocated to the Company’s reportable segments during the nine months ended September 30, 2012 (in thousands):
 
Balance at January 1, 2012
 
Additions
 
 
Other
 
 
Balance at September 30, 2012
Enterprise division
$
956,504

 
$
245,900

 
 
$
(53,949
)
(2)
 
$
1,148,455

Online Services division
282,616

 
26,481

  
 
46,821

(2)
 
355,918

Consolidated
$
1,239,120

 
$
272,381

(1)
 
$
(7,128
)
 
 
$
1,504,373

 
 
(1)
Amount primarily relates to acquisitions. See Note 4 for more information regarding the Company’s acquisitions.
(2)
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 ShareFile from its Enterprise division to its Online Services division. Also included in the Online Services division is foreign currency translation. See Note 4 for more information regarding the Company's acquisitions and Note 9 for more information regarding the Company's segments.
Intangible Assets
The Company has intangible assets with finite lives that 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. Intangible assets consist of the following (in thousands):

21



 
September 30, 2012
 
December 31, 2011
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Product related intangible assets
$
618,565

 
$
317,332

 
$
472,582

 
$
268,332

Other
434,038

 
160,247

 
274,816

 
135,694

Total
$
1,052,603

 
$
477,579

 
$
747,398

 
$
404,026

Amortization of product related intangible assets, which consists primarily of product-related technologies and patents, was $22.9 million and $14.7 million for the three months ended September 30, 2012 and 2011, respectively, and $56.6 million and $39.9 million for the nine months ended September 30, 2012 and 2011, respectively, and is classified as a component of Cost of net revenues in the accompanying condensed consolidated statements of income. Amortization of other intangible assets, which consist primarily of customer relationships, trade names and covenants not to compete was $9.8 million and $4.4 million for the three months ended September 30, 2012 and 2011, respectively, and $25.5 million and $11.9 million for the nine months ended September 30, 2012 and 2011, respectively, and is classified as a component of Operating expenses in the accompanying condensed 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 the nine months ended September 30, 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 result, the carrying value of the CloudStack tradename was written down to zero. See Note 4 for more information regarding the Company's acquisitions.
Estimated future amortization expense is as follows (in thousands):
 
Year ending December 31,
 
2012
$
114,754

2013
123,905

2014
115,952

2015
94,321

2016
73,071

9. SEGMENT INFORMATION
The Company’s revenues are derived from sales of its Enterprise division products which include its Desktop Solutions, Datacenter and Cloud Solutions and related professional services and from sales of its Online Services division's web collaboration, connectivity, remote support and data sharing products. The Enterprise division and the Online Services 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 division products and Online Services division products. 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, amortization of product related intangible assets, amortization of other intangible assets, net interest and other income (expense), net. Accounting policies of the Company’s segments are the same as its consolidated accounting policies. In the first quarter of 2012, the Company transferred the business acquired in its acquisition of ShareFile from its Enterprise division to its Online Services division.


22



Net revenues and segment profit, classified by the Company’s two reportable segments were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net revenues:
 
 
 
 
 
 
 
Enterprise division
$
511,763

 
$
455,790

 
$
1,470,225

 
$
1,271,217

Online Services division
129,659

 
109,558

 
375,902

 
315,809

Consolidated
$
641,422

 
$
565,348

 
$
1,846,127

 
$
1,587,026

Segment profit:
 
 
 
 
 
 
 
Enterprise division
$
130,566

 
$
124,835

 
$
371,515

 
$
341,903

Online Services division
24,720

 
23,907

 
64,828

 
54,660

Unallocated expenses (1):
 
 
 
 
 
 
 
Amortization of intangible assets
(32,768
)
 
(19,109
)
 
(82,064
)
 
(51,796
)
Restructuring

 

 

 
(24
)
Net interest and other income (expense)
8,483

 
(1,861
)
 
15,636

 
10,799

Stock-based compensation
(40,103
)
 
(24,954
)
 
(108,922
)
 
(63,591
)
Consolidated income before income taxes
$
90,898

 
$
102,818

 
$
260,993

 
$
291,951

 
 
(1)
Represents expenses presented to management on a consolidated basis only and not allocated to the operating segments.
Revenues by Product Grouping
Revenues by product grouping for the Company’s Enterprise division and Online Services division were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net revenues:
 
 
 
 
 
 
 
Enterprise division
 
 
 
 
 
 
 
Desktop Solutions revenues(1)
$
348,624

 
$
315,983

 
$
1,029,895

 
$
909,751

Datacenter and Cloud Solutions revenues(2)
127,474

 
111,155

 
339,296

 
282,081

Professional services(3)
31,022

 
23,210

 
86,141

 
63,991

Other
4,643

 
5,442

 
14,893

 
15,394

Total Enterprise division revenues
511,763

 
455,790

 
1,470,225

 
1,271,217

Online Services division revenues
129,659

 
109,558

 
375,902

 
315,809

Total net revenues
$
641,422

 
$
565,348

 
$
1,846,127

 
$
1,587,026

 
 
(1)
Desktop Solutions revenues are primarily comprised of sales from the Company’s desktop virtualization product, XenDesktop, and the Company’s application virtualization product, XenApp, and related license updates and technical support.
(2)
Datacenter and Cloud Solutions revenues are primarily comprised of sales from the Company’s cloud networking products, which include NetScaler, Branch Repeater, Access Gateway and Bytemobile, and the Company’s cloud solutions products which include CloudPlatform (formerly CloudStack) and CloudPortal Business Manager (formerly CloudPortal) and related license updates and maintenance.
(3)
Professional services revenues are primarily comprised of revenues from consulting services and product training and certification.

23



Revenues by Geographic Location
The following table presents revenues by segment and geographic location, for the following periods (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net revenues:
 
 
 
 
 
 
 
Enterprise division
 
 
 
 
 
 
 
Americas
$
281,896

 
$
262,629

 
$
794,148

 
$
715,104

EMEA
164,149

 
136,794

 
488,196

 
406,116

Asia-Pacific
65,718

 
56,367

 
187,881

 
149,997

Total Enterprise division revenues
511,763

 
455,790

 
1,470,225

 
1,271,217

Online Services division
 
 
 
 
 
 
 
Americas
109,935

 
92,975

 
319,946

 
271,925

EMEA
15,941

 
14,074

 
45,974

 
36,795

Asia-Pacific
3,783

 
2,509

 
9,982

 
7,089

Total Online Services division revenues
129,659

 
109,558

 
375,902

 
315,809

Total net revenues
$
641,422

 
$
565,348

 
$
1,846,127

 
$
1,587,026

10. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives Designated as Hedging Instruments
As of September 30, 2012, 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 12 months and the maximum term is 18 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 $0.4 million and $5.2 million at September 30, 2012 and December 31, 2011, respectively, and is included in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. The net unrealized loss as of September 30, 2012 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 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 income (expense), net.

24



Fair Values of Derivative Instruments
 
Asset Derivatives
 
Liability Derivatives
 
(In thousands)
 
September 30, 2012
 
December 31, 2011
 
September 30, 2012
 
December 31, 2011
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
 
$4,068
 
Prepaid
expenses
and other
current
assets
 
$2,762
 
Accrued
expenses
and other
current
liabilities
 
$4,494
 
Accrued
expenses
and other
current
liabilities
 
$8,252
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset Derivatives
 
Liability Derivatives
 
(In thousands)
 
September 30, 2012
 
December 31, 2011
 
September 30, 2012
 
December 31, 2011
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
 
$44
 
Prepaid
expenses
and other
current
assets
 
$69
 
Accrued
expenses
and other
current
liabilities
 
$130
 
Accrued
expenses
and other
current
liabilities
 
$202
The Effect of Derivative Instruments on Financial Performance
 
For the Three Months Ended September 30,
 
(In thousands)
Derivatives in Cash Flow
Hedging Relationships
Amount of Gain (Loss) Recognized in Other
Comprehensive Income
(Effective Portion)
 
Location of (Loss) Gain  Reclassified
from Accumulated Other
Comprehensive Loss into
Income
(Effective Portion)
 
Amount of (Loss) Gain  Reclassified from
Accumulated Other 
Comprehensive Loss
(Effective Portion)
 
2012
 
2011
 
 
 
2012
 
2011
Foreign currency forward contracts
$
4,765

 
$
(11,490
)
 
Operating expenses
 
$
(2,530
)
 
$
3,672

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
(In thousands)
Derivatives in Cash Flow
Hedging Relationships
Amount of Gain (Loss) 
Recognized in Other
Comprehensive Income  (Effective Portion)
 
Location of (Loss) Gain Reclassified
from Accumulated Other
Comprehensive Loss into
Income
(Effective Portion)
 
Amount of (Loss) Gain  Reclassified from
Accumulated Other 
Comprehensive Loss
(Effective Portion)
 
2012
 
2011
 
 
 
2012
 
2011
Foreign currency forward contracts
$
4,727

 
$
(10,233
)
 
Operating expenses
 
$
(4,836
)
 
$
9,166


There was no material ineffectiveness in the Company’s foreign currency hedging program in the periods presented.
 

25



 
For the Three Months Ended September 30,
 
(In thousands)
Derivatives Not Designated as Hedging Instruments
Location of
Loss Recognized in Income on
Derivative
 
Amount of Loss Recognized in Income on Derivative
 
 
 
2012
 
2011
Foreign currency forward contracts
Other income (expense), net
 
$
(604
)
 
$
(456
)
 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
(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
 
 
 
2012
 
2011
Foreign currency forward contracts
Other income (expense), net
 
$
(1,943
)
 
$
958

Outstanding Foreign Currency Forward Contracts
As of September 30, 2012, the Company had the following net notional foreign currency forward contracts outstanding (in thousands):
Foreign Currency
Currency
Denomination
Australian dollars
AUD 8,388
British pounds sterling
GBP 40,499
Canadian dollars
CAD 8,584
Chinese renminbi
CNY 29,002
Danish krone
DKK 5,620
Euro
EUR 32,459
Hong Kong dollars
HKD 55,307
Indian rupees
INR 619,524
Japanese yen
JPY 528,637
New Zealand dollars
NZD 1,680
Singapore dollars
SGD 12,689
Swiss francs
CHF 13,688
11. INCOME TAXES
The Company’s net unrecognized tax benefits totaled approximately $37.7 million and $79.2 million as of September 30, 2012 and December 31, 2011, respectively. The decrease in the net unrecognized tax benefits when comparing September 30, 2012 to December 31, 2011 was primarily due to the closure of IRS examinations for the tax years 2004 through 2008. In addition, certain deferred tax liabilities were reclassified from short-term to long-term as currently pending matters have been closed with the IRS. All amounts included in the balance at September 30, 2012 for tax positions would affect the annual effective tax rate. The Company has no amounts accrued for the payment of interest and penalties as of September 30, 2012.
The Company and one or more of its subsidiaries is subject to federal income taxes in the United States, 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 2008.
In June 2010, the Company reached a settlement in principle with the Internal Revenue Service (“IRS”) regarding certain previously disclosed income tax deficiencies asserted in a Revenue Agent’s Report (the “RAR”), the terms of which were approved in June 2012 (the "Final Approval"). Under the terms of the settlement, the Company agreed to an assessment of income tax deficiencies in full settlement of all open claims under the RAR and resolved with finality for future years all of the transfer pricing issues raised in the RAR. Based on this, the Company incurred a charge of $13.1 million in 2010 in accordance with the authoritative guidance. In connection with the Final Approval, the Company finalized the tax deficiency calculations and formally closed all of its open issues with the IRS relating to the 2004 and 2005 tax years. Because there were no changes from the agreement reached in 2010, no additional amounts have been included in income tax (benefit) expense during 2012.

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Also, in June 2012, the Company closed its IRS examination for the 2006 through 2008 tax years. The Company recognized a net tax benefit of $24.2 million in the second quarter of 2012 related to the closing of tax audits with the IRS for the 2006 through 2008 tax years, the impact of the closure on subsequent years and the reduction of the Company's uncertain tax positions for the closed tax years.
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, it is possible that the Company’s 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 condensed consolidated financial statements. At September 30, 2012, the Company had approximately $17.8 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. 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.
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. The Company does not expect to remit earnings from its foreign subsidiaries. The Company’s effective tax rate was approximately 13.9% and 10.4% for the three months ended September 30, 2012 and 2011, respectively, and 8.6% and 15.4% for the nine months ended September 30, 2012 and 2011, respectively. The increase in the effective tax rate when comparing the three months ended September 30, 2012 to the three months ended September 30, 2011 was primarily due to a research and development tax credit not yet extended for the 2012 taxable year. The decrease in the effective tax rate when comparing the nine months ended September 30, 2012 to the nine months ended September 30, 2011 was primarily due to the impact of the IRS settlement for the tax years 2006 through 2008.
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.
12. TREASURY 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 $3.4 billion, of which $400.0 million was approved in July 2012. 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 September 30, 2012, approximately $411.7 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 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. Additionally, from time to time, the Company may enter into structured stock repurchase arrangements with large financial institutions using general corporate funds in order to lower the average cost to acquire shares. These programs include terms that require the Company to make up-front payments to the counterparty financial institution and result in the receipt of stock during or at the end of the term of the agreement or the receipt of either stock or cash at the maturity of the agreement, depending on market conditions. As of September 30, 2012, the Company did not have any prepaid notional amounts outstanding under structured stock repurchase programs and it has not made any up-front payments to financial institutions related to structured stock repurchase agreements in 2012.
During the three months ended September 30, 2012, the Company expended approximately $75.0 million on open market purchases, repurchasing 983,200 shares of outstanding common stock at an average price of $76.24. During the nine months ended September 30, 2012, the Company expended approximately $175.0 million on open market purchases, repurchasing 2,361,800 shares of outstanding common stock at an average price of $74.08.

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During the three months ended September 30, 2011, the Company expended approximately $125.0 million on open market purchases, repurchasing 2,205,270 shares of outstanding common stock at an average price of $56.68. During the nine months ended September 30, 2011, the Company expended approximately $324.9 million on open market purchases, repurchasing 4,865,770 shares of outstanding common stock at an average price of $66.77.
Shares for Tax Withholding
During the three months ended September 30, 2012, the Company withheld 31,733 shares from stock units that vested, totaling $2.5 million, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. During the nine months ended September 30, 2012, the Company withheld 227,604 shares from stock units that vested, totaling $17.5 million, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. These shares are reflected as treasury stock in the Company’s condensed consolidated balance sheets and the related cash outlays do not reduce the Company’s total stock repurchase authority.
During the three months ended September 30, 2011, the Company withheld 1,998 shares from stock units that vested, totaling $0.1 million, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. During the nine months ended September 30, 2011, the Company withheld 165,738 shares from stock units that vested, totaling $12.2 million, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. These shares are reflected as treasury stock in the Company’s condensed consolidated balance sheets and the related cash outlays do not reduce the Company’s total stock repurchase authority.
13. 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.
The Company has operating lease obligations through 2018 related to two properties that are not utilized. At September 30, 2012, the total remaining obligation on these leases was approximately $4.7 million, of which $1.9 million was accrued as of September 30, 2012, and is reflected, as applicable, in Accrued expenses and other current liabilities and Other liabilities in the accompanying condensed consolidated balance sheets. In calculating these accruals, the Company made estimates, based on market information, including the estimated vacancy periods and sublease rates and opportunities. The Company periodically re-evaluates its estimates related to these vacant facilities.
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 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. In a separate action, in July 2012, the U.S. Patent and Trademark Office issued a final rejection of the asserted claims of the '011 patent on invalidity grounds, accordingly, no accrual has been made related to this matter. The Company intends to appeal the district court's judgment on the '011 patent.

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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. 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 payments pursuant to these provisions. 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.

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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our operating results and financial condition have varied in the past and could in the future vary significantly depending on a number of factors. From time to time, information provided by us or statements made by our employees contain “forward-looking” information that involves risks and uncertainties. In particular, statements contained in this Quarterly Report on Form 10-Q, and in the documents incorporated by reference into this Quarterly Report on Form 10-Q, that are not historical facts, including, but not limited to, statements concerning new products, research and development, offerings of products and services, market positioning and opportunities, headcount, customer demand, distribution and sales channels, financial information and results of operations for future periods, product and price competition, strategy and growth initiatives, seasonal factors, international operations and expansion, investment transactions and valuations of investments and derivative instruments, reinvestment or repatriation of foreign earnings, fluctuations in foreign exchange rates, tax matters, the expected benefits of acquisitions, changes in domestic and foreign economic conditions and credit markets, liquidity, litigation and intellectual property matters, constitute forward-looking statements and are made under the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are neither promises nor guarantees. Our actual results of operations and financial condition have varied and could in the future vary materially from those stated in any forward-looking statements. The factors described in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2011, as may be updated in Part II, Item 1A in this Quarterly Report on Form 10-Q, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q, in the documents incorporated by reference into this Quarterly Report on Form 10-Q or presented elsewhere by our management from time to time. Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition. We caution readers not to place undue reliance on any forward-looking statements, which only speak as of the date made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.
Overview
Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand our financial condition and results of operations. This section is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the three months ended September 30, 2012. The results of operations for the periods presented in this report are not necessarily indicative of the results expected for the full year or for any future period, due in part to the seasonality of our business. Historically, our revenue for the fourth quarter of any year is typically higher than our revenue for the first quarter of the subsequent year.
We design, develop and market technology solutions that enable information technology, or IT, services to be securely delivered on demand – independent of location, device or network. Our customers achieve lower IT operating costs, increased information security, and greater business agility using Citrix technologies that enable mobile workstyles and power cloud services. We market and license our products directly to enterprise customers, over the web, and through systems integrators, or SIs. We also market and license our products indirectly through value-added resellers, or VARs, value-added distributors, or VADs, and original equipment manufacturers, or OEMs.
Executive Summary
We are a strategic technology provider transforming how people, business and IT work and collaborate in the Cloud Era. With our virtualization, networking and cloud technologies, we make complex enterprise IT simpler and more accessible for a diverse, global, and mobile workforce. We deliver a secure and familiar virtual workplace ex