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Citrix Systems 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-10.2
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.1
Form 10-Q
Table of Contents

 

 

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 June 30, 2010

or

 

¨ 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  ¨

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    ¨  No

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

 

x    Large accelerated filer   ¨    Accelerated filer
¨    Non-accelerated filer   ¨    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  ¨    No  x

As of August 3, 2010 there were 186,939,548 shares of the registrant’s Common Stock, $.001 par value per share, outstanding.

 

 

 


Table of Contents

CITRIX SYSTEMS, INC.

Form 10-Q

For the Quarterly Period Ended June 30, 2010

CONTENTS

 

            Page
Number

PART I:

     FINANCIAL INFORMATION   

Item 1.

    

Condensed Consolidated Financial Statements

  
    

Condensed Consolidated Balance Sheets:

June 30, 2010 and December 31, 2009 (Unaudited)

   3
    

Condensed Consolidated Statements of Income:

Three and Six Months ended June 30, 2010 and 2009 (Unaudited)

   4
    

Condensed Consolidated Statements of Cash Flows:

Six Months ended June 30, 2010 and 2009 (Unaudited)

   5
    

Notes to Condensed Consolidated Financial Statements (Unaudited)

   6

Item 2.

    

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   21

Item 3.

    

Quantitative and Qualitative Disclosures about Market Risk

   34

Item 4.

    

Controls and Procedures

   34

PART II:

    

OTHER INFORMATION

  

Item 1.

    

Legal Proceedings

   35

Item 1A.

    

Risk Factors

   35

Item 2.

    

Unregistered Sales of Equity Securities and Use of Proceeds

   35

Item 5.

    

Other Information

   35

Item 6.

    

Exhibits

   36

Signature

   37

 

2


Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CITRIX SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

     June 30,
2010
    December 31,
2009
 
     (In thousands, except par value)  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 344,704      $ 261,443   

Short-term investments — available-for-sale

     478,321        338,168   

Accounts receivable, net of allowances of $5,220 and $4,836 at June 30, 2010 and December 31, 2009, respectively

     319,378        304,912   

Inventories, net

     7,374        8,664   

Prepaid expenses and other current assets

     105,546        71,519   

Current portion of deferred tax assets, net

     56,330        54,589   
                

Total current assets

     1,311,653        1,039,295   

Long-term investments — trading

     —          38,689   

Long-term investments — available-for-sale

     585,418        568,957   

Property and equipment, net

     242,979        247,703   

Goodwill

     912,848        899,819   

Other intangible assets, net

     197,223        213,195   

Long-term portion of deferred tax assets, net

     26,082        37,944   

Other assets

     42,387        45,545   
                
   $ 3,318,590      $ 3,091,147   
                
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 52,583      $ 57,352   

Accrued expenses and other current liabilities

     236,871        221,498   

Current portion of deferred revenues

     594,939        555,514   
                

Total current liabilities

     884,393        834,364   

Long-term portion of deferred revenues

     91,424        63,336   

Other liabilities

     6,757        4,940   

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; 271,931 and 264,831 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively

     272        265   

Additional paid-in capital

     2,844,715        2,587,727   

Retained earnings

     1,672,990        1,578,084   

Accumulated other comprehensive loss

     (10,590     (2,060
                
     4,507,387        4,164,016   

Less — common stock in treasury, at cost (86,740 and 82,222 shares at June 30, 2010 and December 31, 2009, respectively)

     (2,179,592     (1,975,509
                

Total Citrix Systems, Inc. stockholders’ equity

     2,327,795        2,188,507   

Non-controlling interest

     8,221        —     
                

Total stockholders’ equity

     2,336,016        2,188,507   
                
   $ 3,318,590      $ 3,091,147   
                

See accompanying notes.

 

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Table of Contents

CITRIX SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  
     (In thousands, except per share information)  

Revenues:

        

Product licenses

   $ 148,733      $ 129,692      $ 271,439      $ 241,592   

License updates

     168,601        149,334        331,556        297,532   

Online services

     89,211        75,350        174,161        147,330   

Technical services

     51,888        38,452        95,549        75,432   
                                

Total net revenues

     458,433        392,828        872,705        761,886   
                                

Cost of net revenues:

        

Cost of product license revenues

     15,149        11,506        27,800        23,000   

Cost of services revenues

     25,989        21,132        49,679        42,755   

Amortization of product related intangible assets

     12,417        11,423        24,775        23,522   
                                

Total cost of net revenues

     53,555        44,061        102,254        89,277   
                                

Gross margin

     404,878        348,767        770,451        672,609   
                                

Operating expenses:

        

Research and development

     79,543        75,160        157,245        146,197   

Sales, marketing and services

     186,601        167,130        357,121        330,719   

General and administrative

     60,805        59,552        121,424        118,041   

Amortization of other intangibles

     3,776        5,163        7,933        10,157   

Restructuring

     335        2,036        835        22,766   
                                

Total operating expenses

     331,060        309,041        644,558        627,880   
                                

Income from operations

     73,818        39,726        125,893        44,729   

Interest income

     3,837        4,393        7,393        7,108   

Interest expense

     (85     (34     (141     (158

Other (expense) income, net

     (2,877     710        (2,444     (712
                                

Income before income taxes

     74,693        44,795        130,701        50,967   

Income taxes

     27,136        2,276        35,795        1,521   
                                

Net income

   $ 47,557      $ 42,519      $ 94,906      $ 49,446   
                                

Earnings per share:

        

Basic

   $ 0.26      $ 0.23      $ 0.51      $ 0.27   
                                

Diluted

   $ 0.25      $ 0.23      $ 0.50      $ 0.27   
                                

Weighted average shares outstanding:

        

Basic

     185,256        181,567        184,703        180,960   
                                

Diluted

     189,278        184,740        189,126        183,560   
                                

See accompanying notes.

 

4


Table of Contents

CITRIX SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended June 30,  
     2010     2009  
     (In thousands)  

Operating Activities

    

Net income

   $ 94,906      $ 49,446   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Amortization of intangible assets

     32,708        33,679   

Depreciation and amortization of property and equipment

     35,447        34,558   

Stock-based compensation expense

     53,073        56,588   

Loss (gain) on investments

     1,070        (85

Provision for doubtful accounts

     1,575        1,307   

Provision for product returns

     959        1,722   

Provision for inventory reserves

     1,553        1,517   

Tax effect of stock-based compensation

     12,814        (5,480

Excess tax benefit from exercise of stock options

     (18,114     (2,898

Goodwill adjustment

     —          5,393   

Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies

     2,325        (689

Other non-cash items

     706        1,462   
                

Total adjustments to reconcile net income to net cash provided by operating activities

     124,116        127,074   

Changes in operating assets and liabilities, net of the effects of acquisitions:

    

Accounts receivable

     (20,307     5,546   

Inventories

     (262     (154

Prepaid expenses and other current assets

     (42,783     (29,625

Other assets

     3,668        (4,104

Deferred tax assets, net

     7,918        1,124   

Accounts payable

     (3,112     (5,223

Accrued expenses and other current liabilities

     14,247        19,100   

Deferred revenues

     67,514        4,574   

Other liabilities

     879        431   
                

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

     27,762        (8,331
                

Net cash provided by operating activities

     246,784        168,189   

Investing Activities

    

Purchases of available-for-sale investments

     (636,758     (544,315

Proceeds from sales of available-for-sale investments

     243,877        247,111   

Proceeds from maturities of available-for-sale investments

     238,342        128,570   

Proceeds from trading securities

     44,560        —     

Purchases of property and equipment

     (30,072     (40,166

Purchases of other assets

     (1,000     (3,000

Cash paid for acquisitions, net of cash acquired

     (10,227     (1,420

Cash paid for licensing agreements and product related intangible assets

     (10,235     (1,850
                

Net cash used in investing activities

     (161,513     (215,070

Financing Activities

    

Proceeds from issuance of common stock under stock-based compensation plans

     184,192        77,201   

Excess tax benefit from exercise of stock options

     18,114        2,898   

Stock repurchases, net

     (199,944     (64,994

Cash paid for tax withholding on vested stock awards

     (4,138     —     
                

Net cash (used in) provided by financing activities

     (1,776     15,105   

Effect of exchange rate changes on cash and cash equivalents

     (234     (135
                

Change in cash and cash equivalents

     83,261        (31,911

Cash and cash equivalents at beginning of period

     261,443        326,121   
                

Cash and cash equivalents at end of period

   $ 344,704      $ 294,210   
                

See accompanying notes.

 

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Table of Contents

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 footnotes 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, 2009.

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 within the equity section of its condensed consolidated financial statements in accordance with the revised authoritative guidance for the presentation and disclosure of non-controlling interests of a consolidated subsidiary.

During the second quarter of 2009, the Company determined that it had incorrectly recorded acquisition-related payments to certain of its employees in connection with the October 2007 acquisition of XenSource, Inc. as purchase consideration and goodwill when such payments should have been recorded as compensation expense. Accordingly, in the second quarter of 2009, the Company recorded $5.4 million of compensation expense related to this item, of which $4.6 million related to prior periods, with a corresponding decrease to goodwill. As this adjustment was related to the correction of an error, the Company performed the analysis required by Staff Accounting Bulletin 99, Materiality, and Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements. Based on this analysis, the Company concluded that the effect of the error was not material to fiscal year 2009 and prior fiscal years from both a quantitative and qualitative perspective. In accordance with the authoritative guidance, the Company corrected and disclosed this error in the quarter ended June 30, 2009.

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 June 30, 2010 and December 31, 2009 primarily consist of agency securities, corporate securities, government securities, commercial paper and municipal 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. Investments classified as trading securities are stated at fair value with unrealized gains and losses reported in earnings. 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 valuation models that use market quotes and, for certain investments, assumptions as to the creditworthiness of the entities issuing those underlying instruments.

 

6


Table of Contents

CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Inventory

Inventories are stated at the lower of cost or market on an average cost method and primarily consist of finished goods as of June 30, 2010 and December 31, 2009. Beginning in July 2010, the Company began using the standard cost method, which approximates actual cost, to value its inventory.

Revenue Recognition

The Company markets and licenses products primarily through multiple channels such as value-added resellers (“VARs”), value-added distributors (“VADs”), system integrators, independent software vendors, its websites and original equipment manufacturers. The Company’s product licenses are generally perpetual. The Company also separately sells license updates and services, which may include product training, technical support and consulting services, as well as online services.

The Company’s revenue recognition policies are in compliance with the Financial Accounting Standards Board’s (“FASB”) authoritative guidance governing software revenue recognition and because the Company’s Online Services division provides applications as an online service, the Company also follows the provisions of Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition.

The Company recognizes revenue 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. Net revenues include the following categories: Product Licenses, License Updates, Online Services and Technical Services. Product 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, reseller rewards and provisions for returns. License Update revenues consist of fees related to the Subscription Advantage program that are recognized ratably over the term of the contract, which is typically 12-24 months. 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. 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. Online Services revenues consist primarily of fees related to online service agreements, which are recognized ratably over the contract term. In addition, Online Services revenues may also include set-up fees, which are recognized ratably over the contract term or the expected customer life, whichever is longer. Technical Services revenues are comprised of fees from technical support services which are recognized ratably over the contract term as well as revenues from product training and certification, and consulting services revenue related to implementation of the Company’s products, which is recognized as the services are provided.

The Company licenses most of its software products bundled with a one year contract for its Subscription Advantage program. Customers may also elect to purchase subscriptions for license updates, when not bundled with the initial product purchase. Technical support, product training or consulting services may be purchased separately by the customer. The Company’s appliance products are integrated with software that is essential to the functionality of the equipment. Unspecified software upgrades and enhancements can be purchased for the Company’s appliance products through maintenance contracts. Accordingly, for these hardware appliances, the Company accounts for revenue in accordance with authoritative guidance governing software revenue recognition. Online services are sold separately. The Company allocates revenue to license updates 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 the 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.

In the normal course of business, the Company is not obligated to accept product returns from its distributors under any conditions, unless the product item is defective in manufacture. The Company establishes provisions for estimated returns, as well as other sales allowances, concurrently with the recognition of revenue. Allowances for estimated product returns amounted to approximately $1.4 million and $1.6 million at June 30, 2010 and December 31, 2009, respectively.

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.

 

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Table of Contents

CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon vesting or exercise 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 earnings per share (in thousands, except per share information):

 

     Three Months ended
June 30,
   Six Months ended
June 30,
     2010    2009    2010    2009

Numerator:

           

Net income

   $ 47,557    $ 42,519    $ 94,906    $ 49,446
                           

Denominator:

           

Denominator for basic earnings per share — weighted-average shares
outstanding

     185,256      181,567      184,703      180,960

Effect of dilutive employee stock awards

     4,022      3,173      4,423      2,600
                           

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

     189,278      184,740      189,126      183,560
                           

Basic earnings per share

   $ 0.26    $ 0.23    $ 0.51    $ 0.27
                           

Diluted earnings per share

   $ 0.25    $ 0.23    $ 0.50    $ 0.27
                           

Anti-dilutive weighted-average shares

     1,965      23,619      1,926      23,154
                           

4. ACQUISITIONS

During the first quarter of 2010, the Company acquired two privately-held companies for a total cash consideration of approximately $9.2 million. The Company recorded approximately $3.7 million of goodwill, which is not deductible for tax purposes, and acquired $8.3 million in assets including $7.1 million of identifiable intangible assets. In addition, the Company assumed liabilities of approximately $2.8 million in conjunction with the acquisitions. The Company has included the effects of these transactions in its results of operations prospectively from the respective dates of the acquisitions, which effects were not material to its consolidated results.

5. INVESTMENTS

Available-for-sale Investments

Investments in available-for-sale securities at fair value were as follows for the periods ended (in thousands):

 

     June 30, 2010    December 31, 2009

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

   $ 545,678    $ 2,003    $ (343   $ 547,338    $ 507,443    $ 1,412    $ (781   $ 508,074

Corporate securities

     386,447      826      (3,088     384,185      315,239      1,255      (5,295     311,199

Government securities

     98,825      217      (24     99,018      30,269      146      (70     30,345

Commercial paper

     17,433      —        (7     17,426      26,314      —        (1     26,313

Municipal securities

     15,705      73      (6     15,772      31,177      25      (8     31,194
                                                         

Total

   $ 1,064,088    $ 3,119    $ (3,468   $ 1,063,739    $ 910,442    $ 2,838    $ (6,155   $ 907,125
                                                         

The change in net unrealized losses on available-for-sale securities recorded in other comprehensive loss includes unrealized gains (losses) that arose from changes in market value of specifically identified securities that were held during the period and gains (losses) that were previously unrealized, but have been recognized in current period net income due to sales or maturities of available-for-sale securities. This reclassification has no effect on total comprehensive income or stockholders’ equity and was immaterial for all periods presented.

 

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CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

For the three and six months ended June 30, 2010, the Company received proceeds from sales of available-for-sale investments of $127.7 million and $243.9 million, respectively, and for the three and six months ended June 30, 2009, it received proceeds from the sales of available-for-sale investments of $223.7 million and $247.1 million, respectively. For the three and six months ended June 30, 2010, the Company had realized gains on the sales of available-for-sale investments of $2.4 million and $2.6 million, respectively. For the three and six months ended June 30, 2010, the Company had realized losses on the sales of available-for-sale investments of $0.3 million. For the three and six months ended June 30, 2009, the Company had realized gains on the sales of available-for-sale investments of $0.3 million. There were no realized losses on the sales of available-for-sale investments during those periods in 2009. All realized gains and losses related to the sales of available-for-sale investments are included in other (expense) income, 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 June 30, 2010 were approximately six months and nine years, respectively.

Unrealized Losses on Available-for-Sale Investments

The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position as of June 30, 2010 (in thousands):

 

 

     Less than 12 Months    12 Months or Greater    Total

Description of the Securities

   Fair Value    Unrealized Losses    Fair Value    Unrealized Losses    Fair Value    Unrealized Losses

Corporate bonds

   $ 159,896    $ 840    $ 49,752    $ 2,248    $ 209,648    $ 3,088

Agency securities

     96,857      341      618      2      97,475      343
                                         

Total

   $ 256,753    $ 1,181    $ 50,370    $ 2,250    $ 307,123    $ 3,431
                                         

The Company’s long-term unrealized loss in corporate bonds is primarily comprised of an investment issued by AIG Matched Funding Corporation (the “AIG Capped Floater”) with a face value of $50.0 million, which matures in September 2011. American International Group, Inc. (“AIG”), as the issuer’s parent, provided a guarantee of the security at the time of purchase in September 2006. As of June 30, 2010, the unrealized loss of $2.1 million, which is included in accumulated other comprehensive loss, was primarily caused by AIG experiencing liquidity challenges which were reportedly precipitated by problems in the capital markets. AIG’s lack of liquidity triggered a downgrade in the credit ratings for its long-term issues by two rating agencies in 2008. As a result of AIG’s liquidity challenges, in November 2008, the Federal Reserve Bank of New York (“FRBNY”) intervened with a five-year credit facility to help stabilize AIG and its effect on the overall market. In addition, on March 2, 2009, AIG announced that further actions were taken in cooperation with the U.S. Department of Treasury and the FRBNY to provide AIG with additional financial stability. As of the date of this report, AIG has not been reported to have defaulted on capital repayments to holders of its recently matured debt and it continues to pay interest on the Company’s AIG Capped Floater. Because the Company does not intend to sell the AIG Capped Floater and it is more likely than not that it will not be required to sell the security before the recovery of its amortized cost basis, which may not occur until maturity, it does not consider the security to be other-than-temporarily impaired.

If AIG’s financial position deteriorates, the Company may be required to further adjust the carrying value of the AIG Capped Floater and potentially recognize an impairment charge for an other-than-temporary decline in the fair value of the investment. Based on the Company’s available cash and other investments, it does not currently anticipate that the lack of liquidity caused by holding the AIG Capped Floater to recovery will have a material adverse effect on the Company’s financial position.

Trading Investments

The Company held municipal auction rate securities, the majority of which were triple-A rated, whose underlying assets were generally student loans that were substantially backed by the federal government under the Federal Family Education Loan Program through investment accounts managed by UBS Financial Services, Inc. (“UBS”). The market for municipal auction rate securities in the Company’s portfolio began experiencing auction failures in 2008. In November 2008, the Company formally accepted the terms of a settlement (the “Settlement”) from UBS. Upon accepting the terms of the Settlement, the Company received an enforceable, non-transferrable right (the “Put Option”) that enabled it to sell its auction rate securities back to UBS during the period between June 30, 2010 and July 2, 2012 at par value. On June 30, 2010, the Company executed the Put Option and sold all of its remaining investments in auction rate securities back to UBS at par. During the three and six months ended June 30, 2010, the Company realized a gain of $5.6 million and $5.9 million, respectively, related to the sale of its investments in auction rate securities and a corresponding loss of $5.8 million and $6.0 million, respectively, related to the settlement of the Put Option, both of which are included in other (expense) income, net, in the accompanying condensed consolidated statements of income. See Note 6 for additional information regarding the Put Option and auction rate securities.

 

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CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

     As of June 30,
2010
   Quoted
Prices In
Active Markets
for Identical
Assets (Level 1)
   Significant
Other
Observable
Inputs (Level 2)
   Significant
Unobservable
Inputs (Level 3)
     (in thousands)

Short-term investments- available-for-sale

   $ 478,321    $ 478,321    $ —      $ —  

Prepaid expenses and other current assets

     5,701      —        5,701      —  

Long-term investments- available-for-sale

     585,418      537,498      —        47,920

Accrued expenses and other current liabilities

     12,985      —        12,985      —  

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 and generally measures its investments in available-for-sale securities at fair value based on quoted prices in active markets for identical securities. See Note 5 for more information regarding the Company’s available-for-sale investments.

In order to measure the AIG Capped Floater at fair value, the Company used a discounted cash flow model. The Company then discounted those cash flows at a rate reflecting the market risk inherent in holding an AIG security with a similar maturity as evidenced by pricing in the markets. Since utilizing a discounted cash flow model required the Company to make assumptions that were not directly or indirectly observable regarding the AIG Capped Floater’s fair value, during 2009, it was transferred to Level 3 and is included in the table below.

Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

 

     Put Option     Investments     Total  
     (in thousands)  

Balance at December 31, 2009

   $ 6,048      $ 83,785      $ 89,833   

Proceeds received on Level 3 securities

     —          (44,560     (44,560

Decrease in previously recognized unrealized losses included in accumulated other comprehensive loss

     —          2,824        2,824   

Total realized (losses) gains included in earnings

     (6,048     5,871        (177
                        

Balance at June 30, 2010

   $ —        $ 47,920      $ 47,920   
                        

Realized (losses) gains included in earnings for the period are reported in other (expense) income, net. See Note 5 for more information regarding the settlement of the auction rate securities and related Put Option.

Additional Disclosures Regarding Fair Value Measurements

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of these items.

 

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CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 June 30, 2010, 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 2005 Employee Stock Purchase Plan (the “2005 ESPP”). In connection with certain of the Company’s acquisitions, the Company has assumed several plans from acquired companies. The Company’s Board of Directors has provided that no new awards will be granted under the Company’s acquired stock plans. The Company’s superseded and expired stock plans include the Amended and Restated 1995 Stock Plan, Second Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan, Second Amended and Restated 1995 Non-Employee Director Stock Option Plan and Third Amended and Restated 1995 Employee Stock Purchase Plan. Awards previously granted under these plans and 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.

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 consultants and non-employee directors of the Company. Currently, the 2005 Plan provides for the issuance of a maximum of 37,600,000 shares of common stock of which 5,500,000 shares were authorized by the Company’s Board of Directors in April 2010 and subsequently approved by its stockholders in May 2010. 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. All stock-based awards, other than the long-term incentive awards discussed below, are 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 June 30, 2010, there were 32,217,853 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 15,587,184 additional stock-based awards.

Under the 2005 ESPP, all full-time and certain part-time employees of the Company are eligible to purchase common stock of the Company twice per year at the end of a six-month payment period (a “Payment Period”). During each Payment Period, eligible employees who so elect may authorize payroll deductions in an amount no less than 1% nor greater than 10% of his or her base pay for each payroll period in the Payment Period. At the end of each Payment Period, the accumulated deductions are used to purchase shares of common stock from the Company up to a maximum of 12,000 shares for any one employee during a Payment Period. Shares are purchased at a price equal to 85% of the fair market value of the Company’s common stock on the last business day of a Payment Period. Employees who, after exercising their rights to purchase shares of common stock in the 2005 ESPP, would own shares representing 5% or more of the voting power of the Company’s common stock, are ineligible to participate under the 2005 ESPP. The 2005 ESPP provides for the issuance of a maximum of 10,000,000 shares of common stock. As of June 30, 2010, 1,738,536 shares had been issued under the 2005 ESPP. The Company recorded stock-based compensation costs related to the 2005 ESPP of $0.6 million and $1.3 million for the three and six months ended June 30, 2010, respectively.

Stock-Based Compensation

The detail of the total stock-based compensation recognized by income statement classification is as follows (in thousands):

 

Income Statement Classifications

   Three Months Ended
June 30, 2010
   Three Months Ended
June 30, 2009
   Six Months Ended
June 30, 2010
   Six Months Ended
June 30, 2009

Cost of services revenues

   $ 333    $ 397    $ 628    $ 821

Research and development

     14,677      14,330      28,611      28,544

Sales, marketing and services

     8,158      7,754      15,068      15,338

General and administrative

     4,978      5,959      8,766      11,885
                           

Total

   $ 28,146    $ 28,440    $ 53,073    $ 56,588
                           

Stock Options

Options granted from the 2005 Plan typically have a five-year life and vest over three years at a rate of 33.3% of the shares underlying the option one year from date of grant and at a rate of 2.78% monthly thereafter. The Company currently uses the Black-Scholes option pricing model to determine the fair value of its 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 Staff Accounting

 

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CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Bulletin (“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 term on its options. The expected term of the Company’s 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 June 30, 2010 was $10.95. The total intrinsic value of options exercised during the three and six months ended June 30, 2010 was $28.6 million and $113.2 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 June 30, 2010, there was $62.7 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 1.69 years.

The assumptions used to value option grants are as follows:

 

     Three Months Ended
June 30, 2010
    Three Months Ended
June 30, 2009
    Six Months Ended
June 30, 2010
    Six Months Ended
June 30, 2009
 

Expected volatility factor

   0.31      0.38      0.31 – 0.33      0.38 – 0.44   

Approximate risk free interest rate

   1.55   1.38   1.45% – 1.55   1.31% – 1.38

Expected term (in years)

   3.16      3.17      3.16      3.17 – 3.37   

Expected dividend yield

   0   0   0   0

Non-vested Stock

The Company assumed shares of non-vested stock in conjunction with its acquisition of XenSource, Inc. Upon assumption, these shares were reset to vest over three years at a rate of 33.3% of the shares granted one year from date of grant and at a rate of 2.78% monthly thereafter based on service. As of June 30, 2010, the number of non-vested shares granted and outstanding was 138,534 and there was $5.0 million of total unrecognized compensation cost related to non-vested stock. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 0.33 years.

Non-vested Stock Units

Annually, the Company awards vice presidents and senior executives non-vested performance stock units from the 2005 Plan. The number of non-vested stock units underlying each award is determined one year after the date of the award and is based on achievement of a specific corporate financial performance goal. If the performance goal is less than 90% attained, then no non-vested stock units will be issued pursuant to the authorized award. For performance at and above 90%, the number of non-vested stock units issued is 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 executive’s award agreement. The Company is required to estimate the attainment that will be achieved related to the defined performance goals and the number of non-vested stock units that will ultimately be awarded in order to recognize compensation expense over the vesting period. If the performance goal is met, 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 are not met, no compensation cost will ultimately be recognized in that period and any previously recognized compensation cost will be reversed. During 2009, 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.

Annually, the Company also awards vice presidents and senior executives non-vested stock units from the 2005 Plan that vest based on service. These non-vested stock units vest 33.33% on each anniversary subsequent to the date of the award. Each non-vested stock unit, upon vesting, will represent 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 units vest monthly in equal installments based on service and, upon vesting, each stock unit represents the right to receive one share of the Company’s common stock. As of June 30, 2010, the number of non-vested stock units outstanding was 1,212,015 and there was $37.6 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 2.47 years.

Long-term Incentive Plan

In May 2009, the Company granted certain senior level executives restricted stock units that vest based on market and service conditions as part of a long-term incentive plan. The number of restricted stock units underlying each award is determined at the end of a three-year performance period ending December 31, 2011. In order to vest, the Company’s stock price must appreciate by at least ten percent by the end of the performance period. If the Company’s stock appreciation is at least ten percent, then the percentage of the restricted stock units that will vest will be determined by comparing the Company’s stock price appreciation to the appreciation of

 

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CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

the weighted average of two stock market indices comprised of the Standard & Poor’s 500 Index (the “S&P 500”), which has been assigned a two-thirds weighting, and the iShares Standard & Poor’s North America Technology Index (the “IGM”), which has been assigned a one-third weighting. Based on the level of performance, up to 200% of the award may vest. After vesting, the shares underlying the award will be issued at the earliest of six months and one day after the participant’s separation from the Company (other than termination for cause), the participant’s death, or the effective date of a change in control of the Company. In the event of a change in control of the Company prior to the end of the performance period, the payout of any award is limited to a prorated portion of such award based upon a performance assessment prior to the change in control date.

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 restricted stock unit awards was determined through the use of a Monte Carlo simulation model, which utilizes multiple input variables that determine the probability of satisfying the market condition requirements applicable to each award.

The estimated fair value of each award was $24.16 as of the date of grant. As of June 30, 2010, the number of restricted stock units granted pursuant to this award was 175,667 and there was $2.7 million of total unrecognized compensation cost related to restricted stock units. The unrecognized cost is expected to be recognized over 1.58 years.

8. LONG-TERM DEBT

Effective on August 9, 2005, the Company entered into a revolving credit facility (the “Credit Facility”) with a group of financial institutions (the “Lenders”). Effective September 27, 2006, the Company entered into an amendment and restatement of its Credit Facility (the “Amendment”). The Amendment decreased the overall range of interest rates the Company must pay on amounts outstanding on the Credit Facility and lowered the facility fee. In addition, the Amendment extended the term of the Credit Facility. The Credit Facility, as amended, allows the Company to increase the revolving credit commitment up to a maximum aggregate revolving credit commitment of $175.0 million. The Credit Facility, as amended, will expire on September 27, 2011 and it currently provides for a revolving line of credit in the aggregate amount of $100.0 million, subject to continued covenant compliance. A portion of the revolving line of credit (i) in the aggregate amount of $25.0 million may be available for issuances of letters of credit and (ii) in the aggregate amount of $15.0 million may be available for swing line loans. The Credit Facility, as amended, currently bears interest at LIBOR plus 0.32% and adjusts in the range of 0.32% to 0.80% above LIBOR based on the level of the Company’s total debt and its adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) as defined in the agreement. In addition, the Company is required to pay a quarterly facility fee ranging from 0.08% to 0.20% based on the aggregate amount available under the Credit Facility, as amended, and the level of the Company’s total debt and its adjusted EBITDA. Borrowings under the Credit Facility, as amended, are guaranteed by the Company and certain of the Company’s U.S. and foreign subsidiaries, which guarantees are secured by a pledge of shares of certain foreign subsidiaries. As of June 30, 2010, there were no amounts outstanding under the Credit Facility, as amended.

The Credit Facility, as amended, contains customary default provisions, and the Company must comply with various financial and non-financial covenants. The financial covenants consist of a minimum interest coverage ratio and a maximum consolidated leverage ratio. The primary non-financial covenants contain certain limits on the Company’s ability to pay dividends, conduct certain mergers or acquisitions, make certain investments and loans, incur future indebtedness or liens, alter the Company’s capital structure or sell stock or assets. As of June 30, 2010, the Company was in compliance with all covenants of the Credit Facility.

9. SEGMENT INFORMATION

During the first quarter of 2010, the Company changed how it measures profitability internally, develops its annual plan and allocates its resources from a geography-based approach (which included the Americas, EMEA, Asia-Pacific and the Company’s Online Services division), to a product division-based approach. This change reflects how the Company markets and sells its products. Accordingly, the Company has revised its reportable segments to reflect the way its chief operating decision maker (“CODM”) is currently managing and viewing the business. In addition, previously reported segment results have been restated to conform to the 2010 presentation. The Company’s revenues are derived from sales of its Enterprise division products which include its Desktop Solutions, Datacenter and Cloud Solutions and related technical services and from sales of its Online Services division’s web collaboration, connectivity and remote support services. 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 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, 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 technology, amortization of other intangible assets, net interest and other (expense) income. Accounting policies of the Company’s segments are the same as its consolidated accounting policies. In addition, the Company will evaluate goodwill for impairment at the operating segment level, which represents its reporting units.

 

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CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Net revenues and segment profit, classified by the Company’s two reportable segments were as follows (in thousands):

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2010     2009     2010     2009  

Net revenues:

        

Enterprise division

   $ 369,222      $ 317,478      $ 698,544      $ 614,556   

Online Services division

     89,211        75,350        174,161        147,330   
                                

Consolidated

   $ 458,433      $ 392,828      $ 872,705      $ 761,886   
                                

Segment profit:

        

Enterprise division

   $ 95,251      $ 69,696      $ 170,709      $ 124,825   

Online Services division

     23,241        17,092        41,800        32,937   

Unallocated expenses (1):

        

Amortization of intangible assets

     (16,193     (16,586     (32,708     (33,679

Restructuring

     (335     (2,036     (835     (22,766

Net interest and other income

     875        5,069        4,808        6,238   

Stock-based compensation

     (28,146     (28,440     (53,073     (56,588
                                

Consolidated income before income taxes

   $ 74,693      $ 44,795      $ 130,701      $ 50,967   
                                

 

(1) Represents expenses presented to management on a consolidated basis only and not allocated to the operating segments.

In addition to evaluating the Company’s profitability by product division, its CODM also evaluates net revenues by product groupings and geographic locations, including the Company’s Online Services division.

The following table presents revenues by product grouping for the Company’s Enterprise division and Online Services division, for the following periods (in thousands):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Net revenues:

        

Desktop Solutions revenues (1)

   $ 289,550      $ 251,474      $ 553,515      $ 494,477   

Online Services division revenues

     89,211        75,350        174,161        147,330   

Datacenter and Cloud Solutions revenues (2)

     74,444        61,802        135,145        111,073   

Other

     5,228        4,202        9,884        9,006   
                                

Total net revenue

   $ 458,433      $ 392,828      $ 872,705      $ 761,886   
                                

 

(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.

(2)

Datacenter and Cloud Solutions revenues are primarily comprised of sales from the Company’s application networking products which include NetScaler, Access Gateway and Branch Repeater and the Company’s virtual infrastructure products which include XenServer and Essentials for Hyper-V.

The following table presents revenues by geographic location, including the Online Services division for the following periods (in thousands):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Net revenues:

        

Americas

   $ 203,199      $ 173,753      $ 380,931      $ 329,543   

EMEA

     125,160        112,637        244,515        225,355   

Asia-Pacific

     40,863        31,088        73,098        59,658   

Online Services division

     89,211        75,350        174,161        147,330   
                                

Total net revenue

   $ 458,433      $ 392,828      $ 872,705      $ 761,886   
                                

 

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CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

10. RESTRUCTURING

During the first quarter of 2009, the Company announced a restructuring program and reduced its headcount by approximately 450 full-time positions. The restructuring program was completed in 2009. Total costs incurred to date were $27.3 million, of which $26.1 million was related to the Company’s Enterprise division and $1.2 million was related to its Online Services division.

Restructuring charges related to the reduction of the Company’s headcount and non-cancelable lease costs related to the consolidation and exiting of excess facilities by segment consists of the following (in thousands):

 

     Three Months Ended
June  30,
   Six Months Ended
June  30,
     2010    2009    2010    2009

Enterprise division

   $ 174    $ 1,908    $ 674    $ 22,177

Online Services division

     161      128      161      589
                           

Total restructuring charges

   $ 335    $ 2,036    $ 835    $ 22,766
                           

Restructuring accruals

As of June 30, 2010, the $2.8 million in outstanding restructuring liability primarily relates to non-cancelable lease costs related to the consolidation of excess facilities that the Company expects to pay over the lives of the related obligations through fiscal 2012.

The activity in the Company’s restructuring accruals for the six months ended June 30, 2010 is summarized as follows (in thousands):

 

     Total  

Balance at January 1, 2010

   $ 3,492   

Employee severance and related costs

     295   

Adjustments to non-cancelable lease costs and other charges

     540   

Payments

     (1,562

Reversal of previous charges

     —     
        

Balance at June 30, 2010

   $ 2,765   
        

As of June 30, 2010, restructuring accruals by segment consisted of the following (in thousands):

 

     Total  

Enterprise division

   $ 2,447   

Online Services division

     318   
        

Total restructuring accruals

   $ 2,765   
        

11. DERIVATIVE FINANCIAL INSTRUMENTS

Cash Flow Hedges

As of June 30, 2010, the Company’s derivative assets and liabilities 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

 

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CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 stockholders’ equity.

The total cumulative unrealized (loss) gain on cash flow derivative instruments was $(6.6) million and $4.3 million at June 30, 2010 and December 31, 2009, respectively, and is included in accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. The net unrealized loss as of June 30, 2010 is expected to be recognized in income over the next twelve months at the same time the hedged items are recognized in income.

As of June 30, 2010, the Company had the following net notional foreign currency forward contracts outstanding (in thousands):

 

Foreign Currency

   Currency
Denomination

Australian dollars

   AUD 20,656

British pounds sterling

   GBP 12,352

Canadian dollars

   CAD 5,743

Chinese yuan

   CNY 2,239

Euro

   EUR 13,620

Hong Kong dollars

   HKD 78,830

Indian rupees

   INR 726,576

Japanese yen

   JPY 1,405,860

Singapore dollars

   SGD 7,776

Swiss francs

   CHF 13,389

Derivatives not Designated as Hedges

The Company utilizes certain derivative instruments that either do not qualify or are not designated for hedge accounting treatment under the authoritative guidance. Accordingly, changes in the fair value of these contracts are recorded in other (expense) income, net.

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. There were no assets or liabilities related to derivatives not designated as hedges as of June 30, 2010 and December 31, 2009.

Fair Values of Derivative Instruments

 

     Asset Derivatives    Liability Derivatives
                    (In thousands)               
     June 30, 2010    December 31, 2009    June 30, 2010    December 31, 2009

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
and other
current
assets
   $ 5,701    Prepaid
and other
current
assets
   $ 8,981    Accrued
expenses
and other
current
liabilities
   $ 12,985    Accrued
expenses
and other
current
liabilities
   $ 4,141

The Effect of Derivative Instruments on Financial Performance

 

     For the Three Months ended June 30,
     (In thousands)

Derivatives in Cash Flow

Hedging Relationships

   Amount of (Loss) Gain 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)
     2010     2009         2010     2009

Foreign currency forward contracts

   $ (4,499   $ 15,752    Operating expenses    $ (1,228   $ 4,060

 

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CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

     For the Six Months ended June 30,
     (In thousands)

Derivatives in Cash Flow

Hedging Relationships

   Amount of (Loss) Gain 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)
     2010     2009         2010     2009

Foreign currency forward contracts

   $ (10,970   $ 10,075    Operating expenses    $ (4,750   $ 5,122

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

 

     For the Three Months ended June 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
 
          2010     2009  

Foreign currency forward contracts

   Other (expense) income, net    $ (394   $ (2,524

 

     For the Six Months ended June 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
 
         2010     2009  

Foreign currency forward contracts

   Other (expense) income, net   $ (488   $ (2,290

12. COMPREHENSIVE INCOME

The components of comprehensive income, net of tax, are as follows (in thousands):

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010     2009    2010     2009

Net income

   $ 47,557      $ 42,519    $ 94,906      $ 49,446

Other comprehensive income:

         

Change in unrealized (loss) gain on available-for-sale securities

     (416     2,653      2,440        185

Net change due to derivative instruments

     (4,499     15,752      (10,970     10,075
                             

Comprehensive income

   $ 42,642      $ 60,924    $ 86,376      $ 59,706
                             

The components of accumulated other comprehensive income, net of tax, are as follows (in thousands):

 

     June 30,
2010
    December 31,
2009
 

Unrealized loss on available-for-sale securities

   $ (1,502   $ (3,942

Unrealized (loss) gain on derivative instruments

     (6,630     4,340   

Other comprehensive loss on pension liability

     (2,458     (2,458
                

Accumulated other comprehensive loss

   $ (10,590   $ (2,060
                

13. INCOME TAXES

The Company’s net unrecognized tax benefits totaled approximately $59.4 million and $46.2 million as of June 30, 2010 and December 31, 2009, respectively. There were no amounts included in the balance at June 30, 2010 of tax positions, which would not affect the annual effective tax rate, and approximately $0.5 million of accrued interest on tax positions, which is included in income tax expense.

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 2004.

During the third quarter of 2009, the Internal Revenue Service (“IRS”) concluded its examination of the Company’s income tax returns for 2004 and 2005 and issued a Revenue Agent’s Report (the “RAR”). The RAR asserted income tax deficiencies of

 

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CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

approximately $81.3 million (excluding interest) for tax years 2004 and 2005. The Company agreed with all of the adjustments contained in the RAR, with the exception of those related to the transfer pricing and consequential adjustments involving the intercompany transfers of certain intellectually property in earlier tax years. The transfer pricing and any consequential adjustments to the Company’s 2004 and 2005 tax years would impact its income tax liabilities in tax years subsequent to 2005. The Company filed a protest with respect to these adjustments, which caused the matter to be referred to the Appeals Division of the IRS.

In June 2010, the Company reached a settlement in principle with the IRS regarding the income tax deficiencies asserted in the RAR. Under the terms of the settlement in principle, the Company would agree to an assessment of income tax deficiencies in full settlement of all open claims under the RAR and would resolve with finality for future years all of the transfer pricing issues raised in the RAR. Based on this, the Company incurred a charge of approximately $13.1 million in the second quarter of 2010 under the authoritative guidance. Among other things, the authoritative guidance requires application of a “more likely than not” threshold to the recognition and non-recognition of tax positions. It further requires that a change in management judgment related to prior years’ tax positions be recognized in the quarter of such change.

The final settlement requires the finalization of tax deficiency calculations with the IRS and a written agreement signed by the IRS. This process could take several more months to complete. There can be no assurances that a final written agreement will be obtained or that this matter will otherwise be resolved in the Company’s favor. An adverse outcome of this matter could have a material adverse effect on the Company’s results of operations and financial condition.

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 June 30, 2010, the Company had approximately $82.4 million in 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 operational and administrative processes in overseas subsidiaries and its foreign earnings are taxed at lower foreign tax rates. The Company does not expect to remit earnings from its foreign subsidiaries. The Company’s effective tax rate was approximately 36.3% and 5.1% for the three months ended June 30, 2010 and 2009, respectively, and 27.4% and 3.0% for the six months ended June 30, 2010 and 2009, respectively. The increase in the effective tax rate when comparing the three months ended June 30, 2010 to the three months ended June 30, 2009 and the six months ended June 30, 2010 to the six months ended June 30, 2009 is due primarily to the charge related to the settlement in principle with the IRS during the second quarter of 2010, the expiration of the U.S. research and development tax credit on December 31, 2009 and an increase in income in geographic locations taxed at a higher rate. Also contributing to the increase in the effective tax rate when comparing the six months ended June 30, 2010 to the six months ended June 30, 2009 is the impact of the charges recorded in conjunction with the Strategic Restructuring Program in 2009.

14. 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 $2.5 billion, of which $400.0 million was approved in April 2010. 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 June 30, 2010, approximately $356.2 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. Additionally, from time to time, the Company has entered into structured stock repurchase arrangements with large financial institutions using

 

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CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

During the three months ended June 30, 2010, the Company expended approximately $100.0 million on open market purchases, repurchasing 2,138,500 shares of outstanding common stock at an average price of $46.74. In addition, as of June 30, 2010, the Company did not have any prepaid notional amounts remaining under its structured stock repurchase programs and it did not make any up-front payments to financial institutions related to structured stock repurchase agreements.

During the six months ended June 30, 2010, the Company expended approximately $199.9 million on open market purchases, repurchasing 4,427,100 shares of outstanding common stock at an average price of $45.16. In addition, during this period, the Company did not make any up-front payments to financial institutions related to structured stock repurchase agreements.

During the three months ended June 30, 2009, the Company expended approximately $40.0 million on open market purchases, repurchasing 1,319,000 shares of outstanding common stock at an average price of $30.32.

During the six months ended June 30, 2009, the Company expended approximately $65.0 million on open market purchases, repurchasing 2,422,300 shares of outstanding common stock at an average price of $26.83.

Shares for Tax Withholding

During the three months ended June 30, 2010, the Company repurchased 31,126 shares totaling $1.5 million to satisfy tax withholding obligations that arose on the vesting of shares of unvested stock units. During the six months ended June 30, 2010, the Company repurchased 91,601 shares totaling $4.1 million to satisfy tax withholding obligations that arose on the vesting of shares of unvested stock units. These shares are reflected as treasury stock in the Company’s condensed consolidated balance sheets.

15. 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 related to two properties that are not fully utilized which continue to 2017 and 2018 with a total remaining obligation at June 30, 2010 of approximately $6.9 million, of which $3.3 million was accrued as of June 30, 2010, and is reflected in accrued expenses and other current liabilities and other liabilities in the accompanying condensed consolidated balance sheets. In calculating this accrual, 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 the vacant facilities.

Asset Retirement Obligation

The Company recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The Company has asset retirement obligations related to the restoration of leased facilities and the removal of certain leasehold improvements. Considerable management judgment is required in estimating these obligations. Important assumptions include estimates of asset retirement costs and the timing of future asset retirement activities. Changes in these assumptions based on future information could result in adjustments to these estimated liabilities.

The Company has an asset retirement obligation related to restoring a property to its original condition. The restoration is anticipated to occur at the end of the lease term in 2016. The total obligation related to this asset retirement obligation as of June 30, 2010 is approximately $1.8 million, of which $0.9 million was accrued and is reflected in other liabilities in the accompanying condensed consolidated balance sheet. On July 1, 2010, the Company leased more space in the building and will have an additional asset retirement obligation of $2.9 million related to the space. The restoration related to the additional space is also expected to be incurred in 2016, which is the end of the lease term.

Legal Matters

Due to the nature of the Company’s business, it is subject to patent infringement claims, including current suits against it or one or more of its wholly-owned subsidiaries alleging infringement by various Citrix products and services. The Company believes that it has meritorious defenses to the allegations made in its pending cases and intends to vigorously defend these lawsuits; however, it is unable currently to determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any.

 

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CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 the ultimate outcomes will not materially 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.

16. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2009, FASB amended the Accounting Standards Codification (“ASC”) as summarized in Accounting Standards Update (“ASU”) 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements, and ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. As summarized in ASU 2009-14, ASC Topic 985 has been amended to remove from the scope of industry specific revenue accounting guidance for software and software related transactions, tangible products containing software components and non-software components that function together to deliver the product’s essential functionality. As summarized in ASU 2009-13, ASC Topic 605 has been amended (1) to provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and the consideration allocated; (2) to require an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have VSOE or third-party evidence of selling price; and (3) to eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The accounting changes summarized in ASU 2009-14 and ASU 2009-13 are both effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Adoption may either be on a prospective basis or by retrospective application. The Company is in the process of evaluating the potential impact of this standard on its financial position and results of operations.

 

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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, development and offerings of products and services, market positioning, Product Licenses, License Updates, Online Services, Technical Services, Application Networking, Desktop Solutions, Datacenter and Cloud Solutions, Subscription Advantage, XenApp, NetScaler, XenServer and XenDesktop, legal proceedings, corporate bonds, competition and strategy, deferred revenues, stock-based compensation, licensing and subscription renewal programs, intellectual property, international operations, government regulation, the impact of new accounting policies, seasonal factors, sales and sales cycle, revenue recognition, profitability, growth of revenues, composition of revenues, cost of revenues, operating expenses, sales, marketing and services expenses, general and administrative expenses, research and development, valuations of investments and derivative instruments, reinvestment or repatriation of foreign earnings, gross margins, amortization expense, interest income, foreign currency expense, foreign exchange rate fluctuations, impairment charges, fair value measurements, investment transactions (including the AIG Capped Floater and investments in auction rate and available-for-sale securities), asset retirement activities, changes in domestic and foreign economic conditions and credit markets, the Strategic Restructuring Program and related restructuring charges, including costs associated with the consolidation of excess facilities, customer delays or reductions in technology purchases, anticipated operating and capital expenditure requirements, our cash inflows, cash and non-cash charges, contractual obligations, our Credit Facility, in-process research and development, tax rates, estimates and deductions, transfer pricing, the finalization of our tax settlement and written agreement with the IRS, acquisitions, stock repurchases, liquidity, payment of dividends and third party licenses, 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 significantly 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, 2009, as 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.

Executive Summary

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 and six months ended June 30, 2010. 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 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 virtual computing. We market and license our products directly to enterprise customers, over the web, and through systems integrators, or SIs, in addition to indirectly through value-added resellers, or VARs, value-added distributors, or VADs, and original equipment manufacturers, or OEMs.

Our solutions can fundamentally change an information technology organization’s approach and strategic value, transforming information technology, or IT, into an on-demand service by centralizing the delivery of applications and desktops. Further, this approach to IT transforms data centers, making them far more flexible to adapt to the changing needs of an enterprise.

We believe our approach is unique in the market because we have combined innovative technologies in the area of desktop management, including but not limited to desktop virtualization and application virtualization, marketed as our Desktop Solutions, and server virtualization, application networking and optimization, marketed as our Datacenter and Cloud Solutions, to deliver the most comprehensive end-to-end application delivery solution, and one that, when considered as a whole, is competitively differentiated by its feature set and interoperability.

 

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The global recession that started in 2008 impacted IT spending, and we see the uncertainties that remain in today’s economic environment, especially in Europe, continuing to impact IT spending, but to a lesser extent than in early 2009. In addition, there is uncertainty surrounding IT spending in the U.S. Federal government sector. The overall uncertainty in these areas may adversely affect sales of our products and may result in longer sales cycles, slower adoption of technologies and increased price competition.

At the same time, however, this uncertain environment puts a much sharper focus on IT products and services that can reduce cost and deliver quick, tangible return on investment, or ROI. With our customers focused on economic value in technology solutions, we intend to continue highlighting our solutions’ abilities to reduce IT costs, increase business flexibility and deliver ROI.

We continue to see increased interest in desktop virtualization as customers are making strategic purchases that include both XenDesktop and XenApp due to our current programs. XenApp and XenDesktop, for example, can reduce the cost of traditional desktop management by virtualizing the desktop and applications in a customer’s datacenter, where they are more easily and efficiently maintained. XenServer and NetScaler can alter the traditional economies of the datacenter by providing much greater levels of flexibility of computing resources, especially with respect to servers, by improving application performance and thereby reducing the amount of processing power involved, and allowing easy reconfiguration of servers for multiple purposes. Our Online Services division is focused on developing and marketing Web-based access, support and collaboration software and services. These services are primarily marketed via the Web to individuals, prosumers and small businesses. Our web collaboration services from our Online Services division offer secure and cost-effective solutions that allow users to host and actively participate in online meetings, webinars and training sessions remotely and reduce costs associated with business travel. Our web connectivity solution offers a secure, simple and cost efficient way for users to access their desktops remotely, and our remote support solution offers secure, on-demand support over the Internet.

Further, we will endeavor to sustain the long-term growth of our businesses and enhance our current solutions through technological innovation, engineering excellence, selective and strategic acquisition of technology, talent and/or companies, and through a commitment to delivering high-quality products and services to customers and partners. We expect to continue to make strategic investments in research and development of existing and new products, and we will invest in research and development of advanced technologies for future application, including increasing research and development capacity and headcount. We believe that delivering innovative and high-value solutions through our Enterprise division’s products and our Online Services divisions’ services is the key to meeting customer and partner needs and achieving our future growth. In addition, we intend to make a significant investment in brand awareness and increased sales, consulting and technical services capacity and headcount to drive larger strategic customer engagements and more focus on SI partnerships as well as investing in new channel programs that allow our partners to upgrade their capabilities in desktop virtualization, which we believe is currently our largest area of opportunity.

On January 28, 2009, we announced the implementation of a strategic restructuring program, or the Strategic Restructuring Program. The Strategic Restructuring Program included reducing our headcount by approximately 450 full-time positions. In the first half of 2009, we incurred a pre-tax charge of $22.8 million related to employee severance and related costs.

During the second quarter of 2009, we determined that we had incorrectly recorded acquisition-related payments to certain of our employees in connection with the October 2007 acquisition of XenSource, Inc., or XenSource, as purchase consideration and goodwill when such payments should have been recorded as compensation expense. Accordingly, in the second quarter of 2009, we recorded compensation expense related to this item of $5.4 million, of which $4.6 million related to prior periods, with a corresponding decrease to goodwill. As this adjustment was related to the correction of an error, we performed the analysis required by Staff Accounting Bulletin 99, Materiality, and Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements. Based on our analysis, we concluded that the effect of the error was not material to fiscal year 2009 and prior fiscal years from both a quantitative and qualitative perspective.

Summary of Results

For the three months ended June 30, 2010 compared to the three months ended June 30, 2009, a summary of our results included:

 

   

Product License revenue increased 14.7% to $148.7 million;

 

   

License Updates revenue increased 12.9% to $168.6 million;

 

   

Online Services revenue increased 18.4% to $89.2 million;

 

   

Technical Services revenue increased 34.9% to $51.9 million;

 

   

Operating income increased 85.8% to $73.8 million; and

 

   

Diluted earnings per share increased 8.7% to $0.25.

 

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The increase in our Product License revenue was primarily driven by increased sales of our Desktop Solutions products, led by XenDesktop. As expected, we saw signs of improvement, including improving dynamics in certain markets and a high level of interest in desktop virtualization due to our current offerings. We currently expect our Product License revenue to increase when comparing the third quarter of 2010 to the third quarter of 2009. The increase in License Updates revenue was driven by sales of new Subscription Advantage licenses. Our Online Services revenue increased due to increased sales of our web collaboration services. The increase in Technical Services revenue was primarily driven by increased sales of support and consulting services related to our Desktop Solutions and Datacenter and Cloud Solutions. Our increase in operating income was driven by our increased revenue as well as leverage gained in overall operating expenses. In addition, net income and diluted earnings per share were impacted by a $13.1 million income tax expense for the settlement in principle we reached with the Internal Revenue Service, or IRS, related to transfer pricing issues. We currently expect that total revenue will increase when comparing the third quarter of 2010 to the third quarter of 2009, as well as when comparing the 2010 fiscal year to the 2009 fiscal year.

Some of our investments continue to experience declines in fair value, which have resulted in impairment charges and unrealized losses in our investment portfolio. We do not currently anticipate that the lack of liquidity caused by holding these investments will have a material adverse effect on our operating cashflows or financial position. We continue to monitor our overall investment portfolio and if the credit ratings of the issuers of our investments deteriorate or if the issuers experience financial difficulty, including bankruptcy, we may be required to make additional adjustments to the carrying value of the securities in our investment portfolio and recognize additional impairment charges for declines in fair value which are determined to be other-than-temporary. See “– Liquidity and Capital Resources” below.

2010 Acquisitions

During the first quarter of 2010, we acquired two privately-held companies for a total cash consideration of approximately $9.2 million. We recorded approximately $3.7 million of goodwill, which is not deductible for tax purposes, and acquired $8.3 million in assets including $7.1 million of identifiable intangible assets. In addition, we assumed liabilities of approximately $2.8 million in conjunction with the acquisitions. We have included the effects of these transactions in our results of operations prospectively from the respective dates of the acquisitions, which were not material to our consolidated results.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. For more information regarding our critical accounting policies and estimates please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” contained in our Annual Report on Form 10-K for the year ended December 31, 2009 and Note 2 to our condensed consolidated financial statements. There have been no material changes to the critical accounting policies previously disclosed in that report.

 

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Results of Operations

The following table sets forth our condensed consolidated statements of income data and presentation of that data as a percentage of change from period-to-period (in thousands).

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
    Three Months Ended
June 30, 2010
vs. June 30, 2009
    Six Months Ended
June 30, 2010
vs. June 30, 2009
 
     2010     2009     2010     2009      

Revenues:

            

Product licenses

   $ 148,733      $ 129,692      $ 271,439      $ 241,592      14.7   12.4

License updates

     168,601        149,334        331,556        297,532      12.9      11.4   

Online services

     89,211        75,350        174,161        147,330      18.4      18.2   

Technical services

     51,888        38,452        95,549        75,432      34.9      26.7   
                                    

Total net revenues

     458,433        392,828        872,705        761,886      16.7      14.5   
                                    

Cost of net revenues:

            

Cost of license revenues

     15,149        11,506        27,800        23,000      31.7      20.9   

Cost of services revenues

     25,989        21,132        49,679        42,755      23.0      16.2   

Amortization of product related intangible assets

     12,417        11,423        24,775        23,522      8.7      5.3   
                                    

Total cost of net revenues

     53,555        44,061        102,254        89,277      21.5      14.5   
                                    

Gross margin

     404,878        348,767        770,451        672,609      16.1      14.5   
                                    

Operating expenses:

            

Research and development

     79,543        75,160        157,245        146,197      5.8      7.6   

Sales, marketing and services

     186,601        167,130        357,121        330,719      11.7      8.0   

General and administrative

     60,805        59,552        121,424        118,041      2.1      2.9   

Amortization of other intangible assets

     3,776        5,163        7,933        10,157      (26.9   (21.9

Restructuring

     335        2,036        835        22,766      (83.5   (96.3
                                    

Total operating expenses

     331,060        309,041        644,558        627,880      7.1      2.7   
                                    

Income from operations

     73,818        39,726        125,893        44,729      85.8      181.5   

Interest income

     3,837        4,393        7,393        7,108      (12.7   4.0   

Interest expense

     (85     (34     (141     (158   150.0      (10.8

Other (expense) income, net

     (2,877     710        (2,444     (712   *      *   
                                    

Income before income taxes

     74,693        44,795        130,701        50,967      66.7      156.4   

Income taxes

     27,136        2,276        35,795        1,521      *      *   
                                    

Net income

   $ 47,557      $ 42,519      $ 94,906      $ 49,446      11.8   91.9
                                    

 

* not meaningful

Revenues

Net revenues of our Enterprise division include the following categories: Product Licenses, License Updates and Technical Services. Product Licenses primarily represent fees related to the licensing of the following major products:

 

   

Our Desktop Solutions, comprised primarily of our desktop virtualization product XenDesktop and our application virtualization product XenApp; and

 

   

Our Datacenter and Cloud Solutions, comprised primarily of our virtual infrastructure products, XenServer and Essentials for Hyper-V and our application networking products NetScaler, Access Gateway and Branch Repeater.

In addition, we offer incentive programs to our VADs and VARs to stimulate demand for our products. Product License revenues associated with these programs are partially offset by these incentives to our VADs and VARs.

License Updates consist of fees related to our Subscription Advantage program that are recognized ratably over the term of the contract, which is typically 12 to 24 months. Subscription Advantage is an annual renewable program that provides subscribers with automatic delivery of unspecified software upgrades, enhancements and maintenance releases when and if they become available during the term of the subscription. Technical Services revenues are comprised of fees from technical support services which are recognized ratably over the contract term, as well as revenues from product training and certification, and consulting services revenue related to implementation of our products, which is recognized as the services are provided.

Our Online Services division’s revenues consist of fees related to online service agreements from our web collaboration products which primarily include our GoToMeeting, GoToWebinar, Hi-Def Audio, and GoToTraining services, our connectivity service, GoToMyPC, and our remote support services which primarily include GoToAssist. Our Online Services revenue is recognized ratably over the contract term.

 

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     Three Months Ended
June 30,
   Six Months Ended
June 30,
   Three Months
Ended June 30,
2010 vs. June 30, 2009
   Six Months
Ended June 30,
2010 vs. June 30, 2009
     2010    2009    2010    2009      
                    (In thousands)          

Product Licenses

   $ 148,733    $ 129,692    $ 271,439    $ 241,592    $ 19,041    $ 29,847

License Updates

     168,601      149,334      331,556      297,532      19,267      34,024

Online Services

     89,211      75,350      174,161      147,330      13,861      26,831

Technical Services

     51,888      38,452      95,549      75,432      13,436      20,117
                                         

Total net revenues

   $ 458,433    $ 392,828    $ 872,705    $ 761,886    $ 65,605    $ 110,819
                                         

Product Licenses

Product License revenue increased for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 primarily due to an increase in sales of our Desktop Solutions products, led by XenDesktop, of $13.5 million and our Datacenter and Cloud Solutions products of $5.8 million. Product License revenues increased for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 primarily due to increases in sales of our Desktop Solutions products of $17.8 million and our Datacenter and Cloud Solutions of $12.6 million. These increases in Product License revenue were primarily due to the factors discussed in the Executive Summary above. We currently expect Product License sales to increase when comparing the third quarter of 2010 to the third quarter of 2009 due to the increased demand we are seeing in our Desktop Solutions and Datacenter and Cloud Solutions products as well as the other factors discussed in the Executive Summary above.

License Updates

License Updates revenue increased for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 primarily due to an increase in new Subscription Advantage license sales, led by XenDesktop, of $12.5 million and renewals related to our Subscription Advantage product over a larger base of subscribers of $6.7 million. License Update revenue increased for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 primarily due to an increase in new Subscription Advantage license sales of $18.7 million and renewals related to our Subscription Advantage product over a larger base of subscribers of $15.3 million. We currently anticipate that License Updates revenue will increase when comparing the third quarter of 2010 to the third quarter of 2009.

Online Services

Online Services revenue increased for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 primarily due to increased sales of our web collaboration services. We currently expect Online Services revenues to continue to increase when comparing the third quarter of 2010 to the third quarter of 2009 due to anticipated growth in sales of our web collaboration services.

Technical Services

Technical Services revenue increased for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 primarily due to increased sales of support and consulting services related to our to our Desktop Solutions products of $7.2 million and increased sales of support services related Datacenter and Cloud Solutions products of $5.9 million. Technical Services revenue increased for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 primarily due to increased sales of our support and consulting services related to our Desktop Solutions products of $10.5 million and increased sales of support services related Datacenter and Cloud Solutions products of $9.4 million. We currently expect Technical Services sales to increase when comparing the third quarter of 2010 to the third quarter of 2009 consistent with the increase in Product License revenues as discussed above.

Deferred Revenue

Deferred revenues are primarily comprised of License Updates revenue from our Subscription Advantage product, Technical Services revenues related to our support services and consulting contracts and Online Services revenues from annual service agreements for our Online Services products. Deferred revenues increased approximately $67.5 million as of June 30, 2010 compared to December 31, 2009 primarily due to increased sales of our Subscription Advantage product of $44.5 million, increased sales of our support services of $12.4 million and increased sales of our online service agreements of $7.5 million. We currently expect deferred revenues to increase for the remainder of 2010 primarily due to anticipated increases in sales of XenDesktop as discussed in the Executive Summary above.

 

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International Revenues

International revenues (sales outside the United States) accounted for approximately 42.5% of our net revenues for the three months ended June 30, 2010 and 42.1% of our net revenues for the three months ended June 30, 2009. International revenues accounted for approximately 42.7% of our net revenues for the six months ended June 30, 2010 and 42.9% of our net revenues for the six months ended June 30, 2009. See Note 9 to our condensed consolidated financial statements for detailed information on net revenues by geography.

Segment Revenues

During the first quarter of 2010, we changed how we measure profitability internally, develop our annual plan and allocate our resources from a geography-based approach (which included the Americas; Europe, the Middle East and Africa; Asia-Pacific and our Online Services division), to a product division-based approach. This change reflects how we market and sell our products. Accordingly, we have revised our reportable segments to reflect the way we are currently managing and viewing the business. Our revenues are derived from sales of Enterprise division products which primarily include our Desktop Solutions, Datacenter and Cloud Solutions products and related technical services and from our Online Services division’s web collaboration, connectivity and remote support services. The Enterprise division and the Online Services division constitute our two reportable segments.

An analysis of our reportable segment net revenue is presented below (in thousands):

 

                         Increase for the  
     Three Months Ended
June 30,
   Six Months Ended
June 30,
   Three Months Ended
June 30, 2010
vs. June 30, 2009
    Six Months Ended
June 30, 2010
vs. June 30, 2009
 
     2010    2009    2010    2009     

Enterprise division

   $ 369,222    $ 317,478    $ 698,544    $ 614,556    16.3   13.7

Online Services division

     89,211      75,350      174,161      147,330    18.4      18.2   
                                

Net revenues

   $ 458,433    $ 392,828    $ 872,705    $ 761,886    16.7   14.5
                                

With respect to our segment revenues, the increase in net revenues for the comparative periods presented was due primarily to the factors previously discussed above. See Note 9 of our condensed consolidated financial statements for additional information on our segment revenues.

Cost of Net Revenues

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
   Three Months Ended
June 30, 2010
vs. June 30, 2009
    Six Months Ended
June 30, 2010
vs. June 30, 2009
 
     2010    2009    2010    2009     
     (In thousands)  

Cost of product license revenues

   $ 15,149    $ 11,506    $ 27,800    $ 23,000    $ 3,643         $ 4,800      

Cost of services revenues

     25,989      21,132      49,679      42,755      4,857        6,924   

Amortization of product related intangible assets

     12,417      11,423      24,775      23,522      994        1,253   
                                            

Total cost of net revenues

   $   53,555    $   44,061    $ 102,254    $   89,277    $ 9,494      $ 12,977   
                                            

Cost of product license revenues consists primarily of hardware, product media and duplication, manuals, packaging materials, shipping expense and royalties. Cost of services revenue consists primarily of compensation and other personnel-related costs of providing technical support and consulting, as well as the costs related to our Online Services products. Also included in cost of net revenues is amortization of product related intangible assets.

Cost of product license revenues increased for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 primarily due to increased sales of our Datacenter and Cloud Solutions products some of which contain hardware components that have a higher cost than our other software products. We currently anticipate cost of product license revenues will increase when comparing the third quarter of 2010 to the third quarter of 2009 consistent with the anticipated increase in Product License sales.

Cost of services revenues increased for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 primarily due to an increase in sales of technical services related to our Desktop Solutions products. We currently anticipate cost of services revenues will increase when comparing the third quarter of 2010 to the third quarter of 2009 consistent with the anticipated increase in sales of our consulting services and as we continue to improve and expand our web collaboration offerings.

 

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Gross Margin

Gross margin as a percentage of revenue was 88.3% for the three months ended June 30, 2010 and 88.8% for the three months ended June 30, 2009. Gross margin as a percentage of revenue was 88.3% for the six months ended June 30, 2010 and the six months ended June 30, 2009.

Operating Expenses

Foreign Currency Impact on Operating Expenses

A substantial majority of our overseas operating expenses and capital purchasing activities are transacted in local currencies and are therefore subject to fluctuations in foreign currency exchange rates. In order to minimize the impact on our operating results, we generally initiate our hedging of currency exchange risks up to one year in advance of anticipated foreign currency expenses. When the dollar is weak, the resulting increase to foreign currency denominated expenses will be partially offset by the gain in our hedging contracts. When the dollar is strong, the resulting decrease to foreign currency denominated expenses will be partially offset by the aggregate loss in our hedging contracts. There is a risk that there will be fluctuations in foreign currency exchange rates beyond the one-year timeframe for which we hedge our risk. When comparing the three and six months ended June 30, 2010 to the three and six months ended June 30, 2009, we experienced gains in our hedging programs primarily due to the overall weaker dollar compared to most major currencies at the time we entered into the contracts, which is typically one year in advance of the hedged expenses occurring.

Research and Development Expenses

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
   Three Months Ended
June 30, 2010
vs. June 30, 2009
   Six Months Ended
June 30, 2010
vs. June 30, 2009
     2010    2009    2010    2009      
     (In thousands)

Research and development

   $ 79,543    $ 75,160    $ 157,245    $ 146,197    $ 4,383    $ 11,048

Research and development expenses consisted primarily of personnel related costs and facility and equipment costs directly related to our research and development activities. We expensed substantially all development costs included in the research and development of our products.

Research and development expenses increased during the three months ended June 30, 2010 compared to the three months ended June 30, 2009 primarily due to an increase in compensation and other employee related costs of $7.6 million related to annual merit increases and strategic hiring in research and development as discussed above in our Executive Summary. In addition, the second quarter of 2009 included $5.2 million in compensation expense due an adjustment of goodwill related to our 2007 XenSource Acquisition. We expect research and development expense to increase when comparing the third quarter of 2010 to the third quarter of 2009 as we continue to develop existing and new products as well as invest in research and development of advanced technologies for future application.

Research and development expenses increased during the six months ended June 30, 2010 compared to the six months ended June 30, 2009 primarily due to an increase in compensation and other employee related costs of $15.2 million related to merit increases and strategic hiring in research and development as discussed above in our Executive Summary. In addition, the second quarter of 2009 included $5.2 million in compensation expense due an adjustment of goodwill related to our 2007 acquisition of XenSource. For more information regarding the adjustment made to the XenSource acquisition goodwill, see the Executive Summary above.

Sales, Marketing and Services Expenses

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
   Three Months Ended
June 30, 2010
vs. June 30, 2009
   Six Months Ended
June 30, 2010
vs. June 30, 2009
     2010    2009    2010    2009      
     (In thousands)

Sales, marketing and services

   $ 186,601    $ 167,130    $ 357,121    $ 330,719    $ 19,471    $ 26,402

Sales, marketing and services expenses consisted primarily of personnel-related costs, including sales commissions, the costs of marketing programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs and costs related to our facilities, equipment and information systems that are directly related to our sales, marketing and services activities.

 

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Table of Contents

Sales, marketing and services expenses increased during the three months ended June 30, 2010 compared to the three months ended June 30, 2009 primarily due to a $14.0 million increase in compensation and employee related costs due to merit increases and an increase in variable compensation related to higher sales as well as increases made in our sales force. Also contributing to the increase in sales, marketing and services expenses was a $3.6 million increase in marketing program costs related to our investment in brand awareness campaigns. We expect sales, marketing and services expenses to increase when comparing the third quarter of 2010 to the third quarter of 2009 as we continue to promote brand awareness and increase sales, consulting and technical services capacity.

Sales, marketing and services expenses increased during the six months ended June 30, 2010 compared to the six months ended June 30, 2009 primarily due to a $23.1 million increase in compensation and employee related costs due to merit increases and an increase in variable compensation related to higher sales as well as increases made in our sales force. Also contributing to the increase in sales, marketing and services expenses was a $5.8 million increase in marketing program costs related to our investment in brand awareness campaigns.

General and Administrative Expenses

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
   Three Months Ended
June 30, 2010
vs. June 30, 2009
   Six Months Ended
June 30, 2010
vs. June 30, 2009
     2010    2009    2010    2009      
     (In thousands)

General and administrative

   $ 60,805    $ 59,552    $ 121,424    $ 118,041    $ 1,253    $ 3,383

General and administrative expenses consisted primarily of personnel related costs and expenses related to outside consultants assisting with information systems, as well as accounting and legal fees.

General and administrative expenses increased for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 primarily due to an increase in compensation and employee related costs of $4.4 million due to merit increases and additional headcount primarily in IT. This increase is partially offset by a decrease in professional fees of $2.1 million. We currently anticipate that general and administrative expenses will increase when comparing the third quarter of 2010 to the third quarter of 2009 primarily due to investments in IT to support our growth.

General and administrative expenses increased for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 primarily due to an increase in compensation and employee related costs of $6.3 million due to merit increases and additional headcount primarily in IT. This increase is partially offset by a decrease in stock-based compensation of $3.0 million.

Amortization of Other Intangible Assets

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
   Three Months Ended
June 30, 2010
vs. June 30, 2009
    Six Months Ended
June 30, 2010
vs. June 30, 2009
 
     2010    2009    2010    2009     
     (In thousands)  

Amortization of other intangible assets

   $ 3,776    $ 5,163    $ 7,933    $ 10,157    $ (1,387   $ (2,224

The decrease in amortization of other intangible assets when comparing the three months ended June 30, 2010 to the three months ended June 30, 2009 and the six months ended June 30, 2010 to the six months ended June 30, 2009 was primarily due to certain assets becoming fully amortized during the period. As of June 30, 2010, we had unamortized other identified intangible assets with estimable useful lives in the net amount of $40.7 million.

 

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Table of Contents

Restructuring Expenses

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
    Three Months Ended
June 30, 2010
vs. June 30, 2009
    Six Months Ended
June 30, 2010
vs. June 30, 2009
 
     2010     2009    2010     2009      
     (In thousands)  

Restructuring

   $     335      $ 2,036    $     835      $  22,766      $ (1,701   $ (21,931

On January 28, 2009, we announced the implementation of the Strategic Restructuring Program, which primarily included the reduction of our headcount by approximately 450 full-time positions. The pre-tax charges we incurred were primarily related to severance and other costs directly related to the reduction of our workforce and costs related to the consolidation of certain of our facilities. The restructuring program was completed by the end of 2009. For more information, see “—Executive Summary— Overview” and Note 10 to our condensed consolidated financial statements.

Interest Income

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
    Three Months Ended
June 30, 2010
vs. June 30, 2009
    Six Months Ended
June 30, 2010
vs. June 30, 2009
 
     2010     2009    2010     2009      
     (In thousands)  

Interest income

   $  3,837      $ 4,393    $  7,393      $    7,108      $    (556   $    285   

Interest income decreased for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 primarily due to decreased interest rates earned which was partially offset by overall higher average cash, cash equivalent and investment balances. For more information, see “ — Liquidity and Capital Resources.”

Other (Expense) Income, Net

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
    Three Months Ended
June 30, 2010
vs. June 30, 2009
    Six Months Ended
June 30, 2010
vs. June 30, 2009
 
     2010     2009    2010     2009      
     (In thousands)  

Other (expense) income

   $ (2,877   $    710    $ (2,444   $      (712   $ (3,587   $ (1,732

Other (expense) income, net, is primarily comprised of remeasurement of foreign currency transaction gains (losses) and realized gains (losses) related to changes in the fair value of our investments that have a decline in fair value that is considered other-than-temporary, if any, and on the sale of available-for-sale investments. The increase in other (expense) income, net, during the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and during the six months ended June 30, 2010 compared to the six months ended June 30, 2009 is primarily due to an increase in losses related to the remeasurement of our foreign currency transactions due to the strengthening of the U.S. dollar during the periods presented.

Income Taxes

As of June 30, 2010, our net unrecognized tax benefits totaled approximately $59.4 million. There were no amounts included in the balance at June 30, 2010 for tax positions, which would not affect the annual effective tax rate and approximately $0.5 million of accrued interest on tax positions, which is included in income tax expense.

We and certain of our subsidiaries are subject to federal income taxes in the United States, or U.S., as well as income taxes of multiple state and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2004.

In June 2010, we reached a settlement in principle with the IRS regarding the income tax deficiencies asserted in the Revenue Agent’s Report, or RAR. Under the terms of the settlement in principle, we would agree to an assessment of income tax deficiencies in full settlement of all open claims under the RAR and would resolve with finality for future years all of the transfer pricing issues raised in the RAR. Based on this, we incurred a charge of $13.1 million in the second quarter of 2010 under the authoritative guidance. Among other things, the authoritative guidance requires application of a “more likely than not” threshold to the recognition and non-recognition of tax positions. It further requires that a change in management judgment related to prior years’ tax positions be recognized in the quarter of such change.

 

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The final settlement requires the finalization of tax deficiency calculations with the IRS and a written agreement signed by the IRS. This process could take several more months to complete. There can be no assurances that a final written agreement will be obtained or that this matter will otherwise be resolved in our favor. An adverse outcome of this matter could have a material adverse effect on our results of operations and financial condition.

In the ordinary course of global business, there are transactions for which the ultimate tax outcome is uncertain and judgment is required in determining the worldwide provision for income taxes. We provide for income taxes on transactions based on our estimate of the probable liability. We adjust our provision as appropriate for changes that impact our underlying judgments. Changes that impact provision estimates include such items as jurisdictional interpretations on tax filing positions based on the results of tax audits and general tax authority rulings. Due to the evolving nature of tax rules combined with the large number of jurisdictions in which we operate, it is possible that our estimates of our tax liability and the realizability of our deferred tax assets could change in the future, which may result in additional tax liabilities and adversely affect our results of operations, financial condition and cash flows.

We are required to estimate our income taxes in each of the jurisdictions in which we operate as part of the process of preparing our condensed consolidated financial statements. At June 30, 2010, we had approximately $82.4 million in deferred tax assets. The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We review deferred tax assets periodically for recoverability and make estimates and judgments regarding the expected geographic sources of taxable income and gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance.

We maintain certain operational and administrative processes in overseas subsidiaries and our foreign earnings are taxed at lower foreign tax rates. We do not expect to remit earnings from our foreign subsidiaries. Our effective tax rate was approximately 36.3% for the three months ended June 30, 2010 and 5.1% for the three months ended June 30, 2009, and 27.4% for the six months ended June 30, 2010 and 3.0% for the six months ended June 30, 2009. The increase in the effective tax rate when comparing the three months ended June 30, 2010 to the three months ended June 30, 2009 and the six months ended June 30, 2010 to the six months ended June 30, 2009 is due primarily to the charge related to the settlement in principle with the IRS during the second quarter of 2010, the expiration of the U.S. research and development tax credit on December 31, 2009 and an increase in income in geographic locations taxed at a higher rate. Also contributing to the increase in the effective tax rate when comparing the six months ended June 30, 2010 to the six months ended June 30, 2009, is the impact of the charges recorded in conjunction with the Strategic Restructuring Program in 2009.

Liquidity and Capital Resources

During the six months ended June 30, 2010, we generated positive operating cash flows of $246.8 million. These operating cash flows related primarily to net income of $94.9 million, adjusted for, among other things, non-cash charges, including depreciation and amortization expenses of $68.2 million and stock-based compensation expense of $53.1 million. Also contributing to these cash inflows was an aggregate increase in operating assets and liabilities of $27.8 million, net of effects of our acquisitions. Our investing activities used $161.5 million of cash consisting primarily of cash paid for net purchases of investments of $110.0 million and the purchase of property and equipment of $30.1 million. Also contributing to these cash outflows was cash paid for acquisitions and licensing agreements and product related intangible assets of $20.5 million. Our financing activities used cash of $1.8 million primarily due to stock repurchases of $199.9 million. This financing cash outflow was partially offset by proceeds received from the issuance of common stock under our employee stock-based compensation plans of $184.2 million.

During the six months ended June 30, 2009, we generated positive operating cash flows of $168.2 million. These cash flows related primarily to net income of $49.4 million, adjusted for, among other things, non-cash charges, including depreciation and amortization expenses of $68.2 million, stock-based compensation expense of $56.6 million, and a goodwill adjustment of $5.4 million. These cash inflows are partially offset by an aggregate decrease in operating assets and liabilities of $8.3 million, net of effects of our acquisitions, the tax effect of stock-based compensation of $5.5 million and an operating cash outflow of $2.9 million related to the excess benefit from the exercise of stock options. Our investing activities used $215.1 million of cash consisting primarily of cash paid for net purchases of investments of $168.6 million. Also contributing to these cash outflows are the purchase of property and equipment of $40.2 million. Our financing activities provided cash of $15.1 million primarily from proceeds received from the issuance of common stock under our employee stock-based compensation plans of $77.2 million partially offset by expenditures on our stock repurchase program of $65.0 million.

Historically, significant portions of our cash inflows were generated by our operations. We currently expect this trend to continue throughout 2010. We believe that our existing cash and investments together with cash flows expected from operations will be sufficient to meet expected operating and capital expenditure requirements for the next 12 months.

 

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Cash, Cash Equivalents and Investments

 

 

     June 30, 2010    December 31, 2009    2010
Compared to
2009
     (In thousands)

Cash, cash equivalents and investments

   $ 1,408,443    $ 1,207,257    $ 201,186

The increase in cash, cash equivalents and investments when comparing June 30, 2010 to December 31, 2009, is primarily due to cash provided by our operating activities of $246.8 million and cash received from the issuance of common stock under our employee stock-based compensation plans of $184.2 million partially offset by expenditures made on stock repurchases of $199.9 million and purchases of property and equipment of $30.1 million. See “– Liquidity and Capital Resources.” We generally invest our cash and cash equivalents in investment grade, highly liquid securities to allow for flexibility in the event of immediate cash needs. Our short-term and long-term investments primarily consist of interest-bearing securities.

Available-for-sale investments

As of June 30, 2010, we recorded an unrealized loss of approximately $2.1 million, which is included in accumulated other comprehensive loss, related to our $50.0 million face value investment issued by AIG Matched Funding Corporation, or the AIG Capped Floater, which matures in September 2011. American International Group, Inc., or AIG, as the issuer’s parent, provided a guarantee of the security at the time of purchase in September 2006. The unrealized loss was primarily caused by AIG experiencing liquidity challenges which were reportedly precipitated by problems in the capital markets. AIG’s lack of liquidity triggered a downgrade in the credit ratings for its long-term issues by two rating agencies in 2008. As a result of AIG’s liquidity challenges, in November 2008 the Federal Reserve Bank of New York, or the FRBNY, intervened with a five-year credit facility to help stabilize AIG and the overall market. In addition, on March 2, 2009, AIG announced further actions were taken in cooperation with the U.S. Department of Treasury and the FRBNY to provide AIG with additional financial stability. As of the date of this report, AIG has not been reported to have defaulted on capital repayments to holders of its recently matured debt and it continues to pay us interest on the AIG Capped Floater. Because we do not intend to sell the AIG Capped Floater and it is more likely than not that we will not be required to sell the security before the recovery of its amortized cost basis, which may not occur until maturity, we do not consider the security to be other-than-temporarily impaired.

If AIG’s financial position deteriorates, we may be required to further adjust the carrying value of the AIG Capped Floater and potentially recognize an impairment charge for an other-than-temporary decline in the fair value of the investment. Based on our available cash and other investments, we do not currently anticipate that the lack of liquidity caused by holding the AIG Capped Floater to recovery will have a material adverse effect on our financial position.

We continue to monitor our overall investment portfolio and if the credit ratings of the issuers of our investments deteriorate or if the issuers experience financial difficulty, including bankruptcy, we may be required to make additional adjustments to the carrying value of the securities in our investment portfolio and recognize additional impairment charges for declines in fair value that are determined to be other-than-temporary.

Trading Investments

We held municipal auction rate securities, the majority of which were triple-A rated, whose underlying assets were generally student loans that were substantially backed by the federal government under the Federal Family Education Loan Program through investment accounts managed by UBS Financial Services, Inc., or UBS. The market for municipal auction rate securities in our portfolio began experiencing auction failures in 2008. In November 2008, we formally accepted the terms of a settlement, or the Settlement, from UBS. Upon accepting the terms of the Settlement, we received an enforceable, non-transferrable right, or the Put Option, that enabled us to sell our auction rate securities back to UBS during the period between June 30, 2010 and July 2, 2012 at par value. On June 30, 2010, we executed the Put Option and sold all of our remaining investments in auction rate securities back to UBS at par. During the three months ended June 30, 2010, we realized a gain of $5.6 million related to the sale of our investments in auction rate securities and a corresponding loss of $5.8 million related to the settlement of the Put Option. During the six months ended June 30, 2010, we realized a gain of $5.9 million related to the sale of our investments in auction rate securities and a corresponding loss of $6.0 million related to the settlement of the Put Option. These gains and losses are included in other (expense) income, net, in our condensed consolidated statements of income. See Note 6 to our condensed consolidated financial statements for additional information regarding the Put Option and auction rate securities.

 

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Fair Value Measurements

On January 1, 2008, we adopted the authoritative guidance for fair value measurements for financial assets and financial liabilities. The authoritative guidance, which, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined 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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

We measure our cash flow hedges at fair value based on indicative prices in active markets and we generally measure our investments in available-for-sale securities at fair value based on quoted prices in active markets for identical securities.

In order to measure the AIG Capped Floater at fair value we used a discounted cash flow model. We then discounted those cash flows at a rate reflecting the market risk inherent in holding an AIG security with a similar maturity as evidenced by pricing in the markets. Since utilizing a discounted cash flow model required us to make assumptions that were not directly or indirectly observable regarding the AIG Capped Floater’s fair value during 2009, it was transferred to Level 3 and is included in the table below.

Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

 

         Put Option             Long-term    
    Investments     
        Total      
     (In thousands)  

Balance at December 31, 2009

   $ 6,048      $ 83,785      $ 89,833   

Proceeds received on Level 3 securities

     —          (44,560     (44,560

Decrease in previously recognized unrealized losses included in accumulated other comprehensive loss

     —          2,824        2,824   

Total realized (losses) gains included in earnings

     (6,048     5,871        (177
                        

Balance at June 30, 2010

   $ —        $ 47,920      $ 47,920   
                        

Realized (losses) gains included in earnings for the period are reported in other (expense) income, net.

Accounts Receivable, Net

 

     June 30, 2010     December 31, 2009     2010
Compared to
2009
 
     (In thousands)  

Accounts receivable

   $ 324,598      $ 309,748      $ 14,850   

Allowance for returns

     (1,406     (1,617     211   

Allowance for doubtful accounts

     (3,814     (3,219     (595
                        

Accounts receivable, net

   $ 319,378      $ 304,912      $ 14,466   
                        

The increase in accounts receivable when comparing June 30, 2010 to December 31, 2009 was primarily due to an increase in sales in the last month of the second quarter of 2010 compared to the last month of the fourth quarter of 2009. The activity in our allowance for returns was comprised primarily of $1.2 million in credits issued for returns during the first half of 2010 partially offset by $1.0 million of provisions for returns recorded in the first half of 2010. The activity in our allowance for doubtful accounts was comprised primarily of $1.6 million in additional provisions for doubtful accounts recorded during the first half of 2010 partially offset by $1.0 million of uncollectible accounts written off, net of recoveries. From time to time, we could maintain individually significant accounts receivable balances from our distributors or customers, which are comprised of large business enterprises, governments and small and medium-sized businesses. If the financial condition of our distributors or customers deteriorates, our operating results could be adversely affected.

 

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Credit Facility

Effective on August 9, 2005, we entered into a revolving credit facility, or the Credit Facility, with a group of financial institutions, or the Lenders. Effective September 27, 2006, we entered into an amendment and restatement of the Credit Facility, or the Amendment. The Amendment decreased the overall range of interest we will pay on amounts outstanding on the Credit Facility and lowered the facility fee. In addition, the Amendment extended the term of the Credit Facility. The Credit Facility, as amended, allows us to increase the revolving credit commitment up to a maximum aggregate revolving credit commitment of $175.0 million. The Credit Facility, as amended, will expire on September 27, 2011 and it currently provides for a revolving line of credit in the aggregate amount of $100.0 million, subject to continued covenant compliance. A portion of the revolving line of credit (1) in the aggregate amount of $25.0 million may be available for issuances of letters of credit and (2) in the aggregate amount of $15.0 million may be available for swing line loans. The Credit Facility, as amended, currently bears interest at the London Interbank Offered Rate, or LIBOR, plus 0.32% and adjusts in the future in the range of 0.32% to 0.80% above LIBOR based on the level of our total debt and our adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA. In addition, we are required to pay an annual facility fee ranging from 0.08% to 0.20% based on the aggregate amount available under the Credit Facility, as amended, and the level of our total debt and adjusted EBITDA. During the three months ended June 30, 2010, no funds were borrowed under the Credit Facility, as amended, and as of June 30, 2010 there were no amounts outstanding under the Credit Facility, as amended.

The Credit Facility, as amended, contains customary default provisions, and we must comply with various financial and non-financial covenants. The financial covenants consist of a minimum interest coverage ratio and a maximum consolidated leverage ratio. The primary non-financial covenants contain certain limits on our ability to pay dividends, conduct certain mergers or acquisitions, make certain investments and loans, incur future indebtedness or liens, alter our capital structure or sell stock or assets. As of June 30, 2010, we were in compliance with all covenants of the Credit Facility.

Stock Repurchase Program

Our Board of Directors authorized an ongoing stock repurchase program with a total repurchase authority granted to us of $2.5 billion, of which $400.0 million was approved in April 2010. We may use the approved dollar authority to repurchase stock at any time until the approved amounts are exhausted. The objective of our stock repurchase program is to improve stockholders’ returns. At June 30, 2010, approximately $356.2 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.

We are authorized to make open market purchases of our common stock using general corporate funds. Additionally, from time to time, we have entered 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 us to make up-front payments to the counterparty financial institution and result in the receipt of stock during the agreement or the receipt of either stock or cash at the maturity of the agreement, depending on market conditions.

During the three months ended June 30, 2010, we expended approximately $100.0 million on open market purchases, repurchasing 2,138,500 shares of outstanding common stock at an average price of $46.74. In addition, as of June 30, 2010, we did not have any prepaid notional amounts remaining under our structured stock repurchase programs and we did not make any up-front payments to financial institutions related to structured stock repurchase agreements.

During the six months ended June 30, 2010, we expended approximately $199.9 million on open market purchases, repurchasing 4,427,100 shares of outstanding common stock at an average price of $45.16. In addition, during this period, we did not make up-front payments to certain financial institutions related to structured stock repurchase agreements.

During the three months ended June 30, 2009, we expended approximately $40.0 million on open market purchases, repurchasing 1,319,000 shares of outstanding common stock at an average price of $30.32.

During the six months ended June 30, 2009, we expended approximately $65.0 million on open market purchases, repurchasing 2,422,300 shares of outstanding common stock at an average price of $26.83.

Shares for Tax Withholding

During the three months ended June 30, 2010, we repurchased 31,126 shares totaling $1.5 million to satisfy tax withholding obligations that arose on the vesting of shares of unvested stock units. During the six months ended June 30, 2010, we repurchased 91,601 shares totaling $4.1 million to satisfy tax withholding obligations that arose on the vesting of shares of unvested stock units. These shares are reflected as treasury stock in our condensed consolidated balance sheet.

 

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Office Leases

We have operating lease obligations related to two properties that are not fully utilized which continues to 2017 and 2018 with a total remaining obligation at June 30, 2010 of approximately $6.9 million, of which $3.3 million was accrued as of June 30, 2010, and is reflected in accrued expenses and other current liabilities and other liabilities in our condensed consolidated financial statements. In calculating this accrual, we made estimates, based on market information, including the estimated vacancy periods and sublease rates and opportunities. We periodically re-evaluate our estimates related to the vacant facilities.

Asset Retirement Obligation

We recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. We have asset retirement obligations related to the restoration of leased facilities and the removal of certain leasehold improvements. Considerable management judgment is required in estimating these obligations. Important assumptions include estimates of asset retirement costs and the timing of future asset retirement activities. Changes in these assumptions based on future information could result in adjustments to these estimated liabilities.

We have an asset retirement obligation related to restoring a property to its original condition. The restoration is anticipated to occur at the end of the lease term in 2016. The total obligation related to this asset retirement obligation as of June 30, 2010 is approximately $1.8 million, of which $0.9 million was accrued and is reflected in other liabilities in our condensed consolidated balance sheet. On July 1, 2010, we leased more space in the building and will have an additional asset retirement obligation of $2.9 million related to the space. The restoration related to the additional space is also expected to be incurred in 2016, which is the end of the lease term.

Off-Balance Sheet Arrangements

The Company does not have any special purpose entities or off-balance sheet financing arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes with respect to the information appearing in Part II, Item 7A., “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2009.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of June 30, 2010, our management, with the participation of our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that, as of June 30, 2010, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated by and communicated to our management, including our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the quarter ended June 30, 2010, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

Due to the nature of our business, we are subject to patent infringement claims, including current suits against us or one or more of our wholly-owned subsidiaries alleging infringement by various Citrix products and services. We believe that we have meritorious defenses to the allegations made in these pending suits and intend to vigorously defend these lawsuits; however, we are unable currently to determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any.

Further information with respect to this Item may be found in Note 13 to our condensed consolidated financial statements, which information is incorporated into this Part II, Item 3 by reference.

In addition, we are 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, we believe that the ultimate outcomes will not materially affect our business, financial position, results of operations or cash flows.

 

ITEM 1A. RISK FACTORS

The following information updates, and should be read in conjunction with, the information disclosed in Part 1, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, which was filed with the Securities and Exchange Commission on February 23, 2010. There have been no material changes in our risk factors from those disclosed in Part 1, Item 1A., “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer

Our Board of Directors has authorized an ongoing stock repurchase program with a total repurchase authority granted to us of $2.5 billion, of which $400.0 million was approved in April 2010. The objective of the stock repurchase program is to improve stockholders’ returns. At June 30, 2010, approximately $356.2 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. The following table shows the monthly activity related to our stock repurchase program for the quarter ended June 30, 2010:

 

 

     (a)
Total Number
of Shares
(or Units)
Purchased
(1)(2)
   (b)
Average Price
Paid per Share
(or Unit)
   (c)
Total Number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs
   (d)
Maximum Number
(or approximate dollar value)
of Shares (or Units) that
may yet be Purchased
under the Plans or
Programs

April 1, 2010 through April 30, 2010

   824,390    $ 47.84    824,390    $ 418,194

May 1, 2010 through May 31, 2010

   1,344,800      46.07    1,344,800      356,236

June 1, 2010 through June 30, 2010

   436      43.16    436      356,217
               

Total

   2,169,626    $ 46.74    2,169,626    $ 356,217
               

 

(1) Represents shares received under our prepaid stock repurchase programs and acquired in open market purchases. We expended approximately $100.0 million during the quarter ended June 30, 2010 for repurchases of our common stock. For more information see Note 14 to our condensed consolidated financial statements.
(2) Includes shares repurchased to satisfy tax withholding obligations that arose on the vesting of shares of unvested stock units

 

ITEM 5. OTHER INFORMATION

Our policy governing transactions in our securities by our directors, officers and employees permits our officers, directors and certain other persons to enter into trading plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. We have been advised that Alvaro Monserrat, our Senior Vice President, Sales and Services entered into a new trading plan in the second quarter of 2010 in accordance with Rule 10b5-1 and our policy governing transactions in our securities Mr. Monserrat entered into his trading plan to exercise soon to expire stock options and to sell the underlying shares of common stock. We undertake no obligation to update or revise the information provided herein, including for revision or termination of an established trading plan.

 

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ITEM 6. EXHIBITS

 

(a) List of exhibits

 

Exhibit No.

  

Description

  10.1*    First Amendment to Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 28, 2010)
  10.2      Amendment No. 2 to Credit Agreement, dated as of June 30, 2010, among Citrix Systems, Inc., Citrix International GmbH, JP Morgan Chase Bank, N.A., JP Morgan Securities, Inc. and certain other financial institutions
  31.1      Rule 13a-14(a) / 15d-14(a) Certification
  31.2      Rule 13a-14(a) / 15d-14(a) Certification
  32.1      Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101         The following financial statements from Citrix Systems, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, as filed with the SEC on August 9, 2010, formatted in XBRL, as follows:
  

(i)     the Condensed Consolidated Balance Sheets

  

(ii)    the Condensed Consolidated Statement of Income

  

(iii)  the Condensed Consolidated Statements of Cash Flows

  

(iv)   the Notes to Condensed Consolidated Financial Statements, tagged in summary and detail

 

* Indicates a management contract or a compensatory plan, contract or arrangement.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on this 9th day of August 2010.

 

CITRIX SYSTEMS, INC.
By:   /S/ DAVID J. HENSHALL
  David J. Henshall
  Senior Vice President and Chief Financial Officer
  (Authorized Officer and Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit No.

  

Description

  10.1*    First Amendment to Citrix Systems, Inc. Amended and Restated 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 28, 2010)
  10.2      Amendment No. 2 to Credit Agreement, dated as of June 30, 2010, among Citrix Systems, Inc., Citrix International GmbH, JP Morgan Chase Bank, N.A., JP Morgan Securities, Inc. and certain other financial institutions
  31.1      Rule 13a-14(a) / 15d-14(a) Certification
  31.2      Rule 13a-14(a) / 15d-14(a) Certification
  32.1      Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101         The following financial statements from Citrix Systems, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, as filed with the SEC on August 9, 2010, formatted in XBRL, as follows:
  

(i)     the Condensed Consolidated Balance Sheets

  

(ii)    the Condensed Consolidated Statement of Income

  

(iii)   the Condensed Consolidated Statements of Cash Flows

  

(iv)   the Notes to Condensed Consolidated Financial Statements, tagged in summary and detail

 

* Indicates a management contract or a compensatory plan, contract or arrangement.
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