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(Exact name of registrant as specified in its charter)
iDelaware
i75-2275152
(State
or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
i851 West Cypress Creek Road
iFort
Lauderdale
iFlorida
i33309
(Address
of principal executive offices)
(Zip Code)
Registrant’s Telephone Number, Including Area Code:
(i954) i267-3000
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
iCommon Stock, par value $.001 per share
iCTXS
iThe
NASDAQ Global Select Market
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. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). iYes☒ No ☐
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,"“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☒
iLarge
accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
i☐
Smaller reporting company
i☐
Emerging
growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
1
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
As of October 23, 2020, there were i123,123,572 shares of the registrant’s Common Stock, $.001 par value per share, outstanding.
Preferred stock at $ii.01/
par value: ii5,000/ shares
authorized, iiiinone///
issued and outstanding
i—
i—
Common
stock at $ii.001/ par value: ii1,000,000/
shares authorized; ii321,557/ and ii318,760/
shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
Adjustments
to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other
i159,283
i188,443
Stock-based
compensation expense
i228,854
i202,523
Deferred
income tax benefit
(i34,372)
(i184,573)
Effects
of exchange rate changes on monetary assets and liabilities denominated in foreign currencies
(i9,225)
i2,712
Other
non-cash items
i16,196
i7,888
Total
adjustments to reconcile net income to net cash provided by operating activities
i360,736
i216,993
Changes
in operating assets and liabilities:
Accounts receivable
i150,347
i256,628
Inventories
(i592)
i443
Prepaid
expenses and other current assets
(i39,049)
(i13,539)
Other
assets
(i67,139)
(i50,068)
Income
taxes, net
i16,640
(i42,119)
Accounts
payable
i17,973
(i2,645)
Accrued
expenses and other current liabilities
i73,737
(i48,485)
Deferred
revenues
(i103,487)
(i219,000)
Other
liabilities
i14,252
i4,111
Total
changes in operating assets and liabilities
i62,682
(i114,674)
Net
cash provided by operating activities
i815,773
i577,019
Investing
Activities
Purchases of available-for-sale investments
(i476,432)
(i19,999)
Proceeds
from sales of available-for-sale investments
i—
i938,031
Proceeds
from maturities of available-for-sale investments
i166,077
i165,944
Purchases
of property and equipment
(i30,783)
(i50,453)
Cash
paid for licensing agreements, patents and technology
(i5,581)
(i2,405)
Other
i923
i919
Net
cash (used in) provided by investing activities
(i345,796)
i1,032,037
Financing
Activities
Proceeds from term loan credit agreement, net of issuance costs
i998,846
i—
Repayment
of term loan credit agreement
(i750,000)
i—
Proceeds
from 2030 Notes, net of issuance costs
i738,107
i—
Proceeds
from credit facility
i—
i200,000
Repayment
of credit facility
i—
(i200,000)
Repayment
on convertible notes
i—
(i1,164,497)
Stock
repurchases, net
(i1,199,903)
(i353,904)
Cash
paid for tax withholding on vested stock awards
(i104,848)
(i74,794)
Cash
paid for dividends
(i129,108)
(i137,224)
Net
cash used in financing activities
(i446,906)
(i1,730,419)
Effect
of exchange rate changes on cash and cash equivalents
(i8)
(i3,569)
Change
in cash and cash equivalents
i23,063
(i124,932)
Cash
and cash equivalents at beginning of period
i545,761
i618,766
Cash
and cash equivalents at end of period
$
i568,824
$
i493,834
See
accompanying notes.
7
CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. iBASIS
OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Citrix Systems, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. All adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been reflected in the condensed consolidated financial statements and accompanying notes. The results of operations for the periods presented are not necessarily indicative of the results expected for the full year or
for any future period partially because of the seasonality of the Company’s business. Historically, the Company’s revenue for the fourth quarter of any year is typically higher than the revenue for the first quarter of the subsequent year. However, during the three months ended March 31, 2020, this trend was impacted by the novel coronavirus ("COVID-19") pandemic, and the Company's first quarter revenues were higher than the fourth quarter of 2019 due to the Company's decision to make limited use Workspace licenses of Citrix Workspace available in the form of shorter-duration,
discounted on-premises term offerings to quickly help the Company's customers with their immediate business needs. 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 consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
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”); and Asia-Pacific and Japan (“APJ”). All significant transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.
The Company operates under ione
reportable segment and derives its revenues from sales of its Workspace and Networking solutions, and related Support and services. Beginning in the fourth quarter of 2020, the Company is renaming its Networking product grouping to App Delivery and Security to better align with industry categorization of its solutions. See Note 10 for more information on the Company's segment.
2. iSIGNIFICANT
ACCOUNTING POLICIES
During the first quarter of 2020, the Company adopted new accounting guidance related to current expected credit losses and fair value measurements, which are described below. There have been no other significant changes in the Company’s accounting policies during the nine months ended September 30, 2020 as compared to the significant accounting policies described in its Annual Report on Form 10-K for the year ended December 31, 2019.
i
Recent
Accounting Pronouncements
Current Expected Credit Losses
In June 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update on the measurement of credit losses on financial instruments. Previously, credit losses were measured using an incurred loss approach when it was probable that a credit loss had been incurred. The new guidance changes the credit loss model from an incurred loss to an expected loss approach. It requires the application of a current expected credit loss (“CECL”) impairment model to financial assets measured at amortized cost (including trade accounts receivable) and certain off-balance-sheet credit exposures. Under the CECL model, lifetime expected credit losses on such financial assets are measured and recognized at each reporting date based on historical, current, and forecasted information. The standard also changes
the impairment model for available-for-sale debt securities, eliminating the concept of other than temporary impairment and requiring credit losses to be recorded through an allowance for credit losses. The amount of the allowance for credit losses for available-for-sale debt securities is limited to the amount by which fair value is below amortized cost. The Company adopted this standard as of January 1, 2020 using the required modified retrospective adoption method. Results for periods beginning after January 1, 2020 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported under the previous accounting guidance. Adoption of the new standard did not have a material impact on the
Company's condensed consolidated financial position, results of operations and cash flows. See Note 5 for additional information regarding the Company’s allowance for credit losses.
8
Fair Value Measurements
In August 2018, the FASB issued an accounting standard update on fair value measurements. The new guidance modifies the disclosure requirements on fair value measurements by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty, and adding new disclosure requirements. The
Company adopted this standard as of January 1, 2020, and it did not have a material impact on the Company's condensed consolidated financial position, results of operations and cash flows.
Income Taxes
In December 2019, the FASB issued an accounting standard update on income taxes. The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. The new standard will be effective for fiscal years beginning after December 15, 2020 and
interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial position, results of operations and cash flows.
Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020, the FASB issued an accounting standard update to guidance applicable to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This update provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference
rate reform on financial reporting. An entity may elect to apply the amendments for contract modifications by topic or industry subtopic of the codification as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial position, results of operations and cash flows.
i
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. Significant estimates made by management include estimation for reserves for legal contingencies, the standalone selling price related to revenue recognition, the provision for credit losses related to accounts receivable, contract assets, and available-for-sale debt securities, the provision to reduce obsolete or excess inventory to market, the provision for estimated returns, as well as sales allowances, the assumptions used in the valuation of stock-based awards and measurement of expense related to performance stock units, the assumptions used
in the discounted cash flows to mark certain of its investments to market, the valuation of the Company’s goodwill, net realizable value of product related and other intangible assets, the provision for income taxes, valuation allowance for deferred tax assets, uncertain tax positions, and the amortization and depreciation periods for contract acquisition costs, intangible and long-lived assets. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial position and results of operations taken as a whole, the actual amounts of such items, when known, will vary from these estimates.
i
Available-for-sale
Investments
Short-term and long-term available-for-sale investments in debt securities as of September 30, 2020 and December 31, 2019 primarily consist of agency securities, corporate securities and government securities. Investments classified as available-for-sale debt securities are stated at fair value, with unrealized gains and losses, net of taxes, reported in Accumulated other comprehensive loss. The Company classifies its available-for-sale investments as current and non-current based on their actual remaining time to maturity. The Company does not recognize unrealized changes in the fair value of its available-for-sale debt securities in income unless
a security is deemed to be impaired.
The Company’s investment policy is designed to limit exposure to any one issuer depending on credit quality. The Company uses information provided by third parties to adjust the carrying value of certain of its investments to fair value at the end of each period. Fair values are based on a variety of inputs and may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. See Note 6 for additional information regarding the Company’s investments.
9
iForeign
Currency
The functional currency for all of the Company’s wholly-owned foreign subsidiaries is the U.S. dollar. Monetary assets and liabilities of such subsidiaries are remeasured into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are remeasured at average rates prevailing during the year.Foreign currency transaction gains and losses are the result of exchange rate changes on transactions denominated in currencies other than the functional currency, including U.S. dollars. The remeasurement of those foreign currency transactions is included in determining net income
or loss for the period of exchange.
i
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 8 for further information regarding the Company’s stock-based compensation plans.
3. iREVENUE
The following is a description
of the principal activities from which the Company generates revenue.
Subscription
Subscription revenues primarily consist of cloud-hosted offerings, which provide customers a right to access one or more of the Company’s cloud-hosted subscription offerings, with routine customer support, as well as revenues from the Citrix Service Provider ("CSP") program and on-premise subscription software licenses. For the Company’s cloud-hosted performance obligations, revenue is generally recognized on a ratable basis over the contract term beginning
on the date that the Company's service is made available to the customer, as the Company continuously provides online access to the web-based software that the customer can use at any time. The CSP program provides subscription-based services in which the CSP partners host software services to their end users.
Product and license
Product and license revenues are primarily derived from perpetual offerings related to the Company’s Workspace solutions and Networking products. For performance obligations related to perpetual software license agreements, the
Company determined that its licenses are functional intellectual property that are distinct as the user can benefit from the software on its own.
Support and services
Support and services revenues include license updates, maintenance and professional services which are primarily related to the Company's perpetual offerings. License updates and maintenance revenues are primarily comprised of software and hardware maintenance, when and if-available updates and technical support. For performance obligations related to license updates and maintenance, revenue is generally recognized on a straight-line basis over the period of service because the Company transfers control evenly by providing a stand-ready service.
The Company is continuously working on improving its products and pushing those updates through to the customer, and stands ready to provide software updates on a when and if-available basis. Services revenues are comprised of fees from consulting services primarily related to the implementation of the Company’s products and fees from product training and certification.
10
i
The
Company’s typical performance obligations include the following:
Performance Obligation
When Performance Obligation
is Typically Satisfied
Subscription
Cloud-hosted offerings
Over the contract
term, beginning on the date that service is made available to the customer (over time)
CSP
As the usage occurs (over time)
On-premise subscription software licenses
When software activation keys have been made available for download (point in time)
Product and license
Software licenses
When software activation
keys have been made available for download (point in time)
Hardware
When control of the product passes to the customer; typically upon shipment (point in time)
Support and services
License updates and maintenance
Ratably over the course of the service term (over time)
Professional services
As the services are provided
(over time)
Significant Judgments
The Company generates all of its revenues from contracts with customers. At contract inception, the Company assesses the solutions or services, or bundles of solutions and services, obligated in the contract with a customer to identify each performance obligation within the contract,
and then evaluates whether the performance obligations are capable of being distinct and distinct within the context of the contract. Solutions and services that are not both capable of being distinct and distinct within the context of the contract are combined and treated as a single performance obligation in determining the allocation and recognition of revenue.
The standalone selling price is the price at which the Company would sell a promised product or service separately to the customer. For the majority of the Company's software licenses and hardware, CSP and on-premise
subscription software licenses, the Company uses the observable price in transactions with multiple performance obligations. For the majority of the Company’s support and services, and cloud-hosted subscription offerings, the Company uses the observable price when the Company sells that support and service or cloud-hosted subscription separately to similar customers. If the standalone selling price for a performance obligation is not directly observable, the Company estimates it. The
Company estimates a standalone selling price by taking into consideration market conditions, economics of the offering and customers’ behavior. The Company maximizes the use of observable inputs and applies estimation methods consistently in similar circumstances. The Company allocates the transaction price to each distinct performance obligation on a relative standalone selling price basis.
Revenues are recognized when control of the promised products or services are transferred to customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those products or services.
The Company's short-term and long-term contract assets, net of allowance for credit losses, were $i22.1 million and $i29.5
million, respectively, as of September 30, 2020, and $i12.2 million and $i20.5
million, respectively, as of December 31, 2019, and are included in Prepaid expenses and other current assets and Other assets, respectively, in the accompanying condensed consolidated balance sheets. The Current portion of deferred revenues and the Long-term portion of deferred revenues were $i1.31 billion and $i378.4
million, respectively, as of September 30, 2020 and $i1.35 billion and $i443.5
million, respectively, as of December 31, 2019. The difference in the opening and closing balances of the Company’s contract assets and liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment. During the three and nine months ended September 30, 2020, the Company recognized $i512.4
million and $i1.13 billion, respectively, of revenue that was included in the deferred revenue balances as of June 30, 2020 and December 31, 2019, respectively.
The Company performs its obligations under a contract
with a customer by transferring solutions and services in exchange for consideration from the customer. Accounts receivable are recorded when the right to consideration becomes unconditional. The timing of the Company’s performance often differs from the timing of the customer’s payment, which results in the recognition of a contract asset or a contract liability. The Company recognizes a contract asset when the Company transfers products or services
to a customer and the right to consideration is conditional on something other than the passage of time. The Company recognizes a contract liability when it has received consideration or an amount of consideration is due from the customer and the Company has a future obligation to transfer products or services. The Company had iiiino///
material asset impairment charges related to contract assets for either the three and nine months ended September 30, 2020 or September 30, 2019.
For the Company’s software and hardware products, the timing of payment is typically upfront for its perpetual offerings and the Company’s on-premise subscriptions. Therefore, deferred revenue is created when a contract includes performance obligations such as license updates and maintenance or certain professional services that are satisfied
over time. For subscription contracts, the timing of payment is typically in advance of services, and deferred revenue is created as these services are provided over time.
A significant portion of the Company’s contracts have an original duration of one year or less; therefore, the Company applies a practical expedient to determine whether a significant financing component exists and does not consider the effects of the time value of money. For multi-year contracts, the
Company bills annually.
Transaction price allocated to the remaining performance obligations
i
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period (in thousands):
The Company is required to capitalize certain contract acquisition costs consisting primarily of commissions paid and related payroll taxes when contracts are signed. The asset recognized from capitalized incremental and recoverable acquisition costs is amortized on a basis consistent with the pattern of transfer of the products or services to which the asset relates.
The Company’s typical contracts include performance obligations
related to product and licenses and support. In these contracts, incremental costs of obtaining a contract are allocated to the performance obligations based on the relative estimated standalone selling prices and then recognized on a basis that is consistent with the transfer of the goods or services to which the asset relates. The commissions paid on annual renewals of support for product and licenses are not commensurate with the initial commission. The costs allocated to product and licenses are expensed at the time of sale, when revenue for the product and functional software licenses is recognized. The costs allocated to customer support for product and licenses are amortized ratably over a period of the greater of the contract
term or the average customer life, the expected period of benefit of the asset capitalized. The Company currently estimates an average customer life of ithree years to ifive
years, which it believes is appropriate based on consideration of the historical average customer life and the estimated useful life of the underlying product and license sold as part of the transaction. Amortization of contract acquisition costs related to support is limited to the contractual period of the arrangement as the Company intends to pay a commensurate commission upon renewal of the related support. For contracts that contain multi-year services or subscriptions, the amortization period of the capitalized costs is the
12
expected
period of benefit, which is the greater of the contractual term or the expected customer life.
The Company elects to apply a practical expedient to expense contract acquisition costs as incurred where the expected period of benefit is one year or less.
For the three and nine months ended September 30, 2020, the Company recorded amortization of capitalized contract acquisition costs of $i14.7
million and $i41.6 million, respectively, and for the three and nine months ended September 30, 2019, the Company recorded amortization of capitalized contract acquisition costs of $i11.4
million and $i33.0 million, respectively, which is recorded in Sales, marketing and services expense in the accompanying condensed consolidated statements of income. The Company's short-term and long-term contract acquisition costs were $i60.5
million and $i99.8 million, respectively, as of September 30, 2020, and $i50.4 million
and $i81.0 million, respectively, as of December 31, 2019, and are included in Prepaid expenses and other current assets and Other assets, respectively, in the accompanying condensed consolidated balance sheets. There was iiiino///
impairment loss in relation to costs capitalized during the three and nine months ended September 30, 2020 and 2019, respectively.
4. iEARNINGS PER SHARE
Basic earnings per share is calculated by dividing income available to stockholders by the weighted-average number of common shares
outstanding during each period. Diluted earnings per share is computed using the weighted-average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise or settlement of stock awards and shares issuable under the employee stock purchase plan (calculated using the treasury stock method) during the period they were outstanding and potential dilutive common shares from the conversion spread on the Company’s i0.500%
Convertible Notes due 2019 (the “Convertible Notes”) and the Company's warrants during the period they were outstanding.
i
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share information):
Denominator
for basic earnings per share - weighted-average shares outstanding
i123,255
i130,277
i123,835
i131,020
Effect
of dilutive employee stock awards
i2,608
i1,823
i2,572
i2,050
Effect
of dilutive Convertible Notes
i—
i—
i—
i1,901
Effect
of dilutive warrants
i—
i555
i—
i1,326
Denominator
for diluted earnings per share - weighted-average shares outstanding
i125,863
i132,655
i126,407
i136,297
Basic
earnings per share
$
i0.80
$
i2.08
$
i3.17
$
i3.62
Diluted
earnings per share
$
i0.78
$
i2.04
$
i3.10
$
i3.48
/
For
the three and nine months ended September 30, 2020, there were iino/
weighted-average number of shares outstanding used in the computation of diluted earnings per share for the Company's warrants, as they expired on November 18, 2019. For the three and nine months ended September 30, 2019, the weighted-average number of shares outstanding used in the computation of diluted earnings per share includes the dilutive effect of the Company's warrants, as the average stock price during the quarters was above the weighted-average warrant strike price of $i94.18
per share and $i94.52 per share, respectively. Anti-dilutive stock-based awards excluded from the calculations of diluted earnings per share were immaterial during the periods presented.
The Company used the treasury stock method for calculating any potential dilutive effect of the conversion spread on its Convertible Notes on diluted earnings per share because upon conversion the
Company paid cash up to the aggregate principal amount of the Convertible Notes converted and delivered shares of common stock in respect of the remainder of the Company’s conversion obligation in excess of the aggregate principal amount of the Convertible Notes converted. The conversion spread had a dilutive impact on diluted earnings per share when the average market price of the Company’s common stock for a given
13
period exceeded the conversion price. For the three and nine months ended September 30, 2020, and the three months ended September 30,
2019, there was iino/
dilution as the Convertible Notes matured on April 15, 2019. For the nine months ended September 30, 2019, the average market price of the Company's common stock exceeded the conversion price; therefore, the dilutive effect of the Convertible Notes was included in the denominator of diluted earnings per share.
5. iCREDIT
LOSSES
The Company is exposed to credit losses primarily through its accounts receivable, investments in available-for-sale debt securities, and contract assets. See Note 3 for additional information related to the Company's contract assets.
Accounts receivable, net
i
The
Company's accounts receivable, which are typically due within one year, consist of the following (in thousands):
The allowance for credit losses on accounts receivable is determined using a combination of specific reserves for accounts that are deemed to exhibit credit loss indicators and general reserves that are judgmentally
determined using loss rates based on historical write-offs by geography and customer accounts subject to credit check versus non-credit check status and consideration of recent forecasted information, including underlying economic expectations. The credit loss reserves are updated quarterly for most recent write-offs and collections information and underlying economic expectations, which for the nine months ended September 30, 2020 included consideration of the current and expected future economic and market conditions surrounding the COVID-19 pandemic. The Company will compare its current estimate of expected credit losses with the estimate of credit losses from the prior period and will report in net income the amount necessary to adjust the allowance for current expected credit losses.
Credit loss expense is included within General and administrative expenses in the accompanying condensed consolidated statements of income.
i
The activity in the Company's allowance for credit losses for the nine months ended September 30, 2020 is summarized as follows (in thousands):
The allowance for credit losses on the
Company's investments in available-for-sale debt securities is determined using a quantitative discounted cash flow analysis if impairment triggers exist after a qualitative screen is completed. Impairment on available-for-sale debt securities is determined on an individual security basis and the security is subject to impairment when its fair value declines below its amortized cost basis. If the fair value is less than the amortized cost basis, management must then determine whether it intends to sell the security or whether it is more likely than not that it will be required to sell the security before it recovers its value. If management intends to sell the security or will more-likely-than-not be required to sell the impaired security before it recovers its value, a credit loss is recorded to Other income, net in the accompanying condensed consolidated statements of income. If management does not intend to sell the security, nor will it
more-likely-than-not be required to sell the security before the security recovers its value, management must then determine whether the loss is due to credit loss or other factors. For impairment indicators due to credit loss factors, management establishes an allowance for credit losses with a charge to Other income, net. For impairment indicators due to other factors, management records the loss with a charge to Other comprehensive loss in the accompanying condensed consolidated balance sheets.
14
Upon adoption of the credit loss standard, the Company established an allowance for credit losses and did iino/t
have any credit loss expense recorded related to available-for-sale debt securities for the nine months ended September 30, 2020. See Note 6 for more information on allowances for credit losses related to available-for-sale debt securities.
The Company has available-for-sale debt securities that have fair values below amortized cost; however, the Company does not consider a credit allowance necessary as (i) the Company does not intend to sell the securities, (ii) it is not more-likely-than-not that the
Company will be required to sell the investments before recovery of the amortized cost basis, and (iii) the unrealized losses are due to market factors rather than credit loss factors.
6. iINVESTMENTS
Available-for-sale Investments
i
Investments
in available-for-sale securities at fair value were as follows for the periods ended (in thousands):
The
change in net unrealized gains (losses) on available-for-sale securities recorded in Other comprehensive income (loss) includes unrealized gains (losses) that arose from changes in market value, excluding credit-related factors, of specifically identified securities that were held during the period, gains (losses) that were previously unrealized, but have been recognized in current period net income due to sales, and prepayments of available-for-sale investments purchased at a premium.See Note 13 for more information related to comprehensive income.
The average remaining maturities of the Company’s short-term and long-term available-for-sale investments at September 30, 2020 were approximately ithree
months and itwo years, respectively.
For the three and nine months ended September 30, 2020, the Company did iino/t
receive any proceeds from the sales of available-for-sale investments. For the three months ended September 30, 2019, the Company had ino proceeds from the sales of available-for-sale investments. For the nine months ended September 30, 2019, the
Company received proceeds from the sales of available-for-sale investments of $i938.0 million.
Realized and Unrealized Gains and Losses on Available-for-sale Investments
For the three and nine months ended September 30, 2020, the Company did iino/t
have any realized gains on available-for-sale investments. For the three months ended September 30, 2019, the Company had ino realized gains of available-for-sale investments. For the nine months ended September 30, 2019, the Company had realized gains on available-for-sale
investments of $i1.5 million.
Effective January 1, 2020, the new CECL guidance requires the recognition of an allowance for estimated credit losses on investments in available-for-sale debt securities. For the three and nine months ended September 30, 2020, the Company did iino/t
have any realized losses on available-for-sale investments. For the three months ended September 30, 2019, the Company did inot have any realized losses on available-for-sale investments. For the nine months ended September 30, 2019, the Company had realized
losses on available-for-sale investments of $i0.9 million. Realized losses primarily related to sales of
15
these investments during the respective periods. All realized gains and losses related to the sales of available-for-sale investments are included in Other income, net, in the accompanying condensed consolidated statements
of income.
As of December 31, 2019, the Company's gross unrealized losses on available-for-sale investments were $i0.1 million and were not deemed to be other-than-temporarily impaired under the prior accounting guidance.
Equity
Securities without Readily Determinable Fair Values
The Company held direct investments in privately-held companies of $ii12.3/
million as of September 30, 2020 and December 31, 2019, which are accounted for at cost, less impairment plus or minus adjustments resulting from observable price changes in orderly transactions for an identical or a similar investment of the same issuer. These investments are included in Other assets in the accompanying condensed consolidated balance sheets. The Company periodically reviews these investments for impairment and observable price changes on a quarterly basis, and adjusts the carrying value accordingly. The fair value of these investments represent a Level 3 valuation as the assumptions used in valuing these investments are not directly or indirectly observable. See Note 7 for detailed information on fair value measurements.
Equity
Securities Accounted for at Net Asset Value
The Company held equity interests in certain private equity funds of $i10.7 million and $i11.2
million as of September 30, 2020 and December 31, 2019, respectively, which are accounted for under the net asset value practical expedient. These investments are included in Other assets in the accompanying condensed consolidated balance sheets. The net asset value of these investments is determined using quarterly capital statements from the funds, which are based on the Company’s contributions to the funds, allocation of profit and loss and changes in fair value of the underlying fund investments. These private equity funds focus on making venture capital investments, principally by investing in equity securities of early and late stage privately-held corporations. The funds’ general partner shall determine the amount, timing and form (whether cash or in kind) of all distributions made
by the funds. The Company may only transfer its investments in private equity fund interests subject to the general partner’s written consent and cannot trade its fund interests in established securities markets, secondary markets or equivalents thereof. The Company has unfunded commitments of $i0.5 million
as of September 30, 2020.
7. iFAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as an exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement
that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
•Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;
•Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
•Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Available-for-sale
securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service (the “Service”) which uses quoted market prices for identical or comparable instruments rather than direct observations of quoted prices in active markets. The Service applies a four level hierarchical pricing methodology to all of the Company’s fixed income securities based on the circumstances. The hierarchy starts with the highest priority pricing source, then subsequently uses inputs obtained from other third-party sources and large custodial institutions. The Service’s providers utilize a variety of inputs to determine their quoted prices. These inputs may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. Substantially all of the
Company’s available-for-sale investments are valued utilizing inputs obtained from the Service and accordingly are categorized as Level 2 in the table below. The Company periodically independently assesses the pricing obtained from the Service and historically has not adjusted the Service's pricing as a result of this assessment. Available-for-sale securities are included in Level 3 when relevant observable inputs for a security are not available.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy. In certain instances, the inputs used to measure fair value may meet the definition of more than one level
of the fair value hierarchy. The input with the lowest level priority is used to determine the applicable level in the fair value hierarchy.
16
i
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
(In thousands)
Assets:
Cash
and cash equivalents:
Cash
$
i474,756
$
i474,756
$
i—
$
i—
Money
market funds
i42,019
i42,019
i—
i—
Agency
securities
i19,993
i—
i19,993
i—
Corporate
securities
i8,993
i—
i8,993
i—
Available-for-sale
securities:
Agency securities
i1,682
i—
i1,682
i—
Corporate
securities
i48,884
i—
i47,884
i1,000
Government
securities
i9,129
i—
i9,129
i—
Prepaid
expenses and other current assets:
Foreign currency derivatives
i1,889
i—
i1,889
i—
Total
assets
$
i607,345
$
i516,775
$
i89,570
$
i1,000
Accrued
expenses and other current liabilities:
Foreign currency derivatives
i1,390
i—
i1,390
i—
Total
liabilities
$
i1,390
$
i—
$
i1,390
$
i—
/
The
Company’s fixed income available-for-sale security portfolio generally consists of investment grade securities from diverse issuers with a minimum credit rating of A-/A3 and a weighted-average credit rating of AA-/Aa3. The Company values these securities based on pricing from the Service, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value, and accordingly, the Company classifies the majority of its fixed income available-for-sale securities as Level 2.
17
The
Company measures its cash flow hedges, which are classified as Prepaid expenses and other current assets and Accrued expenses and other current liabilities, at fair value based on indicative prices in active markets (Level 2 inputs).
Assets Measured at Fair Value on a Non-recurring Basis Using Significant Unobservable Inputs (Level 3)
During the three months ended September 30, 2020, certain direct investments in privately-held companies with a carrying value of $i5.0
million were determined to be impaired and written down to a fair value of $i4.6 million, resulting in an impairment charge of $i0.4
million. During the nine months ended September 30, 2020, certain direct investments in privately-held companies with a carrying value of $i6.3 million were determined to be impaired and written down to a fair value of $i4.6
million, resulting in an impairment charge of $i1.7 million. The impairment charges were included in Other income, net in the accompanying condensed consolidated statements of income.
During the three months ended September 30, 2019, certain direct investments in privately-held companies with a carrying value of $i0.5
million were determined to be impaired and written down to their fair value of $i0.1 million, resulting in impairment charges of $i0.4
million. During the nine months ended September 30, 2019, certain direct investments in privately-held companies with a carrying value of $i2.4 million were determined to be impaired and written down to their fair value of $i0.4
million, resulting in impairment charges of $i2.0 million. The impairment charges were included in Other income, net in the accompanying condensed consolidated statements of income.
In determining the fair value of the investments, the Company considers many factors, including, but not limited to, operating performance of
the investee, the amount of cash that the investee has on-hand, the ability to obtain additional financing and the overall market conditions in which the investee operates.
During the three months ended September 30, 2020, the Company determined that there were ino
material adjustments resulting from observable price changes to the Company's investments in privately-held companies without a readily determinable fair value. During the nine months ended September 30, 2020, the Company determined there was an upward adjustment of $i1.8
million to one of the Company's investments in a privately-held company without a readily determinable fair value based on an observable input, specifically its ability to obtain additional financing at a favorable valuation. During the three and nine months ended September 30, 2019, the Company determined that there were iino/
material adjustments resulting from observable price changes to the Company's investments in privately-held companies without a readily determinable fair value.
Additional Disclosures Regarding Fair Value Measurements
The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of these items.
i
As
of September 30, 2020, the fair value of the $i750.0 million unsecured senior notes due March 1, 2030 (the "2030 Notes") and $i750.0
million unsecured senior notes due December 1, 2027 (the “2027 Notes") was determined based on inputs that are observable in the market (Level 2). Based on the closing trading price per $i100 as of the last day of trading for the quarter ended September 30, 2020, the carrying value was as follows (in thousands):
Fair
Value
Carrying Value
2030 Notes
$
i798,443
$
i738,811
2027
Notes
$
i862,103
$
i743,593
/
See
Note 11 for more information on the 2030 Notes and 2027 Notes.
8. iSTOCK-BASED COMPENSATION
Plans
The Company’s stock-based compensation program is a long-term retention
program that is intended to attract and reward talented employees and align stockholder and employee interests. As of September 30, 2020, the Company had ione stock-based compensation plan under which it was granting equity awards. The
Company is currently granting stock-based awards from its Second Amended and Restated 2014 Equity Incentive Plan (the "2014 Plan"), which was recently amended at the Company's Annual Meeting of Stockholders on June 3, 2020. Pursuant to the June 2020 amendment, the maximum number of shares of common stock available for issuance under the 2014 Plan was increased to i51,300,000.
In addition, the amendment extended the term of the 2014 Plan to June 3, 2030 and updated the vesting provisions from monthly to annual vesting for annual director awards, consistent with the Company's current compensation program for non-employee directors.
18
As of September 30, 2020, there were i18,516,165
shares of common stock reserved for issuance pursuant to the Company’s stock-based compensation plans, including authorization under its 2014 Plan to grant stock-based awards covering i12,718,506 shares of common stock.
The
Company also has an Employee Stock Purchase Plan (the “ESPP”), which provides for the issuance of a maximum of i16,000,000 shares of common stock. As of September 30, 2020, i2,675,657
shares have been issued under the ESPP. The Company recorded stock-based compensation costs related to the ESPP of $i4.2 million and $i4.0
million for the three months ended September 30, 2020 and 2019, respectively, and $i8.8 million and $i9.5
million for the nine months ended September 30, 2020 and 2019, respectively.
i
The Company used the Black-Scholes model to estimate the fair value of the ESPP awards with the following weighted-average assumptions:
The
Company determined the expected volatility factor by considering the implied volatility in six-month market-traded options of the Company's common stock based on third-party volatility quotes. The Company's decision to use implied volatility was based upon the availability of actively traded options on the Company's common stock and its assessment that implied volatility is more representative of future stock price trends than historical volatility. The risk-free interest rate was based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock options. The current dividend yield has been updated for expected dividend yield payout. The expected term was based on the term of the purchase
period for grants made under the ESPP.
Stock-Based Compensation
i
The detail of the total stock-based compensation recognized by income statement classification is as follows (in thousands):
Three
Months Ended September 30,
Nine Months Ended September 30,
Income Statement Classifications
2020
2019
2020
2019
Cost of subscription, support and services
$
i3,542
$
i2,898
$
i9,708
$
i8,056
Research
and development
i28,803
i25,505
i81,386
i78,761
Sales,
marketing and services
i28,411
i23,838
i76,640
i68,188
General
and administrative
i24,413
i16,728
i61,120
i47,518
Total
$
i85,169
$
i68,969
$
i228,854
$
i202,523
/
Non-vested
Stock Units
Service-Based Stock Units
The Company awards senior level employees and certain other employees non-vested stock units granted under the 2014 Plan that vest based on service. These non-vested stock unit awards vest i33.33% on each of the first, second and third anniversary subsequent
to the grant date of the award. Each non-vested stock unit, upon vesting, represents the right to receive ione share of the Company’s common stock. In addition, the Company awards non-vested stock units to all
of its continuing non-employee directors, which represent the right to receive one share of the Company's common stock upon vesting. Previously, non-vested stock unit awards granted to the Company's continuing non-employee directors vested monthly in i12 equal installments.
Beginning in 2020, new awards granted to non-employee directors will vest in full in one installment on the earlier of: (i) the first anniversary of the award date; or (ii) the day immediately prior to the Company’s next annual meeting of the stockholders following the award date.
19
Company Performance Stock Units
On April 1, 2020, the Company awarded senior level employees i294,605
non-vested performance stock unit awards granted under the 2014 Plan. The number of non-vested performance stock units that ultimately vest will be determined within isixty days following completion of the performance period ending December 31, 2022 and will be based on the achievement of
specific corporate financial performance goals related to the Company’s annualized recurring revenue (ARR) growth measured during the period from January 1, 2020 to December 31, 2022. The number of non-vested stock units issued will be based on a graduated slope, with the maximum number of non-vested stock units issuable pursuant to the award capped at i200%
of the target number of non-vested stock units set forth in the award agreement. The Company is required to estimate the attainment expected to be achieved related to the defined performance goals and the number of non-vested stock units that will ultimately be awarded in order to recognize compensation expense over the vesting period. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. Compensation expense will be recorded through the end of the performance period on December 31, 2022 if it is deemed probable that the performance goals will be met. If the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed.
On
April 6, 2020, the Company awarded certain senior level employees i90,756 non-vested performance stock unit awards granted under the 2014 Plan that vest based on the
Company’s ARR growth during the relevant performance periods, which span January 1, 2020 through December 31, 2021. The number of non-vested stock units issued upon the vesting of the award will be based on a graduated slope, with the maximum number of non-vested stock units issuable pursuant to the award capped at i125%
of the target number of non-vested stock units set forth in the award agreement. The Company is required to estimate the attainment expected to be achieved related to the defined performance goals and the number of non-vested stock units that will ultimately be awarded in order to recognize compensation expense over the vesting period. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. Compensation expense will be recorded through the end of the performance period on December 31, 2021 if it is deemed probable that the performance goals will be met. If the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed.
Unrecognized Compensation Related to Stock Units
As of September 30, 2020, the total number of non-vested stock units outstanding, including company performance awards and service-based awards was i5,748,376. As of September 30,
2020, there was $i480.0 million of total unrecognized compensation cost related to non-vested stock units. The unrecognized cost of the awards legally granted through September 30, 2020 is expected to be recognized over a weighted-average period of i1.66
years.
9. iGOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The Company accounts for goodwill in accordance with the authoritative guidance, which requires that goodwill and certain intangible assets are not amortized,
but are subject to an annual impairment test. The Company performed a qualitative assessment in connection with its annual goodwill impairment test in the fourth quarter of 2019. As a result of the qualitative analysis, a quantitative impairment test was not deemed necessary. There was ino impairment of goodwill or indefinite lived intangible assets as a result of the annual impairment test analysis completed during the fourth quarter of 2019. The balance of
goodwill at September 30, 2020 and December 31, 2019 was $ii1.80/ billion.
Intangible Assets
The Company has intangible assets which were primarily acquired in conjunction with business combinations and technology purchases. Intangible assets with finite lives are recorded at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally three to iseven years, except for patents, which are amortized over the lesser of
their remaining life or seven to iten years.
i
Intangible assets consist of the following (in thousands):
Amortization
and impairment of product related intangible assets, which consists primarily of product related technologies and patents, was $i8.3 million and $i22.6
million for the three months ended September 30, 2020 and 2019, respectively, and $i24.9 million and $i42.7
million for the nine months ended September 30, 2020 and 2019, respectively, and is classified as a component of Cost of net revenues in the accompanying condensed consolidated statements of income. Amortization of other intangible assets, which consist primarily of customer relationships, trade names and covenants not to compete was $i0.7 million and $i4.9
million for the three months ended September 30, 2020 and 2019, respectively, and $i2.1 million and $i11.7
million for the nine months ended September 30, 2020 and 2019, respectively, and is classified as a component of Operating expenses in the accompanying condensed consolidated statements of income.
The Company monitors its intangible assets for indicators of impairment. If the Company determines impairment has occurred, it will write-down the intangible asset to its fair value. For certain intangible assets where the unamortized balances exceeded the undiscounted future net cash flows, the Company measures the amount of the impairment by calculating the amount by which the carrying
values exceed the estimated fair values, which are based on projected discounted future net cash flows. During the three months ended September 30, 2019, the Company tested certain intangible assets for recoverability and, as a result, identified certain definite-lived intangible assets, primarily technology developed by Cedexis Inc., which was acquired by the Company on February 6, 2018, that were impaired and recorded non-cash impairment charges of $i13.2 million
to write down the intangible assets to their estimated fair value of $i4.1 million. The impairment charge is included in Amortization and impairment of product related intangible assets in the accompanying condensed consolidated statements of income. These non-recurring fair value measurements were categorized as Level 3, as significant unobservable inputs were used in the valuation analysis. Key assumptions used in the valuation include forecasts of revenue and expenses over an extended period of time, customer churn rates, rate of migration to future technology,
tax rates, and estimated costs of debt and equity capital to discount the projected cash flows. Certain of these assumptions involve significant judgment, are based on management’s estimate of current and forecasted market conditions and are sensitive and susceptible to change; therefore, further disruptions in the business could potentially result in additional amounts becoming impaired.
i
Estimated future amortization expense of intangible assets with finite lives as of September 30,
2020 is as follows (in thousands):
Citrix has ione reportable segment. The
Company's chief operating decision maker (“CODM”) reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company's CEO is the CODM.
Revenues by Product Grouping
i
Revenues
by product grouping were as follows (in thousands):
(1)Workspace
revenues are primarily comprised of sales from the Company’s application virtualization solutions, which include Citrix Workspace, Citrix Virtual Apps and Desktops, the Company's unified endpoint management solutions, which include Citrix Endpoint Management and Citrix Content Collaboration.
(2)Networking revenues primarily include Citrix ADC and Citrix SD-WAN. Beginning in the fourth quarter of 2020, the Company is renaming its Networking product grouping to App Delivery and Security to better align with industry categorization of its solutions.
(3)Professional services revenues are
comprised of revenues from consulting services primarily related to the Company's perpetual offerings and product training and certification services.
Revenues by Geographic Location
i
The following table presents
revenues by geographic location, for the following periods (in thousands):
The Company defines Strategic Service Providers (SSP) as its ithree
historically largest hyperscale Networking customers. The following table summarizes SSP revenue for the following periods (in thousands):
Subscription revenue relates to fees which are generally recognized ratably over the contractual term. The Company's subscription revenue includes Software as a Service (SaaS), which primarily consists of subscriptions delivered via a cloud-hosted service whereby the customer does not take possession of the software and hybrid subscription offerings; and non-SaaS, which consists primarily of on-premise licensing, hybrid subscription offerings, CSP services and the related support. The Company's hybrid subscription offerings are allocated between SaaS and non-SaaS, which are generally recognized at a point in time. iThe
following table presents subscription revenues by SaaS and non-SaaS components, for the following periods (in thousands):
On January 21, 2020, the Company entered into a Term Loan Credit Agreement (the "Term Loan Credit Agreement") with Bank of America, N.A., as administrative agent, and the other lenders party thereto from time to time (collectively, the “Lenders”). The Term Loan Credit Agreement provides the Company with facilities to borrow term loans on an unsecured basis in an aggregate principal amount of up to $i1.00 billion,
consisting of (i) a $i500.0 million i364-day term loan facility (the “364-day Term Loan”), and (ii) a $i500.0 million
i3-year term loan (the “3-year Term Loan”), in each case in a single borrowing, subject to satisfaction of certain conditions set forth in the Term Loan Credit Agreement. On January 30, 2020, the Company borrowed $i1.00 billion
under the term loans and used the proceeds to enter into accelerated share repurchase transactions (the "ASR") with each of Goldman Sachs & Co. LLC and Wells Fargo Bank, National Association (each, a "Dealer") for an aggregate of $i1.00 billion. See Note 15 for detailed information on the accelerated share repurchase.
Borrowings under the Term Loan Credit Agreement bear interest at a rate equal to (a) either (i) LIBOR or, upon a phase-out of LIBOR, an alternative benchmark rate
as provided in the Term Loan Credit Agreement, or (ii) a customary base rate formula, plus (b) the applicable margin with respect thereto, which initially will be determined based on the Company’s consolidated leverage ratio but may, if so elected by the Company, be based on the Company’s non-credit enhanced, senior unsecured long-term debt rating as determined by Moody’s Investors Service, Inc., Standard & Poor’s Financial Services, LLC and Fitch Ratings Inc., in each case as set forth in the Term Loan Credit Agreement.
The Term Loan Credit Agreement includes a covenant limiting the Company’s
consolidated leverage ratio to not more than i3.5:1.0, subject to, upon the occurrence of a qualified acquisition, if so elected by the Company, a step-up to i4.0:1.0
for the ifour fiscal quarters following such qualified acquisition, and a covenant limiting the Company’s consolidated interest coverage ratio to not less than i3.0:1.0.
The Term Loan Credit Agreement includes customary events of default, with corresponding grace periods in certain circumstances, including, without limitation, payment defaults, cross-defaults, the occurrence of a change of control of the Company and bankruptcy-related defaults. The Lenders are entitled to accelerate repayment of the loans under the Term Loan Credit Agreement upon the occurrence of any of the events of default. In addition, the Term Loan Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the ability of the Company to grant liens, merge or consolidate, dispose of all or substantially all of its assets, change its business and incur subsidiary indebtedness, in each case subject to customary exceptions. In addition, the Term
Loan Credit Agreement requires the Company to make prepayments of any net cash proceeds received in connection with the Company issuing or incurring debt or issuing equity, subject to certain ordinary course exceptions described in the Term Loan Credit Agreement. The Term Loan Credit Agreement also contains representations and warranties customary for an unsecured financing of this type. The Company was in compliance with these covenants as of September 30, 2020.
Senior Notes
On February 25, 2020, the
Company issued $i750.0 million of unsecured senior notes due March 1, 2030. The 2030 Notes accrue interest at a rate of i3.300%
per annum. Interest on the 2030 Notes is due semi-annually on March 1 and September 1 of each year, beginning on September 1, 2020. The net proceeds from this offering were $i738.1 million, after deducting the underwriting discount and estimated offering expenses payable by the Company. Net proceeds from this offering were primarily used to repay amounts outstanding under the
Company's unsecured Term Loan Credit Agreement. The 2030 Notes will mature on March 1, 2030, unless earlier redeemed in accordance with their terms prior to such date. The Company may redeem the 2030 Notes at its option at any time in whole or from time to time in part prior to December 1, 2029 at a redemption price equal to the greater of (i) i100%
of the aggregate principal amount of the 2030 Notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of such Notes under such 2030 Notes, plus in each case, accrued and unpaid interest to, but excluding, the redemption date. At any time on or after December 1, 2029, the redemption price shall be
23
equal to i100%
of the aggregate principal amount of the 2030 Notes to be redeemed, plus accrued and unpaid interest to, but excluding the redemption date. Among other terms, under certain circumstances, holders of the 2030 Notes may require the Company to repurchase their 2030 Notes upon the occurrence of a change of control prior to maturity for cash at a repurchase price equal to i101% of the principal amount of the 2030 Notes to be repurchased
plus accrued and unpaid interest to, but excluding, the repurchase date.
During the nine months ended September 30, 2020, the Company used the net proceeds from the 2030 Notes and cash to repay $i500.0 million under the i364-day
Term Loan and $i250.0 million under the i3-year Term Loan. As of September 30, 2020, $i250.0 million
in principal amount was outstanding under the i3-year Term Loan.
On November 15, 2017, the Company issued $i750.0
million of unsecured senior notes due December 1, 2027. The 2027 Notes accrue interest at a rate of i4.500% per annum. Interest on the 2027 Notes is due semi-annually on June 1 and December 1 of each year. The 2027 Notes will mature on December 1, 2027, unless earlier redeemed in accordance with their terms prior to such date. The Company may redeem the 2027 Notes at its option at any
time in whole or from time to time in part prior to September 1, 2027 at a redemption price equal to the greater of (i) i100% of the aggregate principal amount of the 2027 Notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments under such 2027 Notes, plus in each case, accrued and unpaid interest to, but excluding, the redemption date. Among other terms, under certain circumstances, holders of the 2027 Notes may require
the Company to repurchase their 2027 Notes upon the occurrence of a change of control prior to maturity for cash at a repurchase price equal to i101% of the principal amount of the 2027 Notes to be repurchased plus accrued and unpaid interest to, but excluding, the repurchase date.
Credit Facility
On November
26, 2019, the Company entered into an amended and restated credit agreement (the "Credit Agreement") with a group of financial institutions, which amends and restates the Company’s Credit Agreement, dated January 7, 2015. The Credit Agreement provides for a five year unsecured revolving credit facility in the aggregate amount of $i250.0
million, subject to continued covenant compliance. The Company may elect to increase the revolving credit facility by up to $i250.0 million if existing or new lenders provide additional revolving commitments in accordance with the terms of the Credit Agreement. A portion of the revolving line of credit (i) in the aggregate amount of $i25.0
million may be available for issuances of letters of credit and (ii) in the aggregate amount of $i10.0 million may be available for swing line loans, as part of, not in addition to, the aggregate revolving commitments. The credit facility bears interest at a rate equal to (a) either (i) LIBOR or, upon a phase-out of LIBOR, an alternative benchmark rate as provided in the Credit Agreement, or (ii) a customary base rate formula, plus (b) the applicable margin with respect thereto, which initially will be determined based on the
Company’s consolidated leverage ratio but may, if so elected by the Company, be based on the Company’s long-term debt rating as set forth in the Credit Agreement. In addition, the Company is required to pay a quarterly facility fee ranging from i0.11% to i0.20%
of the aggregate revolving commitments under the credit facility and based on the ratio of the Company’s total debt to the Company’s consolidated EBITDA or long-term credit rating. As of September 30, 2020 and December 31, 2019, iino/
amounts were outstanding under the credit facility. The Credit Agreement contains certain financial covenants and the Company was in compliance with these covenants as of September 30, 2020.
Convertible Notes
During 2014, the Company completed a private placement of approximately $i1.44 billion
principal amount of i0.500% Convertible Notes due 2019. All Convertible Notes were converted by their beneficial owners prior to their maturity on April 15, 2019. In accordance with the terms of the indenture governing the Convertible Notes, on April 15, 2019the Company paid $i1.16
billion in the outstanding aggregate principal amount of the Convertible Notes and delivered i4.9 million newly issued shares of its common stock in respect of the remainder of the Company's conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted, in full satisfaction of such converted notes. The Company
received shares of its common stock under the Bond Hedges (as defined below) that offset the issuance of shares of common stock upon conversion of the Convertible Notes.
24
i
The following table includes total interest expense recognized related to the Term Loan Credit Agreement, the 2030 Notes, the 2027 Notes and the Convertible Notes (in thousands):
See
Note 7 for fair value disclosures related to the Company's 2030 Notes and 2027 Notes.
Convertible Note Hedge and Warrant Transactions
To minimize the impact of potential dilution upon conversion of the Convertible Notes, the Company entered into convertible note hedge transactions relating to approximately ii16.0/
million shares of common stock (the "Bond Hedges") and also entered into separate warrant transactions (the "Warrant Transactions") with each of the Option Counterparties relating to approximately ii16.0/
million shares of common stock to offset any payments in cash or shares of common stock at the Company’s election. As a result of the spin-off of its GoTo Business in January 2017, the number of shares of the Company's common stock covered by the Bond Hedges and Warrant Transactions was adjusted to approximately i20.0 million
shares.
As noted above, the Bond Hedges reduced the dilution upon conversion of the Convertible Notes, as the market price per share of common stock, as measured under the terms of the Bond Hedges, was greater than the strike price of the Bond Hedges, which initially corresponded to the conversion price of the Convertible Notes and was subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. The Warrant Transactions would have separately had a dilutive effect to the extent that the market value per share of common stock, as measured under the terms of the Warrant Transactions, exceeded the applicable strike price of the warrants issued pursuant to the Warrant Transactions (the “Warrants”).
The Warrants expired in ratable portions on a series of expiration dates that commenced on July
15, 2019 and concluded on November 18, 2019, and ino Warrants remain outstanding. During the three months ended September 30, 2019, the strike price of the Warrants was adjusted to $i93.92
per share and the number of shares of the Company's common stock covered by the Warrant Transactions was adjusted to approximately i11.9 million shares as a result of the cash dividend paid in September 2019. Additionally, during the three months ended September 30, 2019, i7.0
million Warrants were exercised, and the Company delivered i0.2 million shares of its common stock as the volume weighted average stock price was above the Warrant strike price. The Warrants were not marked to market as the value of the Warrants were initially recorded in stockholders' equity and remained classified within stockholders' equity through their expiration.
12.
iDERIVATIVE FINANCIAL INSTRUMENTS
Derivatives Designated as Hedging Instruments
As of September 30, 2020, the Company’s derivative assets and liabilities primarily resulted from cash flow hedges related to its forecasted operating expenses transacted in local currencies. A substantial portion of
the Company’s overseas expenses are and will continue to be transacted in local currencies. To protect against fluctuations in operating expenses and the volatility of future cash flows caused by changes in currency exchange rates, the Company has established a program that uses foreign exchange forward contracts to hedge its exposure to these potential changes. The terms of these instruments, and the hedged transactions to which they relate, generally do not exceed i12
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. Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a derivative depends
on the intended use of the derivative and the resulting designation. Gains and losses on derivatives that are designated as cash flow hedges are initially reported as a component of Accumulated other comprehensive loss and are subsequently recognized in income when the hedged exposure is recognized in income. Gains and losses from changes in fair values of derivatives that are not designated as hedges are recognized in Other income, net.
25
The total cumulative unrealized gain on cash flow derivative instruments was $i1.5
million at September 30, 2020, and is included in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. The net unrealized gain as of September 30, 2020 is expected to be recognized in income over the next 12 months at the same time the hedged items are recognized in income. See Note 13 for more information related to comprehensive income.
Derivatives not Designated as Hedging Instruments
A substantial portion of the Company’s overseas assets and liabilities are and will continue to be denominated in local currencies. To protect against fluctuations in earnings caused by changes in currency exchange rates when remeasuring the
Company’s balance sheet, the Company utilizes foreign exchange forward contracts to hedge its exposure to this potential volatility. These contracts are not designated for hedge accounting treatment under the authoritative guidance. Accordingly, changes in the fair value of these contracts are recorded in Other income, net.
Details about accumulated other comprehensive loss components
Amount reclassified from accumulated other comprehensive loss, net of tax
Affected line item in the Condensed Consolidated Statements of Income
Unrealized net gains on available-for-sale securities
$
(i20)
Other
income, net
Unrealized net losses on cash flow hedges
i1,061
Operating expenses *
$
i1,041
/
*
Operating expenses amounts allocated to Research and development, Sales, marketing and services, and General and administrative are not individually significant.
14. iINCOME TAXES
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. The Company maintains certain strategic management and operational activities in overseas subsidiaries and its foreign earnings are taxed at rates that are generally lower than in the United States.
The Company’s effective tax rate generally differs from the U.S. federal statutory rate primarily due to tax credits and lower tax rates on earnings generated by the Company’s foreign operations that are taxed primarily in Switzerland.
The Company’s
effective tax rate was i15.3% and (i150.5)% for the three months ended September 30, 2020
and 2019, respectively. The increase in the effective tax rate when comparing the three months ended September 30, 2020 to the three months ended September 30, 2019, was primarily due to tax items unique to the period ended September 30, 2019. These amounts include an estimated income tax benefit of $ii157.7/ million
due to the recognition of Swiss deferred tax assets related to the enactment of the Federal Act on Tax Reform and AHV Financing (“TRAF”), as well as a $ii17.3/ million
tax benefit attributable to the 2015 U.S. federal income tax return statute of limitations closing during the three months ended September 30, 2019.
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The Company’s effective tax rate was i10.0% and (i42.3)%
for the nine months ended September 30, 2020 and 2019, respectively. The increase in the effective tax rate when comparing the nine months ended September 30, 2020 to the nine months ended September 30, 2019, was primarily due to tax items unique to the period ended September 30, 2019. These amounts include an estimated income tax benefit of $ii157.7/ million
due to the recognition of Swiss deferred tax assets related to the enactment of the TRAF, as well as a $ii17.3/ million
tax benefit attributable to the 2015 U.S. federal income tax return statute of limitations closing during the nine months ended September 30, 2019. These amounts are partially offset by additional discrete tax benefits for share-based payments during the nine months ended September 30, 2020.
On May 19, 2019, Swiss voters approved the TRAF, which provides for broad changes to federal and cantonal taxation in Switzerland effective January 1, 2020. The TRAF requires the abolishment of certain favorable tax regimes, provides for certain transitional relief, and directs the cantons to implement certain mandatory measures while other provisions are at the discretion of the canton. During the period ended December 31,
2019, the Company recorded a deferred tax asset and a partial valuation allowance for the cantonal and federal impact of the TRAF. The income tax impact of the TRAF may be subject to change due to the issuance of further legislative guidance from the Swiss taxing authorities.
The Company’s net unrecognized tax benefits totaled $i75.0 million and $i84.5
million as of September 30, 2020 and December 31, 2019, respectively. At September 30, 2020, $i63.0 million included in the balance for tax positions would affect the annual effective tax rate if recognized. The Company recognizes interest accrued related to uncertain tax positions
and penalties in income tax expense. As of September 30, 2020, the Company has accrued $i3.9 million for the payment of interest.
The Company and one or more of its subsidiaries
are subject to U.S. federal income taxes in the United States, as well as income taxes of multiple state and foreign jurisdictions. The Company is currently under examination by the United States Internal Revenue Service for the 2017 and 2018 tax years. With few exceptions, the Company is generally not subject to examination for state and local income tax, or in non-U.S. jurisdictions, by tax authorities for years prior to 2017.
The Company's U.S. liquidity needs are currently satisfied using cash flows generated from its U.S. operations, borrowings, or both. The Company also utilizes a variety
of tax planning strategies in an effort to ensure that its worldwide cash is available in locations in which it is needed. The Company expects to repatriate a substantial portion of its foreign earnings over time, to the extent that the foreign earnings are not restricted by local laws or result in significant incremental costs associated with repatriating the foreign earnings.
At September 30, 2020, the Company had $i393.9
million in net deferred tax assets. The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company reviews deferred tax assets periodically for recoverability and makes estimates and judgments regarding the expected geographic sources of taxable income and gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance. If the estimates and assumptions used in the Company's determination change in the future, the Company could be required to revise its estimates of the valuation allowances
against its deferred tax assets and adjust its provisions for additional income taxes.
On March 27, 2020, the United States enacted the Coronavirus Aid, Relief & Economic Security (“CARES”) Act. The CARES Act includes a wide variety of tax and non-tax provisions aimed to provide relief to individuals and businesses adversely affected by the COVID-19 pandemic. This legislation includes an array of tax benefits and incentives for businesses, including in part, the deferral of payment of certain employer payroll taxes. Similarly, the Swiss government enacted a number of measures to help mitigate the negative effects of COVID-19 on the Swiss economy. The Company is evaluating the impact of global COVID-19-related laws and proposed laws, however, no material impact to the
Company's financial results is expected as a result of legislation enacted to date. The Company will review any guidance issued in the future by applicable tax authorities and continue to evaluate the impact of any new developments or legislation.
On June 22, 2020, the US Supreme Court denied Altera Corp.’s petition for writ of certiorari and as a result the Supreme Court will not review the decision of the U.S. Court of Appeals for the Ninth Circuit that upheld the validity of the U.S. Treasury Department’s regulations requiring participants in a cost-sharing arrangement to share stock-based compensation costs. Because the Company has already accrued amounts for this uncertain tax position, there are no
changes to the Company's position or treatment of its cost-sharing arrangements in the current period.
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15. iTREASURY STOCK
Stock Repurchase Program
The
Company’s Board of Directors has authorized an ongoing stock repurchase program, of which $i1.00 billion was approved in January 2020. The Company may use the approved dollar authority to repurchase stock at any time until the approved amount is exhausted. The objective of the Company’s stock repurchase program is to improve stockholders’ returns. At September 30,
2020, $i714.1 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. A portion of the funds used to repurchase stock over the course of the program was provided by net proceeds from the Convertible Notes, the 2027 Notes and the Term Loan Credit Agreement, as well as proceeds from employee stock awards and the related tax benefit. The
Company is authorized to make purchases of its common stock using general corporate funds through open market purchases, pursuant to a Rule 10b5-1 plan or in privately negotiated transactions.
On January 30, 2020, the Company used the proceeds from its Term Loan Credit Agreement and entered into ASR transactions with a group of Dealers for an aggregate of $i1.00 billion.
Under the ASR transactions, the Company received an initial share delivery of i6.5 million shares of its common stock, with the remainder delivered upon completion of the ASR transactions. The total number of shares of common stock that the Company repurchased under each ASR agreement was based on the average of the daily volume-weighted average prices of its common stock during the term of
the applicable ASR agreement, less a discount. The Company received delivery of i0.8 million shares of its common stock in August 2020 in final settlement of the ASR Agreement. See Note 11 for detailed information on the Term Loan Credit Agreement.
During the three months ended September 30, 2020, the
Company made ino open market purchases under the stock repurchase program. During the nine months ended September 30, 2020, the Company expended $i199.9
million on open market purchases under the stock repurchase program, repurchasing i1,731,500 shares of common stock at an average price of $i115.45.
During
the three months ended September 30, 2019, the Company expended $i103.9 million on open market purchases under the stock repurchase program, repurchasing i1,130,100
shares of common stock at an average price of $i91.94. During the nine months ended September 30, 2019, the Company expended $i353.9
million on open market purchases under the stock repurchase program, repurchasing i3,640,982 shares of common stock at an average price of $i97.20.
Shares for Tax Withholding
During the three and nine months ended September 30, 2020, the Company withheld i25,826 and i765,426
shares, respectively, from equity awards that vested, totaling $i3.7 million and $i104.8
million, respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. During the three and nine months ended September 30, 2019, the Company withheld i44,829 and i742,946
shares, respectively, from equity awards that vested, totaling $i4.2 million and $i74.8
million respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. These shares are reflected as treasury stock in the Company’s condensed consolidated balance sheets and the related cash outlays do not reduce the Company’s total stock repurchase authority.
16. iCOMMITMENTS
AND CONTINGENCIES
Legal Matters
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of any pending claims, suits, assessments,
regulatory investigations, or other legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made. In addition, in accordance with the relevant authoritative guidance, for matters in which the likelihood of material loss is at least reasonably possible, the Company provides disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, however, the Company will provide disclosure to that effect.
Due to the nature of the Company's business, the
Company is subject to patent infringement claims, including current litigation alleging infringement by various Company solutions and services. The Company believes that it has meritorious defenses to the allegations made in its pending litigation and intends to vigorously defend itself; however, it is unable currently to determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any. In addition, the Company is subject to various other legal proceedings, including suits, assessments, regulatory actions and investigations generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcomes of these matters, the
30
Company
believes that outcomes that will materially and adversely affect its results of operations or cash flows are reasonably possible but not estimable at this time.
On July 25, 2019, a class action lawsuit was filed against Citrix, LogMeIn, Inc. (“LogMeIn”) and certain of their current and former directors and officers in the Circuit Court of the 15th Judicial Circuit, Palm Beach County, Florida. The complaint alleges that the defendants violated federal securities laws by making alleged misstatements and omissions in LogMeIn’s Registration Statement and Prospectus filed in connection with the 2017 spin-off of Citrix’s GoTo family of service offerings and subsequent merger of that business with LogMeIn. The complaint seeks among other things the recovery of monetary damages. On April 28, 2020, the defendants filed motions
to dismiss the complaint, which remain pending. The Company believes that Citrix and its current and former directors named as defendants have meritorious defenses to these allegations; however, the Company is unable to currently determine the ultimate outcome of this matter or the potential exposure or loss, if any.
Guarantees
The authoritative guidance requires certain guarantees to be recorded at fair value and requires a guarantor to make disclosures, even when the likelihood of making any payments under the guarantee is remote. For those guarantees and indemnifications that do not fall within
the initial recognition and measurement requirements of the authoritative guidance, the Company must continue to monitor the conditions that are subject to the guarantees and indemnifications, as required under existing generally accepted accounting principles, to identify if a loss has been incurred. If the Company determines that it is probable that a loss has been incurred, any such estimable loss would be recognized. The initial recognition and measurement requirements do not apply to the provisions contained in the majority of the Company’s software license agreements that indemnify licensees of the Company’s software from damages
and costs resulting from claims alleging that the Company’s software infringes the intellectual property rights of a third party. The Company has not made material payments pursuant to these provisions. 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.
Other Purchase Commitments
In
May 2020, the Company entered into an amended agreement with a third-party provider, in the ordinary course of business, for the use of certain cloud services through June 2029. Under the amended agreement, the Company is committed to a purchase of $i1.00 billion throughout the term of the agreement. As of September 30,
2020, the Company had $i969.8 million of remaining obligations under the purchase agreement.
17. iRESTRUCTURING
The Company has implemented multiple restructuring plans to reduce its cost structure, align resources with its product strategy and improve efficiency, which has resulted in workforce reductions and the consolidation of certain leased facilities. All of the activities related to these restructuring plans are substantially complete.
i
For the three and nine months ended September 30,
2020 and 2019, restructuring charges were comprised of the following (in thousands):
The
Company reviews for impairment of long-lived assets, including right-of-use (“ROU”) assets, whenever events or changes in circumstances indicate that the carrying amount of such assets may be impaired. Measurement of an impairment loss is based on the fair value of the asset compared to its carrying value. The fair value of the ROU assets is determined by utilizing the present value of the estimated future cash flows attributable to the assets. During the nine months ended September 30, 2020, in connection with the COVID-19 pandemic, the Company determined that a vacant facility partially impaired under a previous restructuring plan became fully impaired due to a reassessment of the timing and fees of the assumed sublease rentals and recorded impairment charges of $i8.9
million. This non-recurring fair value measurement was categorized as Level 3, as significant unobservable inputs were utilized.
31
Restructuring accruals
i
The activity in the Company’s restructuring accruals for the nine months ended September 30,
2020 is summarized as follows (in thousands):
The following tables presents the changes in total stockholders'
(deficit) equity during the three and nine months ended September 30, 2020 (in thousands):
On October 22, 2020, the Company announced that its Board of Directors approved a quarterly cash dividend of $i0.35 per share which will be paid on December 22, 2020 to all shareholders of record as of the close of business on December 8, 2020.
36
ITEM
2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 that are not historical facts, including, but not limited to, statements concerning our strategy and operational and growth initiatives, our transition to a subscription-based business model, our expansion of cloud-delivered services, changes in our product and service offerings and features, financial information and results of operations for future periods, revenue trends, the impacts of the COVID-19 pandemic and related market and economic conditions on our business, results of operations and financial condition, customer demand, business continuity, risk mitigation and expectations
regarding remote work, the resiliency of our solutions and business model, expectations regarding our customers’ spending during a weak economic environment, seasonal factors or ordering patterns, stock-based compensation, international operations, investment transactions and valuations of investments and derivative instruments, restructuring charges, reinvestment or repatriation of foreign earnings, fluctuations in foreign exchange rates, tax estimates and other tax matters, liquidity, stock repurchases and dividends, our debt, changes in accounting rules or guidance, acquisitions, litigation matters, and the security of our network, products and services, 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. Readers
are directed to the risks and uncertainties identified in Part I, Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the year ended December 31, 2019, as updated by Part II, Item 1A in this Quarterly Report on Form 10-Q for additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements. Such factors, 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 or presented elsewhere by our management from time to time. Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition. We caution readers not to place undue reliance on any forward-looking statements, which only speak as of the date made. We undertake no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made.
Overview
Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand our financial condition and results of operations. This section is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2020. 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. During the first quarter of 2020, this historical trend was impacted by the COVID-19 pandemic.
Citrix is an enterprise software company focused on helping customers improve the productivity and user experience of their most valuable assets, their employees. We do this by creating a digital workspace that provides unified, secure, and reliable access to all applications and content employees need to be productive - anytime, anywhere, on any device. Our Networking solutions, which can be consumed via hardware or software, complement our Workspace solutions by delivering applications and data employees need across any network with security, reliability and speed.
We market and license our solutions
through multiple channels worldwide, including selling through resellers and direct over the Web. Our partner community comprises thousands of value-added resellers, or VARs, known as Citrix Solution Advisors, value-added distributors, or VADs, systems integrators, or SIs, independent software vendors, or ISVs, original equipment manufacturers, or OEMs, and Citrix Service Providers, or CSPs.
We are a Delaware corporation incorporated on April 17, 1989.
Executive Summary
During the three months ended September 30, 2020, the momentum in our subscription model transition continued, driven primarily by strong demand for our Workspace solutions. We believe that our third quarter
performance reflects the confidence of our customers in Citrix’s vision and the critical role Citrix’s solutions have in helping customers adapt to the secular shifts towards hybrid and flexible work, security and employee experience.
As we previously announced, we discontinued broad availability of perpetual licenses for Citrix Workspace beginning on October 1, 2020. Going forward, customers will have the option of acquiring new Citrix Workspace seats in the form of on-
37
premises subscription or SaaS offerings. However, we will continue to support and renew existing maintenance contracts
for the foreseeable future.
Longer term, our subscription transition is expected to result in more sustainable, recurring revenue growth over time as less revenue comes from one-time product and licensing streams and more revenue comes from predictable, recurring streams that will be recognized in future periods. We believe that this dynamic is best captured in our Subscription and SaaS Annualized Recurring Revenue, or ARR.
Through the first three quarters of 2020, many customers focused on near-term business critical needs as their workforces adapted to remote work precipitated by the pandemic. As such, these customers have often chosen on-premises subscriptions rather than immediately migrating their Citrix Workspace deployments directly to the cloud. As a result of this near-term focus of customers on business critical needs and other cloud migration challenges, the transition
and trade-up of customers to our cloud offerings has not progressed during 2020 at the rate we had anticipated at the beginning of the year. To address the challenges in transitioning our customers to the cloud, we continue to invest in innovation and feature development, simplified cloud migration, and performance and reliability, as well as other cloud customer success initiatives.
This operating metric represents the contracted recurring value of all termed subscriptions normalized to a one-year period. It is calculated at the end of a reporting period by taking each contract’s recurring total contract value and dividing by the length of the contract.
ARR includes only active contractually committed, fixed subscription fees. Our definition of ARR includes contracts expected to recur and therefore excludes contracts with durations of 12 months or less where licenses were issued to address extraordinary business continuity events for our customers. All contracts are annualized, including 30 day offerings where we take monthly recurring revenue multiplied by 12 to annualize. ARR may be influenced by seasonality within the year. ARR should be viewed independently of U.S. GAAP revenue, deferred revenue and unbilled revenue and is not intended to be combined with or to replace those items. ARR is not a forecast of future revenue. As we continue through
this business model transition, we believe ARR is a key indicator of the overall health and trajectory of our business. Management uses ARR to monitor the growth of our subscription business.
On January 21, 2020, we entered into a Term Loan Credit Agreement that provided us with facilities to borrow term loans on an unsecured basis in an aggregate principal amount of up to $1.00 billion, consisting of (1) a $500.0 million 364-day term loan facility (the “364-day Term Loan”), and (2) a $500.0 million 3-year term loan facility (the “3-year Term Loan”), in each case in a single borrowing, subject to satisfaction of certain conditions set forth in the Term Loan Credit Agreement.
On January 21, 2020, our Board of Directors approved an increase of an additional $1.00 billion
in authorized repurchase authority to our existing share repurchase program.
On January 30, 2020, we borrowed $1.00 billion under the term loans and used the proceeds from our Term Loan Credit Agreement to enter into accelerated share repurchase transactions ("ASR") with each of Goldman Sachs & Co. LLC and Wells Fargo Bank, National Association (each, a "Dealer") for an aggregate of $1.00 billion. Under the ASR transactions, we received an initial share delivery of 6.5 million shares of our common stock, with the remainder delivered upon completion of the ASR transactions. The price per share under the ASR was equal to the average of the daily volume-weighted average prices of our common stock during the term of the applicable ASR agreement, less a discount. We received delivery of 0.8 million shares of our common stock in August 2020 in final settlement of
the ASR Agreement. The ASR was entered into pursuant to our existing share repurchase program.
On February 25, 2020, we issued $750.0 million of unsecured senior notes due March 1, 2030 (the "2030 Notes"). The net proceeds from this offering were $738.1 million, after deducting the underwriting discount and estimated offering expenses payable by us. Net proceeds from this offering were primarily used to repay amounts outstanding under our unsecured Term Loan Credit Agreement. During the nine months ended September 30, 2020, we used the net proceeds from the 2030 Notes and cash to repay $750.0 million under the Term Loan Credit Agreement. As of September 30, 2020, $250.0 million was outstanding under the Term Loan Credit
Agreement.
On October 21, 2020, our Board of Directors expanded the size of the Board from ten to eleven directors, and elected Mr. Robert E. Knowling, Jr., as a director, effective as of the same date. Mr. Knowling was also appointed as a member of the Compensation Committee of the Board.
On October 22, 2020, we announced that our Board of Directors declared a $0.35 per share dividend payable December 22, 2020 to all shareholders of record as of the close of business on December 8, 2020.
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Impact
of COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic, which continues to spread throughout the U.S. and the world. The impact from the rapidly changing market and economic conditions due to the COVID-19 outbreak remains uncertain. It has disrupted the business of our customers and partners, has and will likely continue to impact our business and consolidated results of operations and could impact our financial condition in the future. While we have not incurred significant disruptions thus far from the COVID-19 outbreak, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities, the impact to the business of our customers and partners and other factors identified in Part II, Item 1A “Risk
Factors” in this Quarterly Report on Form 10-Q. We also believe that our financial resources will allow us to manage the anticipated impact of COVID-19 on our business operations for the foreseeable future, which could include reductions in revenue and delays in payments from customers and partners. However, we are continuing to monitor the situation and are reviewing our preparedness plans should we begin to experience material impacts.
Impact of COVID-19 on our Results
To provide a flexible solution to help our customers manage through this period, in the first quarter of 2020, we created a short-term on-premises term subscription license at discounted prices. This limited-use license program was intended to help our customers manage through the shock to the system created by the pandemic. We phased out this short-term license program at the end of April 2020. The contribution
from this limited-use license program was not material in the third quarter of 2020, but its impact will be reflected in our full year results.
Impact of COVID-19 on our Outlook and Liquidity
With respect to the remainder of 2020 and into 2021, the broader toll COVID-19 may take on the global economy and the slope of the economic recovery is unknown. We believe that our solutions and our business model are resilient. However, given the unknown magnitude, in terms of depth and duration, of this crisis, we view the increased demand we experienced in the first half of the year, as a potential offset against what could prove to be a more challenging macroeconomic environment in the remainder of the year. Longer term, we believe this global health crisis will cause companies and their employees to change the way they think about remote work. We expect business continuity and risk mitigation
to rise as areas of importance in boardroom discussions and on IT priority lists. We believe a greater number of employees will expect to continue to be able to work remotely, at least some of the time, even as social distancing restrictions abate.
Cash from operations, accounts receivable and revenues could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part II, Item 1A titled “Risk Factors” of this Quarterly Report on Form 10-Q. However, based on our current revenue outlook, we believe that existing cash balances, together with funds generated from operations and amounts available under our revolving credit facility, will be sufficient to finance our operations and meet our foreseeable cash requirements through at least the next twelve months. We have availed ourselves of certain tax deferrals allowed pursuant to
the CARES Act in the U.S. and certain tax deferrals in Switzerland, and may continue to do so in the future. We are evaluating the impact of global COVID-19-related laws and proposed laws, and while there is an impact on the timing of cash flow, no material impact to our financial results is expected as a result of legislation enacted to date. In addition, while the pandemic has not materially impacted our liquidity and capital resources to date, it has led to increased disruption and volatility in capital markets and credit markets which could adversely affect our liquidity and capital resources in the future.
Other Impacts of COVID-19
In March 2020, we directed our global workforce to work from home and severely limited all international and domestic travel. We have extended our paid time-off and sick leave benefits for employees directly impacted by COVID-19 or caring for children
or a member of their household impacted by COVID-19. We provided $1,000 per employee below the Vice President level to cover expenses related to transitioning to a work from home environment, helping support local restaurants and small businesses or charities, or lessening any other potential hardship. We also offer local employee assistance program resources if needed. Certain of our offices have re-opened and we continue to monitor developments at the local level and follow mandates as required by law. For offices that have re-opened, we have implemented new protocols to ensure the safety of our employees, including face coverings, temperature checks, social distancing and capacity limits.
In response to the COVID-19 pandemic, we held our largest customer and partner event, Synergy, as a series of virtual events, and we may deem it advisable to similarly alter, postpone or cancel additional customer, employee or industry
events in the future.
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We have also increased funding for corporate citizenship directed donations and created a relief recovery fund for the COVID-19 outbreak, doubled our charitable match for employee donations, continued to pay vendors no longer providing on-site services, and set up virtual volunteering opportunities.
•Total net revenue increased 4.7% to $767.2 million;
•Subscription revenue increased 64.3% to $262.6 million;
•SaaS revenue increased 36.7% to $137.8 million;
•Product and license revenue decreased 33.5% to $87.2 million;
•Support and services revenue decreased 5.6% to $417.3 million;
•Gross margin as a percentage of revenue increased 0.7% to 83.4%;
•Operating income increased 15.8% to $128.3 million;
•Diluted net income per
share decreased 61.8% to $0.78;
•Unbilled revenue increased $356.7 million to $916.1 million;
•Subscription ARR increased $354.3 million to $1.03 billion; and
•SaaS ARR increased $167.4 million to $630.1 million.
Our Subscription revenue increased primarily due to an increase in on-premise license demand, mostly from our Workspace offerings and our Networking offerings, primarily from pooled capacity. Also contributing to the increase is continued customer adoption of our solutions delivered via the cloud. Our Product and license revenue decreased primarily due to lower sales of our perpetual Networking solutions as customers continue to shift to our subscription offerings. The decrease in Support and services revenue was
primarily due to decreased sales of maintenance services across our perpetual Networking and Workspace offerings and professional services, as more of the revenue is reported in the Subscription revenue line commensurate with our subscription model transition. We currently expect total revenue to increase when comparing the fiscal year 2020 to the fiscal year 2019 due to the acceleration of our transition to a subscription-based model. The increase in operating income was primarily due to an increase in gross margin partially offset by higher operating expenses. The decrease in diluted net income per share was primarily due to an increase in income tax expense as a result of a benefit related to Swiss tax reform in the third quarter of 2019, partially offset by a decrease in the number of weighted average shares outstanding due to share repurchases. Both Subscription and SaaS ARR increased due to the acceleration of subscription bookings.
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. The preparation of these 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, 2019, or the Annual Report, and Note 2 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. There have been no material changes to the critical accounting policies disclosed in the Annual Report.
40
Results
of Operations
The following table sets forth our unaudited condensed consolidated statements of income data and presentation of that data as a percentage of change from period-to-period (in thousands):
Amortization
and impairment of product related intangible assets
8,293
22,622
24,877
42,707
(63.3)
(41.7)
Total
cost of net revenues
127,286
126,918
365,103
344,870
0.3
5.9
Gross margin
639,884
605,983
2,061,941
1,855,871
5.6
11.1
Operating
expenses:
Research and development
130,628
126,420
405,563
390,712
3.3
3.8
Sales,
marketing and services
298,659
274,874
916,279
847,958
8.7
8.1
General and administrative
81,591
80,042
252,498
238,751
1.9
5.8
Amortization
of other intangible assets
701
4,937
2,097
11,671
(85.8)
(82.0)
Restructuring
—
8,879
11,981
16,022
(100.0)
(25.2)
Total
operating expenses
511,579
495,152
1,588,418
1,505,114
3.3
5.5
Income from operations
128,305
110,831
473,523
350,757
15.8
35.0
Interest
income
491
2,649
2,685
16,193
(81.5)
(83.4)
Interest expense
(16,639)
(8,822)
(48,326)
(37,144)
88.6
30.1
Other
income, net
3,841
3,456
7,850
3,735
11.1
110.2
Income before income taxes
115,998
108,114
435,732
333,541
7.3
30.6
Income
tax expense (benefit)
17,771
(162,743)
43,377
(141,159)
(110.9)
(130.7)
Net
income
$
98,227
$
270,857
$
392,355
$
474,700
(63.7)
%
(17.3)
%
41
Revenues
Net
revenues include Subscription, Product and license and Support and services revenues.
Subscription revenue relates to fees which are generally recognized ratably over the contractual term. Our subscription revenue includes SaaS, which primarily consists of subscriptions delivered via a cloud-hosted service whereby the customer does not take possession of the software and hybrid subscription offerings and the related support; and non-SaaS, which consists primarily of on-premise licensing, hybrid subscription offerings, CSP services and the related support. Our hybrid subscription offerings are allocated between SaaS and non-SaaS, which are generally recognized at a point in time. In addition, our CSP program provides subscription-based services in which the CSP partners host software services to their end users. The fees from the CSP program are recognized based on usage and as the CSP services are provided to their end users.
Product
and license revenue primarily represents fees related to the perpetual licensing of the following major solutions:
•Workspace is primarily comprised of our Application Virtualization solutions, which include Citrix Virtual Apps and Desktops, our unified endpoint management solutions, which include Citrix Endpoint Management, Citrix Content Collaboration, and Citrix Workspace; and
•Networking products, which primarily include Citrix ADC and Citrix SD-WAN. Beginning in the fourth quarter of 2020, we are renaming our Networking product grouping to App Delivery and Security to better align with industry categorization of our solutions.
We offer incentive programs to our VADs and VARs to stimulate demand for our solutions. Product and license and Subscription revenues associated with these programs
are partially offset by these incentives to our VADs and VARs.
Support and services revenue consists of maintenance and support fees primarily related to our perpetual offerings and include the following:
•Customer Success Services, which gives customers a choice of tiered support offerings that combine the elements of product version upgrades, guidance, enablement, support and proactive monitoring to help our customers and our partners fully realize their business goals. Fees associated with this offering are recognized ratably over the term of the contract; and
•Hardware maintenance fees for our perpetual Networking products, which include technical support and hardware and software maintenance, are
recognized ratably over the contract term; and
•Fees from consulting services related to the implementation of our solutions, which are recognized as the services are provided; and
•Fees from product training and certification, which are recognized as the services are provided.
Subscription
revenue increased for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to an increase in on-premise license demand of $65.8 million, mostly from our Networking offerings of $36.1 million, mainly from pooled capacity, and our Workspace offerings of $29.7 million. Also contributing to the increase is continued customer adoption of our solutions delivered via the cloud of $37.0 million, primarily from our Workspace offerings.
Subscription revenue increased for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to an increase in on-premise license demand of $203.5 million, mostly from our Workspace offerings of $120.4
million and our Networking offerings of $83.1 million, mainly from pooled capacity. Also contributing to
42
the increase is continued customer adoption of our solutions delivered via the cloud of $113.5 million, primarily from our Workspace offerings.
We currently expect our Subscription revenue to increase when comparing the fiscal year 2020 to the fiscal year 2019 as customers continue to shift to our subscription offerings.
Product and license
Product and license revenue decreased when comparing the three months ended
September 30, 2020 to the three months ended September 30, 2019 primarily due to lower sales of our perpetual Networking products, as customers continue to shift to our subscription offerings.
Product and license revenue decreased when comparing the nine months ended September 30, 2020 to the nine months ended September 30, 2019 primarily due to lower sales of our perpetual Networking products of $59.9 million, partially offset by higher sales of our perpetual Workspace offerings of $43.2 million, mostly from business continuity sales in response to the COVID-19 pandemic in the first quarter of 2020.
We
currently expect our Product and license revenue to decrease when comparing the fiscal year 2020 to the fiscal year 2019 as customers continue to shift to our subscription offerings and away from our Networking hardware products, as well as our decision to discontinue offering new perpetual licenses for Citrix Workspace beginning on October 1, 2020.
Support and services
Support and services revenue decreased for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to lower sales of maintenance services across our Networking perpetual
offerings of $14.3 million, our Workspace perpetual offerings of $6.2 million and professional services of $4.1 million, as more of the revenue is reported in the Subscription revenue line commensurate with our subscription model transition.
Support and services revenue decreased for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to lower sales of maintenance services across our Workspace perpetual offerings of $29.4 million, Networking perpetual offerings of $27.2 million and professional services of $17.4 million, as more of the revenue is reported in the Subscription revenue line commensurate with our subscription model transition.
We currently expect our Support and services revenue to decrease
when comparing the fiscal year 2020 to the fiscal year 2019 as customers continue to shift to our subscription offerings.
Deferred Revenue, Unbilled Revenue and Backlog
Deferred revenue is primarily comprised of Support and services revenue from maintenance fees, which include software and hardware maintenance, technical support related to our perpetual offerings and services revenue related to our consulting contracts. Deferred revenue also includes Subscription revenue from our Content Collaboration and cloud-based subscription offerings.
Deferred revenue primarily consists of billings or payments received in advance of revenue
recognition and is recognized in our condensed consolidated balance sheets and statements of income as the revenue recognition criteria are met. Unbilled revenue primarily represents future billings under our subscription agreements that have not been invoiced and, accordingly, are not recorded in accounts receivable or deferred revenue within our condensed consolidated financial statements. Deferred revenue and unbilled revenue are influenced by several factors, including new business seasonality within the year, the specific timing, size and duration of customer subscription agreements, annual billing cycles of subscription agreements, and invoice timing. Fluctuations in deferred and unbilled revenue may not be a reliable indicator of future performance and the related revenue associated with these contractual commitments.
The following table presents the amounts of deferred revenue and unbilled revenue (in thousands):
Deferred
revenue decreased $103.5 million as of September 30, 2020 compared to December 31, 2019 primarily due to a decrease in maintenance and support of $204.4 million, mostly from Workspace perpetual software maintenance of $140.4 million and Networking perpetual hardware maintenance of $50.8 million, partially offset by an increase from subscription of
43
$103.1 million. Unbilled revenue as of September 30, 2020 increased $211.3 million from December 31, 2019 primarily due to increased customer adoption of multi-year subscription agreements.
While
it is generally our practice to promptly ship our products upon receipt of properly finalized orders, at any given time, we have confirmed product license orders that have not shipped and are unfulfilled. Backlog includes the aggregate amounts we expect to recognize as point in time revenue in the following quarter associated with contractually committed amounts for on-premise subscription software licenses, as well as confirmed product license orders that have not shipped and are wholly unfulfilled. As of September 30, 2020 and September 30, 2019, the amount of backlog was not material. We do not believe that backlog, as of any particular date, is a reliable indicator of future performance.
International
Revenues
International revenues (sales outside the United States) accounted for 51.0% and 47.7% of our net revenues for the three months ended September 30, 2020 and September 30, 2019, respectively, and 50.2% and 47.9% of our net revenues for the nine months ended September 30, 2020 and September 30, 2019, respectively. The change in our international revenues as a percentage of our net revenues for the three and nine months ended September 30, 2020 as compared to the three and nine months ended September 30,
2019 was primarily due to higher revenues in our EMEA region, mainly from Subscription. See Note 10 to our condensed consolidated financial statements for detailed information on net revenues by geography.
Cost of subscription, support and services revenues
$
102,755
$
76,885
$
282,672
$
227,130
$
25,870
$
55,542
Cost
of product and license revenues
16,238
27,411
57,554
75,033
(11,173)
(17,479)
Amortization and impairment of product related intangible assets
8,293
22,622
24,877
42,707
(14,329)
(17,830)
Total
cost of net revenues
$
127,286
$
126,918
$
365,103
$
344,870
$
368
$
20,233
Cost of subscription,
support and services revenues consists primarily of compensation and other personnel-related costs of providing technical support, consulting and cloud capacity costs, as well as the costs related to providing our offerings delivered via the cloud. Cost of product and license revenues consists primarily of hardware, shipping expense, royalties, product media and duplication, manuals and packaging materials. Also included in cost of net revenues is amortization and impairment of product related intangible assets.
Cost of subscription, support and services revenues increased for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, and for the nine months ended September 30, 2020 compared to the nine months ended
September 30, 2019, primarily due to an increase in costs related to providing our subscription offerings. We currently expect Cost of subscription, support and services revenues to increase when comparing the fiscal year 2020 to the fiscal year 2019, consistent with the expected increases in Subscription revenue as discussed above.
Cost of product and license revenues decreased for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, and for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to lower overall sales of our perpetual Networking products, which contain hardware components
that have a higher cost than our software products. We currently expect Cost of product and license revenues to decrease when comparing the fiscal year 2020 to the fiscal year 2019, consistent with the expected decrease in Product and license revenue.
Amortization and impairment of product related intangible assets decreased for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, and for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to the impairment of certain acquired intangible assets, primarily developed technology, in the third quarter of 2019.
The functional currency for all of our wholly-owned foreign subsidiaries is the U.S. dollar. A substantial majority of our overseas operating expenses and capital purchasing activities are transacted in local currencies and are therefore subject to fluctuations in foreign currency exchange rates. In order to minimize the impact on our operating results, we generally initiate our hedging of currency exchange risks up to 12 months in advance of anticipated foreign currency expenses. 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 our 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 our hedging contracts. There is a risk that there will be fluctuations in foreign currency exchange rates beyond the time frame for which we hedge our risk.
Research
and development expenses consist 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 September 30, 2020 compared to the three months ended September 30, 2019 primarily due to stock-based compensation. Research and development expenses increased during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to compensation and other employee-related costs of $8.4 million related to a net increase in
headcount, as well as an increase in stock-based compensation of $2.7 million.
Sales,
marketing and services expenses consist primarily of personnel related costs, including sales commissions, pre-sales support, the costs of marketing programs aimed at increasing revenue, such as brand development, advertising, trade shows, public relations and other market development programs and costs related to our facilities, equipment, information systems and pre-sale demonstration related cloud capacity costs that are directly related to our sales, marketing and services activities.
Sales, marketing and services expenses increased during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to variable compensation of $17.0 million and marketing programs of $13.3 million related to our new brand launch, partially offset by a decrease in compensation
and other employee-related costs of $5.5 million mostly related to COVID-19 travel restrictions.
Sales, marketing and services expenses increased during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to the impact from the COVID-19 pandemic, which included an increase in variable compensation of $56.6 million driven by an increase in demand of limited use licenses and ongoing business continuity sales, and an increase in marketing programs of $23.9 million. These increases were partially offset by a decrease in costs of
45
$12.6 million related to
the cancellation of in-person events in response to the COVID-19 pandemic, including our largest customer and partner event, Synergy, and replacing them with virtual events or postponing to future periods.
General
and administrative expenses consist 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 remained consistent when comparing the three months ended September 30, 2020 to the three months ended September 30, 2019.
General and administrative expenses increased during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to increases in stock-based compensation of $13.6 million, compensation and other employee-related costs of $13.2 million, and credit loss expense of $6.2 million
related to the impact from the COVID-19 pandemic. These increases were partially offset by a decrease in professional fees of $19.9 million.
Restructuring
expenses decreased during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to employee severance and related costs of $6.2 million and the consolidation of certain leased facilities of $2.7 million in the three months ended September 30, 2019.
Restructuring expenses decreased during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to a net decrease in employee severance and related costs of $10.3 million, as well as the consolidation of certain
leased facilities of $2.7 million during the nine months ended September 30, 2019, partially offset by the impairment of an ROU asset related to a restructuring facility of $8.9 million as a result of the COVID-19 pandemic during the nine months ended September 30, 2020.
See Note 17 to our condensed consolidated financial statements for additional details regarding our restructuring charges.
2020 Operating Expense Outlook
When comparing the fiscal year 2020 to the fiscal year 2019, we currently expect
Operating expenses to increase due to continued investment to support our cloud transition and higher compensation related expenses.
Interest
income primarily consists of interest earned on our cash, cash equivalents and investment balances. Interest income decreased for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to lower yields on investments as a result of lower interest rates.
Interest income decreased for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to lower average balances of cash, cash equivalents and investments as a result of the repayment of the outstanding principal balance of our Convertible Notes on April 15, 2019, as well as lower yields on
46
investments
as a result of lower interest rates. See Note 6 to our condensed consolidated financial statements for additional details regarding our investments.
Interest
expense primarily consists of interest paid on our 2027 and 2030 Notes, Term Loan Credit Agreement and our credit facility. Interest expense increased for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to interest expense from our outstanding 2030 Notes and Term Loan Credit Agreement.
Interest expense increased for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019primarily due to interest expense from our outstanding 2030 Notes and Term Loan Credit Agreement of $21.9 million, partially offset by a decrease in interest expense from our Convertible Notes of $10.8 million due to
the repayment of the outstanding principal balance on April 15, 2019. See Note 11 to our condensed consolidated financial statements for additional details regarding our debt.
Other
income, net is primarily comprised of gains (losses) from remeasurement of foreign currency transactions, sublease income, realized losses related to changes in the fair value of our investments that have a decline in fair value and recognized gains (losses) related to our investments, which was not material for all periods presented.
The change in Other income, net during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was not significant.
The change in Other income, net during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 is primarily driven by the remeasurement and settlement of foreign
currency transactions.
Income Taxes
We are required to estimate our income taxes in each of the jurisdictions in which we operate as part of the process of preparing our condensed consolidated financial statements. We maintain certain strategic management and operational activities in overseas subsidiaries and our foreign earnings are taxed at rates that are generally lower than in the United States.
Our effective tax rate generally differs from the U.S. federal statutory rate primarily due to tax credits and lower tax rates on earnings generated by our foreign operations that are taxed primarily in Switzerland.
Our
effective tax rate was 15.3% and (150.5)% for the three months ended September 30, 2020 and 2019, respectively. The increase in the effective tax rate when comparing the three months ended September 30, 2020 to the three months ended September 30, 2019, was primarily due to tax items unique to the period ended September 30, 2019. These amounts include an estimated income tax benefit of $157.7 million due to the recognition of Swiss deferred tax assets related to the enactment of the Federal Act on Tax Reform and AHV Financing (“TRAF”), as well as a $17.3 million tax benefit attributable to the 2015 U.S. federal income tax return statute of limitations
closing during the three months ended September 30, 2019.
Our effective tax rate was 10.0% and (42.3)% for the nine months ended September 30, 2020 and 2019, respectively. The increase in the effective tax rate when comparing the nine months ended September 30, 2020 to the nine months ended September 30, 2019 was primarily due to tax items unique to the period ended September 30, 2019. These amounts include an estimated income tax benefit of $157.7 million due to the recognition of Swiss deferred tax assets related to the enactment of the TRAF, as well as a $17.3 million
tax benefit attributable to the 2015 U.S. federal income tax return statute of limitations closing during the nine months ended September 30, 2019. These amounts are partially offset by additional discrete tax benefits for share-based payments during the nine months ended September 30, 2020.
47
Our U.S. liquidity needs are currently satisfied using cash flows generated from our U.S. operations, borrowings, or both. We also utilize a variety of tax planning strategies in an effort to ensure that our worldwide cash is available in locations in which it is needed. We expect to repatriate a substantial portion of our foreign earnings
over time, to the extent that the foreign earnings are not restricted by local laws or result in significant incremental costs associated with repatriating the foreign earnings. See Note 14 to our condensed consolidated financial statements for additional details regarding our income taxes.
Liquidity and Capital Resources
During the nine months endedSeptember 30, 2020, we generated operating cash flows of $815.8 million. These operating cash flows related primarily to net income of $392.4 million, adjusted for, among other things, non-cash charges, stock-based compensation expense of $228.9 million, depreciation and amortization expenses of $157.0 million and a change in operating assets
and liabilities of $62.7 million. The change in our operating assets and liabilities was mostly the result of an inflow from accounts receivable of $150.3 million, primarily due to an increase in collections from prior period sales and an inflow from accrued expenses and other current liabilities of $73.7 million, primarily due to an increase in employee-related accruals. These inflows are partially offset by an outflow in deferred revenue of $103.5 million and an outflow in other assets of $67.1 million, primarily due to an increase in capitalized commissions from higher subscription sales. Our investing activities used $345.8 million of cash consisting primarily of net purchases of investments of $309.4 million and cash paid for the purchase of property and equipment of $30.8 million. Our financing activities used cash of $446.9 million primarily for stock repurchases of $1.20 billion, cash dividends on our common stock of $129.1 million and cash paid for tax withholding
on vested stock awards of $104.8 million. These outflows are partially offset by net proceeds from the issuance of our 2030 Notes of $738.1 million and net borrowings from our Term Loan Credit Agreement of $248.8 million.
During the nine months ended September 30, 2019, we generated operating cash flows of $577.0 million. These operating cash flows related primarily to net income of $474.7 million, adjusted for, among other things, non-cash charges, stock-based compensation expense of $202.5 million and depreciation and amortization expenses of $178.6 million. Partially offsetting these cash flows was a deferred income tax benefit of $184.6 million and a change in operating assets and liabilities of $114.7 million. The change in our net operating assets and liabilities was primarily a result of an outflow in deferred revenue of $219.0 million, an outflow in other assets of $50.1
million, primarily due to an increase in capitalized contract acquisition costs of $34.5 million and long-term contract assets of $13.9 million, an outflow in accrued expenses and other current liabilities of $48.5 million, primarily due to decreases in employee-related accruals, and an outflow in income taxes, net of $42.1 million, primarily due to decreases in income taxes payable of $24.6 million and an increase in prepaid taxes of $17.6 million. These outflows are partially offset by an inflow in accounts receivable of $256.6 million driven by an increase in collections. Our investing activities provided $1.03 billion of cash consisting primarily of cash received from the net proceeds from the sale of investments of $1.08 billion, partially offset by cash paid for the purchase of property
and equipment of $50.5 million. Our financing activities used cash of $1.73 billion primarily for the cash repayment of the outstanding principal balance of our Convertible Notes of $1.16 billion, stock repurchases of $353.9 million, repayment of borrowings under our credit facility of $200.0 million, cash dividends on our common stock of $137.2 million and cash paid for tax withholding on vested stock awards of $74.8 million. These outflows are partially offset by borrowings from our credit facility of $200.0 million.
Term Loan Credit Agreement
On January 21, 2020, we entered into the Term Loan Credit Agreement with Bank of America, N.A., as administrative agent, and the other lenders party thereto from time to time (collectively, the “Lenders”).The Term Loan Credit Agreement
provides us with facilities to borrow term loans on an unsecured basis in an aggregate principal amount of up to $1.00 billion, consisting of (1) a $500.0 million 364-day Term Loan, and (2) a $500.0 million 3-year Term Loan, in each case in a single borrowing, subject to satisfaction of certain conditions set forth in the Term Loan Credit Agreement. On January 30, 2020, we borrowed $1.00 billion under the term loans and used the proceeds to enter into ASR transactions with each of the Dealers for an aggregate of $1.00 billion. See Notes 11 and 15 to our condensed consolidated financial statements for additional details on the Term Loan Credit Agreement and ASR.
Senior Notes
On February 25, 2020, we issued $750.0 million of unsecured senior notes due March
1, 2030. The 2030 Notes accrue interest at a rate of 3.300% per annum. Interest on the 2030 Notes is due semi-annually on March 1 and September 1 of each year, beginning on September 1, 2020. The net proceeds from this offering were $738.1 million, after deducting the underwriting discount and estimated offering expenses payable by us. Net proceeds from this offering were primarily used to repay amounts outstanding under our Term Loan Credit Agreement. The 2030 Notes will mature on March 1, 2030, unless earlier redeemed in accordance with their terms prior to such date.
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During the nine months ended September 30, 2020,
we used the net proceeds from the 2030 Notes and cash to repay $500.0 million under the 364-day Term Loan and $250.0 million under the 3-year Term Loan. As of September 30, 2020, $250.0 million was outstanding under the 3-year Term Loan.
On November 15, 2017, we issued $750.0 million of the 2027 Notes. The 2027 Notes accrue interest at a rate of 4.500% per annum. Interest on the 2027 Notes is due semi-annually on June 1 and December 1 of each year, beginning on June 1, 2018. The 2027 Notes will mature on December 1, 2027, unless earlier redeemed or repurchased in accordance with their terms prior to such date. See Note 11 to our condensed consolidated financial statements for additional details on the 2030 Notes and the 2027 Notes.
Credit Facility
On November 26, 2019, we entered into an amended and restated credit agreement (the "Credit Agreement") with a group of financial institutions, which amended and restated our existing credit agreement, dated January 7, 2015. The Credit Agreement provides for a five-year unsecured revolving credit facility in the aggregate amount of $250.0 million, subject to continued covenant compliance. We may elect to increase the revolving credit facility by up to $250.0 million if existing or new lenders provide additional revolving commitments in accordance with the terms of the Credit Agreement. The proceeds of borrowings under the Credit Agreement may be used for working capital and general corporate purposes, including acquisitions. As of September 30,
2020, no amounts were outstanding under the credit facility. See Note 11 to our condensed consolidated financial statements for additional details on the Credit Agreement.
Historically, significant portions of our cash inflows were generated by our operations. We currently expect this trend to continue for the remainder of 2020. 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 and service our debt obligations for the next 12 months. For additional information, see section titled Impact of COVID-19 Pandemic above. We continue to search for suitable acquisition candidates and could acquire or make investments
in companies we believe are related to our strategic objectives. We could from time to time continue to seek to raise additional funds through the issuance of debt or equity securities for larger acquisitions and for general corporate purposes.
The increase in Cash, cash equivalents and investments when comparing September 30, 2020 to December 31,
2019, is primarily due to cash received from debt offerings of $987.0 million and cash provided by operating activities of $815.8 million, partially offset by the cash paid for share repurchases of $1.20 billion, cash dividends on our common stock of $129.1 million, cash paid for tax withholding on vested stock awards of $104.8 million, and cash paid for property and equipment of $30.8 million.
As of September 30, 2020, $486.9 million of the $938.4 million of Cash, cash equivalents and investments was held by our foreign subsidiaries. The cash, cash equivalents and investments held by our foreign subsidiaries can be repatriated without incurring any additional U.S. federal tax. Upon repatriation
of these funds, we could be subject to foreign and U.S. state income taxes. The amount of taxes due is dependent on the amount and manner of the repatriation, as well as the locations from which the funds are repatriated and received. 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.
Stock Repurchase Programs
Our Board of Directors authorized an ongoing stock repurchase program, of which $1.00 billion was approved in January 2020. We may use the approved dollar authority to repurchase stock at any time until the approved amount is exhausted. The objective of the stock repurchase program is to improve stockholders’ returns. At September 30,
2020, $714.1 million was available to repurchase common stock pursuant to the stock repurchase program. We may repurchase shares under this program in future periods depending on a variety of factors, including among other things, macroeconomic factors, market conditions and business priorities.All shares repurchased are recorded as treasury stock. A portion of the funds used to repurchase stock over the course of the program was provided by net proceeds from the Convertible Notes, the 2027 Notes and the Term Loan Credit Agreement as well as proceeds from employee stock awards and the related tax benefit. We are authorized to make purchases of our common stock using general corporate funds through open market purchases, pursuant to a Rule 10b5-1 plan or in privately negotiated transactions.
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On
January 30, 2020, we used the proceeds from our Term Loan Credit Agreement to enter into an ASR with a group of Dealers for an aggregate of $1.00 billion. Under the ASR transactions, we received an initial share delivery of 6.5 million shares of our common stock, with the remainder delivered upon completion of the ASR transactions. The total number of shares of common stock that we repurchased under each ASR agreement was based on the average of the daily volume-weighted average prices of our common stock during the term of the applicable ASR agreement, less a discount. We received delivery of 0.8 million shares of our common stock in August 2020 in final settlement of the ASR Agreement. See Note 15 to our condensed consolidated financial statements for detailed information on the ASR.
During the three months ended September 30,
2020, we made no open market purchases under the stock repurchase program. During the nine months ended September 30, 2020, we expended $199.9 million on open market purchases under the stock repurchase program, repurchasing 1,731,500 shares of common stock at an average price of $115.45.
During the three months ended September 30, 2019, we expended $103.9 million on open market purchases under the stock repurchase program, repurchasing 1,130,100 shares of common stock at an average price of $91.94. During the nine months ended September 30, 2019, we expended $353.9 million on open market purchases under the stock repurchase program, repurchasing 3,640,982 shares of common stock at an average price of $97.20.
Shares for Tax Withholding
During
the three and nine months ended September 30, 2020, we withheld 25,826 and 765,426 shares, respectively, from equity awards that vested, totaling $3.7 million and $104.8 million, respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. During the three and nine months ended September 30, 2019, we withheld 44,829 and 742,946 shares, respectively, from equity awards that vested, totaling $4.2 million and $74.8 million respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. These shares are reflected as treasury stock in our condensed consolidated balance sheets and the related cash outlays do not reduce our total stock repurchase authority.
Contractual Obligations
With the exception
of the new Term Loan Credit Agreement entered into on January 21, 2020, consisting of a $500.0 million 364-day Term Loan, and a $500.0 million 3-year Term Loan, and the $750.0 million 2030 Senior Notes issued on February 25, 2020, as discussed above under the subheading “Liquidity and Capital Resources”, there have been no material changes, outside the ordinary course of business to our contractual obligations since December 31, 2019. As of September 30, 2020, $250.0 million in principal amount was outstanding under the 3-year Term Loan. For further information, see “Contractual Obligations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Other
Purchase Commitments
In May 2020, we entered into an amended agreement with a third-party provider, in the ordinary course of business, for the use of certain cloud services through June 2029. Under the amended agreement, we are committed to a purchase of $1.00 billion throughout the term of the agreement. As of September 30, 2020, we had $969.8 million of remaining obligations under the purchase agreement.
Off-Balance Sheet Arrangements
We do not have any special purpose entities or off-balance sheet financing arrangements.
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ITEM
3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes during the quarter ended September 30, 2020 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, 2019.
ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of September 30, 2020, our management, with the participation of
our principal executive and principal financial officers, 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 principal executive officer and our principal financial officer concluded that, as of September 30, 2020, 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 principal executive officer and our principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the three months ended September 30, 2020, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act 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
We are subject to various legal proceedings, including suits, assessments, regulatory actions and investigations. We believe that we have meritorious defenses in these matters; however, we are unable currently to determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any. In addition, due to the nature of our business, we are subject to various litigation matters, including patent infringement claims alleging infringement by various Citrix products and services. We believe that we have meritorious defenses to the allegations made in our pending cases 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.
On July 25, 2019,
a class action lawsuit was filed against Citrix, LogMeIn and certain of their current and former directors and officers in the Circuit Court of the 15th Judicial Circuit, Palm Beach County, Florida. The complaint alleges that the defendants violated federal securities laws by making alleged misstatements and omissions in LogMeIn’s Registration Statement and Prospectus filed in connection with the 2017 spin-off of Citrix’s GoTo family of service offerings and subsequent merger of that business with LogMeIn. The complaint seeks among other things the recovery of monetary damages. On April 28, 2020, the defendants filed motions to dismiss the complaint, which remain pending. We believe that Citrix and our current and former directors named as defendants have meritorious defenses to these allegations; however, we are unable to currently determine the ultimate outcome of this matter or the potential exposure or loss, if any.
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, 2019, which was filed with the Securities and Exchange Commission on February 14, 2020.
The effects of the COVID-19 pandemic could adversely affect our business, results of operations, financial condition and cash flows, and such effects will depend on future developments.
In
March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic, which continues to spread throughout the U.S. and the world. The COVID-19 pandemic and the constantly evolving measures that have been, and may be, instituted to slow the spread of COVID-19, including travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and restrictions, continue to weigh on the macroeconomic environment, and the pandemic has significantly increased economic uncertainty and reduced economic activity. The COVID-19 pandemic could cause a long-term global recession, depression, or other adverse economic conditions across the world. In the event of a recession, depression, or other downturn in the worldwide economy, our business could be adversely affected.
The effects of the COVID-19 pandemic on our business are uncertain and difficult to predict, but may include,
the following, each of which could adversely affect our business, results of operations, financial condition and cash flows:
•The rate of IT spending and the ability of our customers to purchase our offerings could be adversely impacted. Further, the impact of COVID-19 could delay prospective customers’ purchasing decisions, impact customers’ pricing expectations for our offerings, lengthen payment terms, reduce the value or duration of their subscription contracts, or adversely impact renewal rates. For example, even though we experienced an increase in demand for shorter duration limited use on–premises term subscriptions during the first quarter of fiscal year 2020 to meet the immediate needs of our customers during the COVID-19 pandemic, which increased our reported revenue, we also experienced customers electing
to postpone discretionary projects and becoming less inclined to trade-up from existing solutions as the economic environment continues to weaken.
•We could experience disruptions in our operations as a result of continued office closures, risks associated with our employees working remotely, a significant portion of our workforce suffering illness and travel restrictions. Earlier this year, we temporarily closed Citrix offices, instituted a global remote work mandate and instituted significant travel restrictions. While we have begun to re-open some of our offices, many of our employees continue to work remotely and for our offices that have begun to re-open, we have implemented significant new safety protocols, which may limit the effectiveness and productivity of our employees.
•We may be unable to collect amounts due on billed and
unbilled revenue if our customers or partners delay payment or fail to pay us under the terms of our agreements as a result of the impact of COVID-19 on their businesses, including their seeking bankruptcy protection or other similar relief. As a result, our cash flows could be adversely impacted, which could affect our ability to repay or refinance our outstanding indebtedness, fund future product development and
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acquisitions or return capital to shareholders. Further, our ability to obtain outside financing or raise additional capital may be limited as a result of volatility in the financial markets during and following the COVID-19 pandemic.
•We may be unable to service our debt arrangements, including
the 2027 Notes, the 2030 Notes, the Credit Agreement and Term Loan Credit Agreement if we do not generate sufficient cash flow as a result of the impact of COVID-19. Further, we are required to comply with the covenants set forth in the indenture governing the 2027 Notes and the 2030 Notes, the Credit Agreement and the Term Loan Credit Agreement and an adverse impact on our business, results of operations, financial condition or cash flows as a result of COVID-19 could adversely affect our ability to comply with these covenants.
•Our forecasted revenue, operating results and cash flows could vary materially from those we provide as guidance or from those anticipated by investors and analysts if the assumptions on which we base our financial projections are inaccurate as a result of the unpredictability of the impact
that COVID-19 will have on our businesses, our customers’ and partners’ businesses and the global markets and economy.
•We may experience disruptions or delays to our supply chain or fulfillment and delivery operations as a result of COVID-19. For example, we rely on a concentrated number of third-party suppliers and delivery vendors for our Networking products, and may experience disruptions from the temporary closure of third-party supplier and manufacturer facilities, interruptions in product supply, restrictions on export or shipment or disruptions in product fulfillment due to closure or delays of our delivery vendors.
•Our marketing effectiveness and demand generation efforts may be impacted due to the cancelling of customer events or shifting events to virtual-only experiences. For example, we made the decision to replace our
largest annual customer and partner event, Synergy, with a series of virtual-only events, which may ultimately prove less successful. We may need to postpone or cancel other customer, employee or industry events or other marketing initiatives in the future.
•Our business is dependent on attracting and retaining highly skilled employees, and our ability to attract and retain such employees may be adversely impacted by intensified restrictions on travel, immigration, or the availability of work visas during the COVID-19 pandemic.
•Increased cyber incidents during the COVID-19 pandemic and our increased reliance on a remote workforce could increase our exposure to potential cybersecurity breaches and attacks.
•Our results of operations are subject to fluctuations in foreign
currency exchange rates, which risks may be heightened due to increased volatility of foreign currency exchange rates as a result of COVID-19.
The effect of COVID-19 may become more severe and remain prevalent for a significant period of time, and as a result could adversely affect our business, results of operations, financial condition and cash-flows even after the COVID-19 outbreak has subsided.
To the extent the COVID-19 pandemic adversely affects our business, results of operations, financial condition and cash flows, it may also heighten many of the other risks described in the “Risk Factors” section in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The ultimate impact of COVID-19 on our business, results of operations, financial condition and cash flows is dependent on
future developments, including the duration of the pandemic, the severity of the disease and outbreak, future and ongoing actions that may be taken by governmental authorities, the impact on the businesses of our customers and partners, and the length of its impact on the global economy, which are uncertain and are difficult to predict at this time.
Servicing our debt will require a significant amount of cash, which could adversely affect our business, financial condition and results of operations. We may not have sufficient cash flow from our business to make payments on our debt or repurchase our 2027 Notes or 2030 Notes upon certain events.
As of September 30, 2020, we had aggregate indebtedness of $1.73 billion that we have incurred in connection with the issuance of our unsecured senior notes due December
1, 2027, or the 2027 Notes, the issuance of our unsecured senior notes due March 1, 2030, or the 2030 Notes, under the Credit Agreement and under the Term Loan Credit Agreement. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, depends on our future performance, which is subject to general economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and to make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, reducing capital expenditures, restructuring debt or obtaining additional equity or debt financing on terms that may be
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onerous
or highly dilutive. Our ability to refinance our indebtedness, as applicable, will depend on the capital markets and our financial condition at such time. We may not be able to sell assets, restructure our indebtedness or obtain additional equity or debt financing on terms that are acceptable to us or at all, which could result in a default on our debt obligations. See “Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources” and Note 11 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the period ended September 30, 2020 for information regarding our 2030 Notes, 2027 Notes, our Credit Agreement and our Term Loan Credit Agreement.
In addition, if a change in control repurchase event occurs with respect to the 2027 Notes or the 2030 Notes, we will be required,
subject to certain exceptions, to offer to repurchase the 2027 Notes or 2030 Notes, as applicable at a repurchase price equal to 101% of the principal amount of the 2027 Notes or 2030 Notes, as applicable, repurchased, plus accrued and unpaid interest, if any. In such event, we may not have enough available cash or be able to obtain financing to fund the required repurchase of the 2027 Notes or 2030 Notes, as applicable, or making such payments could adversely affect our liquidity. Our ability to repurchase the 2027 Notes or 2030 Notes may be limited by law, by regulatory authority or by agreements governing our other indebtedness.
Further, we are required to comply with the covenants set forth in the indentures governing the 2027 Notes and 2030 Notes, the Credit Agreement and the Term Loan Credit Agreement. In particular, each of the
Credit Agreement and Term Loan Credit Agreement requires us to maintain certain leverage and interest ratios and contains various affirmative and negative covenants, including covenants that limit or restrict our ability to grant liens, merge or consolidate, dispose of all or substantially all of our assets, change our business or incur subsidiary indebtedness. The indenture governing our 2027 Notes and 2030 Notes contains covenants limiting our ability and the ability of our subsidiaries to create certain liens, enter into certain sale and leaseback transactions, and consolidate or merge with, or sell, assign, convey, lease, transfer or otherwise dispose of all or substantially all of our assets, taken as a whole, to, another person. If we fail to comply with these covenants or any other provision
of the agreements governing our indebtedness and do not obtain a waiver from the lenders or noteholders, then, subject to applicable cure periods, our outstanding indebtedness may be declared immediately due and payable. Additionally, a default under an indenture, the Credit Agreement or Term Loan Credit Agreement could lead to a default under the other agreements governing our current and any future indebtedness. If the repayment of the related indebtedness were to be accelerated, we may not have enough available cash or be able to obtain financing to repay the indebtedness.
Our indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences. For example, it could:
•make us more vulnerable to adverse changes
in general U.S. and worldwide economic, industry and competitive conditions and adverse changes in government regulation;
•limit our flexibility in planning for, or reacting to, changes in our business and our industry;
•place us at a disadvantage compared to our competitors who have less debt; and
•limit our ability to borrow additional amounts to fund acquisitions, for working capital and for other general corporate purposes.
Any of these factors could materially and adversely affect our business, financial condition and results of operations. In addition, if we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness would increase. Also, changes by any rating
agency to our credit rating may negatively impact the value and liquidity of both our debt and equity securities, as well as the potential costs associated with any potential refinancing of our indebtedness. Downgrades in our credit rating could also restrict our ability to obtain additional financing in the future and could affect the terms of any such financing.
To the extent the COVID-19 pandemic adversely affects our business, results of operations, financial condition and cash flows, it may also heighten these risks related to servicing our debt.
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ITEM 2.UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer
The Company's Board of Directors authorized an ongoing stock repurchase program, of which $1.00 billion was approved in January 2020. The objective of the stock repurchase program is to improve stockholders’ returns. At September 30, 2020, $714.1 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock.
On January 30, 2020, the
Company used the proceeds from the Term Loan Credit Agreement and entered into ASR transactions with a group of Dealers for an aggregate of $1.00 billion. Under the ASR transactions, the Company received an initial share delivery of 6.5 million shares of its common stock in January 2020 and received delivery of an additional 0.8 million shares of its common stock in August 2020 in final settlement of the ASR Agreement. Under the ASR, the Company repurchased shares of its common stock at an average price of approximately $135.54 per share. See Note 15 to the condensed consolidated financial statements for additional details on the ASR.
The following table shows the monthly activity related to stock repurchases
for the quarter ended September 30, 2020:
Total Number of Shares (or Units) Purchased (1)
Average Price Paid per Share (or Unit) (2)
Total Number of Shares (or
Units) Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (In thousands) (3)
(1)Includes
25,826 shares withheld from restricted stock units that vested in the third quarter of 2020 to satisfy minimum tax withholding obligations that arose on the vesting of restricted stock units.
(2)Amounts are calculated based on the settlement date.
(3)Shares withheld from restricted stock units that vested to satisfy minimum tax withholding obligations that arose on the vesting of awards do not deplete the dollar amount available for purchases under the repurchase program.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4.MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5.OTHER INFORMATION
Our policy governing transactions in Citrix securities by our directors, officers and employees permits our directors, officers and certain other persons to enter into trading plans complying with Rule 10b5-1 under the Exchange Act. We have been advised that Mark Ferrer, our Executive Vice President and Chief Revenue Officer, Jeroen van Rotterdam, our Executive Vice President, Engineering, Donna
Kimmel, our Executive Vice President and Chief People Officer and Mark Schmitz, our Executive Vice President and Chief Operation Officer, each entered into a new trading plan in the third quarter of 2020 in accordance with Rule 10b5-1 and our policy governing transactions in our securities. We undertake no obligation to update or revise the information provided herein, including for revision or termination of an established trading plan.
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 30th day of October, 2020.
