NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION
Background
On January 31, 2017, Citrix Systems, Inc. (the "Company") completed the spin-off of its GoTo family of service offerings (the “Spin-off”) and subsequent merger of that business with LogMeIn, Inc. (the “Merger”) pursuant to a pro rata distribution to its stockholders of
100%
of the shares of common stock of GetGo, Inc., or GetGo, its wholly-owned subsidiary. Pursuant to the transaction, the Company transferred its GoTo Business to GetGo, and after the close of business on January 31, 2017, the Company distributed approximately
26.9 million
shares of GetGo common stock to the Company’s stockholders of record as of the close of business on January 20, 2017 (the “Record Date”). Immediately following the distribution, Lithium Merger Sub, Inc., a wholly-owned subsidiary of LogMeIn, merged with and into GetGo, with GetGo as the surviving corporation (the “Merger”). In connection with the Merger, GetGo became a wholly-owned subsidiary of LogMeIn, and each share of GetGo common stock was converted into the right to receive
one
share of LogMeIn common stock. As a result of these transactions, the Company’s stockholders received approximately
26.9 million
shares of LogMeIn common stock in the aggregate, or
0.171844291
of a share of LogMeIn common stock for each share of the Company’s common stock held of record by such stockholders on the Record Date.
No
fractional shares of LogMeIn were issued, and the Company’s stockholders instead received cash in lieu of any fractional shares.
The Company's revenues are derived from sales of its Workspace Services products, Networking products (formerly Delivery Networking), Data offerings (formerly Cloud) and related License updates and maintenance and Professional services. Prior to the Spin-off, the Company also derived its revenues from sales of the GoTo Business, which were delivered as cloud-based Software as a service ("SaaS"), and included Communications Cloud and Workflow Cloud service offerings. Subsequent to the Spin-off, the Company determined that it has one reportable segment. The Company identified its segment using the “management approach” which designates the internal organization that is used by management for making operating decisions and assessing performance. See Note 10 for more information on the Company's segments.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. All adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been reflected in the condensed consolidated financial statements and accompanying notes. The results of operations for the periods presented are not necessarily indicative of the results expected for the full year or for any future period partially because of the seasonality of the Company’s business. Historically, the Company’s revenue for the fourth quarter of any year is typically higher than the revenue for the first quarter of the subsequent year. The information included in these condensed consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report and the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
.
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. All significant transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.
In these condensed consolidated financial statements, unless otherwise indicated, references to Citrix and the Company, refer to Citrix Systems, Inc. and its consolidated subsidiaries after giving effect to the Spin-off.
As a result of the Spin-off, the condensed consolidated financial statements reflect the GoTo Business operations, assets and liabilities, and cash flows as discontinued operations for all periods presented. Refer to Note 3 for additional information regarding the Spin-off.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant estimates made by management include the provision for doubtful accounts receivable, the provision to reduce obsolete or excess inventory to market, the provision for estimated returns, as well as sales allowances, the assumptions used in the valuation of stock-based awards, the assumptions used in the discounted cash flows to mark certain of its investments to market, the valuation of the Company’s goodwill, net realizable value of product related and other intangible assets, the fair value of convertible senior notes, the provision for lease losses, the provision for income taxes and the amortization and depreciation periods for intangible and long-lived assets. While the Company believes that such estimates are fair when considered in conjunction with the 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.
Available-for-sale Investments
Short-term and long-term available-for-sale investments as of
June 30, 2017
and
December 31, 2016
primarily consist of agency securities, corporate securities, municipal securities and government securities. Investments classified as available-for-sale are stated at fair value with unrealized gains and losses, net of taxes, reported in Accumulated other comprehensive loss. The Company classifies its available-for-sale investments as current and non-current based on their actual remaining time to maturity. The Company does not recognize changes in the fair value of its available-for-sale investments in income unless a decline in value is considered other-than-temporary in accordance with the authoritative guidance.
The Company’s investment policy is designed to limit exposure to any one issuer depending on credit quality. The Company uses information provided by third parties to adjust the carrying value of certain of its investments to fair value at the end of each period. Fair values are based on a variety of inputs and may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. See Note 6 for investment information.
Revenue Recognition
Net revenues include the following categories: Product and licenses, SaaS, License updates and maintenance and Professional services. Product and licenses revenues primarily represent fees related to the licensing of the Company’s software and hardware appliances. These revenues are reflected net of sales allowances, cooperative advertising agreements, partner incentive programs and provisions for returns. SaaS revenues consist primarily of fees related to online service agreements, which are recognized ratably over the contract term. Should the Company charge set-up fees, they would be recognized ratably over the contract term or the expected customer life, whichever is longer. License updates and maintenance revenues consist of fees related to the Subscription Advantage program and maintenance fees, which include technical support and hardware and software maintenance. Subscription Advantage and maintenance fees are recognized ratably over the term of the contract, which is typically
12
to
24
months. The Company capitalizes certain third-party commissions related to Subscription Advantage, maintenance and support renewals. The capitalized commissions are amortized to Sales, marketing and services expense at the time the related deferred revenue is recognized as revenue. Hardware and software maintenance and support contracts are typically sold separately. Hardware maintenance includes technical support, the latest software upgrades when and if they become available, and replacement of malfunctioning appliances. Dedicated account management is available as an add-on to the program for a higher level of service. Software maintenance, including the new Customer Success Services, includes unlimited technical support, immediate access to software upgrades, enhancements and maintenance releases when and if they become available during the term of the contract and configuration and installation support along with acceleration and automation tools. Professional services revenues are comprised of fees from consulting services related to the implementation of the Company’s products and fees from product training and certification, which are recognized as the services are provided.
The Company recognizes revenue when it is earned and when all of the following criteria are met: (1) persuasive evidence of the arrangement exists; (2) delivery has occurred or the service has been provided and the Company has no remaining obligations; (3) the fee is fixed or determinable; and (4) collectability is probable.
The majority of the Company’s product and license revenue consists of revenue from the sale of software products. Software sales generally include a perpetual license to the Company’s software and is subject to the industry specific software revenue recognition guidance. In accordance with this guidance, the Company allocates revenue to license updates related to its stand-alone software and any other undelivered elements of the arrangement based on vendor specific objective evidence (“VSOE”) of fair value of each element and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria described above have been met. The balance of the revenues, net of any discounts inherent in the
arrangement, is recognized at the outset of the arrangement using the residual method as the product licenses are delivered. If management cannot objectively determine the fair value of each undelivered element based on VSOE of fair value, revenue recognition is deferred until all elements are delivered, all services have been performed, or until fair value can be objectively determined.
For hardware appliance and software transactions, the arrangement consideration is allocated to stand-alone software deliverables as a group and the non-software deliverables based on the relative selling prices using the selling price hierarchy in the revenue recognition guidance. The selling price hierarchy for a deliverable is based on its VSOE if available, third-party evidence of selling price ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. The Company then recognizes revenue on each deliverable in accordance with its policies for product and service revenue recognition. VSOE of selling price is based on the price charged when the element is sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices fall within a reasonable range based on historical discounting trends for specific products and services. TPE of selling price is established by evaluating competitor products or services in stand-alone sales to similarly situated customers. However, as the Company’s products contain a significant element of proprietary technology and its solutions offer substantially different features and functionality, the comparable pricing of products with similar functionality typically cannot be obtained. Additionally, as the Company is unable to reliably determine what competitors products’ selling prices are on a stand-alone basis, the Company is not typically able to determine TPE. The estimate of selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies and through different sales channels and competitor pricing strategies.
The Citrix Service Provider ("CSP") program provides subscription-based services in which the CSP partners host software services to their end users. The fees from the CSP program are recognized based on usage and as the CSP services are provided to their end users.
For the Company’s non-software transactions, it allocates the arrangement consideration based on the relative selling price of the deliverables. For the Company’s hardware appliances, it uses ESP as its selling price. For the Company’s support and services, it generally uses VSOE as its selling price. When the Company is unable to establish selling price using VSOE for its support and services, the Company uses ESP in its allocation of arrangement consideration.
The majority of the Company's SaaS offerings are considered hosted service arrangements per the authoritative guidance.
In the normal course of business, the Company is not obligated to accept product returns from its resellers or end customers under any conditions, unless the product item is defective in manufacture. The Company establishes provisions for estimated returns, as well as other sales allowances, concurrently with the recognition of revenue. The provisions are established based upon consideration of a variety of factors, including, among other things, recent and historical return rates for both specific products and distributors and the impact of any new product releases and projected economic conditions. Product returns are provided for in the condensed consolidated financial statements and have historically been within management’s expectations. Allowances for estimated product returns amounted to
$0.9 million
and
$2.0 million
at
June 30, 2017
and
December 31, 2016
, respectively. The Company also records estimated reductions to revenue for customer programs and incentive offerings, including volume-based incentives. The Company could take actions to increase its customer incentive offerings, which could result in an incremental reduction to revenue at the time the incentive is offered.
Foreign Currency
The functional currency for all of the Company’s wholly-owned foreign subsidiaries 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. Prior to January 1, 2015, the functional currency of the Company’s wholly-owned foreign subsidiaries of its former GoTo Business was the currency of the country in which each subsidiary is located. The Company translated assets and liabilities of these foreign subsidiaries at exchange rates in effect at the balance sheet date and included accumulated net translation adjustments in equity as a component of Accumulated other comprehensive loss. As a result of the change in functional currency, the
gains and losses that were previously recorded in Accumulated other comprehensive loss prior to January 1, 2015 were kept constant. As a result of the Spin-off
, accumulated net translation adjustments
associated with the GoTo Business recorded in Accumulated other comprehensive loss of
$13.4 million
were reclassified to Retained earnings during the period ended
June 30, 2017
. See Note 3 for additional information regarding discontinued operations.
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.
Reclassifications
Certain reclassifications of the prior years' amounts have been made to conform to the current year's presentation.
3. DISCONTINUED OPERATIONS
On January 31, 2017, the Company completed the Spin-off of the GoTo Business. Refer to Note 1 for additional information regarding the Spin-off. The financial results of the GoTo Business are presented as Income (loss) from discontinued operations, net of income taxes in the condensed consolidated statements of income. The following table presents the financial results of the GoTo Business through the date of the Spin-off for the indicated periods and do not include corporate overhead allocations:
Major classes of line items constituting Income (loss) from discontinued operations related to the GoTo Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Net revenues
|
$
|
168,993
|
|
|
$
|
58,215
|
|
|
$
|
335,898
|
|
Cost of net revenues
|
37,131
|
|
|
15,456
|
|
|
76,412
|
|
Gross margin
|
131,862
|
|
|
42,759
|
|
|
259,486
|
|
Operating expenses:
|
|
|
|
|
|
Research and development
|
24,110
|
|
|
9,108
|
|
|
45,837
|
|
Sales, marketing and services
|
52,528
|
|
|
20,881
|
|
|
111,349
|
|
General and administrative
|
18,626
|
|
|
7,636
|
|
|
31,586
|
|
Amortization of other intangible assets
|
3,464
|
|
|
1,176
|
|
|
7,138
|
|
Restructuring
|
436
|
|
|
3,189
|
|
|
945
|
|
Separation
|
13,550
|
|
|
40,573
|
|
|
27,781
|
|
Total operating expenses
|
112,714
|
|
|
82,563
|
|
|
224,636
|
|
Income (loss) from discontinued operations before income taxes
|
19,148
|
|
|
(39,804
|
)
|
|
34,850
|
|
Income tax expense
|
4,539
|
|
|
2,900
|
|
|
10,032
|
|
Income (loss) from discontinued operations, net of income tax
|
$
|
14,609
|
|
|
$
|
(42,704
|
)
|
|
$
|
24,818
|
|
The Company incurred significant costs in connection with the separation of its GoTo Business. These costs relate primarily to third-party advisory and consulting services, retention payments to certain employees, incremental stock-based compensation and other costs directly related to the separation of the GoTo Business. During the three months ended
June 30, 2016
, the Company also incurred an additional
$13.6 million
of separation costs, which are included in discontinued operations. During the
six
months ended
June 30, 2017
and
2016
, the Company incurred
$40.6 million
and
$27.8 million
, respectively, of separation costs, which are included in discontinued operations. During the three months ended
June 30, 2017
and
2016
, the Company incurred
$0.2 million
and
$0.4 million
of separation costs, respectively, which are included in continuing operations. During the
six
months ended
June 30, 2017
and
2016
, the Company incurred
$0.5 million
and
$0.8 million
of separation costs, respectively, which are included in continuing operations.
The assets and liabilities of the GoTo Business were re-classified as discontinued operations as of
December 31, 2016
.
Carrying amounts of major classes of assets and liabilities included as part of discontinued operations related to the GoTo Business
|
|
|
|
|
|
December 31, 2016
|
|
(in thousands)
|
Assets
|
|
Current assets:
|
|
Cash
|
$
|
120,861
|
|
Accounts receivable, net
|
44,734
|
|
Prepaid expenses and other current assets
|
14,094
|
|
Total current assets of discontinued operations
|
179,689
|
|
Property and equipment, net
|
81,866
|
|
Goodwill
|
380,917
|
|
Other intangible assets, net
|
54,312
|
|
Deferred tax assets, net
|
18,496
|
|
Other assets
|
3,340
|
|
Long-term assets of discontinued operations
|
$
|
538,931
|
|
Total major classes of assets of discontinued operations
|
$
|
718,620
|
|
|
|
Liabilities
|
|
Current liabilities:
|
|
Accounts payable
|
$
|
11,333
|
|
Accrued expenses and other current liabilities
|
46,088
|
|
Current portion of deferred revenues
|
115,249
|
|
Total current liabilities of discontinued operations
|
172,670
|
|
Long-term portion of deferred revenues
|
4,224
|
|
Other liabilities
|
3,484
|
|
Long-term liabilities of discontinued operations
|
$
|
7,708
|
|
Total major classes of liabilities of discontinued operations
|
$
|
180,378
|
|
As a result of the Spin-off, the Company recorded a
$478.2 million
reduction in retained earnings which included net assets of
$464.8 million
. Of this amount,
$28.5 million
represents cash transferred to the GoTo Business, with the remainder considered a non-cash activity in the Condensed Consolidated Statements of Cash Flows. In accordance with the definitive agreements governing the Spin-off, the Company continues to evaluate certain assets and liabilities, which is expected to be finalized in the third quarter of fiscal year 2017. The Spin-off also resulted in a reduction of Accumulated other comprehensive loss associated with foreign currency translation adjustments of
$13.4 million
, which was reclassified to Retained earnings.
Citrix and GetGo entered into several agreements in connection with the Spin-off, including a transition services agreement ("TSA"), separation and distribution agreement, tax matters agreement, intellectual property matters agreement, and an employee matters agreement. Pursuant to the TSA, Citrix, GetGo and their respective subsidiaries are providing various services to each other on an interim, transitional basis. Services being provided by Citrix include, among others, finance, information technology and certain other administrative services. The services generally commenced on February 1, 2017 and are generally expected to terminate within 12 months of that date. Billings by Citrix under the TSA were not material for the three or six months ended
June 30, 2017
.
4. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted-average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise or settlement of stock awards (calculated using the treasury stock method) during the period they were outstanding.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
108,829
|
|
|
$
|
106,289
|
|
|
$
|
179,154
|
|
|
$
|
179,543
|
|
Income (loss) from discontinued operations, net of income taxes
|
—
|
|
|
14,609
|
|
|
(42,704
|
)
|
|
24,818
|
|
Net income
|
$
|
108,829
|
|
|
$
|
120,898
|
|
|
$
|
136,450
|
|
|
$
|
204,361
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator for basic net earnings per share - weighted-average shares outstanding
|
151,212
|
|
|
154,998
|
|
|
152,247
|
|
|
154,485
|
|
Effect of dilutive employee stock awards
|
2,180
|
|
|
1,668
|
|
|
2,815
|
|
|
1,773
|
|
Effect of dilutive Convertible Notes
|
2,644
|
|
|
—
|
|
|
2,177
|
|
|
—
|
|
Denominator for diluted net earnings per share - weighted-average shares outstanding
|
156,036
|
|
|
156,666
|
|
|
157,239
|
|
|
156,258
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
0.72
|
|
|
$
|
0.69
|
|
|
$
|
1.18
|
|
|
$
|
1.16
|
|
Income (loss) from discontinued operations
|
—
|
|
|
0.09
|
|
|
(0.28
|
)
|
|
0.16
|
|
Basic net earnings per share
|
$
|
0.72
|
|
|
$
|
0.78
|
|
|
$
|
0.90
|
|
|
$
|
1.32
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
0.70
|
|
|
$
|
0.68
|
|
|
$
|
1.14
|
|
|
$
|
1.15
|
|
Income (loss) from discontinued operations
|
—
|
|
|
0.09
|
|
|
(0.27
|
)
|
|
0.16
|
|
Diluted net earnings per share:
|
$
|
0.70
|
|
|
$
|
0.77
|
|
|
$
|
0.87
|
|
|
$
|
1.31
|
|
Anti-dilutive weighted-average shares from stock awards
|
274
|
|
|
296
|
|
|
977
|
|
|
574
|
|
The weighted-average number of shares outstanding used in the computation of basic and diluted earnings per share does not include common stock issuable upon the exercise of the Company's warrants. The effects of these potentially issuable shares were not included in the calculation of diluted earnings per share because the effect would have been anti-dilutive.
The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on its Convertible Notes on diluted earnings per share, if applicable, because upon conversion the Company will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, in respect of the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. The conversion spread will have a dilutive impact on diluted earnings per share when the average market price of the Company’s common stock for a given period exceeds the conversion price. Prior to the separation of the GoTo Business on January 31, 2017, the conversion price was
$90.00
per share. As a result of the Spin-off, the conversion rate for the Convertible Notes was re-set as of the opening of business on February 1, 2017 to
13.9061
shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of
$71.91
per share of common stock. Similar adjustments were made to the conversion rates for the Convertible Note Hedge and Warrant Transactions as of the opening of business on February 1, 2017. For the three and
six
months ended
June 30, 2017
, the average market price of the Company's common stock exceeded the new conversion price, therefore the dilutive effect of the Convertible Notes was included in the denominator of diluted earnings per share. For the three and
six
months ended
June 30, 2016
, the Convertible Notes have been excluded from the computation of diluted earnings per share as the effect would be anti-dilutive since the prior conversion price of the Convertible Notes exceeded the average market price of the Company’s common stock. In addition, the Company uses the treasury stock method for calculating any potential dilutive effect related to the warrants. See Note 11 to the Company's condensed consolidated financial statements for detailed information on the Convertible Notes offering.
5. ACQUISITIONS AND DIVESTITURES
2017 Business Combination
On January 3, 2017, the Company acquired all of the issued and outstanding securities of Unidesk Corporation (“Unidesk” or the “2017 Business Combination"). Citrix acquired Unidesk to enhance its application management and delivery offerings. The total cash consideration for this transaction was
$60.4 million
, net of
$2.7 million
cash acquired. Transaction costs associated with the acquisition were
$0.4 million
.
No
transaction costs were incurred during the three months ended
June 30, 2017
. The Company expensed
$0.1 million
of transaction costs during the
six
months ended
June 30, 2017
, which were included in General and administrative expense in the accompanying condensed consolidated statements of income.
Purchase Accounting for the 2017 Business Combination
The purchase price for Unidesk was allocated to the acquired net tangible and intangible assets based on estimated fair values as of the date of the acquisition. The allocation of the total purchase price is summarized below (in thousands):
|
|
|
|
|
|
|
|
Unidesk
|
|
Purchase Price Allocation
|
|
Asset Life
|
Current assets
|
$
|
5,321
|
|
|
|
Property and equipment
|
131
|
|
|
|
Intangible assets
|
39,470
|
|
|
4 years
|
Goodwill
|
31,212
|
|
|
Indefinite
|
Other assets
|
90
|
|
|
|
Assets acquired
|
76,224
|
|
|
|
Other current liabilities assumed
|
2,290
|
|
|
|
Current portion of deferred revenues
|
3,042
|
|
|
|
Long term portion of deferred revenues
|
2,412
|
|
|
|
Long-term liabilities assumed
|
4,086
|
|
|
|
Deferred taxes
|
1,247
|
|
|
|
Net assets acquired
|
$
|
63,147
|
|
|
|
Current assets acquired in connection with the Unidesk acquisition consisted primarily of cash, accounts receivable and other short term assets. Current liabilities assumed in connection with the acquisition consisted primarily of accounts payable and other accrued expenses. Long-term liabilities assumed in connection with the acquisition consisted primarily of long-term debt, which was paid in full subsequent to the acquisition date. The Company continues to evaluate certain income tax assets and liabilities related to the Unidesk acquisition.
The goodwill related to the Unidesk acquisition is not deductible for tax purposes and is comprised primarily of expected synergies from combining operations and other intangible assets that do not qualify for separate recognition.
The Company has included the effect of the Unidesk acquisition in its results of operations prospectively from the date of acquisition. The effect of the acquisition was not material to the Company's consolidated results for the periods presented; accordingly, pro forma financial disclosures have not been presented.
Identifiable intangible assets acquired in connection with the Unidesk acquisition (in thousands) and the weighted-average lives are as follows:
|
|
|
|
|
|
|
|
Unidesk
|
|
Asset Life
|
Developed technology
|
$
|
35,230
|
|
|
4 years
|
Customer contracts
|
4,240
|
|
|
4 years
|
Total
|
$
|
39,470
|
|
|
|
2016 Business Combination
On September 7, 2016, the Company acquired all of the issued and outstanding securities of a privately held company. The acquisition provides a software solution that cuts the cost of desktop and application virtualization and delivers workspace performance by accelerating desktop logon and application response times for any Microsoft Windows-based environment. The total cash consideration for this transaction was
$11.5 million
, net of
$0.8 million
cash acquired. Transaction costs were
$0.4 million
, none of which were incurred during the three and
six
months ended
June 30, 2017
. The Company expensed
$0.1 million
of transaction costs during the three and
six
months ended
June 30, 2016
. The assets related to this acquisition relate primarily to
$8.2 million
of product technology identifiable intangible assets with a
4
year life and goodwill of
$4.7 million
.
2016 Asset Acquisition
On January 8, 2016, the Company acquired certain monitoring technology assets from a privately-held company for total cash consideration of
$23.6 million
. The acquisition provides a monitoring solution for Citrix's products as it relates to Microsoft Windows applications and desktop delivery. The identifiable intangible assets acquired related primarily to product technologies.
2016 Divestiture
On February 29, 2016, the Company sold its CloudPlatform and CloudPortal Business Manager products to Persistent Telecom Solutions, Inc. The agreement included contingent consideration in the form of an earnout provision based on revenue for a period of
five
years following the closing date. Any income associated with the contingent consideration will be recognized if the earnout provisions are met. No earnout provisions were met during the
three and six
months ended
June 30, 2017
. Therefore,
no
income was recognized during the
three and six
months ended
June 30, 2017
.
6. INVESTMENTS
Available-for-sale Investments
Investments in available-for-sale securities at fair value were as follows for the periods ended (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Description of the
Securities
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Agency securities
|
$
|
479,435
|
|
|
$
|
625
|
|
|
$
|
(1,293
|
)
|
|
$
|
478,767
|
|
|
$
|
411,963
|
|
|
$
|
699
|
|
|
$
|
(1,169
|
)
|
|
$
|
411,493
|
|
Corporate securities
|
805,137
|
|
|
509
|
|
|
(1,164
|
)
|
|
804,482
|
|
|
842,887
|
|
|
193
|
|
|
(2,114
|
)
|
|
840,966
|
|
Municipal securities
|
3,965
|
|
|
12
|
|
|
—
|
|
|
3,977
|
|
|
9,989
|
|
|
3
|
|
|
(4
|
)
|
|
9,988
|
|
Government securities
|
269,920
|
|
|
73
|
|
|
(743
|
)
|
|
269,250
|
|
|
445,083
|
|
|
135
|
|
|
(600
|
)
|
|
444,618
|
|
Total
|
$
|
1,558,457
|
|
|
$
|
1,219
|
|
|
$
|
(3,200
|
)
|
|
$
|
1,556,476
|
|
|
$
|
1,709,922
|
|
|
$
|
1,030
|
|
|
$
|
(3,887
|
)
|
|
$
|
1,707,065
|
|
The change in net unrealized gains (losses) on available-for-sale securities recorded in Other comprehensive income includes unrealized gains (losses) that arose from changes in market value of specifically identified securities that were held during the period, gains (losses) that were previously unrealized, but have been recognized in current period net income due to sales, as well as prepayments of available-for-sale investments purchased at a premium. This reclassification has no effect on total comprehensive income or equity and was not material for all periods presented. See Note 14 for more information related to comprehensive income.
The average remaining maturities of the Company’s short-term and long-term available-for-sale investments at
June 30, 2017
were approximately
six
months and
two
years, respectively.
Realized Gains and Losses on Available-for-sale Investments
For the three and
six
months ended
June 30, 2017
, the Company received proceeds from the sales of available-for-sale investments of
$104.1 million
and
$562.1 million
,
respectively, and for the three and
six
months ended
June 30, 2016
, it received proceeds from the sales of available-for-sale investments of
$212.7 million
and
$446.9 million
, respectively.
The Company had realized gains on the sales of available-for-sale investments during the three and
six
months ended
June 30, 2017
of
$0.2 million
and
$0.7 million
, respectively, and for the three and
six
months ended
June 30, 2016
, it had realized gains on the sales of available-for-sale investments of
$0.3 million
and
$0.5 million
, respectively.
For the three and
six
months ended
June 30, 2017
, the Company had realized losses on available-for-sale investments of
$0.1 million
and
$0.2 million
, respectively, and for the three and
six
months ended
June 30, 2016
, it had realized losses on available-for-sale investments of
$0.1 million
and
$0.3 million
, respectively, primarily related to sales of these investments during these periods.
All realized gains and losses related to the sales of available-for-sale investments are included in
Other (expense) income, net
, in the accompanying condensed consolidated statements of income.
Unrealized Losses on Available-for-Sale Investments
The gross unrealized losses on the Company’s available-for-sale investments that are not deemed to be other-than-temporarily impaired as of
June 30, 2017
and
December 31, 2016
were
$3.2 million
and
$3.9 million
, respectively. Because the Company does not intend to sell any of its investments in an unrealized loss position and it is more likely than not that it will not be required to sell the securities before the recovery of its amortized cost basis, which may not occur until maturity, it does not consider the securities to be other-than-temporarily impaired.
Cost Method Investments
The Company held direct investments in privately-held companies of
$18.5 million
and
$19.2 million
as of
June 30, 2017
and
December 31, 2016
, respectively, which are accounted for based on the cost method and are included in Other assets in the accompanying condensed consolidated balance sheets. The Company periodically reviews these investments for impairment. If the Company determines that an other-than-temporary impairment has occurred, it will write-down the investment to its fair value. For the three months ended
June 30, 2017
,
no
cost method investments were determined to be impaired. For the six months ended
June 30, 2017
, certain cost method investments with a combined carrying value of
$2.6 million
were determined to be impaired and written down to their estimated fair values of
$1.2 million
. Accordingly, the Company recorded
$1.4 million
, respectively, in impairment charges during the
six
months ended
June 30, 2017
, which are included in
Other (expense) income, net
in the accompanying condensed consolidated statements of income. For the three months ended
June 30, 2016
,
no
cost method investments were determined to be impaired. For the
six
months ended
June 30, 2016
, the Company determined that certain cost method investments were impaired and recorded a charge of
$0.3 million
, which was included in
Other (expense) income, net
in the accompanying condensed consolidated statements of income. During the three and
six
months ended
June 30, 2017
, certain companies in which the Company held direct investments were acquired by third parties and as a result of these sales transactions the Company recorded gains of
$0.1 million
and
$1.2 million
, respectively, which were included in
Other (expense) income, net
, in the accompanying condensed consolidated statements of income.
7. FAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as an exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
|
•
|
Level 1.
Observable inputs such as quoted prices in active markets for identical assets or liabilities;
|
|
|
•
|
Level 2
. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
•
|
Level 3
. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service (the “Service”) which uses quoted market prices for identical or comparable instruments rather than direct observations of quoted prices in active markets. The Service applies a four level hierarchical pricing methodology to all of the Company’s fixed income securities based on the circumstances. The hierarchy starts with the highest priority pricing source, then subsequently uses inputs obtained from other third-party sources and large custodial institutions. The Service’s providers utilize a variety of inputs to determine their quoted prices. These inputs may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. Substantially all of the Company’s available-for-sale investments are valued utilizing inputs obtained from the Service and accordingly are categorized as Level 2 in the table below. The Company periodically independently assesses the pricing obtained from the Service and historically has not adjusted the Service's pricing as a result of this assessment. Available-for-sale securities are included in Level 3 when relevant observable inputs for a security are not available.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy. In certain instances, the inputs used to measure fair value may meet the definition of more than one level of the fair value hierarchy. The input with the lowest level priority is used to determine the applicable level in the fair value hierarchy.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017
|
|
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
|
$
|
753,839
|
|
|
$
|
753,839
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market funds
|
89,406
|
|
|
89,406
|
|
|
—
|
|
|
—
|
|
Corporate securities
|
1,526
|
|
|
—
|
|
|
1,526
|
|
|
—
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Agency securities
|
478,767
|
|
|
—
|
|
|
478,767
|
|
|
—
|
|
Corporate securities
|
804,482
|
|
|
—
|
|
|
804,088
|
|
|
394
|
|
Municipal securities
|
3,977
|
|
|
—
|
|
|
3,977
|
|
|
—
|
|
Government securities
|
269,250
|
|
|
—
|
|
|
269,250
|
|
|
—
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
3,264
|
|
|
—
|
|
|
3,264
|
|
|
—
|
|
Total assets
|
$
|
2,404,511
|
|
|
$
|
843,245
|
|
|
$
|
1,560,872
|
|
|
$
|
394
|
|
Accrued expenses and other current liabilities:
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
989
|
|
|
—
|
|
|
989
|
|
|
—
|
|
Total liabilities
|
$
|
989
|
|
|
$
|
—
|
|
|
$
|
989
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Quoted
Prices In
Active Markets
for Identical
Assets (Level 1)
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
(In thousands)
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
Cash
|
$
|
528,637
|
|
|
$
|
528,637
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market funds
|
224,765
|
|
|
224,765
|
|
|
—
|
|
|
—
|
|
Corporate securities
|
82,693
|
|
|
—
|
|
|
82,693
|
|
|
—
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Agency securities
|
411,493
|
|
|
—
|
|
|
411,493
|
|
|
—
|
|
Corporate securities
|
840,966
|
|
|
—
|
|
|
839,968
|
|
|
998
|
|
Municipal securities
|
9,988
|
|
|
—
|
|
|
9,988
|
|
|
—
|
|
Government securities
|
444,618
|
|
|
—
|
|
|
444,618
|
|
|
—
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
2,506
|
|
|
—
|
|
|
2,506
|
|
|
—
|
|
Total assets
|
$
|
2,545,666
|
|
|
$
|
753,402
|
|
|
$
|
1,791,266
|
|
|
$
|
998
|
|
Accrued expenses and other current liabilities:
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
4,435
|
|
|
—
|
|
|
4,435
|
|
|
—
|
|
Total liabilities
|
$
|
4,435
|
|
|
$
|
—
|
|
|
$
|
4,435
|
|
|
$
|
—
|
|
The Company’s fixed income available-for-sale security portfolio generally consists of investment grade securities from diverse issuers with a minimum credit rating of A-/A3 and a weighted-average credit rating of AA-/Aa3. The Company values these securities based on pricing from the Service, whose sources may use quoted prices in active markets for identical assets
(Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value, and accordingly, the Company classifies all of its fixed income available-for-sale securities as Level 2.
The Company measures its cash flow hedges, which are classified as Prepaid expenses and other current assets and Accrued expenses and other current liabilities, at fair value based on indicative prices in active markets (Level 2 inputs).
Assets Measured at Fair Value on a Non-recurring Basis Using Significant Unobservable Inputs (Level 3)
For the three months ended
June 30, 2017
,
no
cost method investments were determined to be impaired. During the
six
months ended
June 30, 2017
, certain cost method investments with a combined carrying value of
$2.6 million
were determined to be impaired and written down to their estimated fair values of
$1.2 million
. Accordingly, the Company recorded
$1.4 million
of impairment charges during the
six
months ended
June 30, 2017
, which are included in
Other (expense) income, net
in the accompanying condensed consolidated statements of income. For the three months ended
June 30, 2016
,
no
cost method investments were determined to be impaired. For the
six
months ended
June 30, 2016
, the Company determined that certain cost method investments were impaired and recorded a charge of
$0.3 million
, which was included in
Other (expense) income, net
in the accompanying condensed consolidated statements of income. In determining the fair value of cost method investments, the Company considers many factors including but not limited to operating performance of the investee, the amount of cash that the investee has on-hand, the ability to obtain additional financing and the overall market conditions in which the investee operates. The fair value of the cost method investments represent a Level 3 valuation as the assumptions used in valuing these investments were not directly or indirectly observable.
For certain intangible assets where the unamortized balances exceeded the undiscounted future net cash flows, the Company measures the amount of the impairment by calculating the amount by which the carrying values exceed the estimated fair values, which are based on projected discounted future net cash flows. These non-recurring fair value measurements are categorized as Level 3 significant unobservable inputs. See Note 9 to the Company's condensed consolidated financial statements for detailed information related to Goodwill and Other Intangible Assets.
Additional Disclosures Regarding Fair Value Measurements
The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of these items.
As of
June 30, 2017
, the fair value of the Convertible Notes, which was determined based on inputs that are observable in the market (Level 2) based on the closing trading price per
$100
as of the last day of trading for the quarter ended
June 30, 2017
, and carrying value of debt instruments (carrying value excludes the equity component of the Company’s Convertible Notes classified in equity) was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Carrying Value
|
Convertible Senior Notes
|
$
|
1,738,506
|
|
|
$
|
1,367,092
|
|
8. STOCK-BASED COMPENSATION
The Company’s stock-based compensation program is a long-term retention program that is intended to attract and reward talented employees and align stockholder and employee interests. As of
June 30, 2017
, the Company had
one
stock-based compensation plan under which it was granting equity awards. The Company is currently granting stock-based awards from its Amended and Restated 2014 Equity Incentive Plan (the "2014 Plan"), which was approved at the Company's Annual Meeting of Stockholders on June 22, 2017. In connection with certain of the Company’s acquisitions, the Company has assumed certain plans from acquired companies. The Company’s Board of Directors has provided that no new awards will be granted under the Company’s acquired stock plans. Awards previously granted under the Company's superseded stock plans that are still outstanding typically expire between
five
and
ten
years from the date of grant and will continue to be subject to all the terms and conditions of such plans, as applicable. The Company’s superseded stock plans with outstanding awards include the Amended and Restated 2005 Equity Incentive Plan ("2005 Plan").
Under the terms of the 2014 Plan, the Company is authorized to grant incentive stock options (“ISOs”), non-qualified stock options (“NSOs”), non-vested stock, non-vested stock units, stock appreciation rights (“SARs”), and performance units and to make stock-based awards to full and part-time employees of the Company and its subsidiaries or affiliates, where legally eligible to participate, as well as to consultants and non-employee directors of the Company. SARs and ISOs are not currently being granted. Currently, the 2014 Plan provides for the issuance of
46,000,000
shares of common stock. In addition, shares of common stock underlying any awards granted under the Company’s 2014 Plan or the 2005 Plan that are forfeited, canceled or otherwise terminated (other than by exercise) are added to the shares of common stock available for issuance under the 2014 Plan. Under the 2014 Plan, NSOs must be granted at exercise prices no less than fair market value on the date of grant. Non-
vested stock awards may be granted for such consideration in cash, other property or services, or a combination thereof, as determined by the Company’s Compensation Committee of its Board of Directors. Stock-based awards are generally exercisable or issuable upon vesting. The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. As of
June 30, 2017
, there were
30,340,575
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
25,119,327
shares of common stock. In connection with the completion of the Spin-off, these awards were modified as described below.
Under the 2015 ESPP, all full-time and certain part-time employees of the Company are eligible to purchase common stock of the Company twice per year at the end of a
six
-month payment period (a “Payment Period”). During each Payment Period, eligible employees who so elect may authorize payroll deductions in an amount no less than
1%
nor greater than
10%
of his or her base pay for each payroll period in the Payment Period. At the end of each Payment Period, the accumulated deductions are used to purchase shares of common stock from the Company up to a maximum of
12,000
shares for any one employee during a Payment Period. Shares are purchased at a price equal to
85%
of the fair market value of the Company's common stock, on either the first business day of the Payment Period or the last business day of the Payment Period, whichever is lower. Employees who, after exercising their rights to purchase shares of common stock in the 2015 ESPP, would own shares representing
5%
or more of the voting power of the Company’s common stock, are ineligible to continue to participate under the 2015 ESPP. The 2015 ESPP provides for the issuance of a maximum of
16,000,000
shares of common stock. As of
June 30, 2017
,
974,830
shares have been issued under the 2015 ESPP. The Company recorded stock-based compensation costs related to its employee stock purchase plans of
$1.9 million
and
$2.1 million
for the three months ended
June 30, 2017
and
2016
, respectively, and it recorded
$3.5 million
and
$4.4 million
for the
six
months ended
June 30, 2017
and
2016
, respectively.
The Company used the Black-Scholes model to estimate the fair value of its Employee Stock Purchase Plan awards with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 30, 2017
|
|
June 30, 2016
|
Expected volatility factor
|
0.29
|
|
|
0.41
|
|
Risk free interest rate
|
0.60
|
%
|
|
0.35
|
%
|
Expected dividend yield
|
0
|
%
|
|
0
|
%
|
Expected life (in years)
|
0.5
|
|
|
0.5
|
|
The Company determined the expected volatility factor by considering the implied volatility in six-month market-traded options of the Company's common stock based on third party volatility quotes. The Company's decision to use implied volatility was based upon the availability of actively traded options on the Company's common stock and its assessment that implied volatility is more representative of future stock price trends than historical volatility. The risk-free interest rate was based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock options. The Company's expected dividend yield input was zero as it has not historically paid, nor expects in the future to pay, cash dividends on its common stock. The expected term is based on the term of the purchase period for grants made under the ESPP.
Modifications of Share-Based Awards
In connection with the completion of the Spin-off, the terms of the Company's existing stock-based compensation arrangements required adjustments to the number and exercise price of outstanding stock options, non-vested stock units, non-vested stock, performance units, and other share-based awards to preserve the intrinsic value of the awards immediately before and after the Spin-off. The outstanding awards continue to vest over the original vesting periods. Certain outstanding awards at the time of the Spin-off held by employees of the GoTo Business were forfeited at the time of the separation. The stock awards held as of January 31, 2017 were adjusted as follows:
|
|
•
|
The number of shares of common stock subject to each outstanding stock option was increased and the corresponding exercise price was decreased to maintain the intrinsic value of each outstanding stock option immediately before and after the Spin-off. There was no incremental expense related to this adjustment.
|
|
|
•
|
The number of shares of common stock underlying each outstanding non-vested stock unit and performance unit was increased to preserve the intrinsic value of such award immediately prior to the Spin-off.
|
|
|
•
|
The opening prices of the performance units granted in 2015 and 2016 were adjusted to reflect the value of the shares of LogMeIn stock distributed to the Company's shareholders as a result of the Spin-off. These adjustments resulted in
|
$6.5 million
in incremental compensation expense to be recognized over the remaining vesting life of the underlying awards.
Stock-Based Compensation
The detail of the total stock-based compensation recognized by income statement classification is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
Income Statement Classifications
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
Cost of services and maintenance revenues
|
$
|
815
|
|
|
$
|
542
|
|
|
$
|
1,407
|
|
|
$
|
1,036
|
|
Research and development
|
11,660
|
|
|
9,689
|
|
|
21,326
|
|
|
17,444
|
|
Sales, marketing and services
|
14,728
|
|
|
12,560
|
|
|
26,325
|
|
|
23,504
|
|
General and administrative
|
13,476
|
|
|
15,576
|
|
|
26,429
|
|
|
32,444
|
|
Total
|
$
|
40,679
|
|
|
$
|
38,367
|
|
|
$
|
75,487
|
|
|
$
|
74,428
|
|
Non-vested Stock Units
Market Performance and Service Condition Stock Units
In March 2017, the Company granted senior level employees non-vested stock unit awards representing, in the aggregate,
275,148
non-vested stock units that vest based on certain target performance and service conditions. The number of non-vested stock units underlying the award will be determined within
sixty
days of the
three
-year performance period ending December 31, 2019. The attainment level under the award will be based on the Company's relative total return to stockholders over the performance period compared to a pre-established custom index group. If the Company’s relative total return to stockholders is between the
41st
percentile and the 80th percentile when compared to the index companies, the number of non-vested stock units earned will be based on interpolation. The maximum number of non-vested stock units that may vest pursuant to the awards is capped at
200%
of the target number of non-vested stock units set forth in the award agreement and is earned if the Company's relative total return to stockholders when compared to the index companies is at or greater than the
80th
percentile. If the Company’s total return to stockholders is negative, the number of non-vested stock units earned will be no more than
100%
regardless of the Company’s relative total return to stockholders compared to the index companies. If the awardee is not employed by the Company at the end of the performance period, the extent to which the awardee will vest in the award, if at all, is dependent upon the timing and character of the termination as provided in the award agreement. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company's common stock.
In January 2016, the Company granted its former Chief Executive Officer
220,235
non-vested stock units that vest based on certain target performance conditions; and in March 2016, the Company granted senior level employees
234,816
non-vested stock units that vest based on certain target performance conditions. These awards were modified as described above as a result of the Spin-off. The attainment level under the awards will be based on the Company's compound annualized total return to stockholders over a
three
-year performance period, with 100% of such stock units earned if the Company achieves total shareholder return of 10% over the performance period. Further, if the Company achieves annualized total shareholder return of less than
10%
during the performance period, the awardees may earn all or a portion of the target award, but not in excess of
100%
of such stock units, depending upon the Company’s relative total shareholder return compared to companies listed in the S&P Computer Software Select Index. If the Company's compound annualized total shareholder return is
5%
or above, the number of non-vested stock units earned will be based on interpolation, with the maximum number of non-vested stock units earned capped at
200%
of the target number of non-vested stock units for a compound annualized total return to stockholders of
30%
over a three-year performance period as set forth in the award agreement. Within
sixty
days following an interim measurement period of
18
months, the Compensation Committee will determine the number of restricted stock units that would be deemed earned based on performance to date, and up to
33%
of the target award may be earned based on such performance; however, any stock units that are deemed earned will remain subject to continued service vesting until the end of the three-year performance period, or a change in control, if earlier. Within
sixty
days following the conclusion of the performance period, the Company’s Compensation Committee will determine the number of restricted stock units that would vest upon the final day of the performance period based on the Company’s performance during the period and in accordance with the terms of the award. On the vesting date, the greater of the full period restricted stock units, or the interim earned restricted stock units, will vest in one installment.
The market condition requirements are reflected in the grant date fair value of the award, and the compensation expense for the award will be recognized assuming that the requisite service is rendered regardless of whether the market conditions are
achieved. The grant date fair value of the non-vested performance stock unit awards was determined through the use of a Monte Carlo simulation model, which utilized multiple input variables that determined the probability of satisfying the market condition requirements applicable to each award as follows:
|
|
|
|
|
|
|
|
|
March 2017 Grant
|
March 2016 Grant
|
January 2016 Grant
|
Expected volatility factor
|
0.27-0.32
|
|
0.29 - 0.39
|
|
0.29 - 0.37
|
|
Risk free interest rate
|
1.48
|
%
|
0.91
|
%
|
1.10
|
%
|
Expected dividend yield
|
0
|
%
|
0
|
%
|
0
|
%
|
For the March 2017 grant, the range of expected volatilities utilized was based on the historical volatilities of the Company's common stock and the average of its peer group. The Company chose to use historical volatility to value these awards because historical stock prices were used to develop the correlation coefficients between the Company and its peer group in order to model the stock price movements. The volatilities used were calculated over the most recent
2.75
year period, which is commensurate with the awards' performance period at the date of grant. The risk free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the performance period. The Company does not intend to pay dividends on its common stock in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its model. The estimated fair value of each award as of the date of grant was
$104.05
.
For the March 2016 and January 2016 grants, the range of expected volatilities utilized was based on the historical volatilities of the Company's common stock and the average of its peer group. The Company chose to use historical volatility to value these awards because historical stock prices were used to develop the correlation coefficients between the Company and its peer group in order to model the stock price movements. The volatilities used were calculated over a
three
year period, which is commensurate with the awards’ performance period at the date of grant. The risk free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the performance period. The Company does not intend to pay dividends on its common stock in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its model. The estimated fair value of each award as of the date of grant was
$66.18
for the March 2016 grant and
$49.68
for the January 2016 grant.
Service Based Stock Units
The Company also awards senior level employees, certain other employees and new non-employee directors, non-vested stock units granted under the 2014 Plan that vest based on service. The majority of these non-vested stock unit awards generally vest
33.33%
on each anniversary subsequent to the date of the award. The Company also assumes non-vested stock units in connection with certain of its acquisitions. The assumed awards have the same
three
year vesting schedule. Each non-vested stock unit, upon vesting, represents the right to receive
one
share of the Company’s common stock. In addition, the Company awards non-vested stock units to all of its continuing non-employee directors. These awards vest monthly in
12
equal installments based on service and, upon vesting, each stock unit represents the right to receive one share of the Company's common stock.
Unrecognized Compensation Related to Stock Units
As of
June 30, 2017
, the number of all non-vested stock units outstanding, including market performance and service condition awards and service-based awards, including service-based awards assumed in connection with acquisitions, were
5,152,745
. As of
June 30, 2017
, there was
$296.9 million
of total unrecognized compensation cost related to non-vested stock units. The unrecognized cost is expected to be recognized over a weighted-average period of
2.26
years.
Non-vested Stock
During the
six
months ended
June 30, 2016
, the Company granted non-vested stock awards of
118,588
shares to its former Chief Executive Officer, with a vesting period of approximately
three
years from the date of grant, subject to the holder’s continued employment with the Company and accelerated vesting under certain circumstances. Non-vested stock is issued and outstanding upon grant; however, award holders are restricted from selling the shares until they vest. If the vesting conditions are not met, the award will be forfeited.
Compensation expense is measured based on the closing market price of the Company’s common stock at the date of grant and is recognized on a straight-line basis over the vesting period. For the three and
six
months ended
June 30, 2017
, the Company recognized
$0.7 million
and
$1.3 million
, respectively, of stock-based compensation expense related to non-vested stock awards. At
June 30, 2017
, there was
$4.0 million
of total unrecognized compensation expense related to these awards, which is expected to be recognized during the third quarter of 2017.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The Company accounts for goodwill in accordance with the authoritative guidance, which requires that goodwill and certain intangible assets are not amortized, but are subject to an annual impairment test. As part of its continued transformation, effective January 1, 2016, the Company reorganized a part of its business by creating a new Data (formerly Cloud) product grouping. In connection with this change, during the fourth quarter of 2016, the Company performed an assessment of its goodwill reporting units and determined that the reorganization resulted in the identification of two goodwill reporting units (excluding the GoTo Business). There was
no
impairment of goodwill or indefinite lived intangible assets as a result of the annual impairment test analysis completed during the fourth quarter of
2016
.
On January 31, 2017, the Company completed the Spin-off of the GoTo Business and
$380.9 million
of the goodwill attributable to the GoTo Business as of December 31, 2016 was distributed to GetGo. As a result of the Spin-off, the Company performed an assessment of the
two
remaining goodwill reporting units for the quarter ended March 31, 2017 and determined that these goodwill reporting units remain unchanged. There were
no
changes in reporting units nor indicators of impairment during the three months ended
June 30, 2017
. See Note 5 for more information regarding the Company's acquisitions.
The following table presents the change in goodwill during the
three and six
months ended
June 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2017
|
|
Additions
|
|
|
Other
|
|
|
Balance at June 30, 2017
|
Goodwill
|
$
|
1,585,893
|
|
|
$
|
31,212
|
|
(1)
|
|
$
|
—
|
|
|
|
$
|
1,617,105
|
|
|
|
(1)
|
Amount relates to preliminary purchase price allocation of goodwill associated with the 2017 Business Combination. See Note 5 for more information regarding the Company's acquisitions.
|
Intangible Assets
The Company has intangible assets which were primarily acquired in conjunction with business combinations and technology purchases. Intangible assets with finite lives are recorded at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally
three
to
seven
years, except for patents, which are amortized over the lesser of their remaining life or
ten
years. In-process R&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When in-process R&D projects are completed, the corresponding amount is reclassified as an amortizable intangible asset and is amortized over the asset's estimated useful life.
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
Product related intangible assets
|
$
|
690,060
|
|
|
$
|
546,244
|
|
|
$
|
647,594
|
|
|
$
|
520,746
|
|
Other
|
227,932
|
|
|
184,198
|
|
|
223,692
|
|
|
176,859
|
|
Total
|
$
|
917,992
|
|
|
$
|
730,442
|
|
|
$
|
871,286
|
|
|
$
|
697,605
|
|
Amortization of product-related intangible assets, which consists primarily of product-related technologies and patents, was
$12.4 million
and
$14.4 million
for the three months ended
June 30, 2017
and
2016
, respectively, and
$25.5 million
and
$28.4 million
for the
six
months ended
June 30, 2017
and
2016
, respectively, 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
$3.7 million
and
$3.8 million
for the three months ended
June 30, 2017
and
2016
, respectively, and
$7.3 million
and
$7.5 million
for the
six
months ended
June 30, 2017
and
2016
, respectively, is classified as a component of Operating expenses in the accompanying condensed consolidated statements of income.
The Company monitors its intangible assets for indicators of impairment. If the Company determines that an impairment has occurred, it will write-down the intangible asset to its fair value. For 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.
Estimated future amortization expense of intangible assets with finite lives as of
June 30, 2017
is as follows (in thousands):
|
|
|
|
|
Year ending December 31,
|
Amount
|
|
2017 (remaining six months)
|
$
|
31,886
|
|
2018
|
59,636
|
|
2019
|
39,010
|
|
2020
|
24,851
|
|
2021
|
8,890
|
|
Thereafter
|
23,277
|
|
Total
|
$
|
187,550
|
|
10. SEGMENT INFORMATION
On January 31, 2017, Citrix completed the Spin-off of the GoTo Business. As a result, the Company re-evaluated its operating segments in the first quarter of 2017, and determined that it has
one
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. During the first quarter of 2017, the Company classified the results of the GoTo Business, formerly a reportable segment, as discontinued operations in its financial statements for all periods presented. See Note 3 for more information regarding discontinued operations.
On July 7, 2017, the Company's board of directors appointed David J. Henshall, formerly the chief financial officer and chief operating officer of the Company, as the Company's president, chief executive officer and a member of the board of directors. In connection with this change, the Company will reevaluate its segments during the third quarter of 2017.
Revenues by Product Grouping
Revenues by product grouping were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net revenues:
|
|
|
|
|
|
|
|
Workspace Services revenues
(1)
|
$
|
420,908
|
|
|
$
|
410,426
|
|
|
$
|
820,412
|
|
|
$
|
809,940
|
|
Networking revenues
(2)
|
196,876
|
|
|
194,898
|
|
|
390,296
|
|
|
390,368
|
|
Data revenues
(3)
|
43,614
|
|
|
33,748
|
|
|
83,649
|
|
|
64,882
|
|
Professional services
(4)
|
31,829
|
|
|
34,915
|
|
|
61,547
|
|
|
67,570
|
|
Total net revenues
|
$
|
693,227
|
|
|
$
|
673,987
|
|
|
$
|
1,355,904
|
|
|
$
|
1,332,760
|
|
|
|
(1)
|
Workspace Services revenues are primarily comprised of sales from the Company’s application virtualization products, which include XenDesktop and XenApp, and the Company's enterprise mobility management products, which include XenMobile and related license updates and maintenance and support.
|
|
|
(2)
|
Networking revenues primarily include NetScaler ADC and NetScaler SD-WAN, and related license updates and maintenance and support.
|
|
|
(3)
|
Data revenues primarily include ShareFile, Podio and Citrix Cloud.
|
|
|
(4)
|
Professional services revenues are primarily comprised of revenues from consulting services and product training and certification services.
|
Revenues by Geographic Location
The following table presents revenues by geographic location, for the following periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net revenues:
|
|
|
|
|
|
|
|
Americas
|
$
|
403,072
|
|
|
$
|
402,684
|
|
|
$
|
794,418
|
|
|
$
|
791,370
|
|
EMEA
|
217,313
|
|
|
205,064
|
|
|
419,165
|
|
|
411,995
|
|
Asia-Pacific
|
72,842
|
|
|
66,239
|
|
|
142,321
|
|
|
129,395
|
|
Total net revenues
|
$
|
693,227
|
|
|
$
|
673,987
|
|
|
$
|
1,355,904
|
|
|
$
|
1,332,760
|
|
11. CONVERTIBLE SENIOR NOTES
Convertible Notes Offering
During 2014, the Company completed a private placement of approximately
$1.44 billion
principal amount of
0.500%
Convertible Notes due 2019. The net proceeds from this offering were approximately
$1.42 billion
, after deducting the initial purchasers’ discounts and commissions and the estimated offering expenses payable by the Company. The Company used approximately
$82.6 million
of the net proceeds to pay the cost of the Bond Hedges described below (after such cost was partially offset by the proceeds to the Company from the Warrant Transactions described below). The Company used the remainder of the net proceeds from the offering and a portion of its existing cash and investments to purchase an aggregate of approximately
$1.5 billion
of its common stock, as authorized under its share repurchase program. The Company used approximately
$101.0 million
to purchase shares of common stock from certain purchasers of the Convertible Notes in privately negotiated transactions concurrently with the closing of the offering, and the remaining
$1.4 billion
to purchase additional shares of common stock through an Accelerated Share Repurchase ("ASR") which the Company entered into with Citibank, N.A. (the “ASR Counterparty”) on April 25, 2014 (the “ASR Agreement”).
The Convertible Notes are governed by the terms of an indenture, dated as of
April 30, 2014
(the “Indenture”), between the Company and Wilmington Trust, National Association, as trustee (the “Trustee”). The Convertible Notes are the senior unsecured obligations of the Company and bear interest at a rate of
0.500%
per annum, payable semi-annually in arrears on April 15 and October 15 of each year. The Convertible Notes will mature on April 15, 2019, unless earlier repurchased or converted. Upon conversion, the Company will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, in respect of the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted.
The initial conversion rate for the Convertible Notes was
11.1111
shares of common stock per
$1,000
principal amount of Convertible Notes, which corresponds to a conversion price of
$90.00
per share of common stock. The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of certain stock dividends on common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, the payment of cash dividends and certain issuer tender or exchange offers. As a result of the Spin-off, the conversion rate for the Convertible Notes was adjusted under the terms of the Indenture. As a result of this adjustment, the conversion rate for the Convertible Notes was re-set as of the opening of business on February 1, 2017 to
13.9061
shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of
$71.91
per share of common stock. Similar adjustments were made to the conversion rates for the Convertible Note Hedge and Warrant Transactions (as defined below) as of the opening of business on February 1, 2017.
The Company may not redeem the Convertible Notes prior to the maturity date and no “sinking fund” is provided for the Convertible Notes, which means that the Company is not required to periodically redeem or retire the Convertible Notes. Upon the occurrence of certain fundamental changes involving the Company, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes in principal amounts of
$1,000
or an integral multiple thereof at a repurchase price equal to
100%
of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
In accounting for the issuance of the Convertible Notes, the Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing
the conversion option was determined by deducting the fair value of the liability component from the face value of the Convertible Notes as a whole. The excess of the principal amount of the liability component over its carrying amount ("debt discount") is amortized to interest expense over the term of the Convertible Notes using the effective interest method with an effective interest rate of
3.0 percent
per annum. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the Convertible Note issuance, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Issuance costs attributable to the
$1.4 billion
liability component are being amortized to expense over the term of the Convertible Notes, and issuance costs attributable to the equity component are included along with the equity component in stockholders' equity. Additionally, a deferred tax liability of
$8.2 million
related to a portion of the equity component transaction costs which are deductible for tax purposes is included in Other liabilities in the accompanying condensed consolidated balance sheets.
As a result of the structure of the Reverse Morris Trust (RMT) transaction with LogMeIn, Inc., and the notification on October 10, 2016 to noteholders in accordance with the Indenture, the Convertible Notes became convertible until the earlier of (1) the close of business on the business day immediately preceding the ex-dividend date for the distribution of the outstanding shares of GetGo common stock to the Company’s stockholders by way of a pro rata dividend, and (2) the Company’s announcement that such distribution will not take place, even though the Convertible Notes were not otherwise convertible at December 31, 2016. The
$1.44 billion
Convertible Notes became convertible with the notice to noteholders. Accordingly, as of December 31, 2016, the carrying amount of the Convertible Notes of
$1.3 billion
was reclassified from Other liabilities to Current liabilities and the difference between the face value and carrying value of
$79.5 million
was reclassified from stockholders’ equity to temporary equity in the accompanying condensed consolidated balance sheets. The conversion period terminated as of the close of business on January 31, 2017 in connection with the Spin-off. As a result, the Convertible Notes were reclassified to Other liabilities from Current liabilities, and the amount previously recorded as Temporary equity was reclassified to Stockholders' equity as of March 31, 2017. See Note 3 for more information on the Company's separation of its GoTo Business.
The Convertible Notes consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
December 31, 2016
|
Liability component
|
|
|
Principal
|
$
|
1,437,483
|
|
$
|
1,437,500
|
|
Less: note discount and issuance costs
|
(70,391
|
)
|
(89,344
|
)
|
Net carrying amount
|
$
|
1,367,092
|
|
$
|
1,348,156
|
|
|
|
|
Equity component
|
|
|
|
Temporary equity
|
$
|
—
|
|
$
|
79,495
|
|
Additional paid-in capital
|
162,869
|
|
83,374
|
|
Total equity (including temporary equity)
|
$
|
162,869
|
|
$
|
162,869
|
|
The following table includes total interest expense recognized related to the Convertible Notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Contractual interest expense
|
$
|
1,797
|
|
|
$
|
1,797
|
|
|
$
|
3,594
|
|
|
$
|
3,594
|
|
Amortization of debt issuance costs
|
1,039
|
|
|
1,015
|
|
|
2,071
|
|
|
2,024
|
|
Amortization of debt discount
|
8,472
|
|
|
8,222
|
|
|
16,882
|
|
|
16,383
|
|
|
$
|
11,308
|
|
|
$
|
11,034
|
|
|
$
|
22,547
|
|
|
$
|
22,001
|
|
See Note 7 to the Company's condensed consolidated financial statements for fair value disclosures related to the Company's Convertible Notes.
Convertible Note Hedge and Warrant Transactions
In connection with the pricing of the Convertible Notes, the Company entered into convertible note hedge transactions relating to approximately
16.0 million
shares of common stock (the "Bond Hedges"), with JPMorgan Chase Bank, National Association, London Branch; Goldman, Sachs & Co.; Bank of America, N.A.; and Royal Bank of Canada (the “Option Counterparties”) and also entered into separate warrant transactions (the "Warrant Transactions") with each of the Option Counterparties relating to approximately
16.0 million
shares of common stock. As a result of the Spin-off, the number of shares of the Company's common stock covered by the Bond Hedges and Warrant Transactions were adjusted to approximately
20.0 million
shares.
The Bond Hedges are generally expected to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any payments in cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, that the Company is required to make in excess of the principal amount of the Convertible Notes upon conversion of any Convertible Notes, as the case may be, in the event that the market price per share of common stock, as measured under the terms of the Bond Hedges, is greater than the strike price of the Bond Hedges, which initially corresponds to the conversion price of the Convertible Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. The Warrant Transactions will separately have a dilutive effect to the extent that the market value per share of common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants issued pursuant to the Warrant Transactions (the “Warrants”). The initial strike price of the Warrants is
$120.00
per share. Subsequent to the Spin-off, the strike price of the Warrants was adjusted to a weighted-average strike price of
$95.25
as of February 1, 2017. The Warrants will expire in ratable portions on a series of expiration dates commencing after the maturity of the Convertible Notes. The Bond Hedges and Warrants are not marked to market. The value of the Bond Hedges and Warrants were initially recorded in stockholders' equity and continue to be classified within stockholders' equity. As of
June 30, 2017
,
no
warrants have been exercised.
Aside from the initial payment of a premium to the Option Counterparties under the Bond Hedges, which amount is partially offset by the receipt of a premium under the Warrant Transactions, the Company is not required to make any cash payments to the Option Counterparties under the Bond Hedges and will not receive any proceeds if the Warrants are exercised.
12. CREDIT FACILITY
Effective January 7, 2015, the Company entered into a Credit Facility with a group of financial institutions (the “Lenders”). The Credit Facility provides for a
five
year revolving line of credit in the aggregate amount of
$250.0 million
, subject to continued covenant compliance. The Company may elect to increase the revolving credit facility by up to
$250.0 million
if existing or new lenders provide additional revolving commitments in accordance with the terms of the Credit Agreement. A portion of the revolving line of credit (i) in the aggregate amount of
$25.0 million
may be available for issuances of letters of credit and (ii) in the aggregate amount of
$10.0 million
may be available for swing line loans, as part of, not in addition to, the aggregate revolving commitments. The Credit Facility bears interest at
LIBOR
plus
1.10%
and adjusts in the range of
1.00%
to
1.30%
above
LIBOR
based on the ratio of the Company’s total debt to its adjusted earnings before interest, taxes, depreciation, amortization and certain other items (“EBITDA”) as defined in the agreement. In addition, the Company is required to pay a quarterly facility fee ranging from
0.125%
to
0.20%
of the aggregate revolving commitments under the Credit Facility and based on the ratio of the Company’s total debt to the Company’s consolidated EBITDA. The weighted average interest rate for the period that amounts were outstanding under the Credit Facility was
1.96%
. As of
June 30, 2017
, there was
$30.0 million
outstanding under the Credit Facility.
The Credit Agreement contains certain financial covenants that require the Company to maintain a consolidated leverage ratio of not more than
3.5
:
1.0
and a consolidated interest coverage ratio of not less than
3.0
:
1.0
. In addition, the Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the ability of the Company to grant liens, merge, dissolve or consolidate, dispose of all or substantially all of its assets, pay dividends during the existence of a default under the Credit Agreement, change its business and incur subsidiary indebtedness, in each case subject to customary exceptions for a credit facility of this size and type. The Company was in compliance with these covenants as of
June 30, 2017
.
13. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives Designated as Hedging Instruments
As of
June 30, 2017
, the Company’s derivative assets and liabilities primarily resulted from cash flow hedges related to its forecasted operating expenses transacted in local currencies. A substantial portion of the Company’s overseas expenses are and will continue to be transacted in local currencies. To protect against fluctuations in operating expenses and the volatility of future cash flows caused by changes in currency exchange rates, the Company has established a program that uses foreign exchange forward contracts to hedge its exposure to these potential changes. The terms of these instruments, and the hedged transactions to which they relate, generally do not exceed
12
months.
Generally, when the dollar is weak, foreign currency denominated expenses will be higher, and these higher expenses will be partially offset by the gains realized from the Company’s hedging contracts. Conversely, if the dollar is strong, foreign currency denominated expenses will be lower. These lower expenses will in turn be partially offset by the losses incurred from the Company’s hedging contracts. The change in the derivative component in Accumulated other comprehensive loss includes unrealized gains or losses that arose from changes in market value of the effective portion of derivatives that were held during the period, and gains or losses that were previously unrealized but have been recognized in the same line item as the forecasted transaction in current period net income due to termination or maturities of derivative contracts. This reclassification has no effect on total comprehensive income or equity.
The total cumulative unrealized gain on cash flow derivative instruments was
$2.4 million
at
June 30, 2017
, and is included in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. The total cumulative unrealized loss on cash flow derivative instruments was
$3.1 million
at
December 31, 2016
, and is included in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. See Note 14 for more information related to comprehensive income. The net unrealized gain as of
June 30, 2017
is expected to be recognized in income over the next 12 months at the same time the hedged items are recognized in income.
Derivatives not Designated as Hedging Instruments
A substantial portion of the Company’s overseas assets and liabilities are and will continue to be denominated in local currencies. To protect against fluctuations in earnings caused by changes in currency exchange rates when remeasuring the Company’s balance sheet, it utilizes foreign exchange forward contracts to hedge its exposure to this potential volatility.
These contracts are not designated for hedge accounting treatment under the authoritative guidance. Accordingly, changes in the fair value of these contracts are recorded in
Other (expense) income, net
.
Fair Values of Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
(In thousands)
|
|
June 30, 2017
|
|
December 31, 2016
|
|
June 30, 2017
|
|
December 31, 2016
|
Derivatives Designated as
Hedging Instruments
|
Balance Sheet
Location
|
|
Fair
Value
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
Balance Sheet
Location
|
|
Fair
Value
|
Foreign currency forward contracts
|
Prepaid
expenses
and other
current
assets
|
|
$2,791
|
|
Prepaid
expenses
and other
current
assets
|
|
$460
|
|
Accrued
expenses
and other
current
liabilities
|
|
$209
|
|
Accrued
expenses
and other
current
liabilities
|
|
$3,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
(In thousands)
|
|
June 30, 2017
|
|
December 31, 2016
|
|
June 30, 2017
|
|
December 31, 2016
|
Derivatives Not Designated as
Hedging Instruments
|
Balance Sheet
Location
|
|
Fair
Value
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
Balance Sheet
Location
|
|
Fair
Value
|
Foreign currency forward contracts
|
Prepaid
expenses
and other
current
assets
|
|
$473
|
|
Prepaid
expenses
and other
current
assets
|
|
$2,046
|
|
Accrued
expenses
and other
current
liabilities
|
|
$780
|
|
Accrued
expenses
and other
current
liabilities
|
|
$619
|
The Effect of Derivative Instruments on Financial Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2017
|
|
(In thousands)
|
Derivatives in Cash Flow
Hedging Relationships
|
Amount of Gain (Loss) Recognized in Other
Comprehensive Income
(Effective Portion)
|
|
Location of (Loss) Gain Reclassified
from Accumulated Other
Comprehensive Loss into
Income
(Effective Portion)
|
|
Amount of (Loss) Gain Reclassified from
Accumulated Other
Comprehensive Loss
(Effective Portion)
|
|
2017
|
|
2016
|
|
|
|
2017
|
|
2016
|
Foreign currency forward contracts
|
$
|
1,890
|
|
|
$
|
(2,360
|
)
|
|
Operating expenses
|
|
$
|
(6
|
)
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2017
|
|
(In thousands)
|
Derivatives in Cash Flow
Hedging Relationships
|
Amount of Gain Recognized in Other
Comprehensive Income
(Effective Portion)
|
|
Location of Loss Reclassified
from Accumulated Other
Comprehensive Loss into
Income
(Effective Portion)
|
|
Amount of Loss Reclassified from
Accumulated Other
Comprehensive Loss
(Effective Portion)
|
|
2017
|
|
2016
|
|
|
|
2017
|
|
2016
|
Foreign currency forward contracts
|
$
|
5,554
|
|
|
$
|
1,027
|
|
|
Operating expenses
|
|
$
|
(1,678
|
)
|
|
$
|
(1,023
|
)
|
There was no material ineffectiveness in the Company’s foreign currency hedging program in the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2017
|
|
(In thousands)
|
Derivatives Not Designated as Hedging Instruments
|
Location of Loss Recognized in Income on
Derivative
|
|
Amount of Loss Recognized in Income on Derivative
|
|
|
|
2017
|
|
2016
|
Foreign currency forward contracts
|
Other (expense) income, net
|
|
$
|
(2,064
|
)
|
|
$
|
(1,992
|
)
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2017
|
|
(In thousands)
|
Derivatives Not Designated as Hedging Instruments
|
Location of Loss Recognized in Income on
Derivative
|
|
Amount of Loss Recognized in Income on Derivative
|
|
|
|
2017
|
|
2016
|
Foreign currency forward contracts
|
Other (expense) income, net
|
|
$
|
(5,150
|
)
|
|
$
|
(3,965
|
)
|
Outstanding Foreign Currency Forward Contracts
As of
June 30, 2017
, the Company had the following net notional foreign currency forward contracts outstanding (in thousands):
|
|
|
Foreign Currency
|
Currency
Denomination
|
Australian Dollar
|
AUD 5,600
|
Brazilian Real
|
BRL 11,200
|
Pounds Sterling
|
GBP 7,400
|
Canadian Dollar
|
CAD 2,350
|
Chinese Yuan Renminbi
|
CNY 60,687
|
Danish Krone
|
DKK 8,264
|
Euro
|
EUR 4,678
|
Hong Kong Dollar
|
HKD 26,000
|
Indian Rupee
|
INR 205,765
|
Japanese Yen
|
JPY 1,587,000
|
Singapore Dollar
|
SGD 10,400
|
Swiss Franc
|
CHF 16,550
|
14. COMPREHENSIVE INCOME
The changes in Accumulated other comprehensive loss by component, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
Unrealized (loss) gain on available-for-sale securities
|
|
Unrealized (loss) gain on derivative instruments
|
|
Other comprehensive loss on pension liability
|
|
Total
|
|
(In thousands)
|
Balance at December 31, 2016
|
$
|
(16,346
|
)
|
|
$
|
(3,108
|
)
|
|
$
|
(3,130
|
)
|
|
$
|
(6,120
|
)
|
|
$
|
(28,704
|
)
|
Other comprehensive income before reclassifications
|
—
|
|
|
1,440
|
|
|
3,876
|
|
|
—
|
|
|
5,316
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
(460
|
)
|
|
1,678
|
|
|
(9
|
)
|
|
1,209
|
|
Net current period other comprehensive income
|
—
|
|
|
980
|
|
|
5,554
|
|
|
(9
|
)
|
|
6,525
|
|
Distribution of the GoTo Business
|
$
|
13,400
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,400
|
|
Balance at June 30, 2017
|
$
|
(2,946
|
)
|
|
$
|
(2,128
|
)
|
|
$
|
2,424
|
|
|
$
|
(6,129
|
)
|
|
$
|
(8,779
|
)
|
Income tax expense or benefit allocated to each component of other comprehensive income (loss) is not material.
Reclassifications out of Accumulated other comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2017
|
|
|
(In thousands)
|
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
|
|
$
|
(85
|
)
|
|
Other (expense) income, net
|
Unrealized net losses on cash flow hedges
|
|
6
|
|
|
Operating expenses *
|
|
|
$
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2017
|
|
|
(In thousands)
|
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
|
|
$
|
(460
|
)
|
|
Other (expense) income, net
|
Unrealized net losses on cash flow hedges
|
|
1,678
|
|
|
Operating expenses *
|
|
|
$
|
1,218
|
|
|
|
* Operating expenses amounts allocated to Research and development, Sales, marketing and services, and General and administrative are not individually significant.
15. INCOME 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 does not expect to remit earnings from its foreign subsidiaries.
In March 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting of stock-based compensation to provide guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires, among other things, the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. The Company adopted this standard in the first quarter of
2017
. There was no material impact upon adoption of this guidance since the recognition of income tax effects of awards was not materially different from amounts previously recorded in the Company's financial statements.
The Company’s continuing operations effective tax rate was
4.8%
and
16.1%
for the three months ended
June 30, 2017
and
2016
, respectively. The decrease in the effective tax rate when comparing the three months ended
June 30, 2017
to the three months ended
June 30, 2016
was in part due to a change in the combination of income between the Company’s U.S. and foreign operations. The decrease was also due to a
$9.8 million
net tax benefit primarily related to an international statutory tax transaction recognized in the three months ended June 30, 2017. The Company’s continuing operations effective tax rate was
23.6%
and
15.9%
for the
six
months ended
June 30, 2017
and
June 30, 2016
, respectively. The increase in the effective tax rate when comparing the
six
months ended
June 30, 2017
to the
six
months ended
June 30, 2016
was primarily due to certain items in the six months ended June 30, 2017. These amounts include a
$46.1 million
income tax charge to establish a valuation allowance due to a change in expectation of realizability of state R&D credits arising from the separation of the GoTo Business. This charge was partially offset by an
$18.5 million
benefit due to the adoption of the accounting standard update requiring recognition of income tax effects related to stock-based compensation when the awards vest or settle. This charge was also partially offset by a
$9.8 million
net tax benefit primarily related to an international statutory tax transaction.
The Company’s net unrecognized tax benefits totaled
$76.1 million
and
$69.8 million
as of
June 30, 2017
and
December 31, 2016
, respectively. All amounts included in the balance at
June 30, 2017
for tax positions would affect the annual effective tax rate if recognized. The Company has
$3.4 million
accrued for the payment of interest and penalties as of
June 30, 2017
.
The Company and one or more of its subsidiaries are subject to U.S. federal income taxes in the United States, as well as income taxes of multiple state and foreign jurisdictions. The Company is currently no longer subject to U.S. federal income tax
examination. With few exceptions, the Company is generally not under examination for state and local income tax, or non-U.S. jurisdictions by tax authorities for years prior to 2013.
In the ordinary course of global business, there are transactions for which the ultimate tax outcome is uncertain; thus, judgment is required in determining the worldwide provision for income taxes. The Company provides for income taxes on transactions based on its estimate of the probable liability. The Company adjusts its provision as appropriate for changes that impact its underlying judgments. Changes that impact provision estimates include such items as jurisdictional interpretations on tax filing positions based on the results of tax audits and general tax authority rulings. Due to the evolving nature of tax rules combined with the large number of jurisdictions in which the Company operates, it is possible that the Company’s estimates of its tax liability and the realizability of its deferred tax assets could change in the future, which may result in additional tax liabilities and adversely affect the Company’s results of operations, financial condition or cash flows.
At
June 30, 2017
, the Company had
$176.5 million
in net deferred tax assets from continuing operations. 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.
The Company’s effective tax rate generally differs from the U.S. federal statutory rate of
35%
due primarily to lower tax rates on earnings generated by the Company’s foreign operations that are taxed primarily in Switzerland. The Company has not provided for U.S. taxes for those earnings because it plans to reinvest all of those earnings indefinitely outside the United States. From time to time, there may be other items that impact the Company's effective tax rate, such as the items specific to the current period discussed above.
16. TREASURY STOCK
Stock Repurchase Program
The Company’s Board of Directors authorized an ongoing stock repurchase program with a total repurchase authority granted to the Company of
$6.8 billion
, of which
$500.0 million
was approved in January 2017. The Company may use the approved dollar authority to repurchase stock at any time until the approved amount is exhausted. The objective of the Company’s stock repurchase program is to improve stockholders’ returns. At
June 30, 2017
,
$404.0 million
was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. A portion of the funds used to repurchase stock over the course of the program was provided by net proceeds from the Convertible Notes offering, as well as proceeds from employee stock option exercises and the related tax benefit. The Company is authorized to make open market purchases of its common stock using general corporate funds through open market purchases, pursuant to a Rule 10b5-1 plan or in privately negotiated transactions.
During the three months ended
June 30, 2017
, the Company had
no
open market purchases. During the
six
months ended
June 30, 2017
, the Company expended
$500.0 million
on open market purchases under the stock repurchase program, repurchasing
6,399,499
shares of outstanding common stock at an average price of
$78.13
.
During the three months ended
June 30, 2016
, the Company had
no
open market purchases. During the
six
months ended
June 30, 2016
, the Company expended
$28.7 million
on open market purchases under the stock repurchase program, repurchasing
426,300
shares of outstanding common stock at an average price of
$67.30
.
Shares for Tax Withholding
During the three months ended
June 30, 2017
, the Company withheld
43,446
shares from equity awards that vested, totaling
$3.6 million
, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. During the
six
months ended
June 30, 2017
, the Company withheld
734,600
shares from stock units that vested, totaling
$60.5 million
, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. During the three months ended
June 30, 2016
, the Company withheld
134,771
shares from equity awards that vested, totaling
$11.0 million
, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. During the
six
months ended
June 30, 2016
, the Company withheld
563,609
shares from stock units that vested, totaling
$43.9 million
, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. These shares are reflected as treasury stock in the Company’s condensed consolidated balance sheets and the related cash outlays do not reduce the Company’s total stock repurchase authority.
17. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain office space and equipment under various operating leases. In addition to rent, the leases require the Company to pay for taxes, insurance, maintenance and other operating expenses. Certain of these leases contain stated escalation clauses while others contain renewal options. The Company recognizes rent expense on a straight-line basis over the term of the lease, excluding renewal periods, unless renewal of the lease is reasonably assured.
Legal Matters
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made. For the matters referenced below, the amount of liability is not probable or the amount cannot be reasonably estimated; and, therefore, accruals have not been made. In addition, in accordance with the relevant authoritative guidance, for matters in which the likelihood of material loss is at least reasonably possible, the Company provides disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, however, the Company will provide disclosure to that effect.
Due to the nature of the Company's business, the Company is subject to patent infringement claims alleging infringement by various Company products and services. The Company believes that it has meritorious defenses to the allegations made in its pending cases and intends to vigorously defend these lawsuits; however, it is unable currently to determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any. In addition, the Company is a defendant in various litigation matters generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcomes of these cases, the Company believes that it is not reasonably possible that the ultimate outcomes will materially and adversely affect its business, financial position, results of operations or cash flows.
Guarantees
The authoritative guidance requires certain guarantees to be recorded at fair value and requires a guarantor to make disclosures, even when the likelihood of making any payments under the guarantee is remote. For those guarantees and indemnifications that do not fall within the initial recognition and measurement requirements of the authoritative guidance, the Company must continue to monitor the conditions that are subject to the guarantees and indemnifications, as required under existing generally accepted accounting principles, to identify if a loss has been incurred. If the Company determines that it is probable that a loss has been incurred, any such estimable loss would be recognized. The initial recognition and measurement requirements do not apply to the provisions contained in the majority of the Company’s software license agreements that indemnify licensees of the Company’s software from damages and costs resulting from claims alleging that the Company’s software infringes the intellectual property rights of a third party. The Company has not made payments pursuant to these provisions. The Company has not identified any losses that are probable under these provisions and, accordingly, the Company has not recorded a liability related to these indemnification provisions.
18. RESTRUCTURING
The Company has implemented multiple restructuring plans to reduce its cost structure, align resources with its product strategy and improve efficiency, which has resulted in workforce reductions and the consolidation of certain leased facilities.
For the three and six months ended
June 30, 2017
and
June 30, 2016
, restructuring charges were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Employee severance and related costs
|
$
|
2,107
|
|
|
$
|
2,541
|
|
|
$
|
8,553
|
|
|
$
|
38,409
|
|
Consolidation of leased facilities
|
211
|
|
|
1,216
|
|
|
1,751
|
|
|
10,904
|
|
Reversal of previous charges
|
(178
|
)
|
|
(177
|
)
|
|
(178
|
)
|
|
(177
|
)
|
Total Restructuring charges
|
$
|
2,140
|
|
|
$
|
3,580
|
|
|
$
|
10,126
|
|
|
$
|
49,136
|
|
During the three and
six
months ended
June 30, 2017
, the Company incurred costs of
$1.8 million
and
$7.5 million
, respectively, related to operational initiatives designed to improve infrastructure scalability and cost saving efficiencies. The charges primarily related to employee severance. Total charges related to this initiative are expected to be approximately
$16.0 million
. As of
June 30, 2017
, total charges incurred since inception were
$7.5 million
.
All remaining costs for the three and six months ended
June 30, 2017
and
2016
relate to other restructuring plans, wherein the majority of the activities related to these previous programs are substantially complete.
Restructuring accruals
The activity in the Company’s restructuring accruals for the
six
months ended
June 30, 2017
is summarized as follows (in thousands):
|
|
|
|
|
|
Total
|
Balance at January 1, 2017
|
$
|
38,059
|
|
Restructuring charges
|
10,126
|
|
Payments
|
(9,373
|
)
|
Balance at June 30, 2017
|
$
|
38,812
|
|
As of
June 30, 2017
, the
$38.8 million
in outstanding restructuring accruals primarily relate to future payments for leased facilities.
19. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017, the Financial Accounting Standards Board issued an accounting standard update on the accounting for business combinations by clarifying the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new guidance is effective for annual and interim periods beginning after December 15, 2017. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations.
In October 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting for income taxes, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transaction occurs as opposed to deferring tax consequences and amortizing them into future periods. This update is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. A modified retrospective approach with a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption is required. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial position or results of operations.
In March 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting for stock-based compensation. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The Company adopted this standard effective January 1, 2017. The impact of the adoption on the condensed consolidated financial statements was as follows:
•
Income tax accounting
- The Company adopted the guidance related to the recognition of excess tax benefits and deficiencies as income tax expense or benefit in the Company's condensed consolidated statements of income on a prospective basis. The Company adopted on a modified retrospective basis the recognition of previously unrecognized excess tax benefits and recorded the cumulative effect of the change as a
$0.4 million
increase to Retained earnings with a corresponding adjustment to Deferred tax assets, net as of January 1, 2017.
•
Forfeitures
- The Company elected to account for forfeitures as they occur on a modified retrospective basis, rather than estimate expected forfeitures and recorded the cumulative effect of the change as a
$5.7 million
decrease to Retained earnings as of January 1, 2017 with a corresponding adjustment to Additional paid-in capital.
•
Cash flow presentation
- The Company elected to adopt the guidance related to the presentation of excess tax benefits in the condensed consolidated statements of cash flows on a prospective basis. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented on the Company's condensed consolidated statements of cash flows since such cash flows have historically been presented as a financing activity.
In February 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting of leases. The new guidance requires that lessees in a leasing arrangement recognize a right-of-use asset and a lease liability for most leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. The new guidance is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations, however, it is expected to have a material impact.
In July 2015, the Financial Accounting Standards Board issued an accounting standard update modifying the accounting for inventory. Under the new guidance, the measurement principle for inventory will change from lower of cost or market value to lower of cost and net realizable value. The standard defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The standard is applicable to inventory that is accounted for under the first-in, first-out method and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. The Company adopted this standard effective January 1, 2017. The adoption of this guidance did not have a significant impact on the Company’s financial position or results of operations.
In May 2014, the Financial Accounting Standards Board issued an accounting standard update on revenue recognition. The new guidance creates a single, principle-based model for revenue recognition and expands and improves disclosures about revenue. In July 2015, the Financial Accounting Standards Board issued an accounting standard update that defers the effective date of the new revenue recognition standard by one year. The new guidance is effective for annual reporting periods beginning on or after December 15, 2017, and must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The Company has completed its assessment of its information technology systems, data and processes related to the implementation of this accounting standard. Additionally, the Company has substantially completed its information technology system design and solution development, and commenced implementation of the solution in the first quarter of fiscal year 2017. The Company expects to adopt the accounting standard update on a modified retrospective basis in the first quarter of fiscal year 2018, and is currently evaluating the potential impact of this standard on its financial position and results of operations. Under the new standard the Company expects to capitalize and amortize certain commissions over the expected customer life rather than expensing them as incurred. Additionally, under the new standard, the Company would be required to recognize term license revenues upfront at time of delivery rather than ratably over the related contract period. The Company expects revenue recognition related to perpetual software, hardware, cloud offerings and professional services to remain substantially unchanged. The Company is currently evaluating and developing internal controls during implementation to ensure its portfolio of contracts are adequately evaluated. The Company's internal controls will be modified and augmented, as necessary, upon adoption of the Company’s new revenue recognition policy effective January 1, 2018.