Citrix Systems (CTXS) 10-Q2022 Q2 Quarterly report

The accompanying unaudited condensed consolidated financial statements of Citrix Systems, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. All adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been reflected in the condensed consolidated financial statements and accompanying notes. The results of operations for the periods presented are not necessarily indicative of the results expected for the full year or for any future period partially because of the seasonality of the Company’s business. Historically, the Company’s revenue for the fourth quarter of any year is typically higher than the revenue for the first quarter of the subsequent year. The information included in these condensed consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report and the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

The condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries in the Americas; Europe, the Middle East and Africa (“EMEA”); and Asia-Pacific and Japan (“APJ”). All significant transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.

The Company's revenues are derived from sales of its Workspace solutions, App Delivery and Security products and related Support and services. The Company operates under 1 reportable segment. See Note 10 for more information on the Company's segment.

On January 31, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Picard Parent, Inc. (“Parent”), Picard Merger Sub, Inc., a wholly owned subsidiary of Parent (“Merger Sub”) and, for certain limited purposes detailed in the Merger Agreement, TIBCO Software, Inc. (“TIBCO”), pursuant to which Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. Parent and Merger Sub were formed by affiliates of Vista Equity Partners (“Vista”). Vista is partnering with Evergreen Coast Capital Corp. (“Evergreen”), an affiliate of Elliott Investment Management L.P. (“Elliott”), to acquire all of the Company’s outstanding shares of common stock (the “Company Common Stock”) for $104.00 per share in cash. At a Special Meeting of Stockholders held on April 21, 2022, the Company's stockholders approved the Merger Agreement. The Merger is currently expected to close during the third quarter of 2022, subject to customary closing conditions, including receipt of final regulatory approvals. See Note 18 for more information on the pending merger transaction.

In October 2021, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update on business combinations. The new guidance requires companies to apply revenue guidance under Accounting Standards Codification Topic 606 to recognize and measure contract assets and contract liabilities acquired in a business combination on the acquisition date. This approach differs from the current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. The update will be effective for the Company beginning in the first quarter of 2023, though early adoption is permitted. The Company is currently evaluating the timing of adoption and impact of this new standard.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant estimates made by management include estimation for reserves for legal contingencies, the standalone selling price of certain performance obligations related to revenue recognition, the provision for credit losses related to accounts receivable, contract assets, and available-for-sale debt securities, the provision to reduce

See Note 7 for additional information regarding the Company’s investments.

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:

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. 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

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. The Company accounts for forfeitures as they occur. See Note 8 for further information regarding the Company’s stock-based compensation plans.

The following is a description of the principal activities from which the Company generates revenue.

Subscription revenues primarily consist of cloud-hosted offerings, which provide customers a right to access one or more of the Company’s cloud-hosted subscription offerings, with routine customer support, as well as revenues from the Citrix Service Provider (“CSP”) program, on-premise subscription software licenses, and hybrid subscription offerings. The CSP program provides subscription-based services in which the CSP partners host software services to their end users.

Product and license revenues are primarily derived from App Delivery and Security products.

The Company generates all of its revenues from contracts with customers. At contract inception, the Company assesses the solutions or services, or bundles of solutions and services, obligated in the contract with a customer to identify each performance obligation within the contract, and then evaluates whether the performance obligations are capable of being distinct and distinct within the context of the contract. Solutions and services that are not both capable of being distinct and distinct within the context of the contract are combined and treated as a single performance obligation in determining the allocation and recognition of revenue.

The standalone selling price is the price at which the Company would sell a promised product or service separately to the customer. For the majority of the Company's software licenses and hardware, CSP and on-premise subscription software licenses, the Company uses the observable price in transactions with multiple performance obligations. For the majority of the Company’s support and services, and cloud-hosted subscription offerings, the Company uses the observable price when the Company sells that support and service and cloud-hosted subscription separately to similar customers. If the standalone selling price for a performance obligation is not directly observable, the Company estimates it. The Company estimates the standalone selling price by taking into consideration market conditions, economics of the offering and customers’ behavior. The Company maximizes the use of observable inputs and applies estimation methods consistently in similar circumstances. The Company allocates the transaction price to each distinct performance obligation on a relative standalone selling price basis.

Revenues are recognized when control of the promised products or services are transferred to customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those products or services.

The Company records revenue net of sales tax.

The Company's short-term and long-term contract assets, net of allowance for credit losses, were $51.8 million and $40.7 million, respectively, as of June 30, 2022, and $46.6 million and $40.5 million, respectively, as of December 31, 2021, and are included in Prepaid expenses and other current assets and Other assets, respectively, in the accompanying condensed consolidated balance sheets. The Current portion of deferred revenues and the Long-term portion of deferred revenues were $1.62 billion and $311.6 million, respectively, as of June 30, 2022 and $1.71 billion and $329.5 million, respectively, as of December 31, 2021. The difference in the opening and closing balances of the Company’s contract assets and liabilities primarily results from the timing difference between the Company’s performance, and the Company’s right to consideration or the customer’s payment. During the three and six months ended June 30, 2022, the Company recognized $605.3 million and $1.07 billion, respectively, of revenue that was included in the deferred revenue balance as of March 31, 2022 and December 31, 2021, respectively.

The Company performs its obligations under a contract with a customer by transferring solutions and services in exchange for consideration from the customer. Accounts receivable are recorded when the right to consideration becomes unconditional. The timing of the Company’s performance differs from the timing of the Company’s right to consideration or the customer’s payment, which results in the recognition of a contract asset or a contract liability. The Company recognizes a contract asset when the Company transfers products or services to a customer and the right to consideration is conditional on something other than the passage of time. The Company recognizes a contract liability when it has received consideration or an amount of consideration is due from the customer and the Company has a future obligation to transfer products or services. The Company had no material asset impairment charges related to contract assets for either the three and six months ended June 30, 2022 and 2021, respectively. 

For the Company’s perpetual offerings, the timing of payment is typically upfront. Therefore, deferred revenue is created when a contract includes performance obligations such as license updates and maintenance or certain professional services that are satisfied over time. For subscription contracts, the timing of payment is typically in advance of services, and deferred revenue is amortized as these services are provided over time.

For contracts that have an original duration of one year or less, the Company applies a practical expedient to determine whether a significant financing component exists and does not consider the effects of the time value of money. For multi-year contracts, the Company bills annually.

The Company is required to capitalize certain contract acquisition costs consisting primarily of commissions paid and related payroll taxes when contracts are signed. The asset recognized from capitalized incremental and recoverable acquisition costs is amortized over the expected period of benefit on a basis consistent with the pattern of transfer of the products or services to which the asset relates. The Company elects to apply a practical expedient to expense contract acquisition costs as incurred where the pattern of transfer is one year or less.

The Company’s typical contracts include performance obligations related to subscription, product and licenses, and support and services. Contract acquisition costs are allocated to performance obligations using a portfolio approach. The Company assesses its sales compensation plans at least annually to evaluate whether contract acquisition costs for renewals and extensions are commensurate with those related to initial contracts. If concluded to be commensurate, the contract acquisition costs are amortized over the contractual term on a basis consistent with the pattern of transfer of the products or services to which the asset relates. If concluded not to be commensurate, the contract acquisition costs are amortized over the greater of the contractual term or estimated customer life on a basis consistent with the pattern of transfer of the products or services to which the asset relates. The Company estimates an average customer life of three years to five years, which it believes is appropriate based on consideration of the historical average customer life and the estimated useful life of the underlying product and license sold as part of the transaction.

For the three and six months ended June 30, 2022, the Company recorded amortization of capitalized contract acquisition costs of $22.0 million and $43.7 million, respectively, and for the three and six months ended June 30, 2021, the Company recorded amortization of capitalized contract acquisition costs of $18.9 million and $37.2 million, respectively, which are recorded in Sales, marketing and services expense in the accompanying condensed consolidated statements of income. The Company's short-term and long-term contract acquisition costs were $85.4 million and $145.8 million, respectively, as of June 30, 2022, and $82.4 million and $144.2 million, respectively, as of December 31, 2021, and are included in Prepaid expenses and other current assets and Other assets, respectively, in the accompanying condensed consolidated balance sheets. There were no impairment losses in relation to costs capitalized during the three and six months ended June 30, 2022 and 2021, respectively.

Basic earnings per share is calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted-average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise or settlement of stock awards and shares issuable under the employee stock purchase plan (calculated using the treasury stock method) during the period they were outstanding.

For the three and six months ended June 30, 2022, anti-dilutive stock-based awards excluded from the calculations of diluted earnings per share were 1.3 million shares and 1.4 million shares, respectively. For the three and six months ended June 30, 2021, anti-dilutive stock-based awards excluded from the calculations of diluted earnings per share were 3.3 million shares and 2.0 million shares, respectively.

The Company is exposed to credit losses primarily through its accounts receivable, investments in available-for-sale debt securities, and contract assets. See Note 3 for additional information related to the Company's contract assets.

The allowance for credit losses on accounts receivable is determined using a combination of specific reserves for accounts that are deemed to exhibit credit loss indicators and general reserves that are judgmentally determined using loss rates based on historical write-offs by geography and customer accounts subject to credit check versus non-credit check status and consideration of recent forecasted information, including underlying economic expectations. The credit loss reserves are updated quarterly for most recent write-offs and collections information and underlying economic expectations. The Company will compare its current estimate of expected credit losses with the estimate of credit losses from the prior period and will report in net income the amount necessary to adjust the allowance for current expected credit losses. Credit loss expense is included within General and administrative expenses in the accompanying condensed consolidated statements of income.

As of June 30, 2022, 1 distributor accounted for 10% of the Company's total gross accounts receivable.

Under the terms of the Wrike Agreement, certain unvested stock options held by Wrike employees were assumed by the Company and converted into options to purchase 526,113 shares of the Company's common stock that were valued at $54.3 million using the Black-Scholes option-pricing model. The portion of the fair value of the assumed stock options associated with pre-combination service of Wrike employees was valued at $28.9 million and represented a component of the Purchase Consideration. The remaining fair value of $25.4 million is being recognized as post-combination stock-based compensation expense over the service period. See Note 8 for detailed information on the assumed stock options.

The Company incurred $20.4 million of expenses related to the Wrike acquisition, of which $0.3 million and $0.6 million were expensed during the three and six months ended June 30, 2022, respectively, and $0.3 million and $15.8 million were expensed during the three and six months ended June 30, 2021, respectively, and are included in General and administrative expense in the accompanying condensed consolidated statements of income.

In February 2021, the Company entered into a three-year term loan credit agreement providing for a $1.00 billion senior unsecured term loan (the “2021 Term Loan”) and issued $750.0 million of unsecured senior notes due March 1, 2026 (the “2026 Notes”). The proceeds of the 2021 Term Loan and the 2026 Notes were used (i) to fund a portion of the purchase price of the acquisition and (ii) to pay fees and expenses incurred in connection with the acquisition. The Company incurred $9.1 million of issuance costs that were netted against Long-term debt in the accompanying condensed consolidated balance sheets. See Note 11 for detailed information on the debt financing.

The Company's short-term available-for-sale debt investments are measured to fair value on a recurring basis. Unrealized gains and losses related to the Company’s short-term investments are recorded in Other comprehensive loss and are generally due to interest rate fluctuations. The securities that are in an unrealized loss position are reviewed on an individual basis in order to evaluate if all or a portion of the unrealized loss is a result of a credit loss. For impairment indicators due to credit loss factors, the Company establishes an allowance for credit losses with a charge to current period net income. See Note 5 for additional information regarding the credit losses for available-for-sale investments. As of June 30, 2022 and December 31, 2021, unrealized gains and losses from the Company’s available-for-sale investments were not material and the amortized cost approximated their fair value. For the three and six months ended June 30, 2022 and 2021, realized gains and losses on available-for-sale investments were not material.

The average remaining maturities of the Company’s short-term available-for-sale investments at June 30, 2022 were approximately five months. As of June 30, 2022, the Company does not hold long-term available-for-sale investments.

For the three and six months ended June 30, 2022, the Company received $13.0 million from the sales of available-for-sale investments. For the three and six months ended June 30, 2021, the Company did not receive any proceeds from the sales of available-for-sale investments.

The Company held equity interests in certain private equity funds of $16.6 million and $21.5 million as of June 30, 2022 and December 31, 2021, respectively, which are accounted for under the net asset value practical expedient. These investments are included in Other assets in the accompanying condensed consolidated balance sheets. The net asset value of these investments is determined using quarterly capital statements from the funds, which are based on the Company’s contributions to the funds, allocation of profit and loss and changes in fair value of the underlying fund investments. These private equity funds focus on making venture capital investments, principally by investing in equity securities of early and late stage privately-held corporations. The funds’ general partner shall determine the amount, timing and form (whether cash or in kind) of all distributions made by the funds. The Company may only transfer its investments in private equity fund interests subject to the general partner’s written consent and cannot trade its fund interests in established securities markets, secondary markets or equivalents thereof. The Company had no unfunded commitments as of June 30, 2022.

The Company held direct investments in privately-held companies of $24.3 million and $24.4 million as of June 30, 2022 and December 31, 2021, respectively, which are accounted for at cost, less impairment plus or minus adjustments resulting from observable price changes in orderly transactions for an identical or a similar investment of the same issuer. These investments are included in Other assets in the accompanying condensed consolidated balance sheets. The Company periodically reviews these investments for impairment and observable price changes on a quarterly basis and adjusts the carrying value accordingly.

The Company’s investment policy is designed to limit exposure to any one issuer depending on credit quality. The Company’s fixed income available-for-sale security portfolio generally consists of investment grade securities from diverse issuers with a minimum credit rating of A-/A3 and a weighted-average credit rating of AA-/Aa3. The Company values these securities based on pricing from the Service, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value, and accordingly, the Company classifies the majority of its fixed income available-for-sale securities as Level 2.

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). See Note 12 for further information regarding the Company's derivatives.

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

See Note 11 for more information on the Company's debt instruments.

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, 2022, the Company had 3 stock-based compensation plans with shares available for grant.

The Company is currently granting stock-based awards from its Second Amended and Restated 2014 Equity Incentive Plan (the “2014 Plan”), which was amended at the Company's Annual Meeting of Stockholders on June 3, 2020. Pursuant to the June 2020 amendment, the maximum number of shares of common stock available for issuance under the 2014 Plan was increased to 51,300,000. In addition, the amendment extended the term of the 2014 Plan to June 3, 2030 and updated the vesting provisions from monthly to annual vesting for annual director awards, consistent with the Company's current compensation program for non-employee directors. As of June 30, 2022, there were 13,651,187 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 10,268,094 shares of common stock.

In connection with the Wrike acquisition, on February 26, 2021, the Company's Board of Directors adopted the 2021 Inducement Plan (the “2021 Inducement Plan”). The 2021 Inducement Plan provides for the grant of equity awards to induce highly-qualified prospective officers and employees to accept employment and to provide them with a proprietary interest in the Company. The Company is authorized to issue 320,000 shares of common stock for inducement awards under the 2021 Inducement Plan. As of June 30, 2022, there were 144,998 shares of common stock reserved for issuance pursuant to the 2021 Inducement Plan, including authorization under the 2021 Inducement Plan to grant stock-based awards covering 48,322 shares of common stock.

Effective February 26, 2021, the Company assumed the Wrangler Topco, LLC Second Amended and Restated 2018 Equity Incentive Plan (the “Wrangler Plan”) and the Wrike, Inc. Amended and Restated 2013 Stock Plan (the “Wrike Plan”). As of June 30, 2022, there were 655,257 shares of the Company’s common stock reserved and authorized for issuance under the terms of the Wrangler Plan, including authorization under the Wrangler Plan to grant stock-based awards covering 226,616 shares of common stock. As of June 30, 2022, there were 127,838 shares of the Company's common stock reserved and authorized for issuance under the terms of the Wrike Plan. All of the Wrike Plan awards are currently outstanding with no new shares available for issuance.

The Company awards senior level employees and certain other employees non-vested stock units granted under the 2014 Plan that vest based on service. These non-vested stock unit awards primarily vest 33.33% on each of the first, second and third anniversary subsequent to the grant date of the award. Each non-vested stock unit, upon vesting, represents the right to receive 1 share of the Company’s common stock. In addition, the Company awards non-vested stock units to all of its continuing non-employee directors, which represent the right to receive 1 share of the Company's common stock upon vesting. Awards granted to non-employee directors vest in full in 1 installment on the earlier of: (i) the first anniversary of the award date; or (ii) the day immediately prior to the Company’s next annual meeting of stockholders following the award date.

During the three months ended June 30, 2022, the Company awarded certain non-executive senior level employees and certain other employees, 947,202 non-vested stock units granted under the 2014 Plan that vest based on service and 62,749 non-vested stock units granted under the Wrangler Plan that also vest based on service. During the six months ended June 30, 2022, the Company awarded certain non-executive senior level employees and certain other employees, 1,008,330 non-vested stock units granted under the 2014 Plan that vest based on service and 117,440 non-vested stock units granted under the Wrangler Plan that also vest based on service. These non-vested stock unit awards primarily vest 100% on the first anniversary of the grant date of the award, subject to continued employment through such date.

As of June 30, 2022, the total number of non-vested stock units outstanding, including company performance awards and service-based awards was 3,621,373. As of June 30, 2022, there was $312.3 million of total unrecognized compensation cost related to non-vested stock units. The unrecognized cost of the awards legally granted through June 30, 2022 is expected to be recognized over a weighted-average period of 1.30 years.

The Company recorded stock-based compensation costs related to its company performance stock units of $4.4 million and $16.4 million for the three and six months ended June 30, 2022, respectively, and $6.4 million and $19.6 million for the three and six months ended June 30, 2021, respectively.

In connection with the acquisition of Wrike, the Company assumed 526,113 outstanding stock options which expire ten years from the date of grant and which were valued using the Black-Scholes option-pricing model. Of these assumed awards, 180,003 options continued with the same monthly vesting conditions under which they were originally granted. The majority of the remaining assumed options were reset to primarily cliff vest on December 31, 2021 or annually over two years.

The estimated weighted-average grant date fair value for the assumed stock options was $103.22 per share and total fair value of $54.3 million. For the three and six months ended June 30, 2022, the Company recorded stock-based compensation costs related to unvested assumed stock options of $2.1 million and $4.6 million, respectively. For the three and six months ended June 30, 2021, the Company recorded stock-based compensation costs related to unvested assumed stock options of $4.5 million and $6.5 million, respectively. As of June 30, 2022, there was $0.7 million of total unrecognized compensation costs related to unvested assumed stock options to be recognized over a weighted-average period of 0.43 years. See Note 6 for detailed information on the Wrike acquisition.

The Company accounts for goodwill in accordance with the authoritative guidance, which requires that goodwill and certain intangible assets are not amortized, but are subject to an annual impairment test. The Company performed a qualitative assessment in connection with its annual goodwill impairment test in the fourth quarter of 2021. As a result of the qualitative analysis, a quantitative impairment test was not deemed necessary. 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 2021.

Amortization of product related intangible assets, which consists primarily of product related technologies and patents, was $17.5 million and $20.1 million for the three months ended June 30, 2022 and 2021, respectively, and $34.8 million and $31.1 million for the six months ended June 30, 2022 and 2021, respectively, and is classified as a component of Cost of net revenues in the accompanying condensed consolidated statements of income. Amortization of other intangible assets, which consist primarily of customer relationships, trade names and backlog was $19.4 million for the three months ended June 30, 2022 and 2021, respectively, and $38.7 million and $27.0 million for the six months ended June 30, 2022 and 2021, respectively, and is classified as a component of Operating expenses in the accompanying condensed consolidated statements of income.

The Company monitors its intangible assets for indicators of impairment. If the Company determines impairment has occurred, it will write-down the intangible asset to its fair value. For certain intangible assets where the unamortized balances exceeded the undiscounted future net cash flows, the Company measures the amount of the impairment by calculating the amount by which the carrying values exceed the estimated fair values, which are based on projected discounted future net cash flows.

Citrix has 1 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.

On February 5, 2021, the Company entered into the 2021 Term Loan Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto from time to time (collectively, the “2021 Lenders”). The 2021 Term Loan Credit Agreement provided the Company with a facility to borrow a term loan on an unsecured basis in an aggregate principal amount of up to $1.00 billion (the “2021 Term Loan”). The Company borrowed $1.00 billion on February 26, 2021 under the 2021 Term Loan, and the loan matures on February 26, 2024. The proceeds of borrowings under the 2021 Term Loan Credit Agreement were used to finance a portion of the purchase price for the Wrike acquisition. See Note 6 for detailed information on the Wrike acquisition.

Borrowings under the 2021 Term Loan Credit Agreement bear interest at a rate equal to (a) either (i) a customary LIBOR formula or, upon a phase-out of LIBOR, an alternative benchmark rate as provided in the 2021 Term Loan Credit Agreement, or (ii) a customary base rate formula, plus (b) the applicable margin with respect thereto, which initially was determined based on the Company’s consolidated leverage ratio. The Company made an election to base the applicable margin on the Company’s non-credit enhanced, senior unsecured long-term debt rating as determined by Moody’s Investors Service, Inc., Standard & Poor’s Financial Services, LLC and Fitch Ratings Inc., in each case as set forth in the 2021 Term Loan Credit Agreement effective in the third quarter of 2021.

The 2021 Term Loan Credit Agreement contains certain financial and non-financial covenants, including a covenant limiting the Company’s consolidated leverage ratio. During the second quarter of 2022, the Company was subject to a mandatory step-down of the consolidated leverage ratio to 3.75:1.0 from 4.0:1:0 (the “Leverage Ratio Step-Down”), and further subject to, upon the occurrence of a qualified acquisition in any quarter on or after the fiscal quarter ending March 31, 2022, if so elected by the Company, a step-up to 4.25:1.0 for the 4 fiscal quarters following such qualified acquisition. The Company was in compliance with these covenants as of June 30, 2022.

Certain 2021 Lenders and/or their affiliates have provided and may continue to provide commercial banking, investment management and other services to the Company, its affiliates and employees, for which they receive customary fees and commissions.

On January 21, 2020, the Company entered into the Term Loan Credit Agreement with Bank of America, N.A., as administrative agent, and other lenders party thereto from time to time that provides the Company with facilities to borrow term loans on an unsecured basis in an aggregate principal amount of up to $1.00 billion, consisting of (i) a $500.0 million 364-day term loan facility (the “364-day Term Loan”), and (ii) a $500.0 million 3-year term loan (the “3-year Term Loan”), in each case in a single borrowing, subject to satisfaction of certain conditions set forth in the Term Loan Credit Agreement. On January 30, 2020, the Company borrowed $1.00 billion under the term loans and used the proceeds to enter into accelerated share repurchase transactions for an aggregate of $1.00 billion.

Borrowings under the Term Loan Credit Agreement bear interest at a rate equal to (a) either (i) LIBOR or, upon a phase-out of LIBOR, an alternative benchmark rate as provided in the Term Loan Credit Agreement, or (ii) a customary base rate formula, plus (b) the applicable margin with respect thereto, which initially was determined based on the Company’s consolidated leverage ratio. The Company made an election to base the applicable margin on the Company’s non-credit

On February 5, 2021, the Company entered into the first amendment to the Term Loan Credit Agreement, which amends, among other things, the covenant limiting the Company’s consolidated leverage ratio. After giving effect to the amendment, the covenant limiting the Company’s consolidated leverage ratio is consistent with the covenant limiting the Company’s consolidated leverage ratio in the 2021 Term Loan Credit Agreement and the Leverage Ratio Step-Down during the second quarter of 2022, and further subject to, upon the occurrence of a qualified acquisition in any quarter on or after the fifth fiscal quarter ending after the Leverage Ratio Step-Down, if so elected by the Company, a step-up to 4.25:1.0 for the 4 fiscal quarters following such qualified acquisition. The Company was in compliance with all covenants as of June 30, 2022.

On February 18, 2021, the Company issued $750.0 million of unsecured senior notes due March 1, 2026. The 2026 Notes accrue interest at a rate of 1.250% per annum. Interest on the 2026 Notes is due semi-annually on March 1 and September 1 of each year, beginning on September 1, 2021. The net proceeds from this offering were $741.4 million, after deducting the underwriting discount and offering expenses payable by the Company. Net proceeds from this offering were used to fund a portion of the purchase price for the Wrike acquisition. The 2026 Notes will mature on March 1, 2026, unless earlier redeemed in accordance with their terms prior to such date.

On February 25, 2020, the Company issued $750.0 million of unsecured senior notes due March 1, 2030. The 2030 Notes accrue interest at a rate of 3.300% per annum. Interest on the 2030 Notes is due semi-annually on March 1 and September 1 of each year. The 2030 Notes will mature on March 1, 2030, unless earlier redeemed in accordance with their terms prior to such date.

On November 15, 2017, the Company issued $750.0 million of unsecured senior notes due December 1, 2027. The 2027 Notes accrue interest at a rate of 4.500% per annum. Interest on the 2027 Notes is due semi-annually on June 1 and December 1 of each year. The 2027 Notes will mature on December 1, 2027, unless earlier redeemed in accordance with their terms prior to such date.

Each of the 2026 Notes, 2030 Notes and 2027 Notes are individually redeemable in whole or from time to time in part at the Company’s option, subject to a make-whole premium. In addition, upon the occurrence of certain change of control triggering events prior to maturity, holders of the notes may require the Company to repurchase the notes for cash at a repurchase price of 101% of the principal amount of the notes to be repurchased plus accrued and unpaid interest to, but excluding, the repurchase date.

On November 26, 2019, the Company entered into an amended and restated credit agreement (the "Credit Agreement") with a group of financial institutions, which amends and restates the Company’s Credit Agreement, dated January 7, 2015. The Credit Agreement provides for a five-year unsecured revolving credit facility in the aggregate amount of $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 a rate equal to (a) either (i) LIBOR or, upon a phase-out of LIBOR, an alternative benchmark rate as provided in the Credit Agreement, or (ii) a customary base rate formula, plus (b) the applicable margin with respect thereto, which initially was determined based on the Company’s consolidated leverage ratio. The Company made an election to base the applicable margin on the Company’s long-term debt rating as set forth in the Credit Agreement effective in the second quarter of 2021. In addition, the Company is required to pay a quarterly facility fee ranging from 0.11% 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 or long-term credit rating. As of June 30, 2022 and December 31, 2021, no amounts were outstanding under the credit facility.

On February 5, 2021, the Company entered into the first amendment to the Credit Agreement, which amends, among other things, the covenant limiting the Company’s consolidated leverage ratio. After giving effect to the amendment, the covenant limiting the Company’s consolidated leverage ratio is consistent with the covenant limiting the Company’s consolidated leverage ratio in the 2021 Term Loan Credit Agreement and Leverage Ratio Step-Down during the second quarter of 2022 to 3.75:1.0, and further subject to, upon the occurrence of a qualified acquisition in any quarter on or after the fifth fiscal quarter ending after the Leverage Ratio Step-Down, if so elected by the Company, a step-up to 4.25:1.0 for the 4 fiscal quarters following such qualified acquisition. The Company was in compliance with all covenants as of June 30, 2022.

On January 16, 2021, the Company entered into a bridge facility and take-out facility commitment letter (the “Commitment Letter”) pursuant to which JPMorgan Chase Bank, N.A. (1) committed to provide a senior unsecured 364-day term loan facility in an aggregate principal amount of $1.45 billion to finance the cash consideration for the Wrike acquisition in the event that the permanent debt financing was not available on or prior to the Closing Date and (2) agreed to use commercially reasonable efforts to assemble a syndicate of lenders to provide the necessary commitments for the senior term loan facility. The commitments under the Commitment Letter were permanently reduced to zero on February 18, 2021, as a result of (i) the effectiveness of the 2021 Term Loan Credit Agreement and (ii) the completion of the issuance of the 2026 Notes. In connection with the Commitment Letter, the Company incurred $5.4 million in issuance costs that were expensed in the first quarter of 2021 and are included in Interest expense in the accompanying condensed statements of income.

As of June 30, 2022, 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. Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Gains and losses on derivatives that are designated as cash flow hedges are initially reported as a component of Accumulated other comprehensive loss and are subsequently recognized in income when the hedged exposure is recognized in income. Gains and losses from changes in fair values of derivatives that are not designated as hedges are recognized in Other (expense) income, net.

The total cumulative unrealized loss on cash flow derivative instruments was $3.5 million and $0.6 million as of June 30, 2022 and December 31, 2021, respectively. Unrealized gains and losses on cash flow derivatives are included in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. The net unrealized loss as of June 30, 2022 is expected to be recognized in income over the next 12 months at the same time the hedged items are recognized in income.

A substantial portion of the Company’s overseas assets and liabilities are and will continue to be denominated in local currencies. To protect against fluctuations in earnings caused by changes in currency exchange rates when remeasuring the Company’s balance sheet, the Company utilizes foreign exchange forward contracts to hedge its exposure to this potential volatility. These contracts are not designated for hedge accounting treatment under the authoritative guidance. Accordingly, changes in the fair value of these contracts are recorded in Other (expense) income, net.

The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of the process of preparing its condensed consolidated financial statements. The Company maintains certain strategic management and operational activities in overseas subsidiaries and its foreign earnings are taxed at rates that are generally lower than in the United States.

The Company’s effective tax rate generally differs from the U.S. federal statutory rate primarily due to tax credits and lower tax rates on earnings generated by the Company’s foreign operations that are taxed primarily in Switzerland.

The Company’s effective tax rate was 21.2% and 8.6% for the three months ended June 30, 2022 and 2021, respectively. The increase in the effective tax rate when comparing the three months ended June 30, 2022 to the three months ended June 30, 2021 was primarily due the geographical mix of income towards higher tax regions and tax benefits unique to the period ended June 30, 2021. These amounts include a tax benefit related to stock-based compensation deductions.

The Company’s effective tax rate was 20.2% and (2.0)% for the six months ended June 30, 2022 and 2021, respectively. The increase in the effective tax rate when comparing the six months ended June 30, 2022 to the six months ended June 30,

The Company’s net unrecognized tax benefits totaled $106.7 million and $103.5 million as of June 30, 2022 and December 31, 2021, respectively. At June 30, 2022, $92.4 million included in the balance for tax positions would affect the annual effective tax rate if recognized. The Company recognizes interest accrued related to uncertain tax positions and penalties in income tax expense. As of June 30, 2022, the Company has accrued $1.9 million for the payment of interest.

At June 30, 2022, the Company had $392.0 million in net deferred tax assets. The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company reviews deferred tax assets periodically for recoverability and makes estimates and judgments regarding the expected geographic sources of taxable income and gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance. If the estimates and assumptions used in the Company's determination change in the future, the Company could be required to revise its estimates of the valuation allowances against its deferred tax assets and adjust its provisions for additional income taxes.

The Company and one or more of its subsidiaries are subject to U.S. federal income taxes in the United States, as well as income taxes of multiple state and foreign jurisdictions. The Company is currently under examination by the United States Internal Revenue Service for 2017 through 2020 tax years. With few exceptions, the Company is generally not subject to examination for state and local income tax, or in non-U.S. jurisdictions, by tax authorities for years prior to 2017.

The Company's U.S. liquidity needs are currently satisfied using cash flows generated from its U.S. operations, borrowings, or both. The Company also utilizes a variety of tax planning strategies in an effort to ensure that its worldwide cash is available in locations in which it is needed. The Company expects to repatriate a substantial portion of its foreign earnings over time, to the extent that the foreign earnings are not restricted by local laws or result in significant incremental costs associated with repatriating the foreign earnings.

The Company’s Board of Directors has authorized an ongoing stock repurchase program. The objective of the Company’s stock repurchase program was to improve stockholders’ returns and mitigate earnings per share dilution posed by the issuance of shares related to employee equity compensation awards. At June 30, 2022, $625.6 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased were 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 debt, as well as proceeds from employee stock awards and the related tax benefit. While the Merger Agreement is in effect, the Company is prohibited from repurchasing shares of its common stock, including under the stock repurchase program. See Note 18 for detailed information on the Merger Agreement.

During the three and six months ended June 30, 2022 and 2021, the Company made no open market purchases under the stock repurchase program.

During the three and six months ended June 30, 2022, the Company withheld 347,267 and 774,649 shares, respectively, from equity awards that vested, totaling $35.2 million and $78.9 million, respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. During the three and six months ended June 30, 2021, the Company withheld 393,837 and 729,184 shares, respectively, from equity awards that vested, totaling $55.0 million and $101.7 million, respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. These shares are reflected as treasury stock in the Company’s condensed consolidated balance sheets.

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, or a range of, the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of any pending claims, suits, assessments, regulatory investigations, or other legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made. In addition, in accordance with the relevant authoritative

The Merger Actions generally allege that the definitive proxy statement filed by the Company on March 16, 2022 with respect to the special meeting of Citrix’s stockholders held on April 21, 2022 (the “Definitive Proxy Statement”) or the preliminary proxy statement filed by the Company with the SEC on March 3, 2022 misrepresent and/or omit certain purportedly material information relating to the Company’s financial projections, the analyses performed by the financial advisor to the Citrix Board of Directors in connection with the Merger, potential conflicts of interest of the Company’s officers and directors, and the events that led to the signing of the Merger Agreement. The Merger Actions assert violations of Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 14a-9 promulgated thereunder against all defendants (the Company, its Board of Directors and certain officers) and violations of Section 20(a) of the Exchange Act against Citrix’s directors and officers. The Bell Complaint also asserted a breach of fiduciary duty against the individual defendants. The Merger Actions seek, among other things, an injunction enjoining the consummation of the Merger, costs of the action, including plaintiffs’ attorneys’ fees and experts’ fees, and other relief the court may deem just and proper.

While the Company believes that the disclosures set forth in the Definitive Proxy Statement comply fully with all applicable law and denies the allegations in the pending Merger Actions described above, in order to moot plaintiffs’ disclosure claims, avoid nuisance and possible expense and business delays, and provide additional information to its stockholders, the Company made certain disclosures that supplement and revise those contained in the Definitive Proxy Statement (the “Supplemental Disclosures”). These Supplemental Disclosures were filed with the SEC in a Current Report on Form 8-K and under Schedule 14A. Nothing in the Supplemental Disclosures shall be deemed an admission of the legal merit, necessity or materiality under applicable laws of any of the disclosures set forth therein. To the contrary, the Company specifically denies all allegations in the Merger Actions described above that any additional disclosure was or is required or material.

In the second quarter of 2022, eight of the Merger Actions, including the Bell Complaint, were voluntarily dismissed. The Company cannot predict the outcome of the remaining Merger Actions. The Company believes that the remaining Merger Actions are without merit, and the Company and the individual defendants intend to vigorously defend against the remaining Merger Actions and any subsequently filed similar actions. If additional similar complaints are filed, absent new or significantly different allegations, the Company will not necessarily disclose such additional filings.

On November 15, 2021, the Company announced the implementation of a restructuring program (the “2021 Restructuring Program”) intended to improve operational efficiency. The 2021 Restructuring Program includes, among other things, the elimination of full-time positions, termination of certain contracts, and asset impairments, primarily related to facilities consolidations. The Company currently expects to record in the aggregate approximately $174.0 million to $240.0 million in pre-tax restructuring and asset impairment charges associated with the 2021 Restructuring Program. Included in these pre-tax charges are approximately $87.0 million to $90.0 million related to employee severance arrangements, approximately $40.0 million to $75.0 million related to the impairment of ROU and other assets from the consolidation of facilities, approximately $20.0 million to $35.0 million in contract termination costs and approximately $27.0 million to $40.0 million related to the impairment of certain acquired intangible assets. See Note 9 for detailed information on intangible assets. The program is expected to be substantially completed over an estimated eighteen-month period.

For the three and six months ended June 30, 2022, restructuring charges were comprised of the following (in thousands):

As of June 30, 2022, charges incurred within Restructuring expenses were $130.4 million since inception of the 2021 Restructuring Program.

The Company reviews for impairment of its long-lived assets, including ROU assets, whenever events or changes in circumstances indicate that the carrying amount of such assets may be impaired. Measurement of an impairment loss is based on the fair value of the asset compared to its carrying value. The fair value of the ROU assets is determined by utilizing the present value of the estimated future cash flows attributable to the assets.

In connection with the 2021 Restructuring Program the Company re-evaluated its real estate needs, resulting in a reduction of owned space and leased space, and the impairment of the associated ROU assets and property and equipment. During the six months ended June 30, 2022, these actions resulted in restructuring charges of $6.5 million, comprised of noncash charges of $3.4 million related to the impairment of operating lease ROU assets, and property and equipment of $3.1 million. Due to the actions taken above, the Company tested the operating lease ROU assets and certain property and equipment for recoverability by comparing the carrying value of the asset group to an estimate of the future undiscounted cash flows expected to result from the use and eventual disposition of the asset group. Based on the results of the recoverability test, the Company determined that the undiscounted cash flows of the asset groups were below the carrying values, indicating impairment. The Company then determined the fair value of the asset groups by utilizing the present value of the estimated future cash flows attributable to the assets.

The activity in the Company’s restructuring accruals for the six months ended June 30, 2022 is summarized as follows (in thousands):

The following tables present the changes in total stockholders' equity during the three and six months ended June 30, 2021 (in thousands):