Citrix 2006 Annual Report Download - page 45

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Citrix Systems, Inc.  Annual Report
Other (expense) income, net is primarily comprised of
remeasurement and foreign currency transaction gains
(losses), other-than-temporary declines in the value of our
equity investments and debt instruments and realized gains
(losses) on the sale of available-for-sale investments. Other
(expense) income remained relatively flat when comparing
2006 to 2005. The decrease in other (expense) income,
net during 2005 as compared to 2004 was due primarily
to losses on the remeasurement of our foreign currency
transactions partially offset by realized gains on the sale of
certain of our investments.
Income Taxes
On October 22, 2004, the American Jobs Creation Act,
or the AJCA, was signed into law. The AJCA provided
for an 85% dividends received deduction on dividend
distributions of foreign earnings to a U.S. taxpayer, if certain
conditions are met. During the second quarter of fiscal
2005, we completed our evaluation of the effects of the
repatriation provision of the AJCA and our Chief Executive
Officer and Board of Directors approved our dividend
reinvestment plan, or DRP, under the AJCA. During 2005,
we repatriated approximately $503.0 million of certain
foreign earnings, of which $500.0 million qualified for
the 85% dividends received deduction. During 2005, we
recorded an estimated tax provision of approximately $24.4
million related to the repatriation. Additionally, during 2005,
we recorded the reversal of approximately $8.8 million
for income taxes on certain foreign earnings for which a
deferred tax liability had been previously recorded.
We maintain certain operational and administrative
processes in overseas subsidiaries and its foreign earnings
are taxed at lower foreign tax rates. Other than the one-
time repatriation provision under the AJCA described
above, we do not expect to remit earnings from our
foreign subsidiaries.
We establish tax reserves when, despite our belief that
our tax return positions are fully supportable, certain
of these positions may be challenged. While it is often
difficult to predict whether we will prevail, we believe
that our tax reserves reflect the probable outcome of
known contingencies. As such, included in our effective
tax rate for the year ended December 31, 2006 is the
reduction of approximately $14.2 million in tax reserves
related to the conclusion of an Internal Revenue Service
examination for the 2001 tax year and the expiration
of a statute of limitations for the 2002 tax year partially
offset by an additional tax reserve of approximately $13.0
million related to uncertainties arising in the third quarter
of 2006. The net effect of these contingencies, primarily
relating to the taxability of transactions between entities
of the consolidated company, did not have a material
impact on our effective tax rate for the year ended
December 31, 2006.
In 2006, our effective tax rate decreased to approximately
24.7% from 26.2% primarily due to the tax impact of the
dividend repatriated under the AJCA in 2005 partially
offset by the tax effects of our adoption of SFAS No. 123R.
In 2005, our effective tax rate increased to 26.2% from
20.1% in 2004, primarily due to the tax impact of the
dividend repatriated under the AJCA. Our effective tax
rate may fluctuate throughout 2007 based on a number
of factors including variations in estimated taxable income
in our geographic locations, completed and potential
acquisitions, our adoption of FASB Interpretation, or FIN,
No. 48, Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109, the effects of
SFAS No. 123R and changes in statutory tax rates,
among others.
Liquidity and Capital Resources
During 2006, we generated positive operating cash flows
of $328.7 million. These cash flows related primarily to
net income of $183.0 million, adjusted for, among other
things, non-cash charges, including depreciation and
amortization of $63.6 million, stock-based compensation
expense of $61.6 million and the tax effect on stock-based
compensation of $40.6 million. These cash inflows are
partially offset by an operating cash outflow of $51.9 million
related to the excess tax benefit due to the exercise of
stock-based awards and a deferred income tax benefit
of $4.4 million. Also attributed to these cash inflows is
an aggregate increase in cash flow from our operating
assets and liabilities of $24.6 million, net of the effects of
acquisitions. Our investing activities used $437.3 million
of cash consisting primarily of the net purchases after