10-Q 1 adbe10qq313.htm 10-Q ADBE 10Q Q313

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 30, 2013

 or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                   to                   
 
Commission File Number: 0-15175
 
ADOBE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
_________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
77-0019522
(I.R.S. Employer
Identification No.)

345 Park Avenue, San Jose, California 95110-2704
(Address of principal executive offices and zip code)

(408) 536-6000
(Registrant’s telephone number, including area code)
 _________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller
reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x
The number of shares outstanding of the registrant’s common stock as of September 27, 2013 was 499,887,325.
 



ADOBE SYSTEMS INCORPORATED
FORM 10-Q
 
TABLE OF CONTENTS
 
 
 
Page No.

PART I—FINANCIAL INFORMATION
 
Item 1.

 

 

 

 

 

Item 2.

Item 3.

Item 4.
 
 
 
 

 PART II—OTHER INFORMATION
 
Item 1.

Item 1A.

Item 2.

Item 4.

Item 5.
Item 6.






 

2


PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
 
August 30,
2013
 
November 30,
2012
 
(Unaudited)
 
(*)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
819,085

 
$
1,425,052

Short-term investments
2,344,852

 
2,113,301

   Trade receivables, net of allowances for doubtful accounts of $10,481 and $12,643, respectively
522,409

 
617,233

Deferred income taxes
47,710

 
59,537

Prepaid expenses and other current assets
128,495

 
116,237

Assets held for sale
23,573

 

Total current assets
3,886,124

 
4,331,360

Property and equipment, net
659,747

 
664,302

Goodwill
4,752,315

 
4,133,259

Purchased and other intangibles, net
637,957

 
545,036

Investment in lease receivable
207,239

 
207,239

Other assets
90,774

 
93,327

Total assets
$
10,234,156

 
$
9,974,523

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 

 
 

Trade payables
$
71,070

 
$
49,759

Accrued expenses
547,997

 
590,140

Capital lease obligations
17,462

 
11,217

Accrued restructuring
4,841

 
9,287

Income taxes payable
4,604

 
49,886

Deferred revenue
683,143

 
561,463

Total current liabilities
1,329,117

 
1,271,752

Long-term liabilities:
 

 
 

Debt and capital lease obligations
1,502,369

 
1,496,938

Deferred revenue
50,932

 
58,102

Accrued restructuring
7,242

 
12,263

Income taxes payable
120,525

 
155,096

Deferred income taxes
328,310

 
265,106

Other liabilities
60,902

 
50,084

Total liabilities
3,399,397

 
3,309,341

Stockholders’ equity:
 

 
 

Preferred stock, $0.0001 par value; 2,000 shares authorized, none issued

 

Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 
  501,806 and 494,132 shares outstanding, respectively
61

 
61

Additional paid-in-capital
3,266,170

 
3,038,665

Retained earnings
6,878,216

 
7,003,003

Accumulated other comprehensive income
12,966

 
30,712

Treasury stock, at cost (99,028 and 106,702 shares, respectively), net of reissuances
(3,322,654
)
 
(3,407,259
)
Total stockholders’ equity
6,834,759

 
6,665,182

Total liabilities and stockholders’ equity
$
10,234,156

 
$
9,974,523

_________________________________________ 
(*)
The Condensed Consolidated Balance Sheet as of November 30, 2012 has been derived from the audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
See accompanying Notes to Condensed Consolidated Financial Statements.

3


ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
August 30,
2013
 
August 31,
2012
 
August 30,
2013
 
August 31,
2012
Revenue:
 
 
 
 
 
 
 
Products
$
582,178

 
$
810,457

 
$
1,902,866

 
$
2,490,000

Subscription
299,346

 
172,920

 
778,133

 
478,669

Services and support
113,595

 
97,203

 
332,542

 
281,580

Total revenue
995,119

 
1,080,580

 
3,013,541

 
3,250,249

 
Cost of revenue:
 

 
 
 
 
 
 
Products
32,564

 
27,234

 
111,351

 
92,976

Subscription
71,656

 
56,191

 
200,763

 
159,794

Services and support
42,856

 
36,196

 
126,927

 
106,034

Total cost of revenue
147,076

 
119,621

 
439,041

 
358,804

 
Gross profit
848,043

 
960,959

 
2,574,500

 
2,891,445

 
Operating expenses:
 

 
 
 
 
 
 
Research and development
208,700

 
189,145

 
621,435

 
547,776

Sales and marketing
388,673

 
368,556

 
1,188,914

 
1,113,978

General and administrative
128,043

 
110,249

 
381,766

 
323,533

Restructuring and other charges
(791
)
 
2,374

 
24,203

 
(2,642
)
Amortization of purchased intangibles
13,064

 
12,331

 
38,295

 
36,374

Total operating expenses
737,689

 
682,655

 
2,254,613

 
2,019,019

 
Operating income
110,354

 
278,304

 
319,887

 
872,426

 
Non-operating income (expense):
 

 
 
 
 
 
 
Interest and other income (expense), net
1,732

 
1,217

 
4,246

 
(2,696
)
Interest expense
(16,747
)
 
(17,253
)
 
(50,786
)
 
(50,720
)
Investment gains (losses), net
(2,079
)
 
944

 
(5,476
)
 
9,153

Total non-operating income (expense), net
(17,094
)
 
(15,092
)
 
(52,016
)
 
(44,263
)
Income before income taxes
93,260

 
263,212

 
267,871

 
828,163

Provision for income taxes
10,258

 
61,855

 
43,206

 
217,721

Net income
$
83,002

 
$
201,357

 
$
224,665

 
$
610,442

Basic net income per share
$
0.16

 
$
0.41

 
$
0.45

 
$
1.23

Shares used to compute basic net income per share
504,116

 
494,051

 
502,039

 
494,672

Diluted net income per share
$
0.16

 
$
0.40

 
$
0.44

 
$
1.22

Shares used to compute diluted net income per share
514,058

 
499,757

 
513,155

 
502,167



  See accompanying Notes to Condensed Consolidated Financial Statements.


4


ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
August 30,
2013
 
August 31,
2012
 
August 30,
2013
 
August 31,
2012
 
Increase/(Decrease)
 
Increase/(Decrease)
Net income
$
83,002

 
$
201,357

 
$
224,665

 
$
610,442

Other comprehensive income, net of taxes:
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gains / losses on available-for-sale
securities
(7,757
)
 
5,688

 
(12,310
)
 
11,255

Reclassification adjustment for gains / losses on
available-for-sale securities recognized
46

 
(897
)
 
(2,326
)
 
(1,807
)
Net increase (decrease) from available-for-sale
securities
(7,711
)
 
4,791

 
(14,636
)
 
9,448

Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Unrealized gains / losses on derivative instruments
(2,947
)
 
(2,621
)
 
29,713

 
20,151

Reclassification adjustment for gains / losses on
derivative instruments recognized
(10,487
)
 
(7,692
)
 
(32,880
)
 
(28,701
)
Net decrease from derivatives designated as
hedging instruments
(13,434
)
 
(10,313
)
 
(3,167
)
 
(8,550
)
Foreign currency translation adjustments
6,651

 
7,417

 
57

 
(8,337
)
Other comprehensive income, net of taxes
(14,494
)
 
1,895

 
(17,746
)
 
(7,439
)
Total comprehensive income, net of taxes
$
68,508

 
$
203,252

 
$
206,919

 
$
603,003



See accompanying Notes to Condensed Consolidated Financial Statements.



5


ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
 
August 30,
2013
 
August 31,
2012
Cash flows from operating activities:
 
 
 
Net income
$
224,665

 
$
610,442

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

 
 
Depreciation, amortization and accretion
239,877

 
221,145

Stock-based compensation
244,090

 
222,649

Write-down of assets held for sale
23,838

 

Deferred income taxes
41,002

 
82,213

Unrealized (gains) losses on investments
6,719

 
(8,254
)
Other non-cash items
(14,214
)
 
(22,984
)
Excess tax benefits from stock-based compensation

 
(6,526
)
Changes in operating assets and liabilities, net of acquired assets and assumed
      liabilities:
 
 
 
Trade receivables, net
112,015

 
95,735

Prepaid expenses and other current assets
(13,669
)
 
(17,630
)
Trade payables
16,106

 
(54,187
)
Accrued expenses
(65,992
)
 
(51,460
)
Accrued restructuring
(8,454
)
 
(60,000
)
Income taxes payable
(75,908
)
 
(13,330
)
Deferred revenue
106,629

 
28,108

Net cash provided by operating activities
836,704

 
1,025,921

Cash flows from investing activities:
 

 
 

Purchases of short-term investments
(1,635,999
)
 
(1,347,568
)
Maturities of short-term investments
292,374

 
376,025

Proceeds from sales of short-term investments
1,084,873

 
795,072

Acquisitions, net of cash acquired
(704,375
)
 
(353,195
)
Purchases of property and equipment
(153,237
)
 
(189,287
)
Purchases of long-term investments and other assets
(64,820
)
 
(15,051
)
Proceeds from sale of long-term investments
3,396

 
28,817

Net cash used for investing activities
(1,177,788
)
 
(705,187
)
Cash flows from financing activities:
 

 
 

Purchases of treasury stock
(700,000
)
 
(305,000
)
Proceeds from issuance of treasury stock
435,884

 
150,185

Excess tax benefits from stock-based compensation

 
6,526

Proceeds from debt and capital lease obligations
25,703

 
3,152

Repayment of debt and capital lease obligations
(19,838
)
 
(6,870
)
Debt issuance costs
(357
)
 
(2,297
)
Net cash used for financing activities
(258,608
)
 
(154,304
)
Effect of foreign currency exchange rates on cash and cash equivalents
(6,275
)
 
6,450

Net increase (decrease) in cash and cash equivalents
(605,967
)
 
172,880

Cash and cash equivalents at beginning of period
1,425,052

 
989,500

Cash and cash equivalents at end of period
$
819,085

 
$
1,162,380

Supplemental disclosures:
 

 
 
Cash paid for income taxes, net of refunds
$
110,697

 
$
163,722

Cash paid for interest
$
64,334

 
$
65,778

Non-cash investing activities:
 
 
 
Issuance of common stock and stock awards assumed in business acquisitions
$
1,160

 
$
4,265



See accompanying Notes to Condensed Consolidated Financial Statements.

6


ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited)

NOTE 1.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We have prepared the accompanying unaudited Condensed Consolidated Financial Statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual Consolidated Financial Statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the Consolidated Financial Statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended November 30, 2012 on file with the SEC (our “Annual Report”).
With the exception of the discussion below, there have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report.
Recent Accounting Pronouncements 
In December 2011, the Financial Accounting Standards Board (“FASB”) amended the accounting standards to increase the prominence of other comprehensive income (“OCI”) by eliminating the option to present components of OCI as part of the statement of changes in shareholders’ equity and requires the components of OCI to be presented either in a single continuous statement of comprehensive income or in two consecutive statements. We adopted the amended accounting standards at the beginning of our first quarter of fiscal 2013 by electing to present consolidated statements of comprehensive income separate from the consolidated statements of income.
In February 2013, the FASB further amended the above accounting standards to improve the presentation of amounts reclassified out of accumulated other comprehensive income in its entirety and by component by presenting the reclassification adjustments on either the face of the statement where net income is presented or in a separate disclosure in the notes to the financial statements. Amounts that are not required to be reclassified in their entirety to net income are required to be cross referenced to related footnote disclosures that provide additional detail. We elected to early adopt the amended accounting standard at the beginning of our second quarter of fiscal 2013 by electing to present the reclassification adjustments and other required disclosures in a separate footnote.
The amended accounting standards only impact the financial statement presentation of OCI and do not change the components that are recognized in net income or OCI. The adoption had no impact on the Company’s financial position or results of operations.
NOTE 2.  ACQUISITIONS
On July 22, 2013, we completed our acquisition of privately held Neolane, a leader in cross-channel campaign management technology. During the third quarter of fiscal 2013, we began integrating Neolane into our Digital Marketing reportable segment. Neolane brings a platform for automation and execution of marketing campaigns across the web, e-mail, social, mobile, call center, direct mail, point of sale and other emerging channels which will drive consistent brand experiences and personalized campaigns for our customers.
Under the acquisition method of accounting, the total preliminary purchase price was allocated to Neolane's net tangible and intangible assets based upon their estimated fair values as of July 22, 2013. The total preliminary purchase price for Neolane was approximately $616.5 million of which approximately $515.3 million was allocated to goodwill, $114.7 million to identifiable intangible assets and $13.5 million to net liabilities assumed. The impact of this acquisition was not material to our Condensed Consolidated Financial Statements.
In addition to the acquisition of Neolane, we also completed a business acquisition on July 24, 2013. The impact of this acquisition was not material to our Condensed Consolidated Financial Statements.
On December 20, 2012, we completed our acquisition of privately held Behance, an online social media platform to showcase and discover creative work. During the first quarter of fiscal 2013, we began integrating Behance into our Digital Media reportable segment. Behance’s community and portfolio capabilities will accelerate our strategy to bring additional community features to

7


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Creative Cloud. We have included the financial results of Behance in our Condensed Consolidated Financial Statements beginning on the acquisition date.
Under the acquisition method of accounting, the total purchase price was allocated to Behance’s net tangible and intangible assets based upon their estimated fair values as of December 20, 2012. The total final purchase price for Behance was approximately $111.1 million of which approximately $91.4 million was allocated to goodwill, $28.5 million to identifiable intangible assets and $8.8 million to net liabilities assumed. The impact of this acquisition was not material to our Condensed Consolidated Financial Statements.
On January 13, 2012, we completed our acquisition of privately held Efficient Frontier, a multi-channel digital ad buying and optimization company. During the first quarter of fiscal 2012, we began integrating Efficient Frontier into our Digital Marketing reportable segment. The Efficient Frontier business added cross-channel digital ad campaign forecasting, execution and optimization capabilities to our Adobe Marketing Cloud, along with a social marketing engagement platform and social ad buying capabilities. We have included the financial results of Efficient Frontier in our Condensed Consolidated Financial Statements beginning on the acquisition date.
Under the acquisition method of accounting, the total purchase price was allocated to Efficient Frontier’s net tangible and intangible assets based upon their estimated fair values as of January 13, 2012. The total final purchase price for Efficient Frontier was approximately $374.7 million of which approximately $291.4 million was allocated to goodwill, $122.7 million to identifiable intangible assets and $39.4 million to net liabilities assumed. The impact of this acquisition was not material to our Condensed Consolidated Financial Statements.
NOTE 3.  CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase. We classify all of our cash equivalents and short-term investments as “available-for-sale.” In general, these investments are free of trading restrictions. We carry these investments at fair value, based on quoted market prices or other readily available market information. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our Condensed Consolidated Balance Sheets. Gains and losses are recognized when realized in our Condensed Consolidated Statements of Income. When we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in income. Gains and losses are determined using the specific identification method.

8


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Cash, cash equivalents and short-term investments consisted of the following as of August 30, 2013 (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
173,240

 
$

 
$

 
$
173,240

Cash equivalents:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
2,500

 

 

 
2,500

Money market mutual funds
506,638

 

 

 
506,638

Time deposits
117,707

 

 

 
117,707

U.S. agency securities
14,999

 
1

 

 
15,000

U.S. Treasury securities
4,000

 

 

 
4,000

Total cash equivalents
645,844

 
1

 

 
645,845

Total cash and cash equivalents
819,084

 
1

 

 
819,085

Short-term fixed income securities:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
1,283,045

 
4,685

 
(4,333
)
 
1,283,397

Foreign government securities
11,238

 
27

 
(27
)
 
11,238

Municipal securities
188,902

 
72

 
(329
)
 
188,645

U.S. agency securities
468,517

 
1,015

 
(939
)
 
468,593

U.S. Treasury securities
393,001

 
149

 
(981
)
 
392,169

Subtotal
2,344,703

 
5,948

 
(6,609
)
 
2,344,042

Marketable equity securities
184

 
626

 

 
810

Total short-term investments
2,344,887

 
6,574

 
(6,609
)
 
2,344,852

Total cash, cash equivalents and short-term investments
$
3,163,971

 
$
6,575

 
$
(6,609
)
 
$
3,163,937



9


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Cash, cash equivalents and short-term investments consisted of the following as of November 30, 2012 (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
200,771

 
$

 
$

 
$
200,771

Cash equivalents:
 

 
 
 
 
 
 

Corporate bonds and commercial paper
3,998

 

 

 
3,998

Money market mutual funds and repurchase agreements
1,171,270

 

 

 
1,171,270

Municipal securities
3,895

 

 

 
3,895

Time deposits
45,118

 

 

 
45,118

Total cash equivalents
1,224,281

 

 

 
1,224,281

Total cash and cash equivalents
1,425,052

 

 

 
1,425,052

Short-term fixed income securities:
 
 
 
 
 
 
 

Corporate bonds and commercial paper
1,059,158

 
11,415

 
(133
)
 
1,070,440

Foreign government securities
6,919

 
45

 
(12
)
 
6,952

Municipal securities
180,488

 
97

 
(60
)
 
180,525

Time deposits
20,113

 

 

 
20,113

U.S. agency securities
501,863

 
2,346

 
(18
)
 
504,191

U.S. Treasury securities
330,072

 
801

 
(37
)
 
330,836

Subtotal
2,098,613

 
14,704

 
(260
)
 
2,113,057

Marketable equity securities
237

 
7

 

 
244

Total short-term investments
2,098,850

 
14,711

 
(260
)
 
2,113,301

Total cash, cash equivalents and short-term investments
$
3,523,902

 
$
14,711

 
$
(260
)
 
$
3,538,353


See Note 4 for further information regarding the fair value of our financial instruments.
The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that have been in an unrealized loss position for less than twelve months, as of August 30, 2013 and November 30, 2012 (in thousands):
 
2013
 
2012
 
Fair 
Value
 
Gross
Unrealized
Losses
 
Fair 
Value
 
Gross
Unrealized
Losses
Corporate bonds and commercial paper
$
667,920

 
$
(4,334
)
 
$
95,489

 
$
(132
)
Foreign government securities
6,444

 
(27
)
 
2,105

 
(12
)
Municipal securities
74,804

 
(329
)
 
40,524

 
(60
)
U.S. Treasury and agency securities
431,040

 
(1,919
)
 
48,203

 
(55
)
Total
$
1,180,208

 
$
(6,609
)
 
$
186,321

 
$
(259
)
 
There were 535 securities and 65 securities that were in an unrealized loss position for less than twelve months at August 30, 2013 and at November 30, 2012, respectively.

10


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that were in a continuous unrealized loss position for more than twelve months, as of November 30, 2012 (in thousands):
 
2012
 
Fair 
Value
 
Gross
Unrealized
Losses
Corporate bonds and commercial paper
$
2,999

 
$
(1
)
Total
$
2,999

 
$
(1
)
As of August 30, 2013, there were no securities in an unrealized loss position for more than twelve months. As of November 30, 2012, there was one security in an unrealized loss position for more than twelve months.
The following table summarizes the cost and estimated fair value of short-term fixed income securities classified as short-term investments based on stated effective maturities as of August 30, 2013 (in thousands):
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
$
572,921

 
$
573,977

Due between one and two years
812,070

 
814,355

Due between two and three years
681,816

 
680,980

Due after three years
277,896

 
274,730

Total
$
2,344,703

 
$
2,344,042

We review our debt and marketable equity securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. We consider factors such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and our intent to sell, or whether it is more likely than not we will be required to sell the investment before recovery of the investment’s amortized cost basis. If we believe that an other-than-temporary decline exists in one of these securities, we write down these investments to fair value. For debt securities, the portion of the write-down related to credit loss would be recorded to interest and other income, net in our Condensed Consolidated Statements of Income. Any portion not related to credit loss would be recorded to accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our Condensed Consolidated Balance Sheets. For equity securities, the write-down would be recorded to investment gains (losses), net in our Condensed Consolidated Statements of Income. During the nine months ended August 30, 2013, we did not consider any of our investments to be other-than-temporarily impaired.
NOTE 4.  FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
We measure certain financial assets and liabilities at fair value on a recurring basis. There have been no transfers between fair value measurement levels during the nine months ended August 30, 2013.

11


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of our financial assets and liabilities at August 30, 2013 was determined using the following inputs (in thousands):
 
  Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
$
2,500

 
$

 
$
2,500

 
$

Money market mutual funds
506,638

 
506,638

 

 

Time deposits
117,707

 
117,707

 

 

U.S. agency securities
15,000

 

 
15,000

 

U.S. Treasury securities
4,000

 

 
4,000

 

Short-term investments:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
1,283,397

 

 
1,283,397

 

Foreign government securities
11,238

 

 
11,238

 

Marketable equity securities
810

 
810

 

 

Municipal securities
188,645

 

 
188,645

 

U.S. agency securities
468,593

 

 
468,593

 

U.S. Treasury securities
392,169

 

 
392,169

 

Prepaid expenses and other current assets:
 
 
 

 
 

 
 

Foreign currency derivatives
12,186

 

 
12,186

 

Other assets:
 
 
 

 
 

 
 

Deferred compensation plan assets
18,723

 
390

 
18,333

 

Total assets
$
3,021,606

 
$
625,545

 
$
2,396,061

 
$

Liabilities:
 

 
 

 
 

 
 

Accrued expenses:
 

 
 

 
 

 
 

Foreign currency derivatives
$
1,420

 
$

 
$
1,420

 
$

Total liabilities
$
1,420

 
$

 
$
1,420

 
$



12


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of our financial assets and liabilities at November 30, 2012 was determined using the following inputs (in thousands): 
 
  Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
$
3,998

 
$

 
$
3,998

 
$

Money market mutual funds and repurchase
    agreements
1,171,270

 
1,171,270

 

 

Municipal securities
3,895

 

 
3,895

 

Time deposits
45,118

 
45,118

 

 

Short-term investments:
 

 


 


 


Corporate bonds and commercial paper
1,070,440

 

 
1,070,440

 

Foreign government securities
6,952

 

 
6,952

 

Marketable equity securities
244

 
244

 

 

Municipal securities
180,525

 

 
180,525

 

Time deposits
20,113

 

 
20,113

 

U.S. agency securities
504,191

 

 
504,191

 

U.S. Treasury securities 
330,836

 

 
330,836

 

Prepaid expenses and other current assets:
 

 
 

 
 

 
 

Foreign currency derivatives
13,513

 

 
13,513

 

Other assets:
 

 
 

 
 

 
 

Deferred compensation plan assets
15,094

 
436

 
14,658

 

Total assets
$
3,366,189

 
$
1,217,068

 
$
2,149,121

 
$

Liabilities:
 

 
 

 
 

 
 

Accrued expenses:
 

 
 

 
 

 
 

Foreign currency derivatives
$
998

 
$

 
$
998

 
$

Total liabilities
$
998

 
$

 
$
998

 
$


See Note 3 for further information regarding the fair value of our financial instruments. 
Our fixed income available-for-sale securities consist of high quality, investment grade securities from diverse issuers with a minimum credit rating of BBB and a weighted average credit rating of AA-. We value these securities based on pricing from pricing vendors who 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. However, we classify all of our fixed income available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fair value of our financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques. Our procedures include controls to ensure that appropriate fair values are recorded such as comparing prices obtained from multiple independent sources.
Our deferred compensation plan assets consist of prime money market funds and mutual funds.


13


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We also have direct investments in privately held companies accounted for under the cost method, which are periodically assessed for other-than-temporary impairment. If we determine that an other-than-temporary impairment has occurred, we write down the investment to its fair value. We estimate fair value of our cost method investments considering available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. For the three and nine months ended August 30, 2013, we determined there were other-than-temporary impairments of $2.0 million and $7.0 million, respectively, on certain of our cost method investments which were written down to fair value.
In May 2013, management approved a plan to sell land, building and other assets located in Waltham, Massachusetts (the “Waltham property assets”). The Company classified the Waltham property assets with a total carrying amount of $47.4 million as assets held for sale and recorded these assets on the Condensed Consolidated Balance Sheets as of May 31, 2013 at $23.6 million representing their fair value less estimated costs to sell. The fair value, net of estimated costs to sell was measured with the assistance of third-party valuation models which used inputs such as market comparable data for similar properties to be purchased by other operating and investing entities and discounted cash flow techniques as part of the analysis. The fair value measurement was categorized as Level 3 as significant unobservable inputs were used in the valuation analysis. As a result, we recorded a write-down of $23.8 million during the second quarter of fiscal 2013. These charges are included in restructuring and other charges in our Condensed Consolidated Statements of Income for the nine months ended August 30, 2013. In September 2013, we finalized the sale of the Waltham property assets for net proceeds of $24.3 million. The sale price, net of costs to sell, approximated the carrying value of the assets as of August 30, 2013. See Note 6 for further details regarding our assets held for sale.
As of August 30, 2013, the carrying value of our lease receivables approximated fair value, based on Level 2 observable inputs which include Treasury rates, LIBOR rates and applicable credit spreads. See Note 13 for further details regarding our investment in lease receivables. The fair value of our long-term debt was approximately $1.6 billion as of August 30, 2013, based on Level 2 quoted prices in inactive markets. See Note 14 for further details regarding our debt.
NOTE 5.  DERIVATIVES AND HEDGING ACTIVITIES
In countries outside the U.S., we transact business in U.S. Dollars and in various other currencies. We may use foreign exchange option contracts or forward contracts to hedge certain cash flow exposures resulting from changes in these foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities of up to twelve months. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business and accordingly, they are not speculative in nature.
We recognize these contracts as derivative instruments and they are classified as either assets or liabilities on the balance sheet and measured on a recurring basis at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income in our Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income (expense), net in our Condensed Consolidated Statements of Income at that time. If we do not elect hedge accounting, or the derivative does not qualify for hedge accounting treatment, the changes in fair market value from period to period are recorded in interest and other income (expense), net in our Condensed Consolidated Statements of Income.
We also hedge our net recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that the value of these assets and liabilities will be adversely affected by changes in exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded to interest and other income (expense), net in our Condensed Consolidated Statements of

14


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Income. These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged.
The bank counterparties to these contracts expose us to credit-related losses in the event of their nonperformance. However, to mitigate that risk, we only contract with counterparties who meet our minimum requirements as determined by our counterparty risk assessment process. We monitor ratings, credit spreads and potential downgrades on at least a quarterly basis. Based on our ongoing assessment of counterparty risk, we may adjust our exposure to various counterparties. In addition, our hedging policy establishes maximum limits for each counterparty to mitigate any concentration of risk.
The aggregate fair value of derivative instruments in net asset positions as of August 30, 2013 and November 30, 2012 was $12.2 million and $13.5 million, respectively. These amounts represent the maximum exposure to loss at the reporting date as a result of all of the counterparties failing to perform as contracted. This exposure could be reduced by up to $1.4 million and $1.0 million, respectively, of liabilities included in master netting arrangements with those same counterparties.
The fair value of derivative instruments on our Condensed Consolidated Balance Sheets as of August 30, 2013 and November 30, 2012 were as follows (in thousands):
 
2013
 
2012
 
Fair Value
Asset
Derivatives(1)
 
Fair Value
Liability
Derivatives(2)
 
Fair Value
Asset
Derivatives(1)
 
Fair Value
Liability
Derivatives(2)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange option contracts(3) 
$
9,849

 
$

 
$
10,897

 
$

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 Foreign exchange forward contracts
2,337

 
1,420

 
2,616

 
998

Total derivatives
$
12,186

 
$
1,420

 
$
13,513

 
$
998

_________________________________________ 
(1) 
Included in prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.
(2) 
Included in accrued expenses on our Condensed Consolidated Balance Sheets.
(3) 
Hedging effectiveness expected to be recognized into income within the next twelve months.
 
The effect of derivative instruments designated as cash flow hedges and of derivative instruments not designated as hedges in our Condensed Consolidated Statements of Income for the three and nine months ended August 30, 2013 was as follows (in thousands):
 
Three Months
 
Nine Months
 
Foreign
Exchange
Option
Contracts
 
Foreign
Exchange
Forward
Contracts
 
Foreign
Exchange
Option
Contracts
 
Foreign
Exchange
Forward
Contracts
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI, net of tax(1) 
$
(2,947
)
 
$

 
$
29,713

 
$

Net gain (loss) reclassified from accumulated
OCI into income, net of tax(2)
$
10,487

 
$

 
$
32,880

 
$

Net gain (loss) recognized in income(3) 
$
(3,989
)
 
$

 
$
(13,656
)
 
$

Derivatives not designated as hedging relationships:
 
 
 
 
 
 
 
Net gain (loss) recognized in income(4) 
$

 
$
(2,028
)
 
$

 
$
2,768



15


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The effect of derivative instruments designated as cash flow hedges and of derivative instruments not designated as hedges in our Condensed Consolidated Statements of Income for the three and nine months ended August 31, 2012 was as follows (in thousands):
 
Three Months
 
Nine Months
 
Foreign
Exchange
Option
Contracts
 
Foreign
Exchange
Forward
Contracts
 
Foreign
Exchange
Option
Contracts
 
Foreign
Exchange
Forward
Contracts
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI, net of tax(1) 
$
(2,621
)
 
$

 
$
20,151

 
$

Net gain (loss) reclassified from accumulated
OCI into income, net of tax(2)
$
7,692

 
$

 
$
28,701

 
$

Net gain (loss) recognized in income(3) 
$
(6,392
)
 
$

 
$
(21,350
)
 
$

Derivatives not designated as hedging relationships:
 
 
 
 
 
 
 
Net gain (loss) recognized in income(4) 
$

 
$
(3,693
)
 
$

 
$
12,880

_________________________________________ 
(1) 
Net change in the fair value of the effective portion classified in other comprehensive income (“OCI”).
(2) 
Effective portion classified as revenue.
(3) 
Ineffective portion and amount excluded from effectiveness testing classified in interest and other income (expense), net.
(4) 
Classified in interest and other income (expense), net.
NOTE 6.  ASSETS HELD FOR SALE

In May 2013, management approved a plan to sell land, building and other assets located in Waltham, Massachusetts (the “Waltham property assets”) with a total carrying amount of $47.4 million. The decision to sell the Waltham property assets was largely based upon lack of operational needs for a facility of this size, in combination with recent improvements in market conditions for commercial real estate in the area. During May 2013, we began to actively market the Waltham property assets and we expected to sell the property within one year from management's approval of the plan. As of May 31, 2013, we classified the Waltham property assets as held for sale on the Condensed Consolidated Balance Sheets at $23.6 million representing their fair value, net of estimated costs to sell which was the lesser of the fair value less cost to sell or carrying amount of the assets. We ceased recognizing depreciation expense on the Waltham property assets upon reclassification. As a result, we recorded a write-down of $23.8 million during the second quarter of fiscal 2013. These charges are included in restructuring and other related charges in our Condensed Consolidated Statements of Income. The Waltham property assets remained classified as assets held for sale in the Condensed Consolidated Balance Sheets as of August 30, 2013.
In September 2013, we finalized the sale of the Waltham property assets for net proceeds of $24.3 million which approximated the carrying value of the assets as of August 30, 2013.

NOTE 7.  GOODWILL AND PURCHASED AND OTHER INTANGIBLES
Goodwill as of August 30, 2013 and November 30, 2012 was $4.752 billion and $4.133 billion, respectively. The increase was primarily due to our acquisitions of Behance and Neolane. During the second quarter of fiscal 2013, we completed our annual goodwill impairment test associated with our three reporting unitsDigital Media, Digital Marketing and Print and Publishingand determined there was no impairment of goodwill.

16


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Purchased and other intangible assets subject to amortization as of August 30, 2013 and November 30, 2012 were as follows (in thousands): 
 
2013
 
2012
 
Cost
 
Accumulated Amortization
 
Net
 
Cost
 
Accumulated Amortization
 
Net
Purchased technology
$
420,029

 
$
(200,850
)
 
$
219,179

 
$
366,574

 
$
(161,538
)
 
$
205,036

Customer contracts and relationships
$
386,808

 
$
(100,929
)
 
$
285,879

 
$
318,027

 
$
(74,214
)
 
$
243,813

Trademarks
67,565

 
(25,644
)
 
41,921

 
53,293

 
(19,171
)
 
34,122

Acquired rights to use technology
154,490

 
(71,478
)
 
83,012

 
104,402

 
(56,782
)
 
47,620

Localization
7,783

 
(5,988
)
 
1,795

 
8,586

 
(4,654
)
 
3,932

Other intangibles
17,699

 
(11,528
)
 
6,171

 
18,742

 
(8,229
)
 
10,513

Total other intangible assets
$
634,345

 
$
(215,567
)
 
$
418,778

 
$
503,050

 
$
(163,050
)
 
$
340,000

Purchased and other intangible
    assets, net
$
1,054,374

 
$
(416,417
)
 
$
637,957

 
$
869,624

 
$
(324,588
)
 
$
545,036

 
In the first quarter of fiscal 2013, we acquired rights to use certain technology for approximately $51.8 million. Of this cost, an estimated $25.3 million was related to future licensing rights that has been capitalized and will be amortized on a straight-line basis over the estimated useful lives ranging from five to ten years. We estimated that the remaining cost of approximately $26.5 million was related to historical use of licensing rights and was expensed as cost of product revenue.   

In the first quarter of fiscal 2013, purchased intangibles associated with certain of our acquisitions in prior years became fully amortized and were removed from the Condensed Consolidated Balance Sheets. Excluding the expense associated with historical use of the acquired rights to use the technology discussed in the paragraph above, amortization expense related to purchased and other intangible assets was $42.2 million and $117.1 million for the three and nine months ended August 30, 2013, respectively. Comparatively, amortization expense was $36.1 million and $108.7 million for the three and nine months ended August 31, 2012, respectively. Of these amounts, $30.3 million and $83.3 million were included in cost of sales for the three and nine months ended August 30, 2013, respectively, and $24.0 million and $72.6 million were included in cost of sales for the three and nine months ended August 31, 2012, respectively.
As of August 30, 2013, we expect amortization expense in future periods to be as follows (in thousands):
Fiscal Year
 
Purchased
Technology
 
Other Intangible
Assets
Remainder of 2013
$
18,715

 
$
20,090

2014
74,216

 
73,849

2015
61,165

 
67,113

2016
22,425

 
61,306

2017
15,140

 
52,684

Thereafter
27,518

 
143,736

Total expected amortization expense
$
219,179

 
$
418,778


17


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 8.  ACCRUED EXPENSES
Accrued expenses as of August 30, 2013 and November 30, 2012 consisted of the following (in thousands):
 
2013
 
2012
Accrued compensation and benefits
$
255,288

 
$
242,887

Sales and marketing allowances 
58,816

 
87,916

Accrued corporate marketing
25,479

 
39,503

Taxes payable
18,199

 
26,164

Royalties payable
10,189

 
10,040

Accrued interest expense
5,233

 
20,796

Other
174,793

 
162,834

Accrued expenses
$
547,997

 
$
590,140


Other primarily includes general corporate accruals for local and regional expenses and technical support. Other is also comprised of deferred rent related to office locations with rent escalations and foreign currency liability derivatives.
NOTE 9.  STOCK-BASED COMPENSATION
Summary of Restricted Stock Units
Restricted stock unit activity for the nine months ended August 30, 2013 and the fiscal year ended November 30, 2012 was as follows (in thousands):
 
2013
 
2012
Beginning outstanding balance
18,415

 
16,871

Awarded
6,826

 
9,431

Released
(5,837
)
 
(5,854
)
Forfeited
(1,241
)
 
(2,147
)
Increase due to acquisition

 
114

Ending outstanding balance
18,163

 
18,415


 Information regarding restricted stock units outstanding at August 30, 2013 and August 31, 2012 is summarized below:
 
Number of
Shares
(thousands)
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2013
 
 
 
 
 
Restricted stock units outstanding
18,163

 
1.29
 
$
831.0

Restricted stock units vested and expected to vest
16,159

 
1.22
 
$
736.8

2012
 

 
 
 
 

Restricted stock units outstanding
18,877

 
1.55
 
$
590.3

Restricted stock units vested and expected to vest
16,403

 
1.45
 
$
512.1

_________________________________________ 
(*) 
The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of August 30, 2013 and August 31, 2012 were $45.75 and $31.27, respectively. 

18


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Summary of Performance Shares 
The following table sets forth the summary of performance share activity under our Performance Share Program for fiscal 2013 (the “2013 Program”) for the nine months ended August 30, 2013 (in thousands): 
 
Shares
Granted
 
Maximum
Shares Eligible
to Receive
Beginning outstanding balance

 

Awarded
946

 
1,891

Forfeited
(84
)
 
(168
)
Ending outstanding balance
862

 
1,723

Effective January 24, 2013, our Executive Compensation Committee modified our Performance Share Program by eliminating the use of qualitative performance objectives, with 100% of shares to be earned based on the achievement of an objective total stockholder return measure over a three-year performance period. Performance awards will be granted under the 2013 Program pursuant to the terms of our 2003 Equity Incentive Plan. The purpose of the 2013 Program is to align key management and senior leadership with stockholders’ interests over the long term and to retain key employees. Performance share awards will be awarded and fully vest upon the Executive Compensation Committee's certification of the level of achievement following the three-year anniversary of the grant date on January 24, 2016. Participants in the 2013 Program generally have the ability to receive up to 200% of the target number of shares originally granted.
In the first quarter of fiscal 2013, the Executive Compensation Committee certified the actual performance achievement of participants in the 2012 Performance Share Program (the “2012 Program”). Based upon the achievement of specific and/or market-based performance goals outlined in the 2012 Program, participants had the ability to receive up to 150% of the target number of shares originally granted. Actual performance resulted in participants achieving 116% of target or approximately 1.3 million shares for the 2012 Program. One third of the shares under the 2012 Program vested in the first quarter of fiscal 2013 and the remaining two thirds vest evenly on the following two anniversaries of the grant, contingent upon the recipient's continued service to Adobe.
In the first quarter of fiscal 2012, the Executive Compensation Committee certified the actual performance achievement of participants in the 2011 Performance Share Program (the “2011 Program”). Based upon the achievement of goals outlined in the 2011 Program, participants had the ability to receive up to 150% of the target number of shares originally granted. Actual performance resulted in participants achieving 130% of target or approximately 0.5 million shares for the 2011 Program. One third of the shares under the 2011 Program vested in the first quarter of fiscal 2012 and the remaining two thirds vest evenly on the following two anniversaries of the grant, contingent upon the recipient's continued service to Adobe.
The following table sets forth the summary of performance share activity under our 2010, 2011 and 2012 programs, based upon share awards actually achieved, for the nine months ended August 30, 2013 and the fiscal year ended November 30, 2012 (in thousands):
 
2013
 
2012
Beginning outstanding balance
388

 
405

Achieved
1,279

 
492

Released
(665
)
 
(464
)
Forfeited
(134
)
 
(45
)
Ending outstanding balance
868

 
388

 

19


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Information regarding performance shares outstanding at August 30, 2013 and August 31, 2012 is summarized below: 
 
Number of
Shares
(thousands)
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2013
 
 
 
 
 
Performance shares outstanding
868

 
0.83
 
$
39.7

Performance shares vested and expected to vest
804

 
0.81
 
$
36.7

2012
 

 
 
 
 

Performance shares outstanding
431

 
0.79
 
$
13.5

Performance shares vested and expected to vest
401

 
0.76
 
$
12.5

_________________________________________ 
(*) 
The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of August 30, 2013 and August 31, 2012 were $45.75 and $31.27, respectively.     
Summary of Stock Options 
There were no option grants during the three months ended August 30, 2013 and August 31, 2012. The assumptions used to value option grants during the nine months ended August 30, 2013 and August 31, 2012 were as follows: 
 
 
Nine Months
 
 
2013
 
2012
Expected life (in years)
 
3.2

 
3.9 - 4.2
Volatility
 
27
%
 
31 - 34%
Risk free interest rate
 
0.36
%
 
0.54 - 0.71%

The expected life of the employee stock purchase plan (“ESPP”) shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights during the three and nine months ended August 30, 2013 and August 31, 2012 were as follows:
 
Three Months
 
Nine Months
 
2013
 
2012
 
2013
 
2012
Expected life (in years)
0.5 - 2.0
 
0.5 - 2.0
 
0.5 - 2.0
 
0.5 - 2.0
Volatility
 27 - 29%
 
30 - 31%
 
26 - 30%
 
 30 - 36%
Risk free interest rate
 0.09 - 0.34%
 
0.15 - 0.30%
 
 0.09 - 0.34%
 
0.06 - 0.30%
 

Option activity for the nine months ended August 30, 2013 and the fiscal year ended November 30, 2012 was as follows (in thousands):
 
2013
 
2012
Beginning outstanding balance
24,517

 
34,802

Granted
25

 
57

Exercised
(13,744
)
 
(6,754
)
Cancelled
(1,546
)
 
(4,692
)
Increase due to acquisition
273

 
1,104

Ending outstanding balance
9,525

 
24,517

 

20


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Information regarding stock options outstanding at August 30, 2013 and August 31, 2012 is summarized below:
 
Number of
Shares
(thousands)
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2013
 
 
 
 
 
 
 
Options outstanding
9,525

 
$
30.80

 
3.10
 
$
142.6

Options vested and expected to vest
9,359

 
$
30.93

 
3.05
 
$
138.9

Options exercisable
7,489

 
$
32.23

 
2.49
 
$
101.5

2012
 

 
 

 
 
 
 

Options outstanding
26,210

 
$
31.67

 
3.01
 
$
85.8

Options vested and expected to vest
25,724

 
$
31.75

 
2.95
 
$
83.1

Options exercisable
21,312

 
$
32.91

 
2.46
 
$
52.7

_________________________________________ 
(*) 
The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of August 30, 2013 and August 31, 2012 were $45.75 and $31.27, respectively.
Summary of Employee Stock Purchase Plan Shares
Employees purchased 3.4 million shares at an average price of $25.71 and 3.2 million shares at an average price of $23.81 for the nine months ended August 30, 2013 and August 31, 2012, respectively. The intrinsic value of shares purchased during the nine months ended August 30, 2013 and August 31, 2012 was $58.5 million and $22.8 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.
Compensation Costs
As of August 30, 2013, there was $479.7 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 2.0 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the three months ended August 30, 2013 and August 31, 2012 were as follows (in thousands):
 
 
2013
 
2012
Income Statement Classifications
 
Option
Grants
and Stock
Purchase
Rights
 
Restricted
Stock and
Performance
Share
Awards
 
Option
Grants
and Stock
Purchase
Rights
 
Restricted
Stock and
Performance
Share
Awards 
Cost of revenue—subscription
$
380

 
$
1,245

 
$
769

 
$
837

Cost of revenue—services and support
878

 
2,609

 
1,147

 
2,167

Research and development
4,786

 
25,736

 
7,340

 
22,536

Sales and marketing
4,617

 
24,309

 
8,639

 
20,194

General and administrative
1,858

 
14,606

 
4,001

 
12,039

Total
$
12,519

 
$
68,505

 
$
21,896

 
$
57,773


21


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the nine months ended August 30, 2013 and August 31, 2012 were as follows (in thousands):
 
 
2013
 
2012
Income Statement Classifications
 
Option
Grants
and Stock
Purchase
Rights
 
Restricted
Stock and
Performance
Share
Awards
 
Option
Grants
and Stock
Purchase
Rights
 
Restricted
Stock and
Performance
Share
Awards
Cost of revenue—subscription
$
1,463

 
$
3,489

 
$
2,212

 
$
2,154

Cost of revenue—services and support
2,559

 
7,419

 
2,965

 
6,610

Research and development
15,340

 
74,677

 
18,756

 
60,905

Sales and marketing
16,177

 
72,087

 
23,806

 
56,483

General and administrative
6,518

 
44,361

 
12,491

 
36,267

Total
$
42,057

 
$
202,033

 
$
60,230

 
$
162,419

NOTE 10.  RESTRUCTURING CHARGES
Fiscal 2011 Restructuring Plan
In the fourth quarter of fiscal 2011, we initiated a restructuring plan consisting of reductions in workforce and the consolidation of facilities in order to better align our resources around our Digital Media and Digital Marketing strategies.
During the nine months ended August 30, 2013, we continued to implement restructuring activities under this plan. Total costs incurred to date and expected to be incurred for closing redundant facilities are $9.7 million as all facilities under this plan have been exited as of August 30, 2013.
Other Restructuring Plans
Other restructuring plans include other Adobe plans and other plans associated with certain of our acquisitions that are substantially complete. We continue to make cash outlays to settle obligations under these plans, however the current impact to our Condensed Consolidated Financial Statements is not significant. Our other restructuring plans primarily consist of the 2009 Restructuring Plan, which was implemented in the fourth quarter of fiscal 2009, in order to appropriately align our costs in connection with our fiscal 2010 operating plan.
During the nine months ended August 30, 2013, we vacated approximately 21,000 square feet of sales facilities in Australia in connection with our other restructuring plans.
Summary of Restructuring Plans
The following table sets forth a summary of restructuring activities related to all of our restructuring plans described above during the nine months ended August 30, 2013 (in thousands):
 
November 30,
2012
 
Costs
Incurred
 
Cash
Payments
 
Other
Adjustments*
 
August 30,
2013
Fiscal 2011 Restructuring Plan:
 
 
 
 
 
 
 
 
 
Termination benefits
$
1,248

 
$

 
$
(760
)
 
$
(58
)
 
$
430

Cost of closing redundant facilities
9,623

 

 
(1,161
)
 
(4,867
)
 
3,595

Other Restructuring Plans:
 
 
 
 
 
 
 
 
 
Termination benefits
991

 

 
(484
)
 
(28
)
 
479

Cost of closing redundant facilities
9,688

 
5,143

 
(6,409
)
 
(843
)
 
7,579

Total restructuring plans
$
21,550

 
$
5,143

 
$
(8,814
)
 
$
(5,796
)
 
$
12,083

_________________________________________ 

22


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(*) 
Included in Other Adjustments are foreign currency translation adjustments and goodwill adjustments of $0.8 million and $0.2 million, respectively.
Accrued restructuring charges of approximately $12.1 million as of August 30, 2013 includes $4.9 million recorded in accrued restructuring, current and $7.2 million related to long-term facilities obligations recorded in accrued restructuring, non-current on our Condensed Consolidated Balance Sheets. We expect to pay accrued termination benefits through fiscal 2014 and facilities-related liabilities under contract through fiscal 2021 of which approximately 58% will be paid through 2015.
NOTE 11.  STOCKHOLDERS’ EQUITY
Retained Earnings
The changes in retained earnings for the nine months ended August 30, 2013 were as follows (in thousands): 
Balance as of November 30, 2012
$
7,003,003

Net income
224,665

Re-issuance of treasury stock
(349,452
)
Balance as of August 30, 2013
$
6,878,216

We account for treasury stock under the cost method. When treasury stock is re-issued at a price higher than its cost, the difference is recorded as a component of additional paid-in-capital in our Condensed Consolidated Balance Sheets. When treasury stock is re-issued at a price lower than its cost, the difference is recorded as a component of additional paid-in-capital to the extent that there are treasury stock gains to offset the losses. If there are no treasury stock gains in additional paid-in-capital, the losses upon re-issuance of treasury stock are recorded as a component of retained earnings in our Condensed Consolidated Balance Sheets.
The components of accumulated other comprehensive income and activity, net of related taxes, as of August 30, 2013 was as follows (in thousands):
 
November 30,
2012
 
Increase / Decrease
 
Reclassification Adjustments
 
August 30,
2013
Net unrealized gains (losses) on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gains on available-for-sale securities
$
14,699

 
$
(4,905
)
 
$
(3,386
)
 
$
6,408

Unrealized losses on available-for-sale securities
(260
)
 
(7,405
)
 
1,060

 
(6,605
)
Net unrealized gains (losses) on available-for-sale securities
14,439

 
(12,310
)
 
(2,326
)
(1) 
(197
)
Net unrealized gains on derivative instruments designated as
hedging instruments
6,604

 
29,713

 
(32,880
)
(2) 
3,437

Cumulative foreign currency translation adjustments
9,669

 
57

 

 
9,726

Total accumulated other comprehensive income, net of taxes
$
30,712

 
$
17,460