10-Q 1 adbe10qq211.htm FORM 10-Q Q211 ADBE 10Q Q211
 
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 June 3, 2011

 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 checkmark 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 June 24, 2011 was 493,866,593.
 

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 6.






 

2


PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
 
June 3,
2011
 
December 3,
2010
 
(Unaudited)
 
(*)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
827,475

 
$
749,891

Short-term investments
1,798,045

 
1,718,124

Trade receivables, net of allowances for doubtful accounts of $14,603 and $15,233, respectively
568,570

 
554,328

Deferred income taxes
68,017

 
83,247

Prepaid expenses and other current assets
127,211

 
110,460

Total current assets
3,389,318

 
3,216,050

Property and equipment, net
463,415

 
448,881

Goodwill
3,693,505

 
3,641,844

Purchased and other intangibles, net
424,199

 
457,263

Investment in lease receivable
207,239

 
207,239

Other assets
162,040

 
169,871

Total assets
$
8,339,716

 
$
8,141,148

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 

 
 

Trade payables
$
60,533

 
$
52,432

Accrued expenses
496,535

 
564,275

Capital lease obligations
9,003

 
8,799

Accrued restructuring
5,260

 
8,119

Income taxes payable
40,970

 
53,715

Deferred revenue
438,078

 
380,748

Total current liabilities
1,050,379

 
1,068,088

Long-term liabilities:
 

 
 

Debt and capital lease obligations
1,509,428

 
1,513,662

Deferred revenue
43,949

 
48,929

Accrued restructuring
7,203

 
8,254

Income taxes payable
173,023

 
164,713

Deferred income taxes
121,996

 
103,098

Other liabilities
44,323

 
42,017

Total liabilities
2,950,301

 
2,948,761

Stockholders’ equity:
 

 
 

Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 
     493,763 and 501,897 shares outstanding, respectively
61

 
61

Additional paid-in-capital
2,611,997

 
2,458,278

Retained earnings
6,228,574

 
5,980,914

Accumulated other comprehensive income
54,342

 
17,428

Treasury stock, at cost (107,071 and 98,937 shares, respectively), net of reissuances
(3,505,559
)
 
(3,264,294
)
Total stockholders’ equity
5,389,415

 
5,192,387

Total liabilities and stockholders’ equity
$
8,339,716

 
$
8,141,148

_________________________________________ 
(*)
The Condensed Consolidated Balance Sheet at December 3, 2010 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
 
Six Month Ended
 
June 3,
2011
 
June 4,
2010
 
June 3,
2011
 
June 4,
2010
Revenue:
 
 
 
 
 
 
 
Products
$
830,281

 
$
795,260

 
$
1,672,970

 
$
1,499,198

Subscription
109,169

 
92,279

 
215,340

 
187,786

Services and support
83,729

 
55,496

 
162,575

 
114,751

Total revenue
1,023,179

 
943,035

 
2,050,885

 
1,801,735

 
Cost of revenue:
 

 
 
 
 
 
 
Products
34,666

 
39,645

 
65,383

 
63,155

Subscription
47,329

 
50,190

 
95,207

 
95,925

Services and support
27,206

 
17,998

 
56,250

 
38,121

Total cost of revenue
109,201

 
107,833

 
216,840

 
197,201

 
Gross profit
913,978

 
835,202

 
1,834,045

 
1,604,534

 
Operating expenses:
 

 
 
 
 
 
 
Research and development
183,211

 
167,318

 
361,611

 
341,658

Sales and marketing
348,690

 
320,976

 
676,768

 
618,270

General and administrative
95,547

 
89,953

 
196,526

 
180,999

Restructuring charges
(586
)
 
11,541

 
(545
)
 
23,163

Amortization of purchased intangibles
10,392

 
18,129

 
20,627

 
36,326

Total operating expenses
637,254

 
607,917

 
1,254,987

 
1,200,416

 
Operating income
276,724

 
227,285

 
579,058

 
404,118

 
Non-operating income (expense):
 

 
 
 
 
 
 
Interest and other income (expense), net
(839
)
 
(6,313
)
 
(1,656
)
 
(5,702
)
Interest expense
(16,727
)
 
(16,076
)
 
(33,747
)
 
(23,771
)
Investment gains (losses), net
86

 
(10,723
)
 
1,676

 
(14,257
)
Total non-operating income (expense), net
(17,480
)
 
(33,112
)
 
(33,727
)
 
(43,730
)
Income before income taxes
259,244

 
194,173

 
545,331

 
360,388

Provision for income taxes
29,808

 
45,562

 
81,304

 
84,623

Net income
$
229,436

 
$
148,611

 
$
464,027

 
$
275,765

Basic net income per share
$
0.46

 
$
0.28

 
$
0.92

 
$
0.53

Shares used to compute basic net income per share
499,686

 
526,148

 
501,910

 
525,124

Diluted net income per share
$
0.45

 
$
0.28

 
$
0.91

 
$
0.52

Shares used to compute diluted net income per share
506,280

 
533,259

 
509,572

 
533,305


  See accompanying Notes to Condensed Consolidated Financial Statements.


4


ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended
 
June 3,
2011
 
June 4,
2010
Cash flows from operating activities:
 
 
 
Net income
$
464,027

 
$
275,765

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

 
 
Depreciation, amortization and accretion
132,906

 
143,487

Stock-based compensation
145,851

 
124,577

Deferred income taxes
28,796

 
(178,038
)
Unrealized (gains) losses on investments
(567
)
 
12,222

Tax benefit from employee stock option plans
7,322

 
38,743

Other non-cash items
3,392

 
1,182

Excess tax benefits from stock-based compensation
(8,778
)
 
(8,485
)
Changes in operating assets and liabilities, net of acquired assets and
        assumed liabilities:
 
 
 
Trade receivables, net
(16,032
)
 
(27,999
)
Prepaid expenses and other current assets
(15,580
)
 
(8,808
)
Trade payables
8,101

 
(8,631
)
Accrued expenses
(72,145
)
 
53,132

Accrued restructuring
(4,206
)
 
(18,962
)
Income taxes payable
(4,004
)
 
25,580

Deferred revenue
52,350

 
87,186

Net cash provided by operating activities
721,433

 
510,951

Cash flows from investing activities:
 

 
 

Purchases of short-term investments
(1,137,730
)
 
(1,202,326
)
Maturities of short-term investments
254,706

 
285,889

Proceeds from sales of short-term investments
798,484

 
318,092

Acquisitions, net of cash acquired
(36,572
)
 

Purchases of property and equipment
(69,922
)
 
(75,175
)
Purchases of long-term investments and other assets
(10,672
)
 
(18,998
)
Proceeds from sale of long-term investments
4,230

 
719

Other
(124
)
 
2,177

Net cash used for investing activities
(197,600
)
 
(689,622
)
Cash flows from financing activities:
 

 
 

Purchases of treasury stock
(545,015
)
 
(250,020
)
Proceeds from issuance of treasury stock
87,383

 
84,060

Excess tax benefits from stock-based compensation
8,778

 
8,485

Proceeds from debt

 
1,493,439

Repayment of debt and capital lease obligations
(3,624
)
 
(1,000,058
)
Debt issuance costs

 
(10,662
)
Net cash (used for) provided by financing activities
(452,478
)
 
325,244

Effect of foreign currency exchange rates on cash and cash equivalents
6,229

 
(8,454
)
Net increase in cash and cash equivalents
77,584

 
138,119

Cash and cash equivalents at beginning of period
749,891

 
999,487

Cash and cash equivalents at end of period
$
827,475

 
$
1,137,606

Supplemental disclosures:
 

 
 
Cash paid for income taxes, net of refunds
$
54,381

 
$
198,512

Cash paid for interest
$
31,972

 
$
2,742


See accompanying Notes to Condensed Consolidated Financial Statements.

5


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. Certain immaterial prior year amounts have been reclassified to conform to the current year presentation in the Condensed Consolidated Statements of Cash Flows. 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 December 3, 2010 on file with the SEC. The six months ended June 4, 2010 financial results benefited from an extra week in the first quarter of fiscal 2010 due to our 52/53 week financial calendar whereby fiscal 2010 was a 53-week year compared with fiscal 2011 which is a 52-week year.
There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 3, 2010.
Recent Accounting Pronouncements 
There have been no new accounting pronouncements during the six months ended June 3, 2011, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended December 3, 2010, that are of significance, or potential significance, to us.
NOTE 2.  ACQUISITIONS
Demdex
On January 18, 2011, we completed our acquisition of privately held Demdex, a data management platform company. The impact of this acquisition was not material to our consolidated balance sheets or results of operations.
Day Software Holding AG
On October 28, 2010, we completed our acquisition of Day Software Holding AG (“Day”), a provider of Web content management solutions that many leading global enterprises rely on for Web 2.0 content application and content infrastructure. Day is based in Basel, Switzerland and Boston, Massachusetts. We believe that our acquisition of Day has enabled us to provide comprehensive solutions to create, manage, deliver and optimize Web content. Following the closing, we integrated Day as a product line within our Enterprise segment for financial reporting purposes. We have included the financial results of Day in our Condensed Consolidated Financial Statements beginning on the acquisition date.
Under the acquisition method of accounting, the total preliminary purchase price was allocated to Day’s net tangible and intangible assets based upon their estimated fair values as of October 28, 2010. During the first six months of fiscal 2011, we finalized our purchase accounting after adjustments were made to the preliminary purchase price allocation. The total final purchase price for Day was approximately $248.3 million of which approximately $157.0 million was allocated to goodwill, $79.2 million to substantially all of the identifiable intangible assets and $9.0 million to net tangible assets. The impact of this acquisition was not material to our condensed consolidated balance sheets or results of operations.
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.

6


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Cash, cash equivalents and short-term investments consisted of the following as of June 3, 2011 (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
181,036

 
$

 
$

 
$
181,036

Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
28,044

 

 

 
28,044

Money market mutual funds and repurchase agreements
576,878

 

 

 
576,878

Municipal securities
601

 

 

 
601

Time deposits
40,916

 

 

 
40,916

Total cash equivalents
646,439

 

 

 
646,439

Total cash and cash equivalents
827,475

 

 

 
827,475

Short-term fixed income securities:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
1,038,924

 
9,263

 
(269
)
 
1,047,918

Foreign government securities
16,443

 
137

 

 
16,580

Municipal securities
118,453

 
198

 
(18
)
 
118,633

U.S. agency securities
214,279

 
1,424

 

 
215,703

U.S. Treasury securities
383,913

 
2,189

 
(1
)
 
386,101

Subtotal
1,772,012

 
13,211

 
(288
)
 
1,784,935

Marketable equity securities
10,778

 
2,332

 

 
13,110

Total short-term investments
1,782,790

 
15,543

 
(288
)
 
1,798,045

Total cash, cash equivalents and short-term investments
$
2,610,265

 
$
15,543

 
$
(288
)
 
$
2,625,520



7


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Cash, cash equivalents and short-term investments consisted of the following as of December 3, 2010 (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
98,691

 
$

 
$

 
$
98,691

Cash equivalents:
 

 
 
 
 
 
 

Commercial paper
41,389

 

 

 
41,389

Money market mutual funds and repurchase agreements
477,259

 

 

 
477,259

Municipal securities
350

 

 

 
350

Time deposits
64,006

 

 

 
64,006

U.S. Treasury securities
68,195

 
1

 

 
68,196

Total cash equivalents
651,199

 
1

 

 
651,200

Total cash and cash equivalents
749,890

 
1

 

 
749,891

Short-term fixed income securities:
 
 
 
 
 
 
 

Corporate bonds and commercial paper
977,889

 
8,079

 
(1,450
)
 
984,518

Foreign government securities
33,079

 
309

 
(2
)
 
33,386

Municipal securities
119,608

 
29

 
(32
)
 
119,605

U.S. agency securities
229,772

 
778

 
(179
)
 
230,371

U.S. Treasury securities
336,441

 
2,828

 
(209
)
 
339,060

Subtotal
1,696,789

 
12,023

 
(1,872
)
 
1,706,940

Marketable equity securities
11,196

 
1,122

 
(1,134
)
 
11,184

Total short-term investments
1,707,985

 
13,145

 
(3,006
)
 
1,718,124

Total cash, cash equivalents and short-term investments
$
2,457,875

 
$
13,146

 
$
(3,006
)
 
$
2,468,015


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 a continuous unrealized loss position for less than twelve months, as of June 3, 2011 and December 3, 2010 (in thousands):
 
2011
 
2010
 
Fair 
Value
 
Gross
Unrealized
Losses
 
Fair 
Value
 
Gross
Unrealized
Losses
Corporate bonds and commercial paper
$
96,582

 
$
(269
)
 
$
257,615

 
$
(1,450
)
Foreign government securities

 

 
4,531

 
(2
)
Marketable equity securities

 

 
9,380

 
(1,134
)
Municipal securities
20,172

 
(18
)
 
43,028

 
(32
)
U.S. Treasury and agency securities
6,533

 
(1
)
 
192,702

 
(388
)
Total
$
123,287

 
$
(288
)
 
$
507,256

 
$
(3,006
)
 
As of June 3, 2011 and December 3, 2010, there were no securities in a continuous unrealized loss position for more than twelve months. There were 63 securities and 168 securities that were in an unrealized loss position at June 3, 2011 and at December 3, 2010, respectively.

8


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 June 3, 2011 (in thousands):
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
$
776,046

 
$
778,874

Due within two years
558,841

 
563,185

Due within three years
376,128

 
381,038

Due after three years
60,997

 
61,838

Total
$
1,772,012

 
$
1,784,935

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. As of June 3, 2011, we did not record any other-than-temporary impairment losses associated with our debt and marketable equity securities.

9


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 4.  FAIR VALUE MEASUREMENTS
 
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 six months ended June 3, 2011.
The fair value of our financial assets and liabilities at June 3, 2011 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:
 
 
 
 
 
 
 
Commercial paper
$
28,044

 
$

 
$
28,044

 
$

Foreign government securities

 

 

 

Money market mutual funds and repurchase
    agreements
576,878

 
576,878

 

 

Municipal securities
601

 

 
601

 

Time deposits
40,916

 
40,916

 

 

U.S. agency securities

 

 

 

U.S. Treasury securities

 

 

 

Short-term investments:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
1,047,918

 

 
1,047,918

 

Foreign government securities
16,580

 

 
16,580

 

Marketable equity securities
13,110

 
13,110

 

 

Municipal securities
118,633

 

 
118,633

 

U.S. agency securities
215,703

 

 
215,703

 

U.S. Treasury securities
386,101

 

 
386,101

 

Prepaid expenses and other current assets:
 
 
 

 
 

 
 

Foreign currency derivatives
10,026

 

 
10,026

 

Other assets:
 
 
 

 
 

 
 

Deferred compensation plan assets
12,822

 
522

 
12,300

 

Total assets
$
2,467,332

 
$
631,426

 
$
1,835,906

 
$

Liabilities:
 

 
 

 
 

 
 

Accrued expenses:
 

 
 

 
 

 
 

Foreign currency derivatives
$
8,723

 
$

 
$
8,723

 
$

Total liabilities
$
8,723

 
$

 
$
8,723

 
$



10


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of our financial assets and liabilities at December 3, 2010 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:
 
 
 
 
 
 
 
Commercial paper
$
41,389

 
$

 
$
41,389

 
$

Money market mutual funds and repurchase
    agreements
477,259

 
477,259

 

 

Municipal securities
350

 

 
350

 

Time deposits
64,006

 
64,006

 

 

U.S. Treasury securities
68,196

 

 
68,196

 

Short-term investments:
 

 


 


 


Corporate bonds and commercial paper
984,518

 

 
984,518

 

Foreign government securities
33,386

 

 
33,386

 

Marketable equity securities
11,184

 
11,184

 

 

Municipal securities
119,605

 

 
119,605

 

U.S. agency securities
230,371

 

 
230,371

 

U.S. Treasury securities 
339,060

 

 
339,060

 

Prepaid expenses and other current assets:
 

 
 

 
 

 
 

Foreign currency derivatives
18,821

 

 
18,821

 

Other assets:
 

 
 

 
 

 
 

Deferred compensation plan assets
11,071

 
617

 
10,454

 

Total assets
$
2,399,216

 
$
553,066

 
$
1,846,150

 
$

Liabilities:
 

 
 

 
 

 
 

Accrued expenses:
 

 
 

 
 

 
 

Foreign currency derivatives
$
1,945

 
$

 
$
1,945

 
$

Total liabilities
$
1,945

 
$

 
$
1,945

 
$


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. 
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

11


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

performance and any other readily available market data. For the three and six months ended June 3, 2011, we determined there were no other-than-temporary impairments on our cost method investments. See Note 7 for further information regarding our cost method investments.

NOTE 5.  DERIVATIVES AND HEDGING ACTIVITIES
 
In countries outside the U.S., we transact business in U.S. Dollars and in various other currencies. Therefore, we are subject to exposure from movements in foreign currency rates. We may use foreign exchange option contracts or forward contracts to hedge certain operational (“cash flow”) exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, may have maturities between one and twelve months. The maximum original duration of any contract is 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 derivative instruments from hedging activities as either assets or liabilities on the balance sheet and measure them 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, net in our Condensed Consolidated Statements of Income at that time.
We also hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce the risk that our earnings and cash flows 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 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.
We mitigate concentration of risk related to foreign currency hedges as well as interest rate hedges through a policy that establishes counterparty limits. 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 under our counterparty risk assessment process. In addition, our hedging policy establishes maximum limits for each counterparty. We monitor ratings, credit spreads and potential downgrades on at least a quarterly basis. Based on our on-going assessment of counterparty risk, we will adjust our exposure to various counterparties.
The aggregate fair value of derivative instruments in net asset positions as of June 3, 2011 and December 3, 2010 was $10.0 million and $18.8 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 $8.7 million and $1.9 million, respectively, of liabilities included in master netting arrangements with those same counterparties.

12


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of derivative instruments on our Condensed Consolidated Balance Sheets as of June 3, 2011 and December 3, 2010 were as follows (in thousands):
 
2011
 
2010
 
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) 
$
4,849

 
$

 
$
6,092

 
$

Derivatives not designated as hedging instruments:


 


 


 


 Foreign exchange forward contracts
5,177

 
8,723

 
12,729

 
1,945

Total derivatives
$
10,026

 
$
8,723

 
$
18,821

 
$
1,945

_________________________________________ 
(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 to 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 three and six months ended June 3, 2011 was as follows (in thousands):
 
Three Months
 
Six 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) 
$
100

 
$

 
$
33

 
$

Net gain (loss) reclassified from accumulated
OCI into income, net of tax(2)
$
184

 
$

 
$
184

 
$

Net gain (loss) recognized in income(3) 
$
(6,717
)
 
$

 
$
(15,023
)
 
$

Derivatives not designated as hedging relationships:


 


 
 
 
 
Net gain (loss) recognized in income(4) 
$

 
$
(8,366
)
 
$

 
$
(18,516
)

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 three and six months ended June 4, 2010 was as follows (in thousands):
 
Three Months
 
Six 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) 
$
28,425

 
$

 
$
38,789

 
$

Net gain (loss) reclassified from accumulated
OCI into income, net of tax(2)
$
6,206

 
$

 
$
6,206

 
$

Net gain (loss) recognized in income(3) 
$
(5,845
)
 
$

 
$
(9,766
)
 
$

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

 
$
10,761

 
$

 
$
21,801

_________________________________________ 
(1) 
Net change in the fair value of the effective portion classified in other comprehensive income (“OCI”).
(2) 
Effective portion classified as revenue.

13


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(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.  GOODWILL AND PURCHASED AND OTHER INTANGIBLES
 
Goodwill as of June 3, 2011 and December 3, 2010 was $3.694 billion and $3.642 billion, respectively. The increase was due to our acquisition of Demdex and foreign currency translation adjustments offset in part by insignificant adjustments to our Day purchase price allocation and tax deductions from acquired stock options. During the second quarter of fiscal 2011, we completed our annual goodwill impairment test and determined there was no impairment of goodwill.
Purchased and other intangible assets subject to amortization as of June 3, 2011 and December 3, 2010 was as follows (in thousands): 
 
2011
 
2010
 
Cost
 
Accumulated Amortization
 
Net
 
Cost
 
Accumulated Amortization
 
Net
Purchased technology
$
270,026

 
$
(79,459
)
 
$
190,567

 
$
260,198

 
$
(61,987
)
 
$
198,211

Customer contracts and relationships
$
402,054

 
$
(214,394
)
 
$
187,660

 
$
398,421

 
$
(197,459
)
 
$
200,962

Trademarks
41,357

 
(8,394
)
 
32,963

 
172,019

 
(136,480
)
 
35,539

Localization
13,215

 
(9,982
)
 
3,233

 
14,768

 
(9,355
)
 
5,413

Other intangibles
52,572

 
(42,796
)
 
9,776

 
51,265

 
(34,127
)
 
17,138

Total other intangible assets
$
509,198

 
$
(275,566
)
 
$
233,632

 
$
636,473

 
$
(377,421
)
 
$
259,052

Purchased and other intangible
    assets, net
$
779,224

 
$
(355,025
)
 
$
424,199

 
$
896,671

 
$
(439,408
)
 
$
457,263

 
Purchased and other intangible assets from prior acquisitions, primarily Macromedia, were removed from the balance sheet as they were fully amortized at the end of fiscal 2010. Amortization expense related to purchased and other intangible assets was $30.4 million and $60.4 million for the three and six months ended June 3, 2011, respectively. Comparatively, amortization expense was $42.2 million and $79.1 million for the three and six months ended June 4, 2010, respectively. Of these amounts, $20.2 million and $39.9 million were included in cost of sales for the three and six months ended June 3, 2011, respectively, and $24.0 million and $42.7 million were included in cost of sales for the three and six months ended June 4, 2010, respectively.
As of June 3, 2011, we expect amortization expense in future periods to be as follows (in thousands):
Fiscal Year
 
Purchased
Technology
 
Other Intangible
Assets
Remainder of 2011
$
22,436

 
$
28,501

2012
 
44,816

 
30,923

2013
 
40,752

 
27,693

2014
 
37,599

 
26,668

2015
 
34,881

 
26,241

Thereafter
10,083

 
93,606

Total expected amortization expense
$
190,567

 
$
233,632


14


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 7.  OTHER ASSETS
 
Other assets as of June 3, 2011 and December 3, 2010 consisted of the following (in thousands):
 
2011
 
2010
Acquired rights to use technology
$
65,044

 
$
71,521

Investments
23,971

 
25,018

Deferred compensation plan assets
12,822

 
11,071

Prepaid land lease
13,136

 
13,215

Security and other deposits
10,909

 
11,266

Debt issuance costs
8,987

 
9,574

Prepaid royalties
6,375

 
7,726

Restricted cash
2,627

 
2,499

Prepaid rent
492

 
787

Other(*)
17,677

 
17,194

Other assets
$
162,040

 
$
169,871

_________________________________________ 
(*)    Fiscal 2011 and 2010 includes a tax asset of approximately $11.0 million related to an acquired entity.
Investments represent our direct investments in privately held companies which are accounted for based on the cost method. We assess these investments for impairment in value as circumstances dictate.

NOTE 8.  ACCRUED EXPENSES
 
Accrued expenses as of June 3, 2011 and December 3, 2010 consisted of the following (in thousands):
 
2011
 
2010
Accrued compensation and benefits
$
198,720

 
$
290,366

Sales and marketing allowances 
39,940

 
38,706

Accrued marketing
41,581

 
26,404

Taxes payable
23,088

 
21,800

Accrued interest expense
21,136

 
21,203

Other
172,070

 
165,796

Accrued expenses                                                                                         
$
496,535

 
$
564,275


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, accrued royalties and foreign currency liability derivatives.

NOTE 9.  INCOME TAXES
 
The gross liability for unrecognized tax benefits at June 3, 2011 was $163.2 million, exclusive of interest and penalties. If the total unrecognized tax benefits at June 3, 2011 were recognized in the future, $147.9 million of unrecognized tax benefits would decrease the effective tax rate, which is net of an estimated $15.3 million federal benefit related to deducting certain payments on future state tax returns.
As of June 3, 2011, the combined amount of accrued interest and penalties related to tax positions taken on our tax returns was approximately $16.2 million. This amount is included in non-current income taxes payable.

15


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. These events could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging from $0 to approximately $5 million. These amounts would decrease income tax expense.

NOTE 10.  STOCK-BASED COMPENSATION
 
The assumptions used to value option grants during the three and six months ended June 3, 2011 and June 4, 2010 were as follows: 
 
Three Months
 
Six Months
 
2011
 
2010
 
2011
 
2010
Expected life (in years)
3.9 - 4.2
 
3.9 - 5.1
 
3.8 - 4.2
 
3.8 - 5.1
Volatility
30 - 31%
 
29 - 30%
 
30 - 35%
 
29 - 36%
Risk free interest rate
1.34 - 1.74%
 
2.06 - 2.66%
 
1.34 - 1.74%
 
1.76 - 2.66%

The expected life of 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 six months ended June 3, 2011 and June 4, 2010 were as follows:
 
Three Months
 
Six Months
 
2011
 
2010
 
2011
 
2010
Expected life (in years)
0.5 - 2.0
 
0.5 - 2.0
 
0.5 - 2.0
 
0.5 - 2.0
Volatility
32 - 34%
 
32%
 
32 - 34%
 
32%
Risk free interest rate
0.19 - 0.61%
 
0.18 - 1.09%
 
0.19 - 0.61%
 
0.18 - 1.09%
 
Summary of Stock Options 
Option activity for the six months ended June 3, 2011 and the fiscal year ended December 3, 2010 was as follows (in thousands):
 
2011
 
2010
Beginning outstanding balance
37,075

 
41,251

Granted
4,252

 
3,198

Exercised
(4,469
)
 
(5,196
)
Cancelled
(878
)
 
(2,908
)
Increase due to acquisition
130

 
730

Ending outstanding balance
36,110

 
37,075

 

16


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Information regarding stock options outstanding at June 3, 2011 and June 4, 2010 is summarized below:
 
 
Number of
Shares
(thousands)
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2011
 
 
 
 
 
 
 
Options outstanding
36,110

 
$
31.67

 
3.70
 
$
131.1

Options vested and expected to vest
34,746

 
$
31.72

 
3.61
 
$
126.4

Options exercisable
25,790

 
$
32.55

 
2.92
 
$
83.9

2010
 

 
 

 
 
 
 

Options outstanding
39,288

 
$
30.52

 
4.15
 
$
153.5

Options vested and expected to vest
37,542

 
$
30.58

 
4.05
 
$
145.5

Options exercisable
26,486

 
$
30.88

 
3.38
 
$
96.6

_________________________________________ 
(*)    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 June 3, 2011 and June 4, 2010 were $33.27 and $31.59, respectively.
Summary of Employee Stock Purchase Plan Shares
Employees purchased 1.4 million shares at an average price of $20.61 and 1.3 million shares at an average price of $20.20 for the six months ended June 3, 2011 and June 4, 2010, respectively. The intrinsic value of shares purchased during the six months ended June 3, 2011 and June 4, 2010 was $15.3 million and $21.4 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.
Summary of Restricted Stock Units
Restricted stock unit activity for the six months ended June 3, 2011 and the fiscal year ended December 3, 2010 was as follows (in thousands):
 
2011
 
2010
Beginning outstanding balance
13,890

 
10,433

Awarded
7,319

 
7,340

Released
(2,919
)
 
(2,589
)
Forfeited
(648
)
 
(1,294
)
Increase due to acquisition
59

 

Ending outstanding balance
17,701

 
13,890

 

17


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Information regarding restricted stock units outstanding at June 3, 2011 and June 4, 2010 is summarized below:
 
 
Number of
Shares
(thousands)
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2011
 
 
 
 
 
Restricted stock units outstanding
17,701

 
1.73
 
$
588.9

Restricted stock units vested and expected to vest
15,128

 
1.62
 
$
502.7

2010
 

 
 
 
 

Restricted stock units outstanding
14,364

 
1.88
 
$
453.8

Restricted stock units vested and expected to vest
11,016

 
1.71
 
$
347.8

_________________________________________ 
(*)    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 June 3, 2011 and June 4, 2010 were $33.27 and $31.59, respectively. 
Summary of Performance Shares 
Effective January 24, 2011, the Executive Compensation Committee adopted the 2011 Performance Share Program (the "2011 Program"). The purpose of the 2011 Program is to align key management and senior leadership with stockholders’ interests and to retain key employees. The measurement period for the 2011 Program is our fiscal 2011 year. All members of our executive management and other key senior management are participating in the 2011 Program. Awards granted under the 2011 Program are granted in the form of performance shares pursuant to the terms of our 2003 Equity Incentive Plan. If pre-determined performance goals are met, shares of stock will be granted to the recipient, with one third vesting on the later of the date of certification of achievement or the first anniversary date of the grant, and the remaining two thirds vesting evenly on the following two annual anniversary dates of the grant, contingent upon the recipient’s continued service to Adobe. Participants in the 2011 Program have the ability to receive up to 150% of the target number of shares originally granted.
The following table sets forth the summary of performance share activity under our 2011 Program for the six months ended June 3, 2011 (in thousands): 
 
Shares
Granted
 
Maximum
Shares Eligible
to Receive
Beginning outstanding balance

 

Awarded
425

 
638

Forfeited

 

Ending outstanding balance
425

 
638


In the first quarter of fiscal 2011, the Executive Compensation Committee certified the actual performance achievement of participants in the 2010 Performance Share Program (the "2010 Program"). Based upon the achievement of goals outlined in the 2010 Program, participants had the ability to receive up to 150% of the target number of shares originally granted. Actual performance resulted in participants achieving 135% of target or approximately 0.3 million shares for the 2010 Program. One third of the shares under the 2010 Program vested in the first quarter of fiscal 2011 and the remaining two thirds vest evenly on the following two annual anniversary dates of the grant, contingent upon the recipient's continued service to Adobe.
The performance metrics under the 2009 Performance Share Program were not achieved and therefore no shares were awarded.


18


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table sets forth the summary of performance share activity under our 2007, 2008 and 2010 programs, based upon share awards actually achieved, for the six months ended June 3, 2011 and the fiscal year ended December 3, 2010 (in thousands):
 
2011
 
2010
Beginning outstanding balance
557

 
950

Achieved
337

 

Released
(427
)
 
(350
)
Forfeited
(10
)
 
(43
)
Ending outstanding balance
457

 
557

 
Information regarding performance shares outstanding at June 3, 2011 and June 4, 2010 is summarized below: 
 
Number of
Shares
(thousands)
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2011
 
 
 
 
 
Performance shares outstanding
457

 
0.89
 
$
15.2

Performance shares vested and expected to vest
421

 
0.87
 
$
13.8

2010
 

 
 
 
 

Performance shares units outstanding
593

 
1.06
 
$
18.7

Performance shares vested and expected to vest
509

 
1.01
 
$
15.9

_________________________________________ 
(*)    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 June 3, 2011 and June 4, 2010 were $33.27 and $31.59, respectively.     
 
Compensation Costs
As of June 3, 2011, there was $530.3 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 2.7 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 June 3, 2011 and June 4, 2010 were as follows (in thousands):
 
 
2011
 
2010
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
$
232

 
$
367

 
$
341

 
$
324

Cost of revenue—services and support
1,264

 
2,299

 
268

 
67

Research and development
7,024

 
19,444

 
10,871

 
11,990

Sales and marketing
8,334

 
20,616

 
11,773

 
13,001

General and administrative
5,255

 
10,024

 
5,636

 
5,826

Total
$
22,109

 
$
52,750

 
$
28,889

 
$
31,208



19


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 six months ended June 3, 2011 and June 4, 2010 were as follows (in thousands):
 
 
2011
 
2010
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
$
424

 
$
688

 
$
680

 
$
604

Cost of revenue—services and support
2,359

 
4,374

 
685

 
598

Research and development
13,778

 
40,022

 
22,925

 
27,350

Sales and marketing
15,884

 
37,032

 
23,520

 
25,157

General and administrative
11,205

 
20,085

 
11,246

 
11,812

Total
$
43,650

 
$
102,201

 
$
59,056

 
$
65,521


NOTE 11.  RESTRUCTURING CHARGES
 
Fiscal 2009 Restructuring Plan
In the fourth quarter of fiscal 2009, in order to appropriately align our costs in connection with our fiscal 2010 operating plan, we initiated a restructuring plan consisting of reductions in workforce and the consolidation of facilities. The restructuring activities related to this program affected only those employees and facilities that were associated with Adobe prior to the acquisition of Omniture on October 23, 2009.
During the second quarter of fiscal 2011, we continued to implement restructuring activities under this plan. We vacated approximately 16,000 square feet of sales facilities in Sweden and accrued $0.5 million for the fair value of our future contractual obligations under those operating leases. Total costs incurred for termination benefits through the second quarter of fiscal 2011 was $40.1 million. Total costs incurred to date and expected to be incurred for closing redundant facilities are $8.3 million and $11.0 million, respectively.

Omniture Restructuring Plan
We completed our acquisition of Omniture on October 23, 2009. In the fourth quarter of fiscal 2009, we initiated a plan to restructure the pre-merger operations of Omniture to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. In connection with this restructuring plan, we accrued a total of approximately $12.2 million in costs related to termination benefits, the closure of duplicative facilities and cancellation of certain contracts associated with the wind-down of subsidiaries and other service contracts held by Omniture through the second quarter of fiscal 2011. Substantially all of these costs were recorded as a part of the purchase price allocation.    
Fiscal 2008 Restructuring Plan
In the fourth quarter of fiscal 2008, we initiated a restructuring program consisting of reductions in workforce and the consolidation of facilities, in order to reduce our operating costs and focus our resources on key strategic priorities. In connection with the restructuring plan, we recognized costs related to termination benefits for employee positions that were eliminated and for the closure of duplicative facilities. Total costs incurred to date for termination benefits was $35.2 million and was completed during the first quarter of fiscal 2011. Total costs incurred to date and expected to be incurred for closing redundant facilities are $8.3 million and $8.6 million, respectively. 
Macromedia Restructuring Plan
We completed our acquisition of Macromedia on December 3, 2005. In connection with this acquisition, we initiated plans to restructure both the pre-merger operations of Adobe and Macromedia to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. In connection with the worldwide restructuring plan, we recognized costs related to termination benefits for employee positions that were eliminated and for the closure of duplicative

20


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

facilities. We also recognized costs related to the cancellation of certain contracts associated with the wind-down of subsidiaries and other service contracts held by Macromedia. Total costs incurred for termination benefits and contract terminations were $27.0 million and $3.2 million, respectively, and those actions were completed during fiscal 2007.
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 six months ended June 3, 2011 (in thousands):
 
December 3,
2010
 
Costs
Incurred
 
Cash
Payments
 
Other
Adjustments
 
June 3,
2011
Fiscal 2009 Plan:
 
 
 
 
 
 
 
 
 
Termination benefits
$
1,573

 
$

 
$
(357
)
 
$
3

 
$
1,219

Cost of closing redundant facilities
7,302

 
543

 
(1,241
)
 
(962
)
 
5,642

Omniture Plan:
 
 
 

 
 

 
 

 
 

Termination benefits
486

 

 
(4
)
 
44

 
526

Cost of closing redundant facilities
2,720

 

 
(715
)
 
373

 
2,378

Contract termination
179

 

 

 

 
179

Fiscal 2008 Plan:
 
 
 

 
 

 
 

 
 

Termination benefits
300

 

 
(164
)
 
(136
)
 

Cost of closing redundant facilities
2,149

 

 
(300
)
 
(114
)
 
1,735

Macromedia Plan:
 
 
 

 
 

 
 

 
 

Cost of closing redundant facilities
1,658

 

 
(874
)
 

 
784

Other
6

 

 
(6
)
 

 

Total restructuring plans
$
16,373

 
$
543

 
$
(3,661
)
 
$
(792
)
 
$
12,463

 
Accrued restructuring charges of approximately $12.5 million at June 3, 2011 includes $5.3 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 2011 and facilities-related liabilities under contract through fiscal 2021.

NOTE 12.  STOCKHOLDERS’ EQUITY
 
Retained Earnings
The changes in retained earnings for the six months ended June 3, 2011 were as follows (in thousands): 
Balance as of December 3, 2010
$
5,980,914

Net income
464,027

Re-issuance of treasury stock
(216,367
)
Balance as of June 3, 2011
$
6,228,574

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 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.

21


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Comprehensive Income
The following table sets forth the activity for each component of comprehensive income, net of related taxes, for the three and six months ended June 3, 2011 and June 4, 2010 (in thousands):
 
Three Months
 
Six Months
 
2011
 
2010
 
2011
 
2010
 
Increase/(Decrease)
 
Increase/(Decrease)
Net income
$
229,436

 
$
148,611

 
$
464,027

 
$
275,765

Other comprehensive income:
 

 
 
 
 
 
 
Available-for-sale securities:
 

 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities
5,898

 
212

 
5,845

 
(546
)
Reclassification adjustment for gains on available-for-sale
    securities recognized during the period
(630
)
 
(359
)
 
(1,174
)
 
(703
)
Subtotal available-for-sale securities
5,268

 
(147
)
 
4,671

 
(1,249
)
Derivatives designated as hedging instruments:
 

 
 
 
 
 
 
Unrealized gains on derivative instruments
100

 
28,425

 
33

 
38,789

Reclassification adjustment for gains on derivative
    instruments recognized during the period
(184
)
 
(6,206
)
 
(184
)
 
(6,206
)
Subtotal derivatives designated as hedging
     instruments
(84
)
 
22,219

 
(151
)
 
32,583

Foreign currency translation adjustments
20,463

 
(11,187
)
 
32,394

 
(15,786
)
Other comprehensive income
25,647

 
10,885

 
36,914

 
15,548

Total comprehensive income, net of taxes
$
255,083

 
$
159,496

 
$
500,941

 
$
291,313

The following table sets forth the components of accumulated other comprehensive income, net of related taxes, as of June 3, 2011