10-Q 1 adbe10qq215.htm 10-Q ADBE 10Q Q215

 
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 May 29, 2015

 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 June 19, 2015 was 497,645,374.
 



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)
 
May 29,
2015
 
November 28,
2014
 
(Unaudited)
 
(*)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
956,147

 
$
1,117,400

Short-term investments
2,457,101

 
2,622,091

Trade receivables, net of allowances for doubtful accounts of $7,226 and $7,867, respectively
502,617

 
591,800

Deferred income taxes
71,218

 
95,279

Prepaid expenses and other current assets
191,314

 
175,758

Total current assets
4,178,397

 
4,602,328

Property and equipment, net
785,199

 
785,123

Goodwill
5,388,971

 
4,721,962

Purchased and other intangibles, net
583,198

 
469,662

Investment in lease receivable
80,439

 
80,439

Other assets
149,179

 
126,315

Total assets
$
11,165,383

 
$
10,785,829

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 

 
 

Trade payables
$
56,539

 
$
68,377

Accrued expenses
647,784

 
683,866

Debt and capital lease obligations

 
603,229

Accrued restructuring
1,695

 
17,120

Income taxes payable
55,473

 
23,920

Deferred revenue
1,175,542

 
1,097,923

Total current liabilities
1,937,033

 
2,494,435

Long-term liabilities:
 

 
 

Debt
1,904,376

 
911,086

Deferred revenue
52,613

 
57,401

Accrued restructuring
4,347

 
5,194

Income taxes payable
244,799

 
125,746

Deferred income taxes
326,922

 
342,315

Other liabilities
85,190

 
73,747

Total liabilities
4,555,280

 
4,009,924

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; 
 498,276 and 497,484 shares outstanding, respectively
61

 
61

Additional paid-in-capital
3,994,652

 
3,778,495

Retained earnings
6,879,444

 
6,924,294

Accumulated other comprehensive income (loss)
(129,473
)
 
(8,094
)
Treasury stock, at cost (102,558 and 103,350 shares, respectively), net of reissuances
(4,134,581
)
 
(3,918,851
)
Total stockholders’ equity
6,610,103

 
6,775,905

Total liabilities and stockholders’ equity
$
11,165,383

 
$
10,785,829

_________________________________________ 
(*)
The Condensed Consolidated Balance Sheet as of November 28, 2014 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.

3


ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
May 29,
2015
 
May 30,
2014
 
May 29,
2015
 
May 30,
2014
Revenue:
 
 
 
 
 
 
 
Subscription
$
773,963

 
$
476,694

 
$
1,487,405

 
$
900,257

Products
274,538

 
479,247

 
565,312

 
950,701

Services and support
113,657

 
112,267

 
218,622

 
217,370

Total revenue
1,162,158

 
1,068,208

 
2,271,339

 
2,068,328

 
Cost of revenue:
 

 
 
 
 
 
 
Subscription
103,694

 
84,147

 
199,221

 
160,879

Products
21,467

 
24,499

 
41,170

 
51,997

Services and support
60,012

 
46,258

 
111,580

 
90,537

Total cost of revenue
185,173

 
154,904

 
351,971

 
303,413

Gross profit
976,985

 
913,304

 
1,919,368

 
1,764,915

 
Operating expenses:
 

 
 
 
 
 
 
Research and development
208,047

 
209,092

 
423,556

 
418,617

Sales and marketing
426,998

 
426,830

 
819,739

 
836,971

General and administrative
130,208

 
129,138

 
275,289

 
268,122

Restructuring and other charges
34

 
(366
)
 
1,789

 
297

Amortization of purchased intangibles
18,081

 
13,352

 
32,353

 
26,904

Total operating expenses
783,368

 
778,046

 
1,552,726

 
1,550,911

 Operating income
193,617

 
135,258

 
366,642

 
214,004

 
Non-operating income (expense):
 

 
 
 
 
 
 
Interest and other income (expense), net
3,739

 
2,563

 
7,077

 
5,708

Interest expense
(16,605
)
 
(17,103
)
 
(31,150
)
 
(33,693
)
Investment gains (losses), net
223

 
553

 
1,653

 
144

Total non-operating income (expense), net
(12,643
)
 
(13,987
)
 
(22,420
)
 
(27,841
)
Income before income taxes
180,974

 
121,271

 
344,222

 
186,163

Provision for income taxes
33,481

 
32,744

 
111,841

 
50,590

Net income
$
147,493

 
$
88,527

 
$
232,381

 
$
135,573

Basic net income per share
$
0.30

 
$
0.18

 
$
0.47

 
$
0.27

Shares used to compute basic net income per share
499,290

 
497,931

 
499,022

 
497,439

Diluted net income per share
$
0.29

 
$
0.17

 
$
0.46

 
$
0.27

Shares used to compute diluted net income per share
505,582

 
506,687

 
507,061

 
508,227





4


ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
May 29,
2015
 
May 30,
2014
 
May 29,
2015
 
May 30,
2014
 
Increase/(Decrease)
 
Increase/(Decrease)
Net income
$
147,493

 
$
88,527

 
$
232,381

 
$
135,573

Other comprehensive income, net of taxes:
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gains / losses on available-for-sale
securities
876

 
1,977

 
59

 
3,488

Reclassification adjustment for recognized gains / losses on available-for-sale securities
(633
)
 
(1,251
)
 
(1,560
)
 
(1,888
)
Net increase (decrease) from available-for-sale
securities
243

 
726

 
(1,501
)
 
1,600

Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Unrealized gains / losses on derivative instruments
8,144

 
2,001

 
20,354

 
1,971

Reclassification adjustment for recognized gains / losses on derivative instruments
(21,953
)
 
(2,616
)
 
(45,580
)
 
(5,414
)
Net increase (decrease) from derivatives designated as hedging instruments
(13,809
)
 
(615
)
 
(25,226
)
 
(3,443
)
Foreign currency translation adjustments
(12,096
)
 
(10,060
)
 
(94,652
)
 
2,382

Other comprehensive income (loss), net of taxes
(25,662
)
 
(9,949
)
 
(121,379
)
 
539

Total comprehensive income, net of taxes
$
121,831

 
$
78,578

 
$
111,002

 
$
136,112






5


ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended
 
May 29,
2015
 
May 30,
2014
Cash flows from operating activities:
 
 
 
Net income
$
232,381

 
$
135,573

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

 
 
Depreciation, amortization and accretion
165,564

 
155,289

Stock-based compensation
168,860

 
165,798

Deferred income taxes
(25,431
)
 
4,632

Unrealized (gains) losses on investments
(9,963
)
 
623

Tax benefit from stock-based compensation
44,721

 
4,832

Excess tax benefits from stock-based compensation
(44,739
)
 
(4,875
)
Other non-cash items
(702
)
 
(457
)
Changes in operating assets and liabilities, net of acquired assets and assumed
      liabilities:
 
 
 
Trade receivables, net
91,267

 
69,337

Prepaid expenses and other current assets
(27,307
)
 
(23,977
)
Trade payables
(13,763
)
 
(7,238
)
Accrued expenses
(35,598
)
 
12,071

Accrued restructuring
(15,601
)
 
(4,082
)
Income taxes payable
60,994

 
11,891

Deferred revenue
63,816

 
99,792

Net cash provided by operating activities
654,499

 
619,209

Cash flows from investing activities:
 

 
 

Purchases of short-term investments
(679,378
)
 
(895,758
)
Maturities of short-term investments
174,139

 
128,661

Proceeds from sales of short-term investments
661,182

 
587,384

Acquisitions, net of cash acquired
(805,979
)
 

Purchases of property and equipment
(71,276
)
 
(56,591
)
Purchases of long-term investments and other assets
(17,954
)
 
(6,946
)
Proceeds from sale of long-term investments
1,986

 
896

Net cash used for investing activities
(737,280
)
 
(242,354
)
Cash flows from financing activities:
 

 
 

Purchases of treasury stock
(400,000
)
 
(350,000
)
Proceeds from issuance of treasury stock
71,169

 
109,143

Cost of issuance of treasury stock
(161,955
)
 
(150,095
)
Excess tax benefits from stock-based compensation
44,739

 
4,875

Proceeds from debt issuance
989,280

 

Repayment of debt and capital lease obligations
(602,189
)
 
(8,059
)
Debt issuance costs
(7,871
)
 

Net cash used for financing activities
(66,827
)
 
(394,136
)
Effect of foreign currency exchange rates on cash and cash equivalents
(11,645
)
 
(255
)
Net decrease in cash and cash equivalents
(161,253
)
 
(17,536
)
Cash and cash equivalents at beginning of period
1,117,400

 
834,556

Cash and cash equivalents at end of period
$
956,147

 
$
817,020

Supplemental disclosures:
 

 
 
Cash paid for income taxes, net of refunds
$
20,208

 
$
27,532

Cash paid for interest
$
23,806

 
$
32,130

Non-cash investing activities:
 
 
 
Issuance of common stock and stock awards assumed in business acquisitions
$
677

 
$




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 28, 2014 on file with the SEC (our “Annual Report”).
There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report.
Assets Held-For-Sale
Included in property and equipment, net in the Condensed Consolidated Balance sheets as of May 29, 2015 are certain land, with a carrying value of $35.5 million, and an unoccupied building with a net carrying value of $0.8 million, located in San Jose, California and are classified as held-for-sale. During the second quarter of fiscal 2015, management approved a plan to sell these property assets largely based upon a general lack of operational needs for the facility and land, and recent improvements in market conditions for commercial real estate in the area. We began to actively market the property assets during the second quarter of fiscal 2015 and we expect to sell the property within one year.

Recent Accounting Pronouncements Not Yet Effective
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard is effective for us in the first quarter of fiscal 2018. However, in April 2015, the FASB proposed to defer the effective date by one year which we will evaluate if approved. Further, we have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
With the exception of the new standard discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended May 29, 2015, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended November 28, 2014, that are of significance or potential significance to us.
NOTE 2.  ACQUISITIONS
On January 27, 2015, we completed our acquisition of privately held Fotolia, a leading marketplace for royalty-free photos, images, graphics and HD videos. During the first quarter of fiscal 2015, we began integrating Fotolia into our Digital Media reportable segment.
Under the acquisition method of accounting, the total preliminary purchase price was allocated to Fotolia's net tangible and intangible assets based upon their estimated fair values as of January 27, 2015. During the second quarter of fiscal 2015, we recorded immaterial purchase accounting adjustments based on changes to management’s estimates and assumptions in regards to assumed intangible assets, liabilities and equity awards. The total adjusted preliminary purchase price for Fotolia was $807.5 million of which $747.9 million was allocated to goodwill that was non-deductible for tax purposes, $204.4 million to identifiable intangible assets and $144.8 million to net liabilities assumed. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date and are considered preliminary pending finalization of valuation analyses pertaining to tax liabilities assumed including calculation of deferred tax assets and liabilities. Proforma information has not been presented as the impact to our Condensed Consolidated Financial Statements was not material.

7


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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.
Cash, cash equivalents and short-term investments consisted of the following as of May 29, 2015 (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
189,336

 
$

 
$

 
$
189,336

Cash equivalents:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
1,005

 

 

 
1,005

Money market mutual funds
697,055

 

 

 
697,055

Municipal securities
5,100

 
1

 

 
5,101

Time deposits
63,650

 

 

 
63,650

Total cash equivalents
766,810

 
1

 

 
766,811

Total cash and cash equivalents
956,146

 
1

 

 
956,147

Short-term fixed income securities:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
1,535,460

 
5,673

 
(844
)
 
1,540,289

Asset-backed securities
55,697

 
100

 
(5
)
 
55,792

Municipal securities
154,726

 
207

 
(74
)
 
154,859

U.S. agency securities
323,320

 
602

 
(14
)
 
323,908

U.S. Treasury securities
381,754

 
514

 
(15
)
 
382,253

Total short-term investments
2,450,957

 
7,096

 
(952
)
 
2,457,101

Total cash, cash equivalents and short-term investments
$
3,407,103

 
$
7,097

 
$
(952
)
 
$
3,413,248



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 November 28, 2014 (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
348,283

 
$

 
$

 
$
348,283

Cash equivalents:
 

 
 
 
 
 
 

Money market mutual funds
705,978

 

 

 
705,978

Time deposits
63,139

 

 

 
63,139

Total cash equivalents
769,117

 

 

 
769,117

Total cash and cash equivalents
1,117,400

 

 

 
1,117,400

Short-term fixed income securities:
 
 
 
 
 
 
 

Corporate bonds and commercial paper
1,514,632

 
5,253

 
(509
)
 
1,519,376

Foreign government securities
4,499

 
12

 

 
4,511

Municipal securities
174,775

 
438

 
(12
)
 
175,201

U.S. agency securities
497,154

 
1,295

 
(64
)
 
498,385

U.S. Treasury securities
423,075

 
1,080

 
(28
)
 
424,127

Subtotal
2,614,135

 
8,078

 
(613
)
 
2,621,600

Marketable equity securities
153

 
338

 

 
491

Total short-term investments
2,614,288

 
8,416

 
(613
)
 
2,622,091

Total cash, cash equivalents and short-term investments
$
3,731,688

 
$
8,416

 
$
(613
)
 
$
3,739,491


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 May 29, 2015 and November 28, 2014 (in thousands):
 
2015
 
2014
 
Fair 
Value
 
Gross
Unrealized
Losses
 
Fair 
Value
 
Gross
Unrealized
Losses
Corporate bonds and commercial paper
$
335,218

 
$
(821
)
 
$
291,890

 
$
(443
)
Municipal securities
43,184

 
(74
)
 
21,759

 
(12
)
U.S. Treasury and agency securities
88,491

 
(27
)
 
43,507

 
(64
)
Asset-backed securities
5,272

 
(5
)
 

 

Total
$
472,165

 
$
(927
)
 
$
357,156

 
$
(519
)
 
There were 270 securities and 213 securities in an unrealized loss position for less than twelve months at May 29, 2015 and at November 28, 2014, respectively.

9


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 May 29, 2015 and November 28, 2014 (in thousands):
 
2015
 
2014
 
Fair 
Value
 
Gross
Unrealized
Losses
 
Fair 
Value
 
Gross
Unrealized
Losses
Corporate bonds and commercial paper
$
3,425

 
$
(23
)
 
$
8,636

 
$
(66
)
U.S. Treasury and agency securities
651

 
(2
)
 
5,884

 
(28
)
Total
$
4,076

 
$
(25
)
 
$
14,520

 
$
(94
)
There were three securities and eight securities in an unrealized loss position for more than twelve months at May 29, 2015 and at November 28, 2014, respectively.
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 May 29, 2015 (in thousands):
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
$
608,233

 
$
609,026

Due between one and two years
953,819

 
956,347

Due between two and three years
660,113

 
661,961

Due after three years
228,792

 
229,767

Total
$
2,450,957

 
$
2,457,101

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 six months ended May 29, 2015, we did not consider any of our investments to be other-than-temporarily impaired.

10


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 six months ended May 29, 2015.
The fair value of our financial assets and liabilities at May 29, 2015 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
$
1,005

 
$

 
$
1,005

 
$

Money market mutual funds
697,055

 
697,055

 

 

Municipal securities
5,101

 

 
5,101

 

Time deposits
63,650

 
63,650

 

 

Short-term investments:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
1,540,289

 

 
1,540,289

 

Asset-backed securities
55,792

 

 
55,792

 

Municipal securities
154,859

 

 
154,859

 

U.S. agency securities
323,908

 

 
323,908

 

U.S. Treasury securities
382,253

 

 
382,253

 

Prepaid expenses and other current assets:
 
 
 

 
 

 
 

Foreign currency derivatives
19,284

 

 
19,284

 

Other assets:
 
 
 

 
 

 
 

Deferred compensation plan assets
31,136

 
525

 
30,611

 

Interest rate swap derivatives
17,697

 

 
17,697

 

Total assets
$
3,292,029

 
$
761,230

 
$
2,530,799

 
$

Liabilities:
 

 
 

 
 

 
 

Accrued expenses:
 

 
 

 
 

 
 

Foreign currency derivatives
$
1,355

 
$

 
$
1,355

 
$

Total liabilities
$
1,355

 
$

 
$
1,355

 
$



11


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of our financial assets and liabilities at November 28, 2014 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:
 
 
 
 
 
 
 
Money market mutual funds
$
705,978

 
$
705,978

 
$

 
$

Time deposits
63,139

 
63,139

 

 

Short-term investments:
 

 
 
 


 


Corporate bonds and commercial paper
1,519,376

 

 
1,519,376

 

Foreign government securities
4,511

 

 
4,511

 

Marketable equity securities
491

 
491

 

 

Municipal securities
175,201

 

 
175,201

 

U.S. agency securities
498,385

 

 
498,385

 

U.S. Treasury securities 
424,127

 

 
424,127

 

Prepaid expenses and other current assets:
 

 
 

 
 

 
 

Foreign currency derivatives
32,991

 

 
32,991

 

Other assets:
 

 
 

 
 

 
 

Deferred compensation plan assets
25,745

 
549

 
25,196

 

Interest rate swap derivatives
14,268

 

 
14,268

 

Total assets
$
3,464,212

 
$
770,157

 
$
2,694,055

 
$

Liabilities:
 

 
 

 
 

 
 

Accrued expenses:
 

 
 

 
 

 
 

Foreign currency derivatives
$
663

 
$

 
$
663

 
$

Total liabilities
$
663

 
$

 
$
663

 
$


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 and derivatives 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.


12


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 six months ended May 29, 2015 and May 30, 2014, we determined there were no other-than-temporary impairments on our cost method investments.
As of May 29, 2015, the carrying value of our lease receivables approximated fair value, based on Level 2 valuation inputs which include Treasury rates, London Interbank Offered Rate (“LIBOR”) rates and applicable credit spreads. See Note 12 for further details regarding our investment in lease receivable.
The fair value of our senior notes was $2 billion as of May 29, 2015, based on observable market prices in less active markets and categorized as Level 2. See Note 13 for further details regarding our debt.
NOTE 5.  DERIVATIVES
Hedge Accounting and Hedging Programs
We recognize all derivative instruments as either assets or liabilities in our Condensed Consolidated Balance Sheets 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.

We evaluate hedge effectiveness on our hedges that are designated and qualify for hedge accounting at the inception of the hedge prospectively as well as retrospectively, and record any ineffective portion of the hedging instruments in interest and other income (expense), net on our Condensed Consolidated Statements of Income. The time value of purchased contracts is recorded in interest and other income (expense), net in our Condensed Consolidated Statements of Income.

The bank counterparties to these contracts expose us to credit-related losses in the event of their nonperformance which are largely mitigated with collateral security agreements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. In addition, the Company enters into master netting arrangements which have the ability to further limit credit related losses with the same counterparty by permitting net settlement of transactions. Our hedging policy also establishes maximum limits for each counterparty to mitigate any concentration of risk.
Balance Sheet Hedging—Hedges of Foreign Currency Assets and Liabilities
We 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 contracts hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value as either assets or liabilities on the Condensed Consolidated Balance Sheet with changes in the fair value recorded to interest and other income (expense), net in our Condensed Consolidated Statements of Income. These contracts 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.

Cash Flow Hedging—Hedges of Forecasted Foreign Currency Revenue and Interest Rate Risk

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.

13


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 contract 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.
In December 2014, prior to issuing new long-term fixed rate debt, we entered into an interest rate lock agreement on a notional amount of $600 million to hedge against the variability of future interest payments due to changes in the benchmark interest rate. This instrument was designated as a cash flow hedge. Upon issuance of our $1 billion of 3.25% senior notes due February 1, 2025 (the “2025 Notes”) in January 2015, we terminated the instrument and incurred a loss of $16.2 million. This loss is recorded in the stockholders’ equity section in our Condensed Consolidated Balance Sheets in accumulated other comprehensive income and will be reclassified to interest expense over a ten-year term consistent with the impact of the hedged item. See Note 13 for further details regarding our debt.

Fair Value Hedging - Hedges of Interest Rate Risk

During the third quarter of fiscal 2014, we entered into interest rate swaps designated as fair value hedges related to our $900 million of 4.75% fixed interest rate senior notes due February 1, 2020 (the “2020 Notes”). In effect, the interest rate swaps convert the fixed interest rate on our 2020 Notes to a floating interest rate based on the LIBOR. Under the terms of the swaps, we will pay monthly interest at the one-month LIBOR rate plus a fixed number of basis points on the $900 million notional amount through February 1, 2020. In exchange, we will receive 4.75% fixed rate interest from the swap counterparties. See Note 13 for further details regarding our debt.

The interest rate swaps are accounted for as fair value hedges and substantially offset the changes in fair value of the hedged portion of the underlying debt that are attributable to the changes in market risk. Therefore, the gains and losses related to changes in the fair value of the interest rate swaps are included in interest and other income (expense), net in our Condensed Consolidated Statement of Income. The fair value of the interest rate swaps is reflected as either an asset or liability in our Condensed Consolidated Balance Sheets.

The fair value of derivative instruments on our Condensed Consolidated Balance Sheets as of May 29, 2015 and November 28, 2014 were as follows (in thousands):
 
2015
 
2014
 
Fair Value
Asset
Derivatives
 
Fair Value
Liability
Derivatives
 
Fair Value
Asset
Derivatives
 
Fair Value
Liability
Derivatives
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange option contracts(1) (3) 
$
16,996

 
$

 
$
31,275

 
$

Interest rate swap (2)
17,697

 

 
14,268

 

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 Foreign exchange forward contracts (1)
2,288

 
1,355

 
1,716

 
663

Total derivatives
$
36,981

 
$
1,355

 
$
47,259

 
$
663

_________________________________________ 
(1) 
Included in prepaid expenses and other current assets and accrued expenses for asset derivatives and liability derivatives, respectively, on our Condensed Consolidated Balance Sheets.
(2) 
Included in other assets or other liabilities on our Condensed Consolidated Balance Sheets.
(3) 
Hedging effectiveness expected to be recognized into income within the next twelve months.
 

14


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our Condensed Consolidated Statements of Income for the three and six months ended May 29, 2015 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) 
$
8,144

 
$

 
$
30,383

 
$

Net gain (loss) reclassified from accumulated
OCI into income, net of tax(2)
$
22,209

 
$

 
$
45,922

 
$

Net gain (loss) recognized in income(3) 
$
(4,206
)
 
$

 
$
(7,140
)
 
$

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

 
$
2,005

 
$

 
$
4,075

The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our Condensed Consolidated Statements of Income for the three and six months ended May 30, 2014 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) 
$
2,001

 
$

 
$
1,971

 
$

Net gain (loss) reclassified from accumulated
OCI into income, net of tax(2)
$
2,616

 
$

 
$
5,414

 
$

Net gain (loss) recognized in income(3) 
$
(3,653
)
 
$

 
$
(7,196
)
 
$

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

 
$
(515
)
 
$

 
$
720

_________________________________________ 
(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.

15


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 6.  GOODWILL AND PURCHASED AND OTHER INTANGIBLES
Goodwill as of May 29, 2015 and November 28, 2014 was $5.39 billion and $4.72 billion, respectively. The increase was due to our acquisition of Fotolia and offset by foreign currency translation adjustments. During the second quarter of fiscal 2015, we completed our annual goodwill impairment test associated with our reporting units and determined there was no impairment of goodwill.
Purchased and other intangible assets subject to amortization as of May 29, 2015 and November 28, 2014 were as follows (in thousands): 
 
2015
 
2014
 
Cost
 
Accumulated Amortization
 
Net
 
Cost
 
Accumulated Amortization
 
Net
Purchased technology
$
413,240

 
$
(296,137
)
 
$
117,103

 
$
405,208

 
$
(264,697
)
 
$
140,511

Customer contracts and relationships
$
509,505

 
$
(170,249
)
 
$
339,256

 
$
376,994

 
$
(143,330
)
 
$
233,664

Trademarks
87,777

 
(41,654
)
 
46,123

 
67,268

 
(36,516
)
 
30,752

Acquired rights to use technology
150,179

 
(96,685
)
 
53,494

 
148,836

 
(86,258
)
 
62,578

Localization
805

 
(462
)
 
343

 
549

 
(382
)
 
167

Other intangibles
30,830

 
(3,951
)
 
26,879

 
3,163

 
(1,173
)
 
1,990

Total other intangible assets
$
779,096

 
$
(313,001
)
 
$
466,095

 
$
596,810

 
$
(267,659
)
 
$
329,151

Purchased and other intangible assets, net
$
1,192,336

 
$
(609,138
)
 
$
583,198

 
$
1,002,018

 
$
(532,356
)
 
$
469,662

 
Amortization expense related to purchased and other intangible assets was $45.6 million and $85.2 million for the three and six months ended May 29, 2015, respectively. Comparatively, amortization expense related to purchased and other intangible assets was $37.6 million and $76.0 million for the three and six months ended May 30, 2014. Of these amounts $27.3 million and $52.2 million were included in cost of sales for the three and six months ended May 29, 2015, respectively, and $24.2 million and $49.1 million for the three and six months ended May 30, 2014.
As of May 29, 2015, we expect amortization expense in future periods to be as follows (in thousands):
Fiscal Year
 
Purchased
Technology
 
Other Intangible
Assets
Remainder of 2015
$
31,360

 
$
56,368

2016
29,639

 
106,940

2017
22,261

 
97,153

2018
15,243

 
86,315

2019
8,359

 
59,925

Thereafter
10,241

 
59,394

Total expected amortization expense
$
117,103

 
$
466,095


16


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 7.  ACCRUED EXPENSES
Accrued expenses as of May 29, 2015 and November 28, 2014 consisted of the following (in thousands):
 
2015
 
2014
Accrued compensation and benefits
$
296,599

 
$
320,679

Sales and marketing allowances 
55,214

 
75,627

Accrued corporate marketing
46,683

 
28,369

Taxes payable
20,847

 
24,658

Royalties payable
15,013

 
15,073

Accrued interest expense
27,411

 
22,621

Other
186,017

 
196,839

Accrued expenses
$
647,784

 
$
683,866


Other primarily includes general corporate accruals and local and regional expenses, including our accrual for a loss contingency. Other is also comprised of deferred rent related to office locations with rent escalations and foreign currency liability derivatives. See Note 12 for further information regarding the loss contingency.
NOTE 8.  STOCK-BASED COMPENSATION
Summary of Restricted Stock Units
Restricted stock unit activity for the six months ended May 29, 2015 and the fiscal year ended November 28, 2014 was as follows (in thousands):
 
2015
 
2014
Beginning outstanding balance
13,564

 
17,948

Awarded
3,171

 
4,413

Released
(5,712
)
 
(7,502
)
Forfeited
(518
)
 
(1,295
)
Ending outstanding balance
10,505

 
13,564

Information regarding restricted stock units outstanding at May 29, 2015 and May 30, 2014 is summarized below:
 
Number of
Shares
(thousands)
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2015
 
 
 
 
 
Restricted stock units outstanding
10,505

 
1.23
 
$
830.8

Restricted stock units vested and expected to vest
9,405

 
1.16
 
$
734.2

2014
 

 
 
 
 

Restricted stock units outstanding
14,297

 
1.28
 
$
922.7

Restricted stock units vested and expected to vest
12,552

 
1.22
 
$
804.0

_________________________________________ 
(*) 
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 May 29, 2015 and May 30, 2014 were $79.09 and $64.54, respectively. 

17


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Summary of Performance Shares 
On January 26, 2015, our Executive Compensation Committee approved the 2015 Performance Share Program, including the award calculation methodology, under the terms of our 2003 Equity Incentive Plan. Under our 2015 Performance Share Program (“2015 Program”), shares may be earned based on the achievement of an objective relative total stockholder return measured over a three-year performance period. The purpose of the 2015 Program is to help focus key employees on building stockholder value, provide significant award potential for achieving outstanding Company performance and enhance the ability of the Company to attract and retain highly talented and competent individuals. 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, 2018. Participants in the 2015 Program generally have the ability to receive up to 200% of the target number of shares originally granted.
On January 24, 2014, our Executive Compensation Committee approved the 2014 Performance Share Program, including the award calculation methodology, under the terms of our 2003 Equity Incentive Plan. Under our 2014 Performance Share Program (“2014 Program”), shares may be earned based on the achievement of an objective relative total stockholder return measured over a three-year performance period. The purpose of the 2014 Program is to help focus key employees on building stockholder value, provide significant award potential for achieving outstanding company performance and enhance the ability of the Company to attract and retain highly talented and competent individuals. 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, 2017. Participants in the 2014 Program generally have the ability to receive up to 200% of the target number of shares originally granted.
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 relative total stockholder return measured over a three-year performance period. Performance awards were granted under the 2013 Performance Share Program (“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.
As of May 29, 2015, the shares awarded under our 2015, 2014, and 2013 Performance Share Programs are yet to be achieved. The following table sets forth the summary of performance share activity under our 2015, 2014, and 2013 Performance Share Programs for the six months ended May 29, 2015 and the fiscal year ended November 28, 2014 (in thousands): 
 
2015
 
2014
 
Shares
Granted
 
Maximum
Shares Eligible
to Receive
 
Shares
Granted
 
Maximum
Shares Eligible
to Receive
Beginning outstanding balance
1,517

 
3,034

 
854

 
1,707

Awarded
671

 
1,342

 
709

 
1,417

Forfeited
(101
)
 
(201
)
 
(46
)
 
(90
)
Ending outstanding balance
2,087

 
4,175

 
1,517

 
3,034

The following table sets forth the summary of performance share activity under our performance share programs prior to fiscal 2013, based upon share awards actually achieved, for the six months ended May 29, 2015 and the fiscal year ended November 28, 2014 (in thousands):
 
2015
 
2014
Beginning outstanding balance
354

 
861

Released
(354
)
 
(486
)
Forfeited

 
(21
)
Ending outstanding balance

 
354


18


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 
Information regarding performance shares outstanding at May 30, 2014 is summarized below: 
 
Number of
Shares
(thousands)
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2014
 
 
 
 
 
Performance shares outstanding
358

 
0.65
 
$
23.1

Performance shares vested and expected to vest
335

 
0.65
 
$
21.5

_________________________________________ 
(*) 
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 value as of May 30, 2014 was $64.54.     
Summary of Stock Options 
There were no option grants during the six months ended May 29, 2015 and the six months ended May 30, 2014. Option activity for the six months ended May 29, 2015 and the fiscal year ended November 28, 2014 was as follows (in thousands):
 
2015
 
2014
Beginning outstanding balance
3,173

 
7,359

Exercised
(1,218
)
 
(4,055
)
Cancelled
(30
)
 
(153
)
Increase due to acquisition
88

 
22

Ending outstanding balance
2,013

 
3,173

 
Information regarding stock options outstanding at May 29, 2015 and May 30, 2014 is summarized below:
 
Number of
Shares
(thousands)
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2015
 
 
 
 
 
 
 
Options outstanding
2,013

 
$
28.35

 
2.95
 
$
102.1

Options vested and expected to vest
1,993

 
$
28.48

 
2.92
 
$
100.9

Options exercisable
1,825

 
$
29.95

 
2.61
 
$
89.7

2014
 

 
 

 
 
 
 

Options outstanding
4,972

 
$
29.37

 
3.14
 
$
174.9

Options vested and expected to vest
4,922

 
$
29.47

 
3.11
 
$
172.6

Options exercisable
4,140

 
$
30.59

 
2.74
 
$
140.5

_________________________________________ 
(*) 
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 May 29, 2015 and May 30, 2014 were $79.09 and $64.54, respectively.
Summary of Employee Stock Purchase Plan Shares
There were no stock purchases under the employee stock purchase plan (“ESPP”) during the three months ended May 29, 2015 and May 30, 2014. The expected life of the ESPP shares is the average of the remaining purchase periods under each offering

19


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

period. The assumptions used to value employee stock purchase rights during the six months ended May 29, 2015 and May 30, 2014 were as follows:
 
2015
 
2014
Expected life (in years)
0.5 - 2.0
 
0.5 - 2.0
Volatility
27% - 30%
 
27% - 28%
Risk free interest rate
0.12% - 0.67%
 
0.09% - 0.39%
 

Employees purchased 0.7 million shares at an average price of $50.31 and 1.2 million shares at an average price of $27.84 for the six months ended May 29, 2015 and May 30, 2014, respectively. The intrinsic value of shares purchased during the six months ended May 29, 2015 and May 30, 2014 was $16.0 million and $39.0 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 May 29, 2015, there was $499.8 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 1.8 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 May 29, 2015 and May 30, 2014 were as follows (in thousands):
 
 
2015
 
2014
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
$
371

 
$
1,780

 
$
505

 
$
1,441

Cost of revenue—services and support
1,404

 
1,429

 
964

 
1,682

Research and development
3,639

 
25,292

 
3,989

 
25,910

Sales and marketing
4,630

 
28,255

 
4,316

 
25,363

General and administrative
1,133

 
17,191

 
1,494

 
17,346

Total
$
11,177

 
$
73,947

 
$
11,268

 
$
71,742

Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the six months ended May 29, 2015 and May 30, 2014 were as follows (in thousands):
 
 
2015
 
2014
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
$
812

 
$
3,309

 
$
1,441

 
$
2,810

Cost of revenue—services and support
2,620

 
3,286

 
1,682

 
3,220

Research and development
7,695

 
51,997

 
25,910

 
52,467

Sales and marketing
9,228

 
55,540

 
25,363

 
51,094

General and administrative
2,596

 
33,952

 
17,346

 
32,941

Total
$
22,951

 
$
148,084

 
$
71,742

 
$
142,532


20


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 9.  RESTRUCTURING CHARGES
Fiscal 2014 Restructuring Plan
In the fourth quarter of fiscal 2014, in order to better align our global resources for Digital Media and Digital Marketing, we initiated a restructuring plan to vacate our Research and Development facility in China and our Sales and Marketing facility in Russia. This plan consisted of reductions of approximately 350 full-time positions and we recorded restructuring charges of approximately $19.6 million through the second quarter of fiscal 2015 related to ongoing termination benefits for the positions eliminated. The amount accrued for the fair value of future contractual obligations under these operating leases was insignificant. During the first quarter of fiscal 2015 we vacated both of these facilities and as of May 29, 2015 we consider the Fiscal 2014 Restructuring Plan to be substantially complete.
Other Restructuring Plans
During the past several years, we have implemented Other Restructuring Plans consisting of reductions in workforce and the consolidation of facilities to better align our resources around our business strategies. As of May 29, 2015, we considered our Other Restructuring Plans to be 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.
Summary of Restructuring Plans
The following table sets forth a summary of restructuring activities related to all of our restructuring plans during the six months ended May 29, 2015 (in thousands):
 
November 28,
2014
 
Costs
Incurred
 
Cash
Payments
 
Other
Adjustments
 
May 29,
2015
Fiscal 2014 Restructuring Plan:
 
 
 
 
 
 
 
 
 
   Termination benefits
$
14,461

 
$
773

 
$
(16,202
)
 
$
1,097

 
$
129

   Cost of closing redundant facilities
472

 

 
(417
)
 
(27
)
 
28

Other Restructuring Plans:
 
 
 
 
 
 
 
 
 
   Termination benefits
537

 

 
(120
)
 
(305
)
 
112

   Cost of closing redundant facilities
6,844

 

 
(651
)
 
(420
)
 
5,773

Total restructuring plans
$
22,314

 
$
773

 
$
(17,390
)
 
$
345

 
$
6,042

Accrued restructuring charges of $6.0 million as of May 29, 2015 includes $1.7 million recorded in accrued restructuring, current and $4.3 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 2015 and facilities-related liabilities under contract through fiscal 2021 of which approximately 34% will be paid through fiscal 2016.
NOTE 10.  STOCKHOLDERS’ EQUITY
Retained Earnings
The changes in retained earnings for the six months ended May 29, 2015 were as follows (in thousands): 
Balance as of November 28, 2014
$
6,924,294

Net income
232,381

Re-issuance of treasury stock
(277,231
)
Balance as of May 29, 2015
$
6,879,444

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

21


ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 reduction of retained earnings in our Condensed Consolidated Balance Sheets.
The components of accumulated other comprehensive income (loss) and activity, net of related taxes, as of May 29, 2015 were as follows (in thousands):
 
November 28,
2014
 
Increase / Decrease
 
Reclassification Adjustments
 
May 29,
2015
Net unrealized gains on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gains on available-for-sale securities
$
8,237

 
$
509

 
$
(1,684
)
 
$
7,062

Unrealized losses on available-for-sale securities
(609
)
 
(450
)
 
124

 
(935
)
Total net unrealized gains on available-for-sale securities
7,628

 
59

 
(1,560
)
(1) 
6,127

Net unrealized gains / losses on derivative instruments designated as hedging instruments
28,655

 
20,354

 
(45,580
)
(2) 
3,429

Cumulative foreign currency translation adjustments
(44,377
)
 
(94,652
)
 

 
(139,029
)
Total accumulated other comprehensive income (loss), net of taxes
$
(8,094
)
 
$
(74,239
)
 
$
(47,140
)
 
$
(129,473
)
_________________________________________ 
(1) 
Reclassification adjustments for gains / losses on available-for-sale securities are classified in interest and other income (expense), net.
(2) 
Reclassification adjustments for loss on the interest rate lock agreement and gains / losses on other derivative instruments are classified in interest and other income (expense), net and revenue, respectively.

The following table sets forth the taxes related to each component of other comprehensive income (loss) for the three and six months ended May 29, 2015 and May 30, 2014 (in thousands):
 
Three Months
 
Six Months
 
2015
 
2014
 
2015
 
2014
Available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gains / losses
$
(49
)
 
$
(11
)
 
$
(156
)
 
$
(31
)
Reclassification adjustments

 
(2
)
 

 
(3
)
Subtotal available-for-sale securities
(49
)
 
(13
)
 
(156
)
 
(34
)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Unrealized gains / losses on derivative instruments*

 

 
6,147

 

Reclassification adjustments*
(157
)
 

 
(210
)
 

Subtotal derivatives designated as hedging instruments
(157
)
 

 
5,937

 

Foreign currency translation adjustments
(336
)
 
(560
)
 
(2,431
)
 
(558
)
Total taxes, other comprehensive income (loss)
$
(542
)
 
$
(573
)
 
$
3,350

 
$
(592
)