UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2020

 or

☐ 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 INC.

(Exact name of registrant as specified in its charter)

________________________________

Delaware	77-0019522
(State or other jurisdiction of incorporation or organization)	(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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.0001 par value per share	ADBE	NASDAQ

________________________________

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 ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer (Do not check if a smaller reporting company) ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ☐ No ☒

The number of shares outstanding of the registrant’s common stock as of March 20, 2020 was 481,800,850.

ADOBE INC.

FORM 10-Q

TABLE OF CONTENTS

		Page No.
PART I—FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:	3
	Condensed Consolidated Balance Sheets February 28, 2020 and November 29, 2019	3
	Condensed Consolidated Statements of Income Three Months Ended February 28, 2020 and March 1, 2019	4
	Condensed Consolidated Statements of Comprehensive Income Three Months Ended February 28, 2020 and March 1, 2019	5
	Condensed Consolidated Statements of Stockholders’ Equity Three Months Ended February 28, 2020 and March 1, 2019	6
	Condensed Consolidated Statements of Cash Flows Three Months Ended February 28, 2020 and March 1, 2019	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40
Item 4.	Controls and Procedures	40
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	55
Signature		57
Summary of Trademarks		58

2

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except par value)

	February 28, 2020			November 29, 2019
	(Unaudited)			(*)
ASSETS
Current assets:
Cash and cash equivalents	$	2,688		$	2,650
Short-term investments	1,483			1,527
Trade receivables, net of allowances for doubtful accounts of $9 and $10, respectively	1,389			1,535
Prepaid expenses and other current assets	895			783
Total current assets	6,455			6,495
Property and equipment, net	1,340			1,293
Operating lease right-of-use assets, net	504			—
Goodwill	10,691			10,691
Other intangibles, net	1,626			1,721
Other assets	598			562
Total assets	$	21,214		$	20,762
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade payables	$	265		$	209
Accrued expenses	1,241			1,399
Debt	—			3,149
Deferred revenue	3,489			3,378
Income taxes payable	149			56
Operating lease liabilities	84			—
Total current liabilities	5,228			8,191
Long-term liabilities:
Debt	4,113			989
Deferred revenue	125			123
Income taxes payable	530			616
Deferred income taxes	48			140
Operating lease liabilities	514			—
Other liabilities	191			173
Total liabilities	10,749			10,232
Stockholders’ equity:
Preferred stock, $0.0001 par value; 2 shares authorized, none issued	—			—
Common stock, $0.0001 par value; 900 shares authorized; 601 shares issued;  483 shares outstanding for both periods	—			—
Additional paid-in-capital	6,665			6,504
Retained earnings	15,390			14,829
Accumulated other comprehensive income (loss)	(189		)	(188		)
Treasury stock, at cost (118 shares for both periods)	(11,401		)	(10,615		)
Total stockholders’ equity	10,465			10,530
Total liabilities and stockholders’ equity	$	21,214		$	20,762

^{_________________________________________} 

(*) The condensed consolidated balance sheet as of November 29, 2019 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 INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share data)

(Unaudited)

	Three Months Ended
	February 28, 2020			March 1, 2019
Revenue:
Subscription	$	2,825		$	2,305
Product	143			171
Services and support	123			125
Total revenue	3,091			2,601
Cost of revenue:
Subscription	355			288
Product	7			12
Services and support	90			97
Total cost of revenue	452			397
Gross profit	2,639			2,204
Operating expenses:
Research and development	532			465
Sales and marketing	857			781
General and administrative	271			216
Amortization of intangibles	42			47
Total operating expenses	1,702			1,509
Operating income	937			695
Non-operating income (expense):
Interest expense	(33		)	(41		)
Investment gains (losses), net	(3		)	44
Other income (expense), net	18			4
Total non-operating income (expense), net	(18		)	7
Income before income taxes	919			702
Provision for (benefit from) income taxes	(36		)	28
Net income	$	955		$	674
Basic net income per share	$	1.98		$	1.38
Shares used to compute basic net income per share	482			488
Diluted net income per share	$	1.96		$	1.36
Shares used to compute diluted net income per share	488			494

4

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

	Three Months Ended
	February 28, 2020			March 1, 2019
	Increase/(Decrease)
Net income	$	955		$	674
Other comprehensive income (loss), net of taxes:
Available-for-sale securities:
Unrealized gains / losses on available-for-sale securities	4			13
Derivatives designated as hedging instruments:
Unrealized gains / losses on derivative instruments	1			(9		)
Reclassification adjustment for realized gains / losses on derivative instruments	(2		)	(8		)
Net increase (decrease) from derivatives designated as hedging instruments	(1		)	(17		)
Foreign currency translation adjustments	(4		)	2
Other comprehensive income (loss), net of taxes	(1		)	(2		)
Total comprehensive income, net of taxes	$	954		$	672

5

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions)

(Unaudited)

	Three Months Ended February 28, 2020
	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock
	Shares	Amount											Shares		Amount			Total
Balances at November 29, 2019	601	$	—	$	6,504		$	14,829		$	(188	)	(118	)	$	(10,615	)	$	10,530
Net income	—	—		—			955			—			—		—			955
Other comprehensive income (losses), net of taxes	—	—		—			—			(1		)	—		—			(1		)
Re-issuance of treasury stock under stock compensation plans	—	—		(56		)	(394		)	—			2		72			(378		)
Purchase of treasury stock	—	—		—			—			—			(2	)	(850		)	(850		)
Stock-based compensation	—	—		217			—			—			—		—			217
Value of shares in deferred compensation plan	—	—		—			—			—			—		(8		)	(8		)
Balances at February 28, 2020	601	$	—	$	6,665		$	15,390		$	(189	)	(118	)	$	(11,401	)	$	10,465

	Three Months Ended March 1, 2019
	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock
	Shares	Amount											Shares		Amount			Total
Balances at November 30, 2018	601	$	—	$	5,685		$	11,816		$	(148	)	(113	)	$	(7,991	)	$	9,362
Impacts of adoption of the new revenue standard	—	—		—			442			—			—		—			442
Net income	—	—		—			674			—			—		—			674
Other comprehensive income (losses), net of taxes	—	—		—			—			(2		)	—		—			(2		)
Re-issuance of treasury stock under stock compensation plans	—	—		(8		)	(353		)	—			3		80			(281		)
Purchase of treasury stock	—	—		—			—			—			(2	)	(500		)	(500		)
Stock-based compensation	—	—		180			—			—			—		—			180
Value of shares in deferred compensation plan	—	—		—			—			—			—		(4		)	(4		)
Balances at March 1, 2019	601	$	—	$	5,857		$	12,579		$	(150	)	(112	)	$	(8,415	)	$	9,871

6

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	Three Months Ended
	February 28, 2020			March 1, 2019
Cash flows from operating activities:
Net income	$	955		$	674
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	188			186
Stock-based compensation	217			185
Reduction of operating lease right-of-use assets	21			—
Deferred income taxes	(93		)	(19		)
Unrealized losses (gains) on investments, net	6			(42		)
Other non-cash items	2			1
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
Trade receivables, net	145			65
Prepaid expenses and other assets	(197		)	(148		)
Trade payables	55			(41		)
Accrued expenses and other liabilities	(98		)	(20		)
Income taxes payable	10			6
Deferred revenue	114			166
Net cash provided by operating activities	1,325			1,013
Cash flows from investing activities:
Purchases of short-term investments	(213		)	—
Maturities of short-term investments	235			97
Proceeds from sales of short-term investments	26			14
Acquisitions, net of cash acquired	—			(100		)
Purchases of property and equipment	(94		)	(65		)
Purchases of long-term investments, intangibles and other assets	(2		)	(78		)
Net cash used for investing activities	(48		)	(132		)
Cash flows from financing activities:
Purchases of treasury stock	(850		)	(500		)
Proceeds from re-issuance of treasury stock	88			72
Taxes paid related to net share settlement of equity awards	(467		)	(353		)
Proceeds from issuance of debt	3,144			—
Repayment of debt	(3,150		)	—
Other financing activities, net	2			(3		)
Net cash used for financing activities	(1,233		)	(784		)
Effect of foreign currency exchange rates on cash and cash equivalents	(6		)	(1		)
Net increase in cash and cash equivalents	38			96
Cash and cash equivalents at beginning of period	2,650			1,643
Cash and cash equivalents at end of period	$	2,688		$	1,739
Supplemental disclosures:
Cash paid for income taxes, net of refunds	$	45		$	52
Cash paid for interest	$	38		$	51

7

ADOBE INC.

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 U.S. Securities and Exchange Commission (“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 29, 2019 on file with the SEC (our “Annual Report”).

Reclassification

Certain immaterial prior year amounts have been reclassified to conform to current year presentation in the condensed consolidated statements of cash flows and notes to condensed consolidated financial statements.

Recently Adopted Accounting Guidance

On February 24, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), (“ASC 842”), a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases with terms greater than twelve months, including for those leases classified as operating leases under the legacy standard (“ASC 840”). Under ASC 842, added disclosures are required as compared to ASC 840 to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. 

On November 30, 2019, the beginning of our fiscal year 2020, we adopted ASC 842 using the alternative modified retrospective transition method provided in ASU 2018-11, Leases (Topic 842): Targeted Improvements. Under this method, we recorded ROU assets and lease liabilities of approximately $519 million and $618 million, respectively, at the adoption date and did not include any retrospective adjustments to comparative periods to reflect the adoption of ASC 842. The lease liabilities reflect the remaining minimum rental payments for our existing leases as of the adoption date, discounted using our incremental borrowing rate for each lease. The standard had no impact on our consolidated net income or cash flows. We elected the package of practical expedients permitted under the transition guidance, which allowed us to carry forward our assessments on whether a contract was or contains a lease, our historical lease classification and our initial direct costs for any leases that existed prior to adoption date. We also elected the practical expedient that allowed us to carry forward our accounting treatment for existing land easements. We did not elect the hindsight practical expedient to determine the lease term for existing leases.

On August 28, 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging, requiring expanded hedge accounting for both non-financial and financial risk components and refining the measurement of hedge results to better reflect an entity’s hedging strategies. The updated standard also amends the presentation and disclosure requirements and changes how entities assess hedge effectiveness. On November 30, 2019, the beginning of our fiscal year 2020, we adopted the accounting requirements of the updated standard utilizing the modified retrospective method of transition. The adoption of this standard did not have a material impact on our condensed consolidated financial statements and related disclosures.

Significant Accounting Policies

Leases

We determine if an arrangement is or contains a lease at contract inception. In certain of our lease arrangements, primarily those related to our data center arrangements, judgment is required in determining if a contract contains a lease. For these arrangements, there is judgment in evaluating if the arrangement involves an identified asset that is physically distinct or whether we have the right to substantially all of the capacity of an identified asset that is not physically distinct. In arrangements that involved an identified asset, there is also judgment in evaluating if we have the right to direct the use of that asset.

We do not have any finance leases. Operating leases are recorded in our condensed consolidated balance sheets. ROU assets and lease liabilities are measured at the lease commencement date based on the present value of the remaining lease payments

8

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

over the lease term, determined using the discount rate for the lease at the commencement date. Because the rate implicit in our leases is not readily determinable, we use our incremental borrowing rate as the discount rate, which approximates the interest rate at which we could borrow on a collateralized basis with similar terms and payments and in similar economic environments. Our leases have remaining lease terms of up to 12 years, some of which include options to extend the lease for up to 9 years and options to terminate the lease within 1 year. Optional periods to extend the lease, including by not exercising a termination option, are included in the lease term when it is reasonably certain that the option will be exercised. We also have one land lease that expires in 2091. Operating lease expense is recognized on a straight-line basis over the lease term. We account for lease and non-lease components, principally common area maintenance for our facilities leases, as a single lease component for our facilities and data center leases.

There have been no other material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report.

Recent Accounting Pronouncements Not Yet Effective

On June 16, 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses, requiring the measurement and recognition of expected credit losses for financial assets held at amortized cost, which include our accounts receivable and contract assets. The standard also requires that we recognize credit impairment losses related to our available-for-sale debt securities through an allowance for credit losses instead of a reduction in the cost basis. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition with a cumulative effect adjustment recorded to opening retained earnings as of the initial adoption date. The updated standard is effective for us beginning in the first quarter of fiscal 2021 and we do not plan to early adopt. We are currently evaluating the effect that the standard will have on our condensed 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 three months ended February 28, 2020, as compared to the recent accounting pronouncements described in our Annual Report, that are of significance or potential significance to us.

NOTE 2.  REVENUE

Segment Information

Our segment results for the three months ended February 28, 2020 and March 1, 2019 were as follows:

(dollars in millions)	Digital Media			Digital Experience			Publishing			Total
Three months ended February 28, 2020
Revenue	$	2,169		$	858		$	64		$	3,091
Cost of revenue	87			361			4			452
Gross profit	$	2,082		$	497		$	60		$	2,639
Gross profit as a percentage of revenue	96		%	58		%	94		%	85		%
Three months ended March 1, 2019
Revenue	$	1,777		$	743		$	81		$	2,601
Cost of revenue	68			324			5			397
Gross profit	$	1,709		$	419		$	76		$	2,204
Gross profit as a percentage of revenue	96		%	56		%	93		%	85		%

9

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Revenue by geographic area for the three months ended February 28, 2020 and March 1, 2019 were as follows:

(in millions)	2020		2019
Americas	$	1,797	$	1,510
EMEA	817		703
APAC	477		388
Total	$	3,091	$	2,601

Revenue by major offerings in our Digital Media reportable segment for the three months ended February 28, 2020 and March 1, 2019 were as follows:

(in millions)	2020		2019
Creative Cloud	$	1,818	$	1,495
Document Cloud	351		282
Total	$	2,169	$	1,777

Subscription revenue by segment for the three months ended February 28, 2020 and March 1, 2019 were as follows:

(in millions)	2020		2019
Digital Media	$	2,058	$	1,664
Digital Experience	739		612
Publishing	28		29
Total	$	2,825	$	2,305

Contract Balances

A receivable is recorded when an unconditional right to invoice and receive payment exists, such that only the passage of time is required before payment of consideration is due. Included in trade receivables on the condensed consolidated balance sheets are unbilled receivable balances which have not yet been invoiced, and are typically related to license revenue or services which are delivered prior to invoicing occurring. As of February 28, 2020, the balance of trade receivables, net of allowances for doubtful accounts, was $1.39 billion, inclusive of unbilled receivables of $114 million. As of November 29, 2019, the balance of trade receivables, net of allowances for doubtful accounts, was $1.53 billion, inclusive of unbilled receivables of $149 million.

We maintain an allowance for doubtful accounts which reflects our best estimate of potentially uncollectible trade receivables and is based on both specific and general reserves. The allowance for doubtful accounts was $9 million and $10 million as of February 28, 2020 and November 29, 2019, respectively.

A contract asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract assets are included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion on the condensed consolidated balance sheets. Contract assets were $76 million and $64 million as of February 28, 2020 and November 29, 2019, respectively.

Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services, including non-cancellable and non-refundable committed funds and refundable customer deposits. Deferred revenue is recognized as revenue when transfer of control to customers has occurred. As of February 28, 2020, the balance of deferred revenue was $3.61 billion, which includes $45 million of refundable customer deposits. Arrangements with some of our enterprise customers with non-cancellable and non-refundable committed funds provide options to either renew monthly on-premise term-based licenses or use some or all funds to purchase other Adobe products or services. Non-cancellable and non-refundable committed funds related to these agreements comprised approximately 6% of the total deferred revenue.

10

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

As of November 29, 2019, the balance of deferred revenue was $3.50 billion. During the three months ended February 28, 2020, approximately $1.47 billion of revenue was recognized that was included in the balance of deferred revenue as of November 29, 2019.

Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and unbilled amounts that will be recognized as revenue in future periods. As of February 28, 2020, remaining performance obligations were approximately $9.91 billion. Non-cancellable and non-refundable funds related to some of our enterprise customer agreements referred to in the paragraph above comprised approximately 5% of the total remaining performance obligations. Approximately 74% of the remaining performance obligations, excluding the aforementioned enterprise customer agreements, are expected to be recognized over the next 12 months with the remainder recognized thereafter.

Incremental costs of obtaining a contract with a customer are capitalized if we expect the benefit of those costs to be longer than one year and primarily relate to sales commissions paid to our sales force personnel. Capitalized contract acquisition costs are included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion on the condensed consolidated balance sheets. Capitalized contract acquisition costs were $505 million and $474 million as of February 28, 2020 and November 29, 2019, respectively.

As part of our revenue reserves, we record refund liabilities for amounts that may be subject to future refunds, which include sales returns reserves and customer rebates and credits. Refund liabilities are included in accrued expenses on the condensed consolidated balance sheets. Refund liabilities were $122 million and $126 million as of February 28, 2020 and November 29, 2019, respectively.

NOTE 3.  ACQUISITIONS

On January 23, 2019, we completed the acquisition of Allegorithmic, a privately-held 3D editing and authoring software company for gaming and entertainment, and integrated it into our Digital Media reportable segment. Prior to the acquisition, we held an equity interest in Allegorithmic that was accounted for as an equity-method investment. We acquired the remaining equity interest for approximately $106 million in cash consideration. The total purchase price, inclusive of the acquisition-date fair-value of our pre-existing equity interest, was approximately $161 million.

In conjunction with the acquisition, we separately recognized an investment gain of approximately $42 million, which represents the difference between the $55 million acquisition-date fair value of our pre-existing equity interest and our previous carrying amount.

Under the acquisition method of accounting, the total final purchase price was allocated to Allegorithmic’s net tangible and intangible assets based upon their estimated fair values as of the acquisition date. The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill. Of the total purchase price, $126 million was allocated to goodwill that was non-deductible for tax purposes, $45 million to identifiable intangible assets and the remainder to net liabilities assumed.

Pro forma financial information has not been presented as the impact to our condensed consolidated financial statements was not material.

NOTE 4.  CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash equivalents consist of highly liquid marketable debt securities with remaining maturities of three months or less at the date of purchase. We classify our investments in marketable debt securities as “available-for-sale.” 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 determined using the specific identification method and 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.

11

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Cash, cash equivalents and short-term investments consisted of the following as of February 28, 2020:

(in millions)	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Current assets:
Cash	$	473	$	—	$	—	$	473
Cash equivalents:
Corporate debt securities	45		—		—		45
Money market mutual funds	2,143		—		—		2,143
Time deposits	27		—		—		27
Total cash equivalents	2,215		—		—		2,215
Total cash and cash equivalents	2,688		—		—		2,688
Short-term fixed income securities:
Asset-backed securities	95		1		—		96
Corporate debt securities	1,368		8		—		1,376
Municipal securities	11		—		—		11
Total short-term investments	1,474		9		—		1,483
Total cash, cash equivalents and short-term investments	$	4,162	$	9	$	—	$	4,171

Cash, cash equivalents and short-term investments consisted of the following as of November 29, 2019:

(in millions)	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Current assets:
Cash	$	467	$	—	$	—	$	467
Cash equivalents:
Corporate debt securities	46		—		—		46
Money market mutual funds	2,049		—		—		2,049
Time deposits	88		—		—		88
Total cash equivalents	2,183		—		—		2,183
Total cash and cash equivalents	2,650		—		—		2,650
Short-term fixed income securities:
Asset-backed securities	89		—		—		89
Corporate debt securities	1,408		4		—		1,412
Municipal securities	18		—		—		18
U.S. Treasury securities	8		—		—		8
Total short-term investments	1,523		4		—		1,527
Total cash, cash equivalents and short-term investments	$	4,173	$	4	$	—	$	4,177

12

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

We had immaterial gross unrealized losses related to our available-for-sale securities as of February 28, 2020 and November 29, 2019. The following table summarizes the fair value of our available-for-sale securities that have been in a continuous unrealized loss position as of February 28, 2020 and November 29, 2019:

(in millions)	2020				2019
	Less Than Twelve Months		More Than  Twelve Months		Less Than  Twelve Months		More Than  Twelve Months
Corporate debt securities	$	70	$	9	$	235	$	44
Asset-backed securities	3		—		7		7
Municipal securities	—		—		3		—
Total	$	73	$	9	$	245	$	51

There were 4 securities and 38 securities in an unrealized loss position for more than twelve months at February 28, 2020 and at November 29, 2019, respectively. There were 27 securities and 115 securities in an unrealized loss position for less than twelve months at February 28, 2020 and at November 29, 2019, 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 February 28, 2020:

(in millions)	Amortized Cost		Estimated Fair Value
Due within one year	$	922	$	925
Due between one and two years	364		367
Due between two and three years	188		191
Total	$	1,474	$	1,483

We review our debt 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. The portion of the write-down related to credit loss would be recorded to other income (expense), 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. During the three months ended February 28, 2020 and March 1, 2019, we did not consider any of our investments to be other-than-temporarily impaired.

13

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 5.  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 three months ended February 28, 2020.

The fair value of our financial assets and liabilities at February 28, 2020 was determined using the following inputs:

(in millions)	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 debt securities	$	45	$	—	$	45	$	—
Money market mutual funds	2,143		2,143				—
Time deposits	27		27				—
Short-term investments:
Asset-backed securities	96		—		96		—
Corporate debt securities	1,376		—		1,376		—
Municipal securities	11		—		11		—
Prepaid expenses and other current assets:
Foreign currency derivatives	33		—		33		—
Other assets:
Deferred compensation plan assets	98		4		94		—
Total assets	$	3,829	$	2,174	$	1,655	$	—

Liabilities:
Accrued expenses:
Foreign currency derivatives	$	8	$	—	$	8	$	—

14

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of our financial assets and liabilities at November 29, 2019 was determined using the following inputs:

(in millions)	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 debt securities	$	46	$	—	$	46	$	—
Money market mutual funds	2,049		2,049		—		—
Time deposits	88		88		—		—
Short-term investments:
Asset-backed securities	89		—		89		—
Corporate debt securities	1,412		—		1,412		—
Municipal securities	18		—		18		—
U.S. Treasury securities	8		—		8		—
Prepaid expenses and other current assets:
Foreign currency derivatives	29		—		29		—
Other assets:
Deferred compensation plan assets	94		5		89		—
Total assets	$	3,833	$	2,142	$	1,691	$	—

Liabilities:
Accrued expenses:
Treasury lock derivatives	$	30	$	—	$	30	$