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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 March 4, 2022
 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)
________________________________
Delaware77-0019522
(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)

(408536-6000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.0001 par value per shareADBENASDAQ
________________________________
 
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 filerAccelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting companyEmerging 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
As of March 25, 2022, 472.5 million shares of the registrant’s common stock, $0.0001 par value per share, were issued and outstanding.



ADOBE INC.
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

Table of Contents
PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except par value)
 March 4,
2022
December 3,
2021
(Unaudited)(*)
ASSETS
Current assets:  
Cash and cash equivalents$2,739 $3,844 
Short-term investments1,962 1,954 
Trade receivables, net of allowances for doubtful accounts of $18 and $16, respectively
1,685 1,878 
Prepaid expenses and other current assets1,090 993 
Total current assets7,476 8,669 
Property and equipment, net1,703 1,673 
Operating lease right-of-use assets, net435 443 
Goodwill12,795 12,668 
Other intangibles, net1,743 1,820 
Deferred income taxes950 1,085 
Other assets874 883 
Total assets$25,976 $27,241 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:  
Trade payables$295 $312 
Accrued expenses1,333 1,736 
Debt499  
Deferred revenue4,894 4,733 
Income taxes payable83 54 
Operating lease liabilities93 97 
Total current liabilities7,197 6,932 
Long-term liabilities: 
Debt3,626 4,123 
Deferred revenue125 145 
Income taxes payable540 534 
Deferred income taxes4 5 
Operating lease liabilities447 453 
Other liabilities262 252 
Total liabilities12,201 12,444 
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; 
472 and 475 shares outstanding, respectively
  
Additional paid-in-capital8,750 8,428 
Retained earnings24,961 23,905 
Accumulated other comprehensive income (loss)(177)(137)
Treasury stock, at cost (129 and 126 shares, respectively)
(19,759)(17,399)
Total stockholders’ equity13,775 14,797 
Total liabilities and stockholders’ equity$25,976 $27,241 
_________________________________________
(*)    The condensed consolidated balance sheet as of December 3, 2021 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
3

Table of Contents
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
 Three Months Ended
 March 4,
2022
March 5,
2021
Revenue: 
Subscription$3,958 $3,584 
Product145 155 
Services and other159 166 
Total revenue4,262 3,905 
 
Cost of revenue:
Subscription393 324 
Product10 10 
Services and other109 113 
Total cost of revenue512 447 
Gross profit3,750 3,458 
 
Operating expenses:
Research and development701 620 
Sales and marketing1,158 1,049 
General and administrative269 290 
Amortization of intangibles42 45 
Total operating expenses2,170 2,004 
 Operating income1,580 1,454 
 
Non-operating income (expense):
Interest expense(28)(30)
Investment gains (losses), net(9)5 
Other income (expense), net 4 
Total non-operating income (expense), net(37)(21)
Income before income taxes1,543 1,433 
Provision for income taxes277 172 
Net income$1,266 $1,261 
Basic net income per share$2.68 $2.63 
Shares used to compute basic net income per share473 479 
Diluted net income per share$2.66 $2.61 
Shares used to compute diluted net income per share475 483 


  See accompanying notes to condensed consolidated financial statements.

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ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
Three Months Ended
 March 4,
2022
March 5,
2021
Increase/(Decrease)
Net income$1,266 $1,261 
Other comprehensive income (loss), net of taxes:
Available-for-sale securities:
Unrealized gains / losses on available-for-sale securities(14)(3)
Derivatives designated as hedging instruments:
Unrealized gains / losses on derivative instruments
23 5 
Reclassification adjustment for realized gains / losses on derivative instruments(15)12 
Net increase (decrease) from derivatives designated as hedging instruments8 17 
Foreign currency translation adjustments(34)3 
Other comprehensive income (loss), net of taxes(40)17 
Total comprehensive income, net of taxes$1,226 $1,278 


See accompanying notes to condensed consolidated financial statements.


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ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
(Unaudited)
Three Months Ended March 4, 2022
 
  Common Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
 Treasury Stock 
 SharesAmountSharesAmountTotal
Balances at December 3, 2021
601 $ $8,428 $23,905 $(137)(126)$(17,399)$14,797 
Net income— — — 1,266 — — — 1,266 
Other comprehensive income (loss),
net of taxes
— — — — (40)— — (40)
Re-issuance of treasury stock under stock compensation plans
— —  (210)— 1 35 (175)
Repurchases of common stock— — — — — (4)(2,400)(2,400)
Stock-based compensation— — 322 — — — — 322 
Value of shares in deferred compensation plan
— — — — — — 5 5 
Balances at March 4, 2022
601 $ $8,750 $24,961 $(177)(129)$(19,759)$13,775 



Three Months Ended March 5, 2021
 
  Common Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
 Treasury Stock 
 SharesAmountSharesAmountTotal
Balances at November 27, 2020
601 $ $7,357 $19,611 $(158)(122)$(13,546)$13,264 
Net income
— — — 1,261 — — — 1,261 
Other comprehensive income (loss),
net of taxes
— — — — 17 — — 17 
Re-issuance of treasury stock under stock compensation plans
— —  (351)— 2 47 (304)
Repurchases of common stock— — — — — (2)(950)(950)
Stock-based compensation— — 260 — — — — 260 
Value of shares in deferred compensation plan
— — — — — — (2)(2)
Balances at March 5, 2021
601 $ $7,617 $20,521 $(141)(122)$(14,451)$13,546 


See accompanying notes to condensed consolidated financial statements.
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ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 Three Months Ended
 March 4,
2022
March 5,
2021
Cash flows from operating activities:  
Net income$1,266 $1,261 
Adjustments to reconcile net income to net cash provided by operating activities: 
Depreciation, amortization and accretion213 196 
Stock-based compensation322 260 
Reduction of operating lease right-of-use assets22 19 
Deferred income taxes129 117 
Unrealized losses (gains) on investments, net17  
Other non-cash items2 2 
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
Trade receivables, net191 (82)
Prepaid expenses and other assets(187)(242)
Trade payables6 (59)
Accrued expenses and other liabilities(389)(200)
Income taxes payable36 29 
Deferred revenue141 471 
Net cash provided by operating activities1,769 1,772 
Cash flows from investing activities:  
Purchases of short-term investments(288)(289)
Maturities of short-term investments208 246 
Proceeds from sales of short-term investments54 39 
Acquisitions, net of cash acquired(106)(1,470)
Purchases of property and equipment(100)(59)
Purchases of long-term investments, intangibles and other assets(28)(25)
Net cash used for investing activities(260)(1,558)
Cash flows from financing activities:  
Repurchases of common stock(2,400)(950)
Proceeds from re-issuance of treasury stock91 87 
Taxes paid related to net share settlement of equity awards(266)(391)
Other financing activities, net(29)10 
Net cash used for financing activities(2,604)(1,244)
Effect of foreign currency exchange rates on cash and cash equivalents(10)4 
Net change in cash and cash equivalents(1,105)(1,026)
Cash and cash equivalents at beginning of period3,844 4,478 
Cash and cash equivalents at end of period$2,739 $3,452 
Supplemental disclosures: 
Cash paid for income taxes, net of refunds$59 $91 
Cash paid for interest$50 $50 


See accompanying notes to condensed consolidated financial statements.
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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 (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 December 3, 2021 on file with the SEC (our “Annual Report”).
Use of Estimates
In preparing the condensed consolidated financial statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of the SEC, we must make estimates and judgments that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ materially from these estimates.
Fiscal Year
Our fiscal year is a 52- or 53-week year that ends on the Friday closest to November 30. Our financial results for the three months ended March 5, 2021 benefited from an extra week in the first quarter of fiscal 2021 due to our 52/53 week financial calendar whereby fiscal 2022 is a 52-week year compared with fiscal 2021 which was a 53-week year.
Significant Accounting Policies
There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report.
Adopted Accounting Guidance and Accounting Pronouncements Not Yet Effective
There have been no recent accounting pronouncements, changes in accounting pronouncements or recently adopted accounting guidance during the three months ended March 4, 2022 that are of significance or potential significance to us.
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ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
NOTE 2.  REVENUE
Segment Information
Our segment results for the three months ended March 4, 2022 and March 5, 2021 were as follows:
(dollars in millions)Digital
Media
Digital
Experience
Publishing and
Advertising
Total
Three months ended March 4, 2022
Revenue$3,110 $1,057 $95 $4,262 
Cost of revenue134 352 26 512 
Gross profit$2,976 $705 $69 $3,750 
Gross profit as a percentage of revenue96 %67 %73 %88 %
Three months ended March 5, 2021
Revenue$2,859 $934 $112 $3,905 
Cost of revenue98 319 30 447 
Gross profit$2,761 $615 $82 $3,458 
Gross profit as a percentage of revenue97 %66 %73 %89 %
Revenue by geographic area for the three months ended March 4, 2022 and March 5, 2021 were as follows:
(in millions)20222021
Americas $2,446 $2,224 
EMEA1,136 1,052 
APAC680 629 
Total$4,262 $3,905 
Revenue by major offerings in our Digital Media reportable segment for the three months ended March 4, 2022 and March 5, 2021 were as follows:
(in millions)20222021
Creative Cloud$2,548 $2,379 
Document Cloud562 480 
Total$3,110 $2,859 
Subscription revenue by segment for the three months ended March 4, 2022 and March 5, 2021 were as follows:
(in millions)20222021
Digital Media $2,995 $2,731 
Digital Experience932 812 
Publishing and Advertising31 41 
Total$3,958 $3,584 
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. As of March 4, 2022, the balance of trade receivables, net of allowances for doubtful accounts, was $1.69 billion, inclusive of unbilled receivables of $92 million. As of December 3, 2021, the balance of trade receivables, net of allowances for doubtful accounts, was $1.88 billion, inclusive of unbilled receivables of $82 million.
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ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
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. We maintain general reserves on a collective basis by considering factors such as historical experience, credit-worthiness, the age of the trade receivable balances, current economic conditions and a reasonable and supportable forecast of future economic conditions. The allowance for doubtful accounts was $18 million and $16 million as of March 4, 2022 and December 3, 2021, 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. We regularly review contract asset balances for impairment, considering factors such as historical experience, credit-worthiness, age of the balance, current economic conditions and a reasonable and supportable forecast of future economic conditions. Contract asset impairments were not material for the three months ended March 4, 2022. Contract assets were $80 million and $85 million as of March 4, 2022 and December 3, 2021, 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 March 4, 2022, the balance of deferred revenue was $5.02 billion, which includes $68 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 5% of the total deferred revenue.
As of December 3, 2021, the balance of deferred revenue was $4.88 billion. During the three months ended March 4, 2022, approximately $2.15 billion of revenue was recognized that was included in the balance of deferred revenue as of December 3, 2021.
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 March 4, 2022, remaining performance obligations were approximately $13.83 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 73% 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 $624 million and $611 million as of March 4, 2022 and December 3, 2021, respectively.
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 $105 million and $128 million as of March 4, 2022 and December 3, 2021, respectively.
NOTE 3.  ACQUISITIONS
Frame.io
On October 7, 2021, we completed the acquisition of Frame.io, a privately held company that provides a cloud-based video collaboration platform, for approximately $1.24 billion, primarily in cash consideration. The financial results of Frame.io have been included in our condensed consolidated financial statements since the date of the acquisition. Frame.io is reported as part of our Digital Media reportable segment.
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ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
The table below represents the preliminary purchase price allocation to total identifiable intangible assets acquired and net liabilities assumed based on their respective estimated fair values as of October 7, 2021. During the three months ended March 4, 2022, we recorded purchase accounting adjustments that were not material based on changes to management’s estimates and assumptions in regards to the total purchase price and its related impact to goodwill. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date. Fair values associated with the net tax liabilities assumed and their related impact to goodwill were pending finalization as of the reporting date.
(dollars in millions)AmountWeighted Average Useful Life (years)
Purchased technology$331 4
In-process research and development (1)
19 N/A
Trademarks4 3
Customer contracts and relationships3 10
Total identifiable intangible assets357 
Net liabilities assumed(39)N/A
Goodwill (2)
918 N/A
Total purchase price$1,236 
_________________________________________
(1)    Capitalized as purchased technology and considered indefinite lived until completion or abandonment of the associated research and development efforts.
(2)    Non-deductible for tax-purposes.
Workfront
On December 7, 2020, we completed the acquisition of Workfront, a privately held company that provides a workflow platform, for approximately $1.52 billion of cash consideration. The financial results of Workfront have been included in our condensed consolidated financial statements since the date of the acquisition. Workfront is reported as part of our Digital Experience reportable segment.
The table below represents the final purchase price allocation to total identifiable intangible assets acquired and net liabilities assumed based on their estimated fair values as of December 7, 2020 and the associated estimated useful lives at that date.
(dollars in millions)AmountWeighted Average Useful Life (years)
Customer contracts and relationships$290 10
Purchased technology100 3
Backlog40 2
Trademarks30 5
Total identifiable intangible assets460 
Net liabilities assumed(31)N/A
Goodwill (1)
1,095 N/A
Total purchase price$1,524 
_________________________________________
(1)    Non-deductible for tax-purposes.
Pro forma financial information has not been presented for these acquisitions as the impacts to our condensed consolidated financial statements were not material.
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ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
NOTE 4.  CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of highly liquid marketable 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 unrealized non-credit-related losses of marketable debt securities are included in accumulated other comprehensive income, net of taxes, in our condensed consolidated balance sheets. Unrealized credit-related losses are recorded to other income (expense), net in our condensed consolidated statements of income with a corresponding allowance for credit-related losses 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.
Cash, cash equivalents and short-term investments consisted of the following as of March 4, 2022:
(in millions)Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
Current assets:    
Cash$644 $ $ $644 
Cash equivalents:
Corporate debt securities6   6 
Money market funds1,979   1,979 
Time deposits110   110 
Total cash equivalents2,095   2,095 
Total cash and cash equivalents2,739   2,739 
Short-term fixed income securities:
Asset-backed securities130  (1)129 
Corporate debt securities1,408 1 (11)1,398 
Foreign government securities5   5 
Municipal securities33   33 
U.S. Treasury securities402  (5)397 
Total short-term investments1,978 1 (17)1,962 
Total cash, cash equivalents and short-term investments$4,717 $1 $(17)$4,701 
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ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
Cash, cash equivalents and short-term investments consisted of the following as of December 3, 2021:
(in millions)Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
Current assets:    
Cash$750 $ $ $750 
Cash equivalents:  
Corporate debt securities5   5 
Money market funds2,914   2,914 
Time deposits175   175 
Total cash equivalents3,094   3,094 
Total cash and cash equivalents3,844   3,844 
Short-term fixed income securities: 
Asset-backed securities124   124 
Corporate debt securities1,426 2 (3)1,425 
Municipal securities28   28 
U.S. Treasury securities378  (1)377 
Total short-term investments1,956 2 (4)1,954 
Total cash, cash equivalents and short-term investments$5,800 $2 $(4)$5,798 

See Note 5 for further information regarding the fair value of our financial instruments.
The following table summarizes the estimated fair value of short-term fixed income debt securities classified as short-term investments based on stated effective maturities as of March 4, 2022:
(in millions)Estimated
Fair Value
Due within one year$840 
Due between one and two years678 
Due between two and three years417 
Due after three years27 
Total$1,962 

We review our debt securities classified as short-term investments on a regular basis for impairment. For debt securities in unrealized loss positions, we determine whether any portion of the decline in fair value below the amortized cost basis is due to credit-related factors if we neither intend to sell nor anticipate that it is more likely than not that we will be required to sell prior to recovery of the amortized cost basis. We consider factors such as the extent to which the market value has been less than the cost, any noted failure of the issuer to make scheduled payments, changes to the rating of the security and other relevant credit-related factors in determining whether or not a credit loss exists. During the three months ended March 4, 2022 and March 5, 2021, we did not recognize an allowance for credit-related losses on any of our investments.
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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
The fair value of our financial assets and liabilities at March 4, 2022 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$6 $ $6 $ 
Money market funds1,979 1,979   
Time deposits110 110   
Short-term investments:
Asset-backed securities129  129  
Corporate debt securities1,398  1,398  
Foreign government securities5  5  
Municipal securities33  33  
U.S. Treasury securities397  397  
Prepaid expenses and other current assets:   
Foreign currency derivatives94  94  
Other assets: 
Deferred compensation plan assets160 160   
Total assets$4,311 $2,249 $2,062 $ 
Liabilities:    
Accrued expenses:    
Foreign currency derivatives$15 $ $15 $ 

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ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
The fair value of our financial assets and liabilities at December 3, 2021 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$5 $ $5 $ 
Money market funds 2,914 2,914   
Time deposits175 175   
Short-term investments: 
Asset-backed securities124  124  
Corporate debt securities1,425  1,425  
Municipal securities28  28  
U.S. Treasury securities 377  377  
Prepaid expenses and other current assets:    
Foreign currency derivatives98  98  
Other assets:    
Deferred compensation plan assets151 151   
Total assets$5,297 $3,240 $2,057 $ 
Liabilities:    
Accrued expenses:    
Foreign currency derivatives$8 $ $8 $ 
See Note 4 for further information regarding the fair value of our financial instruments. 
Our fixed income available-for-sale debt securities consist of high quality, investment grade securities from diverse issuers with a weighted average credit rating of AA-. We value these securities based on pricing from independent pricing vendors who use matrix pricing valuation techniques including market approach methodologies that model information generated by market transactions involving identical or comparable assets, as well as discounted cash flow methodologies. Inputs include quoted prices in active markets for identical assets or inputs other than quoted prices that are observable either directly or indirectly in determining fair value, including benchmark yields, issuer spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. We therefore classify all of our fixed income available-for-sale securities as Level 2. We perform routine procedures such as comparing prices obtained from multiple independent sources to ensure that appropriate fair values are recorded.
The fair values of our money market funds, time deposits and deferred compensation plan assets, which consist of money market and other mutual funds, are based on quoted prices in active markets at the measurement date.
Our over-the-counter foreign currency derivatives are valued using pricing models and discounted cash flow methodologies based on observable foreign exchange and interest rate data at the measurement date.
Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The fair value of our senior notes was $4.15 billion as of March 4, 2022, based on observable market prices in less active markets and categorized as Level 2. See Note 14 for further details regarding our debt.
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ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
NOTE 6.  DERIVATIVE FINANCIAL INSTRUMENTS
We may use derivatives to partially offset our business exposure to foreign currency and interest rate risk on expected future cash flows and certain existing assets and liabilities. We do not use any of our derivative instruments for trading purposes.
We enter into master netting arrangements to mitigate credit risk in derivative transactions by permitting net settlement of transactions with the same counterparty. We do not offset fair value amounts recognized for derivative instruments under master netting arrangements. We also enter into collateral security agreements with certain of our counterparties to exchange cash collateral when the net fair value of certain derivative instruments fluctuates from contractually established thresholds. Collateral posted is included in prepaid expenses and other current assets and collateral received is included in accrued expenses on our condensed consolidated balance sheets.
Cash Flow Hedges
In countries outside the United States, we transact business in U.S. Dollars and in various other currencies. We may use foreign exchange option contracts or forward contracts to hedge a portion of our forecasted foreign currency denominated revenue. These foreign exchange contracts, carried at fair value, have maturities of up to 12 months.
In June 2019, we entered into Treasury lock agreements with large financial institutions which fixed benchmark U.S. Treasury rates for an aggregate notional amount of $1 billion of our future debt issuance. These derivative instruments hedged the impact of changes in the benchmark interest rate to future interest payments and were settled upon debt issuance in the first quarter of fiscal 2020. We incurred a loss related to the settlement of the instruments which is amortized to interest expense over the term of our debt due February 1, 2030. See Note 14 for further details regarding our debt.
As of March 4, 2022, we had net derivative gains on our foreign exchange option contracts expected to be recognized within the next 18 months, of which $63 million of gains are expected to be recognized into revenue within the next 12 months. In addition, we had net derivative losses on our Treasury lock agreements, of which $5 million is expected to be recognized into interest expense within the next 12 months.
Non-Designated Hedges
Our derivatives not designated as hedging instruments consist of foreign currency forward contracts that we primarily use to hedge monetary assets and liabilities denominated in non-functional currencies.