ADBE 10Q Q312
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2012

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

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

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

(408) 536-6000
(Registrant’s telephone number, including area code)
 _________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller
reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x
The number of shares outstanding of the registrant’s common stock as of September 21, 2012 was 495,054,621.
 



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

PART I—FINANCIAL INFORMATION
 
Item 1.

 

 

 

 

Item 2.

Item 3.

Item 4.
 
 
 
 

 PART II—OTHER INFORMATION
 
Item 1.

Item 1A.

Item 2.

Item 6.






 

2

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
 
August 31,
2012
 
December 2,
2011
 
(Unaudited)
 
(*)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,162,380

 
$
989,500

Short-term investments
2,084,983

 
1,922,192

   Trade receivables, net of allowances for doubtful accounts of $14,516 and $15,080, respectively
566,671

 
634,373

Deferred income taxes
57,024

 
91,963

Prepaid expenses and other current assets
139,115

 
133,423

Total current assets
4,010,173

 
3,771,451

Property and equipment, net
619,392

 
527,828

Goodwill
4,126,548

 
3,849,217

Purchased and other intangibles, net
576,948

 
545,526

Investment in lease receivable
207,239

 
207,239

Other assets
89,713

 
89,922

Total assets
$
9,630,013

 
$
8,991,183

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 

 
 

Trade payables
$
58,446

 
$
86,660

Accrued expenses
547,812

 
554,941

Capital lease obligations
11,093

 
9,212

Accrued restructuring
14,803

 
80,930

Income taxes payable
31,910

 
42,634

Deferred revenue
505,646

 
476,402

Total current liabilities
1,169,710

 
1,250,779

Long-term liabilities:
 

 
 

Debt and capital lease obligations
1,499,881

 
1,505,096

Deferred revenue
54,687

 
55,303

Accrued restructuring
12,706

 
7,449

Income taxes payable
151,946

 
156,958

Deferred income taxes
253,626

 
181,602

Other liabilities
48,764

 
50,883

Total liabilities
3,191,320

 
3,208,070

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; 
   494,732 and 491,540 shares outstanding, respectively
61

 
61

Additional paid-in-capital
2,961,799

 
2,753,896

Retained earnings
6,815,375

 
6,528,735

Accumulated other comprehensive income
22,511

 
29,950

Treasury stock, at cost (106,102 and 109,294 shares, respectively), net of reissuances
(3,361,053
)
 
(3,529,529
)
Total stockholders’ equity
6,438,693

 
5,783,113

Total liabilities and stockholders’ equity
$
9,630,013

 
$
8,991,183

_________________________________________ 
(*)
The Condensed Consolidated Balance Sheet as of December 2, 2011 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 SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
August 31,
2012
 
September 2,
2011
 
August 31,
2012
 
September 2,
2011
Revenue:
 
 
 
 
 
 
 
Products
$
810,457

 
$
811,920

 
$
2,490,000

 
$
2,484,588

Subscription
172,920

 
114,555

 
478,669

 
330,197

Services and support
97,203

 
86,737

 
281,580

 
249,312

Total revenue
1,080,580

 
1,013,212

 
3,250,249

 
3,064,097

 
Cost of revenue:
 

 
 
 
 
 
 
Products
27,234

 
26,209

 
92,976

 
91,592

Subscription
56,191

 
47,492

 
159,794

 
142,699

Services and support
36,196

 
30,953

 
106,034

 
87,203

Total cost of revenue
119,621

 
104,654

 
358,804

 
321,494

 
Gross profit
960,959

 
908,558

 
2,891,445

 
2,742,603

 
Operating expenses:
 

 
 
 
 
 
 
Research and development
189,145

 
181,039

 
547,776

 
542,650

Sales and marketing
368,556

 
340,724

 
1,113,978

 
1,017,492

General and administrative
110,249

 
98,493

 
323,533

 
295,019

Restructuring charges
2,374

 
3,816

 
(2,642
)
 
3,271

Amortization of purchased intangibles
12,331

 
10,376

 
36,374

 
31,003

Total operating expenses
682,655

 
634,448

 
2,019,019

 
1,889,435

 
Operating income
278,304

 
274,110

 
872,426

 
853,168

 
Non-operating income (expense):
 

 
 
 
 
 
 
Interest and other income (expense), net
1,217

 
33

 
(2,696
)
 
(1,623
)
Interest expense
(17,253
)
 
(16,431
)
 
(50,720
)
 
(50,178
)
Investment gains (losses), net
944

 
(993
)
 
9,153

 
683

Total non-operating income (expense), net
(15,092
)
 
(17,391
)
 
(44,263
)
 
(51,118
)
Income before income taxes
263,212

 
256,719

 
828,163

 
802,050

Provision for income taxes
61,855

 
61,618

 
217,721

 
142,922

Net income
$
201,357

 
$
195,101

 
$
610,442

 
$
659,128

Basic net income per share
$
0.41

 
$
0.39

 
$
1.23

 
$
1.32

Shares used to compute basic net income per share
494,051

 
494,537

 
494,672

 
499,451

Diluted net income per share
$
0.40

 
$
0.39

 
$
1.22

 
$
1.30

Shares used to compute diluted net income per share
499,757

 
498,741

 
502,167

 
506,334



  See accompanying Notes to Condensed Consolidated Financial Statements.


4

Table of Contents

ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
 
August 31,
2012
 
September 2,
2011
Cash flows from operating activities:
 
 
 
Net income
$
610,442

 
$
659,128

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

 
 
Depreciation, amortization and accretion
221,145

 
196,915

Stock-based compensation
222,649

 
210,969

Deferred income taxes
82,213

 
50,716

Unrealized (gains) losses on investments
(8,254
)
 
1,462

Other non-cash items
(22,984
)
 
17,109

Excess tax benefits from stock-based compensation
(6,526
)
 
(9,096
)
Changes in operating assets and liabilities, net of acquired assets and assumed
      liabilities:
 
 
 
Trade receivables, net
95,735

 
(8,322
)
Prepaid expenses and other current assets
(17,630
)
 
(4,100
)
Trade payables
(54,187
)
 
12,347

Accrued expenses
(51,460
)
 
(119,185
)
Accrued restructuring
(60,000
)
 
(1,859
)
Income taxes payable
(13,330
)
 
(13,233
)
Deferred revenue
28,108

 
53,710

Net cash provided by operating activities
1,025,921

 
1,046,561

Cash flows from investing activities:
 

 
 

Purchases of short-term investments
(1,347,568
)
 
(1,620,985
)
Maturities of short-term investments
376,025

 
345,701

Proceeds from sales of short-term investments
795,072

 
1,029,581

Acquisitions, net of cash acquired
(353,195
)
 
(107,121
)
Purchases of property and equipment
(189,287
)
 
(135,397
)
Purchases of long-term investments and other assets
(15,051
)
 
(13,914
)
Proceeds from sale of long-term investments
28,817

 
4,413

Net cash used for investing activities
(705,187
)
 
(497,722
)
Cash flows from financing activities:
 

 
 

Purchases of treasury stock
(305,000
)
 
(695,015
)
Proceeds from issuance of treasury stock
150,185

 
143,563

Excess tax benefits from stock-based compensation
6,526

 
9,096

Repayment of debt and capital lease obligations
(6,870
)
 
(7,803
)
Proceeds from debt and capital lease obligations
3,152

 

Debt issuance costs
(2,297
)
 

Net cash used for financing activities
(154,304
)
 
(550,159
)
Effect of foreign currency exchange rates on cash and cash equivalents
6,450

 
20,641

Net increase in cash and cash equivalents
172,880

 
19,321

Cash and cash equivalents at beginning of period
989,500

 
749,891

Cash and cash equivalents at end of period
$
1,162,380

 
$
769,212

Supplemental disclosures:
 

 
 
Cash paid for income taxes, net of refunds
$
163,722

 
$
97,255

Cash paid for interest
$
65,778

 
$
63,588

Non-cash investing activities:
 
 
 
Issuance of common stock and stock awards assumed in business acquisitions
$
4,265

 
$


See accompanying Notes to Condensed Consolidated Financial Statements.

5

Table of Contents

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 December 2, 2011 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.
Recent Accounting Pronouncements 
There have been no new accounting pronouncements during the nine months ended August 31, 2012, as compared to the recent accounting pronouncements described in our Annual Report, that are of significance, or potential significance, to us.
NOTE 2.  ACQUISITIONS
On January 13, 2012, we completed our acquisition of privately held Efficient Frontier, a multi-channel digital ad buying and optimization company. During the first quarter of fiscal 2012, we began integrating Efficient Frontier into our Digital Marketing reportable segment. The Efficient Frontier business adds cross-channel digital ad campaign forecasting, execution and optimization capabilities to our Adobe Digital Marketing Suite, along with a social marketing engagement platform and social ad buying capabilities. We have included the financial results of Efficient Frontier in our condensed consolidated financial statements beginning on the acquisition date.
Under the acquisition method of accounting, the total preliminary purchase price was allocated to Efficient Frontier’s net tangible and intangible assets based upon their estimated fair values as of January 13, 2012. During the nine months ended August 31, 2012, we made adjustments to the preliminary purchase price allocation. The total adjusted preliminary purchase price for Efficient Frontier was approximately $374.7 million of which approximately $289.6 million was allocated to goodwill, $122.7 million to identifiable intangible assets and $37.6 million to net liabilities assumed. The impact of this acquisition was not material to our condensed consolidated financial statements.
During fiscal 2011, we completed six business combinations with aggregate purchase prices totaling approximately $281.0 million of which approximately $213.3 million was allocated to goodwill, $87.5 million to identifiable intangible assets and $19.8 million to net liabilities assumed. We also completed two asset acquisitions with aggregate purchase prices totaling $47.3 million. We have included the financial results of the business combinations in our consolidated results of operations beginning on the acquisition dates, however the impact of these acquisitions were not material to our condensed consolidated financial statements.
NOTE 3.  CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase. We classify all of our cash equivalents and short-term investments as “available-for-sale.” In general, these investments are free of trading restrictions. We carry these investments at fair value, based on quoted market prices or other readily available market information. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our Condensed Consolidated Balance Sheets. Gains and losses are recognized when realized in our Condensed Consolidated Statements of Income. When we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in income. Gains and losses are determined using the specific identification method.

6

Table of Contents

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Cash, cash equivalents and short-term investments consisted of the following as of August 31, 2012 (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
273,293

 
$

 
$

 
$
273,293

Cash equivalents:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
5,749

 

 

 
5,749

Money market mutual funds and repurchase agreements
827,921

 

 

 
827,921

Time deposits
55,417

 

 

 
55,417

Total cash equivalents
889,087

 

 

 
889,087

Total cash and cash equivalents
1,162,380

 

 

 
1,162,380

Short-term fixed income securities:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
1,069,107

 
11,920

 
(123
)
 
1,080,904

Foreign government securities
8,063

 
48

 

 
8,111

Municipal securities
148,984

 
136

 
(8
)
 
149,112

U.S. agency securities
494,630

 
2,585

 
(26
)
 
497,189

U.S. Treasury securities
348,467

 
966

 
(15
)
 
349,418

Subtotal
2,069,251

 
15,655

 
(172
)
 
2,084,734

Marketable equity securities
249

 

 

 
249

Total short-term investments
2,069,500

 
15,655

 
(172
)
 
2,084,983

Total cash, cash equivalents and short-term investments
$
3,231,880

 
$
15,655

 
$
(172
)
 
$
3,247,363



7

Table of Contents

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Cash, cash equivalents and short-term investments consisted of the following as of December 2, 2011 (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
261,206

 
$

 
$

 
$
261,206

Cash equivalents:
 

 
 
 
 
 
 

Corporate bonds and commercial paper
15,948

 

 

 
15,948

Money market mutual funds and repurchase agreements
687,152

 

 

 
687,152

Time deposits
15,694

 

 

 
15,694

U.S. agency securities
2,500

 

 

 
2,500

U.S. Treasury securities
7,000

 

 

 
7,000

Total cash equivalents
728,294

 

 

 
728,294

Total cash and cash equivalents
989,500

 

 

 
989,500

Short-term fixed income securities:
 
 
 
 
 
 
 

Corporate bonds and commercial paper
1,109,674

 
6,533

 
(4,670
)
 
1,111,537

Foreign government securities
7,280

 
43

 

 
7,323

Municipal securities
106,255

 
104

 
(4
)
 
106,355

U.S. agency securities
374,514

 
1,496

 
(117
)
 
375,893

U.S. Treasury securities
307,181

 
1,640

 
(4
)
 
308,817

Subtotal
1,904,904

 
9,816

 
(4,795
)
 
1,909,925

Marketable equity securities
10,581

 
1,686

 

 
12,267

Total short-term investments
1,915,485

 
11,502

 
(4,795
)
 
1,922,192

Total cash, cash equivalents and short-term investments
$
2,904,985

 
$
11,502

 
$
(4,795
)
 
$
2,911,692


See Note 4 for further information regarding the fair value of our financial instruments.
The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that have been in an unrealized loss position for less than twelve months, as of August 31, 2012 and December 2, 2011 (in thousands):
 
2012
 
2011
 
Fair 
Value
 
Gross
Unrealized
Losses
 
Fair 
Value
 
Gross
Unrealized
Losses
Corporate bonds and commercial paper
$
64,634

 
$
(70
)
 
$
408,178

 
$
(4,438
)
Municipal securities
23,273

 
(8
)
 
17,125

 
(3
)
U.S. Treasury and agency securities
55,658

 
(41
)
 
133,857

 
(121
)
Total
$
143,565

 
$
(119
)
 
$
559,160

 
$
(4,562
)
 
There were 49 securities and 213 securities that were in an unrealized loss position for less than twelve months at August 31, 2012 and at December 2, 2011, respectively.

8

Table of Contents

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 have been in a continuous unrealized loss position for more than twelve months, as of August 31, 2012 and December 2, 2011 (in thousands):
 
2012
 
2011
 
Fair 
Value
 
Gross
Unrealized
Losses
 
Fair 
Value
 
Gross
Unrealized
Losses
Corporate bonds and commercial paper
$
15,189

 
$
(53
)
 
$
22,918

 
$
(232
)
Municipal securities

 

 
2,668

 
(1
)
Total
$
15,189

 
$
(53
)
 
$
25,586

 
$
(233
)
There were 6 securities and 13 securities that were in an unrealized loss position for more than twelve months at August 31, 2012 and at December 2, 2011, 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 August 31, 2012 (in thousands):
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
$
869,849

 
$
871,889

Due between one and two years
422,844

 
427,220

Due between two and three years
566,140

 
571,649

Due after three years
210,418

 
213,976

Total
$
2,069,251

 
$
2,084,734

We review our debt and marketable equity securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. We consider factors such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and our intent to sell, or whether it is more likely than not we will be required to sell, the investment before recovery of the investment’s amortized cost basis. If we believe that an other-than-temporary decline exists in one of these securities, we write down these investments to fair value. For debt securities, the portion of the write-down related to credit loss would be recorded to interest and other income, net in our Condensed Consolidated Statements of Income. Any portion not related to credit loss would be recorded to accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our Condensed Consolidated Balance Sheets. For equity securities, the write-down would be recorded to investment gains (losses), net in our Condensed Consolidated Statements of Income. During the nine months ended August 31, 2012, we did not consider any of our investments to be other-than-temporarily impaired.

9

Table of Contents

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 nine months ended August 31, 2012.
The fair value of our financial assets and liabilities at August 31, 2012 was determined using the following inputs (in thousands):
 
  Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
$
5,749

 
$

 
$
5,749

 
$

Money market mutual funds and repurchase
    agreements
827,921

 
827,921

 

 

Time deposits
55,417

 
55,417

 

 

Short-term investments:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
1,080,904

 

 
1,080,904

 

Foreign government securities
8,111

 

 
8,111

 

Marketable equity securities
249

 
249

 

 

Municipal securities
149,112

 

 
149,112

 

U.S. agency securities
497,189

 

 
497,189

 

U.S. Treasury securities
349,418

 

 
349,418

 

Prepaid expenses and other current assets:
 
 
 

 
 

 
 

Foreign currency derivatives
22,455

 

 
22,455

 

Other assets:
 
 
 

 
 

 
 

Deferred compensation plan assets
14,218

 
403

 
13,815

 

Total assets
$
3,010,743

 
$
883,990

 
$
2,126,753

 
$

Liabilities:
 

 
 

 
 

 
 

Accrued expenses:
 

 
 

 
 

 
 

Foreign currency derivatives
$
1,958

 
$

 
$
1,958

 
$

Total liabilities
$
1,958

 
$

 
$
1,958

 
$



10

Table of Contents

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of our financial assets and liabilities at December 2, 2011 was determined using the following inputs (in thousands): 
 
  Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
$
15,948

 
$

 
$
15,948

 
$

Money market mutual funds and repurchase
    agreements
687,152

 
687,152

 

 

Time deposits
15,694

 
15,694

 

 

U.S. agency securities
2,500

 

 
2,500

 

U.S. Treasury securities
7,000

 

 
7,000

 

Short-term investments:
 

 


 


 


Corporate bonds and commercial paper
1,111,537

 

 
1,111,537

 

Foreign government securities
7,323

 

 
7,323

 

Marketable equity securities
12,267

 
12,267

 

 

Municipal securities
106,355

 

 
106,355

 

U.S. agency securities
375,893

 

 
375,893

 

U.S. Treasury securities 
308,817

 

 
308,817

 

Prepaid expenses and other current assets:
 

 
 

 
 

 
 

Foreign currency derivatives
25,362

 

 
25,362

 

Other assets:
 

 
 

 
 

 
 

Deferred compensation plan assets
12,803

 
523

 
12,280

 

Total assets
$
2,688,651

 
$
715,636

 
$
1,973,015

 
$

Liabilities:
 

 
 

 
 

 
 

Accrued expenses:
 

 
 

 
 

 
 

Foreign currency derivatives
$
3,881

 
$

 
$
3,881

 
$

Total liabilities
$
3,881

 
$

 
$
3,881

 
$


See Note 3 for further information regarding the fair value of our financial instruments. 
Our fixed income available-for-sale securities consist of high quality, investment grade securities from diverse issuers with a minimum credit rating of BBB and a weighted average credit rating of AA-. We value these securities based on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. However, we classify all of our fixed income available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fair value of our financial instruments having Level 2 inputs were derived from pricing models that use non-binding market consensus prices that are corroborated by observable market data or quoted prices for similar instruments. 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.


11

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We have direct investments in privately held companies accounted for under the cost method, which are periodically assessed for other-than-temporary impairment. If we determine that an other-than-temporary impairment has occurred, we write-down the investment to its fair value. We estimate fair value of our cost method investments considering available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. For the three and nine months ended August 31, 2012, we determined there were no material other-than-temporary impairments on our cost method investments.
As of August 31, 2012, the carrying value of our lease receivables approximated fair value, based on Level 2 valuation inputs which include Treasury rates, LIBOR rates and applicable credit spreads. See Note 12 for further details regarding our investment in lease receivables. The fair value of our long-term debt was approximately $1.6 billion as of August 31, 2012, based on Level 2 quoted prices in inactive markets. See Note 13 for further details regarding our debt.
NOTE 5.  DERIVATIVES AND HEDGING ACTIVITIES
In countries outside the U.S., we transact business in U.S. Dollars and in various other currencies. Therefore, we are subject to exposure from movements in foreign currency rates. We may use foreign exchange option contracts or forward contracts to hedge certain operational (“cash flow”) exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, may have maturities between one and twelve months. The maximum original duration of any contract is twelve months. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business and accordingly, they are not speculative in nature.
We recognize derivative instruments from hedging activities as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income in our Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income, net in our Condensed Consolidated Statements of Income at that time.
We also hedge our net recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded to interest and other income (expense), net in our Condensed Consolidated Statements of Income. These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged.
We mitigate concentration of risk related to foreign currency hedges through a policy that establishes counterparty limits. The bank counterparties to these contracts expose us to credit-related losses in the event of their nonperformance. However, to mitigate that risk, we only contract with counterparties who meet our minimum requirements as determined by our counterparty risk assessment process. In addition, our hedging policy establishes maximum limits for each counterparty. We monitor ratings, credit spreads and potential downgrades on at least a quarterly basis. Based on our ongoing assessment of counterparty risk, we will adjust our exposure to various counterparties.
The aggregate fair value of derivative instruments in net asset positions as of August 31, 2012 and December 2, 2011 was $22.5 million and $25.4 million, respectively. These amounts represent the maximum exposure to loss at the reporting date as a result of all of the counterparties failing to perform as contracted. This exposure could be reduced by up to $2.0 million and $3.9 million, respectively, of liabilities included in master netting arrangements with those same counterparties.

12

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of derivative instruments on our Condensed Consolidated Balance Sheets as of August 31, 2012 and December 2, 2011 were as follows (in thousands):
 
2012
 
2011
 
Fair Value
Asset
Derivatives(1)
 
Fair Value
Liability
Derivatives(2)
 
Fair Value
Asset
Derivatives(1)
 
Fair Value
Liability
Derivatives(2)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange option contracts(3) 
$
11,604

 
$

 
$
19,296

 
$

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 Foreign exchange forward contracts
10,851

 
1,958

 
6,066

 
3,881

Total derivatives
$
22,455

 
$
1,958

 
$
25,362

 
$
3,881

_________________________________________ 
(1) 
Included in prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.
(2) 
Included in accrued expenses on our Condensed Consolidated Balance Sheets.
(3) 
Hedging effectiveness expected to be recognized into income within the next twelve months.
 
The effect of derivative instruments designated as cash flow hedges and of derivative instruments not designated as hedges in our Condensed Consolidated Statements of Income for three and nine months ended August 31, 2012 was as follows (in thousands):
 
Three Months
 
Nine Months
 
Foreign
Exchange
Option
Contracts
 
Foreign
Exchange
Forward
Contracts
 
Foreign
Exchange
Option
Contracts
 
Foreign
Exchange
Forward
Contracts
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI, net of tax(1) 
$
(2,621
)
 
$

 
$
20,151

 
$

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

 
$

 
$
28,701

 
$

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

 
$
(21,350
)
 
$

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

 
$
(3,693
)
 
$

 
$
12,880


The effect of derivative instruments designated as cash flow hedges and of derivative instruments not designated as hedges in our Condensed Consolidated Statements of Income for three and nine months ended September 2, 2011 was as follows (in thousands):
 
Three Months
 
Nine Months
 
Foreign
Exchange
Option
Contracts
 
Foreign
Exchange
Forward
Contracts
 
Foreign
Exchange
Option
Contracts
 
Foreign
Exchange
Forward
Contracts
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI, net of tax(1) 
$
1,624

 
$

 
$
1,657

 
$

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

 
$

 
$
184

 
$

Net gain (loss) recognized in income(3) 
$
(4,741
)
 
$

 
$
(19,764
)
 
$

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

 
$
11,112

 
$

 
$
(7,403
)
_________________________________________ 

13

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


(1) 
Net change in the fair value of the effective portion classified in other comprehensive income (“OCI”).
(2) 
Effective portion classified as revenue.
(3) 
Ineffective portion and amount excluded from effectiveness testing classified in interest and other income (expense), net.
(4) 
Classified in interest and other income (expense), net.
NOTE 6.  GOODWILL AND PURCHASED AND OTHER INTANGIBLES
Goodwill as of August 31, 2012 and December 2, 2011 was $4.127 billion and $3.849 billion, respectively. The increase was primarily due to our acquisition of Efficient Frontier and foreign currency translation adjustments. During the second quarter of fiscal 2012, we completed our annual goodwill impairment test associated with our three reporting units - Digital Media, Digital Marketing and Print and Publishing - and determined there was no impairment of goodwill.
Purchased and other intangible assets subject to amortization as of August 31, 2012 and December 2, 2011 were as follows (in thousands): 
 
2012
 
2011
 
Cost
 
Accumulated Amortization
 
Net
 
Cost
 
Accumulated Amortization
 
Net
Purchased technology
$
365,125

 
$
(142,399
)
 
$
222,726

 
$
314,057

 
$
(91,363
)
 
$
222,694

Customer contracts and relationships
$
318,638

 
$
(67,160
)
 
$
251,478

 
$
433,534

 
$
(229,364
)
 
$
204,170

Trademarks
53,356

 
(17,186
)
 
36,170

 
52,734

 
(11,217
)
 
41,517

Acquired rights to use technology
104,603

 
(53,987
)
 
50,616

 
106,865

 
(48,137
)
 
58,728

Localization
8,975

 
(5,489
)
 
3,486

 
9,762

 
(6,591
)
 
3,171

Other intangibles
22,475

 
(10,003
)
 
12,472

 
63,906

 
(48,660
)
 
15,246

Total other intangible assets
$
508,047

 
$
(153,825
)
 
$
354,222

 
$
666,801

 
$
(343,969
)
 
$
322,832

Purchased and other intangible
    assets, net
$
873,172

 
$
(296,224
)
 
$
576,948

 
$
980,858

 
$
(435,332
)
 
$
545,526

 
Amortization expense related to purchased and other intangible assets was $36.1 million and $108.7 million for the three and nine months ended August 31, 2012, respectively. Comparatively, amortization expense was $30.2 million and $97.0 million for the three and nine months ended September 2, 2011, respectively. Of these amounts, $24.0 million and $72.6 million were included in cost of sales for the three and nine months ended August 31, 2012, respectively, and $19.7 million and $65.9 million were included in cost of sales for the three and nine months ended September 2, 2011, respectively.
As of August 31, 2012, we expect amortization expense in future periods to be as follows (in thousands):
Fiscal Year
 
Purchased
Technology
 
Other Intangible
Assets
Remainder of 2012
$
18,782

 
$
18,063

2013
70,209

 
61,286

2014
64,134

 
56,833

2015
49,496

 
50,819

2016
11,509

 
45,189

Thereafter
8,596

 
122,032

Total expected amortization expense
$
222,726

 
$
354,222


14

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 7.  ACCRUED EXPENSES
Accrued expenses as of August 31, 2012 and December 2, 2011 consisted of the following (in thousands):
 
2012
 
2011
Accrued compensation and benefits
$
203,747

 
$
235,500

Sales and marketing allowances 
81,774

 
58,156

Accrued corporate marketing
43,506

 
37,757

Taxes payable
30,117

 
26,732

Royalties payable
11,864

 
18,778

Accrued interest expense
5,406

 
21,010

Other
171,398

 
157,008

Accrued expenses                                                                                         
$
547,812

 
$
554,941


Other primarily includes general corporate accruals for local and regional expenses and technical support. Other is also comprised of deferred rent related to office locations with rent escalations and foreign currency liability derivatives.
NOTE 8.  STOCK-BASED COMPENSATION
There were no option grants during the three months ended August 31, 2012. The assumptions used to value option grants during the three months ended September 31, 2011 and the nine months ended August 31, 2012 and September 2, 2011 were as follows: 
 
Three Months
 
Nine Months
 
2011
 
2012
 
2011
Expected life (in years)
3.9

 
3.9 - 4.2
 
3.8 - 4.2
Volatility
33
%
 
31 - 34%
 
30 - 35%
Risk free interest rate
1.08
%
 
0.54 - 0.71%
 
1.08 - 1.92%

The expected life of employee stock purchase plan (“ESPP”) shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights during the three and nine months ended August 31, 2012 and September 2, 2011 were as follows:
 
Three Months
 
Nine Months
 
2012
 
2011
 
2012
 
2011
Expected life (in years)
0.5 - 2.0
 
0.5 - 2.0
 
0.5 - 2.0
 
0.5 - 2.0
Volatility
30 - 31%
 
30 - 31%
 
 30 - 36%
 
30 - 34%
Risk free interest rate
0.15 - 0.30%
 
0.10 - 0.50%
 
0.06 - 0.30%
 
0.10 - 0.61%
 

15

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Summary of Stock Options 
Option activity for the nine months ended August 31, 2012 and the fiscal year ended December 2, 2011 was as follows (in thousands):
 
2012
 
2011
Beginning outstanding balance
34,802

 
37,075

Granted
57

 
4,507

Exercised
(5,629
)
 
(4,987
)
Cancelled
(4,124
)
 
(2,268
)
Increase due to acquisition
1,104

 
475

Ending outstanding balance
26,210

 
34,802

 
Information regarding stock options outstanding at August 31, 2012 and September 2, 2011 is summarized below:
 
Number of
Shares
(thousands)
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2012
 
 
 
 
 
 
 
Options outstanding
26,210

 
$
31.67

 
3.01
 
$
85.8

Options vested and expected to vest
25,724

 
$
31.75

 
2.95
 
$
83.1

Options exercisable
21,312

 
$
32.91

 
2.46
 
$
52.7

2011
 

 
 

 
 
 
 

Options outstanding
35,692

 
$
31.61

 
3.44
 
$
46.0

Options vested and expected to vest
34,565

 
$
31.65

 
3.36
 
$
44.3

Options exercisable
26,536

 
$
32.42

 
2.73
 
$
27.9

_________________________________________ 
(*) 
The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of August 31, 2012 and September 2, 2011 were $31.27 and $24.15, respectively.
Summary of Employee Stock Purchase Plan Shares
Employees purchased 3.2 million shares at an average price of $23.81 and 3.7 million shares at an average price of $23.48 for the nine months ended August 31, 2012 and September 2, 2011, respectively. The intrinsic value of shares purchased during the nine months ended August 31, 2012 and September 2, 2011 was $22.8 million and $28.9 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.
Summary of Restricted Stock Units
Restricted stock unit activity for the nine months ended August 31, 2012 and the fiscal year ended December 2, 2011 was as follows (in thousands):
 
2012
 
2011
Beginning outstanding balance
16,871

 
13,890

Awarded
9,045

 
8,180

Released
(5,395
)
 
(3,819
)
Forfeited
(1,758
)
 
(1,587
)
Increase due to acquisition
114

 
207

Ending outstanding balance
18,877

 
16,871


16

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 Information regarding restricted stock units outstanding at August 31, 2012 and September 2, 2011 is summarized below:
 
Number of
Shares
(thousands)
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2012
 
 
 
 
 
Restricted stock units outstanding
18,877

 
1.55
 
$
590.3

Restricted stock units vested and expected to vest
16,403

 
1.45
 
$
512.1

2011
 

 
 
 
 

Restricted stock units outstanding
17,353

 
1.53
 
$
419.1

Restricted stock units vested and expected to vest
15,107

 
1.42
 
$
364.4

_________________________________________ 
(*) 
The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of August 31, 2012 and September 2, 2011 were $31.27 and $24.15, respectively. 
Summary of Performance Shares 
Effective January 24, 2012, the Executive Compensation Committee adopted the 2012 Performance Share Program (the “2012 Program”). The purpose of the 2012 Program is to align key management and senior leadership with stockholders’ interests and to retain key employees. The measurement period for the 2012 Program is our fiscal 2012 year. Members of our executive management and other key senior management are participating in the 2012 Program. Awards granted under the 2012 Program are granted in the form of performance shares pursuant to the terms of our 2003 Equity Incentive Plan. If pre-determined Adobe specific and/or market-based performance goals are met, shares of stock will be granted to the recipient, with one third vesting on the later of the date of certification of achievement or the first anniversary date of the grant, and the remaining two thirds vesting evenly on the following two anniversaries of the grant, contingent upon the recipient’s continued service to Adobe. Participants in the 2012 Program generally have the ability to receive up to 150% of the target number of shares originally granted.
The following table sets forth the summary of performance share activity under our 2012 Program for the nine months ended August 31, 2012 (in thousands): 
 
Shares
Granted
 
Maximum
Shares Eligible
to Receive
Beginning outstanding balance

 

Awarded
1,125

 
1,652

Forfeited
(17
)
 
(26
)
Ending outstanding balance
1,108

 
1,626


In the first quarter of fiscal 2012, the Executive Compensation Committee certified the actual performance achievement of participants in the 2011 Performance Share Program (the “2011 Program”). Based upon the achievement of goals outlined in the 2011 Program, participants had the ability to receive up to 150% of the target number of shares originally granted. Actual performance resulted in participants achieving 130% of target or approximately 0.5 million shares for the 2011 Program. One third of the shares under the 2011 Program vested in the first quarter of fiscal 2012 and the remaining two thirds vest evenly on the following two anniversaries of the grant, contingent upon the recipient's continued service to Adobe.


17

Table of Contents

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table sets forth the summary of performance share activity under our 2007, 2008, 2010 and 2011 programs, based upon share awards actually achieved, for the nine months ended August 31, 2012 and the fiscal year ended December 2, 2011 (in thousands):
 
2012
 
2011
Beginning outstanding balance
405

 
557

Achieved
492

 
337

Released
(464
)
 
(436
)
Forfeited
(2
)
 
(53
)
Ending outstanding balance
431

 
405

 
The performance metrics under the 2009 Performance Share Program were not achieved and therefore no shares were awarded.
Information regarding performance shares outstanding at August 31, 2012 and September 2, 2011 is summarized below: 
 
Number of
Shares
(thousands)
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2012
 
 
 
 
 
Performance shares outstanding
431

 
0.79
 
$
13.5

Performance shares vested and expected to vest
401

 
0.76
 
$
12.5

2011
 

 
 
 
 

Performance shares outstanding
427

 
0.66
 
$
10.3

Performance shares vested and expected to vest
402

 
0.64
 
$
9.5

_________________________________________ 
(*) 
The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of August 31, 2012 and September 2, 2011 were $31.27 and $24.15, respectively.     
Compensation Costs
As of August 31, 2012, there was $511.3 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 2.4 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the three months ended August 31, 2012 and September 2, 2011 were as follows (in thousands):
 
 
2012
 
2011
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
$
769

 
$
837

 
$
235

 
$
355

Cost of revenue—services and support
1,147

 
2,167

 
1,215

 
2,115

Research and development
7,340

 
22,536

 
7,143

 
16,732

Sales and marketing
8,639

 
20,194

 
7,916

 
16,628

General and administrative
4,001

 
12,039

 
4,376

 
8,403

Total
$
21,896

 
$
57,773

 
$
20,885

 
$
44,233


18

Table of Contents

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the nine months ended August 31, 2012 and September 2, 2011 were as follows (in thousands):
 
 
2012
 
2011
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
$
2,212

 
$
2,154

 
$
659

 
$
1,043

Cost of revenue—services and support
2,965

 
6,610

 
3,574

 
6,489

Research and development
18,756

 
60,905

 
20,921

 
56,754

Sales and marketing
23,806

 
56,483

 
23,800

 
53,660

General and administrative
12,491

 
36,267

 
15,581

 
28,488

Total
$
60,230

 
$
162,419

 
$
64,535

 
$
146,434

NOTE 9.  RESTRUCTURING CHARGES
Fiscal 2011 Restructuring Plan
In the fourth quarter of fiscal 2011, we initiated a restructuring plan consisting of reductions in workforce and the consolidation of facilities in order to better align our resources around our Digital Media and Digital Marketing strategies.
During the nine months ended August 31, 2012, we continued to implement restructuring activities under this plan. We vacated approximately 64,000 square feet of sales and/or research and development facilities in Canada, the Czech Republic, Germany, Ireland, Israel and the United Kingdom. We accrued $11.1 million for the fair value of our future contractual obligations under those operating leases as of the dates we ceased to use the leased properties using our estimated credit-adjusted risk-free interest rates ranging from approximately 1% to 4%. This amount is net of the fair value of future estimated sublease income of approximately $3.4 million. Total costs incurred for termination benefits through the third quarter of fiscal 2012 was $56.7 million which includes favorable adjustments of $21.9 million arising from revisions to severance cost estimates that were made in connection with the fourth quarter fiscal 2011 restructuring plan. Total costs incurred to date and expected to be incurred for closing redundant facilities are $14.9 million as all facilities under this plan have been exited as of August 31, 2012.
Other Restructuring Plans
Other restructuring plans include other Adobe plans and other plans associated with certain of our acquisitions that are substantially complete. We continue to make cash outlays to settle obligations under these plans, however the current impact to our condensed consolidated financial statements is not significant. As of August 31, 2012, the total remaining balance under our other restructuring plans was $1.7 million for termination benefits and $11.5 million for closing redundant facilities, of which approximately $8.4 million relates to our Fiscal 2009 Restructuring Plan. Our other restructuring plans primarily consist of the following:
Fiscal 2009 Restructuring Plan—In the fourth quarter of fiscal 2009, in order to appropriately align our costs in connection with our fiscal 2010 operating plan, we initiated a restructuring plan consisting of reductions in workforce and the consolidation of facilities. The restructuring activities related to this program affected only those employees and facilities that were associated with Adobe prior to the acquisition of Omniture, Inc. (“Omniture”) on October 23, 2009.
Omniture Restructuring Plan—We completed our acquisition of Omniture on October 23, 2009. In the fourth quarter of fiscal 2009, we initiated a plan to restructure the pre-merger operations of Omniture to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure.
Fiscal 2008 Restructuring Plan—In the fourth quarter of fiscal 2008, we initiated a restructuring program consisting of reductions in workforce and the consolidation of facilities, in order to reduce our operating costs and focus our resources on key strategic priorities.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


Summary of Restructuring Plans
The following table sets forth a summary of restructuring activities related to all of our restructuring plans described above during the nine months ended August 31, 2012 (in thousands):
 
December 2,
2011
 
Costs
Incurred
 
Cash
Payments
 
Other
Adjustments*
 
August 31,
2012
Fiscal 2011 Restructuring Plan:
 
 
 
 
 
 
 
 
 
Termination benefits
$
72,817

 
$

 
$
(47,273
)
 
$
(22,180
)
 
$
3,364

Cost of closing redundant facilities
2,995

 
11,097

 
(3,723
)
 
551

 
10,920

Other Restructuring Plans:
 
 
 
 
 
 
 
 
 
Termination benefits
1,548

 
810

 
(529
)
 
(143
)
 
1,686

Cost of closing redundant facilities
11,019

 
4,475

 
(5,833
)
 
1,878

 
11,539

Total restructuring plans
$
88,379

 
$
16,382

 
$
(57,358
)
 
$
(19,894
)
 
$
27,509

_________________________________________ 
(*) 
Included in Other Adjustments are foreign currency translation adjustments and Goodwill adjustments of $0.5 million and $0.4 million, respectively.
Accrued restructuring charges of approximately $27.5 million as of August 31, 2012 includes $14.8 million recorded in accrued restructuring, current and $12.7 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 2013 and facilities-related liabilities under contract through fiscal 2021.
NOTE 10.  STOCKHOLDERS’ EQUITY
Retained Earnings
The changes in retained earnings for the nine months ended August 31, 2012 were as follows (in thousands): 
Balance as of December 2, 2011
$
6,528,735

Net income
610,442

Re-issuance of treasury stock
(323,802
)
Balance as of June 1, 2012
$
6,815,375

We account for treasury stock under the cost method. When treasury stock is re-issued at a price higher than its cost, the difference is recorded as a component of additional paid-in-capital in our Condensed Consolidated Balance Sheets. When treasury stock is re-issued at a price lower than its cost, the difference is recorded as a component of additional paid-in-capital to the extent that there are gains to offset the losses. If there are no treasury stock gains in additional paid-in-capital, the losses upon re-issuance of treasury stock are recorded as a component of retained earnings in our Condensed Consolidated Balance Sheets.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Comprehensive Income
The following table sets forth the activity for each component of comprehensive income, net of related taxes, for the three and nine months ended August 31, 2012 and September 2, 2011 (in thousands):
 
Three Months
 
Nine Months
 
2012
 
2011
 
2012
 
2011
 
Increase/(Decrease)
 
Increase/(Decrease)
Net income
$
201,357

 
$
195,101

 
$
610,442

 
$
659,128

Other comprehensive income:
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gains / losses on available-for-sale securities
5,688

 
(3,256
)
 
11,255

 
2,589

Reclassification adjustment for gains on available-for-sale
    securities recognized during the period
(897
)
 
(428
)
 
(1,807
)
 
(1,602
)
Subtotal available-for-sale securities
4,791

 
(3,684
)
 
9,448

 
987

Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Unrealized gains on derivative instruments
(2,621
)
 
1,624

 
20,151

 
1,657

Reclassification adjustment for gains on derivative
    instruments recognized during the period
(7,692
)
 

 
(28,701
)
 
(184
)
Subtotal derivatives designated as hedging
     instruments
(10,313
)
 
1,624

 
(8,550
)
 
1,473

Foreign currency translation adjustments
7,417

 
6,912

 
(8,337
)
 
39,306

Other comprehensive income
1,895

 
4,852

 
(7,439
)
 
41,766

Total comprehensive income, net of taxes
$
203,252

 
$
199,953

 
$
603,003

 
$
700,894

The following table sets forth the components of accumulated other comprehensive income, net of related taxes, as of August 31, 2012 and December 2, 2011 (in thousands):
 
2012
 
2011
Net unrealized gains on available-for-sale securities:
 
 
 
Unrealized gains on available-for-sale securities
$
15,635

 
$
10,810

Unrealized losses on available-for-sale securities
(171
)
 
(4,794
)
Total net unrealized gains on available-for-sale securities
15,464

 
6,016

Net unrealized gains on derivative instruments designated as hedging instruments
4,804

 
13,354

Cumulative foreign currency translation adjustments
2,243

 
10,580

Total accumulated other comprehensive income, net of taxes
$
22,511

 
$
29,950

Stock Repurchase Program 
To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we repurchase shares in the open market and also enter into structured repurchase agreements with third parties.
During the nine months ended August 31, 2012 and September 2, 2011, we entered into structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments of $305.0 million and $695.0 million, respectively. With these structured stock repurchase agreements entered into during the nine months ended August 31, 2012, we have exhausted our $1.6 billion authority granted by our Board of Directors in fiscal 2010. We enter into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our common stock over a specified period of time. We only enter into such transactions when the discount that we receive is higher than the foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.
The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval and the average VWAP of our stock during the interval less the agreed upon discount. During the nine months ended August 31, 2012, we repurchased approximately 9.5 million shares at an average price of $32.17 through structured repurchase agreements entered into during the nine months ended August 31, 2012. During the nine months ended September 2, 2011, we repurchased approximately 19.8 million shares at an average price of $32.48 through structured repurchase agreements entered into during the nine months ended September 2, 2011.
As of August 31, 2012 and December 2, 2011, the prepayments were classified as treasury stock on our Condensed Consolidated Balance Sheets at the payment date, though only shares physically delivered to us by the financial statement date were excluded from the computation of earnings per share. As of August 31, 2012 and December 2, 2011, no prepayments remained under these agreements.
In April 2012, the Board of Directors approved a new stock repurchase program granting the company authority to repurchase up to $2.0 billion in common stock through the end of fiscal 2015. The new stock repurchase program approved by our Board of Directors is similar to our previous $1.6 billion stock repurchase program. As of August 31, 2012, we had not entered into any stock repurchase agreements under the new authority.
Subsequent to August 31, 2012, as part of our $2.0 billion stock repurchase program, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $100.0 million. This amount will be classified as treasury stock on our Condensed Consolidated Balance Sheets. Upon completion of the $100.0 million stock repurchase agreement, $1.9 billion remains under our current authority. See Note 16 for further discussion of our stock repurchase program.

NOTE 11.  NET INCOME PER SHARE
 
The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended August 31, 2012 and September 2, 2011 (in thousands, except per share data):
 
Three Months
 
Nine Months
 
2012
 
2011
 
2012
 
2011
Net income
$
201,357

 
$
195,101

 
$
610,442

 
$
659,128

Shares used to compute basic net income per share
494,051

 
494,537

 
494,672

 
499,451

Dilutive potential common shares:
 
 
 
 
 
 
 
Unvested restricted stock and performance share awards
3,464

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