form_10q.htm
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 5, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File Number: 0-15175
ADOBE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
_________________________
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Delaware
(State or other jurisdiction of
incorporation or organization)
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77-0019522
(I.R.S. Employer
Identification No.)
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345 Park Avenue, San Jose, California 95110-2704
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(Address of principal executive offices and zip code)
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(Registrant’s telephone number, including area code)
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_________________________
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller
reporting company)
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Smaller reporting company o
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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 April 2, 2010 was 526,422,951.
FORM 10-Q
TABLE OF CONTENTS
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Page No.
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PART I—FINANCIAL INFORMATION
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Item 1.
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3
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3
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4
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5
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6
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Item 2.
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31
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Item 3.
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45
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Item 4.
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46
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PART II—OTHER INFORMATION
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Item 1.
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46
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Item 1A.
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46
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Item 2.
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57
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Item 6.
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58
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68
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69
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
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March 5,
2010
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November 27,
2009
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ASSETS
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Current assets:
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Cash and cash equivalents
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$ |
1,589,442 |
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$ |
999,487 |
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Short-term investments
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1,082,942 |
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904,986 |
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Trade receivables, net of allowances for doubtful accounts of $14,602 and $15,225, respectively
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350,577 |
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410,879 |
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Deferred income taxes
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67,265 |
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77,417 |
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Prepaid expenses and other current assets
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86,993 |
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80,855 |
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Total current assets
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3,177,219 |
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2,473,624 |
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Property and equipment, net
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386,205 |
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388,132 |
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Goodwill
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3,494,073 |
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3,494,589 |
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Purchased and other intangibles, net
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487,605 |
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527,388 |
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Investment in lease receivable
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207,239 |
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207,239 |
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Other assets
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192,728 |
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191,265 |
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Total assets
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$ |
7,945,069 |
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$ |
7,282,237 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Trade payables
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$ |
44,188 |
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$ |
58,904 |
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Accrued expenses
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364,437 |
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419,646 |
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Accrued restructuring
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19,773 |
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37,793 |
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Income taxes payable
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151,841 |
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46,634 |
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Deferred revenue
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320,535 |
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281,576 |
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Total current liabilities
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900,774 |
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844,553 |
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Long-term liabilities:
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Debt
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1,493,546 |
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1,000,000 |
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Deferred revenue
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39,208 |
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36,717 |
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Accrued restructuring
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6,104 |
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6,921 |
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Income taxes payable
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224,273 |
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223,528 |
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Deferred income taxes
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79,670 |
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252,486 |
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Other liabilities
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30,074 |
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27,464 |
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Total liabilities
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2,773,649 |
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2,391,669 |
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Stockholders’ equity:
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Preferred stock, $0.0001 par value; 2,000 shares authorized, none issued
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— |
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— |
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Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 525,782 and 522,657 shares outstanding, respectively
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61 |
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61 |
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Additional paid-in-capital
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2,339,965 |
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2,390,061 |
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Retained earnings
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5,427,068 |
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5,299,914 |
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Accumulated other comprehensive income
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29,109 |
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24,446 |
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Treasury stock, at cost (75,052 and 78,177 shares, respectively), net of reissuances
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(2,624,783 |
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(2,823,914 |
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Total stockholders’ equity
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5,171,420 |
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4,890,568 |
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Total liabilities and stockholders’ equity
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$ |
7,945,069 |
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$ |
7,282,237 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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March 5,
2010
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February 27,
2009
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Revenue:
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Products
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$ |
703,938 |
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$ |
729,861 |
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Subscription
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95,507 |
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12,338 |
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Services and support
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59,255 |
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44,191 |
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Total revenue
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858,700 |
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786,390 |
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Cost of revenue:
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Products
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23,510 |
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51,435 |
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Subscription
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45,735 |
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7,483 |
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Services and support
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20,123 |
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18,435 |
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Total cost of revenue
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89,368 |
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77,353 |
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Gross profit
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769,332 |
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709,037 |
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Operating expenses:
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Research and development
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174,340 |
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149,917 |
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Sales and marketing
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297,294 |
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249,491 |
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General and administrative
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91,046 |
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74,051 |
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Restructuring charges
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11,622 |
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12,270 |
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Amortization of purchased intangibles
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18,197 |
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15,392 |
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Total operating expenses
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592,499 |
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501,121 |
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Operating income
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176,833 |
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207,916 |
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Non-operating income (expense):
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Interest and other income, net
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611 |
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13,284 |
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Interest expense
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(7,695 |
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(792 |
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Investment gains (losses), net
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(3,534 |
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(17,246 |
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Total non-operating income (expense), net
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(10,618 |
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(4,754 |
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Income before income taxes
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166,215 |
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203,162 |
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Provision for income taxes
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39,061 |
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46,727 |
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Net income
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$ |
127,154 |
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$ |
156,435 |
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Basic net income per share
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$ |
0.24 |
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$ |
0.30 |
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Shares used in computing basic net income per share
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524,173 |
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524,268 |
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Diluted net income per share
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$ |
0.24 |
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$ |
0.30 |
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Shares used in computing diluted net income per share
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532,645 |
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527,830 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended |
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March 5,
2010
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February 27,
2009
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Cash flows from operating activities:
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Net income
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$ |
127,154 |
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$ |
156,435 |
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation, amortization and accretion
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68,581 |
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68,740 |
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Stock-based compensation
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64,480 |
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45,618 |
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Deferred income taxes
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(157,932 |
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26,518 |
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Unrealized losses on investments
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2,331 |
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15,784 |
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Retirements of property and equipment
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130 |
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3,157 |
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Tax benefit from employee stock option plans
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35,609 |
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2,711 |
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Provision for losses on trade receivables
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816 |
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2,701 |
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Other non-cash items
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5,025 |
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1,567 |
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Excess tax benefits from stock-based compensation
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(7,058 |
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(84 |
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Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
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Trade receivables, net
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59,601 |
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164,484 |
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Prepaid expenses and other current assets
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4,180 |
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7,859 |
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Trade payables
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(14,716 |
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(14,424 |
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Accrued expenses
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(59,008 |
) |
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(53,098 |
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Accrued restructuring
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(18,716 |
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(16,656 |
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Income taxes payable
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106,740 |
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4,465 |
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Deferred revenue
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42,586 |
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(50,034 |
) |
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Net cash provided by operating activities
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259,803 |
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365,743 |
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Cash flows from investing activities:
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Purchases of short-term investments
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(400,054 |
) |
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(435,171 |
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Maturities of short-term investments
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140,611 |
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137,900 |
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Proceeds from sales of short-term investments
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78,958 |
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189,432 |
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Purchases of property and equipment
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(25,547 |
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(15,916 |
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Purchases of long-term investments and other assets
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(5,747 |
) |
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(9,201 |
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Proceeds from sale of long-term investments
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|
719 |
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1,394 |
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Other
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2,341 |
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— |
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Net cash used for investing activities
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(208,719 |
) |
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(131,562 |
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Cash flows from financing activities:
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Purchases of treasury stock
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(20 |
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(13 |
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Proceeds from issuance of treasury stock
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49,824 |
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28,604 |
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Excess tax benefits from stock-based compensation
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|
7,058 |
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84 |
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Proceeds from debt
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1,493,439 |
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— |
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Repayment of debt
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(1,000,000 |
) |
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— |
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Debt issuance costs
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(10,142 |
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— |
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Net cash provided by financing activities
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540,159 |
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28,675 |
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Effect of foreign currency exchange rates on cash and cash equivalents
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(1,288 |
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(381 |
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Net increase in cash and cash equivalents
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589,955 |
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|
262,475 |
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Cash and cash equivalents at beginning of period
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|
999,487 |
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|
886,450 |
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Cash and cash equivalents at end of period
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$ |
1,589,442 |
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$ |
1,148,925 |
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Supplemental disclosures:
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Cash paid for income taxes, net of refunds
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$ |
54,664 |
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$ |
4,631 |
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Cash paid for interest
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$ |
2,617 |
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$ |
892 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We have prepared the accompanying unaudited Condensed Consolidated Financial Statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended November 27, 2009 on file with the SEC. Our first quarter fiscal 2010 financial results benefitted from an extra week in the quarter due to our 52/53 week financial calendar whereby fiscal 2010 is a 53-week year compared with fiscal 2009 which was a 52-week year.
With the exception of the adoption of an accounting pronouncement related to revenue recognition, discussed below, there have been no material changes to our significant accounting policies, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended November 27, 2009.
Recent Accounting Pronouncements
There have also been no new recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 5, 2010, with the exception of those discussed below, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended November 27, 2009, that are of significance, or potential significance, to us.
Revenue Recognition
In October 2009, the FASB amended the accounting standards for certain multiple deliverable revenue arrangements to:
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provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;
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·
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require an entity to allocate revenue in an arrangement using the best estimated selling price (“BESP”) of deliverables if a vendor does not have vendor-specific objective evidence (“VSOE”) of selling price or third-party evidence (“TPE”) of selling price; and
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·
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eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.
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We elected to early adopt this accounting guidance at the beginning of our first quarter of fiscal 2010 on a prospective basis for applicable transactions originating or materially modified after November 27, 2009.
Multiple Element Arrangements
We enter into multiple element revenue arrangements in which a customer may purchase a combination of software, upgrades, hosting services, maintenance and support, and consulting.
For multiple element arrangements that contain non-software related elements, for example our software as a service (“SaaS”) offerings, we allocate revenue to each non-software element based upon the relative selling price of each and if software and software-related elements are also included in the arrangement, to those elements as a group based on our BESP for the group. When applying the relative selling price method, we determine the selling price for each deliverable using VSOE of selling price, if it exists, or TPE of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use our BESP for that deliverable. Revenue allocated to each element is then recognized when the basic revenue recognition criteria is met for each element. The manner in which we account for multiple element arrangements that contain only software and software-related elements remains unchanged.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Consistent with our methodology under previous accounting guidance, we determine VSOE of fair value for each element based on historical stand-alone sales to third-parties or from the stated renewal rate for the elements contained in the initial software license arrangement.
In certain instances, we were not able to establish VSOE for all deliverables in an arrangement with multiple elements. This may be due to us infrequently selling each element separately, not pricing products or services within a narrow range, or only having a limited sales history. When VSOE cannot be established, we attempt to establish the selling price of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our offerings contain significant differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, we typically are not able to obtain TPE of selling price.
When we are unable to establish selling prices using VSOE or TPE, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings.
We determine BESP for a product or service by considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices. The determination of BESP is made through consultation with and formal approval by our management, taking into consideration our go-to-market strategy.
We regularly review VSOE and have established a review process for TPE and BESP and maintain internal controls over the establishment and updates of these estimates. There was no material impact to revenue during the three months ended March 5, 2010 resulting from changes in VSOE, TPE or BESP, nor do we expect a material impact from such changes in the near term.
Given the nature of our transactions, which are primarily software and software-related, our go-to-market strategies and our pricing practices, total net revenue as reported during the three months ended March 5, 2010 is materially consistent with total net revenue that would have been reported if the transactions entered into or materially modified after November 27, 2009 were subject to previous accounting guidance.
The new accounting standards for revenue recognition, if applied in the same manner to the year ended November 27, 2009, would not have had a material impact on total net revenues for that fiscal year. In terms of the timing and pattern of revenue recognition, the new accounting guidance for revenue recognition is not expected to have a significant effect on total net revenues in periods after the initial adoption.
Variable Interest Entities
In June 2009, the FASB issued amended standards for determining whether to consolidate a variable interest entity. These new standards amend the evaluation criteria to identify the primary beneficiary of a variable interest entity and requires ongoing reassessment of whether an enterprise is the primary beneficiary of the variable interest entity. The provisions of the new standards are effective for annual reporting periods beginning after November 15, 2009 and interim periods within those fiscal years. These standards were effective for us beginning in the first quarter of fiscal 2010. The adoption of the new standards did not have an impact on our consolidated financial position, results of operations and cash flows.
Intangible Assets Useful Lives
In April 2008, the FASB issued new standards which provided guidance on how to determine the useful life of intangible assets by amending the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. These standards are effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and was effective for us beginning in the first quarter of fiscal 2010. There was no impact to our current consolidated financial statements as we did not purchase any intangible assets during the quarter.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Business Combinations and Non-Controlling Interests
In December 2007, the FASB revised their guidance for business combinations and non-controlling interests. The new standards change how business acquisitions are accounted for and impact financial statements both on the acquisition date and in subsequent periods. The changes also impact the accounting and reporting for minority interests, which are recharacterized as non-controlling interests and classified as a component of equity. The new standards were effective for us beginning in the first quarter of fiscal 2010. We currently believe that depending on the size and frequency of acquisitions, the adoption of these standards may have a material effect on our future consolidated financial statements. There was no impact to our current consolidated financial statements as we did not have any business combinations during the quarter.
NOTE 2. ACQUISITIONS
On October 23, 2009, we completed the acquisition of Omniture, Inc. (“Omniture”), an industry leader in Web analytics and online business optimization based in Orem, Utah, for approximately $1.8 billion. Under the terms of the agreement, we completed our tender offer to acquire all of the outstanding shares of Omniture common stock at a price of $21.50 per share, net to the seller in cash, without interest. Acquiring Omniture accelerates our strategy of delivering more effective solutions for assembling, delivering, targeting and optimizing Web content and applications. The transaction was accounted for using the purchase method of accounting. We have included the financial results of Omniture in our Condensed Consolidated Financial Statements beginning on the acquisition date. Following the closing, we integrated Omniture as a new reportable segment for financial reporting purposes.
The total purchase price for Omniture was approximately $1.8 billion which consisted of $1.7 billion in cash paid for outstanding common stock, $85.0 million for the estimated fair value of earned stock options and restricted stock units assumed and converted and $14.4 million for direct transaction costs. The preliminary allocation of the purchase price was based upon a preliminary valuation and our estimates and assumptions. In the first quarter of fiscal 2010, adjustments were made to the preliminary purchase price allocation to reflect the finalization of the valuation of intangible assets and deferred revenue. Additional adjustments were also made to restructuring liabilities, taxes and residual goodwill. Of the total purchase price, a preliminary estimate of $1.3 billion has been allocated to goodwill, $436.1 million to identifiable intangible assets, $35.0 million to net tangible assets and $11.7 million to restructuring liabilities. We also expensed $4.6 million for in-process research and development charges. The primary areas of the purchase price allocation that are not yet finalized relate to certain restructuring liabilities, income and non-income based taxes and residual goodwill.
The following table presents the results of Adobe and Omniture for the three months ended February 27, 2009, on a pro forma basis, as though the companies had been combined as of the beginning fiscal 2009. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2009 or of results that may occur in the future.
| |
|
|
Three Months Ended
|
|
| |
|
|
February 27, 2009
|
|
|
Net revenues
|
|
$ |
843,706 |
|
|
Net income
|
|
$ |
120,929 |
|
|
Basic net income per share
|
|
$ |
0.23 |
|
|
Shares used in computing basic net income per share
|
|
|
524,268 |
|
|
Diluted net income per share
|
|
$ |
0.23 |
|
|
Shares used in computing diluted net income per share
|
|
|
529,305 |
|
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.” 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-
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in earnings. Gains and losses are determined using the specific identification method.
Cash, cash equivalents and short-term investments consisted of the following as of March 5, 2010 (in thousands):
| |
|
|
Amortized
Cost
|
|
|
|
Unrealized
Gains
|
|
|
|
Unrealized
Losses
|
|
|
|
Estimated
Fair Value
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
81,729 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
81,729 |
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
|
1,444,137 |
|
|
|
— |
|
|
|
— |
|
|
|
1,444,137 |
|
|
Bank time deposits
|
|
|
47,701 |
|
|
|
— |
|
|
|
— |
|
|
|
47,701 |
|
|
United States treasury notes
|
|
|
6,999 |
|
|
|
— |
|
|
|
— |
|
|
|
6,999 |
|
|
United States local government municipal bonds
|
|
|
1,500 |
|
|
|
— |
|
|
|
— |
|
|
|
1,500 |
|
|
Government guaranteed bonds(1)
|
|
|
4,999 |
|
|
|
— |
|
|
|
— |
|
|
|
4,999 |
|
|
Corporate bonds
|
|
|
2,379 |
|
|
|
— |
|
|
|
(2 |
) |
|
|
2,377 |
|
|
Total cash equivalents
|
|
|
1,507,715 |
|
|
|
— |
|
|
|
(2 |
) |
|
|
1,507,713 |
|
|
Total cash and cash equivalents
|
|
|
1,589,444 |
|
|
|
— |
|
|
|
(2 |
) |
|
|
1,589,442 |
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States treasury notes
|
|
|
392,963 |
|
|
|
2,243 |
|
|
|
(12 |
) |
|
|
395,194 |
|
|
United States government agency bonds
|
|
|
87,626 |
|
|
|
257 |
|
|
|
(13 |
) |
|
|
87,870 |
|
|
United States local government municipal bonds
|
|
|
88,451 |
|
|
|
4 |
|
|
|
— |
|
|
|
88,455 |
|
|
Government guaranteed bonds(1)
|
|
|
214,081 |
|
|
|
2,641 |
|
|
|
(10 |
) |
|
|
216,712 |
|
|
Corporate bonds
|
|
|
240,423 |
|
|
|
3,783 |
|
|
|
(47 |
) |
|
|
244,159 |
|
|
Obligations of foreign governments
|
|
|
30,869 |
|
|
|
307 |
|
|
|
— |
|
|
|
31,176 |
|
|
Multi-lateral government agencies bonds
|
|
|
11,333 |
|
|
|
189 |
|
|
|
— |
|
|
|
11,522 |
|
|
Subtotal
|
|
|
1,065,746 |
|
|
|
9,424 |
|
|
|
(82 |
) |
|
|
1,075,088 |
|
|
Other marketable equity securities
|
|
|
2,508 |
|
|
|
5,346 |
|
|
|
— |
|
|
|
7,854 |
|
|
Total short-term investments
|
|
|
1,068,254 |
|
|
|
14,770 |
|
|
|
(82 |
) |
|
|
1,082,942 |
|
|
Total cash, cash equivalents and short-term investments
|
|
$ |
2,657,698 |
|
|
$ |
14,770 |
|
|
$ |
(84 |
) |
|
$ |
2,672,384 |
|
Cash, cash equivalents and short-term investments consisted of the following as of November 27, 2009 (in thousands):
| |
|
|
Amortized
Cost
|
|
|
|
Unrealized
Gains
|
|
|
|
Unrealized
Losses
|
|
|
|
Estimated
Fair Value
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
75,110 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
75,110 |
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
|
884,240 |
|
|
|
— |
|
|
|
— |
|
|
|
884,240 |
|
|
Bank time deposits
|
|
|
40,137 |
|
|
|
— |
|
|
|
— |
|
|
|
40,137 |
|
|
Total cash equivalents
|
|
|
924,377 |
|
|
|
— |
|
|
|
— |
|
|
|
924,377 |
|
|
Total cash and cash equivalents
|
|
|
999,487 |
|
|
|
— |
|
|
|
— |
|
|
|
999,487 |
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States treasury notes
|
|
|
373,180 |
|
|
|
3,199 |
|
|
|
(1 |
) |
|
|
376,378 |
|
|
United States government agency bonds
|
|
|
59,447 |
|
|
|
273 |
|
|
|
— |
|
|
|
59,720 |
|
|
Government guaranteed bonds(2)
|
|
|
221,730 |
|
|
|
3,409 |
|
|
|
(1 |
) |
|
|
225,138 |
|
|
Corporate bonds
|
|
|
185,735 |
|
|
|
4,702 |
|
|
|
— |
|
|
|
190,437 |
|
|
Obligations of foreign governments
|
|
|
23,022 |
|
|
|
397 |
|
|
|
— |
|
|
|
23,419 |
|
|
Multi-lateral government agencies bonds
|
|
|
24,598 |
|
|
|
269 |
|
|
|
— |
|
|
|
24,867 |
|
|
Subtotal
|
|
|
887,712 |
|
|
|
12,249 |
|
|
|
(2 |
) |
|
|
899,959 |
|
|
Other marketable equity securities
|
|
|
2,527 |
|
|
|
2,500 |
|
|
|
— |
|
|
|
5,027 |
|
|
Total short-term investments
|
|
|
890,239 |
|
|
|
14,749 |
|
|
|
(2 |
) |
|
|
904,986 |
|
|
Total cash, cash equivalents and short-term investments
|
|
$ |
1,889,726 |
|
|
$ |
14,749 |
|
|
$ |
(2 |
) |
|
$ |
1,904,473 |
|
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
_________________________________________
|
(1)
|
Includes approximately 86% in U.S. government guaranteed corporate bonds and 14% in foreign government guaranteed corporate bonds.
|
|
(2)
|
Includes approximately 85% in U.S. government guaranteed corporate bonds and 15% in foreign government guaranteed corporate bonds.
|
See Note 4 for further information regarding the fair value of our financial instruments.
The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category that have been in a continuous unrealized loss position for less than twelve months, as of March 5, 2010 and November 27, 2009 (in thousands):
| |
|
|
2010 |
|
|
|
2009 |
|
| |
|
|
Fair
Value
|
|
|
|
Gross
Unrealized
Losses
|
|
|
|
Fair
Value
|
|
|
|
Gross
Unrealized
Losses
|
|
|
United States treasury notes and agency bonds
|
|
$ |
72,841 |
|
|
$ |
(25 |
) |
|
$ |
11,179 |
|
|
$ |
(1 |
) |
|
Government guaranteed bonds
|
|
|
5,033 |
|
|
|
(1 |
) |
|
|
5,041 |
|
|
|
(1 |
) |
|
Foreign government guaranteed bonds
|
|
|
4,774 |
|
|
|
(9 |
) |
|
|
— |
|
|
|
— |
|
|
Corporate bonds
|
|
|
44,490 |
|
|
|
(49 |
) |
|
|
— |
|
|
|
— |
|
|
Total
|
|
$ |
127,138 |
|
|
$ |
(84 |
) |
|
$ |
16,220 |
|
|
$ |
(2 |
) |
As of March 5, 2010 and November 27, 2009, there were no securities in a continuous unrealized loss position for more than twelve months. There were 34 securities and 4 securities that were in an unrealized loss position at March 5, 2010 and at November 27, 2009, respectively.
The following table summarizes the cost and estimated fair value of debt securities classified as short-term investments based on stated maturities as of March 5, 2010 (in thousands):
| |
|
|
Amortized
Cost
|
|
|
|
Estimated
Fair Value
|
|
|
Due within one year
|
|
$ |
599,178 |
|
|
$ |
600,819 |
|
|
Due within two years
|
|
|
266,888 |
|
|
|
270,525 |
|
|
Due within three years
|
|
|
148,113 |
|
|
|
150,220 |
|
|
Due after three years
|
|
|
51,567 |
|
|
|
53,524 |
|
|
Total
|
|
$ |
1,065,746 |
|
|
$ |
1,075,088 |
|
As of March 5, 2010, we did not consider any of our investments to be other-than-temporarily impaired.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4. FAIR VALUE MEASUREMENTS
We measure certain financial assets and liabilities at fair value on a recurring basis. The fair value of these financial assets and liabilities was determined using the following inputs at March 5, 2010 (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)
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds and overnight deposits(1)
|
|
$ |
1,491,837 |
|
|
$ |
1,491,837 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Fixed income available-for-sale securities(2)
|
|
|
1,090,964 |
|
|
|
— |
|
|
|
1,090,964 |
|
|
|
— |
|
|
Available-for-sale equity securities(3)
|
|
|
7,854 |
|
|
|
7,854 |
|
|
|
— |
|
|
|
— |
|
|
Total current assets
|
|
|
2,590,655 |
|
|
|
1,499,691 |
|
|
|
1,090,964 |
|
|
|
— |
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments of limited partnership(4)
|
|
|
33,855 |
|
|
|
— |
|
|
|
— |
|
|
|
33,855 |
|
|
Foreign currency derivatives(5)
|
|
|
18,645 |
|
|
|
— |
|
|
|
18,645 |
|
|
|
— |
|
|
Deferred compensation plan assets(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
716 |
|
|
|
716 |
|
|
|
— |
|
|
|
— |
|
|
Equity and fixed income mutual funds
|
|
|
8,456 |
|
|
|
— |
|
|
|
8,456 |
|
|
|
— |
|
|
Subtotal for deferred compensation plan assets
|
|
|
9,172 |
|
|
|
716 |
|
|
|
8,456 |
|
|
|
— |
|
|
|
|
|
61,672 |
|
|
|
716 |
|
|
|
27,101 |
|
|
|
33,855 |
|
|
Total assets
|
|
$ |
2,652,327 |
|
|
$ |
1,500,407 |
|
|
$ |
1,118,065 |
|
|
$ |
33,855 |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives(6)
|
|
$ |
462 |
|
|
$ |
— |
|
|
$ |
462 |
|
|
$ |
— |
|
|
Total liabilities
|
|
$ |
462 |
|
|
$ |
— |
|
|
$ |
462 |
|
|
$ |
— |
|
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
We measure certain financial assets and liabilities at fair value on a recurring basis. The fair value of these financial assets and liabilities was determined using the following inputs at November 27, 2009 (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)
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds and overnight deposits(1)
|
|
$ |
924,378 |
|
|
$ |
924,378 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Fixed income available-for-sale securities(2)
|
|
|
899,960 |
|
|
|
— |
|
|
|
899,960 |
|
|
|
— |
|
|
Available-for-sale equity securities(3)
|
|
|
5,026 |
|
|
|
5,026 |
|
|
|
— |
|
|
|
— |
|
|
Total current assets
|
|
|
1,829,364 |
|
|
|
929,404 |
|
|
|
899,960 |
|
|
|
— |
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments of limited partnership(4)
|
|
|
37,121 |
|
|
|
— |
|
|
|
— |
|
|
|
37,121 |
|
|
Foreign currency derivatives(5)
|
|
|
4,307 |
|
|
|
— |
|
|
|
4,307 |
|
|
|
— |
|
|
Deferred compensation plan assets(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
717 |
|
|
|
717 |
|
|
|
— |
|
|
|
— |
|
|
Equity and fixed income mutual funds
|
|
|
8,328 |
|
|
|
— |
|
|
|
8,328 |
|
|
|
— |
|
|
Subtotal for deferred compensation plan assets
|
|
|
9,045 |
|
|
|
717 |
|
|
|
8,328 |
|
|
|
— |
|
|
|
|
|
50,473 |
|
|
|
717 |
|
|
|
12,635 |
|
|
|
37,121 |
|
|
Total assets
|
|
$ |
1,879,837 |
|
|
$ |
930,121 |
|
|
$ |
912,595 |
|
|
$ |
37,121 |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives(6)
|
|
$ |
1,589 |
|
|
$ |
— |
|
|
$ |
1,589 |
|
|
$ |
— |
|
|
Total liabilities
|
|
$ |
1,589 |
|
|
$ |
— |
|
|
$ |
1,589 |
|
|
$ |
— |
|
_________________________________________
|
(1)
|
Included in cash and cash equivalents on our Condensed Consolidated Balance Sheets.
|
|
(2)
|
Included in either cash and cash equivalents or short-term investments on our Condensed Consolidated Balance Sheets.
|
|
(3)
|
Included in short-term investments on our Condensed Consolidated Balance Sheets.
|
|
(4)
|
Included in other assets on our Condensed Consolidated Balance Sheets.
|
|
(5)
|
Included in prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.
|
|
(6)
|
Included in accrued expenses on our Condensed Consolidated Balance Sheets.
|
See Note 3 for further information regarding the fair value of our financial instruments.
Fixed income available-for-sale securities include U.S. treasury securities, Agency or U.S. government guaranteed securities, or U.S. municipal bonds (71% of total), corporate bonds (23% of total), obligations of foreign governments and their agencies (5% of total), and obligations of multi-lateral government agencies (1% of total) at March 5, 2010 and U.S. treasury securities, Agency or U.S. government guaranteed securities (70% of total), corporate bonds (21% of total), obligations of foreign governments and their agencies (6% of total), and obligations of multi-lateral government agencies (3% of total) at November 27, 2009. These are all high quality, investment grade securities with a minimum credit rating of A- 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. Our procedures include controls to ensure that appropriate fair values are recorded such as comparing prices obtained from multiple independent sources.
The investments of limited partnership relate to our interest in Adobe Ventures IV L.P. (“Adobe Ventures”), which are consolidated in our Condensed Consolidated Financial Statements. The Level 3 investments consist of investments in
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
privately-held companies. These investments are remeasured at fair value each period with any gains or losses recognized in investment gains (losses), net in our Condensed Consolidated Statements of Income. We estimated fair value of the Level 3 investments by 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.
A reconciliation of the beginning and ending balances for investments of limited partnership using significant unobservable inputs (Level 3) as of March 5, 2010 and November 27, 2009 was as follows (in thousands):
|
Balance as of November 28, 2008
|
|
$ |
38,753 |
|
|
Purchases and sales of investments, net
|
|
|
1,921 |
|
|
Unrealized net investment losses included in earnings
|
|
|
(3,553 |
) |
|
Balance as of November 27, 2009
|
|
|
37,121 |
|
|
Purchases and sales of investments, net
|
|
|
268 |
|
|
Unrealized net investment losses included in earnings
|
|
|
(3,534 |
) |
|
Balance as of March 5, 2010
|
|
$ |
33,855 |
|
We also have direct investments in privately-held companies accounted for under the cost method, which are periodically assessed for other-than-temporary impairment. If we determine that an other-than-temporary impairment has occurred, we write-down the investment to its fair value. We estimate fair value of our cost method investments considering available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. For the three months ended March 5, 2010, we determined that there were no other-than-temporary impairments on our cost method investments.
See Note 7 for further information regarding our limited partnership interest in Adobe Ventures and our cost method investments.
NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES
In countries outside the U.S., we transact business in U.S. dollars and in various other currencies. Therefore, we are subject to exposure from movements in foreign currency rates. We may use foreign exchange option contracts or forward contracts to hedge certain operational (“cash flow”) exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, may have maturities between one and twelve months. The maximum original duration of any contract is twelve months. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business and accordingly, they are not speculative in nature.
We recognize derivative instruments and 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 on 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 on our Condensed Consolidated Statements of Income at that time.
We also hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded to interest and other income, net on our Condensed Consolidated Statement 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.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
We mitigate concentration of risk related to foreign currency hedges as well as interest rate hedges through a policy that establishes counterparty limits. The bank counterparties in these contracts expose us to credit-related losses in the event of their nonperformance. However, to mitigate that risk, we only contract with counterparties who meet our minimum requirements under our counterparty risk assessment process. In addition, our hedging policy establishes maximum limits for each counterparty. We monitor ratings, credit spreads and potential downgrades on at least a quarterly basis. Based on our on-going assessment of counterparty risk, we will adjust our exposure to various counterparties.
The aggregate fair value of derivative instruments in net asset positions as of March 5, 2010 and November 27, 2009 was $18.6 million and $4.3 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 $0.5 million and $1.6 million, respectively, of liabilities included in master netting arrangements with those same counterparties.
The fair value of derivative instruments on our Condensed Consolidated Balance Sheets as of March 5, 2010 and November 27, 2009 were as follows (in thousands):
| |
|
|
2010 |
|
|
|
2009 |
|
| |
|
|
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)
|
|
$ |
15,711 |
|
|
$ |
— |
|
|
$ |
4,175 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
|
2,934 |
|
|
|
462 |
|
|
|
132 |
|
|
|
1,589 |
|
|
Total derivatives
|
|
$ |
18,645 |
|
|
$ |
462 |
|
|
$ |
4,307 |
|
|
$ |
1,589 |
|
_________________________________________
|
(1)
|
Included in prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.
|
|
(2)
|
Included in accrued expenses on our Condensed Consolidated Balance Sheets.
|
|
(3)
|
Hedging effectiveness expected to be recognized to income within the next twelve months.
|
The effect of derivative instruments designated as cash flow hedges and of derivative instruments not designated as hedges in our Condensed Consolidated Statements of Income for three months ended March 5, 2010 and February 27, 2009 was as follows (in thousands):
| |
|
|
2010 |
|
|
|
2009 |
|
| |
|
|
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)
|
|
$ |
10,364 |
|
|
$ |
— |
|
|
$ |
(5,450 |
) |
|
$ |
— |
|
|
Net gain (loss) reclassified from accumulated OCI into income, net of tax(2)
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
20,476 |
|
|
$ |
— |
|
|
Net gain (loss) recognized in income(3)Net gain (loss) recognized in income(3)
|
|
$ |
(3,921 |
) |
|
$ |
— |
|
|
$ |
(1,632 |
) |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) recognized in income(4)Net gain (loss) recognized in income(4)
|
|
$ |
— |
|
|
$ |
11,040 |
|
|
$ |
— |
|
|
$ |
(3,245 |
) |
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, net.
|
|
(4)
|
Classified in interest and other income, net.
|
NOTE 6. GOODWILL AND PURCHASED AND OTHER INTANGIBLES
Goodwill as of March 5, 2010 and November 27, 2009 was $3.494 billion and $3.495 billion, respectively. The change includes adjustments to our Omniture purchase price allocation in addition to foreign currency translation adjustments.
Purchased and other intangible assets subject to amortization as of March 5, 2010 were as follows (in thousands):
| |
|
|
Cost
|
|
|
|
Accumulated
Amortization
|
|
|
|
Net
|
|
|
Purchased technology
|
|
$ |
220,272 |
|
|
$ |
(31,094 |
) |
|
$ |
189,178 |
|
|
Localization
|
|
$ |
10,948 |
|
|
$ |
(2,175 |
) |
|
$ |
8,773 |
|
|
Trademarks
|
|
|
172,020 |
|
|
|
(112,820 |
) |
|
|
59,200 |
|
|
Customer contracts and relationships
|
|
|
364,369 |
|
|
|
(168,392 |
) |
|
|
195,977 |
|
|
Other intangibles
|
|
|
47,162 |
|
|
|
(12,685 |
) |
|
|
34,477 |
|
|
Total other intangible assets
|
|
$ |
594,499 |
|
|
$ |
(296,072 |
) |
|
$ |
298,427 |
|
|
Purchased and other intangible assets
|
|
$ |
814,771 |
|
|
$ |
(327,166 |
) |
|
$ |
487,605 |
|
Purchased and other intangible assets subject to amortization as of November 27, 2009 were as follows (in thousands):
| |
|
|
Cost
|
|
|
|
Accumulated
Amortization
|
|
|
|
Net
|
|
|
Purchased technology
|
|
$ |
586,952 |
|
|
$ |
(387,731 |
) |
|
$ |
199,221 |
|
|
Localization
|
|
$ |
20,284 |
|
|
$ |
(15,222 |
) |
|
$ |
5,062 |
|
|
Trademarks
|
|
|
172,030 |
|
|
|
(104,953 |
) |
|
|
67,077 |
|
|
Customer contracts and relationships
|
|
|
363,922 |
|
|
|
(159,450 |
) |
|
|
204,472 |
|
|
Other intangibles
|
|
|
54,535 |
|
|
|
(2,979 |
) |
|
|
51,556 |
|
|
Total other intangible assets
|
|
$ |
610,771 |
|
|
$ |
(282,604 |
) |
|
$ |
328,167 |
|
|
Purchased and other intangible assets
|
|
$ |
1,197,723 |
|
|
$ |
(670,335 |
) |
|
$ |
527,388 |
|
During the three months ended March 5, 2010, purchased and other intangible assets from prior acquisitions, primarily Macromedia, became fully amortized and were removed from the balance sheet. Amortization expense related to purchased and other intangible assets was $36.9 million and $39.0 million for the three months ended March 5, 2010 and February 27, 2009, respectively. Of these amounts, $18.7 million and $23.6 million was included in cost of sales for the three months ended March 5, 2010 and February 27, 2009, respectively.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As of March 5, 2010, we expect amortization expense in future periods to be as follows (in thousands):
|
Fiscal Year
|
|
|
|
Purchased
Technology
|
|
|
|
Other Intangible
Assets
|
|
|
Remainder of 2010
|
|
$ |
26,968 |
|
|
$ |
74,161 |
|
|
2011
|
|
|
32,573 |
|
|
|
54,693 |
|
|
2012
|
|
|
30,967 |
|
|
|
22,407 |
|
|
2013
|
|
|
27,008 |
|
|
|
21,681 |
|
|
2014
|
|
|
25,293 |
|
|
|
21,281 |
|
|
Thereafter
|
|
|
46,369 |
|
|
|
104,204 |
|
|
Total expected amortization expense
|
|
$ |
189,178 |
|
|
$ |
298,427 |
|
NOTE 7. OTHER ASSETS
Other assets as of March 5, 2010 and November 27, 2009 consisted of the following (in thousands):
| |
|
|
2010
|
|
|
|
2009
|
|
|
Acquired rights to use technology
|
|
$ |
81,299 |
|
|
$ |
84,313 |
|
|
Investments
|
|
|
60,760 |
|
|
|
63,526 |
|
|
Security and other deposits
|
|
|
11,067 |
|
|
|
11,692 |
|
|
Prepaid royalties
|
|
|
11,536 |
|
|
|
12,059 |
|
|
Debt issuance costs
|
|
|
10,598 |
|
|
|
— |
|
|
Deferred compensation plan assets
|
|
|
9,172 |
|
|
|
9,045 |
|
|
Restricted cash
|
|
|
2,308 |
|
|
|
4,650 |
|
|
Prepaid land lease
|
|
|
3,200 |
|
|
|
3,209 |
|
|
Prepaid rent
|
|
|
1,229 |
|
|
|
1,377 |
|
|
Other
|
|
|
1,559 |
|
|
|
1,394 |
|
|
Other assets
|
|
$ |
192,728 |
|
|
$ |
191,265 |
|
Included in investments are our indirect investments through our limited partnership interest in Adobe Ventures of approximately $33.9 million and $37.1 million as of March 5, 2010 and November 27, 2009, respectively. We consolidate Adobe Ventures in accordance with the provisions for consolidating variable interest entities as we have determined we have the power to direct the activities that most significantly impact the entity’s economic performance and we have the obligation to absorb losses or the right to receive benefits through our limited partnership interest in Adobe Ventures. The partnership is controlled by Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures. We are the primary beneficiary of Adobe Ventures and bear virtually all of the risks and rewards related to our ownership. Our investment in Adobe Ventures does not have a significant impact on our consolidated financial position, results of operations or cash flows.
The primary purpose of our limited partnership interest in Adobe Ventures is to invest in securities of private companies which either operate in, or are expected to operate in, industries where technology and business model trends are expected to have an impact on our core business. Our maximum capital commitment to Adobe Ventures is $104.6 million, of which, approximately $95.0 million has been invested.
Adobe Ventures carries its investments in equity securities at estimated fair value and investment gains and losses are included in our Condensed Consolidated Statements of Income. Substantially all of the investments held by Adobe Ventures at March 5, 2010 and November 27, 2009 are not publicly traded and, therefore, there is no established market for these securities. In order to determine the fair value of these investments, we use the most recent round of financing involving new non-strategic investors or estimates of fair value made by Granite Ventures. We evaluate the fair value of these investments held by Adobe Ventures on a regular basis. This evaluation includes, but is not limited to, reviewing each company’s cash position, financing needs, earnings and revenue outlook, operational performance, management and ownership changes and competition. In the case of privately-held companies, this evaluation is based on information that we request from these companies. This information is not subject to the same disclosure regulations as U.S. publicly traded companies and as such, the basis for these evaluations is subject to the timing and the accuracy of the data received from these companies.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Also included in investments are our direct investments in privately-held companies of approximately $26.9 million and $26.4 million as of March 5, 2010 and November 27, 2009, respectively, which are accounted for based on the cost method. We assess these investments for impairment in value as circumstances dictate.
NOTE 8. ACCRUED EXPENSES
Accrued expenses as of March 5, 2010 and November 27, 2009 consisted of the following (in thousands):
| |
|
|
2010
|
|
|
|
2009
|
|
|
Accrued compensation and benefits
|
|
$ |
133,044 |
|
|
$ |
164,352 |
|
|
Taxes payable
|
|
|
9,474 |
|
|
|
11,879 |
|
|
Sales and marketing allowances
|
|
|
28,419 |
|
|
|
32,774 |
|
|
Other
|
|
|
193,500 |
|
|
|
210,641 |
|
|
Accrued expenses
|
|
$ |
364,437 |
|
|
$ |
419,646 |
|
Other primarily includes general corporate accruals for corporate marketing programs, local and regional expenses, and technical support. Other is also comprised of deferred rent related to office locations with rent escalations, accrued royalties, foreign currency derivatives and accrued interest on our outstanding debt.
NOTE 9. INCOME TAXES
The gross liability for unrecognized tax benefits at March 5, 2010 was $217.5 million, exclusive of interest and penalties. If the total unrecognized tax benefits at March 5, 2010 were recognized in the future, $200.2 million of unrecognized tax benefits would decrease the effective tax rate, which is net of an estimated $17.3 million federal benefit related to deducting certain payments on future tax returns.
As of March 5, 2010, the combined amount of accrued interest and penalties related to tax positions taken on our tax returns was approximately $16.2 million. This amount is included in non-current income taxes payable.
The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. These events could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Given the uncertainties described, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits equal to $0 to approximately $13 million. These amounts would decrease income tax expense as a result of our adoption of new accounting standards related to business combinations in fiscal 2010.
In December 2009, we repatriated $700 million of undistributed foreign earnings for which a deferred tax liability had been previously accrued. As such, a long-term deferred tax liability of approximately $200 million was reclassified from deferred income taxes to income taxes payable.
NOTE 10. STOCK-BASED COMPENSATION
The assumptions used to value option grants during the three months ended March 5, 2010 and February 27, 2009 were as follows:
| |
|
|
2010
|
|
|
|
2009
|
|
|
Expected life (in years)
|
|
|
3.8 – 4.1 |
|
|
|
3.7 – 3.8 |
|
|
Volatility
|
|
|
31 – 36 |
% |
|
|
50 – 57 |
% |
|
Risk free interest rate
|
|
|
1.76 – 1.97 |
% |
|
|
1.16 – 1.40 |
% |
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The expected term 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 months ended March 5, 2010 and February 27, 2009 were as follows:
| |
|
|
2010
|
|
|
|
2009
|
|
|
Expected life (in years)
|
|
|
0.5 – 2.0 |
|
|
|
0.5 – 2.0 |
|
|
Volatility
|
|
|
32 |
% |
|
|
49 – 57 |
% |
|
Risk free interest rate
|
|
|
0.18 – 1.09 |
% |
|
|
0.27 – 0.88 |
% |
Summary of Stock Options
Option activity for the three months ended March 5, 2010 and the fiscal year ended November 27, 2009 was as follows (in thousands):
| |
|
|
2010
|
|
|
|
2009
|
|
|
Beginning outstanding balance
|
|
|
41,251 |
|
|
|
40,704 |
|
|
Granted
|
|
|
3,027 |
|
|
|
5,758 |
|
|
Exercised
|
|
|
(2,300 |
) |
|
|
(7,560 |
) |
|
Cancelled
|
|
|
(622 |
) |
|
|
(3,160 |
) |
|
Increase due to acquisition
|
|
|
— |
|
|
|
5,509 |
|
|
Ending outstanding balance
|
|
|
41,356 |
|
|
|
41,251 |
|
Information regarding stock options outstanding at March 5, 2010 and February 27, 2009 is summarized below:
| |
|
|
Number of
Shares
(thousands)
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
|
|
Aggregate
Intrinsic
Value(*)
(millions)
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
|
41,356 |
|
|
$ |
30.27 |
|
|
|
4.29 |
|
|
$ |
254.7 |
|
|
Options vested and expected to vest
|
|
|
39,258 |
|
|
$ |
30.32 |
|
|
|
4.19 |
|
|
$ |
241.2 |
|
|
Options exercisable
|
|
|
26,270 |
|
|
$ |
30.55 |
|
|
|
3.39 |
|
|
$ |
158.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
|
42,773 |
|
|
$ |
28.96 |
|
|
|
4.12 |
|
|
$ |
18.8 |
|
|
Options vested and expected to vest
|
|
|
40,561 |
|
|
$ |
28.90 |
|
|
|
4.00 |
|
|
$ |
18.8 |
|
|
Options exercisable
|
|
|
27,635 |
|
|
$ |
27.40 |
|
|
|
3.19 |
|
|
$ |
18.8 |
|
_________________________________________
|
(*)
|
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 March 5, 2010 and February 27, 2009 were $35.16 and $16.70, respectively.
|
|
|
Summary of Employee Stock Purchase Plan Shares
|
Employees purchased 1.3 million shares at an average price of $20.20 and 1.2 million shares at an average price of $18.10 for the three months ended March 5, 2010 and February 27, 2009, respectively. The intrinsic value of shares purchased during the three months ended March 5, 2010 and February 27, 2009 was $21.4 million and $3.7 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.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Summary of Restricted Stock Units
Restricted stock unit activity for the three months ended March 5, 2010 and the fiscal year ended November 27, 2009 was as follows (in thousands):
| |
|
|
2010
|
|
|
|
2009
|
|
|
Beginning outstanding balance
|
|
|
10,433 |
|
|
|
4,261 |
|
|
Awarded
|
|
|
5,548 |
|
|
|
6,176 |
|
|
Released
|
|
|
(1,523 |
) |
|
|
(1,162 |
) |
|
Forfeited
|
|
|
(316 |
) |
|
|
(401 |
) |
|
Increase due to acquisition
|
|
|
— |
|
|
|
1,559 |
|
|
Ending outstanding balance
|
|
|
14,142 |
|
|
|
10,433 |
|
Information regarding restricted stock units outstanding at March 5, 2010 and February 27, 2009 is summarized below:
| |
|
|
Number of
Shares
(thousands)
|
|
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
|
|
Aggregate
Intrinsic
Value(*)
(millions)
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units outstanding
|
|
|
14,142 |
|
|
|
2.08 |
|
|
$ |
497.2 |
|
|
Restricted stock units vested and expected to vest
|
|
|
10,527 |
|
|
|
1.90 |
|
|
$ |
369.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units outstanding
|
|
|
6,269 |
|
|
|
2.13 |
|
|
$ |
104.7 |
|
|
Restricted stock units vested and expected to vest
|
|
|
4,638 |
|
|
|
1.94 |
|
|
$ |
77.4 |
|
_________________________________________
|
(*)
|
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 March 5, 2010 and February 27, 2009 were $35.16 and $16.70, respectively.
|
Summary of Performance Shares
Effective January 25, 2010, the Executive Compensation Committee adopted the 2010 Performance Share Program (the “2010 Program”). The purpose of the 2010 Program is to align key management and senior leadership with stockholders’ interests and to retain key employees. The measurement period for the 2010 Program is our fiscal 2010 year. All members of our executive management and other key senior leaders are participating in the 2010 Program. Awards granted under the 2010 Program were granted in the form of performance shares pursuant to the terms of our 2003 Equity Incentive Plan. If pre-determined performance goals are met, shares of stock will be granted to the recipient, with one third vesting on the later of the date of certification of achievement or the first anniversary date of the grant, and the remaining two thirds vesting evenly on the following two annual anniversary dates of the grant, contingent upon the recipient’s continued service to Adobe. Participants in the 2010 Program have the ability to receive up to 150% of the target number of shares originally granted.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table sets forth the summary of performance share activity under our 2010 Program for the three months ended March 5, 2010 (in thousands):
| |
|
|
Shares
Granted
|
|
|
|
Maximum
Shares Eligible
to Receive
|
|
|
Beginning outstanding balance
|
|
|
— |
|
|
|
— |
|
|
Awarded
|
|
|
263 |
|
|
|
394 |
|
|
Forfeited
|
|
|
— |
|
|
|
— |
|
|
Ending outstanding balance
|
|
|
263 |
|
|
|
394 |
|
The performance metrics under the 2009 Performance Share Program were not achieved and therefore no shares were awarded. The following table sets forth the summary of performance share activity under our 2007 and 2008 programs, based upon share awards actually achieved, for the three months ended March 5, 2010 and the fiscal year ended November 27, 2009 (in thousands):
| |
|
|
2010
|
|
|
|
2009
|
|
|
Beginning outstanding balance
|
|
|
950 |
|
|
|
383 |
|
|
Achieved
|
|
|
— |
|
|
|
1,022 |
|
|
Released
|
|
|
(327 |
) |
|
|
(382 |
) |
|
Forfeited
|
|
|
(16 |
) |
|
|
(73 |
) |
|
Ending outstanding balance
|
|
|
607 |
|
|
|
950 |
|
Information regarding performance shares outstanding at March 5, 2010 and February 27, 2009 is summarized below:
| |
|
|
Number of
Shares
(thousands)
|
|
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
|
|
Aggregate
Intrinsic
Value(*)
(millions)
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Performance shares outstanding
|
|
|
607 |
|
|
|
1.28 |
|
|
$ |
21.3 |
|
|
Performance shares vested and expected to vest
|
|
|
505 |
|
|
|
1.23 |
|
|
$ |
17.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance shares units outstanding
|
|
|
1,045 |
|
|
|
1.76 |
|
|
$ |
17.5 |
|
|
Performance shares vested and expected to vest
|
|
|
811 |
|
|
|
1.67 |
|
|
$ |
13.5 |
|
_________________________________________
|
(*)
|
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 March 5, 2010 and February 27, 2009 were $35.16 and $16.70, respectively.
|
Compensation Costs
As of March 5, 2010, there was $438.5 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 2.9 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
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 three months ended March 5, 2010 and February 27, 2009 were as follows (in thousands):
| |
|
|
2010 |
|
|
|
2009 |
|
|
Income Statement Classifications
|
|
|
|
Option
Grants
and Stock
Purchase
Rights(1)
|
|
|
|
Restricted
Stock and
Performance
Share
Awards(1) (2)
|
|
|
|
Option
Grants
and Stock
Purchase
Rights (1)
|
|
|
|
Restricted
Stock and
Performance
Share
Awards (1) (2)
|
|
|
Cost of revenue—services and support
|
|
$ |
417 |
|
|
$ |
531 |
|
|
$ |
(91 |
) |
|
$ |
194 |
|
|
Research and development
|
|
|
12,054 |
|
|
|
15,361 |
|
|
|
14,132 |
|
|
|
8,444 |
|
|
Sales and marketing
|
|
|
12,086 |
|
|
|
12,435 |
|
|
|
8,867 |
|
|
|
5,237 |
|
|
General and administrative
|
|
|
5,610 |
|
|
|
5,986 |
|
|
|
6,188 |
|
|
|
2,866 |
|
|
Total
|
|
$ |
30,167 |
|
|
$ |
34,313 |
|
|
$ |
29,096 |
|
|
$ |
16,741 |
|
_________________________________________
|
(1)
|
For the three months ended March 5, 2010, there were no amounts associated with cash recoveries of fringe benefit tax from employees in India. For the three months ended February 27, 2009, we recorded $0.2 million associated with cash recoveries of fringe benefit tax from employees in India.
|
|
(2)
|
For the three months ended March 5, 2010, we recorded $0.5 million associated with the performance shares awarded under the 2010 Program. For the three months ended February 27, 2009 we recorded $0.4 million associated with the performance shares awarded under the 2009 Program. These shares are liability-classified for financial statement purposes until the metrics under the program have been achieved.
|
NOTE 11. RESTRUCTURING CHARGES
Fiscal 2009 Restructuring Plan
On November 10, 2009, in order to appropriately align our costs in connection with our fiscal 2010 operating plan, we initiated a restructuring plan consisting of reductions of up to approximately 630 full-time positions worldwide and the consolidation of facilities. In connection with this restructuring plan, in the fourth quarter of fiscal 2009, we recorded restructuring charges of approximately $25.5 million related to ongoing termination benefits for the elimination of approximately 340 of these full-time positions worldwide. As of November 27, 2009, approximately $2.5 million was paid. The restructuring activities related to this program affected only those employees that were associated with Adobe prior to the acquisition of Omniture on October 23, 2009.
In the first quarter of fiscal 2010, we continued to implement restructuring activities under this program. We vacated approximately 8,000 square feet of sales facilities in Australia, Canada, Denmark and the U.S. We accrued $0.4 million for the fair value of our future contractual obligations under these operating leases and we expect to pay these facility related liabilities through fiscal 2011. We also recorded charges of $11.9 million for termination benefits for the elimination of approximately 159 of the remaining full-time positions expected to be terminated worldwide. The remaining accrual associated with these ongoing termination benefits is expected to be paid during fiscal 2010.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table sets forth a summary of restructuring activities during the three months ended March 5, 2010 related to our fiscal 2009 Restructuring Plan (in thousands):
| |
|
|
November 27,
2009
|
|
|
|
Costs
Incurred
|
|
|
|
Cash
Payments
|
|
|
|
Other
Adjustments
|
|
|
|
March 5,
2010
|
|
|
Termination benefits
|
|
$ |
22,984 |
|
|
$ |
11,925 |
|
|
$ |
(24,035 |
) |
|
$ |
(1,118 |
) |
|
$ |
9,756 |
|
|
Cost of closing redundant facilities
|
|
|
— |
|
|
|
377 |
|
|
|
(29 |
) |
|
|
2 |
|
|
|
350 |
|
|
Total
|
|
$ |
22,984 |
|
|
$ |
12,302 |
|
|
$ |
(24,064 |
) |
|
$ |
(1,116 |
) |
|
$ |
10,106 |
|
Accrued restructuring charges of approximately $10.1 million at March 5, 2010, was recorded in accrued restructuring, current on our Condensed Consolidated Balance Sheets. Total costs incurred to date and expected to be incurred for closing redundant facilities are $0.4 million and $15.1 million, respectively. We expect to pay the accrued termination benefits and facilities-related liabilities through fiscal 2010 and fiscal 2011, respectively.
Included in the other adjustments column are $0.7 million related to changes to previous estimates and $0.4 million related to foreign currency translation adjustments.
Omniture Restructuring Plan
We completed our acquisition of Omniture on October 23, 2009. In the fourth quarter of fiscal 2009, we initiated a plan to restructure the pre-merger operations of Omniture to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. In connection with this restructuring plan, we accrued a total of approximately $10.6 million in costs related to termination benefits for the elimination of approximately 100 regular positions and for the closure of duplicative facilities. We also accrued approximately $0.2 million in costs related to the cancellation of certain contracts associated with the wind-down of subsidiaries and other service contracts held by Omniture. These costs were recorded as a part of the purchase price allocation, as discussed in Note 2.
Additionally, approximately $1.5 million of restructuring costs related to facilities were included in the liabilities assumed by us upon acquisition of Omniture on October 23, 2009 for which subsequent payments of $0.1 million were made during the fourth quarter of fiscal 2009.
The following table sets forth a summary of restructuring activities during the three months ended March 5, 2010 related to our Omniture Restructuring Plan (in thousands):
| |
|
|
November 27,
2009
|
|
|
|
Costs
Recorded
|
|
|
|
Cash
Payments
|
|
|
|
Other
Adjustments
|
|
|
|
March 5,
2009
|
|
|
Termination benefits
|
|
$ |
6,712 |
|
|
$ |
— |
|
|
$ |
(4,111 |
) |
|
$ |
(129 |
) |
|
$ |
2,472 |
|
|
Cost of closing redundant facilities
|
|
|
5,324 |
|
|
|
— |
|
|
|
(141 |
) |
|
|
301 |
|
|
|
5,484 |
|
|
Contract termination
|
|
|
242 |
|
|
|
— |
|
|
|
(127 |
) |
|
|
275 |
|
|
|
390 |
|
|
Total
|
|
$ |
12,278 |
|
|
$ |
— |
|
|
$ |
(4,379 |
) |
|
$ |
447 |
|
|
$ |
8,346 |
|
Accrued restructuring charges of approximately $8.3 million at March 5, 2010 include $6.0 million recorded in accrued restructuring, current and $2.3 million related to long-term facilities obligations recorded in accrued restructuring, non-current on our Condensed Consolidated Balance Sheets. We expect to pay the accrued termination benefits and facilities-related liabilities through fiscal 2010 and fiscal 2013, respectively.
Included in the other adjustments column are purchase price allocation adjustments for restructuring charges related to termination benefits, closing redundant facilities and contract terminations aggregating $0.8 million as an adjustment to Omniture goodwill offset in part by small foreign currency translation adjustments.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Fiscal 2008 Restructuring Plan
In the fourth quarter of fiscal 2008, we initiated a restructuring program, consisting of reductions in workforce of approximately 560 full-time positions globally and the consolidation of facilities, in order to reduce our operating costs and focus our resources on key strategic priorities. In connection with this restructuring program, we recorded restructuring charges in the fourth quarter of fiscal 2008 totaling $29.2 million related to ongoing termination benefits for the elimination of approximately 460 of the 560 full-time positions globally. As of November 28, 2008, $0.4 million was paid.
During fiscal 2009, we continued to implement restructuring activities under this program. We vacated approximately 89,000 square feet of research and development and sales facilities in the U.S., the United Kingdom and Canada. We accrued $8.5 million for the fair value of our future contractual obligations under these operating leases using our credit-adjusted risk-free interest rate, estimated at approximately 6% as of the date we ceased to use the leased properties. This amount is net of the fair value of future estimated sublease income of approximately $4.4 million. We also recorded additional charges of $6.7 million for termination benefits for the elimination of substantially all of the remaining 100 full-time positions expected to be terminated.
The following table sets forth a summary of restructuring activities during the three months ended March 5, 2010 related to our fiscal 2008 Restructuring Plan (in thousands):
| |
|
|
November 27,
2009
|
|
|
|
Costs
Incurred
|
|
|
|
Cash
Payments
|
|
|
|
Other
Adjustments
|
|
|
|
March 5,
2010
|
|
|
Termination benefits
|
|
$ |
1,057 |
|
|
$ |
— |
|
|
$ |
(196 |
) |
|
$ |
(56 |
) |
|
$ |
805 |
|
|
Cost of closing redundant facilities
|
|
|
3,382 |
|
|
|
— |
|
|
|
(526 |
) |
|
|
(83 |
) |
|
|
2,773 |
|
|
Total
|
|
$ |
4,439 |
|
|
$ |
— |
|
|
$ |
(722 |
) |
|
$ |
(139 |
) |
|
$ |
3,578 |
|
Accrued restructuring charges of approximately $3.6 million at March 5, 2010 include $1.2 million recorded in accrued restructuring, current and $2.4 million related to long-term facilities obligations recorded in accrued restructuring, non-current on our Condensed Consolidated Balance Sheets. Total costs incurred to date and expected to be incurred for closing redundant facilities are $8.7 million and $9.1 million, respectively. We paid substantially all of the accrued termination benefits during fiscal 2009. We paid $0.7 million in the first quarter of fiscal 2010 and expect to pay the remaining amount in the second quarter of fiscal 2010. We expect to pay facilities-related liabilities through fiscal 2013. Included in the other adjustments column are foreign currency translation adjustments of $0.1 million.
Macromedia Restructuring Plan
We completed our acquisition of Macromedia on December 3, 2005. In connection with this acquisition, we initiated plans to restructure both the pre-merger operations of Adobe and Macromedia to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. In connection with the worldwide restructuring plan, we recognized costs related to termination benefits for employee positions that were eliminated and for the closure of duplicative facilities. We also recognized costs related to the cancellation of certain contracts associated with the wind-down of subsidiaries and other service contracts held by Macromedia. Costs for termination benefits and contract terminations were completed during fiscal 2007. Total costs incurred were $27.0 million and $3.2 million, respectively.
The following table sets forth a summary of restructuring activities during the three months ended March 5, 2010 related to our Macromedia Restructuring Plan (in thousands):
| |
|
|
November 27,
2009
|
|
|
|
Cash
Payments
|
|
|
|
Other Adjustments
|
|
|
|
March 5,
2010
|
|
|
Cost of closing redundant facilities
|
|
$ |
5,006 |
|
|
$ |
(1,155 |
) |
|
$ |
(11 |
) |
|
$ |
3,840 |
|
|
Other
|
|
|
8 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
7 |
|
|
Total
|
|
$ |
5,014 |
|
|
$ |
(1,156 |
) |
|
$ |
(11 |
) |
|
$ |
3,847 |
|
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Accrued restructuring charges of approximately $3.8 million at March 5, 2010 related to facilities obligations include $2.3 million recorded in accrued restructuring, current and $1.5 million recorded in accrued restructuring, non-current on our Condensed Consolidated Balance Sheets. We expect to pay these liabilities through fiscal 2012. Included in the other adjustments column are small foreign currency translation adjustments.
NOTE 12. STOCKHOLDERS’ EQUITY
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 repurchases with third-parties.
We did not enter into any new structured repurchase agreements during the three months ended March 5, 2010 and February 27, 2009. We have previously entered 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 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 three months ended March 5, 2010, we repurchased approximately 1.7 million shares at an average price of $36.21 through structured repurchase agreements entered into during fiscal 2009. During the three months ended February 27, 2009, we repurchased approximately 5.0 million shares at an average price of $22.79 through structured repurchase agreements entered into during fiscal 2008.
As of March 5, 2010 and November 27, 2009, 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 are excluded from the denominator in the computation of earnings per share. As of March 5, 2010, there were no up-front payments remaining under the agreements. As of February 27, 2009, approximately $19.7 million of up-front payments remained under the agreements.
Subsequent to March 5, 2010, as part of our stock repurchase program, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $250.0 million. This amount will be classified as treasury stock on our Condensed Consolidated Balance Sheets. See Note 19 for further discussion of our stock repurchase program.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 13. COMPREHENSIVE INCOME (LOSS)
The following table sets forth the activity for each component of comprehensive income, net of related taxes, for the three months ended March 5, 2010 and February 27, 2009 (in thousands):
| |
|
|
2010
|
|
|
|
2009
|
|
|
Net income
|
|
$ |
127,154 |
|
|
$ |
156,435 |
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Unrealized losses on available-for-sale securities, net of taxes
|
|
|
(758 |
) |
|
|
(1,969 |
) |
|
Reclassification adjustment for gains on available-for-sale securities recognized during the period
|
|
|
(344 |
) |
|
|
(1,310 |
) |
|
Subtotal available-for-sale securities
|
|
|
(1,102 |
) |
|
|
(3,279 |
) |
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on derivative instruments
|
|
|
10,364 |
|
|
|
(5,450 |
) |
|
Reclassification adjustment for gains on derivative instruments recognized during the period
|
|
|
— |
|
|
|
(20,476 |
) |
|
Subtotal derivative instruments
|
|
|
10,364 |
|
|
|
(25,926 |
) |
|
Foreign currency translation adjustments
|
|
|
(4,599 |
) |
|
|
(2,922 |
) |
|
Other comprehensive income (loss)
|
|
|
4,663 |
|
|
|
(32,127 |
) |
|
Total comprehensive income, net of taxes
|
|
$ |
131,817 |
|
|
$ |
124,308 |
|
The following table sets forth the components of accumulated other comprehensive income, net of related taxes, as of March 5, 2010 and November 27, 2009 (in thousands):
| |
|
|
2010
|
|
|
|
2009
|
|
|
Net unrealized gains on available-for-sale securities:
|
|
|
|
|
|
|
|
|