Edgar Filing: ADOBE SYSTEMS INC

ADBE 10Q Q213

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

(Mark One)



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

For the quarterly period ended May 31, 2013



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

For the transition period from to

Commission File Number: 0-15175

ADOBE SYSTEMS INCORPORATED

(Exact name of registrant as specified in its charter)

_________________________



Delaware (State or other jurisdiction of incorporation or organization)	77-0019522 (I.R.S. Employer Identification No.)

345 Park Avenue, San Jose, California 95110-2704

(Address of principal executive offices and zip code)

(408) 536-6000

(Registrant’s telephone number, including area code)

_________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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



Large accelerated filer x	Accelerated filer o	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

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

The number of shares outstanding of the registrant’s common stock as of June 21, 2013 was 502,261,330.

ADOBE SYSTEMS INCORPORATED

FORM 10-Q

TABLE OF CONTENTS



		Page No.
PART I—FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:	3
	Condensed Consolidated Balance Sheets May 31, 2013 and November 30, 2012	3
	Condensed Consolidated Statements of Income Three and Six Months Ended May 31, 2013 and June 1, 2012	4
	Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended May 31, 2013 and June 1, 2012	5
	Condensed Consolidated Statements of Cash Flows Six Months Ended May 31, 2013 and June 1, 2012	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
Item 4.	Controls and Procedures	44

PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 4.	Mine Safety Disclosures	56
Item 6.	Exhibits	56
Signature		57
Summary of Trademarks		58
Index to Exhibits		59

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)



	May 31, 2013			November 30, 2012
	(Unaudited)			(*)
ASSETS
Current assets:
Cash and cash equivalents	$	1,246,410		$	1,425,052
Short-term investments	2,619,298			2,113,301
Trade receivables, net of allowances for doubtful accounts of $10,908 and $12,643, respectively	470,052			617,233
Deferred income taxes	54,525			59,537
Prepaid expenses and other current assets	143,799			116,237
Assets held for sale	23,573			—
Total current assets	4,557,657			4,331,360
Property and equipment, net	645,865			664,302
Goodwill	4,225,169			4,133,259
Purchased and other intangibles, net	551,265			545,036
Investment in lease receivable	207,239			207,239
Other assets	93,174			93,327
Total assets	$	10,280,369		$	9,974,523

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade payables	$	53,685		$	49,759
Accrued expenses	538,402			590,140
Capital lease obligations	20,083			11,217
Accrued restructuring	6,671			9,287
Income taxes payable	7,129			49,886
Deferred revenue	638,885			561,463
Total current liabilities	1,264,855			1,271,752
Long-term liabilities:
Debt and capital lease obligations	1,505,560			1,496,938
Deferred revenue	52,376			58,102
Accrued restructuring	8,790			12,263
Income taxes payable	161,937			155,096
Deferred income taxes	286,104			265,106
Other liabilities	73,445			50,084
Total liabilities	3,353,067			3,309,341
Stockholders’ equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized, none issued	—			—
Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 503,052 and 494,132 shares outstanding, respectively	61			61
Additional paid-in-capital	3,189,883			3,038,665
Retained earnings	6,855,463			7,003,003
Accumulated other comprehensive income	27,461			30,712
Treasury stock, at cost (97,782 and 106,702 shares, respectively), net of reissuances	(3,145,566		)	(3,407,259		)
Total stockholders’ equity	6,927,302			6,665,182
Total liabilities and stockholders’ equity	$	10,280,369		$	9,974,523

^{_________________________________________}


(*)	The Condensed Consolidated Balance Sheet as of November 30, 2012 has been derived from the audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)



	Three Months Ended						Six Months Ended
	May 31, 2013			June 1, 2012			May 31, 2013			June 1, 2012
Revenue:
Products	$	644,899		$	871,022		$	1,320,688		$	1,679,543
Subscription	254,521			159,519			478,787			305,749
Services and support	111,129			93,908			218,947			184,377
Total revenue	1,010,549			1,124,449			2,018,422			2,169,669
Cost of revenue:
Products	26,805			40,074			78,787			65,742
Subscription	66,527			54,823			129,107			103,603
Services and support	41,949			36,021			84,071			69,838
Total cost of revenue	135,281			130,918			291,965			239,183
Gross profit	875,268			993,531			1,726,457			1,930,486
Operating expenses:
Research and development	203,097			180,903			412,735			358,631
Sales and marketing	402,208			386,459			800,241			745,422
General and administrative	120,870			110,603			253,723			213,284
Restructuring and other charges	24,992			(2,191		)	24,994			(5,016		)
Amortization of purchased intangibles	12,792			12,614			25,231			24,043
Total operating expenses	763,959			688,388			1,516,924			1,336,364
Operating income	111,309			305,143			209,533			594,122
Non-operating income (expense):
Interest and other income (expense), net	1,268			(1,128		)	2,514			(3,913		)
Interest expense	(17,205		)	(16,629		)	(34,039		)	(33,467		)
Investment gains (losses), net	(4,245		)	7,188			(3,397		)	8,209
Total non-operating income (expense), net	(20,182		)	(10,569		)	(34,922		)	(29,171		)
Income before income taxes	91,127			294,574			174,611			564,951
Provision for income taxes	14,581			70,698			32,948			155,866
Net income	$	76,546		$	223,876		$	141,663		$	409,085
Basic net income per share	$	0.15		$	0.45		$	0.28		$	0.83
Shares used to compute basic net income per share	503,384			495,950			500,996			494,983
Diluted net income per share	$	0.15		$	0.45		$	0.28		$	0.81
Shares used to compute diluted net income per share	512,446			501,377			511,535			502,154

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)



	Three Months Ended						Six Months Ended
	May 31, 2013			June 1, 2012			May 31, 2013			June 1, 2012
	Increase/(Decrease)						Increase/(Decrease)
Net income	$	76,546		$	223,876		$	141,663		$	409,085
Other comprehensive income, net of taxes:
Available-for-sale securities:
Unrealized gains / losses on available-for-sale securities	(5,255		)	(7,297		)	(4,553		)	5,568
Reclassification adjustment for gains on available-for-sale securities recognized during the period	(788		)	(413		)	(2,372		)	(911		)
Net increase (decrease) from available-for-sale securities	(6,043		)	(7,710		)	(6,925		)	4,657
Derivatives designated as hedging instruments:
Unrealized gains on derivative instruments	10,885			10,191			32,660			22,772
Reclassification adjustment for gains on derivative instruments recognized during the period	(15,299		)	(10,661		)	(22,392		)	(21,009		)
Net increase (decrease) from derivatives designated as hedging instruments	(4,414		)	(470		)	10,268			1,763
Foreign currency translation adjustments	(2,192		)	(17,952		)	(6,594		)	(15,755		)
Other comprehensive income, net of taxes	(12,649		)	(26,132		)	(3,251		)	(9,335		)
Total comprehensive income, net of taxes	$	63,897		$	197,744		$	138,412		$	399,750

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended
	May 31, 2013			June 1, 2012
Cash flows from operating activities:
Net income	$	141,663		$	409,085
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	157,702			147,035
Stock-based compensation	163,066			142,980
Write down of assets held for sale	23,838			—
Deferred income taxes	18,661			58,094
Unrealized (gains) losses on investments	3,894			(7,403		)
Other non-cash items	(9,191		)	(13,578		)
Excess tax benefits from stock-based compensation	—			(5,354		)
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
Trade receivables, net	147,839			134,658
Prepaid expenses and other current assets	(18,651		)	(32,956		)
Trade payables	3,437			(43,203		)
Accrued expenses	(46,482		)	(43,767		)
Accrued restructuring	(5,209		)	(56,156		)
Income taxes payable	(30,132		)	12,593
Deferred revenue	70,744			60,553
Net cash provided by operating activities	621,179			762,581
Cash flows from investing activities:
Purchases of short-term investments	(1,358,634		)	(910,579		)
Maturities of short-term investments	196,201			281,911
Proceeds from sales of short-term investments	641,203			489,623
Acquisitions, net of cash acquired	(96,356		)	(353,245		)
Purchases of property and equipment	(106,439		)	(111,855		)
Purchases of long-term investments and other assets	(59,768		)	(9,448		)
Proceeds from sale of long-term investments	3,240			27,626
Net cash used for investing activities	(780,553		)	(585,967		)
Cash flows from financing activities:
Purchases of treasury stock	(300,000		)	(305,000		)
Proceeds from issuance of treasury stock	273,221			89,237
Excess tax benefits from stock-based compensation	—			5,354
Proceeds from debt and capital lease obligations	25,703			—
Repayment of debt and capital lease obligations	(9,804		)	(4,554		)
Debt issuance costs	(357		)	(2,297		)
Net cash used for financing activities	(11,237		)	(217,260		)
Effect of foreign currency exchange rates on cash and cash equivalents	(8,031		)	2,384
Net decrease in cash and cash equivalents	(178,642		)	(38,262		)
Cash and cash equivalents at beginning of period	1,425,052			989,500
Cash and cash equivalents at end of period	$	1,246,410		$	951,238
Supplemental disclosures:
Cash paid for income taxes, net of refunds	$	68,507		$	96,105
Cash paid for interest	$	32,676		$	34,172
Non-cash investing activities:
Issuance of common stock and stock awards assumed in business acquisitions	$	661		$	4,265

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We have prepared the accompanying unaudited Condensed Consolidated Financial Statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual Consolidated Financial Statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the Consolidated Financial Statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended November 30, 2012 on file with the SEC (our “Annual Report”).

With the exception of the discussion below, there have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report.

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) amended the accounting standards to increase the prominence of other comprehensive income (“OCI”) by eliminating the option to present components of OCI as part of the statement of changes in shareholders’ equity and requires the components of OCI to be presented either in a single continuous statement of comprehensive income or in two consecutive statements. We adopted the amended accounting standards at the beginning of our first quarter of fiscal 2013 by electing to present separate consolidated statements of comprehensive income from the consolidated statements of income.

In February 2013, the FASB further amended the above accounting standards to improve the presentation of amounts reclassified out of accumulated other comprehensive income in its entirety and by component by presenting the reclassification adjustments on either the face of the the statement where net income is presented or in a separate disclosure in the notes to the financial statements. Amounts that are not required to be reclassified in their entirety to net income are required to be cross referenced to related footnote disclosures that provide additional detail. We elected to early adopt the amended accounting standard at the beginning of our second quarter of fiscal 2013 by electing to present the reclassification adjustments and other required disclosures in a separate footnote.

The amended accounting standards only impact the financial statement presentation of OCI and do not change the components that are recognized in net income or OCI. The adoption had no impact on the Company’s financial position or results of operations.

NOTE 2. ACQUISITIONS

On December 20, 2012, we completed our acquisition of privately held Behance, an online social media platform to showcase and discover creative work. During the first quarter of fiscal 2013, we began integrating Behance into our Digital Media reportable segment. Behance’s community and portfolio capabilities will accelerate our strategy to bring additional community features to Creative Cloud. We have included the financial results of Behance in our Condensed Consolidated Financial Statements beginning on the acquisition date.

Under the acquisition method of accounting, the total purchase price was allocated to Behance’s net tangible and intangible assets based upon their estimated fair values as of December 20, 2012. The total final purchase price for Behance was approximately $111.1 million of which approximately $91.4 million was allocated to goodwill, $28.5 million to identifiable intangible assets and $8.8 million to net liabilities assumed. The impact of this acquisition was not material to our Condensed Consolidated Financial Statements.

On January 13, 2012, we completed our acquisition of privately held Efficient Frontier, a multi-channel digital ad buying and optimization company. During the first quarter of fiscal 2012, we began integrating Efficient Frontier into our Digital Marketing reportable segment. The Efficient Frontier business adds cross-channel digital ad campaign forecasting, execution and optimization capabilities to our Adobe Marketing Cloud, along with a social marketing engagement platform and social ad buying capabilities. We have included the financial results of Efficient Frontier in our Condensed Consolidated Financial Statements beginning on the acquisition date.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Under the acquisition method of accounting, the total purchase price was allocated to Efficient Frontier’s net tangible and intangible assets based upon their estimated fair values as of January 13, 2012. The total final purchase price for Efficient Frontier was approximately $374.7 million of which approximately $291.4 million was allocated to goodwill, $122.7 million to identifiable intangible assets and $39.4 million to net liabilities assumed. The impact of this acquisition was not material to our Condensed Consolidated Financial Statements.

NOTE 3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase. We classify all of our cash equivalents and short-term investments as “available-for-sale.” In general, these investments are free of trading restrictions. We carry these investments at fair value, based on quoted market prices or other readily available market information. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our Condensed Consolidated Balance Sheets. Gains and losses are recognized when realized in our Condensed Consolidated Statements of Income. When we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in income. Gains and losses are determined using the specific identification method.

Cash, cash equivalents and short-term investments consisted of the following as of May 31, 2013 (in thousands):



	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Current assets:
Cash	$	322,438	$	—	$	—		$	322,438
Cash equivalents:
Corporate bonds and commercial paper	23,992		—		(1		)	23,991
Money market mutual funds	761,427		—		—			761,427
Time deposits	138,554		—		—			138,554
Total cash equivalents	923,973		—		(1		)	923,972
Total cash and cash equivalents	1,246,411		—		(1		)	1,246,410
Short-term fixed income securities:
Corporate bonds and commercial paper	1,406,253		7,714		(1,501		)	1,412,466
Foreign government securities	14,863		44		(9		)	14,898
Municipal securities	194,428		277		(31		)	194,674
U.S. agency securities	534,734		1,445		(363		)	535,816
U.S. Treasury securities	461,277		287		(459		)	461,105
Subtotal	2,611,555		9,767		(2,363		)	2,618,959
Marketable equity securities	180		159		—			339
Total short-term investments	2,611,735		9,926		(2,363		)	2,619,298
Total cash, cash equivalents and short-term investments	$	3,858,146	$	9,926	$	(2,364	)	$	3,865,708

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Cash, cash equivalents and short-term investments consisted of the following as of November 30, 2012 (in thousands):



	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Current assets:
Cash	$	200,771	$	—	$	—		$	200,771
Cash equivalents:
Corporate bonds and commercial paper	3,998		—		—			3,998
Money market mutual funds and repurchase agreements	1,171,270		—		—			1,171,270
Municipal securities	3,895		—		—			3,895
Time deposits	45,118		—		—			45,118
Total cash equivalents	1,224,281		—		—			1,224,281
Total cash and cash equivalents	1,425,052		—		—			1,425,052
Short-term fixed income securities:
Corporate bonds and commercial paper	1,059,158		11,415		(133		)	1,070,440
Foreign government securities	6,919		45		(12		)	6,952
Municipal securities	180,488		97		(60		)	180,525
Time deposits	20,113		—		—			20,113
U.S. agency securities	501,863		2,346		(18		)	504,191
U.S. Treasury securities	330,072		801		(37		)	330,836
Subtotal	2,098,613		14,704		(260		)	2,113,057
Marketable equity securities	237		7		—			244
Total short-term investments	2,098,850		14,711		(260		)	2,113,301
Total cash, cash equivalents and short-term investments	$	3,523,902	$	14,711	$	(260	)	$	3,538,353

See Note 4 for further information regarding the fair value of our financial instruments.

The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that have been in an unrealized loss position for less than twelve months, as of May 31, 2013 and November 30, 2012 (in thousands):



	2013					2012
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Corporate bonds and commercial paper	$	532,012	$	(1,501	)	$	95,489	$	(132	)
Foreign government securities	10,076		(9		)	2,105		(12		)
Municipal securities	30,705		(31		)	40,524		(60		)
U.S. Treasury and agency securities	425,823		(823		)	48,203		(55		)
Total	$	998,616	$	(2,364	)	$	186,321	$	(259	)

There were 422 securities and 65 securities that were in an unrealized loss position for less than twelve months at May 31, 2013 and at November 30, 2012, respectively.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that were in a continuous unrealized loss position for more than twelve months, as of November 30, 2012 (in thousands):



	2012
	Fair Value		Gross Unrealized Losses
Corporate bonds and commercial paper	$	2,999	$	(1	)
Total	$	2,999	$	(1	)

As of May 31, 2013, there were no securities in an unrealized loss position for more than twelve months. As of November 30, 2012, there was one security in an unrealized loss position for more than twelve months.

The following table summarizes the cost and estimated fair value of short-term fixed income securities classified as short-term investments based on stated effective maturities as of May 31, 2013 (in thousands):



	Amortized Cost		Estimated Fair Value
Due within one year	$	662,219	$	663,737
Due between one and two years	780,088		783,575
Due between two and three years	825,495		827,482
Due after three years	343,753		344,165
Total	$	2,611,555	$	2,618,959

We review our debt and marketable equity securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. We consider factors such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and our intent to sell, or whether it is more likely than not we will be required to sell the investment before recovery of the investment’s amortized cost basis. If we believe that an other-than-temporary decline exists in one of these securities, we write down these investments to fair value. For debt securities, the portion of the write-down related to credit loss would be recorded to interest and other income, net in our Condensed Consolidated Statements of Income. Any portion not related to credit loss would be recorded to accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our Condensed Consolidated Balance Sheets. For equity securities, the write-down would be recorded to investment gains (losses), net in our Condensed Consolidated Statements of Income. During the six months ended May 31, 2013, we did not consider any of our investments to be other-than-temporarily impaired.

NOTE 4. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

We measure certain financial assets and liabilities at fair value on a recurring basis. There have been no transfers between fair value measurement levels during the six months ended May 31, 2013.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of our financial assets and liabilities at May 31, 2013 was determined using the following inputs (in thousands):



	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents:
Corporate bonds and commercial paper	$	23,991	$	—	$	23,991	$	—
Money market mutual funds	761,427		761,427		—		—
Time deposits	138,554		138,554		—		—
Short-term investments:
Corporate bonds and commercial paper	1,412,466		—		1,412,466		—
Foreign government securities	14,898		—		14,898		—
Marketable equity securities	339		339		—		—
Municipal securities	194,674		—		194,674		—
U.S. agency securities	535,816		—		535,816		—
U.S. Treasury securities	461,105		—		461,105		—
Prepaid expenses and other current assets:
Foreign currency derivatives	23,781		—		23,781		—
Other assets:
Deferred compensation plan assets	18,450		399		18,051		—
Total assets	$	3,585,501	$	900,719	$	2,684,782	$	—



Liabilities:
Accrued expenses:
Foreign currency derivatives	$	2,498	$	—	$	2,498	$	—
Total liabilities	$	2,498	$	—	$	2,498	$	—

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of our financial assets and liabilities at November 30, 2012 was determined using the following inputs (in thousands):



	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents:
Corporate bonds and commercial paper	$	3,998	$	—	$	3,998	$	—
Money market mutual funds and repurchase agreements	1,171,270		1,171,270		—		—
Municipal securities	3,895		—		3,895		—
Time deposits	45,118		45,118		—		—
Short-term investments:
Corporate bonds and commercial paper	1,070,440		—		1,070,440		—
Foreign government securities	6,952		—		6,952		—
Marketable equity securities	244		244		—		—
Municipal securities	180,525		—		180,525		—
Time deposits	20,113		—		20,113		—
U.S. agency securities	504,191		—		504,191		—
U.S. Treasury securities	330,836		—		330,836		—
Prepaid expenses and other current assets:
Foreign currency derivatives	13,513		—		13,513		—
Other assets:
Deferred compensation plan assets	15,094		436		14,658		—
Total assets	$	3,366,189	$	1,217,068	$	2,149,121	$	—



Liabilities:
Accrued expenses:
Foreign currency derivatives	$	998	$	—	$	998	$	—
Total liabilities	$	998	$	—	$	998	$	—

See Note 3 for further information regarding the fair value of our financial instruments.

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

Our deferred compensation plan assets consist of prime money market funds and mutual funds.

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Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We also have direct investments in privately held companies accounted for under the cost method, which are periodically assessed for other-than-temporary impairment. If we determine that an other-than-temporary impairment has occurred, we write down the investment to its fair value. We estimate fair value of our cost method investments considering available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. For the three and six months ended May 31, 2013, we determined there was an other-than-temporary impairment of $5.0 million on our cost method investments and wrote down the investments to fair value.

In May 2013, management approved a plan to sell land, building and other assets located in Waltham, Massachusetts (the “Waltham property assets”). The Company classified the Waltham property assets with a total carrying amount of $47.4 million as assets held for sale and recorded these assets at fair value net of estimated costs to sell on the Condensed Consolidated Balance Sheets as of May 31, 2013. The fair value, net of estimated cost to sell was approximately $23.6 million, and was measured with the assistance of third-party valuation models which used inputs such as market comparable data for similar properties to be purchased by other operating and investing entities and discounted cash flow techniques as part of the analysis. The fair value measurement was categorized as Level 3 as significant unobservable inputs were used in the valuation analysis. As a result, we recorded a write-down of $23.8 million during the second quarter of fiscal 2013. These charges are included in restructuring and other charges in our Condensed Consolidated Statements of Income. See Note 6 for further details regarding our assets held for sale.

As of May 31, 2013, the carrying value of our lease receivables approximated fair value, based on Level 2 observable inputs which include Treasury rates, LIBOR rates and applicable credit spreads. See Note 13 for further details regarding our investment in lease receivables. The fair value of our long-term debt was approximately $1.6 billion as of May 31, 2013, based on Level 2 quoted prices in inactive markets. See Note 14 for further details regarding our debt.

NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES

In countries outside the U.S., we transact business in U.S. Dollars and in various other currencies. We may use foreign exchange option contracts or forward contracts to hedge certain cash flow exposures resulting from changes in these foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities of up to twelve months. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business and accordingly, they are not speculative in nature.

We recognize these contracts as derivative instruments and they are classified as either assets or liabilities on the balance sheet and measured at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income in our Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income (expense), net in our Condensed Consolidated Statements of Income at that time. If we do not elect hedge accounting, or the derivative does not qualify for hedge accounting treatment, the changes in fair market value from period to period are recorded in interest and other income (expense), net in our Condensed Consolidated Statements of Income.

We also hedge our net recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that the value of these assets and liabilities will be adversely affected by changes in exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded to interest and other income (expense), net in our Condensed Consolidated Statements of Income. These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged.

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(Unaudited)

The bank counterparties to these contracts expose us to credit-related losses in the event of their nonperformance. However, to mitigate that risk, we only contract with counterparties who meet our minimum requirements as determined by our counterparty risk assessment process. We monitor ratings, credit spreads and potential downgrades on at least a quarterly basis. Based on our ongoing assessment of counterparty risk, we may adjust our exposure to various counterparties. In addition, our hedging policy establishes maximum limits for each counterparty to mitigate any concentration of risk.

The aggregate fair value of derivative instruments in net asset positions as of May 31, 2013 and November 30, 2012 was $23.8 million and $13.5 million, respectively. These amounts represent the maximum exposure to loss at the reporting date as a result of all of the counterparties failing to perform as contracted. This exposure could be reduced by up to $2.5 million and $1.0 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 May 31, 2013 and November 30, 2012 were as follows (in thousands):



	2013				2012
	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⁾	$	21,158	$	—	$	10,897	$	—
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	2,623		2,498		2,616		998
Total derivatives	$	23,781	$	2,498	$	13,513	$	998

^{_________________________________________}


⁽¹⁾	Included in prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.


⁽²⁾	Included in accrued expenses on our Condensed Consolidated Balance Sheets.


⁽³⁾	Hedging effectiveness expected to be recognized into income within the next twelve months.

The effect of derivative instruments designated as cash flow hedges and of derivative instruments not designated as hedges in our Condensed Consolidated Statements of Income for the three and six months ended May 31, 2013 was as follows (in thousands):



	Three Months					Six Months
	Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts		Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts
Derivatives in cash flow hedging relationships:
Net gain (loss) recognized in OCI, net of tax⁽¹⁾	$	10,885		$	—	$	32,660		$	—
Net gain (loss) reclassified from accumulated OCI into income, net of tax⁽²⁾	$	15,299		$	—	$	22,392		$	—
Net gain (loss) recognized in income⁽³⁾	$	(4,999	)	$	—	$	(9,667	)	$	—
Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income⁽⁴⁾	$	—		$	3,318	$	—		$	4,796

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	Three Months					Six Months
	Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts		Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts
Derivatives in cash flow hedging relationships:
Net gain (loss) recognized in OCI, net of tax⁽¹⁾	$	10,191		$	—	$	22,772		$	—
Net gain (loss) reclassified from accumulated OCI into income, net of tax⁽²⁾	$	10,661		$	—	$	21,009		$	—
Net gain (loss) recognized in income⁽³⁾	$	(6,714	)	$	—	$	(14,958	)	$	—
Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income⁽⁴⁾	$	—		$	8,423	$	—		$	16,573

^{_________________________________________}


⁽¹⁾	Net change in the fair value of the effective portion classified in other comprehensive income (“OCI”).


⁽²⁾	Effective portion classified as revenue.


⁽³⁾	Ineffective portion and amount excluded from effectiveness testing classified in interest and other income (expense), net.


⁽⁴⁾	Classified in interest and other income (expense), net.

NOTE 6. ASSETS HELD FOR SALE

In May 2013, management approved a plan to sell land, building and other assets located in Waltham, Massachusetts (the “Waltham property assets”) with a total carrying amount of $47.4 million. The decision to sell the Waltham property assets was largely based upon lack of operational needs for a facility of this size, in combination with recent improvements in market conditions for commercial real estate in the area. During May 2013, we began to actively market the Waltham property assets and we expect to sell the property within one year from management's approval of the plan. As of May 31, 2013, we classified the Waltham property assets as held for sale on the Condensed Consolidated Balance Sheets at its fair value, net of estimated cost to sell of $23.6 million which was the lesser of the fair value less cost to sell or carrying amount of the assets. We ceased recognizing depreciation expense on the Waltham property assets upon reclassification. As a result, we recorded a write-down of $23.8 million during the second quarter of fiscal 2013. These charges are included in restructuring and other charges in our Condensed Consolidated Statements of Income.

NOTE 7. GOODWILL AND PURCHASED AND OTHER INTANGIBLES

Goodwill as of May 31, 2013 and November 30, 2012 was $4.225 billion and $4.133 billion, respectively. The increase was primarily due to our acquisition of Behance. During the second quarter of fiscal 2013, we completed our annual goodwill impairment test associated with our three reporting units—Digital Media, Digital Marketing and Print and Publishing—and determined there was no impairment of goodwill.

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(Unaudited)

Purchased and other intangible assets subject to amortization as of May 31, 2013 and November 30, 2012 were as follows (in thousands):



	2013							2012
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Purchased technology	$	358,512	$	(181,269	)	$	177,243	$	366,574	$	(161,538	)	$	205,036
Customer contracts and relationships	$	324,161	$	(91,564	)	$	232,597	$	318,027	$	(74,214	)	$	243,813
Trademarks	66,475		(23,443		)	43,032		53,293		(19,171		)	34,122
Acquired rights to use technology	152,817		(66,316		)	86,501		104,402		(56,782		)	47,620
Localization	7,226		(2,550		)	4,676		8,586		(4,654		)	3,932
Other intangibles	17,644		(10,428		)	7,216		18,742		(8,229		)	10,513
Total other intangible assets	$	568,323	$	(194,301	)	$	374,022	$	503,050	$	(163,050	)	$	340,000
Purchased and other intangible assets, net	$	926,835	$	(375,570	)	$	551,265	$	869,624	$	(324,588	)	$	545,036

In the first quarter of fiscal 2013, we acquired rights to use certain technology for approximately $51.8 million. Of this cost, an estimated $25.3 million was related to future licensing rights and has been capitalized and will be amortized on a straight-line basis over the estimated useful lives ranging from five to ten years. We estimated that the remaining cost of approximately $26.5 million was related to historical use of licensing rights and was expensed as cost of product revenue.

In the first quarter of fiscal 2013, certain purchased intangibles associated with our Omniture acquisition became fully amortized and were removed from the balance sheet. Excluding the expense associated with historical use of the acquired rights to use the technology discussed above, amortization expense related to purchased and other intangible assets was $37.5 million and $74.9 million for the three and six months ended May 31, 2013, respectively. Comparatively, amortization expense was $39.5 million and $72.6 million for the three and six months ended June 1, 2012, respectively. Of these amounts, $26.6 million and $53.0 million were included in cost of sales for the three and six months ended May 31, 2013, respectively, and $27.0 million and $48.6 million were included in cost of sales for the three and six months ended June 1, 2012, respectively.

As of May 31, 2013, we expect amortization expense in future periods to be as follows (in thousands):



Fiscal Year	Purchased Technology		Other Intangible Assets
Remainder of 2013	$	35,578	$	39,362
2014	66,544		67,134
2015	51,819		61,229
2016	13,136		55,605
2017	6,736		47,170
Thereafter	3,430		103,522
Total expected amortization expense	$	177,243	$	374,022

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(Unaudited)

NOTE 8. ACCRUED EXPENSES

Accrued expenses as of May 31, 2013 and November 30, 2012 consisted of the following (in thousands):



	2013		2012
Accrued compensation and benefits	$	249,877	$	242,887
Sales and marketing allowances	64,525		87,916
Accrued corporate marketing	31,620		39,503
Taxes payable	18,343		26,164
Royalties payable	9,470		10,040
Accrued interest expense	20,969		20,796
Other	143,598		162,834
Accrued expenses	$	538,402	$	590,140

Other primarily includes general corporate accruals for local and regional expenses and technical support. Other is also comprised of deferred rent related to office locations with rent escalations and foreign currency liability derivatives.

NOTE 9. STOCK-BASED COMPENSATION

Summary of Restricted Stock Units

Restricted stock unit activity for the six months ended May 31, 2013 and the fiscal year ended November 30, 2012 was as follows (in thousands):



	2013		2012
Beginning outstanding balance	18,415		16,871
Awarded	6,190		9,431
Released	(5,402	)	(5,854	)
Forfeited	(899	)	(2,147	)
Increase due to acquisition	—		114
Ending outstanding balance	18,304		18,415

Information regarding restricted stock units outstanding at May 31, 2013 and June 1, 2012 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2013
Restricted stock units outstanding	18,304	1.47	$	785.4
Restricted stock units vested and expected to vest	16,009	1.40	$	684.6
2012
Restricted stock units outstanding	18,674	1.74	$	555.6
Restricted stock units vested and expected to vest	15,949	1.64	$	473.7

^{_________________________________________}


^(*)	The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of May 31, 2013 and June 1, 2012 were $42.91 and $29.82, respectively.

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Summary of Performance Shares

The following table sets forth the summary of performance share activity under our Performance Share Program for fiscal 2013 (the “2013 Program”) for the six months ended May 31, 2013 (in thousands):



	Shares Granted		Maximum Shares Eligible to Receive
Beginning outstanding balance	—		—
Awarded	945		1,891
Forfeited	(64	)	(128	)
Ending outstanding balance	881		1,763

Effective January 24, 2013, our Executive Compensation Committee modified our Performance Share Program by eliminating the use of qualitative performance objectives, with 100% of shares to be earned based on the achievement of an objective total stockholder return measure over a three-year performance period. Performance awards will be granted under the 2013 Program pursuant to the terms of our 2003 Equity Incentive Plan. The purpose of the 2013 Program is to align key management and senior leadership with stockholders’ interests over the long term and to retain key employees. Performance share awards will be awarded and fully vest upon the Executive Compensation Committee's certification of the level of achievement following the three-year anniversary of the grant date on January 24, 2016. Participants in the 2013 Program generally have the ability to receive up to 200% of the target number of shares originally granted.

In the first quarter of fiscal 2013, the Executive Compensation Committee certified the actual performance achievement of participants in the 2012 Performance Share Program (the “2012 Program”). Based upon the achievement of specific and/or market-based performance goals outlined in the 2012 Program, participants had the ability to receive up to 150% of the target number of shares originally granted. Actual performance resulted in participants achieving 116% of target or approximately 1.3 million shares for the 2012 Program. One third of the shares under the 2012 Program vested in the first quarter of fiscal 2013 and the remaining two thirds vest evenly on the following two anniversaries of the grant, contingent upon the recipient's continued service to Adobe.

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

The following table sets forth the summary of performance share activity under our 2010, 2011 and 2012 programs, based upon share awards actually achieved, for the six months ended May 31, 2013 and the fiscal year ended November 30, 2012 (in thousands):



	2013		2012
Beginning outstanding balance	388		405
Achieved	1,279		492
Released	(665	)	(464	)
Forfeited	(125	)	(45	)
Ending outstanding balance	877		388

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(Unaudited)

Information regarding performance shares outstanding at May 31, 2013 and June 1, 2012 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2013
Performance shares outstanding	877	1.08	$	37.6
Performance shares vested and expected to vest	793	1.06	$	33.9
2012
Performance shares outstanding	434	1.03	$	12.9
Performance shares vested and expected to vest	394	1.01	$	11.7

^{_________________________________________}


^(*)	The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of May 31, 2013 and June 1, 2012 were $42.91 and $29.82, respectively.

Summary of Stock Options

Option grants during the three and six months ended May 31, 2013 and June 1, 2012 were primarily made to non-employee directors who elected to receive options during the annual equity grant period in the second quarter of each fiscal year. The assumptions used to value option grants during the three and six months ended May 31, 2013 and June 1, 2012 were as follows:



	Three Months				Six Months
	2013		2012		2013		2012
Expected life (in years)	3.2		4.2		3.2		3.9 - 4.2
Volatility	27	%	31	%	27	%	31 - 34%
Risk free interest rate	0.36	%	0.71	%	0.36	%	0.54 - 0.71%

There were no stock purchases under the employee stock purchase plan (“ESPP”) during the three months ended May 31, 2013 and June 1, 2012. The assumptions used to value employee stock purchase rights during the six months ended May 31, 2013 and June 1, 2012 were as follows:



	Six Months
	2013	2012
Expected life (in years)	0.5 - 2.0	0.5 - 2.0
Volatility	26 - 30%	36	%
Risk free interest rate	0.12 - 0.27%	0.06 - 0.27%

The expected life of ESPP shares is the average of the remaining purchase periods under each offering period.

Option activity for the six months ended May 31, 2013 and the fiscal year ended November 30, 2012 was as follows (in thousands):



	2013		2012
Beginning outstanding balance	24,517		34,802
Granted	25		57
Exercised	(10,462	)	(6,754	)
Cancelled	(1,429	)	(4,692	)
Increase due to acquisition	129		1,104
Ending outstanding balance	12,780		24,517

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(Unaudited)

Information regarding stock options outstanding at May 31, 2013 and June 1, 2012 is summarized below:



	Number of Shares (thousands)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2013
Options outstanding	12,780	$	31.84	2.89	$	142.1
Options vested and expected to vest	12,576	$	31.95	2.84	$	138.5
Options exercisable	10,387	$	33.05	2.36	$	102.9
2012
Options outstanding	27,392	$	31.26	3.27	$	87.0
Options vested and expected to vest	26,741	$	31.38	3.20	$	82.9
Options exercisable	21,503	$	32.82	2.63	$	47.0

^{_________________________________________}


^(*)	The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of May 31, 2013 and June 1, 2012 were $42.91 and $29.82, respectively.

Summary of Employee Stock Purchase Plan Shares

Employees purchased 1.2 million shares at an average price of $25.49 and 1.1 million shares at an average price of $23.64 for the six months ended May 31, 2013 and June 1, 2012, respectively. The intrinsic value of shares purchased during the six months ended May 31, 2013 and June 1, 2012 was $14.5 million and $5.0 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.

Compensation Costs

As of May 31, 2013, there was $530.5 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 2.2 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the three months ended May 31, 2013 and June 1, 2012 were as follows (in thousands):



	2013				2012
Income Statement Classifications	Option Grants and Stock Purchase Rights		Restricted Stock and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock and Performance Share Awards
Cost of revenue—subscription	$	446	$	1,181	$	701	$	714
Cost of revenue—services and support	826		2,360		702		2,373
Research and development	4,734		23,210		4,217		20,288
Sales and marketing	4,893		24,026		6,387		19,373
General and administrative	2,146		15,048		3,990		12,654
Total	$	13,045	$	65,825	$	15,997	$	55,402

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(Unaudited)

Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the six months ended May 31, 2013 and June 1, 2012 were as follows (in thousands):



	2013				2012
Income Statement Classifications	Option Grants and Stock Purchase Rights		Restricted Stock and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock and Performance Share Awards
Cost of revenue—subscription	$	1,083	$	2,244	$	1,443	$	1,317
Cost of revenue—services and support	1,681		4,810		1,818		4,443
Research and development	10,554		48,941		11,416		38,369
Sales and marketing	11,560		47,778		15,167		36,289
General and administrative	4,660		29,755		8,490		24,228
Total	$	29,538	$	133,528	$	38,334	$	104,646

NOTE 10. RESTRUCTURING CHARGES

Fiscal 2011 Restructuring Plan

In the fourth quarter of fiscal 2011, we initiated a restructuring plan consisting of reductions in workforce and the consolidation of facilities in order to better align our resources around our Digital Media and Digital Marketing strategies.

During the six months ended May 31, 2013, we continued to implement restructuring activities under this plan. Total costs incurred to date and expected to be incurred for closing redundant facilities are $10.7 million as all facilities under this plan have been exited as of May 31, 2013.

Other Restructuring Plans

Other restructuring plans include other Adobe plans and other plans associated with certain of our acquisitions that are substantially complete. We continue to make cash outlays to settle obligations under these plans, however the current impact to our Condensed Consolidated Financial Statements is not significant. Our other restructuring plans primarily consist of the 2009 Restructuring Plan, which was implemented in the fourth quarter of fiscal 2009, in order to appropriately align our costs in connection with our fiscal 2010 operating plan.

During the six months ended May 31, 2013 we vacated approximately 21,000 square feet of sales facilities in Australia in connection with our other restructuring plans.

Summary of Restructuring Plans

The following table sets forth a summary of restructuring activities related to all of our restructuring plans described above during the six months ended May 31, 2013 (in thousands):



	November 30, 2012		Costs Incurred		Cash Payments			Other Adjustments^*			May 31, 2013
Fiscal 2011 Restructuring Plan:
Termination benefits	$	1,248	$	—	$	(732	)	$	(66	)	$	450
Cost of closing redundant facilities	9,623		—		(813		)	(3,855		)	4,955
Other Restructuring Plans:
Termination benefits	991		—		(192		)	(38		)	761
Cost of closing redundant facilities	9,688		5,115		(4,624		)	(884		)	9,295
Total restructuring plans	$	21,550	$	5,115	$	(6,361	)	$	(4,843	)	$	15,461

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(Unaudited)

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^(*)	Included in Other Adjustments are foreign currency translation adjustments and goodwill adjustments of $0.7 million and $0.2 million, respectively.

Accrued restructuring charges of approximately $15.5 million as of May 31, 2013 includes $6.7 million recorded in accrued restructuring, current and $8.8 million related to long-term facilities obligations recorded in accrued restructuring, non-current on our Condensed Consolidated Balance Sheets. We expect to pay accrued termination benefits through fiscal 2013 and facilities-related liabilities under contract through fiscal 2021 of which approximately 62% will be paid through 2015.

NOTE 11. STOCKHOLDERS’ EQUITY

Retained Earnings

The changes in retained earnings for the six months ended May 31, 2013 were as follows (in thousands):



Balance as of November 30, 2012	$	7,003,003
Net income	141,663
Re-issuance of treasury stock	(289,203		)
Balance as of May 31, 2013	$	6,855,463

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

The components of accumulated other comprehensive income and activity, net of related taxes, as of May 31, 2013 was as follows (in thousands):



	November 30, 2012			Increase / Decrease			Reclassification Adjustments				May 31, 2013
Net unrealized gains on available-for-sale securities:
Unrealized gains on available-for-sale securities	$	14,699		$	(2,424	)	$	(2,400	)		$	9,875
Unrealized losses on available-for-sale securities	(260		)	(2,129		)	28				(2,361		)
Total net unrealized gains on available-for-sale securities	14,439			(4,553		)	(2,372		)	⁽¹⁾	7,514
Net unrealized gains on derivative instruments designated as hedging instruments	6,604			32,660			(22,392		)	⁽²⁾	16,872
Cumulative foreign currency translation adjustments	9,669			(6,594		)	—				3,075
Total accumulated other comprehensive income, net of taxes	$	30,712		$	21,513		$	(24,764	)		$	27,461

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⁽¹⁾	Classified in interest and other income (expense), net.


⁽²⁾	Classified as revenue.

Table of Contents

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table sets forth the taxes related to each component of other comprehensive income for the three and six months ended May 31, 2013 and June 1, 2012 (in thousands):



	Three Months					Six Months
	2013		2012			2013	2012
Available-for-sale securities:
Unrealized gains / losses	$	24	$	(3,069	)	$