ADBE 10Q Q214
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 30, 2014
or
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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)
_________________________
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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.
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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 20, 2014 was 497,375,239.
ADOBE SYSTEMS INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
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PART I—FINANCIAL INFORMATION | |
Item 1. |
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Item 2. |
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Item 3. |
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Item 4. | | |
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PART II—OTHER INFORMATION | |
Item 1. |
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Item 1A. |
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Item 2. |
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Item 4. |
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Item 5. | | |
Item 6. |
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PART I—FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
|
| | | | | | | |
| May 30, 2014 | | November 29, 2013 |
| (Unaudited) | | (*) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 817,020 |
| | $ | 834,556 |
|
Short-term investments | 2,513,191 |
| | 2,339,196 |
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Trade receivables, net of allowances for doubtful accounts of $7,929 and $10,228, respectively | 531,557 |
| | 599,820 |
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Deferred income taxes | 72,489 |
| | 102,247 |
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Prepaid expenses and other current assets | 180,086 |
| | 170,110 |
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Total current assets | 4,114,343 |
| | 4,045,929 |
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Property and equipment, net | 642,450 |
| | 659,774 |
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Goodwill | 4,773,798 |
| | 4,771,981 |
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Purchased and other intangibles, net | 532,317 |
| | 605,254 |
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Investment in lease receivable | 207,239 |
| | 207,239 |
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Other assets | 102,052 |
| | 90,121 |
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Total assets | $ | 10,372,199 |
| | $ | 10,380,298 |
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| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | |
| | |
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Trade payables | $ | 54,858 |
| | $ | 62,096 |
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Accrued expenses | 656,940 |
| | 656,939 |
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Debt and capital lease obligations | 609,742 |
| | 14,676 |
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Accrued restructuring | 3,627 |
| | 6,171 |
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Income taxes payable | 13,696 |
| | 10,222 |
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Deferred revenue | 879,109 |
| | 775,544 |
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Total current liabilities | 2,217,972 |
| | 1,525,648 |
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Long-term liabilities: | |
| | |
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Debt and capital lease obligations | 896,551 |
| | 1,499,297 |
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Deferred revenue | 49,495 |
| | 53,268 |
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Accrued restructuring | 6,099 |
| | 7,717 |
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Income taxes payable | 139,870 |
| | 132,545 |
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Deferred income taxes | 351,612 |
| | 375,634 |
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Other liabilities | 73,712 |
| | 61,555 |
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Total liabilities | 3,735,311 |
| | 3,655,664 |
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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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Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 497,247 and 496,261 shares outstanding, respectively | 61 |
| | 61 |
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Additional paid-in-capital | 3,562,682 |
| | 3,392,696 |
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Retained earnings | 6,806,104 |
| | 6,928,964 |
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Accumulated other comprehensive income | 46,642 |
| | 46,103 |
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Treasury stock, at cost (103,587 and 104,573 shares, respectively), net of reissuances | (3,778,601 | ) | | (3,643,190 | ) |
Total stockholders’ equity | 6,636,888 |
| | 6,724,634 |
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Total liabilities and stockholders’ equity | $ | 10,372,199 |
| | $ | 10,380,298 |
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(*) | The Condensed Consolidated Balance Sheet as of November 29, 2013 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.
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| May 30, 2014 | | May 31, 2013 | | May 30, 2014 | | May 31, 2013 |
Revenue: | | | | | | | |
Products | $ | 479,247 |
| | $ | 644,899 |
| | $ | 950,701 |
| | $ | 1,320,688 |
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Subscription | 476,694 |
| | 254,521 |
| | 900,257 |
| | 478,787 |
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Services and support | 112,267 |
| | 111,129 |
| | 217,370 |
| | 218,947 |
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Total revenue | 1,068,208 |
| | 1,010,549 |
| | 2,068,328 |
| | 2,018,422 |
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Cost of revenue: | |
| | | | | | |
Products | 24,499 |
| | 26,805 |
| | 51,997 |
| | 78,787 |
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Subscription | 84,147 |
| | 66,527 |
| | 160,879 |
| | 129,107 |
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Services and support | 46,258 |
| | 41,949 |
| | 90,537 |
| | 84,071 |
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Total cost of revenue | 154,904 |
| | 135,281 |
| | 303,413 |
| | 291,965 |
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Gross profit | 913,304 |
| | 875,268 |
| | 1,764,915 |
| | 1,726,457 |
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Operating expenses: | |
| | | | | | |
Research and development | 209,092 |
| | 203,097 |
| | 418,617 |
| | 412,735 |
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Sales and marketing | 426,830 |
| | 402,208 |
| | 836,971 |
| | 800,241 |
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General and administrative | 129,138 |
| | 120,870 |
| | 268,122 |
| | 253,723 |
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Restructuring and other charges | (366 | ) | | 24,992 |
| | 297 |
| | 24,994 |
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Amortization of purchased intangibles | 13,352 |
| | 12,792 |
| | 26,904 |
| | 25,231 |
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Total operating expenses | 778,046 |
| | 763,959 |
| | 1,550,911 |
| | 1,516,924 |
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Operating income | 135,258 |
| | 111,309 |
| | 214,004 |
| | 209,533 |
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Non-operating income (expense): | |
| | | | | | |
Interest and other income (expense), net | 2,563 |
| | 1,268 |
| | 5,708 |
| | 2,514 |
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Interest expense | (17,103 | ) | | (17,205 | ) | | (33,693 | ) | | (34,039 | ) |
Investment gains (losses), net | 553 |
| | (4,245 | ) | | 144 |
| | (3,397 | ) |
Total non-operating income (expense), net | (13,987 | ) | | (20,182 | ) | | (27,841 | ) | | (34,922 | ) |
Income before income taxes | 121,271 |
| | 91,127 |
| | 186,163 |
| | 174,611 |
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Provision for income taxes | 32,744 |
| | 14,581 |
| | 50,590 |
| | 32,948 |
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Net income | $ | 88,527 |
| | $ | 76,546 |
| | $ | 135,573 |
| | $ | 141,663 |
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Basic net income per share | $ | 0.18 |
| | $ | 0.15 |
| | $ | 0.27 |
| | $ | 0.28 |
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Shares used to compute basic net income per share | 497,931 |
| | 503,384 |
| | 497,439 |
| | 500,996 |
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Diluted net income per share | $ | 0.17 |
| | $ | 0.15 |
| | $ | 0.27 |
| | $ | 0.28 |
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Shares used to compute diluted net income per share | 506,687 |
| | 512,446 |
| | 508,227 |
| | 511,535 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| May 30, 2014 | | May 31, 2013 | | May 30, 2014 | | May 31, 2013 |
| Increase/(Decrease) | | Increase/(Decrease) |
Net income | $ | 88,527 |
| | $ | 76,546 |
| | $ | 135,573 |
| | $ | 141,663 |
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Other comprehensive income, net of taxes: | | | | | | | |
Available-for-sale securities: | | | | | | | |
Unrealized gains / losses on available-for-sale securities | 1,977 |
| | (5,255 | ) | | 3,488 |
| | (4,553 | ) |
Reclassification adjustment for gains / losses on available-for-sale securities recognized | (1,251 | ) | | (788 | ) | | (1,888 | ) | | (2,372 | ) |
Net increase (decrease) from available-for-sale securities | 726 |
| | (6,043 | ) | | 1,600 |
| | (6,925 | ) |
Derivatives designated as hedging instruments: | | | | | | | |
Unrealized gains / losses on derivative instruments | 2,001 |
| | 10,885 |
| | 1,971 |
| | 32,660 |
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Reclassification adjustment for gains / losses on derivative instruments recognized | (2,616 | ) | | (15,299 | ) | | (5,414 | ) | | (22,392 | ) |
Net increase (decrease) from derivatives designated as hedging instruments | (615 | ) | | (4,414 | ) | | (3,443 | ) | | 10,268 |
|
Foreign currency translation adjustments | (10,060 | ) | | (2,192 | ) | | 2,382 |
| | (6,594 | ) |
Other comprehensive income, net of taxes | (9,949 | ) | | (12,649 | ) | | 539 |
| | (3,251 | ) |
Total comprehensive income, net of taxes | $ | 78,578 |
| | $ | 63,897 |
| | $ | 136,112 |
| | $ | 138,412 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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| | | | | | | |
| Six Months Ended |
| May 30, 2014 | | May 31, 2013 |
Cash flows from operating activities: | | | |
Net income | $ | 135,573 |
| | $ | 141,663 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
Depreciation, amortization and accretion | 155,289 |
| | 157,702 |
|
Stock-based compensation | 165,798 |
| | 163,066 |
|
Deferred income taxes | 4,632 |
| | 18,661 |
|
Write down of assets held for sale | — |
| | 23,838 |
|
Unrealized (gains) losses on investments | 623 |
| | 3,894 |
|
Other non-cash items | 4,375 |
| | (9,191 | ) |
Excess tax benefits from stock-based compensation | (4,875 | ) | | — |
|
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities: | | | |
Trade receivables, net | 69,337 |
| | 147,839 |
|
Prepaid expenses and other current assets | (23,977 | ) | | (18,651 | ) |
Trade payables | (7,238 | ) | | 3,437 |
|
Accrued expenses | 12,071 |
| | (46,482 | ) |
Accrued restructuring | (4,082 | ) | | (5,209 | ) |
Income taxes payable | 11,891 |
| | (30,132 | ) |
Deferred revenue | 99,792 |
| | 70,744 |
|
Net cash provided by operating activities | 619,209 |
| | 621,179 |
|
Cash flows from investing activities: | |
| | |
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Purchases of short-term investments | (895,758 | ) | | (1,358,634 | ) |
Maturities of short-term investments | 128,661 |
| | 196,201 |
|
Proceeds from sales of short-term investments | 587,384 |
| | 641,203 |
|
Acquisitions, net of cash acquired | — |
| | (96,356 | ) |
Purchases of property and equipment | (56,591 | ) | | (106,439 | ) |
Purchases of long-term investments and other assets | (6,946 | ) | | (59,768 | ) |
Proceeds from sale of long-term investments | 896 |
| | 3,240 |
|
Net cash used for investing activities | (242,354 | ) | | (780,553 | ) |
Cash flows from financing activities: | |
| | |
|
Purchases of treasury stock | (350,000 | ) | | (300,000 | ) |
Proceeds from issuance of treasury stock | 109,143 |
| | 356,771 |
|
Cost of issuance of treasury stock | (150,095 | ) | | (83,550 | ) |
Excess tax benefits from stock-based compensation | 4,875 |
| | — |
|
Proceeds from debt and capital lease obligations | — |
| | 25,703 |
|
Repayment of debt and capital lease obligations | (8,059 | ) | | (9,804 | ) |
Debt issuance costs | — |
| | (357 | ) |
Net cash used for financing activities | (394,136 | ) | | (11,237 | ) |
Effect of foreign currency exchange rates on cash and cash equivalents | (255 | ) | | (8,031 | ) |
Net decrease in cash and cash equivalents | (17,536 | ) | | (178,642 | ) |
Cash and cash equivalents at beginning of period | 834,556 |
| | 1,425,052 |
|
Cash and cash equivalents at end of period | $ | 817,020 |
| | $ | 1,246,410 |
|
Supplemental disclosures: | |
| | |
Cash paid for income taxes, net of refunds | $ | 27,532 |
| | $ | 68,507 |
|
Cash paid for interest | $ | 32,130 |
| | $ | 32,676 |
|
Non-cash investing activities: | | | |
Issuance of common stock and stock awards assumed in business acquisitions | $ | — |
| | $ | 661 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
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 29, 2013 on file with the SEC (our “Annual Report”).
There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report.
Recent Accounting Pronouncements Not Yet Effective
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard becomes effective for us in the first quarter of fiscal 2018. We have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
With the exception of the new revenue standard discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended May 30, 2014, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended November 29, 2013, that are of significance or potential significance to us.
NOTE 2. ACQUISITIONS
On July 22, 2013, we completed our acquisition of privately held Neolane, a leader in cross-channel campaign management technology. During the third quarter of fiscal 2013, we began integrating Neolane into our Digital Marketing reportable segment. Neolane brings a platform for automation and execution of marketing campaigns across the web, e-mail, social, mobile, call center, direct mail, point of sale and other emerging channels which will drive consistent brand experiences and personalized campaigns for our customers.
Under the acquisition method of accounting, the total final purchase price was allocated to Neolane's net tangible and intangible assets based upon their estimated fair values as of July 22, 2013. The total final purchase price for Neolane was $616.7 million of which $515.2 million was allocated to goodwill that was non-deductible for tax purposes, $115.0 million to identifiable intangible assets and $13.5 million to net liabilities assumed. The impact of this acquisition was not material to our Condensed Consolidated Financial Statements.
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 has brought additional community features to Creative Cloud since its acquisition. 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 $111.1 million of which $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.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 30, 2014 (in thousands): |
| | | | | | | | | | | | | | | |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
Current assets: | | | | | | | |
Cash | $ | 286,379 |
| | $ | — |
| | $ | — |
| | $ | 286,379 |
|
Cash equivalents: | | | | | | | |
Money market mutual funds | 441,576 |
| | — |
| | — |
| | 441,576 |
|
Municipal securities | 1,500 |
| | 2 |
| | — |
| | 1,502 |
|
Time deposits | 61,064 |
| | — |
| | — |
| | 61,064 |
|
U.S. Treasury securities | 26,499 |
| | — |
| | — |
| | 26,499 |
|
Total cash equivalents | 530,639 |
| | 2 |
| | — |
| | 530,641 |
|
Total cash and cash equivalents | 817,018 |
| | 2 |
| | — |
| | 817,020 |
|
Short-term fixed income securities: | | | | | | | |
Corporate bonds and commercial paper | 1,402,478 |
| | 7,998 |
| | (229 | ) | | 1,410,247 |
|
Foreign government securities | 20,697 |
| | 79 |
| | — |
| | 20,776 |
|
Municipal securities | 181,886 |
| | 671 |
| | (2 | ) | | 182,555 |
|
U.S. agency securities | 471,961 |
| | 1,477 |
| | (101 | ) | | 473,337 |
|
U.S. Treasury securities | 425,007 |
| | 920 |
| | (75 | ) | | 425,852 |
|
Subtotal | 2,502,029 |
| | 11,145 |
| | (407 | ) | | 2,512,767 |
|
Marketable equity securities | 178 |
| | 246 |
| | — |
| | 424 |
|
Total short-term investments | 2,502,207 |
| | 11,391 |
| | (407 | ) | | 2,513,191 |
|
Total cash, cash equivalents and short-term investments | $ | 3,319,225 |
| | $ | 11,393 |
| | $ | (407 | ) | | $ | 3,330,211 |
|
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 29, 2013 (in thousands):
|
| | | | | | | | | | | | | | | |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
Current assets: | | | | | | | |
Cash | $ | 286,221 |
| | $ | — |
| | $ | — |
| | $ | 286,221 |
|
Cash equivalents: | |
| | | | | | |
|
Money market mutual funds | 429,373 |
| | — |
| | — |
| | 429,373 |
|
Time deposits | 104,711 |
| | — |
| | — |
| | 104,711 |
|
U.S. Treasury securities | 14,251 |
| | — |
| | — |
| | 14,251 |
|
Total cash equivalents | 548,335 |
| | — |
| | — |
| | 548,335 |
|
Total cash and cash equivalents | 834,556 |
| | — |
| | — |
| | 834,556 |
|
Short-term fixed income securities: | | | | | | | |
|
Corporate bonds and commercial paper | 1,261,375 |
| | 7,116 |
| | (631 | ) | | 1,267,860 |
|
Foreign government securities | 11,213 |
| | 56 |
| | — |
| | 11,269 |
|
Municipal securities | 186,320 |
| | 328 |
| | (24 | ) | | 186,624 |
|
U.S. agency securities | 446,615 |
| | 1,516 |
| | (186 | ) | | 447,945 |
|
U.S. Treasury securities | 424,076 |
| | 799 |
| | (97 | ) | | 424,778 |
|
Subtotal | 2,329,599 |
| | 9,815 |
| | (938 | ) | | 2,338,476 |
|
Marketable equity securities | 177 |
| | 543 |
| | — |
| | 720 |
|
Total short-term investments | 2,329,776 |
| | 10,358 |
| | (938 | ) | | 2,339,196 |
|
Total cash, cash equivalents and short-term investments | $ | 3,164,332 |
| | $ | 10,358 |
| | $ | (938 | ) | | $ | 3,173,752 |
|
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 30, 2014 and November 29, 2013 (in thousands):
|
| | | | | | | | | | | | | | | |
| 2014 | | 2013 |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Corporate bonds and commercial paper | $ | 93,651 |
| | $ | (95 | ) | | $ | 225,759 |
| | $ | (631 | ) |
Municipal securities | 15,742 |
| | (2 | ) | | 13,522 |
| | (24 | ) |
U.S. Treasury and agency securities | 38,156 |
| | (29 | ) | | 105,278 |
| | (283 | ) |
Total | $ | 147,549 |
| | $ | (126 | ) | | $ | 344,559 |
| | $ | (938 | ) |
There were 78 securities and 177 securities in an unrealized loss position for less than twelve months at May 30, 2014 and at November 29, 2013, respectively.
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 May 30, 2014 (in thousands):
|
| | | | | | | |
| 2014 |
| Fair Value | | Gross Unrealized Losses |
Corporate bonds and commercial paper | $ | 20,841 |
| | $ | (134 | ) |
U.S. Treasury and agency securities | 29,437 |
| | (147 | ) |
Total | $ | 50,278 |
| | $ | (281 | ) |
As of May 30, 2014, there were 19 securities in an unrealized loss position for more than twelve months. As of November 29, 2013, there were no securities 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 30, 2014 (in thousands):
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
Due within one year | $ | 598,760 |
| | $ | 599,985 |
|
Due between one and two years | 889,136 |
| | 893,246 |
|
Due between two and three years | 766,734 |
| | 770,962 |
|
Due after three years | 247,399 |
| | 248,574 |
|
Total | $ | 2,502,029 |
| | $ | 2,512,767 |
|
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 30, 2014, 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
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 30, 2014.
The fair value of our financial assets and liabilities at May 30, 2014 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: | | | | | | | |
Money market mutual funds | $ | 441,576 |
| | $ | 441,576 |
| | $ | — |
| | $ | — |
|
Municipal securities | 1,502 |
| | — |
| | 1,502 |
| | — |
|
Time deposits | 61,064 |
| | 61,064 |
| | — |
| | — |
|
U.S. Treasury securities | 26,499 |
| | — |
| | 26,499 |
| | — |
|
Short-term investments: | | | | | | | |
Corporate bonds and commercial paper | 1,410,247 |
| | — |
| | 1,410,247 |
| | — |
|
Foreign government securities | 20,776 |
| | — |
| | 20,776 |
| | — |
|
Marketable equity securities | 424 |
| | 424 |
| | — |
| | — |
|
Municipal securities | 182,555 |
| | — |
| | 182,555 |
| | — |
|
U.S. agency securities | 473,337 |
| | — |
| | 473,337 |
| | — |
|
U.S. Treasury securities | 425,852 |
| | — |
| | 425,852 |
| | — |
|
Prepaid expenses and other current assets: | | | |
| | |
| | |
|
Foreign currency derivatives | 6,184 |
| | — |
| | 6,184 |
| | — |
|
Other assets: | | | |
| | |
| | |
|
Deferred compensation plan assets | 23,382 |
| | 528 |
| | 22,854 |
| | — |
|
Total assets | $ | 3,073,398 |
| | $ | 503,592 |
| | $ | 2,569,806 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
Liabilities: | |
| | |
| | |
| | |
|
Accrued expenses: | |
| | |
| | |
| | |
|
Foreign currency derivatives | $ | 1,120 |
| | $ | — |
| | $ | 1,120 |
| | $ | — |
|
Total liabilities | $ | 1,120 |
| | $ | — |
| | $ | 1,120 |
| | $ | — |
|
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The fair value of our financial assets and liabilities at November 29, 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: | | | | | | | |
Money market mutual funds | $ | 429,373 |
| | $ | 429,373 |
| | $ | — |
| | $ | — |
|
Time deposits | 104,711 |
| | 104,711 |
| | — |
| | — |
|
U.S. Treasury securities | 14,251 |
| | — |
| | 14,251 |
| | — |
|
Short-term investments: | |
| |
|
| |
|
| |
|
|
Corporate bonds and commercial paper | 1,267,860 |
| | — |
| | 1,267,860 |
| | — |
|
Foreign government securities | 11,269 |
| | — |
| | 11,269 |
| | — |
|
Marketable equity securities | 720 |
| | 720 |
| | — |
| | — |
|
Municipal securities | 186,624 |
| | — |
| | 186,624 |
| | — |
|
U.S. agency securities | 447,945 |
| | — |
| | 447,945 |
| | — |
|
U.S. Treasury securities | 424,778 |
| | — |
| | 424,778 |
| | — |
|
Prepaid expenses and other current assets: | |
| | |
| | |
| | |
|
Foreign currency derivatives | 11,891 |
| | — |
| | 11,891 |
| | — |
|
Other assets: | |
| | |
| | |
| | |
|
Deferred compensation plan assets | 19,816 |
| | 894 |
| | 18,922 |
| | — |
|
Total assets | $ | 2,919,238 |
| | $ | 535,698 |
| | $ | 2,383,540 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
Liabilities: | |
| | |
| | |
| | |
|
Accrued expenses: | |
| | |
| | |
| | |
|
Foreign currency derivatives | $ | 1,067 |
| | $ | — |
| | $ | 1,067 |
| | $ | — |
|
Total liabilities | $ | 1,067 |
| | $ | — |
| | $ | 1,067 |
| | $ | — |
|
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.
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
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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. During the three and six months ended May 30, 2014, we determined there were no other-than-temporary impairments on our cost method investments. Comparatively, during 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.
As of May 30, 2014, the carrying value of our lease receivables approximated fair value, based on Level 2 valuation inputs which include Treasury rates, LIBOR rates and applicable credit spreads. See Note 12 for further details regarding our investment in lease receivables. The fair value of our debt was $1.6 billion as of May 30, 2014, based on Level 2 quoted prices in inactive markets. See Note 13 for further details regarding our debt.
NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES
Hedge Accounting
We recognize derivative instruments and hedging activities as either assets or liabilities in our Condensed Consolidated Balance Sheets 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.
Economic Hedging—Hedges of Forecasted Transactions
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 on a recurring basis at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the contract 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 contract 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.
Balance Sheet Hedging—Hedging of Foreign Currency Assets and Liabilities
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 contracts 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 contracts 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.
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.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
We evaluate hedge effectiveness at the inception of the hedge prospectively as well as retrospectively and record any ineffective portion of the hedging instruments in interest and other income (expense), net on our Condensed Consolidated Statements of Income. The net gain (loss) recognized in interest and other income (expense), net for cash flow hedges due to hedge ineffectiveness was insignificant for the periods presented. The time value of purchased contracts is recorded in interest and other income (expense), net in our Condensed Consolidated Statements of Income.
The fair value of derivative instruments on our Condensed Consolidated Balance Sheets as of May 30, 2014 and November 29, 2013 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| 2014 | | 2013 |
| 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) | $ | 5,574 |
| | $ | — |
| | $ | 8,913 |
| | $ | — |
|
Derivatives not designated as hedging instruments: | | | | | | | |
Foreign exchange forward contracts | 610 |
| | 1,120 |
| | 2,978 |
| | 1,067 |
|
Total derivatives | $ | 6,184 |
| | $ | 1,120 |
| | $ | 11,891 |
| | $ | 1,067 |
|
_________________________________________
| |
(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 aggregate fair value of derivative instruments in net asset positions 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 the fair value of liabilities included in master netting arrangements with those same counterparties.
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 30, 2014 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) | $ | 2,001 |
| | $ | — |
| | $ | 1,971 |
| | $ | — |
|
Net gain (loss) reclassified from accumulated OCI into income, net of tax(2) | $ | 2,616 |
| | $ | — |
| | $ | 5,414 |
| | $ | — |
|
Net gain (loss) recognized in income(3) | $ | (3,653 | ) | | $ | — |
| | $ | (7,196 | ) | | $ | — |
|
Derivatives not designated as hedging relationships: | | | | | | | |
Net gain (loss) recognized in income(4) | $ | — |
| | $ | (515 | ) | | $ | — |
| | $ | 720 |
|
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 |
|
_________________________________________ | |
(1) | Net change in the fair value of the effective portion classified in other comprehensive income (“OCI”). |
| |
(2) | Effective portion classified as revenue. |
| |
(3) | Ineffective portion and amount excluded from effectiveness testing classified in interest and other income (expense), net. |
| |
(4) | Classified in interest and other income (expense), net. |
NOTE 6. GOODWILL AND PURCHASED AND OTHER INTANGIBLES
Goodwill as of May 30, 2014 and November 29, 2013 was $4.774 billion and $4.772 billion, respectively. During the second quarter of fiscal 2014, we completed our annual goodwill impairment test associated with our three reporting units—Digital Media, Digital Marketing and Print and Publishing—and determined there was no impairment of goodwill.
Purchased and other intangible assets subject to amortization as of May 30, 2014 and November 29, 2013 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2014 | | 2013 |
| Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
Purchased technology | $ | 403,427 |
| | $ | (237,064 | ) | | $ | 166,363 |
| | $ | 423,237 |
| | $ | (220,414 | ) | | $ | 202,823 |
|
Customer contracts and relationships | $ | 389,821 |
| | $ | (131,342 | ) | | $ | 258,479 |
| | $ | 389,800 |
| | $ | (111,416 | ) | | $ | 278,384 |
|
Trademarks | 67,171 |
| | (32,228 | ) | | 34,943 |
| | 67,546 |
| | (27,933 | ) | | 39,613 |
|
Acquired rights to use technology | 155,827 |
| | (87,480 | ) | | 68,347 |
| | 155,322 |
| | (76,740 | ) | | 78,582 |
|
Localization | 3,402 |
| | (1,686 | ) | | 1,716 |
| | 3,404 |
| | (2,172 | ) | | 1,232 |
|
Other intangibles | 12,484 |
| | (10,015 | ) | | 2,469 |
| | 16,447 |
| | (11,827 | ) | | 4,620 |
|
Total other intangible assets | $ | 628,705 |
| | $ | (262,751 | ) | | $ | 365,954 |
| | $ | 632,519 |
| | $ | (230,088 | ) | | $ | 402,431 |
|
Purchased and other intangible assets, net | $ | 1,032,132 |
| | $ | (499,815 | ) | | $ | 532,317 |
| | $ | 1,055,756 |
| | $ | (450,502 | ) | | $ | 605,254 |
|
In the first quarter of fiscal 2013, we acquired rights to use certain technology for $51.8 million. Of this cost, an estimated $25.3 million was related to future licensing rights that has been capitalized and is being amortized on a straight-line basis over the estimated useful lives ranging from five to ten years. We estimated that the remaining cost of $26.5 million was related to historical use of licensing rights and was expensed as cost of product revenue.
In the second quarter of fiscal 2014, certain purchased intangibles associated with our acquisitions of Efficient Frontier and Day Software Holding AG became fully amortized and were removed from the Condensed Consolidated Balance Sheets.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Amortization expense related to purchased and other intangible assets was $37.6 million and $76.0 million for the three and six months ended May 30, 2014, respectively. Comparatively, excluding the expense associated with historical use of the acquired rights to use the technology discussed in the paragraph above, amortization expense was $37.5 million and $74.9 million for the three and six months ended May 31, 2013. Of these amounts, $24.2 million and $49.1 million were included in cost of sales for the three and six months ended May 30, 2014, respectively, and $25.0 million and $50.2 million for the three and six months ended May 31, 2013. As of May 30, 2014, we expect amortization expense in future periods to be as follows (in thousands):
|
| | | | | | | | |
Fiscal Year | | Purchased Technology | | Other Intangible Assets |
Remainder of 2014 | $ | 37,573 |
| | $ | 38,040 |
|
2015 | 61,461 |
| | 68,267 |
|
2016 | 22,936 |
| | 62,283 |
|
2017 | 15,459 |
| | 52,875 |
|
2018 | 9,059 |
| | 41,810 |
|
Thereafter | 19,875 |
| | 102,679 |
|
Total expected amortization expense | $ | 166,363 |
| | $ | 365,954 |
|
NOTE 7. ACCRUED EXPENSES
Accrued expenses as of May 30, 2014 and November 29, 2013 consisted of the following (in thousands):
|
| | | | | | | |
| 2014 | | 2013 |
Accrued compensation and benefits | $ | 311,085 |
| | $ | 318,219 |
|
Sales and marketing allowances | 72,063 |
| | 66,502 |
|
Accrued corporate marketing | 35,255 |
| | 22,801 |
|
Taxes payable | 19,381 |
| | 18,225 |
|
Royalties payable | 17,428 |
| | 14,778 |
|
Accrued interest expense | 20,744 |
| | 20,613 |
|
Other | 180,984 |
| | 195,801 |
|
Accrued expenses | $ | 656,940 |
| | $ | 656,939 |
|
Other primarily includes general corporate accruals for technical support and local and regional expenses, including our accrual for a loss contingency as of May 30, 2014. Other is also comprised of deferred rent related to office locations with rent escalations and foreign currency liability derivatives. See Note 12 for further information regarding the loss contingency.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8. STOCK-BASED COMPENSATION
Summary of Restricted Stock Units
Restricted stock unit activity for the six months ended May 30, 2014 and the fiscal year ended November 29, 2013 was as follows (in thousands):
|
| | | | | |
| 2014 | | 2013 |
Beginning outstanding balance | 17,948 |
| | 18,415 |
|
Awarded | 3,654 |
| | 7,236 |
|
Released | (6,520 | ) | | (6,224 | ) |
Forfeited | (785 | ) | | (1,479 | ) |
Ending outstanding balance | 14,297 |
| | 17,948 |
|
Information regarding restricted stock units outstanding at May 30, 2014 and May 31, 2013 is summarized below:
|
| | | | | | | | |
| Number of Shares (thousands) | | Weighted Average Remaining Contractual Life (years) | | Aggregate Intrinsic Value(*) (millions) |
2014 | | | | | |
Restricted stock units outstanding | 14,297 |
| | 1.28 | | $ | 922.7 |
|
Restricted stock units vested and expected to vest | 12,552 |
| | 1.22 | | $ | 804.0 |
|
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 |
|
_________________________________________
| |
(*) | 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 30, 2014 and May 31, 2013 were $64.54 and $42.91, respectively. |
Summary of Performance Shares
On January 24, 2014, our Executive Compensation Committee approved the 2014 Performance Share Program, including the award calculation methodology, under the terms of our 2003 Equity Incentive Plan. Under our 2014 Performance Share Program (“2014 Program”), shares may be earned based on the achievement of an objective relative total stockholder return measured over a three-year performance period. The purpose of the 2014 Program is to help focus key employees on building stockholder value, provide significant award potential for achieving outstanding Company performance and enhance the ability of the Company to attract and retain highly talented and competent individuals. 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, 2017. Participants in the 2014 Program generally have the ability to receive up to 200% of the target number of shares originally granted.
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 relative total stockholder return measured over a three-year performance period. Performance awards were granted under the 2013 Performance Share Program (“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.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As of May 30, 2014, the shares awarded under our 2013 and 2014 Performance Share Programs are yet to be achieved. The following table sets forth the summary of performance share activity under our 2013 and 2014 Performance Share Programs for the six months ended May 30, 2014 (in thousands):
|
| | | | | |
| Shares Granted | | Maximum Shares Eligible to Receive |
Beginning outstanding balance | 854 |
| | 1,707 |
|
Awarded | 709 |
| | 1,417 |
|
Forfeited | (19 | ) | | (38 | ) |
Ending outstanding balance | 1,544 |
| | 3,086 |
|
In the first quarter of fiscal 2013, the Executive Compensation Committee certified the actual performance achievement of participants in the 2012 Performance Share Program (“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 date, 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 30, 2014 and the fiscal year ended November 29, 2013 (in thousands):
|
| | | | | |
| 2014 | | 2013 |
Beginning outstanding balance | 861 |
| | 388 |
|
Achieved | — |
| | 1,279 |
|
Released | (486 | ) | | (665 | ) |
Forfeited | (17 | ) | | (141 | ) |
Ending outstanding balance | 358 |
| | 861 |
|
Information regarding performance shares outstanding at May 30, 2014 and May 31, 2013 is summarized below:
|
| | | | | | | | |
| Number of Shares (thousands) | | Weighted Average Remaining Contractual Life (years) | | Aggregate Intrinsic Value(*) (millions) |
2014 | | | | | |
Performance shares outstanding | 358 |
| | 0.65 | | $ | 23.1 |
|
Performance shares vested and expected to vest | 335 |
| | 0.65 | | $ | 21.5 |
|
2013 | |
| | | | |
|
Performance shares outstanding | 877 |
| | 1.08 | | $ | 37.6 |
|
Performance shares vested and expected to vest | 793 |
| | 1.06 | | $ | 33.9 |
|
_________________________________________
| |
(*) | 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 30, 2014 and May 31, 2013 were $64.54 and $42.91, respectively. |
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Summary of Stock Options
There were no option grants during the six months ended May 30, 2014 and May 31, 2013. Option activity for the six months ended May 30, 2014 and the fiscal year ended November 29, 2013 was as follows (in thousands):
|
| | | | | |
| 2014 | | 2013 |
Beginning outstanding balance | 7,359 |
| | 24,517 |
|
Granted | — |
| | 25 |
|
Exercised | (2,272 | ) | | (15,872 | ) |
Cancelled | (115 | ) | | (1,584 | ) |
Increase due to acquisition | — |
| | 273 |
|
Ending outstanding balance | 4,972 |
| | 7,359 |
|
Information regarding stock options outstanding at May 30, 2014 and May 31, 2013 is summarized below:
|
| | | | | | | | | | | | |
| Number of Shares (thousands) | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (years) | | Aggregate Intrinsic Value(*) (millions) |
2014 | | | | | | | |
Options outstanding | 4,972 |
| | $ | 29.37 |
| | 3.14 | | $ | 174.9 |
|
Options vested and expected to vest | 4,922 |
| | $ | 29.47 |
| | 3.11 | | $ | 172.6 |
|
Options exercisable | 4,140 |
| | $ | 30.59 |
| | 2.74 | | $ | 140.5 |
|
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 |
|
_________________________________________
| |
(*) | 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 30, 2014 and May 31, 2013 were $64.54 and $42.91, respectively. |
Summary of Employee Stock Purchase Plan Shares
There were no stock purchases under the employee stock purchase plan (“ESPP”) during the three months ended May 30, 2014 and May 31, 2013. The assumptions used to value employee stock purchase rights during the six months ended May 30, 2014 and May 31, 2013 were as follows:
|
| | | |
| Six Months |
| 2014 | | 2013 |
Expected life (in years) | 0.5 - 2.0 | | 0.5 - 2.0 |
Volatility | 27% - 28% | | 26 - 30% |
Risk free interest rate | 0.09% - 0.39% | | 0.12 - 0.27% |
The expected life of the ESPP shares is the average of the remaining purchase periods under each offering period.
Employees purchased 1.2 million shares at an average price of $27.84 and 1.2 million shares at an average price of $25.49 for the six months ended May 30, 2014 and May 31, 2013, respectively. The intrinsic value of shares purchased during the six months ended May 30, 2014 and May 31, 2013 was $39.0 million and $14.5 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)
Compensation Costs
As of May 30, 2014, there was $509.6 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 1.9 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 30, 2014 and May 31, 2013 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | 2014 | | 2013 |
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 | $ | 505 |
| | $ | 1,441 |
| | $ | 446 |
| | $ | 1,181 |
|
Cost of revenue—services and support | 964 |
| | 1,682 |
| | 826 |
| | 2,360 |
|
Research and development | 3,989 |
| | 25,910 |
| | 4,734 |
| | 23,210 |
|
Sales and marketing | 4,316 |
| | 25,363 |
| | 4,893 |
| | 24,026 |
|
General and administrative | 1,494 |
| | 17,346 |
| | 2,146 |
| | 15,048 |
|
Total | $ | 11,268 |
| | $ | 71,742 |
| | $ | 13,045 |
| | $ | 65,825 |
|
Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the six months ended May 30, 2014 and May 31, 2013 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | 2014 | | 2013 |
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 | $ | 966 |
| | $ | 2,810 |
| | $ | 1,083 |
| | $ | 2,244 |
|
Cost of revenue—services and support | 1,695 |
| | 3,220 |
| | 1,681 |
| | 4,810 |
|
Research and development | 8,246 |
| | 52,467 |
| | 10,554 |
| | 48,941 |
|
Sales and marketing | 9,079 |
| | 51,094 |
| | 11,560 |
| | 47,778 |
|
General and administrative | 3,280 |
| | 32,941 |
| | 4,660 |
| | 29,755 |
|
Total | $ | 23,266 |
| | $ | 142,532 |
| | $ | 29,538 |
| | $ | 133,528 |
|
NOTE 9. RESTRUCTURING CHARGES
Restructuring Plans
Our restructuring plans consist of reductions in workforce and the consolidation of facilities to better align our resources around our business strategies. As of May 30, 2014, we considered our restructuring plans to be 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.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Summary of Restructuring Plans
The following table sets forth a summary of restructuring activities related to all of our restructuring plans during the six months ended May 30, 2014 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| November 29, 2013 | | Costs Incurred | | Cash Payments | | Other Adjustments | | May 30, 2014 |
Termination benefits | $ | 2,233 |
| | $ | — |
| | $ | (567 | ) | | $ | (377 | ) | | $ | 1,289 |
|
Cost of closing redundant facilities | 11,655 |
| | 528 |
| | (3,811 | ) | | 65 |
| | 8,437 |
|
Total restructuring plans | $ | 13,888 |
| | $ | 528 |
| | $ | (4,378 | ) | | $ | (312 | ) | | $ | 9,726 |
|
Accrued restructuring charges of $9.7 million as of May 30, 2014 includes $3.6 million recorded in accrued restructuring, current and $6.1 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 2014 and facilities-related liabilities under contract through fiscal 2021 of which approximately 36% will be paid through 2015.
NOTE 10. STOCKHOLDERS’ EQUITY
Retained Earnings
The changes in retained earnings for the six months ended May 30, 2014 were as follows (in thousands):
|
| | | |
Balance as of November 29, 2013 | $ | 6,928,964 |
|
Net income | 135,573 |
|
Re-issuance of treasury stock | (258,433 | ) |
Balance as of May 30, 2014 | $ | 6,806,104 |
|
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 treasury stock 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 reduction 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 30, 2014 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| November 29, 2013 | | Increase / Decrease | | Reclassification Adjustments | | May 30, 2014 |
Net unrealized gains on available-for-sale securities: | | | | | | | |
Unrealized gains on available-for-sale securities | $ | 10,178 |
| | $ | 2,993 |
| | $ | (1,925 | ) | | $ | 11,246 |
|
Unrealized losses on available-for-sale securities | (937 | ) | | 495 |
| | 37 |
| | (405 | ) |
Net unrealized gains on available-for-sale securities | 9,241 |
| | 3,488 |
| | (1,888 | ) | (1) | 10,841 |
|
Net unrealized gains on derivative instruments designated as hedging instruments | 5,367 |
| | 1,971 |
| | (5,414 | ) | (2) | 1,924 |
|
Cumulative foreign currency translation adjustments | 31,495 |
| | 2,382 |
| | — |
| | 33,877 |
|
Total accumulated other comprehensive income, net of taxes | $ | 46,103 |
| | $ | 7,841 |
| | $ | (7,302 | ) | | $ | 46,642 |
|
_________________________________________
| |
(1) | Classified in interest and other income (expense), net. |
| |
(2) | Classified as revenue. |
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 30, 2014 and May 31, 2013 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months | | Six Months Ended |
| 2014 | | 2013 | | 2014 | | 2013 |
Available-for-sale securities: | | | | | | | |
Unrealized gains / losses | $ | (11 | ) | | $ | 24 |
| | $ | (31 | ) | | $ | 34 |
|
Reclassification adjustments | (2 | ) | | — |
| | (3 | ) | | — |
|
Subtotal available-for-sale securities | (13 | ) | | 24 |
| | (34 | ) | | 34 |
|
Derivatives designated as hedging instruments: | | | | | | | |
Unrealized gains on derivative instruments* | — |
| | — |
| | — |
| | — |
|
Reclassification adjustments* | — |
| | — |
| | — |
| | — |
|
Subtotal derivatives designated as hedging instruments | — |
| | — |
| | — |
| | — |
|
Foreign currency translation adjustments | (560 | ) | | (196 | ) | | (558 | ) | | (500 | ) |
Total taxes, other comprehensive income | $ | (573 | ) | | $ | (172 | ) | | $ | (592 | ) | | $ | (466 | ) |
_________________________________________
| |
(*) | Taxes related to derivative instruments were zero based on the tax jurisdiction where the derivative instruments were executed. |
Stock Repurchase Program
To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we may repurchase shares in the open market or enter into structured repurchase agreements with third parties. We are currently repurchasing common stock under our $2.0 billion authority granted by our Board of Directors in April 2012, which can be used through the end of fiscal 2015.
During the six months ended May 30, 2014 and May 31, 2013, we entered into several structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling $350.0 million and $300.0 million, respectively. We enter into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our common stock over a specified period of time. We only enter into such transactions when the discount that we receive is higher than the foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured 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 six months ended May 30, 2014, we repurchased approximately 7.1 million shares at an average price of $60.55 through structured repurchase agreements entered into during fiscal 2013 and the six months ended May 30, 2014. During the six months ended May 31, 2013, we repurchased approximately 6.6 million shares at an average price of $41.07 through structured repurchase agreements entered into during 2012 and the six months ended May 31, 2013.
As of May 30, 2014, the prepayments were classified as treasury stock on our Condensed Consolidated Balance Sheets at the payment date, though only shares delivered to us by the financial statement date were excluded from the computation of earnings per share. As of May 30, 2014, $50.8 million of prepayment remained under this agreement.
Subsequent to May 30, 2014, as part of our $2.0 billion stock repurchase program, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $125.0 million. This amount will be classified as treasury stock on our Condensed Consolidated Balance Sheets. Upon completion of the $125.0 million stock repurchase agreement, $325.0 million remains under our current authority.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 11. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share for the three and six months ended May 30, 2014 and May 31, 2013 (in thousands, except per share data):
|
| | | | | | | | | | | | | | | |
| Three Months | | Six Months Ended |
| 2014 | | 2013 | | 2014 | |