filings.toolsItem 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ADOBE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except par value)
| September 1, 2023 | December 2, 2022 | ||||||||||
| (Unaudited) | (*) | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 6,601 | $ | 4,236 | |||||||
| Short-term investments | 915 | 1,860 | |||||||||
| Trade receivables, net of allowances for doubtful accounts of $18 and $23, respectively | 1,851 | 2,065 | |||||||||
| Prepaid expenses and other current assets | 1,043 | 835 | |||||||||
| Total current assets | 10,410 | 8,996 | |||||||||
| Property and equipment, net | 2,036 | 1,908 | |||||||||
| Operating lease right-of-use assets, net | 373 | 407 | |||||||||
| Goodwill | 12,800 | 12,787 | |||||||||
| Other intangibles, net | 1,167 | 1,449 | |||||||||
| Deferred income taxes | 1,065 | 777 | |||||||||
| Other assets | 1,239 | 841 | |||||||||
| Total assets | $ | 29,090 | $ | 27,165 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Trade payables | $ | 314 | $ | 379 | |||||||
| Accrued expenses | 1,714 | 1,790 | |||||||||
| Debt | — | 500 | |||||||||
| Deferred revenue | 5,375 | 5,297 | |||||||||
| Income taxes payable | 857 | 75 | |||||||||
| Operating lease liabilities | 74 | 87 | |||||||||
| Total current liabilities | 8,334 | 8,128 | |||||||||
| Long-term liabilities: | |||||||||||
| Debt | 3,633 | 3,629 | |||||||||
| Deferred revenue | 108 | 117 | |||||||||
| Income taxes payable | 498 | 530 | |||||||||
| Operating lease liabilities | 389 | 417 | |||||||||
| Other liabilities | 352 | 293 | |||||||||
| Total liabilities | 13,314 | 13,114 | |||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock, $0.0001 par value; 2 shares authorized; none issued | — | — | |||||||||
| Common stock, $0.0001 par value; 900 shares authorized; 601 shares issued; 456 and 462 shares outstanding, respectively | — | — | |||||||||
| Additional paid-in-capital | 11,195 | 9,868 | |||||||||
| Retained earnings | 32,012 | 28,319 | |||||||||
| Accumulated other comprehensive income (loss) | (285) | (293) | |||||||||
| Treasury stock, at cost (145 and 139 shares, respectively) | (27,146) | (23,843) | |||||||||
| Total stockholders’ equity | 15,776 | 14,051 | |||||||||
| Total liabilities and stockholders’ equity | $ | 29,090 | $ | 27,165 |
(*) The condensed consolidated balance sheet as of December 2, 2022 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 INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 1, 2023 | September 2, 2022 | September 1, 2023 | September 2, 2022 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Subscription | $ | 4,631 | $ | 4,128 | $ | 13,521 | $ | 12,156 | |||||||||||||||
| Product | 96 | 126 | 346 | 417 | |||||||||||||||||||
| Services and other | 163 | 179 | 494 | 508 | |||||||||||||||||||
| Total revenue | 4,890 | 4,433 | 14,361 | 13,081 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Subscription | 447 | 413 | 1,317 | 1,216 | |||||||||||||||||||
| Product | 7 | 8 | 23 | 27 | |||||||||||||||||||
| Services and other | 126 | 125 | 380 | 354 | |||||||||||||||||||
| Total cost of revenue | 580 | 546 | 1,720 | 1,597 | |||||||||||||||||||
| Gross profit | 4,310 | 3,887 | 12,641 | 11,484 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 881 | 775 | 2,584 | 2,214 | |||||||||||||||||||
| Sales and marketing | 1,337 | 1,266 | 3,983 | 3,671 | |||||||||||||||||||
| General and administrative | 353 | 319 | 1,041 | 879 | |||||||||||||||||||
| Amortization of intangibles | 42 | 43 | 126 | 127 | |||||||||||||||||||
| Total operating expenses | 2,613 | 2,403 | 7,734 | 6,891 | |||||||||||||||||||
| Operating income | 1,697 | 1,484 | 4,907 | 4,593 | |||||||||||||||||||
| Non-operating income (expense): | |||||||||||||||||||||||
| Interest expense | (27) | (28) | (85) | (84) | |||||||||||||||||||
| Investment gains (losses), net | 6 | (6) | 12 | (23) | |||||||||||||||||||
| Other income (expense), net | 67 | 6 | 157 | 5 | |||||||||||||||||||
| Total non-operating income (expense), net | 46 | (28) | 84 | (102) | |||||||||||||||||||
| Income before income taxes | 1,743 | 1,456 | 4,991 | 4,491 | |||||||||||||||||||
| Provision for income taxes | 340 | 320 | 1,046 | 911 | |||||||||||||||||||
| Net income | $ | 1,403 | $ | 1,136 | $ | 3,945 | $ | 3,580 | |||||||||||||||
| Basic net income per share | $ | 3.07 | $ | 2.42 | $ | 8.62 | $ | 7.60 | |||||||||||||||
| Shares used to compute basic net income per share | 456 | 469 | 458 | 471 | |||||||||||||||||||
| Diluted net income per share | $ | 3.05 | $ | 2.42 | $ | 8.59 | $ | 7.57 | |||||||||||||||
| Shares used to compute diluted net income per share | 459 | 469 | 459 | 473 |
See accompanying notes to condensed consolidated financial statements.
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 1, 2023 | September 2, 2022 | September 1, 2023 | September 2, 2022 | ||||||||||||||||||||
| Increase/(Decrease) | Increase/(Decrease) | ||||||||||||||||||||||
| Net income | $ | 1,403 | $ | 1,136 | $ | 3,945 | $ | 3,580 | |||||||||||||||
| Other comprehensive income (loss), net of taxes: | |||||||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| Unrealized gains / losses on available-for-sale securities | 5 | (6) | 19 | (35) | |||||||||||||||||||
| Reclassification adjustment for recognized gains / losses on available-for-sale securities | — | — | 5 | — | |||||||||||||||||||
| Net increase (decrease) from available-for-sale securities | 5 | (6) | 24 | (35) | |||||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||
| Unrealized gains / losses on derivative instruments | 8 | 107 | — | 193 | |||||||||||||||||||
| Reclassification adjustment for realized gains / losses on derivative instruments | (4) | (47) | (28) | (89) | |||||||||||||||||||
| Net increase (decrease) from derivatives designated as hedging instruments | 4 | 60 | (28) | 104 | |||||||||||||||||||
| Foreign currency translation adjustments | 3 | (83) | 12 | (156) | |||||||||||||||||||
| Other comprehensive income (loss), net of taxes | 12 | (29) | 8 | (87) | |||||||||||||||||||
| Total comprehensive income, net of taxes | $ | 1,415 | $ | 1,107 | $ | 3,953 | $ | 3,493 |
See accompanying notes to condensed consolidated financial statements.
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
(Unaudited)
| Three Months Ended September 1, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances at June 2, 2023 | 601 | $ | — | $ | 10,717 | $ | 30,609 | $ | (297) | (145) | $ | (26,191) | $ | 14,838 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 1,403 | — | — | — | 1,403 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of taxes | — | — | — | — | 12 | — | — | 12 | ||||||||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury stock under stock compensation plans | — | — | 36 | — | — | 2 | 48 | 84 | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | (2) | (1,003) | (1,003) | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 442 | — | — | — | — | 442 | ||||||||||||||||||||||||||||||||||||||||||
| Balances at September 1, 2023 | 601 | $ | — | $ | 11,195 | $ | 32,012 | $ | (285) | (145) | $ | (27,146) | $ | 15,776 |
| Three Months Ended September 2, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances at June 3, 2022 | 601 | $ | — | $ | 9,102 | $ | 26,022 | $ | (195) | (130) | $ | (20,944) | $ | 13,985 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 1,136 | — | — | — | 1,136 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of taxes | — | — | — | — | (29) | — | — | (29) | ||||||||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury stock under stock compensation plans | — | — | 68 | — | — | 1 | 35 | 103 | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | (5) | (1,200) | (1,200) | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 378 | — | — | — | — | 378 | ||||||||||||||||||||||||||||||||||||||||||
| Balances at September 2, 2022 | 601 | $ | — | $ | 9,548 | $ | 27,158 | $ | (224) | (134) | $ | (22,109) | $ | 14,373 |
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
(Unaudited)
| Nine Months Ended September 1, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 2, 2022 | 601 | $ | — | $ | 9,868 | $ | 28,319 | $ | (293) | (139) | $ | (23,843) | $ | 14,051 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 3,945 | — | — | — | 3,945 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of taxes | — | — | — | — | 8 | — | — | 8 | ||||||||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury stock under stock compensation plans | — | — | 36 | (252) | — | 4 | 103 | (113) | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | (10) | (3,407) | (3,407) | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 1,291 | — | — | — | — | 1,291 | ||||||||||||||||||||||||||||||||||||||||||
| Value of shares in deferred compensation plan | — | — | — | — | — | — | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||
| Balances at September 1, 2023 | 601 | $ | — | $ | 11,195 | $ | 32,012 | $ | (285) | (145) | $ | (27,146) | $ | 15,776 |
| Nine Months Ended September 2, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 3, 2021 | 601 | $ | — | $ | 8,428 | $ | 23,905 | $ | (137) | (126) | $ | (17,399) | $ | 14,797 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 3,580 | — | — | — | 3,580 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of taxes | — | — | — | — | (87) | — | — | (87) | ||||||||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury stock under stock compensation plans | — | — | 68 | (327) | — | 3 | 86 | (173) | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | (11) | (4,800) | (4,800) | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 1,052 | — | — | — | — | 1,052 | ||||||||||||||||||||||||||||||||||||||||||
| Value of shares in deferred compensation plan | — | — | — | — | — | — | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||||
| Balances at September 2, 2022 | 601 | $ | — | $ | 9,548 | $ | 27,158 | $ | (224) | (134) | $ | (22,109) | $ | 14,373 |
See accompanying notes to condensed consolidated financial statements.
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| Nine Months Ended | |||||||||||
| September 1, 2023 | September 2, 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 3,945 | $ | 3,580 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation, amortization and accretion | 650 | 641 | |||||||||
| Stock-based compensation | 1,291 | 1,052 | |||||||||
| Reduction of operating lease right-of-use assets | 54 | 63 | |||||||||
| Deferred income taxes | (276) | 282 | |||||||||
| Unrealized losses (gains) on investments, net | (7) | 33 | |||||||||
| Other non-cash items | — | 8 | |||||||||
| Changes in operating assets and liabilities, net of acquired assets and assumed liabilities: | |||||||||||
| Trade receivables, net | 217 | 146 | |||||||||
| Prepaid expenses and other assets | (787) | (133) | |||||||||
| Trade payables | (47) | 11 | |||||||||
| Accrued expenses and other liabilities | (153) | (237) | |||||||||
| Income taxes payable | 749 | 2 | |||||||||
| Deferred revenue | 69 | 65 | |||||||||
| Net cash provided by operating activities | 5,705 | 5,513 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of short-term investments | — | (703) | |||||||||
| Maturities of short-term investments | 754 | 497 | |||||||||
| Proceeds from sales of short-term investments | 215 | 221 | |||||||||
| Acquisitions, net of cash acquired | — | (126) | |||||||||
| Purchases of property and equipment | (313) | (351) | |||||||||
| Purchases of long-term investments, intangibles and other assets | (34) | (39) | |||||||||
| Proceeds from sale of long-term investments and other assets | 1 | — | |||||||||
| Net cash provided by (used for) investing activities | 623 | (501) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repurchases of common stock | (3,400) | (4,800) | |||||||||
| Proceeds from re-issuance of treasury stock | 314 | 278 | |||||||||
| Taxes paid related to net share settlement of equity awards | (387) | (451) | |||||||||
| Repayment of debt | (500) | — | |||||||||
| Other financing activities, net | 8 | 59 | |||||||||
| Net cash used for financing activities | (3,965) | (4,914) | |||||||||
| Effect of foreign currency exchange rates on cash and cash equivalents | 2 | (72) | |||||||||
| Net change in cash and cash equivalents | 2,365 | 26 | |||||||||
| Cash and cash equivalents at beginning of period | 4,236 | 3,844 | |||||||||
| Cash and cash equivalents at end of period | $ | 6,601 | $ | 3,870 | |||||||
| Supplemental disclosures: | |||||||||||
| Cash paid for income taxes, net of refunds | $ | 590 | $ | 486 | |||||||
| Cash paid for interest | $ | 103 | $ | 101 | |||||||
See accompanying notes to condensed consolidated financial statements.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 2, 2022 on file with the SEC (our “Annual Report”).
Use of Estimates
In preparing the condensed consolidated financial statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of the SEC, we must make estimates and judgments that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ materially from these estimates.
Significant Accounting Policies
There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report.
Adopted Accounting Guidance and Accounting Pronouncements Not Yet Effective
There have been no recent accounting pronouncements, changes in accounting pronouncements or recently adopted accounting guidance during the nine months ended September 1, 2023 that are of significance or potential significance to us.
NOTE 2. REVENUE
Segment Information
Our segment results for the three months ended September 1, 2023 and September 2, 2022 were as follows:
| (dollars in millions) | Digital Media | Digital Experience | Publishing and Advertising | Total | |||||||||||||||||||
| Three months ended September 1, 2023 | |||||||||||||||||||||||
| Revenue | $ | 3,594 | $ | 1,229 | $ | 67 | $ | 4,890 | |||||||||||||||
| Cost of revenue | 161 | 397 | 22 | 580 | |||||||||||||||||||
| Gross profit | $ | 3,433 | $ | 832 | $ | 45 | $ | 4,310 | |||||||||||||||
| Gross profit as a percentage of revenue | 96 | % | 68 | % | 67 | % | 88 | % | |||||||||||||||
| Three months ended September 2, 2022 | |||||||||||||||||||||||
| Revenue | $ | 3,232 | $ | 1,120 | $ | 81 | $ | 4,433 | |||||||||||||||
| Cost of revenue | 136 | 385 | 25 | 546 | |||||||||||||||||||
| Gross profit | $ | 3,096 | $ | 735 | $ | 56 | $ | 3,887 | |||||||||||||||
| Gross profit as a percentage of revenue | 96 | % | 66 | % | 69 | % | 88 | % |
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Our segment results for the nine months ended September 1, 2023 and September 2, 2022 were as follows:
| (dollars in millions) | Digital Media | Digital Experience | Publishing and Advertising | Total | |||||||||||||||||||
| Nine months ended September 1, 2023 | |||||||||||||||||||||||
| Revenue | $ | 10,500 | $ | 3,627 | $ | 234 | $ | 14,361 | |||||||||||||||
| Cost of revenue | 455 | 1,200 | 65 | 1,720 | |||||||||||||||||||
| Gross profit | $ | 10,045 | $ | 2,427 | $ | 169 | $ | 12,641 | |||||||||||||||
| Gross profit as a percentage of revenue | 96 | % | 67 | % | 72 | % | 88 | % | |||||||||||||||
| Nine months ended September 2, 2022 | |||||||||||||||||||||||
| Revenue | $ | 9,542 | $ | 3,272 | $ | 267 | $ | 13,081 | |||||||||||||||
| Cost of revenue | 411 | 1,111 | 75 | 1,597 | |||||||||||||||||||
| Gross profit | $ | 9,131 | $ | 2,161 | $ | 192 | $ | 11,484 | |||||||||||||||
| Gross profit as a percentage of revenue | 96 | % | 66 | % | 72 | % | 88 | % |
Revenue by geographic area for the three and nine months ended September 1, 2023 and September 2, 2022 were as follows:
| Three Months | Nine Months | ||||||||||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Americas | $ | 2,943 | $ | 2,600 | $ | 8,601 | $ | 7,570 | |||||||||||||||
| EMEA | 1,229 | 1,143 | 3,615 | 3,436 | |||||||||||||||||||
| APAC | 718 | 690 | 2,145 | 2,075 | |||||||||||||||||||
| Total | $ | 4,890 | $ | 4,433 | $ | 14,361 | $ | 13,081 |
Revenue by major offerings in our Digital Media reportable segment for the three and nine months ended September 1, 2023 and September 2, 2022 were as follows:
| Three Months | Nine Months | ||||||||||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Creative Cloud | $ | 2,909 | $ | 2,625 | $ | 8,522 | $ | 7,778 | |||||||||||||||
| Document Cloud | 685 | 607 | 1,978 | 1,764 | |||||||||||||||||||
| Total Digital Media revenue | $ | 3,594 | $ | 3,232 | $ | 10,500 | $ | 9,542 |
Subscription revenue by segment for the three and nine months ended September 1, 2023 and September 2, 2022 were as follows:
| Three Months | Nine Months | ||||||||||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Digital Media | $ | 3,506 | $ | 3,116 | $ | 10,225 | $ | 9,190 | |||||||||||||||
| Digital Experience | 1,096 | 981 | 3,208 | 2,874 | |||||||||||||||||||
| Publishing and Advertising | 29 | 31 | 88 | 92 | |||||||||||||||||||
| Total subscription revenue | $ | 4,631 | $ | 4,128 | $ | 13,521 | $ | 12,156 |
Contract Balances
A receivable is recorded when an unconditional right to invoice and receive payment exists, such that only the passage of time is required before payment of consideration is due. Included in trade receivables on the condensed consolidated balance sheets are unbilled receivable balances which have not yet been invoiced, and are typically related to license revenue or services which are delivered prior to invoicing. As of September 1, 2023, the balance of trade receivables, net of allowances for doubtful
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
accounts, was $1.85 billion, inclusive of unbilled receivables of $103 million. As of December 2, 2022, the balance of trade receivables, net of allowances for doubtful accounts, was $2.07 billion, inclusive of unbilled receivables of $93 million.
We maintain an allowance for doubtful accounts which reflects our best estimate of potentially uncollectible trade receivables and is based on both specific and general reserves. We maintain general reserves on a collective basis by considering factors such as historical experience, credit-worthiness, the age of the trade receivable balances, current economic conditions and a reasonable and supportable forecast of future economic conditions. The allowance for doubtful accounts was $18 million and $23 million as of September 1, 2023 and December 2, 2022, respectively.
A contract asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract assets are included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion on the condensed consolidated balance sheets. We regularly review contract asset balances for impairment, considering factors such as historical experience, credit-worthiness, age of the balance, current economic conditions and a reasonable and supportable forecast of future economic conditions. Contract asset impairments were not material for the nine months ended September 1, 2023. Contract assets were $131 million and $97 million as of September 1, 2023 and December 2, 2022, respectively.
Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services, including non-cancellable and non-refundable committed funds and refundable customer deposits. Deferred revenue is recognized as revenue when transfer of control to customers has occurred. As of September 1, 2023, the balance of deferred revenue was $5.48 billion, which includes $47 million of refundable customer deposits. Arrangements with some of our enterprise customers with non-cancellable and non-refundable committed funds provide options to either renew monthly on-premise term-based licenses or use some or all funds to purchase other Adobe products or services. Non-cancellable and non-refundable committed funds related to these agreements comprised approximately 5% of the total deferred revenue.
As of December 2, 2022, the balance of deferred revenue was $5.41 billion. During the three and nine months ended September 1, 2023, approximately $983 million and $4.85 billion of revenue, respectively, was recognized that was included in the balance of deferred revenue as of December 2, 2022.
Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and unbilled amounts that will be recognized as revenue in future periods. As of September 1, 2023, remaining performance obligations were approximately $15.72 billion. Non-cancellable and non-refundable funds related to some of our enterprise customer agreements referred to in the paragraph above comprised approximately 5% of the total remaining performance obligations. Approximately 71% of the remaining performance obligations, excluding the aforementioned enterprise customer agreements, are expected to be recognized over the next 12 months with the remainder recognized thereafter.
Incremental costs of obtaining a contract with a customer are capitalized if we expect the benefit of those costs to be longer than one year and primarily relate to sales commissions paid to our sales force personnel. Capitalized contract acquisition costs are included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion on the condensed consolidated balance sheets. Capitalized contract acquisition costs were $673 million and $629 million as of September 1, 2023 and December 2, 2022, respectively.
We record refund liabilities for amounts that may be subject to future refunds, which include sales returns reserves and customer rebates and credits. Refund liabilities are included in accrued expenses on the condensed consolidated balance sheets. Refund liabilities were $99 million and $106 million as of September 1, 2023 and December 2, 2022, respectively.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3. ACQUISITIONS
Figma
On September 15, 2022, we entered into a definitive agreement under which we intend to acquire Figma, Inc. (“Figma”) for approximately $20 billion, comprised of approximately half cash and half stock, subject to customary purchase price adjustments. Approximately 6 million additional restricted stock units will be granted to Figma’s Chief Executive Officer and employees that will vest over four years subsequent to closing. We continue to work toward closing the transaction, subject to obtaining regulatory approvals and satisfying customary closing conditions. We will be required to pay Figma a reverse termination fee of $1 billion if the transaction fails to receive regulatory clearance, assuming all other closing conditions have been satisfied or waived, or if it fails to close within 18 months from September 15, 2022.
Figma is a privately held company that provides a web-first collaborative product design platform. Following the closing, we intend to integrate Figma into our Digital Media reportable segment for financial reporting purposes.
NOTE 4. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of highly liquid marketable securities with remaining maturities of three months or less at the date of purchase. We classify our investments in marketable debt securities as “available-for-sale.” We carry these investments at fair value, based on quoted market prices or other readily available market information. Unrealized gains and unrealized non-credit-related losses of marketable debt securities are included in accumulated other comprehensive income, net of taxes, in our condensed consolidated balance sheets. Unrealized credit-related losses are recorded to other income (expense), net in our condensed consolidated statements of income with a corresponding allowance for credit-related losses in our condensed consolidated balance sheets. Gains and losses are determined using the specific identification method and recognized when realized in our condensed consolidated statements of income.
Cash, cash equivalents and short-term investments consisted of the following as of September 1, 2023:
| (in millions) | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||||||||
| Current assets: | |||||||||||||||||||||||
| Cash | $ | 629 | $ | — | $ | — | $ | 629 | |||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | 5,972 | — | — | 5,972 | |||||||||||||||||||
| Total cash and cash equivalents | 6,601 | — | — | 6,601 | |||||||||||||||||||
| Short-term fixed income securities: | |||||||||||||||||||||||
| Asset-backed securities | 23 | — | — | 23 | |||||||||||||||||||
| Corporate debt securities | 559 | — | (7) | 552 | |||||||||||||||||||
| U.S. agency securities | 33 | — | — | 33 | |||||||||||||||||||
| U.S. Treasury securities | 317 | — | (10) | 307 | |||||||||||||||||||
| Total short-term investments | 932 | — | (17) | 915 | |||||||||||||||||||
| Total cash, cash equivalents and short-term investments | $ | 7,533 | $ | — | $ | (17) | $ | 7,516 |
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Cash, cash equivalents and short-term investments consisted of the following as of December 2, 2022:
| (in millions) | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||||||||
| Current assets: | |||||||||||||||||||||||
| Cash | $ | 657 | $ | — | $ | — | $ | 657 | |||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Corporate debt securities | 39 | — | — | 39 | |||||||||||||||||||
| Money market funds | 3,479 | — | — | 3,479 | |||||||||||||||||||
| Time deposits | 61 | — | — | 61 | |||||||||||||||||||
| Total cash equivalents | 3,579 | — | — | 3,579 | |||||||||||||||||||
| Total cash and cash equivalents | 4,236 | — | — | 4,236 | |||||||||||||||||||
| Short-term fixed income securities: | |||||||||||||||||||||||
| Asset-backed securities | 98 | — | (1) | 97 | |||||||||||||||||||
| Corporate debt securities | 1,290 | — | (24) | 1,266 | |||||||||||||||||||
| Foreign government securities | 5 | — | — | 5 | |||||||||||||||||||
| Municipal securities | 24 | — | — | 24 | |||||||||||||||||||
| U.S. agency securities | 34 | — | — | 34 | |||||||||||||||||||
| U.S. Treasury securities | 450 | — | (16) | 434 | |||||||||||||||||||
| Total short-term investments | 1,901 | — | (41) | 1,860 | |||||||||||||||||||
| Total cash, cash equivalents and short-term investments | $ | 6,137 | $ | — | $ | (41) | $ | 6,096 |
See Note 5 for further information regarding the fair value of our financial instruments.
The following table summarizes the estimated fair value of short-term fixed income debt securities classified as short-term investments based on stated effective maturities as of September 1, 2023:
| (in millions) | Estimated Fair Value | ||||||||||
| Due within one year | $ | 584 | |||||||||
| Due between one and two years | 315 | ||||||||||
| Due between two and three years | 16 | ||||||||||
| Total | $ | 915 |
We review our debt securities classified as short-term investments on a regular basis for impairment. For debt securities in unrealized loss positions, we determine whether any portion of the decline in fair value below the amortized cost basis is due to credit-related factors if we neither intend to sell nor anticipate that it is more likely than not that we will be required to sell prior to recovery of the amortized cost basis. We consider factors such as the extent to which the market value has been less than the cost, any noted failure of the issuer to make scheduled payments, changes to the rating of the security and other relevant credit-related factors in determining whether or not a credit loss exists. During the nine months ended September 1, 2023 and September 2, 2022, we did not recognize an allowance for credit-related losses on any of our investments.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 5. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The fair value of our financial assets and liabilities at September 1, 2023 was determined using the following inputs:
| (in millions) | Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | $ | 5,972 | $ | 5,972 | $ | — | $ | — | |||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Asset-backed securities | 23 | — | 23 | — | |||||||||||||||||||
| Corporate debt securities | 552 | — | 552 | — | |||||||||||||||||||
| U.S. agency securities | 33 | — | 33 | — | |||||||||||||||||||
| U.S. Treasury securities | 307 | — | 307 | — | |||||||||||||||||||
| Prepaid expenses and other current assets: | |||||||||||||||||||||||
| Foreign currency derivatives | 82 | — | 82 | — | |||||||||||||||||||
| Other assets: | |||||||||||||||||||||||
| Deferred compensation plan assets | 199 | 199 | — | — | |||||||||||||||||||
| Total assets | $ | 7,168 | $ | 6,171 | $ | 997 | $ | — |
| Liabilities: | |||||||||||||||||||||||
| Accrued expenses: | |||||||||||||||||||||||
| Foreign currency derivatives | $ | 8 | $ | — | $ | 8 | $ | — | |||||||||||||||
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The fair value of our financial assets and liabilities at December 2, 2022 was determined using the following inputs:
| (in millions) | Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Corporate debt securities | $ | 39 | $ | — | $ | 39 | $ | — | |||||||||||||||
| Money market funds | 3,479 | 3,479 | — | — | |||||||||||||||||||
| Time deposits | 61 | 61 | — | — | |||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Asset-backed securities | 97 | — | 97 | — | |||||||||||||||||||
| Corporate debt securities | 1,266 | — | 1,266 | — | |||||||||||||||||||
| Foreign government securities | 5 | — | 5 | — | |||||||||||||||||||
| Municipal securities | 24 | — | 24 | — | |||||||||||||||||||
| U.S. agency securities | 34 | — | 34 | — | |||||||||||||||||||
| U.S. Treasury securities | 434 | — | 434 | — | |||||||||||||||||||
| Prepaid expenses and other current assets: | |||||||||||||||||||||||
| Foreign currency derivatives | 51 | — | 51 | — | |||||||||||||||||||
| Other assets: | |||||||||||||||||||||||
| Deferred compensation plan assets | 160 | 160 | — | — | |||||||||||||||||||
| Total assets | $ | 5,650 | $ | 3,700 | $ | 1,950 | $ | — |
| Liabilities: | |||||||||||||||||||||||
| Accrued expenses: | |||||||||||||||||||||||
| Foreign currency derivatives | $ | 15 | $ | — | $ | 15 | $ | — | |||||||||||||||
See Note 4 for further information regarding the fair value of our financial instruments.
Our fixed income available-for-sale debt securities consist of high quality, investment grade securities from diverse issuers with a weighted average credit rating of AA-. We value these securities based on pricing from independent pricing vendors who use matrix pricing valuation techniques including market approach methodologies that model information generated by market transactions involving identical or comparable assets, as well as discounted cash flow methodologies. Inputs include quoted prices in active markets for identical assets or inputs other than quoted prices that are observable either directly or indirectly in determining fair value, including benchmark yields, issuer spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. We therefore classify all of our fixed income available-for-sale securities as Level 2. We perform routine procedures such as comparing prices obtained from multiple independent sources to ensure that appropriate fair values are recorded.
The fair values of our money market funds, time deposits and deferred compensation plan assets, which consist of money market and other mutual funds, are based on quoted prices in active markets at the measurement date.
Our over-the-counter foreign currency derivatives are valued using pricing models and discounted cash flow methodologies based on observable foreign exchange and interest rate data at the measurement date.
Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The fair value of our senior notes was $3.35 billion as of September 1, 2023, based on observable market prices in less active markets and categorized as Level 2. See Note 14 for further details regarding our debt.
NOTE 6. DERIVATIVE FINANCIAL INSTRUMENTS
We may use derivatives to partially offset our business exposure to foreign currency and interest rate risk on expected future cash flows and certain existing assets and liabilities. We do not use any of our derivative instruments for trading purposes.
We enter into master netting arrangements to mitigate credit risk in derivative transactions by permitting net settlement of transactions with the same counterparty. We do not offset fair value amounts recognized for derivative instruments under master netting arrangements. We also enter into collateral security agreements with certain of our counterparties to exchange cash collateral when the net fair value of certain derivative instruments fluctuates from contractually established thresholds.
Cash Flow Hedges
In countries outside the United States, we transact business in U.S. Dollars and in various other currencies. We may use foreign exchange option contracts and forward contracts to hedge a portion of our forecasted foreign currency denominated revenue and expenses. These foreign exchange contracts, carried at fair value, have maturities of up to 12 months.
In June 2019, we entered into Treasury lock agreements with large financial institutions which fixed benchmark U.S. Treasury rates for an aggregate notional amount of $1 billion of our future debt issuance. These derivative instruments hedged the impact of changes in the benchmark interest rate to future interest payments and were settled upon debt issuance in the first quarter of fiscal 2020. We incurred a loss related to the settlement of the instruments which is amortized to interest expense over the term of our debt due February 1, 2030. See Note 14 for further details regarding our debt.
As of September 1, 2023, we had net derivative gains on our foreign exchange option contracts expected to be recognized within the next 18 months, of which $5 million of net gains are expected to be recognized into revenue within the next 12 months. In addition, we had net derivative losses on our Treasury lock agreements, of which $5 million is expected to be recognized into interest expense within the next 12 months.
Non-Designated Hedges
Our derivatives not designated as hedging instruments consist of foreign currency forward contracts that we primarily use to hedge monetary assets and liabilities denominated in non-functional currencies.
Fair value asset derivatives are included in prepaid expenses and other current assets and fair value liability derivatives are included in accrued expenses on our condensed consolidated balance sheets. The fair value of derivative instruments as of September 1, 2023 and December 2, 2022 were as follows:
| (in millions) | 2023 | 2022 | |||||||||||||||||||||
| Fair Value Asset Derivatives | Fair Value Liability Derivatives | Fair Value Asset Derivatives | Fair Value Liability Derivatives | ||||||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||
| Foreign exchange option contracts | $ | 79 | $ | — | $ | 36 | $ | — | |||||||||||||||
| Foreign exchange forward contracts | — | — | — | 7 | |||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Foreign exchange forward contracts | 3 | 8 | 15 | 8 | |||||||||||||||||||
| Total derivatives | $ | 82 | $ | 8 | $ | 51 | $ | 15 |
Gains and losses on derivative instruments, net of tax, recognized in our condensed consolidated statements of comprehensive income for the three and nine months ended September 1, 2023 and September 2, 2022 were primarily
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
associated with our foreign exchange option contracts. For the three and nine months ended September 1, 2023, we recognized $7 million of net gains and $5 million of net losses, respectively, in our condensed consolidated statements of comprehensive income from our foreign exchange option contracts. For the three and nine months ended September 2, 2022, we recognized $107 million and $193 million of net gains, respectively, in our condensed consolidated statements of comprehensive income from our foreign exchange option contracts.
The effects of derivative instruments on our condensed consolidated statements of income for the three and nine months ended September 1, 2023 and September 2, 2022 were primarily associated with foreign exchange option contracts. For the three and nine months ended September 1, 2023, we reclassified $5 million and $36 million of net gains, respectively, from accumulated other comprehensive income into revenue resulting from our foreign exchange option contracts. Comparatively, for the three and nine months ended September 2, 2022, we reclassified $54 million and $105 million of net gains, respectively, from accumulated other comprehensive income into revenue resulting from our foreign exchange option contracts.
NOTE 7. GOODWILL AND OTHER INTANGIBLES
Goodwill as of September 1, 2023 and December 2, 2022 was $12.80 billion and $12.79 billion, respectively. During the second quarter of fiscal 2023, we completed our annual goodwill impairment test associated with our reporting units and determined there was no impairment of goodwill.
Other intangible assets subject to amortization as of September 1, 2023 and December 2, 2022 were as follows:
| (in millions) | 2023 | 2022 | |||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||
| Customer contracts and relationships | $ | 1,204 | $ | (588) | $ | 616 | $ | 1,204 | $ | (495) | $ | 709 | |||||||||||||||||||||||
| Purchased technology | 973 | (598) | 375 | 1,060 | (530) | 530 | |||||||||||||||||||||||||||||
| Trademarks | 376 | (205) | 171 | 375 | (172) | 203 | |||||||||||||||||||||||||||||
| Other | 20 | (15) | 5 | 61 | (54) | 7 | |||||||||||||||||||||||||||||
| Other intangibles, net | $ | 2,573 | $ | (1,406) | $ | 1,167 | $ | 2,700 | $ | (1,251) | $ | 1,449 |
Amortization expense related to other intangibles was $92 million and $284 million for the three and nine months ended September 1, 2023, respectively. Comparatively, amortization expense related to other intangibles was $101 million and $303 million for the three and nine months ended September 2, 2022, respectively. Of these amounts, $50 million and $158 million were included in cost of revenue for the three and nine months ended September 1, 2023, respectively, and $58 million and $176 million were included in cost of revenue for the three and nine months ended September 2, 2022, respectively.
As of September 1, 2023, the estimated aggregate amortization expense in future periods was as follows:
| (in millions) | ||||||||
| Fiscal Year | Other Intangibles (1) | |||||||
| Remainder of 2023 | $ | 93 | ||||||
| 2024 | 331 | |||||||
| 2025 | 295 | |||||||
| 2026 | 142 | |||||||
| 2027 | 104 | |||||||
| Thereafter | 182 | |||||||
| Total expected amortization expense | $ | 1,147 |
(1)Excludes capitalized in-process research and development which is considered indefinite lived until the completion or abandonment of the associated research and development efforts.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8. ACCRUED EXPENSES
Accrued expenses as of September 1, 2023 and December 2, 2022 consisted of the following:
| (in millions) | 2023 | 2022 | |||||||||
| Accrued compensation and benefits | $ | 486 | $ | 485 | |||||||
| Accrued bonuses | 415 | 489 | |||||||||
| Accrued corporate marketing | 126 | 154 | |||||||||
| Taxes payable | 115 | 117 | |||||||||
| Refund liabilities | 99 | 106 | |||||||||
| Other | 473 | 439 | |||||||||
| Accrued expenses | $ | 1,714 | $ | 1,790 |
Other primarily includes general business accruals, derivative collateral liabilities, accrued hosting fees and royalties payable.
NOTE 9. STOCK-BASED COMPENSATION
Restricted Stock Units
Restricted stock unit activity for the nine months ended September 1, 2023 was as follows:
| Number of Shares (in millions) | Weighted Average Grant Date Fair Value | Aggregate Fair Value (1) (in millions) | |||||||||||||||
| Beginning outstanding balance | 7.4 | $ | 449.94 | ||||||||||||||
| Awarded | 4.6 | $ | 368.45 | ||||||||||||||
| Released | (3.0) | $ | 430.69 | ||||||||||||||
| Forfeited | (0.4) | $ | 441.31 | ||||||||||||||
| Ending outstanding balance | 8.6 | $ | 413.42 | $ | 4,846 | ||||||||||||
| Expected to vest | 7.7 | $ | 414.19 | $ | 4,320 |
(1) The aggregate fair value is calculated using the closing stock price as of September 1, 2023 of $563.21.
The total fair value of restricted stock units vested during the nine months ended September 1, 2023 was $1.20 billion.
Performance Shares
In the first quarter of fiscal 2023, the Executive Compensation Committee of our Board of Directors (the “ECC”) approved the 2023 Performance Share Program, the terms of which are similar to the 2022 Performance Share Program that is still outstanding. For information regarding our outstanding Performance Share Programs, including the terms, see “Note 12. Stock-Based Compensation” of our Annual Report on Form 10-K for the fiscal year ended December 2, 2022.
As of September 1, 2023, the shares awarded under our 2023, 2022 and 2021 Performance Share Programs remained outstanding and were yet to be earned.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Performance share activity for the nine months ended September 1, 2023 was as follows:
| Number of Shares (in millions) | Weighted Average Grant Date Fair Value | Aggregate Fair Value (1) (in millions) | |||||||||||||||
| Beginning outstanding balance | 0.4 | $ | 495.23 | ||||||||||||||
| Awarded | 0.2 | $ | 437.58 | ||||||||||||||
| Released | (0.1) | $ | 498.74 | ||||||||||||||
| Forfeited | — | $ | 492.68 | ||||||||||||||
| Ending outstanding balance | 0.5 | $ | 465.76 | $ | 263 | ||||||||||||
| Expected to vest | 0.4 | $ | 466.10 | $ | 232 |
(1) The aggregate fair value is calculated using the closing stock price as of September 1, 2023 of $563.21.
Under our Performance Share Programs, participants generally have the ability to receive up to 200% of the target number of shares originally granted. Shares released during the nine months ended September 1, 2023 resulted from 63% achievement of target for the 2020 Performance Share Program, as certified by the ECC in the first quarter of fiscal 2023.
The total fair value of performance shares vested during the nine months ended September 1, 2023 was $39 million.
Employee Stock Purchase Plan Shares
Employees purchased 1.1 million shares at an average price of $286.31 and 0.8 million shares at an average price of $333.92 for the nine months ended September 1, 2023 and September 2, 2022, respectively. The intrinsic value of shares purchased during the nine months ended September 1, 2023 and September 2, 2022 was $185 million and $73 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 September 1, 2023, there was $3.17 billion of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards and purchase rights which will be recognized over a weighted average period of 2.44 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
Total stock-based compensation costs included in our condensed consolidated statements of income for the three and nine months ended September 1, 2023 and September 2, 2022 were as follows:
| Three Months | Nine Months | ||||||||||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Cost of revenue | $ | 30 | $ | 26 | $ | 88 | $ | 71 | |||||||||||||||
| Research and development | 224 | 189 | 657 | 527 | |||||||||||||||||||
| Sales and marketing | 130 | 112 | 375 | 305 | |||||||||||||||||||
| General and administrative | 58 | 51 | 171 | 149 | |||||||||||||||||||
| Total | $ | 442 | $ | 378 | $ | 1,291 | $ | 1,052 |
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) and activity, net of related taxes, were as follows:
| (in millions) | December 2, 2022 | Increase / Decrease | Reclassification Adjustments | September 1, 2023 | |||||||||||||||||||
| Net unrealized gains / losses on available-for-sale securities | $ | (41) | $ | 19 | $ | 5 | (1) | $ | (17) | ||||||||||||||
| Net unrealized gains / losses on derivative instruments designated as hedging instruments | 17 | — | (28) | (2) | (11) | ||||||||||||||||||
| Cumulative foreign currency translation adjustments | (269) | 12 | — | (257) | |||||||||||||||||||
| Total accumulated other comprehensive income (loss), net of taxes | $ | (293) | $ | 31 | $ | (23) | $ | (285) |
(1)Reclassification adjustments for gains / losses on available-for-sale securities are classified in other income (expense), net.
(2)Reclassification adjustments for gains / losses on foreign currency hedges are classified in revenue or operating expenses, depending on the nature of the underlying transaction, and reclassification adjustments for gains / losses on Treasury lock hedges are classified in interest expense.
Taxes related to each component of other comprehensive income (loss) for the three and nine months ended September 1, 2023 and September 2, 2022 were immaterial.
NOTE 11. 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 our shares in the open market or enter into structured repurchase agreements with third parties. In December 2020, our Board of Directors granted authority to repurchase up to $15 billion in our common stock through the end of fiscal 2024.
During the nine months ended September 1, 2023 and September 2, 2022, we entered into accelerated share repurchase agreements (“ASRs”) with large financial institutions whereupon we provided them with prepayments of $1.4 billion and $2.4 billion, respectively. Under the terms of our ASRs, the financial institutions agree to deliver a portion of shares to us at contract inception and the remaining shares at settlement. The total number of shares delivered and average purchase price paid per share are determined upon settlement based on the Volume Weighted Average Price (“VWAP”) over the term of the ASR, less an agreed upon discount.
During the nine months ended September 1, 2023 and September 2, 2022, we also entered into structured stock repurchase agreements with large financial institutions whereupon we provided them with prepayments totaling $2 billion and $2.4 billion, respectively. Under the terms of these structured stock repurchase agreements, the financial institutions agree to deliver shares to us at monthly intervals during the respective contract terms, and the number of shares delivered each month are determined based on the total notional amount of the contracts, the number of trading days in the intervals and the VWAP during the intervals, less an agreed upon discount.
During the nine months ended September 1, 2023, we repurchased a total of 9.7 million shares, including approximately 5.7 million shares at an average price of $396.43 through structured repurchase agreements entered into during fiscal 2022 and the nine months ended September 1, 2023, as well as 4.0 million shares at an average price of $348.46 through the ASR entered into during the nine months ended September 1, 2023. During the nine months ended September 2, 2022, we repurchased a total of 10.7 million shares, including approximately 5.4 million shares at an average price of $429.13 through structured repurchase agreements entered into during fiscal 2021 and the nine months ended September 2, 2022, as well as 5.3 million shares at an average price of $451.55 through the ASR entered into during the nine months ended September 2, 2022.
For the nine months ended September 1, 2023, the prepayments were classified as treasury stock, a component of stockholders’ equity on our condensed consolidated balance sheets, at the payment date, though only shares physically delivered to us by September 1, 2023 were excluded from the computation of net income per share. As of September 1, 2023, $333 million of prepayment remained under our outstanding structured stock repurchase agreement.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Subsequent to September 1, 2023, as part of the December 2020 stock repurchase authority, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $1 billion. Upon completion of the $1 billion stock repurchase agreement, $2.15 billion remains under our December 2020 authority.
NOTE 12. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended September 1, 2023 and September 2, 2022:
| Three Months | Nine Months | ||||||||||||||||||||||
| (in millions, except per share data) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net income | $ | 1,403 | $ | 1,136 | $ | 3,945 | $ | 3,580 | |||||||||||||||
| Shares used to compute basic net income per share | 456.4 | 468.5 | 457.7 | 471.1 | |||||||||||||||||||
| Dilutive potential common shares from stock plans and programs | 3.1 | 0.9 | 1.5 | 1.6 | |||||||||||||||||||
| Shares used to compute diluted net income per share | 459.5 | 469.4 | 459.2 | 472.7 | |||||||||||||||||||
| Basic net income per share | $ | 3.07 | $ | 2.42 | $ | 8.62 | $ | 7.60 | |||||||||||||||
| Diluted net income per share | $ | 3.05 | $ | 2.42 | $ | 8.59 | $ | 7.57 | |||||||||||||||
| Anti-dilutive potential common shares | 0.5 | 5.0 | 3.5 | 3.5 |
NOTE 13. COMMITMENTS AND CONTINGENCIES
Indemnifications
In the ordinary course of business, we provide indemnifications of varying scope to customers and channel partners against claims of intellectual property infringement made by third parties arising from the use of our products and from time to time, we are subject to claims by our customers under these indemnification provisions. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.
To the extent permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.
Legal Proceedings
In connection with disputes relating to the validity or alleged infringement of third-party intellectual property rights, including patent rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation may be very costly and can be disruptive to our business operations by diverting the attention and energies of management and key technical personnel. Although we have successfully defended or resolved past litigation and disputes, we may not prevail in any ongoing or future litigation and disputes. Third-party intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from licensing certain of our products or offering certain of our services, subject us to injunctions restricting our sale of products or services, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers including contractual provisions under various license arrangements and service agreements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In addition to intellectual property disputes, we are subject to legal proceedings, claims, including claims relating to commercial, employment and other matters, and investigations, including government investigations. Some of these disputes, legal proceedings and investigations may include speculative claims for substantial or indeterminate amounts of damages. We consider all claims on a quarterly basis in accordance with GAAP and based on known facts assess whether potential losses are considered reasonably possible or probable and estimable. Based upon this assessment, we then evaluate disclosure requirements and whether to accrue for such claims in our financial statements. This determination is then reviewed and discussed with the Audit Committee of the Board of Directors.
We make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Unless otherwise specifically disclosed in this note, we have determined that no provision for liability nor disclosure is required related to any claim against us because: (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.
All legal costs associated with litigation are expensed as incurred. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us. It is possible, nevertheless, that our consolidated financial position, results of operations or cash flows could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations.
In connection with our anti-piracy efforts, from time to time we undertake litigation against alleged copyright infringers. Such lawsuits may lead to counter-claims alleging improper use of litigation or violation of other laws. We believe we have valid defenses with respect to such counter-claims; however, it is possible that our consolidated financial position, results of operations or cash flows could be negatively affected in any particular period by the resolution of one or more of these counter-claims.
NOTE 14. DEBT
The carrying value of our borrowings as of September 1, 2023 and December 2, 2022 were as follows:
| (dollars in millions) | Issuance Date | Due Date | Effective Interest Rate | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||
| 1.70% 2023 Notes | February 2020 | February 2023 | 1.92% | $ | — | $ | 500 | ||||||||||||||||||||||||||||||||||
| 1.90% 2025 Notes | February 2020 | February 2025 | 2.07% | 500 | 500 | ||||||||||||||||||||||||||||||||||||
| 3.25% 2025 Notes | January 2015 | February 2025 | 3.67% | 1,000 | 1,000 | ||||||||||||||||||||||||||||||||||||
| 2.15% 2027 Notes | February 2020 | February 2027 | 2.26% | 850 | 850 | ||||||||||||||||||||||||||||||||||||
| 2.30% 2030 Notes | February 2020 | February 2030 | 2.69% | 1,300 | 1,300 | ||||||||||||||||||||||||||||||||||||
| Total debt outstanding, at par | $ | 3,650 | $ | 4,150 | |||||||||||||||||||||||||||||||||||||
| Current portion of debt, at par | — | (500) | |||||||||||||||||||||||||||||||||||||||
| Unamortized discount and debt issuance costs | (17) | (21) | |||||||||||||||||||||||||||||||||||||||
| Carrying value of long-term debt | $ | 3,633 | $ | 3,629 | |||||||||||||||||||||||||||||||||||||
| Carrying value of current debt, net of unamortized discount and debt issuance costs | $ | — | $ | 500 | |||||||||||||||||||||||||||||||||||||
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Senior Notes
In January 2015, we issued $1 billion of senior notes due February 1, 2025. The related discount and issuance costs are amortized to interest expense over the term of the notes using the effective interest method. Interest is payable semi-annually, in arrears, on February 1 and August 1.
In February 2020, we issued $500 million of senior notes due February 1, 2023, $500 million of senior notes due February 1, 2025, $850 million of senior notes due February 1, 2027 and $1.30 billion of senior notes due February 1, 2030. Our total proceeds of approximately $3.14 billion, net of issuance discount, were used for general corporate purposes including repayment of debt instruments due in fiscal 2020. The related discount and issuance costs are amortized to interest expense over the respective terms of the notes using the effective interest method. Interest is payable semi-annually, in arrears, on February 1 and August 1.
During the first quarter of fiscal 2023, the $500 million of senior notes due February 1, 2023 became due and were repaid.
Our senior notes rank equally with our other unsecured and unsubordinated indebtedness. We may redeem the notes at any time, subject to a make-whole premium. In addition, upon the occurrence of certain change of control triggering events, we may be required to repurchase the notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The notes do not contain financial covenants but include covenants that limit our ability to grant liens on assets and to enter into sale and leaseback transactions, subject to significant allowances.
Term Loan Credit Agreement
In January 2023, we entered into a delayed draw term loan credit agreement (the “Term Loan Credit Agreement”), providing for a senior unsecured term loan (the “Term Loan”) of up to $3.5 billion for the purpose of partially funding the purchase price for our acquisition of Figma and the related fees and expenses incurred in connection with the acquisition. The Term Loan is available for funding in a single drawing upon the closing of the Figma acquisition at any time prior to March 15, 2024. The Term Loan will mature two years following the initial funding date and requires no scheduled principal amortization payments prior to maturity. The Term Loan may be prepaid and terminated at our election at any time without premium or penalty. At our election, the Term Loan will bear interest at either (i) term Secured Overnight Financing Rate (“SOFR”), plus a margin, (ii) adjusted daily SOFR, plus a margin, or (iii) base rate, plus a margin. Base rate is defined as the highest of (a) the federal funds rate plus 0.50%, (b) the agent’s prime rate, or (c) term SOFR plus 1.00%. The margin for term SOFR and adjusted daily SOFR loans is based on our debt ratings, and ranges from 0.750% to 1.250%. The margin for base rate loans is based on our debt ratings, and ranges from 0.000% to 0.250%. In addition, commitment fees determined according to our debt ratings are payable quarterly in an amount ranging from 0.040% to 0.100% per annum until the funding of the Term Loan.
The Term Loan Credit Agreement contains customary representations, warranties, affirmative and negative covenants, events of default and indemnification provisions in favor of the lenders similar to those contained in the Revolving Credit Agreement. As of September 1, 2023, there were no outstanding borrowings under the Term Loan.
Revolving Credit Agreement
In June 2022, we entered into a credit agreement (“Revolving Credit Agreement”), providing for a five-year $1.5 billion senior unsecured revolving credit facility, which replaced our previous five-year $1 billion senior unsecured revolving credit agreement entered into in October 2018 (the “Prior Revolving Credit Agreement”). The Revolving Credit Agreement provides for loans to Adobe and certain of its subsidiaries that may be designated from time to time as additional borrowers. Pursuant to the terms of the Revolving Credit Agreement, we may, subject to the agreement of lenders to provide additional commitments, obtain up to an additional $500 million in commitments, for a maximum aggregate commitment of $2 billion. At our election, loans under the Revolving Credit Agreement will bear interest at either (i) term SOFR, plus a margin, (ii) adjusted daily SOFR, plus a margin, (iii) alternative currency rate, plus a margin, or (iv) base rate, which is defined as the highest of (a) the federal funds rate plus 0.50%, (b) the agent’s prime rate, or (c) term SOFR plus 1.00%. The margin for term SOFR, adjusted daily SOFR and alternative currency rate loans is based on our debt ratings, and ranges from 0.460% to 0.900%. In addition, facility fees determined according to our debt ratings are payable on the aggregate commitments, regardless of usage, quarterly in an amount ranging from 0.040% to 0.100% per annum. We are permitted to permanently reduce the aggregate commitment under
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
the Revolving Credit Agreement at any time. Subject to certain conditions stated in the Revolving Credit Agreement, Adobe and any of its subsidiaries designated as additional borrowers may borrow, prepay and re-borrow amounts at any time during the term of the Revolving Credit Agreement.
The Revolving Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including events of default and indemnification provisions in favor of the lenders. The negative covenants include restrictions regarding the incurrence of liens and indebtedness, certain merger transactions, dispositions and other matters, all subject to certain exceptions.
The facility will terminate and all amounts owing thereunder will be due and payable on the maturity date unless (a) the commitments are terminated earlier upon the occurrence of certain events, including an event of default, or (b) the maturity date is further extended upon our request, subject to the agreement of the lenders.
As of September 1, 2023, there were no outstanding borrowings under this Revolving Credit Agreement.
Commercial Paper Program
Subsequent to September 1, 2023, we established a commercial paper program under which we may issue unsecured commercial paper up to a total of $3 billion outstanding at any time, with maturities of up to 397 days from the date of issue. The net proceeds from the issuance of commercial paper are expected to be used for general corporate purposes, which may include working capital, capital expenditures, acquisitions, stock repurchases, refinancing indebtedness or any other general corporate purposes.
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