ADOBE INC. (Exact Name of Registrant As Specified in Its Charter) ______
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________________________ FORM 10-Q (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 2019 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-15175 ADOBE INC. (Exact name of registrant as specified in its charter) ________________________________ Delaware 77-0019522 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) 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) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol Name of each exchange on which registered Common Stock, $0.0001 par value per share ADBE The NASDAQ Stock Market LLC (NASDAQ Global Select Market) ________________________________ 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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated Accelerated filer o Non-accelerated Smaller reporting Emerging growth filer x filer o company o company o (Do not check if a smaller reporting company) If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x The number of shares outstanding of the registrant’s common stock as of June 21, 2019 was 485,438,762. ADOBE INC. FORM 10-Q TABLE OF CONTENTS Page No. PART I—FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements: 3 Condensed Consolidated Balance Sheets May 31, 2019 and November 30, 2018 3 Condensed Consolidated Statements of Income Three and Six Months Ended May 31, 2019 and June 1, 2018 4 Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended May 31, 2019 and June 1, 2018 5 Condensed Consolidated Statements of Stockholders’ Equity Three and Six Months Ended May 31, 2019 and June 1, 2018 6 Condensed Consolidated Statements of Cash Flows Six Months Ended May 31, 2019 and June 1, 2018 8 Notes to Condensed Consolidated Financial Statements 9 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 39 Item 3. Quantitative and Qualitative Disclosures about Market Risk 54 Item 4. Controls and Procedures 54 PART II—OTHER INFORMATION Item 1. Legal Proceedings 54 Item 1A. Risk Factors 55 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 67 Item 4. Mine Safety Disclosures 67 Item 5. Other Information 67 Item 6. Exhibits 68 Signature 73 Summary of Trademarks 74 2 Table of Contents PART I—FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ADOBE INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value) May 31, November 30, 2019 2018 (Unaudited) (*) ASSETS Current assets: Cash and cash equivalents $ 2,082,910 $ 1,642,775 Short-term investments 1,396,069 1,586,187 Trade receivables, net of allowances for doubtful accounts of $12,379 and $14,981, respectively 1,272,668 1,315,578 Prepaid expenses and other current assets 590,998 312,499 Total current assets 5,342,645 4,857,039 Property and equipment, net 1,205,020 1,075,072 Goodwill 10,697,874 10,581,048 Purchased and other intangibles, net 1,917,149 2,069,001 Other assets 503,221 186,522 Total assets $ 19,665,909 $ 18,768,682 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Trade payables $ 169,101 $ 186,258 Accrued expenses 1,314,998 1,163,185 Debt 3,145,668 — Income taxes payable 45,778 35,709 Deferred revenue 3,011,552 2,915,974 Total current liabilities 7,687,097 4,301,126 Long-term liabilities: Debt 987,938 4,124,800 Deferred revenue 122,522 137,630 Income taxes payable 637,733 644,101 Deferred income taxes 133,886 46,702 Other liabilities 165,040 152,209 Total liabilities 9,734,216 9,406,568 Stockholders’ equity: Preferred stock, $0.0001 par value; 2,000 shares authorized, none issued — — Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 486,273 and 487,663 shares outstanding, respectively 61 61 Additional paid-in-capital 6,050,800 5,685,337 Retained earnings 13,183,938 11,815,597 Accumulated other comprehensive income (loss) (144,364) (148,130) Treasury stock, at cost (114,561 and 113,171 shares, respectively), net of reissuances (9,158,742) (7,990,751) Total stockholders’ equity 9,931,693 9,362,114 Total liabilities and stockholders’ equity $ 19,665,909 $ 18,768,682 _________________________________________ (*) The condensed consolidated balance sheet as of November 30, 2018 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes to condensed consolidated financial statements. 3 Table of Contents ADOBE INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended May 31, June 1, May 31, June 1, 2019 2018 2019 2018 Revenue: Subscription $ 2,456,097 $ 1,923,131 $ 4,761,064 $ 3,716,489 Product 152,816 150,993 323,370 322,601 Services and support 135,367 121,236 260,792 235,217 Total revenue 2,744,280 2,195,360 5,345,226 4,274,307 Cost of revenue: Subscription 296,476 186,355 584,507 351,040 Product 9,345 10,779 21,450 23,656 Services and support 101,667 84,210 198,817 165,550 Total cost of revenue 407,488 281,344 804,774 540,246 Gross profit 2,336,792 1,914,016 4,540,452 3,734,061 Operating expenses: Research and development 475,958 374,128 940,595 722,897 Sales and marketing 848,927 646,215 1,630,445 1,227,172 General and administrative 219,334 178,040 435,443 348,480 Amortization of purchased intangibles 43,026 17,149 89,592 34,295 Total operating expenses 1,587,245 1,215,532 3,096,075 2,332,844 Operating income 749,547 698,484 1,444,377 1,401,217 Non-operating income (expense): Interest and other income (expense), net 2,558 11,599 6,824 28,271 Interest expense (40,577) (20,363) (81,170) (40,262) Investment gains (losses), net (756) 1,079 43,075 4,075 Total non-operating income (expense), net (38,775) (7,685) (31,271) (7,916) Income before income taxes 710,772 690,799 1,413,106 1,393,301 Provision for income taxes 78,179 27,632 106,272 147,058 Net income $ 632,593 $ 663,167 $ 1,306,834 $ 1,246,243 Basic net income per share $ 1.30 $ 1.35 $ 2.68 $ 2.53 Shares used to compute basic net income per share 487,535 491,914 487,795 491,993 Diluted net income per share $ 1.29 $ 1.33 $ 2.65 $ 2.50 Shares used to compute diluted net income per share 492,212 498,252 493,200 499,166 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents ADOBE INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited) Three Months Ended Six Months Ended May 31, June 1, May 31, June 1, 2019 2018 2019 2018 Increase/(Decrease) Increase/(Decrease) Net income $ 632,593 $ 663,167 $ 1,306,834 $ 1,246,243 Other comprehensive income (loss), net of taxes: Available-for-sale securities: Unrealized gains / losses on available-for-sale securities 9,910 (1,721) 22,312 (24,869) Reclassification adjustment for recognized gains / losses on available-for-sale securities 67 75 192 197 Net increase (decrease) from available-for-sale securities 9,977 (1,646) 22,504 (24,672) Derivatives designated as hedging instruments: Unrealized gains / losses on derivative instruments 16,765 31,104 8,308 29,767 Reclassification adjustment for recognized gains / losses on derivative instruments (8,675) (37) (16,872) (2,177) Net increase (decrease) from derivatives designated as hedging instruments 8,090 31,067 (8,564) 27,590 Foreign currency translation adjustments (11,999) (48,712) (10,174) (20,327) Other comprehensive income (loss), net of taxes 6,068 (19,291) 3,766 (17,409) Total comprehensive income, net of taxes $ 638,661 $ 643,876 $ 1,310,600 $ 1,228,834 See accompanying notes to condensed consolidated financial statements.