NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
.
Basis of Presentation
Principles of Consolidation
The consolidated financial statements include the accounts of Dolby Laboratories, Inc. and our wholly owned subsidiaries. In addition, we have consolidated the financial results of jointly owned affiliated companies in which our principal stockholder has a controlling interest. We report these controlling interests as a separate line in our consolidated statements of operations as net income attributable to controlling interest and in our consolidated balance sheets as a controlling interest. We eliminate all intercompany accounts and transactions upon consolidation.
Use of Estimates
The preparation of our financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported and disclosed in our consolidated financial statements and accompanying notes. Actual results could differ from our estimates. Significant items subject to such estimates and assumptions include:
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Estimated selling prices for elements sold in ME revenue arrangements
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Valuation allowances for accounts receivable
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Carrying values of inventories and certain PP&E, goodwill, and intangible assets
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Fair values of investments
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Accrued liabilities, including liabilities for unrecognized tax benefits
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Deferred income tax assets and liabilities
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Stock-based compensation
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Fiscal Year
Our fiscal year is a 52 or 53 week period ending on the last Friday in September. The fiscal years presented herein include the 53 week period ended
September 30, 2016
(fiscal
2016
) and the 52 week periods ended
September 29, 2017
(fiscal
2017
) and
September 25, 2015
(fiscal
2015
).
Reclassifications
We have reclassified certain prior period amounts within our consolidated financial statements and accompanying notes to conform to our current period presentation. These reclassifications did not affect total revenue, operating income, operating cash flows or net income.
2
.
Summary of Significant Accounting Policies
Concentration of Credit Risk
Our financial instruments that are exposed to concentrations of credit risk principally consist of cash, cash equivalents, investments, and accounts receivable. Our investment portfolio consists of investment grade securities diversified amongst security types, industries, and issuers. All our securities are held in custody by a recognized financial institution. Our policy limits the amount of credit exposure to a maximum of
5%
to any one issuer, except for the U.S. Treasury, and we believe no significant concentration risk exists with respect to these investments. The majority of our licensing revenue is generated from customers outside of the U.S. We manage this risk by performing regular evaluations of the creditworthiness of our licensing customers. In fiscal
2017
and
2016
, we did not have any individual customers whose revenue exceeded 10% of our total revenue. In fiscal
2015
, revenue from one customer, Samsung, accounted for approximately
12%
of our total revenue, and consisted primarily of licensing revenue from our mobile and broadcast markets.
Cash and Cash Equivalents
We consider all short-term highly liquid investments with original maturities of
90
days or less from the date of purchase to be cash equivalents. Cash and cash equivalents primarily consist of funds held in general checking accounts, money market accounts, commercial paper, and U.S. agency notes.
Restricted Cash
Restricted cash on our consolidated balance sheets consist of cash contributed by Dolby and third-party licensors to Via Licensing Corporation, our wholly-owned subsidiary, that may only be used for licensor enforcement actions or licensee compliance activities related to certain Via-administered patent pools, as well as to disperse costs associated with any audit of Via Licensing Corporation for the Wideband Code Division Multiple Access (W-CDMA) patent pool.
Investments
All of our investments are classified as available-for-sale securities, with the exception of our mutual fund investments held in our supplemental retirement plan, which are classified as trading securities. Investments that have an original maturity of
91
days or more at the date of purchase and a current maturity of less than one year are classified as short-term investments, while investments with a current maturity of more than one year are classified as long-term investments. Our investments are recorded at fair value in our consolidated balance sheets. Unrealized gains and losses on our AFS securities are reported as a component of AOCI, while realized gains and losses, other-than-temporary impairments, and credit losses are reported as a component of net income. Upon sale, gains and losses are reclassified from AOCI into earnings, and are determined based on specific identification of securities sold.
We evaluate our investment portfolio for credit losses and other-than-temporary impairments by comparing the fair value with the cost basis for each of our investment securities. An investment is impaired if the fair value is less than its cost basis. If any portion of the impairment is deemed to be the result of a credit loss, the credit loss portion of the impairment is included as a component of net income. If we deem it probable that we will not recover the full cost basis of the security, the security is other-than-temporarily impaired and the impairment loss is recognized as a component of net income.
Allowance for Doubtful Accounts
We continually monitor customer payments and maintain a reserve for estimated losses resulting from our customers’ inability to make required payments. In determining the reserve, we evaluate the collectibility of our accounts receivable based upon a variety of factors. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, we record a specific allowance against amounts due, and thereby reduce the net recognized receivable to the amount reasonably believed to be collectible. For all other customers, we recognize allowances for doubtful accounts based on our actual historical write-off experience in conjunction with the length of time the receivables are past due, the creditworthiness of the customer, geographic risk and the current business environment. Actual future losses from uncollectible accounts may differ from our estimates.
Inventories
Inventories are stated at the lower of cost and net realizable value. We evaluate our ending inventories for estimated excess quantities and obsolescence. Our evaluation includes the analysis of future sales demand by product within specific time horizons. Inventories in excess of projected future demand are written down to their net realizable value. In addition, we assess the impact of changing technology on our inventory balances and write-off inventories that are considered obsolete. Write-downs and write-offs of inventory are recorded as a cost of products in our consolidated statements of operations. We classify inventory that we do not expect to sell within twelve months as other non-current assets in our consolidated balance sheets.
Property, Plant, and Equipment
PP&E is stated at cost less accumulated depreciation. Depreciation expense is recognized on a straight-line basis according to estimated useful lives assigned to each of our different categories of PP&E as summarized within the following table:
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PP&E Category
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Useful Life
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Computer equipment and software
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3 to 5 years
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Machinery and equipment
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3 to 8 years
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Furniture and fixtures
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5 to 8 years
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Leasehold improvements
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Lesser of useful life or related lease term
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Equipment provided under operating leases
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Lesser of lease term or 15 years
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Buildings and building improvements
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20 to 40 years
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We capitalize certain costs incurred during the construction phase of a project or asset into construction-in-progress until the construction process is complete. Once the related asset is placed into service, we transfer its carrying value into the appropriate fixed asset category and begin depreciating the value over its useful life.
Equipment Provided Under Operating Leases.
We account for our cinema equipment installed at third party sites under collaborative or other arrangements as operating leases, and depreciate these assets on a straight-line basis over their estimated useful life.
Internal Use Software.
We account for the costs of computer software developed for internal use by capitalizing costs of materials and external consultants. These costs are included in PP&E, net of accumulated amortization in our consolidated balance sheets. Our capitalized internal use software costs are typically amortized on a straight-line basis over estimated useful lives of
three
to
five
years. Costs incurred during the preliminary project and post-implementation stages are charged to expense.
Goodwill, Intangible Assets, and Long-Lived Assets
We test goodwill for impairment annually during our third fiscal quarter and whenever events or changes in circumstances indicate that the carrying amount may be impaired. We perform a qualitative assessment as a determinant for whether the two-step annual goodwill impairment test should be performed.
In performing the qualitative assessment, we consider events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, changes in the composition or carrying amount of a reporting unit's net assets, and changes in the price of our common stock. If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then the two-step goodwill impairment test is not performed.
If the two-step goodwill test is performed, we evaluate and test our goodwill for impairment at a reporting-unit level using expected future cash flows to be generated by the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the calculated fair value of the goodwill. A reporting unit is an operating segment or one level below. Our operating segment is aligned with the management principles of our business.
During the fiscal quarter ended December 30, 2016, we reorganized certain aspects of our internal business infrastructure primarily to integrate and align sales support more directly with our business units. In accordance with ASC Topic 350, we reviewed and reassigned our goodwill amongst our reporting units using a relative fair value allocation approach. Before doing so, we performed a “Step Zero” qualitative assessment during the quarter ended September 30, 2016 and determined that there was minimal risk of goodwill impairment in our pre-reorganization reporting units. Immediately after the reorganization, and related to our consolidated balance of goodwill of
$307.1 million
as of December 30, 2016, we initiated the "Step One" goodwill impairment assessment using a market approach and an income approach to value our reporting units. We completed this assessment as of March 31, 2017 and determined that there was no goodwill impairment.
In addition, we completed our annual goodwill impairment assessment for fiscal
2017
in the fiscal quarter ended
June 30, 2017
. We determined, after performing a qualitative review, that it is more likely than not that the fair value of our reporting units are substantially in excess of their respective carrying amounts. Accordingly, there was no
impairment, and the "Step One" goodwill impairment test was not required. We did not incur any goodwill impairment losses in any of the periods presented.
Intangible assets are stated at their original cost less accumulated amortization, and those with definite lives are amortized over their estimated useful lives. Our intangible assets principally consist of acquired technology, patents, trademarks, customer relationships and contracts, the majority of which are amortized on a straight-line basis over their useful lives using a range from
three
to
eighteen
years.
We review long-lived assets, including intangible assets, for impairment whenever events or a change in circumstances indicate an asset’s carrying value may not be recoverable. Recoverability of an asset is measured by comparing its carrying value to the total future undiscounted cash flows that the asset is expected to generate. If it is determined that an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying value of the asset exceeds its estimated fair value.
Revenue Recognition
We enter into revenue arrangements with our customers to license technologies, trademarks, and other aspects of our technological expertise and to sell products and services. We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been completed, our price to the buyer is fixed or determinable, and collectability is probable.
Multiple Element Arrangements.
Some of our revenue arrangements include multiple elements, such as hardware, software, maintenance, and other services. We evaluate each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when it has standalone value and delivery of an undelivered element is both probable and within our control. When these criteria are not met, the delivered and undelivered elements are combined and the arrangement fees are allocated to this combined single unit. If the unit separation criteria are met, we account for each element within a ME arrangement separately, whereby the total arrangement fees are allocated to each element based on its relative selling price, which we establish using a selling price hierarchy. We determine the selling price of each element based on its VSOE, if available, TPE, if VSOE is not available, or ESP, if neither VSOE nor TPE is available.
For some arrangements, customers receive certain elements over a period of time, after delivery of the initial product. These elements may include support and maintenance or the right to receive upgrades. Revenue allocated to the undelivered element is recognized either over its estimated service period or when the upgrade is delivered. We do not recognize revenue that is contingent upon the future delivery of products or services or upon future performance obligations. We recognize revenue for delivered elements only when we have completed all contractual obligations.
We determine our ESP for an individual element within a ME revenue arrangement using the same methods used to determine the selling price of an element sold on a standalone basis. If we sell the element on a standalone basis, we estimate the selling price by considering actual sales prices. Otherwise, we estimate the selling price by considering internal factors such as pricing practices and margin objectives. Consideration is also given to market conditions such as competitor pricing strategies, customer demands and industry technology lifecycles. Management applies judgment to establish margin objectives, pricing strategies and technology lifecycles.
We account for the majority of our digital cinema server and processor sales as ME arrangements that may include up to four separate units, or elements, of accounting.
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The first element consists of our digital cinema server hardware and the accompanying software, which is essential to the functionality of the hardware. This element is typically delivered at the time of sale.
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The second element is the right to receive support and maintenance, which is included with the purchase of the hardware element and is typically delivered over a service period subsequent to the initial sale.
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The third element is the right to receive specified upgrades, which is included with the purchase of the hardware element and is typically delivered when a specified upgrade is available, subsequent to the initial sale. Under revenue recognition accounting standards, sales of our digital cinema servers typically result in the allocation of a substantial majority of the arrangement fees to the delivered hardware element based on its ESP, which we recognize as revenue at the time of sale once delivery has occurred. A small portion of the arrangement fee is allocated to the undelivered support and maintenance element, and when applicable, to the undelivered specified upgrade element based on the VSOE or ESP of each element. The portion of the arrangement fees allocated to the support and maintenance element are recognized as revenue ratably over the estimated service period, and the portion of the arrangement fees allocated to specified upgrades are recognized as revenue upon delivery of the upgrade.
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The fourth element is the right to receive commissioning services performed solely in connection with our digital servers necessary for the installation of Dolby Atmos-enabled theaters. These services consist of the review of venue designs specifying proposed speaker placement, as well as calibration services performed for installed speakers to ensure optimal playback. A small portion of the arrangement fee is allocated to these services based on their ESP which we recognize as revenue once the services have been completed.
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Software Arrangements.
Revenue recognition for transactions that involve software, such as fees we earn from certain system licensees, may include multiple elements. For some of our ME arrangements that involve software, customers receive certain elements over a period of time or after delivery of the initial software. These elements may include support, maintenance, and services. The fair value of these elements are recognized over the estimated period for which these elements will be delivered, which is sometimes the estimated life of the software. If we do not have VSOE of fair value for any undelivered element of these ME arrangements that include software, we defer revenue until all elements are delivered or services have been performed, or until we have VSOE of fair value for all remaining undelivered elements. If the undelivered element is support and we do not have VSOE of fair value for the support element, revenue for the entire arrangement is bundled and recognized ratably over the support period. To the extent that the undelivered element is support within the context of a royalty usage based arrangement, and assuming all other revenue recognition criteria are met, we recognize the entire royalty fee as license revenue once reported.
In certain cases, our arrangements require the licensee to pay a fixed fee for the right to distribute units in the future. These fees are generally recognized upon contract execution, unless the arrangement includes contingency terms wherein we assess the totality of the existing facts and circumstances and conclude upon an accounting treatment thereon, or is considered a ME arrangement.
Licensing.
Our licensing revenue is primarily derived from royalties paid to us by licensees of our IP rights, including patents, trademarks, and trade secrets. Royalties are recognized when all revenue recognition criteria have been met. We determine that there is persuasive evidence of an arrangement upon the execution of a license agreement or in cases where an agreement has expired, upon the receipt of a licensee’s royalty report and payment. Generally, royalties are deemed fixed or determinable upon receipt of a licensee’s royalty report in accordance with the terms of the underlying executed agreement. We determine collectibility based on an evaluation of the licensee’s recent payment history, the existence of a standby letter-of-credit between the licensee’s financial institution and our financial institution, and other factors. If we cannot determine that collectibility is probable, we recognize revenue upon receipt of cash, provided that all other revenue recognition criteria have been met. Corrective royalty statements generally comprise less than
1%
of our net licensing revenue and are recognized when received, or earlier if a reliable estimate can be made of an anticipated reduction in revenue from a prior royalty statement. An estimate of anticipated reduction in revenue based on historical negative correction royalty statements is also recorded. Deferred revenue represents amounts that we have already collected that are ultimately expected to be recognized as revenue, but for which not all revenue recognition criteria have been met. Licensing revenue also includes fees we earn for administering joint patent licensing programs (“patent pools”) containing patents owned by us and/or other companies. Royalties related to patent pools are recorded net of royalties payable to third party patent pool members and are recognized when all revenue recognition criteria have been met.
We generate the majority of our licensing revenue through our licensing contracts with OEMs ("system licensees") and implementation licensees. Our revenue recognition policies for each of these arrangements are summarized below.
Licensing to system licensees.
We license our technologies to system licensees who manufacture consumer electronics products and, in return, the system licensee pays us a royalty generally for each unit shipped that incorporates our technologies. Royalties from system licensees are generally recognized upon receipt of a royalty report from the licensee and when all other revenue recognition criteria have been met. In certain cases, our arrangements require the licensee to pay up-front, non-refundable royalties for units they may distribute in the future. These up-front fees are generally recognized upon contract execution, unless the arrangement includes extended payment terms or is considered a ME arrangement. In addition, in some cases we receive initial license fees for our technologies and provide post-contract support. In these cases we recognize the initial fees ratably over the expected support term.
Licensing to software vendors.
We license our technologies for resale to software vendors and, in return, the software vendor pays us a royalty for each unit of software distributed that incorporates our technologies. Royalties from software vendors are generally recognized upon receipt of a royalty report from the licensee and when all other revenue recognition criteria have been met. In addition, in some cases we receive initial license fees for our technologies and provide post-contract upgrades and support. In these cases, we recognize the initial fees ratably
over the expected support term, as VSOE of fair value typically does not exist for the upgrade and support elements of the contract.
Recovery Payments from Licensees.
Licensing revenue recognized in any given quarter may include recovery payments representing back payments and/or settlements from licensees. These payments arise as a result of ongoing collection efforts as well as activities aimed at identifying potential unauthorized uses of our technologies. Although such collections have become a recurring part of our business, we cannot predict the timing or magnitude of such payments with certainty.
Back payments represent incremental royalties that relate to amounts not previously reported by licensees under existing licensing agreements. Consistent with the manner in which royalty revenue is recognized, we recognize reported back payments as revenue in either the period the fee becomes due and payable, or when collectability is deemed probable, whichever is later.
Settlements represent new agreements under which a third party has agreed to remit payments to us based on past use of our technology. We recognize settlements as revenue in the period in which all revenue recognition criteria have been met. Generally, settlement fees are deemed to be fixed or determinable upon execution of the settlement agreement, provided such agreement contains no contingency terms or extended payment terms. If we are unable to determine that collectability is probable based on an evaluation of a customer's creditworthiness, we recognize revenue upon the receipt of cash, provided the other revenue recognition criteria have been met.
In general, we classify legal costs associated with activities aimed at identifying potential unauthorized uses of our technologies, auditing existing licensees, and on occasion, pursuing litigation as S&M in our consolidated statements of operations.
Product Sales.
Revenue from the sale of products is recognized when the risk of ownership has transferred to our customer, as provided under the terms of the governing purchase agreement, and when all other revenue recognition criteria have been met. Generally, these purchase agreements provide that the risk of ownership is transferred to the customer when the product is shipped, except in specific instances in which certain foreign regulations stipulate that the risk of ownership is transferred to the customer upon their receipt of the shipment. In these instances, we recognize revenue when the product is received by the customer.
Services.
Services revenue is recognized as the related services are performed and when all other revenue recognition criteria have been met.
Collaborative Arrangements.
In partnership with established cinema exhibitors, we offer Dolby Cinema, a branded premium cinema experience for movie audiences. Under such collaborations, Dolby and the exhibitor are both active participants, and share the significant risks and rewards associated with the business. Accordingly, these collaborations are governed by revenue sharing arrangements under which Dolby receives a portion of the theatrical box-office revenues in exchange for the use of our imaging and sound technologies, our proprietary designs and corporate branding as well as for the use of our equipment at the exhibitor’s venue. The use of our equipment meets the definition of a lease, and for the related portion of Dolby's share of revenue, we apply
ASC 840, Leases,
and recognize revenue accordingly. For the use of our IP, the only other predominant deliverable, we apply
ASC 605, Revenue Recognition,
and recognize revenue when all revenue recognition criteria are met, which is generally upon receipt of quarterly box office reports from exhibitors, and on determining that collectability is probable. In general, revenues from collaboration arrangements are recognized as licensing revenue in our consolidated statements of operations.
Cost of Revenue
Cost of licensing.
Cost of licensing primarily consists of amortization expenses associated with purchased intangible assets and intangible assets acquired in business combinations. Cost of licensing also includes royalty obligations to third parties for licensing IP rights as part of arrangements with our customers, depreciation of our Dolby Cinema equipment provided under operating leases in collaborative arrangements, and direct fees incurred.
Cost of products.
Cost of products primarily consists of the cost of materials related to products sold, applied labor, and manufacturing overhead. Our cost of products also includes third party royalty obligations paid to license IP that we include in our products.
Cost of services.
Cost of services primarily consists of the personnel and personnel-related costs of employees performing our professional services, and those of outside consultants, and reimbursable expenses incurred on behalf of customers.
Stock-Based Compensation
We measure expenses associated with all employee stock-based compensation awards using a fair-value method and record such expense in our consolidated financial statements on a straight-line basis over the requisite service period.
Advertising and Promotional Costs
Advertising and promotional costs are charged to S&M expense as incurred. Our advertising and promotional costs were as follows (in thousands):
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Fiscal Year Ended
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September 29,
2017
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September 30,
2016
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September 25,
2015
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Advertising and promotional costs
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$
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47,402
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$
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44,221
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$
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46,202
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Foreign Currency Activities
Foreign Currency Translation.
We maintain business operations in foreign countries. We translate the assets and liabilities of our international subsidiaries, the majority of which are denominated in non-U.S. dollar functional currencies, into U.S. dollars using exchange rates in effect at the end of each period. Revenues and expenses of these subsidiaries are translated using the average rates for the period. Gains and losses from these translations are included in AOCI within stockholders’ equity.
Foreign Currency Transactions.
Certain of our foreign subsidiaries transact in currencies other than their functional currency. Therefore, we re-measure non-functional currency assets and liabilities of these subsidiaries using exchange rates at the end of each period. As a result, we recognize foreign currency transaction and re-measurement gains and losses, which are recorded within other income, net in our consolidated statements of operations. These losses were as follows (in thousands):
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Fiscal Year Ended
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September 29,
2017
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September 30,
2016
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September 25,
2015
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Foreign currency transaction (losses)
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$
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(74
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)
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$
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(474
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)
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$
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(142
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)
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Foreign Currency Exchange Risk.
In an effort to reduce the risk that our earnings will be adversely affected by foreign currency exchange rate fluctuations, we enter into foreign currency forward contracts to hedge against assets and liabilities for which we have foreign currency exchange rate exposure. These derivative instruments are carried at fair value with changes in the fair value recorded to other income/(expense), net, in our consolidated statements of operations. While not designated as hedging instruments, these foreign currency forward contracts are used to reduce the exchange rate risk associated primarily with intercompany receivables and payables. These contracts do not subject us to material balance sheet risk due to exchange rate movements as gains and losses on these derivatives are intended to offset gains and losses on the related receivables and payables for which we have foreign currency exchange rate exposure. As of
September 29, 2017
and
September 30, 2016
, the outstanding derivative instruments had maturities of equal to or less than
31
days and
31
days, respectively, and the total notional amounts of outstanding contracts were
$24.5 million
and
$18.3 million
, respectively. The fair values of these contracts were nominal as of
September 29, 2017
and
September 30, 2016
, and were included within prepaid expenses and other current assets and within accrued liabilities in our consolidated balance sheets.
Income Taxes
We use the asset and liability method, under which deferred income tax assets and liabilities are determined based upon the difference between the financial statement carrying amounts and the tax bases of assets and liabilities, and NOL carryforwards are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets is additionally dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment, and record a valuation allowance to reduce our deferred tax assets when uncertainty regarding their realizability exists.
We record an unrecognized tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the tax authorities. We include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued are reduced in the period that such determination is made and are reflected as a reduction of the overall income tax provision.
Repatriation of Undistributed Foreign Earnings.
Beginning in fiscal
2010
, we initiated a policy election to indefinitely reinvest a portion of the undistributed earnings of certain foreign subsidiaries with operations outside of the U.S. We consider the earnings of these foreign subsidiaries to be indefinitely invested outside the U.S. on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs, and our specific plans for reinvestment of those subsidiary earnings. A majority of the amounts held outside of the U.S. are generally utilized to support non-U.S. liquidity needs in order to fund operations and growth of our foreign subsidiaries and acquisitions.
Sales Tax.
We account for sales tax on a net basis by excluding sales tax from our revenue.
Withholding Taxes.
We recognize licensing revenue gross of withholding taxes, which our licensees remit directly to their local tax authorities, and for which we receive a partial foreign tax credit in our income tax provision. The foreign current tax includes this withholding tax expense while the appropriate foreign tax credit benefit is included in current federal and foreign taxes.
Recently Issued Accounting Standards
We continually assess any ASUs or other new accounting pronouncements issued by the FASB to determine their applicability and impact on us. Where it is determined that a new accounting pronouncement will result in a change to our financial reporting, we take the appropriate steps to ensure that such changes are properly reflected in our consolidated financial statements or notes thereto.
Adopted Standards
Consolidation.
During fiscal 2017, we adopted ASU 2015-02,
Consolidation: Amendments to the Consolidation Analysis
, which amended the consolidation requirements in ASC 810 and changed the consolidation analysis required under U.S. GAAP. The ASU significantly amended how variable interests held by a reporting entity’s related parties or de facto agents affect its consolidation conclusion. Adoption of this new standard did not result in any changes to the entities we currently consolidate and did not otherwise have any impact on our consolidated financial statements or notes thereto.
Inventory.
During fiscal 2017, we adopted ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which affected reporting entities that measure inventory using FIFO or average cost. Specifically, ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Adoption of this new standard did not result in any material changes to inventory and did not otherwise have any impact on our consolidated financial statements or notes thereto.
Standards Not Yet Effective
Revenue Recognition.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606), which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new standard defines a five-step approach for recognizing revenue, which may require a company to use more judgment and make more estimates than under the current guidance. Amongst the elements in the new standard are requirements for 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, to capitalize certain direct costs associated with revenues and contract acquisition costs, and to provide expanded disclosures.
We are evaluating the impact of adoption of Topic 606 on all of our revenue streams and believe that the following are the most significant changes that could occur:
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Estimating and recording royalty-based revenue earned from our licensees’ shipments in the same period in which those shipments occurred, rather than recognizing our royalty-based revenue in the quarter in which it is reported to us by our licensees, which is typically in the quarter after those shipments have occurred;
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•
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For certain transactions that have extended payment and minimum commitment terms with no further performance obligations, recognizing licensing revenues on contract execution instead of when the amounts are due and payable by the customer;
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Specified performance obligations for which we have not historically had VSOE and which resulted in the deferral of significant revenue balances may accelerate revenue recognition as VSOE for the undelivered elements is no longer required to separately recognize revenue for the delivered elements;
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Recording a one-time adjustment to retained earnings to reflect the loss of specified future revenues upon adoption.
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We have not yet quantified the impact of these anticipated changes.
We may adopt the new standard by either the full retrospective method, whereby the standard is applied to all periods presented, or the modified retrospective method, whereby the standard is applied prospectively on the adoption date. We are currently evaluating our transition options. Although permitted, we do not intend to early-adopt the new standard, but will adopt it beginning September 29, 2018 being our first quarter of fiscal 2019.
In addition to our ongoing evaluation of the accounting changes and of our transition options, the Company is also addressing the impact of the new accounting standard and its expanded disclosure requirements on our policies, processes, controls, and systems.
Leases.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which amends the existing accounting standards for leases. Under the new guidance, a lessee will be required to recognize a lease liability and right-of-use asset for all leases. The new guidance also modifies the classification criteria and accounting for sales-type and direct financing leases, and requires additional disclosures to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. The ASU must be applied using a modified retrospective approach. Upon adoption, we will recognize a lease liability and right-of-use asset for each of our long-term lease arrangements, which currently exceed 40 as of
September 29, 2017
. We currently intend to early adopt this new standard concurrently with the adoption of the new revenue recognition standard beginning September 29, 2018.
We have not yet quantified the impact of these changes, however, we anticipate this standard will have a material impact on our consolidated balance sheets and will not have a material impact on our consolidated income statements. We currently expect the most significant impact will be the recognition of right-of-use assets and lease liabilities for operating leases. Our accounting for capital leases is expected to remain substantially unchanged.
Share-Based Compensation
. In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory withholding requirements, as well as classification in the statement of cash flows. We will adopt the new standard beginning September 30, 2017. Currently, excess tax benefits or deficiencies from stock-based awards are recorded as additional paid-in capital. Upon adoption, excess tax benefits or deficiencies from stock-based awards will be recorded as a component of the income tax provision. As a result, upon adoption, income tax expense and the associated effective tax rate will be impacted by fluctuations in the stock price between the grant dates and exercise or vesting dates of the stock-based awards.
Going Concern.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards as specified in the guidance. The ASU is effective for us beginning September 29, 2018. Early adoption is permitted, including adoption in an interim period. We do not anticipate that the new standard will impact our consolidated financial statements.
Cash Flow Classification.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. The new guidance addresses eight specific cash flow issues, with the objective of reducing an existing diversity in practices regarding the manner in which certain cash receipts and payments are presented and classified in the statement of cash flows. The ASU is effective for us beginning September 29, 2018. Early adoption is permitted, including adoption in an interim period, and we are currently evaluating the timing and impact of the standard on our consolidated financial statements.
Income Taxes: Intra-Entity Asset Transfers.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
. The new guidance requires the recognition of the
income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The ASU is effective for us beginning September 29, 2018. Early adoption is permitted, including adoption in an interim period. We do not anticipate that the new standard will materially impact our consolidated financial statements.
Restricted Cash.
In November 2016, the FASB issued ASU 2016-18,
Restricted Cash — a consensus of the FASB Emerging Issues Task Force
, which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The ASU is effective for us beginning September 29, 2018. Early adoption is permitted, including adoption in an interim period. Aside from conforming to new cash flow presentation and restricted cash disclosure requirements, we do not anticipate that the new standard will materially impact our consolidated financial statements.
Accounting for Hedging Activities.
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,
which enables entities to better portray the economics of their risk management activities in the financial statements while enhancing the transparency and understandability of hedge results. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness. The ASU is effective for us beginning September 29, 2018 and we do not currently plan to early adopt. We do not anticipate that the new standard will materially impact our consolidated financial statements.
3
.
Composition of Certain Financial Statement Captions
The following tables present detailed information from our consolidated balance sheets as of
September 29, 2017
and
September 30, 2016
(amounts displayed in thousands, except as otherwise noted).
Accounts Receivable
|
|
|
|
|
|
|
|
|
Accounts Receivable, Net
|
September 29,
2017
|
|
September 30,
2016
|
Trade accounts receivable
|
$
|
62,305
|
|
|
$
|
66,229
|
|
Accounts receivable from patent administration program customers
|
14,412
|
|
|
11,829
|
|
Accounts receivable, gross
|
76,717
|
|
|
78,058
|
|
Less: allowance for doubtful accounts
|
(2,967
|
)
|
|
(2,370
|
)
|
Total
|
$
|
73,750
|
|
|
$
|
75,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
Beginning Balance
|
Charged to
G&A
|
Deductions
|
Ending Balance
|
For fiscal year ended:
|
|
|
|
|
September 25, 2015
|
$
|
1,615
|
|
$
|
33
|
|
$
|
(106
|
)
|
$
|
1,542
|
|
September 30, 2016
|
1,542
|
|
1,017
|
|
(189
|
)
|
2,370
|
|
September 29, 2017
|
2,370
|
|
924
|
|
(327
|
)
|
2,967
|
|
Inventories
|
|
|
|
|
|
|
|
|
Inventories
|
September 29,
2017
|
|
September 30,
2016
|
Raw materials
|
$
|
6,812
|
|
|
$
|
3,526
|
|
Work in process
|
4,954
|
|
|
4,020
|
|
Finished goods
|
13,285
|
|
|
8,808
|
|
Total
|
$
|
25,051
|
|
|
$
|
16,354
|
|
Inventories are stated at the lower of cost and net realizable value. Inventory with a consumption period expected to exceed twelve months is recorded within other non-current assets in our consolidated balance sheets. We have included
$1.8 million
and
$1.6 million
of raw materials inventory within other non-current assets in our consolidated balance sheets as of
September 29, 2017
and
September 30, 2016
, respectively. Based on anticipated inventory consumption rates, and aside from existing write-downs due to excess inventory, we do not believe that material risk of obsolescence exists prior to ultimate sale.
Prepaid Expenses And Other Current Assets
|
|
|
|
|
|
|
|
|
Prepaid Expenses And Other Current Assets
|
September 29,
2017
|
|
September 30,
2016
|
Prepaid expenses
|
$
|
16,681
|
|
|
$
|
13,440
|
|
Other current assets
|
11,383
|
|
|
11,578
|
|
Income tax receivable
|
2,444
|
|
|
1,284
|
|
Total
|
$
|
30,508
|
|
|
$
|
26,302
|
|
Accrued Liabilities
|
|
|
|
|
|
|
|
|
Accrued Liabilities
|
September 29,
2017
|
|
September 30,
2016
|
Accrued royalties
|
$
|
2,274
|
|
|
$
|
1,939
|
|
Amounts payable to patent administration program partners
|
49,141
|
|
|
34,472
|
|
Accrued compensation and benefits
|
92,277
|
|
|
71,261
|
|
Accrued professional fees
|
5,530
|
|
|
6,528
|
|
Unpaid PP&E additions
|
10,096
|
|
|
17,100
|
|
Other accrued liabilities
|
47,716
|
|
|
37,755
|
|
Total
|
$
|
207,034
|
|
|
$
|
169,055
|
|
Other Non-Current Liabilities
|
|
|
|
|
|
|
|
|
Other Non-Current Liabilities
|
September 29,
2017
|
|
September 30,
2016
|
Supplemental retirement plan obligations
|
$
|
2,928
|
|
|
$
|
2,540
|
|
Non-current tax liabilities
|
91,013
|
|
|
68,254
|
|
Other liabilities
|
13,573
|
|
|
12,128
|
|
Total
|
$
|
107,514
|
|
|
$
|
82,922
|
|
Refer to Note
10
“
Income Taxes
” for additional information related to tax liabilities.
4
.
Investments & Fair Value Measurements
We use cash holdings to purchase investment grade securities diversified among security types, industries, and issuers. All of our investment securities are measured at fair value, and are recorded within cash equivalents and both short-term and long-term investments in our consolidated balance sheets. With the exception of our mutual fund investments held in our SERP and classified as trading securities, all of our investments are classified as AFS securities.
Our investment securities primarily consist of government bonds, certificates of deposit, municipal debt securities, corporate bonds, U.S. agency securities, and commercial paper. In addition, our cash and cash equivalents also consist of highly-liquid money market funds. Consistent with our investment policy, none of our municipal debt investments are supported by letters of credit or standby purchase agreements. Our cash and investment portfolio consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29,
2017
|
|
Cost
|
Unrealized
|
|
|
Estimated Fair Value
|
|
Gains
|
Losses
|
Total
|
|
Level 1
|
Level 2
|
Level 3
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
623,244
|
|
|
|
|
|
$
|
623,244
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
1,223
|
|
—
|
|
—
|
|
1,223
|
|
|
|
|
1,223
|
|
|
|
Money market funds
|
2,550
|
|
—
|
|
—
|
|
2,550
|
|
|
2,550
|
|
|
|
|
|
Cash and cash equivalents
|
627,017
|
|
—
|
|
—
|
|
627,017
|
|
|
2,550
|
|
1,223
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposit
(1)
|
17,236
|
|
9
|
|
(1
|
)
|
17,244
|
|
|
|
|
17,244
|
|
|
|
U.S. agency securities
|
9,518
|
|
—
|
|
(20
|
)
|
9,498
|
|
|
|
|
9,498
|
|
|
|
Government bonds
|
2,034
|
|
—
|
|
(6
|
)
|
2,028
|
|
|
2,028
|
|
|
|
|
|
Commercial paper
|
15,160
|
|
2
|
|
(1
|
)
|
15,161
|
|
|
|
|
15,161
|
|
|
|
Corporate bonds
|
174,750
|
|
54
|
|
(163
|
)
|
174,641
|
|
|
|
|
174,641
|
|
|
|
Municipal debt securities
|
29,178
|
|
16
|
|
(9
|
)
|
29,185
|
|
|
|
|
29,185
|
|
|
|
Short-term investments
|
247,876
|
|
81
|
|
(200
|
)
|
247,757
|
|
|
2,028
|
|
245,729
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposit
(1)
|
22,940
|
|
5
|
|
(6
|
)
|
22,939
|
|
|
|
|
22,939
|
|
|
|
U.S. agency securities
|
21,779
|
|
—
|
|
(178
|
)
|
21,601
|
|
|
|
|
21,601
|
|
|
|
Government bonds
|
17,839
|
|
—
|
|
(107
|
)
|
17,732
|
|
|
17,732
|
|
|
|
|
|
Corporate bonds
|
218,857
|
|
327
|
|
(537
|
)
|
218,647
|
|
|
|
|
218,647
|
|
|
|
Municipal debt securities
|
28,913
|
|
29
|
|
(25
|
)
|
28,917
|
|
|
|
|
28,917
|
|
|
|
Other long-term investments
(2)
|
4,171
|
|
357
|
|
—
|
|
4,528
|
|
|
357
|
|
|
|
—
|
|
Long-term investments
|
314,499
|
|
718
|
|
(853
|
)
|
314,364
|
|
|
18,089
|
|
292,104
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and investments
|
$
|
1,189,392
|
|
$
|
799
|
|
$
|
(1,053
|
)
|
$
|
1,189,138
|
|
|
$
|
22,667
|
|
$
|
539,056
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Investments held in supplemental retirement plan:
|
|
|
|
|
|
|
|
|
Assets
|
3,026
|
|
|
|
|
|
3,026
|
|
|
3,026
|
|
|
|
|
|
Included in prepaid expenses and other current assets & other non-current assets
|
|
|
|
|
|
Liabilities
|
3,026
|
|
|
|
|
|
3,026
|
|
|
3,026
|
|
|
|
|
|
Included in accrued liabilities & other non-current liabilities
|
|
|
|
|
|
|
|
(1)
|
Certificates of deposit include marketable securities and those with a maturity in excess of one year as of
September 29, 2017
are classified within long-term investments.
|
|
|
(2)
|
Other long-term investments as of
September 29, 2017
include a marketable equity security of
$0.4 million
, and other investments that are not carried at fair value including an equity method investment of
$0.6 million
and two cost method equity investments of
$3.0 million
and
$0.5 million
. During fiscal 2017, we recorded a write-off charge to reduce the carrying value of a cost method equity investment to zero in recognition of an other-than-temporary impairment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
Cost
|
Unrealized
|
|
|
Estimated Fair Value
|
|
Gains
|
Losses
|
Total
|
|
Level 1
|
Level 2
|
Level 3
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
501,863
|
|
|
|
|
|
$
|
501,863
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
1,099
|
|
|
|
|
|
1,099
|
|
|
|
|
1,099
|
|
|
|
Corporate bonds
|
2,240
|
|
—
|
|
—
|
|
2,240
|
|
|
|
|
2,240
|
|
|
|
Money market funds
|
10,910
|
|
—
|
|
—
|
|
10,910
|
|
|
10,910
|
|
|
|
|
|
Cash and cash equivalents
|
516,112
|
|
—
|
|
—
|
|
516,112
|
|
|
10,910
|
|
3,339
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposit
(1)
|
13,912
|
|
6
|
|
|
|
13,918
|
|
|
|
|
13,918
|
|
|
|
Commercial paper
|
19,629
|
|
1
|
|
(10
|
)
|
19,620
|
|
|
|
|
19,620
|
|
|
|
Corporate bonds
|
63,762
|
|
24
|
|
(14
|
)
|
63,772
|
|
|
|
|
63,772
|
|
|
|
Municipal debt securities
|
24,334
|
|
|
|
(15
|
)
|
24,319
|
|
|
|
|
24,319
|
|
|
|
Short-term investments
|
121,637
|
|
31
|
|
(39
|
)
|
121,629
|
|
|
—
|
|
121,629
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposit
(1)
|
4,500
|
|
10
|
|
|
|
4,510
|
|
|
|
|
4,510
|
|
|
|
U.S. agency securities
|
27,536
|
|
24
|
|
(26
|
)
|
27,534
|
|
|
27,534
|
|
|
|
|
|
Government bonds
|
31,971
|
|
77
|
|
(12
|
)
|
32,036
|
|
|
32,036
|
|
|
|
|
|
Corporate bonds
|
295,921
|
|
715
|
|
(266
|
)
|
296,370
|
|
|
|
|
296,370
|
|
|
|
Municipal debt securities
|
30,090
|
|
28
|
|
(32
|
)
|
30,086
|
|
|
|
|
30,086
|
|
|
|
Other long-term investments
(2)
|
3,002
|
|
366
|
|
|
|
3,368
|
|
|
366
|
|
|
|
|
|
Long-term investments
|
393,020
|
|
1,220
|
|
(336
|
)
|
393,904
|
|
|
59,936
|
|
330,966
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and investments
|
$
|
1,030,769
|
|
$
|
1,251
|
|
$
|
(375
|
)
|
$
|
1,031,645
|
|
|
$
|
70,846
|
|
$
|
455,934
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Investments held in supplemental retirement plan:
|
|
|
|
|
|
|
|
Assets
|
2,638
|
|
|
|
|
|
2,638
|
|
|
2,638
|
|
|
|
|
|
Included in prepaid expenses and other current assets & other non-current assets
|
|
|
|
|
|
Liabilities
|
2,638
|
|
|
|
|
|
2,638
|
|
|
2,638
|
|
|
|
|
|
Included in accrued liabilities & other non-current liabilities
|
|
|
|
|
|
|
|
(1)
|
Certificates of deposit include marketable securities and those with a maturity in excess of one year as of
September 30, 2016
are classified within long-term investments.
|
|
|
(2)
|
Other long-term investments as of
September 30, 2016
include a marketable equity security of
$0.4 million
, and other investments that are not carried at fair value including an equity method investment of
$0.5 million
and two cost method equity investments of
$2.0 million
and
$0.5 million
.
|
Fair Value Hierarchy.
Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. We minimize the use of unobservable inputs and use observable market data, if available, when determining fair value. We classify our inputs to measure fair value using the following three-level hierarchy:
Level 1: Quoted prices in active markets at the measurement date for identical assets and liabilities. We base the fair value of our Level 1 financial instruments, which are traded in active markets, using quoted market prices for identical instruments.
Level 2: Prices may be based upon quoted prices in active markets or inputs not quoted on active markets but are corroborated by market data. We obtain the fair value of our Level 2 financial instruments from a professional pricing service, which may use quoted market prices for identical or comparable instruments, or model driven valuations using observable market data or inputs corroborated by observable market data. To validate the fair value determination provided by our primary pricing service, we perform quality controls over values received which include comparing our pricing service provider’s assessment of the fair values of our investment securities against the fair values of our investment securities obtained from another independent source, reviewing the pricing movement in the context of overall market trends, and reviewing trading information from our investment managers. In addition, we assess the inputs and methods used in determining the fair value in order to determine the classification of securities in the fair value hierarchy.
Level 3: Unobservable inputs are used when little or no market data is available and reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
The following table describes the valuation techniques and inputs applicable to each class of security held within our investment portfolio as of
September 29, 2017
:
|
|
|
|
|
|
Asset Type
|
Primary Source
|
Update Frequency
|
Fair Value Methodology
|
Secondary Source
|
|
|
|
|
|
Level 1
|
|
|
|
|
Money Market Funds
|
Not Applicable
|
Daily
|
$1 per share
|
Not Applicable
|
U.S. Government Bonds
|
FT Interactive Data
|
Daily
|
Market Prices
|
Bloomberg
|
|
|
|
|
|
Level 2
|
|
|
|
|
Certificates of Deposit
|
ICE (Intercontinental Exchange)
|
Monthly
|
Market Prices
|
Bloomberg
|
Commercial Paper
|
U.S. Bank Pricing Unit
|
Daily
|
Matrix Pricing
|
Not Applicable
|
Corporate Bonds
|
ICE (Intercontinental Exchange)
|
Daily
|
Institutional Bond Quotes - evaluations based on various market and industry inputs
|
Bloomberg
|
Municipal Debt Securities
|
Standard & Poor's
|
Daily
|
Evaluations based on various market and industry inputs
|
ICE (Intercontinental Exchange) &
Bloomberg
|
US Agency Securities
(1)
|
ICE (Intercontinental Exchange)
|
Daily
|
Institutional Bond Quotes - evaluations based on various market and industry inputs
|
Bloomberg
|
Int'l Government Bonds
|
ICE (Intercontinental Exchange)
Extel Financial Ltd
|
Daily
|
Evaluations based on various market factors
|
Bloomberg
|
|
|
(1)
|
US Agency Securities were transferred from Level 1 to Level 2 in the fiscal 2017 fair value hierarchy as quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value may be used.
|
Securities In Gross Unrealized Loss Position.
We periodically evaluate our investments for other-than-temporary declines in fair value. The unrealized losses on our AFS securities were primarily the result of unfavorable changes in interest rates subsequent to the initial purchase of these securities. The following table presents the gross unrealized losses and fair value for those AFS securities that were in an unrealized loss position as of
September 29, 2017
and
September 30, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2017
|
|
September 30, 2016
|
|
Less Than 12 Months
|
Greater Than 12 Months
|
|
Less Than 12 Months
|
Greater Than 12 Months
|
Investment Type
|
Fair Value
|
Gross Unrealized Losses
|
Fair Value
|
Gross Unrealized Losses
|
|
Fair Value
|
Gross Unrealized Losses
|
Fair Value
|
Gross Unrealized Losses
|
Certificate of deposit
|
$
|
19,750
|
|
$
|
(6
|
)
|
$
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
U.S. agency securities
|
19,713
|
|
(91
|
)
|
11,386
|
|
(108
|
)
|
|
22,988
|
|
(38
|
)
|
—
|
|
—
|
|
Government bonds
|
15,029
|
|
(64
|
)
|
4,729
|
|
(49
|
)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Commercial paper
|
4,292
|
|
(1
|
)
|
—
|
|
—
|
|
|
11,479
|
|
(10
|
)
|
—
|
|
—
|
|
Corporate bonds
|
125,890
|
|
(251
|
)
|
109,806
|
|
(449
|
)
|
|
153,491
|
|
(280
|
)
|
1,000
|
|
—
|
|
Municipal debt securities
|
26,749
|
|
(24
|
)
|
3,625
|
|
(10
|
)
|
|
35,625
|
|
(42
|
)
|
4,615
|
|
(5
|
)
|
Total
|
$
|
211,423
|
|
$
|
(437
|
)
|
$
|
129,546
|
|
$
|
(616
|
)
|
|
$
|
223,583
|
|
$
|
(370
|
)
|
$
|
5,615
|
|
$
|
(5
|
)
|
Although we had certain securities that were in an unrealized loss position as of
September 29, 2017
, we expect to recover the full carrying value of these securities as we do not intend to, nor do we currently anticipate a need to sell these securities prior to recovering the associated unrealized losses. As a result, we do not consider any portion of the unrealized losses at either
September 29, 2017
or
September 30, 2016
to represent an other-than-temporary impairment, nor do we consider any of the unrealized losses to be credit losses.
Investment Maturities.
The following table summarizes the amortized cost and estimated fair value of the AFS securities within our investment portfolio based on stated maturities as of
September 29, 2017
and
September 30, 2016
, which are recorded within cash equivalents and both short and long-term investments in our consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2017
|
|
September 30, 2016
|
Range of maturity
|
Amortized Cost
|
Fair Value
|
|
Amortized Cost
|
Fair Value
|
Due within 1 year
|
$
|
251,649
|
|
$
|
251,530
|
|
|
$
|
135,886
|
|
$
|
135,884
|
|
Due in 1 to 2 years
|
213,555
|
|
213,154
|
|
|
225,679
|
|
225,953
|
|
Due in 2 to 3 years
|
96,773
|
|
96,682
|
|
|
164,339
|
|
164,583
|
|
Total
|
$
|
561,977
|
|
$
|
561,366
|
|
|
$
|
525,904
|
|
$
|
526,420
|
|
5
.
Property, Plant, & Equipment
PP&E are recorded at cost, with depreciation expense included in cost of licensing, cost of products, cost of services, R&D, S&M, and G&A expenses in our consolidated statements of operations. Depreciation expense was
$53.4 million
,
$52.0 million
, and
$48.2 million
in fiscal
2017
,
2016
, and
2015
, respectively.
As of
September 29, 2017
and
September 30, 2016
, PP&E consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
Property, Plant, & Equipment
|
September 29,
2017
|
|
September 30,
2016
|
Land
|
$
|
43,364
|
|
|
$
|
43,325
|
|
Buildings and building improvements
|
281,196
|
|
|
251,700
|
|
Leasehold improvements
|
65,034
|
|
|
60,480
|
|
Machinery and equipment
|
98,437
|
|
|
88,943
|
|
Computer equipment and software
|
173,341
|
|
|
154,291
|
|
Furniture and fixtures
|
28,118
|
|
|
26,900
|
|
Equipment provided under operating leases
|
97,456
|
|
|
35,968
|
|
Construction-in-progress
|
3,673
|
|
|
32,576
|
|
Property, plant, and equipment, gross
|
790,619
|
|
|
694,183
|
|
Less: accumulated depreciation
|
(305,344
|
)
|
|
(250,527
|
)
|
Property, plant, & equipment, net
|
$
|
485,275
|
|
|
$
|
443,656
|
|
6
.
Goodwill & Intangible Assets
Goodwill
The following table outlines changes to the carrying amount of goodwill (in thousands):
|
|
|
|
|
|
Goodwill
|
Balance at September 25, 2015
|
$
|
307,708
|
|
Translation adjustments
|
1,908
|
|
Balance at September 30, 2016
|
$
|
309,616
|
|
Translation adjustments
|
1,471
|
|
Balance at September 29, 2017
|
$
|
311,087
|
|
Intangible Assets
Intangible assets are stated at their original cost less accumulated amortization. Intangible assets subject to amortization consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2017
|
|
September 30, 2016
|
Intangible Assets, Net
|
Cost
|
Accumulated
Amortization
|
Net
|
|
Cost
|
Accumulated
Amortization
|
Net
|
Acquired patents and technology
|
$
|
299,707
|
|
$
|
(128,986
|
)
|
$
|
170,721
|
|
|
$
|
293,824
|
|
$
|
(101,711
|
)
|
$
|
192,113
|
|
Customer relationships
|
56,843
|
|
(38,368
|
)
|
18,475
|
|
|
56,821
|
|
(34,113
|
)
|
22,708
|
|
Other intangibles
|
22,742
|
|
(22,290
|
)
|
452
|
|
|
22,716
|
|
(22,195
|
)
|
521
|
|
Total
|
$
|
379,292
|
|
$
|
(189,644
|
)
|
$
|
189,648
|
|
|
$
|
373,361
|
|
$
|
(158,019
|
)
|
$
|
215,342
|
|
During fiscal
2017
and
2016
, we purchased various patents and developed technology for cash consideration of
$5.3 million
and
$121.0 million
, and upon acquisition, these intangible assets had a weighted-average useful life of
18.0
years and
10.1
years, respectively. These acquisitions facilitate our R&D efforts, technologies and potential product offerings. Included within the total patent purchases made during fiscal 2016 was the acquisition of a large individual patent portfolio that fits within our existing patent licensing programs in exchange for consideration of
$105.0 million
. These assets are categorized within the "Acquired patents and technology" intangible asset class, and are being amortized over their weighted-average useful life of
9.0
years.
Amortization expense for our intangible assets is included in cost of licensing, cost of products, R&D and S&M expenses in our consolidated statements of operations. Amortization expense was
$30.9 million
,
$33.2 million
, and
$21.0 million
in fiscal
2017
,
2016
and
2015
, respectively. As of
September 29, 2017
, expected amortization expense of our intangible assets in future periods was as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
Amortization Expense
|
2018
|
$
|
25,581
|
|
2019
|
24,908
|
|
2020
|
24,445
|
|
2021
|
24,418
|
|
2022
|
22,191
|
|
Thereafter
|
68,105
|
|
Total
|
$
|
189,648
|
|
7
.
Stockholders' Equity & Stock-Based Compensation
We provide stock-based awards as a form of compensation for employees, officers and directors. We have issued stock-based awards in the form of stock options and RSUs under our equity incentive plans, as well as shares under our ESPP.
Common Stock - Class A and Class B
Our Board of Directors has authorized two classes of common stock, Class A and Class B. At
September 29, 2017
, we had authorized
500,000,000
Class A shares and
500,000,000
Class B shares. At
September 29, 2017
, we had
59,281,837
shares of Class A common stock and
42,873,597
shares of Class B common stock issued and outstanding. Holders of our Class A and Class B common stock have identical rights, except that holders of our Class A common stock are entitled to one vote per share and holders of our Class B common stock are entitled to ten votes per share. Shares of Class B common stock can be converted to shares of Class A common stock at any time at the option of the stockholder and automatically convert upon sale or transfer, except for certain transfers specified in our amended and restated certificate of incorporation.
2005 Stock Incentive Plan
Following shareholder approval in January 2005, our 2005 Stock Plan was adopted by our Board of Directors on February 16, 2005, the day prior to the completion of our IPO. Our 2005 Stock Plan, as amended and restated, provides for the ability to grant incentive stock options, non-qualified stock options, restricted stock, RSUs, stock appreciation rights, deferred stock units, performance units, performance bonus awards, and performance shares. A total of
46.0 million
shares of our Class A common stock is authorized for issuance under the 2005 Stock Plan. For awards granted prior to February 2011, any shares subject to an award with a per share price less than the fair market value of our Class A common stock on the date of grant and any shares subject to an outstanding RSU award will be counted against the authorized share reserve as
two
shares for every one share subject to the award, and if returned to the 2005 Stock Plan, such shares will be counted as
two
shares for every one share returned. For those awards granted from February 2011 onward, any shares subject to an award with a per share price less than the fair market value of our Class A common stock on the date of grant and any shares subject to an outstanding RSU award will be counted against the authorized share reserve as
1.6
shares for every one share subject to the award, and if returned to the 2005 Stock Plan, such shares will be counted as
1.6
for every one share returned.
Stock Options.
Stock options are generally granted at fair market value on the date of grant. Options granted to employees and officers prior to June 2008 generally vest over
4 years
, with equal annual cliff-vesting and expire on the earlier of
10 years
after the date of grant or
three months
after termination of service. Options granted to employees and officers from June 2008 onward generally vest over
four years
, with
25%
of the shares subject to the option becoming exercisable on the one-year anniversary of the date of grant and the balance of the shares vesting in equal monthly installments over the following
36 months
. These options expire on the earlier of ten years after the date of grant or three months after termination of service. All options granted vest over the requisite service period and upon the exercise of stock options, we issue new shares of Class A common stock under the 2005 Stock Plan. Our 2005 Stock Plan also allows us to grant stock awards which vest based on the satisfaction of specific performance criteria.
Performance-Based Stock Options.
In fiscal 2016, we began granting PSOs to our executive officers with shares of our Class A common stock underlying such options. The contractual term for the PSOs is seven years, with vesting contingent upon market-based performance conditions, representing the achievement of specified Dolby annualized TSR targets at the end of a three-year measurement period following the date of grant. If the minimum conditions are met, the PSOs earned will cliff vest on the third anniversary of the grant date, upon certification of achievement of the performance conditions by our Compensation Committee. Anywhere from
0%
to
125%
of the
shares subject to a PSO may vest based on achievement of the performance conditions at the end of the three-year performance period.
In valuing the PSOs which will be recognized as compensation cost, we used a Monte Carlo valuation model. Aside from the use of an expected term for the PSOs commensurate with their shorter contractual term, the nature of the valuation inputs used in the Monte Carlo valuation model were consistent with those used to value our non-performance based options granted under the 2005 Plan. Compensation cost is being amortized on a straight-line basis over the requisite service period.
On December 15, 2016, we granted PSOs to our executive officers exercisable for an aggregate of
276,199
shares at the target award amount, which would be exercisable for an aggregate of up to
345,248
shares at 125% of the target award amount. On December 15, 2015, we granted PSOs to our executive officers exercisable for an aggregate of
335,699
shares at the target award amount, which would be exercisable for an aggregate of up to
419,623
shares at
125%
of the target award amount. As of
September 29, 2017
, PSOs exercisable for an aggregate of
571,398
shares at the target award amount, which would be exercisable for an aggregate of up to
714,246
shares at
125%
of the target award amount, were outstanding.
The following table summarizes information about stock options issued under our 2005 Stock Plan:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining
Contractual Life
|
Aggregate
Intrinsic
Value
(1)
|
|
(in thousands)
|
|
(in years)
|
(in thousands)
|
Options outstanding at September 30, 2016
|
8,690
|
|
$
|
35.98
|
|
|
|
Grants
|
1,934
|
|
46.88
|
|
|
|
Exercises
|
(1,679
|
)
|
34.41
|
|
|
|
Forfeitures and cancellations
|
(204
|
)
|
37.64
|
|
|
|
Options outstanding at September 29, 2017
|
8,741
|
|
38.65
|
|
7.0
|
$
|
164,950
|
|
|
|
|
|
|
Options vested and expected to vest at September 29, 2017
|
8,342
|
|
38.44
|
|
6.7
|
159,235
|
|
|
|
|
|
|
Options exercisable at September 29, 2017
|
4,783
|
|
$
|
36.07
|
|
5.8
|
102,627
|
|
|
|
(1)
|
Aggregate intrinsic value is based on the closing price of our Class A common stock on
September 29, 2017
of
$57.52
and excludes the impact of options that were not in-the-money.
|
The following table summarizes information about stock options outstanding and exercisable at
September 29, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
Options Exercisable
|
Range of Exercise Price
|
Shares
|
Weighted-Average
Remaining Contractual Life
|
Weighted-Average
Exercise Price
|
|
Shares
|
Weighted-Average
Exercise Price
|
|
(in thousands)
|
(in years)
|
|
|
(in thousands)
|
|
$24.60 - $28.90
|
785
|
|
3.6
|
$
|
28.21
|
|
|
813
|
|
$
|
27.64
|
|
$28.91 - $33.40
|
2,374
|
|
7.3
|
32.36
|
|
|
1,189
|
|
31.59
|
|
$33.41 - $37.33
|
110
|
|
5.4
|
35.37
|
|
|
85
|
|
35.03
|
|
$37.34 - $42.95
|
1,705
|
|
6.1
|
38.43
|
|
|
1,521
|
|
38.38
|
|
$42.96 - $47.45
|
3,374
|
|
8.0
|
44.30
|
|
|
1,125
|
|
43.12
|
|
$47.46 - $62.29
|
393
|
|
8.5
|
50.89
|
|
|
50
|
|
52.59
|
|
|
8,741
|
|
|
|
|
4,783
|
|
|
Restricted Stock Units.
Beginning in fiscal 2008, we began granting RSUs to certain directors, officers and employees under our 2005 Stock Plan. Awards granted to employees and officers generally vest over
four years
, with equal annual cliff-vesting. Awards granted to directors prior to November 2010 generally vest over
three years
, with equal annual cliff-vesting. Awards granted after November 2010 and prior to fiscal 2014 to new directors vest over approximately
two years
, with
50%
vesting per year, while awards granted from November 2010 onward to ongoing directors generally vest over approximately
one year
. Awards granted to new directors from fiscal 2014 onward vest on the earlier of the first anniversary of the award’s date of grant, or the day immediately preceding the date of the next annual meeting of stockholders that occurs after the award’s date of grant. Our 2005 Stock Plan also allows us to grant RSUs that vest based on the satisfaction of specific performance criteria, although no such awards had been granted as of
September 29, 2017
. At each vesting date, the holder of the award is issued shares of our Class A common stock. Compensation expense from these awards is equal to the fair market value of our Class A common stock on the date of grant and is recognized on a straight-line basis over the requisite service period.
The following table summarizes information about RSUs issued under our 2005 Stock Plan:
|
|
|
|
|
|
|
|
Shares
|
Weighted-Average
Grant Date
Fair Value
|
|
(in thousands)
|
|
Non-vested at September 30, 2016
|
2,872
|
|
$
|
40.16
|
|
Granted
|
1,218
|
|
46.80
|
|
Vested
|
(1,108
|
)
|
36.69
|
|
Forfeitures
|
(143
|
)
|
39.75
|
|
Non-vested at
September 29
, 2017
|
2,839
|
|
$
|
44.38
|
|
The fair value as of the respective vesting dates of RSUs were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
Restricted stock units - vest date fair value
|
$
|
51,985
|
|
$
|
40,283
|
|
$
|
45,175
|
|
Employee Stock Purchase Plan
. Our plan allows eligible employees to have up to
10 percent
of their eligible compensation withheld and used to purchase Class A common stock, subject to a maximum of
$25,000
worth of stock purchased in a calendar year or no more than
1,000
shares in an offering period, whichever is less. An offering period consists of successive
six
-month purchase periods, with a look back feature to our stock price at the commencement of a
one
-year offering period. The plan provides for a discount equal to
15 percent
of the lower of the closing price of our Class A common stock on the New York Stock Exchange on the first and last day of the offering periods. The plan also includes an automatic reset feature that provides for an offering period to be reset and recommenced to a new lower-priced offering if the offering price of a new offering period is less than that of the immediately preceding offering period.
Stock Option Valuation Assumptions
We use the Black-Scholes option pricing model to determine the estimated fair value of employee stock options at the date of the grant. The Black-Scholes model includes inputs that require us to make certain estimates and assumptions regarding the expected term of the award, as well as the future risk-free interest rate, and the volatility of our stock price over the expected term of the award.
Expected Term.
The expected term of an award represents the estimated period of time that options granted will remain outstanding, and is measured from the grant date to the date at which the option is either exercised or canceled. Our determination of the expected term involves an evaluation of historical terms and other factors such as the exercise and termination patterns of our employees who hold options to acquire our Class A common stock, and is based on certain assumptions made regarding the future exercise and termination behavior.
Risk-Free Interest Rate.
The risk-free interest rate is based on the yield curve of United States Treasury instruments in effect on the date of grant. In determining an estimate for the risk-free interest rate, we use average interest rates based on these instruments’ constant maturities with a term that approximates and corresponds with the expected term of our awards.
Expected Stock Price Volatility.
The expected volatility represents the estimated volatility in the price of our Class A common stock over a time period that approximates the expected term of the awards, and is determined using a blended combination of historical and implied volatility. Historical volatility is representative of the historical trends in our stock price for periods preceding the measurement date for a period that is commensurate with the expected term. Implied volatility is based upon externally traded option contracts of our Class A common stock.
Dividend Yield.
The dividend yield is based on our anticipated dividend payout over the expected term of our option awards. Dividend declarations and the establishment of future record and payment dates are subject to the Board of Directors’ continuing determination that the dividend policy is in the best interests of our stockholders. The dividend policy may be changed or canceled at the discretion of the Board of Directors at any time.
The weighted-average assumptions used in the determination of the fair value of our stock options were as follows:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
Expected term (in years)
|
5.13
|
|
5.24
|
|
4.64
|
|
Risk-free interest rate
|
2.1
|
%
|
1.7
|
%
|
1.5
|
%
|
Expected stock price volatility
|
27.4
|
%
|
29.8
|
%
|
29.6
|
%
|
Dividend yield
|
1.1
|
%
|
1.4
|
%
|
0.9
|
%
|
The following table summarizes the weighted-average fair value (per share) of stock options granted and the total intrinsic value of stock options exercised (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
Stock options granted - weighted-average grant date fair value
|
$
|
11.39
|
|
$
|
8.49
|
|
$
|
10.54
|
|
Stock options exercised - intrinsic value
|
28,544
|
|
27,485
|
|
8,546
|
|
Stock-Based Compensation Expense
Stock-based compensation expense for equity awards granted to employees is determined by estimating their fair value on the date of grant, and recognizing that value as an expense on a straight-line basis over the requisite service period in which our employees earn the awards. Compensation expense related to these equity awards is recognized net of estimated forfeitures, which reduce the expense recorded in the consolidated statements of operations. Our methodology under which estimated forfeiture rates are derived is based on an evaluation of trends in our historical forfeiture data with consideration for other potential driving factors. If in subsequent periods actual forfeitures significantly differ from our estimates, we will revise such estimates accordingly. Beginning in fiscal 2015, we revised the method under which we estimate forfeitures. The impact of this change in estimate was not material. The estimated annual forfeiture rates used for awards granted were
10.16%
,
10.49%
and
9.98%
in fiscal
2017
,
2016
, and
2015
, respectively.
The following tables separately present stock-based compensation expense both by award type and classification within our consolidated statements of operations (in thousands):
Expense - By Award Type
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
Stock options
|
$
|
18,630
|
|
$
|
21,311
|
|
$
|
22,972
|
|
Restricted stock units
|
43,171
|
|
42,201
|
|
40,332
|
|
Employee stock purchase plan
|
3,542
|
|
3,473
|
|
3,765
|
|
Total stock-based compensation
|
65,343
|
|
66,985
|
|
67,069
|
|
Benefit from income taxes
|
(18,959
|
)
|
(19,627
|
)
|
(19,606
|
)
|
Total stock-based compensation, net of tax
|
$
|
46,384
|
|
$
|
47,358
|
|
$
|
47,463
|
|
Expense - By Income Statement Classification
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Compensation Expense - By Classification
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
Cost of products
|
$
|
946
|
|
$
|
859
|
|
$
|
949
|
|
Cost of services
|
512
|
|
547
|
|
457
|
|
Research and development
|
18,497
|
|
17,771
|
|
18,682
|
|
Sales and marketing
|
26,175
|
|
27,579
|
|
24,283
|
|
General and administrative
|
19,213
|
|
20,229
|
|
22,698
|
|
Total stock-based compensation
|
65,343
|
|
66,985
|
|
67,069
|
|
Benefit from income taxes
|
(18,959
|
)
|
(19,627
|
)
|
(19,606
|
)
|
Total stock-based compensation, net of tax
|
$
|
46,384
|
|
$
|
47,358
|
|
$
|
47,463
|
|
The tax benefit that we recognize from shares issued under our ESPP is excluded from the tables above. This benefit was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
Tax benefit - shares issued under ESPP
|
$
|
802
|
|
$
|
550
|
|
$
|
328
|
|
Unrecognized Compensation Expense.
At
September 29, 2017
, total unrecorded compensation expense associated with employee stock options expected to vest was approximately
$30.9 million
, which is expected to be recognized over a weighted-average period of
2.4
years. At
September 29, 2017
, total unrecorded compensation expense associated with RSUs expected to vest was approximately
$77.0 million
, which is expected to be recognized over a weighted-average period of
2.6
years.
Common Stock Repurchase Program
In November 2009, we announced a stock repurchase program ("program"), providing up to
$250.0 million
to be used for the repurchase of our Class A common stock. The following table summarizes the initial amount of authorized repurchases as well as additional repurchases approved by our Board of Directors as of
September 29, 2017
(in thousands):
|
|
|
|
|
Authorization Period
|
Authorization Amount
|
Fiscal 2010: November 2009
|
$
|
250,000
|
|
Fiscal 2010: July 2010
|
300,000
|
|
Fiscal 2011: July 2011
|
250,000
|
|
Fiscal 2012: February 2012
|
100,000
|
|
Fiscal 2015: October 2014
|
200,000
|
|
Fiscal 2017: January 2017
|
200,000
|
|
Total
|
$
|
1,300,000
|
|
Stock repurchases under the program may be made through open market transactions, negotiated purchases, or otherwise, at times and in amounts that we consider appropriate. The timing of repurchases and the number of shares repurchased depend upon a variety of factors, including price, regulatory requirements, the rate of dilution from our equity compensation plans and other market conditions. The program does not have a specified expiration date, and can be limited, suspended or terminated at our discretion at any time without prior notice. Shares repurchased under the program will be returned to the status of authorized but unissued shares of Class A common stock. As of
September 29, 2017
, the remaining authorization to purchase additional shares is approximately
$152.0 million
.
The following table provides information regarding share repurchase activity under the program in fiscal
2017
:
|
|
|
|
|
|
|
|
|
|
Quarterly Repurchase Activity
|
Shares
Repurchased
|
Cost
(1)
|
Average Price Paid Per Share
(2)
|
|
|
(in thousands)
|
|
Q1 - Quarter ended December 30, 2016
|
531,465
|
|
$
|
25,001
|
|
$
|
47.02
|
|
Q2 - Quarter ended March 31, 2017
|
519,917
|
|
24,999
|
|
48.07
|
|
Q3 - Quarter ended June 30, 2017
|
485,179
|
|
24,994
|
|
51.50
|
|
Q4 - Quarter ended September 29, 2017
|
488,909
|
|
25,006
|
|
51.13
|
|
Total
|
2,025,470
|
|
$
|
100,000
|
|
|
|
|
(1)
|
Cost of share repurchases includes the price paid per share and applicable commissions.
|
|
|
(2)
|
Average price paid per share excludes commission costs.
|
Dividend Program
In October 2014, our Board of Directors initiated a quarterly cash dividend program for our stockholders. The following table summarizes dividends declared under the program during fiscal
2017
:
|
|
|
|
|
|
|
|
|
|
Fiscal Period
|
Declaration Date
|
Record Date
|
Payment Date
|
Cash Dividend Per Common Share
|
Dividend Payment
|
Fiscal 2017
|
|
|
|
|
|
|
Q1 - Quarter ended December 30, 2016
|
January 25, 2017
|
February 6, 2017
|
February 15, 2017
|
$
|
0.14
|
|
$14.3 million
|
|
Q2 - Quarter ended March 31, 2017
|
April 26, 2017
|
May 8, 2017
|
May 16, 2017
|
$
|
0.14
|
|
$14.3 million
|
|
Q3 - Quarter ended June 30, 2017
|
July 24, 2017
|
August 7, 2017
|
August 15, 2017
|
$
|
0.14
|
|
$14.3 million
|
|
Q4 - Quarter ended September 29, 2017
|
October 25, 2017
|
November 6, 2017
|
November 15, 2017
|
$
|
0.16
|
|
$16.3 million
|
(1)
|
|
|
(1)
|
The dividend payment amount is estimated based on the number of shares of our Class A and Class B common stock that we estimate will be outstanding as of the Record Date.
|
8
.
Accumulated Other Comprehensive Income
OCI consists of two components: unrealized gains or losses on our AFS marketable investment securities and the gain or loss from foreign currency translation adjustments. Until realized and reported as a component of net income, these comprehensive income items accumulate and are included within AOCI, a subsection within stockholders’ equity in our consolidated balance sheets. Unrealized gains and losses on our investment securities are reclassified from AOCI into earnings when realized upon sale, and are determined based on specific identification of securities sold. Gains and losses from the translation of assets and liabilities denominated in non-U.S. dollar functional currencies are included in AOCI.
The following table summarizes the changes in the accumulated balances during the period, and includes information regarding the manner in which the reclassifications out of AOCI into earnings affect our consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
September 29, 2017
|
|
Fiscal Year Ended
September 30, 2016
|
|
Investment Securities
|
Currency Translation Adjustments
|
Total
|
|
Investment Securities
|
Currency Translation Adjustments
|
Total
|
Beginning Balance
|
$
|
742
|
|
$
|
(10,939
|
)
|
$
|
(10,197
|
)
|
|
$
|
350
|
|
$
|
(11,812
|
)
|
$
|
(11,462
|
)
|
Other comprehensive income before reclassifications:
|
|
|
|
|
|
|
|
Unrealized gains/(losses) - investment securities
|
(1,062
|
)
|
|
|
(1,062
|
)
|
|
(220
|
)
|
|
(220
|
)
|
Foreign currency translation gains/(losses)
(1)
|
|
|
4,184
|
|
4,184
|
|
|
|
287
|
|
287
|
|
Income tax effect - benefit/(expense)
|
12
|
|
(621
|
)
|
(609
|
)
|
|
188
|
|
586
|
|
774
|
|
Net of tax
|
(1,050
|
)
|
3,563
|
|
2,513
|
|
|
(32
|
)
|
873
|
|
841
|
|
Amounts reclassified from AOCI into earnings:
|
|
|
|
|
|
|
|
Realized gains/(losses) - investment securities
(1)
|
(95
|
)
|
|
|
(95
|
)
|
|
563
|
|
|
563
|
|
Income tax effect - benefit/(expense)
(2)
|
26
|
|
|
|
26
|
|
|
(139
|
)
|
|
(139
|
)
|
Net of tax
|
(69
|
)
|
—
|
|
(69
|
)
|
|
424
|
|
—
|
|
424
|
|
Net current-period other comprehensive income/(loss)
|
(1,119
|
)
|
3,563
|
|
2,444
|
|
|
392
|
|
873
|
|
1,265
|
|
Ending Balance
|
$
|
(377
|
)
|
$
|
(7,376
|
)
|
$
|
(7,753
|
)
|
|
$
|
742
|
|
$
|
(10,939
|
)
|
$
|
(10,197
|
)
|
|
|
(1)
|
Realized gains or losses, if any, from the sale of our AFS investment securities or from foreign currency translation adjustments are included within other income/expense, net in our consolidated statements of operations.
|
|
|
(2)
|
The income tax benefit or expense is included within provision for income taxes in our consolidated statements of operations.
|
9
.
Earnings Per Share
Basic EPS is computed by dividing net income attributable to Dolby Laboratories, Inc. by the number of weighted-average shares of Class A and Class B common stock outstanding during the period. Through application of the treasury stock method, diluted EPS is computed in the same manner, except that the number of weighted-average shares outstanding is increased by the number of potentially dilutive shares from employee incentive plans during the period. Potentially dilutive shares include the hypothetical number of shares issued under the assumed exercise of outstanding stock options and vesting of outstanding RSUs.
Basic and diluted EPS are computed independently for each fiscal quarter and year-to-date period presented, which involves the use of different weighted-average share count figures relating to quarterly and annual periods. As a result, and after factoring the effect of rounding to the nearest cent per share, the sum of all four quarter-to-date EPS figures may not equal year-to-date EPS.
The following table sets forth the computation of basic and diluted EPS attributable to Dolby Laboratories, Inc. (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
September 25, 2015
|
Numerator:
|
|
|
|
Net income attributable to Dolby Laboratories, Inc.
|
$
|
201,802
|
|
$
|
185,860
|
|
$
|
181,390
|
|
|
|
|
|
Denominator:
|
|
|
|
Weighted-average shares outstanding—basic
|
101,784
|
|
100,717
|
|
102,354
|
|
Potential common shares from options to purchase common stock
|
1,098
|
|
1,013
|
|
811
|
|
Potential common shares from restricted stock units
|
404
|
|
694
|
|
697
|
|
Weighted-average shares outstanding—diluted
|
103,286
|
|
102,424
|
|
103,862
|
|
|
|
|
|
Net income per share attributable to Dolby Laboratories, Inc.:
|
|
|
|
Basic
|
$
|
1.98
|
|
$
|
1.85
|
|
$
|
1.77
|
|
Diluted
|
$
|
1.95
|
|
$
|
1.81
|
|
$
|
1.75
|
|
|
|
|
|
Antidilutive awards excluded from calculation:
|
|
|
|
Stock options
|
160
|
|
2,971
|
|
4,270
|
|
Restricted stock units
|
—
|
|
30
|
|
127
|
|
10
.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.
Income Tax Provision
The following two tables present the components of our income before provision for income taxes by geographic region and the portion of our provision for income taxes classified as current and deferred (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
United States
|
$
|
28,221
|
|
$
|
37,223
|
|
$
|
17,091
|
|
Foreign
|
228,423
|
|
198,681
|
|
228,691
|
|
Total
|
$
|
256,644
|
|
$
|
235,904
|
|
$
|
245,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
Current:
|
|
|
|
Federal
|
$
|
30,719
|
|
$
|
19,226
|
|
$
|
24,262
|
|
State
|
610
|
|
521
|
|
130
|
|
Foreign
|
55,531
|
|
52,492
|
|
52,461
|
|
Total current
|
86,860
|
|
72,239
|
|
76,853
|
|
|
|
|
|
Deferred:
|
|
|
|
Federal
|
(27,345
|
)
|
(19,540
|
)
|
(9,593
|
)
|
State
|
(4,596
|
)
|
(3,451
|
)
|
(3,686
|
)
|
Foreign
|
(702
|
)
|
254
|
|
(1,032
|
)
|
Total deferred
|
(32,643
|
)
|
(22,737
|
)
|
(14,311
|
)
|
Provision for income taxes
|
$
|
54,217
|
|
$
|
49,502
|
|
$
|
62,542
|
|
Repatriation of Undistributed Foreign Earnings
Beginning in fiscal
2010
, we initiated a policy election to indefinitely reinvest a portion of the undistributed earnings of certain foreign subsidiaries with operations outside of the U.S. We consider the earnings of these foreign subsidiaries to be indefinitely invested outside the U.S. on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. A majority of the amounts held outside of the U.S. are generally utilized to support non-U.S. liquidity needs in order to fund operations and other growth of our foreign subsidiaries and acquisitions.
As a result, we have not recorded a deferred tax liability on undistributed earnings of foreign subsidiaries of approximately
$868.0 million
, which are permanently reinvested outside the U.S. If these undistributed earnings held by foreign subsidiaries are repatriated to the U.S., they may be subject to federal and state income taxes, less any applicable foreign tax credits and withholding taxes, estimated at approximately
$224.8 million
as of
September 29, 2017
. Accordingly, if a determination is made to repatriate some or all of these foreign earnings, we would need to adjust our income tax provision in the period that the determination is made to accrue for taxes payable on earnings that will no longer be indefinitely invested outside the U.S.
Withholding
Taxes
We recognize licensing revenue gross of withholding taxes, which our licensees remit directly to their local tax authorities, and for which we receive a partial foreign tax credit in our income tax provision. The foreign current tax provision includes this withholding tax expense while the appropriate foreign tax credit benefit is included in current federal and foreign tax provision. Withholding taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
Withholding taxes
|
$
|
48,012
|
|
$
|
45,151
|
|
$
|
45,372
|
|
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, using enacted tax rates in effect for the year in which the differences are expected to reverse. Based upon the level of historical taxable income and projections for future taxable income over periods in which the deferred tax assets are deductible, we believe it is more likely than not that the benefits of these deductible differences will be realized; therefore, a valuation allowance is not required.
A summary of the tax effects of the temporary differences were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
Deferred income tax assets:
|
|
|
Investments
|
$
|
2,327
|
|
$
|
972
|
|
Inventories
|
6,821
|
|
7,855
|
|
Net operating loss
|
2,806
|
|
2,818
|
|
Accrued expenses
|
19,732
|
|
16,497
|
|
Stock-based compensation
|
26,970
|
|
31,397
|
|
Revenue recognition
|
53,843
|
|
54,043
|
|
Depreciation and amortization
|
52,876
|
|
26,364
|
|
Research and development credits
|
15,504
|
|
12,837
|
|
Foreign tax credits
|
10,140
|
|
9,727
|
|
Translation adjustment
|
625
|
|
1,223
|
|
Other
|
6,696
|
|
9,473
|
|
Total gross deferred income tax assets
|
198,340
|
|
173,206
|
|
Less: valuation allowance
|
—
|
|
—
|
|
Total deferred income tax assets
|
198,340
|
|
173,206
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
Intangibles
|
(2,277
|
)
|
(2,014
|
)
|
International earnings
|
(4,855
|
)
|
(4,097
|
)
|
Unrealized gain on investments
|
(293
|
)
|
(305
|
)
|
Deferred income tax assets, net (non-current)
|
$
|
190,915
|
|
$
|
166,790
|
|
NOL and Tax Credit Carryforwards
At
September 29, 2017
, the NOL carried forward for federal and California tax purposes were
$2.2 million
and
$9.7 million
, respectively, and will expire in fiscal
2029
if unused. Additionally, we had a total foreign NOL carryforward of
$7.9 million
as of
September 29, 2017
, an amount which is not subject to expiration. At
September 29, 2017
, we also had foreign tax credit and federal R&D tax credit carryforwards of
$7.7 million
and
$4.9 million
, respectively, which will expire between fiscal 2025 and fiscal 2035, and California and foreign R&D tax credits of
$20.9 million
and
$1.5 million
, respectively, which will be carried forward indefinitely.
Effective Tax Rate
Each period, the combination of multiple different factors can impact our effective tax rate. These factors include both recurring items such as tax rates and the relative amount of income earned in foreign jurisdictions, as well as discrete items that may occur in, but are not necessarily consistent between periods. The benefit associated with the foreign rate differential shown below is net of the impact of uncertain tax positions affecting the amount of income subject to foreign taxation. A reconciliation of the federal statutory tax rate to our effective tax rate on income from continuing operations was as follows:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
Federal statutory rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
State income taxes, net of federal effect
|
0.7
|
|
0.7
|
|
0.7
|
|
Stock-based compensation expense rate
|
1.4
|
|
1.5
|
|
1.7
|
|
Research and development tax credits
|
(3.7
|
)
|
(5.2
|
)
|
(3.0
|
)
|
Tax exempt interest
|
(0.1
|
)
|
(0.1
|
)
|
(0.2
|
)
|
U.S. manufacturing tax incentives
|
(0.8
|
)
|
(1.1
|
)
|
(0.3
|
)
|
Foreign rate differential
|
(11.7
|
)
|
(9.5
|
)
|
(9.1
|
)
|
Audit settlements
|
(0.6
|
)
|
(2.3
|
)
|
—
|
|
Other
|
0.9
|
|
2.0
|
|
0.6
|
|
Effective tax rate
|
21.1
|
%
|
21.0
|
%
|
25.4
|
%
|
Our effective tax rate remained unchanged in fiscal
2017
, from
21.0%
in fiscal
2016
to
21.1%
in fiscal
2017
. The effective tax rate in fiscal
2017
compared to fiscal
2016
reflects a benefit from a higher proportion of our overall earnings being attributable to lower tax-rate jurisdictions, offset by reduced benefits from both federal R&D tax credits and lower settlements from prior years' state audits.
Our effective tax rate decreased from
25.4%
in fiscal
2015
to
21.0%
in fiscal
2016
. The decrease was primarily due to benefits from the settlement of a multi-year state audit and federal R&D tax credits that were retroactively reinstated in fiscal
2015
.
Uncertain Tax Positions
As of
September 29, 2017
, the total amount of gross unrecognized tax benefits was
$98.7 million
, of which
$85.0 million
, if recognized, would reduce our effective tax rate. Our liability for unrecognized tax benefits is classified within other non-current liabilities in our consolidated balance sheets. Over the next twelve months, we estimate that this amount will be reduced by
$3.7 million
as a result of the expiration of certain statute of limitations. Aggregate changes in the balance of gross unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
Beginning Balance
|
$
|
75,168
|
|
$
|
65,161
|
|
$
|
31,351
|
|
Gross increases - tax positions taken during prior years
|
308
|
|
4,343
|
|
507
|
|
Gross decreases - tax positions taken during prior years
|
—
|
|
—
|
|
—
|
|
Gross increases - tax positions taken during current year
|
26,724
|
|
26,585
|
|
34,293
|
|
Gross decreases - settlements with tax authorities during current year
|
(1,101
|
)
|
(20,086
|
)
|
—
|
|
Lapse of statute of limitations
|
(2,434
|
)
|
(835
|
)
|
(990
|
)
|
Ending Balance
|
$
|
98,665
|
|
$
|
75,168
|
|
$
|
65,161
|
|
Classification of Interest and Penalties
We include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued are reduced in the period that such determination is made and are reflected as a reduction of the overall income tax provision. In fiscal
2017
, our current tax provision was
increased
by interest expense of
$1.8 million
, while in fiscal
2016
, our current tax provision was
increased
by interest expense of
$0.4 million
and
reduced
by penalties of
$0.5 million
. Accrued interest and penalties are included within the related tax liability line item in our consolidated balance sheets. Our accrued interest and penalties on unrecognized tax benefits as of
September 29, 2017
and
September 30, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
Accrued interest
|
$
|
3,733
|
|
$
|
1,936
|
|
Accrued penalties
|
55
|
|
53
|
|
Total
|
$
|
3,788
|
|
$
|
1,989
|
|
We continue to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected tolling of the statute of limitations in various taxing jurisdictions. We file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. The material income tax jurisdictions are the United States (Federal), California, New York and the Netherlands. Our tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate.
During fiscal
2017
, we settled two multi-year examinations of our tax filings by taxing authorities, and as a result, recognized a total net tax benefit of
$1.5 million
related to the settlement of these audits. We settled the examination of our tax filings with the State of California for the 2009 through 2011 fiscal years and our tax filings with the State of New York for the 2011 through 2013 fiscal years.
We are currently under audit by the State of New York for the 2014 through 2015 fiscal years. In the U.S federal jurisdiction, other major states, and major foreign jurisdictions, the fiscal years subsequent to 2013, 2011, and 2010, respectively, remain open and could be subject to examination by the taxing authorities.
Management does not believe that the outcome of any ongoing examination will have a material impact on our consolidated financial statements. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If resolution
of any tax issues addressed in our current audits are done in a manner inconsistent with management’s expectations, we could be required to adjust our tax provision for income taxes in the period such resolution occurs.
11
.
Restructuring
Restructuring charges recorded in our statements of operations represent costs associated with separate individual restructuring plans implemented in various fiscal periods. Accruals for restructuring charges are included within accrued liabilities in our consolidated balance sheets while restructuring charges are included within restructuring charges in our consolidated statements of operations.
Fiscal 2017 Restructuring Plan.
In September 2017, we implemented a plan to reduce certain activities in order to reallocate those resources towards higher priority investment areas. As a result, we recorded
$12.9 million
in restructuring costs during fiscal 2017, representing severance and other related benefits offered to approximately
80
employees that were affected by this action. The table presented below summarizes changes in restructuring accruals under this plan (in thousands):
|
|
|
|
|
|
Severance and associated costs
|
Restructuring charges
|
$
|
12,856
|
|
Cash payments
|
(168
|
)
|
Non-cash and other adjustments
|
—
|
|
Balance at September 29, 2017
|
$
|
12,688
|
|
Fiscal 2016 Restructuring Plan.
In January 2016, we implemented a plan to reorganize and consolidate certain activities and positions within our global business infrastructure. As a result, we recorded
$1.3 million
in restructuring costs during fiscal 2016, representing severance and other related benefits offered to approximately
30
employees that were affected by this action. The table presented below summarizes changes in restructuring accruals under this plan, and reflects the completion of activity during fiscal 2016 (in thousands):
|
|
|
|
|
|
Severance and associated costs
|
Restructuring charges
|
$
|
1,294
|
|
Cash payments
|
(1,233
|
)
|
Non-cash and other adjustments
|
(61
|
)
|
Balance at September 30, 2016
|
$
|
—
|
|
12
.
Commitments & Contingencies
In the ordinary course of business, we enter into contractual agreements with third parties that include non-cancelable payment obligations, for which we are liable in future periods. These arrangements can include terms binding us to minimum payments and/or penalties if we terminate the agreement for any reason other than an event of default as described by the agreement. The following table presents a summary of our contractual obligations and commitments as of
September 29, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Fiscal Period
|
|
Fiscal
2018
|
Fiscal
2019
|
Fiscal
2020
|
Fiscal
2021
|
Fiscal
2022
|
Thereafter
|
Total
|
Naming rights
|
$
|
7,715
|
|
$
|
7,811
|
|
$
|
7,909
|
|
$
|
8,008
|
|
$
|
8,108
|
|
$
|
86,865
|
|
$
|
126,416
|
|
Operating leases
|
15,593
|
|
12,887
|
|
11,874
|
|
10,210
|
|
8,960
|
|
25,291
|
|
84,815
|
|
Purchase obligations
|
12,105
|
|
24,072
|
|
21,010
|
|
—
|
|
—
|
|
—
|
|
57,187
|
|
Donation commitments
|
255
|
|
6,300
|
|
322
|
|
122
|
|
122
|
|
958
|
|
8,079
|
|
Total
|
$
|
35,668
|
|
$
|
51,070
|
|
$
|
41,115
|
|
$
|
18,340
|
|
$
|
17,190
|
|
$
|
113,114
|
|
$
|
276,497
|
|
Naming Rights.
We are party to an agreement for naming rights and related benefits with respect to the Dolby Theatre in Hollywood, California, the location of the Academy Awards®. The term of the agreement is
20
years, over which we will make payments on a semi-annual basis until fiscal 2032. Our payment obligations are conditioned in part on the Academy Awards being held and broadcast from the Dolby Theatre.
Operating Leases.
Operating lease payments represent our commitments for future minimum rent made under non-cancelable leases for office space, including those payable to our principal stockholder and portions attributable to the controlling interests in our wholly owned subsidiaries. The following table summarizes information about our total rental expenses under operating leases, including the portion of this total rent expense which is payable to our principal stockholder (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
Total rent expense
|
$
|
15,091
|
|
$
|
13,288
|
|
$
|
15,349
|
|
Purchase Obligations.
Purchase obligations primarily consist of our commitments made under agreements to purchase goods and services related to Dolby Cinema and for purposes that include IT and telecommunications, marketing and professional services, and manufacturing and other R&D activities.
Donation Commitments.
Donation commitments primarily relate to a non-cancelable obligation entered into during fiscal 2014 to install and donate imaging and audio products to the Museum of the Academy of Motion Picture Arts and Sciences in Los Angeles, California, and to provide maintenance services for
15 years
from its expected opening date in fiscal
2019
, in exchange for various marketing, branding, and publicity benefits.
Purchase Obligations.
Purchase obligations primarily consist of our commitments made under agreements to purchase goods and services related to Dolby Cinema and for purposes that include IT and telecommunications, marketing and professional services, and manufacturing and other R&D activities.
Indemnification Clauses.
On a limited basis, our contractual agreements will contain a clause under which we agree to provide indemnification to the counterparty, most commonly to licensees in connection with licensing arrangements that include our IP. We have also entered into indemnification agreements with our officers, directors, and certain employees, and our certificate of incorporation and bylaws contain similar indemnification obligations. Additionally, and although not a contractual requirement, we have at times elected to defend our licensees from third party IP infringement claims. Since the terms and conditions of our contractual indemnification clauses do not explicitly specify our obligations, we are unable to reasonably estimate the maximum potential exposure for which we could be liable. Furthermore, we have not historically made any payments in connection with any such obligation and believe there to be a remote likelihood that any potential exposure in future periods would be of a material amount. As a result, no amounts have been accrued in our consolidated financial statements with respect to the contingent aspect of these indemnities.
13
.
Business Combinations
Doremi Technologies
On October 31, 2014 ("acquisition date"), we completed our acquisition of all outstanding interests of Doremi Technologies, LLC ("Doremi"), a privately held company, and certain assets related to the business of Doremi from Doremi Labs, Inc. and Highlands Technologies SAS (the “Doremi-related assets”) for cash consideration of
$98.4 million
and up to an additional
$20.0 million
in contingent consideration that may be earned over a
four
-year period following the closing of the acquisition. Upon acquisition, the
fair value of the contingent consideration liability was estimated to be
$0.7 million
, and based on revisions to initial estimates, the fair value of this liability was remeasured to
$0.1 million
as of September 25, 2015 and to
zero
as of September 30, 2016.
The following table summarizes the purchase price allocation made to the net tangible and intangible assets acquired (including cash of
$8.4 million
), and liabilities assumed based on their acquisition date fair values, with the excess amount recorded as goodwill, which is representative of the expected benefits from the integration of Doremi's technologies and assembled workforce (in thousands):
|
|
|
|
|
Purchase Price Allocation
|
|
Current assets
|
$
|
17,231
|
|
Inventories
|
16,372
|
|
Intangible assets
|
45,600
|
|
Goodwill
|
39,672
|
|
Current liabilities
|
(11,653
|
)
|
Non-current liabilities
|
(8,820
|
)
|
Cash consideration paid to sellers
|
98,402
|
|
Add: contingent consideration
|
740
|
|
Total purchase consideration
|
$
|
99,142
|
|
The following table summarizes the fair values allocated to the various intangible assets acquired (in
thousands), the weighted-average useful lives over which they will be amortized using the straight-line method, and
the classification of their amortized expense in our consolidated statements of operations. The value of these acquired
intangibles was determined based on the present value of estimated future cash flows under various valuation
techniques and inputs.
|
|
|
|
|
|
|
Intangible Assets Acquired
|
Purchase Price Allocation
|
Weighted-Average Useful Life (Years)
|
Income Statement Classification: Amortization Expense
|
Customer relationships
|
$
|
25,600
|
|
10
|
Sales & Marketing
|
Developed technology
|
17,500
|
|
7.5
|
Cost of Sales
|
Trade name
|
1,300
|
|
1
|
Sales & Marketing
|
Backlog
|
1,200
|
|
1
|
Cost of Sales
|
Total
|
$
|
45,600
|
|
|
|
Total acquisition-related costs incurred in connection with the transaction were
$0.4 million
during fiscal 2015. These costs were included in G&A expenses in our consolidated statements of operations. Pro forma financial information has not been presented for any period since the impact of the Doremi acquisition was not material.
14
.
Operating Segments & Geographic Information
Operating Segments
Operating segments are defined as components of an enterprise for which separate financial information is available, and which are evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and assess performance. Our CODM is our Chief Executive Officer. Reporting segments are operating segments exceeding specified revenue, profit or loss, or asset thresholds for which separate disclosure of information is necessary.
We operate as a single reporting segment. During the fiscal quarter ended December 30, 2016, we reorganized certain aspects of our internal business infrastructure primarily to integrate and align sales support more directly with our business units. Following the reorganization, we reassessed our business units and concluded that the composition of our reportable segments remains unchanged and that we continue to operate as a single reportable segment. This reflects the fact that our CODM continues to evaluate our financial information and resources, and continues to assess the performance of these resources, on a consolidated basis. All required financial segment information is therefore included in our consolidated financial statements.
Geographic Information
The methods to determine revenue by geographic region for each of the three categories included within total revenue in our consolidated statements of operations are described within the table presented below.
|
|
|
Revenue Category
|
Basis For Determining Geographic Location
|
Licensing
|
Region in which our licensees’ headquarters are located
|
Products
|
Destination to which our products are shipped
|
Services
|
Location in which the relevant services are performed
|
The following tables present selected information regarding total revenue by geographic location (amounts presented in thousands).
Revenue Composition - United States & International
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Location
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
United States
|
$
|
373,264
|
|
$
|
320,129
|
|
$
|
276,733
|
|
International
|
708,190
|
|
705,609
|
|
693,905
|
|
Total revenue
|
$
|
1,081,454
|
|
$
|
1,025,738
|
|
$
|
970,638
|
|
Revenue Concentration - Significant Individual Geographic Regions
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Location
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
United States
|
35
|
%
|
31
|
%
|
29
|
%
|
South Korea
|
16
|
%
|
17
|
%
|
21
|
%
|
China
|
16
|
%
|
14
|
%
|
7
|
%
|
Japan
|
12
|
%
|
12
|
%
|
13
|
%
|
Europe
|
11
|
%
|
14
|
%
|
13
|
%
|
Taiwan
|
4
|
%
|
4
|
%
|
10
|
%
|
Other
|
6
|
%
|
8
|
%
|
7
|
%
|
Total
|
100
|
%
|
100
|
%
|
100
|
%
|
Long-lived tangible assets, net of accumulated depreciation, by geographic region were as follows (in thousands):
|
|
|
|
|
|
|
|
Location
|
September 29,
2017
|
September 30,
2016
|
United States
|
$
|
439,023
|
|
$
|
412,447
|
|
International
|
46,252
|
|
31,209
|
|
Total long-lived tangible assets, net of accumulated depreciation
|
$
|
485,275
|
|
$
|
443,656
|
|
15
.
Legal Matters
We are involved in various legal proceedings that occasionally arise in the normal course of business. These can include claims of alleged infringement of IP rights, commercial, employment, and other matters. In our opinion, resolution of these proceedings is not expected to have a material adverse impact on our operating results or financial condition. Given the unpredictable nature of legal proceedings, it is possible that an unfavorable resolution of one or more such proceedings could materially affect our future operating results or financial condition in a particular period, including as a result of required changes to our licensing terms, monetary penalties, and other potential consequences. However, based on the information known by us as of the date of this filing and the rules and regulations applicable to the preparation of our consolidated financial statements, any such amounts are either immaterial, or it is not possible to provide an estimated amount of any such potential losses.
16
.
Related Parties
We maintain contractual agreements relating to certain entities affiliated with the Dolby family, who is considered a related party as our principal stockholder. These jointly-owned entities were established for the purpose of acquiring and leasing commercial property in the U.S. and U.K. primarily for our operational use. Although the entities affiliated with the Dolby family are the limited member or LP in each of these entities, they have a controlling interest based on holding majority economic ownership. We are the managing member or general partner in each of these affiliated entities, and with the exception of isolated instances where portions of these facilities are leased to third parties, we occupy the majority of the space. Therefore, since these affiliated entities are an integrated part of our operations, we have consolidated the entities’ assets and liabilities and results of operations in our consolidated financial statements. The share of earnings and net assets of the entities attributable to the limited member or LP, as the case may be, is reflected as controlling interest in our consolidated financial statements.
Our interests in these consolidated affiliated entities and the location of the property leased to Dolby Laboratories as of
September 29, 2017
were as follows:
|
|
|
|
|
Entity Name
|
Minority Ownership Interest
|
Location Of Properties
|
Dolby Properties Brisbane, LLC
|
49.0
|
%
|
Brisbane, California
|
Dolby Properties Burbank, LLC
|
49.0
|
%
|
Burbank, California
|
Dolby Properties UK, LLC
|
49.0
|
%
|
Wootton Bassett, England
|
Dolby Properties, LP
|
10.0
|
%
|
Wootton Bassett, England
|
Jointly-Owned Real Estate Entities.
We lease from our principal stockholder a commercial office building located at 100 Potrero Avenue in San Francisco, California under a term that expires on
October 31, 2024
, and we lease additional facilities located in California and the U.K. from the jointly-owned real estate entities described above. Related party rent expense included in operating expenses in our consolidated statements of operations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
Related party rent expense included in operating expenses
|
$
|
3,142
|
|
$
|
3,097
|
|
$
|
3,136
|
|
Distributions.
Distributions made by the jointly-owned real estate entities to our principal stockholder were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
Distributions to principal stockholder
|
$
|
(2,094
|
)
|
$
|
(214
|
)
|
$
|
(5,615
|
)
|
Related Party Transaction: Sale of interests in Affiliated Entity.
During fiscal 2015, we entered into an agreement with entities affiliated with the Dolby family to sell our
37.5%
ownership interest in Dolby Properties, LLC, a jointly-owned real estate entity. As a result of this related party transaction, we no longer have a continuing involvement with, nor retain the rights previously held to control the operations of this entity, and it was therefore deconsolidated from our consolidated financial statements for the fiscal year ended
September 25, 2015
.
Upon deconsolidation, we recognized a pre-tax gain on sale of
$26.2 million
, which is included within other income/(expense), net in our consolidated statements of operations. As shown within the table presented below, the gain on sale was measured as the cash consideration received in exchange for our interests of
$31.3 million
, less the net book value of Dolby Properties, LLC as of the
August 5, 2015
transaction date (in thousands). Dolby Properties, LLC was established for operating the commercial office building and approximate 122,000 square feet of space located at 999 Brannan Street in San Francisco, California, and its primary assets represented the land, building and capital improvements made to the property. Determination of the fair value of the interests sold was based upon an independent appraisal completed by real estate valuation experts.
|
|
|
|
|
Deconsolidation of Subsidiary
|
|
Cash consideration received
(1)
|
$
|
31,263
|
|
Less: net book value of Dolby Properties, LLC
|
(5,042
|
)
|
Gain on sale (pre-tax)
|
$
|
26,221
|
|
|
|
(1)
|
Net cash proceeds from the sale of
$27.2 million
as disclosed within our consolidated statements of cash flows is derived by deducting cash balances of
$4.1 million
held by the Subsidiary and acquired by the Purchaser from gross cash consideration received of
$31.3 million
.
|
The arrangements and nature of our involvement in the four other real estate entities jointly-owned with Dolby family-affiliated entities were unaffected by this transaction.
17
.
Retirement Plans
We maintain a tax-qualified Section 401(k) retirement plan for employees in the United States and similar plans in foreign jurisdictions. Under the plan, employees are eligible to receive matching contributions and profit-sharing contributions.
We also maintain a SERP, a non-qualified, employer-funded retirement plan for certain senior executives employed in the United States. The plan was adopted in
October 2004
prior to our IPO and was terminated in fiscal
2005
. We have not made any contributions to the SERP since fiscal
2006
. The purpose of the plan was to provide these executives with the opportunity to receive retirement income benefits in addition to the benefits generally available to all employees. The benefits provided to participants were based on defined contributions that we made to the plan and the gains and losses on the investment of those contributions. At
September 29, 2017
, the balance in the SERP account represents amounts contributed prior to the plan's termination, with the underlying plan investments consisting primarily of mutual fund investments. SERP assets are included within prepaid expenses and other current assets and within other non-current assets, while SERP liabilities are included within accrued liabilities and within other non-current liabilities in our consolidated balance sheets.
Retirement plan expenses, which are included in cost of products, cost of services, R&D, S&M, and G&A expense in our consolidated statements of operations, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 29,
2017
|
September 30,
2016
|
September 25,
2015
|
Retirement plan expenses
|
$
|
22,035
|
|
$
|
20,471
|
|
$
|
19,431
|
|
18
.
Selected Quarterly Financial Data
The following table presents selected unaudited quarterly financial information from fiscal
2017
and
2016
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2017
|
|
Fiscal Year 2016
|
|
Q1
|
Q2
|
Q3
|
Q4
|
|
Q1
|
Q2
|
Q3
|
Q4
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Licensing
|
$
|
232,699
|
|
$
|
241,617
|
|
$
|
278,106
|
|
$
|
213,370
|
|
|
$
|
211,129
|
|
$
|
249,336
|
|
$
|
253,026
|
|
$
|
203,541
|
|
Products
|
28,211
|
|
20,713
|
|
22,569
|
|
23,797
|
|
|
24,809
|
|
20,063
|
|
20,638
|
|
25,033
|
|
Services
|
5,357
|
|
5,144
|
|
4,990
|
|
4,881
|
|
|
4,876
|
|
4,941
|
|
3,923
|
|
4,423
|
|
Total revenue
|
266,267
|
|
267,474
|
|
305,665
|
|
242,048
|
|
|
240,814
|
|
274,340
|
|
277,587
|
|
232,997
|
|
Cost of revenue
|
29,967
|
|
26,977
|
|
32,125
|
|
29,238
|
|
|
29,766
|
|
24,373
|
|
24,621
|
|
30,222
|
|
Gross margin
|
236,300
|
|
240,497
|
|
273,540
|
|
212,810
|
|
|
211,048
|
|
249,967
|
|
252,966
|
|
202,775
|
|
Income before taxes and controlling interest
|
67,656
|
|
66,194
|
|
96,303
|
|
26,491
|
|
|
39,484
|
|
83,823
|
|
81,784
|
|
30,813
|
|
Net income attributable to Dolby Laboratories
|
$
|
53,374
|
|
$
|
50,590
|
|
$
|
76,043
|
|
$
|
21,795
|
|
|
$
|
30,901
|
|
$
|
67,398
|
|
$
|
63,628
|
|
$
|
23,933
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.53
|
|
$
|
0.50
|
|
$
|
0.75
|
|
$
|
0.21
|
|
|
$
|
0.31
|
|
$
|
0.67
|
|
$
|
0.63
|
|
$
|
0.24
|
|
Diluted
|
$
|
0.51
|
|
$
|
0.49
|
|
$
|
0.73
|
|
$
|
0.21
|
|
|
$
|
0.30
|
|
$
|
0.66
|
|
$
|
0.62
|
|
$
|
0.23
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
101,483
|
|
101,787
|
|
101,905
|
|
101,959
|
|
|
100,734
|
|
100,456
|
|
100,533
|
|
101,145
|
|
Diluted
|
103,876
|
|
103,883
|
|
104,222
|
|
103,530
|
|
|
101,931
|
|
101,555
|
|
102,677
|
|
103,766
|
|