10-Q 1 a10-qxq317.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From              To             
Commission File Number: 001-32431

image0a12.jpg
DOLBY LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
90-0199783
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1275 Market Street
San Francisco, CA
94103-1410
(415) 558-0200
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý
 
Accelerated filer  ¨
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company  ¨
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý
On July 28, 2017, the registrant had 58,014,060 shares of Class A common stock, par value $0.001 per share, and 44,023,597 shares of Class B common stock, par value $0.001 per share, outstanding.


DOLBY LABORATORIES, INC.
FORM 10-Q
For the Fiscal Quarter Ended June 30, 2017
TABLE OF CONTENTS
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 


2

GLOSSARY OF TERMS
The following table summarizes certain terms and abbreviations that may be used within the text of this report:
Abbreviation
 
Term
AAC
 
Advanced Audio Coding
AFS
 
Available-For-Sale (Securities)
AOCI
 
Accumulated Other Comprehensive Income
APIC
 
Additional-Paid In-Capital
ASC
 
Accounting Standards Codification
ASP
 
Average Selling Price
ASU
 
Accounting Standards Update
ATSC
 
Advanced Television Systems Committee
AVR
 
Audio/Video Receiver
CE
 
Consumer Electronics
CODM
 
Chief Operating Decision Maker
COGS
 
Cost Of Goods Sold
COSO
 
Committee Of Sponsoring Organizations (Of The Treadway Commission)
DD
 
Dolby Digital®
DD+
 
Dolby Digital Plus™
DMA
 
Digital Media Adapter
DTV
 
Digital Television
DVB
 
Digital Video Broadcasting
DVD
 
Digital Versatile Disc
EPS
 
Earnings Per Share
ESP
 
Estimated Selling Price
ESPP
 
Employee Stock Purchase Plan
FASB
 
Financial Accounting Standards Board
FCPA
 
Foreign Corrupt Practices Act
FIFO
 
First-in, First-out
G&A
 
General & Administrative
HDR
 
High-Dynamic Range
HDTV
 
High Definition Television
HE AAC
 
High Efficiency Advanced Audio Coding
HEVC
 
High Efficiency Video Coding
HFR
 
High Frame Rate
HTIB
 
Home Theater In-A-Box
IC
 
Integrated Circuit
IMB
 
Integrated Media Block
IP
 
Intellectual Property
IPO
 
Initial Public Offering
IPTV
 
Internet Protocol Television
IT
 
Information Technology
LCD
 
Liquid Crystal Display
LIFO
 
Last-in, Last-out
LP
 
Limited Partner/Partnership
ME
 
Multiple Element
NOL
 
Net Operating Loss
OCI
 
Other Comprehensive Income
ODD
 
Optical Disc Drive
OECD
 
Organization For Economic Co-Operation & Development
OEM
 
Original Equipment Manufacturer
OLED
 
Organic Light-Emitting Diode
OTT
 
Over-The-Top
PC
 
Personal Computer
PCS
 
Post-Contract Support
PP&E
 
Property, Plant And Equipment
PSO
 
Performance-Based Stock Option
R&D
 
Research & Development
RSU
 
Restricted Stock Unit
S&M
 
Sales & Marketing
SERP
 
Supplemental Executive Retirement Plan
SoC
 
System(s)-On-A-Chip
STB
 
Set-Top Box
TAM
 
Total Available Market
TPE
 
Third Party Evidence
TSR
 
Total Stockholder Return
UHD
 
Ultra High Definition
U.S. GAAP
 
Generally Accepted Accounting Principles In The United States
VSOE
 
Vendor Specific Objective Evidence

3

PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)


 
June 30,
2017
September 30,
2016
ASSETS
(unaudited)
 
Current assets:
 
 
Cash and cash equivalents
$
592,616

$
516,112

Restricted cash
6,187

3,645

Short-term investments
247,665

121,629

Accounts receivable, net of allowance for doubtful accounts of $3,279 and $2,370
82,102

75,688

Inventories
19,950

16,354

Prepaid expenses and other current assets
29,790

26,302

Total current assets
978,310

759,730

Long-term investments
303,320

393,904

Property, plant, and equipment, net
476,353

443,656

Intangible assets, net
196,494

215,342

Goodwill
309,911

309,616

Deferred taxes
178,466

166,790

Other non-current assets
30,252

21,068

Total assets
$
2,473,106

$
2,310,106

 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
Accounts payable
$
12,728

$
17,544

Accrued liabilities
176,985

169,055

Income taxes payable
852

2,304

Deferred revenue
22,835

24,180

Total current liabilities
213,400

213,083

Long-term deferred revenue
36,123

35,366

Other non-current liabilities
101,204

82,922

Total liabilities
350,727

331,371

 
 
 
Stockholders’ equity:
 
 
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 57,885,128 shares issued and outstanding at June 30, 2017 and 57,018,362 at September 30, 2016
57

57

Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 44,073,597 shares issued and outstanding at June 30, 2017 and 44,403,847 at September 30, 2016
44

44

Additional paid-in capital
51,426

42,032

Retained earnings
2,075,559

1,938,320

Accumulated other comprehensive (loss)
(11,518
)
(10,197
)
Total stockholders’ equity – Dolby Laboratories, Inc.
2,115,568

1,970,256

Controlling interest
6,811

8,479

Total stockholders’ equity
2,122,379

1,978,735

Total liabilities and stockholders’ equity
$
2,473,106

$
2,310,106

See accompanying notes to unaudited interim condensed consolidated financial statements

4

DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
June 30,
2017
July 1,
2016
 
June 30,
2017
July 1,
2016
Revenue:
 
 
 
 
 
Licensing
$
278,106

$
253,026

 
$
752,422

$
713,491

Products
22,569

20,638

 
71,493

65,510

Services
4,990

3,923

 
15,491

13,740

Total revenue
305,665

277,587

 
839,406

792,741

 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
Cost of licensing
12,711

6,620

 
29,628

19,851

Cost of products
14,910

14,098

 
46,618

47,114

Cost of services
4,504

3,903

 
12,823

11,795

Total cost of revenue
32,125

24,621

 
89,069

78,760

 
 
 
 
 
 
Gross margin
273,540

252,966

 
750,337

713,981

 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
Research and development
59,631

54,977

 
175,490

160,393

Sales and marketing
73,480

74,234

 
220,275

220,503

General and administrative
44,497

42,570

 
129,290

129,130

Restructuring charges
—

(10
)
 
—

1,245

Total operating expenses
177,608

171,771

 
525,055

511,271

 
 
 
 
 
 
Operating income
95,932

81,195

 
225,282

202,710

 
 
 
 
 
 
Other income/expense:
 
 
 
 
 
Interest income
2,511

1,464

 
6,511

4,011

Interest expense
(31
)
(26
)
 
(94
)
(88
)
Other income/(expense), net
(2,109
)
(849
)
 
(1,546
)
(1,542
)
Total other income
371

589

 
4,871

2,381

 
 
 
 
 
 
Income before income taxes
96,303

81,784

 
230,153

205,091

Provision for income taxes
(20,117
)
(18,017
)
 
(49,666
)
(42,768
)
Net income including controlling interest
76,186

63,767

 
180,487

162,323

Less: net (income) attributable to controlling interest
(143
)
(139
)
 
(480
)
(396
)
Net income attributable to Dolby Laboratories, Inc.
$
76,043

$
63,628

 
$
180,007

$
161,927

 
 
 
 
 
 
Net income per share:
 
 
 
 
 
Basic
$
0.75

$
0.63

 
$
1.77

$
1.61

Diluted
$
0.73

$
0.62

 
$
1.73

$
1.59

Weighted-average shares outstanding:
 
 
 
 
 
Basic
101,905

100,533

 
101,725

100,578

Diluted
104,222

102,677

 
103,986

101,979

 
 
 
 
 
 
Related party rent expense:
 
 
 
 
 
Included in operating expenses
$
784

$
778

 
$
2,359

$
2,315

Included in net income attributable to controlling interest
$
176

$
179

 
$
526

$
529

 
 
 
 
 
 
Cash dividend declared per common share
$
0.14

$
0.12

 
$
0.42

$
0.36

Cash dividend paid per common share
$
0.14

$
0.12

 
$
0.42

$
0.36

See accompanying notes to unaudited interim condensed consolidated financial statements

5

DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
June 30,
2017
July 1,
2016
 
June 30,
2017
July 1,
2016
Net income including controlling interest
$
76,186

$
63,767

 
$
180,487

$
162,323

Other comprehensive income:
 
 
 




Currency translation adjustments, net of tax
3,267

(2,875
)
 
(12
)
(753
)
Unrealized gains/(losses) on investments, net of tax
75

701

 
(1,363
)
1,404

Comprehensive income
79,528

61,593

 
179,112

162,974

Less: comprehensive (income)/loss attributable to controlling interest
(295
)
172

 
(426
)
210

Comprehensive income attributable to Dolby Laboratories, Inc.
$
79,233

$
61,765

 
$
178,686

$
163,184

See accompanying notes to unaudited interim condensed consolidated financial statements

6

DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)

 
Dolby Laboratories, Inc.
 
 
 
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss)
Total Dolby
Laboratories,
Inc.
Controlling
Interest
Total
Balance at September 30, 2016
$
101

$
42,032

$
1,938,320

$
(10,197
)
$
1,970,256

$
8,479

$
1,978,735

Net income
—

—

180,007

—

180,007

480

180,487

Currency translation adjustments, net of tax of $205
—

—

—

42

42

(54
)
(12
)
Unrealized losses on investments, net of tax of $22
—

—

—

(1,363
)
(1,363
)
—

(1,363
)
Distributions to controlling interest
—

—

—

—

—

(2,094
)
(2,094
)
Stock-based compensation expense
—

48,940

—

—

48,940

—

48,940

Repurchase of common stock
(2
)
(74,992
)
—

—

(74,994
)
—

(74,994
)
Cash dividends declared and paid on common stock
—

—

(42,768
)
—

(42,768
)
—

(42,768
)
Tax benefit from employee stock plans
—

4,558

—

—

4,558

—

4,558

Common stock issued under employee stock plans
2

47,763

—

—

47,765

—

47,765

Tax withholdings on vesting of restricted stock
—

(16,875
)
—

—

(16,875
)
—

(16,875
)
Balance at June 30, 2017
$
101

$
51,426

$
2,075,559

$
(11,518
)
$
2,115,568

$
6,811

$
2,122,379


 
Dolby Laboratories, Inc.
 
 
 
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss)
Total Dolby
Laboratories,
Inc.
Controlling
Interest
Total
Balance at September 25, 2015
$
102

$
17,571

$
1,800,857

$
(11,462
)
$
1,807,068

$
8,939

$
1,816,007

Net income
—

—

161,927

—

161,927

396

162,323

Currency translation adjustments, net of tax of $476
—

—

—

(147
)
(147
)
(606
)
(753
)
Unrealized gains on investments, net of tax of $(26)
—

—

—

1,404

1,404

—

1,404

Distributions to controlling interest
—

—

—

—

—

(214
)
(214
)
Stock-based compensation expense
—

51,473

—

—

51,473

—

51,473

Repurchase of common stock
(2
)
(84,852
)
—

—

(84,854
)
—

(84,854
)
Cash dividends declared and paid on common stock
—

—

(36,256
)
—

(36,256
)
—

(36,256
)
Tax (deficiency) from employee stock plans
—

(724
)
—

—

(724
)
—

(724
)
Common stock issued under employee stock plans
2

44,066

—

—

44,068

—

44,068

Tax withholdings on vesting of restricted stock
—

(12,154
)
—

—

(12,154
)
—

(12,154
)
Balance at July 1, 2016
$
102

$
15,380

$
1,926,528

$
(10,205
)
$
1,931,805

$
8,515

$
1,940,320


See accompanying notes to unaudited interim condensed consolidated financial statements

7

DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Fiscal Year-To-Date Ended
 
June 30,
2017
July 1,
2016
Operating activities:
 
 
Net income including controlling interest
$
180,487

$
162,323

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
64,543

63,829

Stock-based compensation
48,940

51,473

Amortization of premium on investments
2,077

3,288

Excess tax benefit from exercise of stock options
(4,881
)
(1,313
)
Provision for doubtful accounts
1,167

1,133

Deferred income taxes
(11,446
)
(5,838
)
Other non-cash items affecting net income
2,547

306

Changes in operating assets and liabilities:
 
 
Accounts receivable
(7,576
)
8,798

Inventories
(6,840
)
(6,024
)
Prepaid expenses and other assets
(10,657
)
(11,075
)
Accounts payable and other liabilities
14,877

10,808

Income taxes, net
19,033

(1,612
)
Deferred revenue
(560
)
8,052

Other non-current liabilities
773

(193
)
Net cash provided by operating activities
292,484

283,955

 
 
 
Investing activities:
 
 
Purchase of investments
(204,447
)
(247,680
)
Proceeds from sales of investment securities
36,579

242,141

Proceeds from maturities of investment securities
126,199

77,668

Purchases of PP&E
(81,668
)
(77,079
)
Purchase of intangible assets
(5,250
)
(118,770
)
Change in restricted cash
(2,542
)
(2,737
)
Net cash used in investing activities
(131,129
)
(126,457
)
 
 
 
Financing activities:
 
 
Proceeds from issuance of common stock
47,765

44,067

Repurchase of common stock
(74,994
)
(84,854
)
Payment of cash dividend
(42,768
)
(36,256
)
Distribution to controlling interest
(2,094
)
(214
)
Excess tax benefit from exercise of stock options
4,881

1,313

Shares repurchased for tax withholdings on vesting of restricted stock
(16,875
)
(12,153
)
Net cash used in financing activities
(84,085
)
(88,097
)
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
(766
)
(1,336
)
Net increase in cash and cash equivalents
76,504

68,065

Cash and cash equivalents at beginning of period
516,112

531,926

Cash and cash equivalents at end of period
$
592,616

$
599,991

 
 
 
Supplemental disclosure:
 
 
Cash paid for income taxes, net of refunds received
$
44,694

$
50,235

 
 
 
Non-cash investing and financing activities:
 
 
Decrease in PP&E purchases unpaid at period-end
$
(11,614
)
$
(13,911
)
Purchase consideration payable for acquisition
$
—

$
95


See accompanying notes to unaudited interim condensed consolidated financial statements

8

DOLBY LABORATORIES, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation
Unaudited Interim Condensed Consolidated Financial Statements
We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with U.S. GAAP, and with SEC rules and regulations, which allow for certain information and footnote disclosures that are normally included in annual financial statements prepared in accordance with U.S. GAAP to be condensed or omitted. In our opinion, these unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended September 30, 2016 and include all adjustments necessary for fair presentation. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements for the fiscal year ended September 30, 2016, which are included in our Annual Report on Form 10-K filed with the SEC.
The results for the fiscal quarter ended June 30, 2017 are not necessarily indicative of the results to be expected for any subsequent quarterly or annual financial period, including the fiscal year ending September 29, 2017.
Principles of Consolidation
The unaudited interim condensed 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.
Operating Segments
We operate as a single reportable 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, our Chief Executive Officer, 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 unaudited interim condensed consolidated financial statements.
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 unaudited interim condensed consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include estimated selling prices for elements sold in ME revenue arrangements; valuation allowances for accounts receivable; carrying values of inventories and certain property, plant, and equipment, goodwill and intangible assets; fair values of investments; accrued liabilities including liabilities for unrecognized tax benefits, deferred income tax assets and liabilities, and stock-based compensation. Actual results could differ from our estimates.
Fiscal Year
Our fiscal year is a 52 or 53 week period ending on the last Friday in September. The fiscal periods presented herein include the 13 week period ended June 30, 2017 and the 13 week period ended July 1, 2016. Our fiscal year ended September 30, 2016 (fiscal 2016) consisted of 53 weeks while our fiscal year ending September 29, 2017 (fiscal 2017) will consist of 52 weeks.

9


2. Summary of Significant Accounting Policies
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.
Recently Issued Accounting Standards
Adopted Standards
Consolidation.  During the first quarter of fiscal 2017, we adopted ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis, which amended the consolidation requirements in ASC 810 and significantly 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 the second quarter of 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. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. 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.
There have been no new accounting standards made effective or otherwise adopted during the current interim period that caused any changes to our significant accounting policies from those that were described in our Form 10-K for the prior fiscal year ended September 30, 2016.
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, recognize certain direct costs associated with revenues and contract acquisition costs, and make expanded disclosures.
We are evaluating the impact of adoption on all of our revenue streams. We believe that the following are the most significant changes that could occur:

•
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;
•
Recording a one-time adjustment to retained earnings to reflect the loss of specified future revenues upon adoption;
•
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;
•
Capitalizing sales commissions that are direct and incremental to obtaining a contract and amortizing those commissions commensurate with revenue recognition, instead of expensing such commissions as incurred.
We have not yet quantified the impact of these 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

10

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 (which is our first quarter of fiscal 2019).
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 long-term leases, which are those with terms in excess of twelve months. 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. Consistent with current guidance, a lessee's recognition, measurement, and presentation of expenses and cash flows arising from a lease will continue to depend primarily on its classification. The ASU is effective for us beginning September 28, 2019, and must be applied using a modified retrospective approach. Early adoption is permitted, including adoption in an interim period. 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 the end of the third quarter of fiscal 2017. We currently intend to early adopt this new standard concurrently with the adoption of the new revenue recognition standard beginning September 29, 2018.
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. We are currently evaluating the impact of the standard on our consolidated financial statements.
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 No. 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 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 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 June 30, 2017 and September 30, 2016 (amounts displayed in thousands, except as otherwise noted).

11

Accounts Receivable
 
June 30,
2017
 
September 30,
2016
Trade accounts receivable
$
70,594

 
$
66,229

Accounts receivable from patent administration program customers
14,787

 
11,829

Accounts receivable, gross
85,381

 
78,058

Less: allowance for doubtful accounts
(3,279
)
 
(2,370
)
Total
$
82,102

 
$
75,688

Inventories
 
June 30,
2017
 
September 30,
2016
Raw materials
$
4,755

 
$
3,526

Work in process
2,389

 
4,020

Finished goods
12,806

 
8,808

Total
$
19,950

 
$
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. In addition to the amounts shown in the table above, we have included $2.0 million and $1.6 million of raw materials inventory within other non-current assets in our consolidated balance sheets as of June 30, 2017 and September 30, 2016, respectively. Based on anticipated inventory consumption rates, and aside from existing write-downs due to excess and obsolete inventory, we do not believe that material risk of obsolescence exists prior to ultimate sale.
Prepaid Expenses And Other Current Assets
 
June 30,
2017
 
September 30,
2016
Prepaid expenses
$
16,510

 
$
13,440

Other current assets
10,311

 
11,578

Income tax receivable
2,969

 
1,284

Total
$
29,790

 
$
26,302

Accrued Liabilities
 
June 30,
2017
 
September 30,
2016
Accrued royalties
$
1,962

 
$
1,939

Amounts payable to patent administration program partners
51,105

 
34,472

Accrued compensation and benefits
71,822

 
71,261

Accrued professional fees
5,685

 
6,528

Unpaid PP&E additions
6,359

 
17,100

Other accrued liabilities
40,052

 
37,755

Total
$
176,985

 
$
169,055

Other Non-Current Liabilities
 
June 30,
2017
 
September 30,
2016
Supplemental retirement plan obligations
$
2,820

 
$
2,540

Non-current tax liabilities
85,792

 
68,254

Other liabilities
12,592

 
12,128

Total
$
101,204

 
$
82,922


12


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 investment securities are classified as AFS securities.
Our investment securities primarily consist of 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 held municipal debt investments are supported by letters of credit or standby purchase agreements. Our cash and investment portfolio consists of the following (in thousands):
 
June 30, 2017
 
Cost
Unrealized
 
 
Estimated Fair Value
 
Gains
Losses
Total
 
Level 1
Level 2
Level 3
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash
$
577,632

 
 
$
577,632

 


 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
14,719

—

—

14,719

 
14,719

 
 
Certificate of deposit (1)
150

—

—

150

 
 
150

 
Municipal debt securities
115

—

—

115

 
 
115

 
Cash and cash equivalents
592,616

—

—

592,616


14,719

265

—

 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Certificate of deposit (1)
15,559

14

—

15,573

 
 
15,573

 
Government bonds
535

—

(3
)
532

 
532

 
 
U.S. Agency securities
9,214

—

(30
)
9,184

 
9,184

 
 
Commercial paper
20,596

2

(2
)
20,596

 
 
20,596

 
Corporate bonds
177,039

67

(216
)
176,890

 
 
176,890

 
Municipal debt securities
24,884

12

(6
)
24,890

 
 
24,890

 
Short-term investments
247,827

95

(257
)
247,665


9,716

237,949

—

 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
Certificate of deposit (1)
24,046

8

(7
)
24,047

 
 
24,047

 
U.S. agency securities
18,304

—

(195
)
18,109

 
18,109

 
 
Government bonds
18,471

—

(184
)
18,287

 
18,287

 
 
Corporate bonds
201,043

322

(611
)
200,754

 
 
200,754

 
Municipal debt securities
37,799

34

(57
)
37,776

 
 
37,776

 
Other long-term investments (2)
4,002

345

—

4,347

 
345





Long-term investments
303,665

709

(1,054
)
303,320


36,741

262,577

—

 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, and investments
$
1,144,108

$
804

$
(1,311
)
$
1,143,601

 
$
61,176

$
500,791

$
—

 
 
 
 
 
 
 
 
 
Investments held in supplemental retirement plan:
 
 
 
 
 
 
 
Assets
2,918

 
 
2,918

 
2,918

 
 
Included in prepaid expenses and other current assets & other non-current assets
 
 
 
 
 
Liabilities
2,918

 
 
2,918

 
2,918

 
 
Included in accrued liabilities & other non-current liabilities
 
 
 
 
 
(1)
Certificates of deposit include marketable securities, while those with a maturity in excess of one year as of June 30, 2017 are classified within long-term investments.
(2)
Other long-term investments as of June 30, 2017 include a marketable equity security of $0.3 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 $3.0 million and $0.5 million. During the third quarter of 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.

13

 
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, while 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.

14

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 for less than twelve months and for twelve months or greater as of June 30, 2017 and September 30, 2016 (in thousands):
 
June 30, 2017
 
September 30, 2016
 
Less Than 12 Months
12 Months Or Greater
 
Less Than 12 Months
12 Months Or Greater
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
$
20,169

$
(7
)
$
—

$
—

 
$
—

$
—

$
—

$
—

U.S. agency securities
27,292

(225
)
—

—

 
22,988

(38
)
—

—

Government bonds
18,819

(187
)
—

—

 
—

—

—

—

Commercial paper
3,999

(2
)
—

—

 
11,479

(10
)
—

—

Corporate bonds
217,429

(815
)
2,399

(12
)
 
153,491

(280
)
1,000

—

Municipal debt securities
34,085

(63
)
—

—

 
35,625

(42
)
4,615

(5
)
Total
$
321,793

$
(1,299
)
$
2,399

$
(12
)
 
$
223,583

$
(370
)
$
5,615

$
(5
)
Although we had certain securities that were in an unrealized loss position as of June 30, 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 June 30, 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 June 30, 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):
 
June 30, 2017
 
September 30, 2016
Range of maturity
Amortized Cost
Fair Value
 
Amortized Cost
Fair Value
Due within 1 year
$
251,614

$
251,484

 
$
135,886

$
135,884

Due in 1 to 2 years
191,471

191,239

 
225,679

225,953

Due in 2 to 3 years
117,240

116,751

 
164,339

164,583

Total
$
560,325

$
559,474

 
$
525,904

$
526,420


5. Property, Plant, & Equipment
Property, plant, and equipment 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. PP&E consist of the following (in thousands):
 
June 30,
2017
 
September 30,
2016
Land
$
43,319

 
$
43,325

Buildings and building improvements
279,876

 
251,700

Leasehold improvements
62,550

 
60,480

Machinery and equipment
94,317

 
88,943

Computer equipment and software
167,992

 
154,291

Furniture and fixtures
28,003

 
26,900

Equipment provided under operating leases
86,933

 
35,968

Construction-in-progress
4,616

 
32,576

Property, plant, and equipment, gross
767,606

 
694,183

Less: accumulated depreciation
(291,253
)
 
(250,527
)
Property, plant, and equipment, net
$
476,353

 
$
443,656


15


6. Goodwill & Intangible Assets
Goodwill
The following table outlines changes to the carrying amount of goodwill (in thousands):
 
Goodwill
Balance at September 30, 2016
$
309,616

Translation adjustments
295

Balance at June 30, 2017
$
309,911

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 in the fiscal quarter ended June 30, 2017 related to our consolidation goodwill balance of $309.9 million. 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 either the fiscal year-to-date period ended June 30, 2017 or July 1, 2016.
Intangible Assets
Our intangible assets are stated at their original cost less accumulated amortization, and principally consist of acquired technology, patents, trademarks, customer relationships and contracts. Intangible assets subject to amortization consist of the following (in thousands):
 
June 30, 2017
 
September 30, 2016
Intangible Assets, Net
Cost
Accumulated
Amortization
Net
 
Cost
Accumulated
Amortization
Net
Acquired patents and technology
$
299,274

$
(122,393
)
$
176,881

 
$
293,824

$
(101,711
)
$
192,113

Customer relationships
56,828

(37,691
)
19,137

 
56,821

(34,113
)
22,708

Other intangibles
22,724

(22,248
)
476

 
22,716

(22,195
)
521

Total
$
378,826

$
(182,332
)
$
196,494

 
$
373,361

$
(158,019
)
$
215,342

We purchase various patents and developed technologies that enable us to further develop our audio, imaging and potential product offerings.
Patent Portfolio Acquisition.    In the first quarter of fiscal 2016, we completed an asset purchase of a patent portfolio that fits within our existing patent licensing programs for consideration of $105.0 million. These assets are categorized within the "Acquired patents and technology" intangible asset class, and will be amortized over their weighted-average useful life of 9.0 years.
With regard to our purchase of intangible assets during the periods presented, the following table summarizes the consideration paid, the weighted-average useful lives over which the acquired assets will be amortized using the greater of either the straight-line basis or a ratio-to-revenue method, and the classification of their amortized expense

16

in our consolidated statements of operations:
Fiscal Period
Total Purchase Consideration (1)
Weighted-Average
Useful Life
 
(in millions)
(in years)
Fiscal 2016
 
 
Q1 - Quarter ended January 1, 2016
$105.3
9.0
Q2 - Quarter ended April 1, 2016
None
Q3 - Quarter ended July 1, 2016
$15.0
18.0
 
$120.3
9.1
Fiscal 2017
 
 
Q1 - Quarter ended December 30, 2016
None
Q2 - Quarter ended March 31, 2017
$5.3
18.0
Q3 - Quarter ended June 30, 2017
None
 
$5.3
18.0
(1) Amortization expense on the intangible assets from patent portfolio acquisitions is included within cost of revenue in our consolidated statements of operations.
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 $7.3 million and $8.2 million in the third quarter of fiscal 2017 and 2016, respectively, and $24.0 million and $24.9 million in the fiscal year-to-date
period ended June 30, 2017 and July 1, 2016, respectively. As of June 30, 2017, estimated amortization expense in future fiscal periods was as follows (in thousands):
Fiscal Year
 Amortization Expense
Remainder of 2017
$
7,303

2018
25,485

2019
24,811

2020
24,348

2021
24,321

Thereafter
90,226

Total
$
196,494


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 June 30, 2017, we had authorized 500,000,000 Class A shares and 500,000,000 Class B shares. At June 30, 2017, we had 57,885,128 shares of Class A common stock and 44,073,597 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.
Stock Incentive Plans
2005 Stock Plan.    In January 2005, our stockholders approved our 2005 Stock Plan, which our Board of Directors adopted in November 2004. The 2005 Stock Plan became effective on February 16, 2005, the day prior to the completion of our initial public offering. 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

17

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 granted at fair market value on the date of grant. Options granted to employees and officers prior to June 2008 generally vested over four years, with equal annual cliff-vesting and expire on the earlier of ten 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 (PSOs).    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 June 30, 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 all 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
2,052

46.25

 
 
Exercises
(1,025
)
34.66

 
 
Forfeitures and cancellations
(179
)
37.26

 
 
Options outstanding at June 30, 2017
9,538

38.31

6.9
$
102,312

Options vested and expected to vest at June 30, 2017
8,895

38.05

6.8
97,680

Options exercisable at June 30, 2017
5,099

$
35.66

5.8
68,079

(1)
Aggregate intrinsic value is based on the closing price of our Class A common stock on June 30, 2017 of $48.96 and excludes the impact of options that were not in-the-money.
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

18

grant RSUs that vest based on the satisfaction of specific performance criteria, although no such awards had been granted as of June 30, 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
1,162

46.44

Vested
(1,062
)
36.50

Forfeitures
(118
)
39.62

Non-vested at June 30, 2017
2,854

$
44.10

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 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.

19

The weighted-average assumptions used in the determination of the fair value of our stock options were as follows:
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
June 30,
2017
July 1,
2016
 
June 30,
2017
July 1,
2016
Expected term (in years)
5.13

5.24

 
5.13

5.24

Risk-free interest rate
1.8
%
1.2
%
 
2.1
%
1.7
%
Expected stock price volatility
25.1
%
30.1
%
 
27.4
%
29.8
%
Dividend yield
1.1
%
1.1
%
 
1.1
%
1.4
%
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. The selection of applicable estimated forfeiture rates 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 initial estimates, we will revise such estimates accordingly.
The following two tables separately present stock-based compensation expense both by award type and classification in our consolidated statements of operations (in thousands):
Expense - By Award Type
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
June 30,
2017
July 1,
2016
 
June 30,
2017
July 1,
2016
Compensation Expense - By Type
 
 
 
 
 
Stock options
$
4,489

$
4,980

 
$
13,867

$
16,344

Restricted stock units
10,349

10,080

 
32,446

32,423

Employee stock purchase plan
904

947

 
2,627

2,706

Total stock-based compensation
15,742

16,007

 
48,940

51,473

Benefit from income taxes
(4,568
)
(4,655
)
 
(14,231
)
(15,067
)
Total stock-based compensation, net of tax
$
11,174

$
11,352

 
$
34,709

$
36,406


Expense - By Income Statement Line Item Classification
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
June 30,
2017
July 1,
2016
 
June 30,
2017
July 1,
2016
Compensation Expense - By Classification
 
 
 
 
Cost of products
$
229

$
220

 
$
710

$
719

Cost of services
126

113

 
383

356

Research and development
4,551

4,243

 
13,987

13,618

Sales and marketing
6,187

6,451

 
19,563

20,602

General and administrative
4,649

4,980

 
14,297

16,178

Total stock-based compensation
15,742

16,007

 
48,940

51,473

Benefit from income taxes
(4,568
)
(4,655
)
 
(14,231
)
(15,067
)
Total stock-based compensation, net of tax
$
11,174

$
11,352

 
$
34,709

$
36,406

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 Quarter Ended
 
Fiscal Year-To-Date Ended
 
June 30,
2017
July 1,
2016
 
June 30,
2017
July 1,
2016
Tax benefit - shares issued under ESPP
$
367

$
358

 
$
786

$
481

Unrecognized Compensation Expense.    At June 30, 2017, total unrecorded compensation expense associated with employee stock options expected to vest was approximately $35.4 million, which is expected to be recognized over a weighted-average period of 2.4 years. At June 30, 2017, total unrecorded compensation expense associated

20

with RSUs expected to vest was approximately $83.7 million, which is expected to be recognized over a weighted-average period of 2.7 years.
Common Stock Repurchase Program
In November 2009, we announced a stock repurchase program ("program"), providing for the repurchase of up to $250.0 million 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 June 30, 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 June 30, 2017, the remaining authorization to purchase additional shares is approximately $177.0 million.
The following table provides information regarding share repurchase activity under the program during 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

Total
1,536,561

$
74,994

 
(1)
Cost of share repurchases includes the price paid per share and applicable commissions.
(2)
Average price paid per share excludes commission costs.
Dividend
In October 2014, our Board of Directors initiated a recurring quarterly dividend program for our stockholders. The following table summarizes dividend payments to be made under the program in relation to 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
(1)
(1)
The amount of the dividend payment 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
Other comprehensive income 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 accumulated other comprehensive income, a subsection within stockholders’ equity in our consolidated balance sheet. Unrealized gains and losses on our investment securities are reclassified from AOCI into earnings when realized upon sale, and

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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 Quarter Ended
June 30, 2017
 
Fiscal Year-To-Date Ended
June 30, 2017
 
Investment Securities
Currency Translation Adjustments
Total
 
Investment Securities
Currency Translation Adjustments
Total
Beginning Balance
$
(696
)
$
(14,012
)
$
(14,708
)
 
$
742

$
(10,939
)
$
(10,197
)
Other comprehensive income/(loss) before reclassifications:
 
 
 
 
 
 
 
Unrealized gains/(losses) - investment securities
67

 
67

 
(1,407
)
 
(1,407
)
Foreign currency translation gains/(losses) (1)
 
3,576

3,576

 
 
(163
)
(163
)
Income tax effect - benefit/(expense)
17

(461
)
(444
)
 
20

205

225

Net of tax
84

3,115

3,199

 
(1,387
)
42

(1,345
)
Amounts reclassified from AOCI into earnings:
 
 
 
 
 
 
 
Realized gains/(losses) - investment securities (1)
(12
)
 
(12
)
 
22

 
22

Income tax effect - benefit/(expense) (2)
3

 
3

 
2

 
2

Net of tax
(9
)
—

(9
)
 
24

—

24

Net current-period other comprehensive (loss)
75

3,115

3,190

 
(1,363
)
42

(1,321
)
Ending Balance
$
(621
)
$
(10,897
)
$
(11,518
)
 
$
(621
)
$
(10,897
)
$
(11,518
)
 
Fiscal Quarter Ended
July 1, 2016
 
Fiscal Year-To-Date Ended
July 1, 2016
 
Investment Securities
Currency Translation Adjustments
Total
 
Investment Securities
Currency Translation Adjustments
Total
Beginning Balance
$
1,053

$
(9,395
)
$
(8,342
)
 
$
350

$
(11,812
)
$
(11,462
)
Other comprehensive income/(loss) before reclassifications:
 
 
 
 
 
 
 
Unrealized gains - investment securities
695

 
695

 
937

 
937

Foreign currency translation losses (1)
 
(2,852
)
(2,852
)
 
 
(623
)
(623
)
Income tax effect - benefit/(expense)
(6
)
288

282

 
99

476

575

Net of tax
689

(2,564
)
(1,875
)
 
1,036

(147
)
889

Amounts reclassified from AOCI into earnings:
 
 
 
 
 
 
 
Realized gains - investment securities (1)
15

 
15

 
493

 
493

Income tax effect - (expense) (2)
(3
)
 
(3
)
 
(125
)
 
(125
)
Net of tax
12

—

12

 
368

—

368

Net current-period other comprehensive income
701

(2,564
)
(1,863
)
 
1,404

(147