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 December 28, 2018

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

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. YesýNo¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YesýNo¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filerý	Accelerated filer¨
Non-accelerated filer¨	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¨Noý

On January 25, 2019, the registrant had 64,386,897 shares of Class A common stock, par value $0.001 per share, and 38,229,820 shares of Class B common stock, par value $0.001 per share, outstanding.

DOLBY LABORATORIES, INC.

FORM 10-Q

For the Fiscal Quarter Ended December 28, 2018

TABLE OF CONTENTS

	PART I – FINANCIAL INFORMATION
Item 1.	Unaudited Interim Condensed Consolidated Financial Statements	4
	Unaudited Interim Condensed Consolidated Balance Sheets	4
	Unaudited Interim Condensed Consolidated Statements of Operations	5
	Unaudited Interim Condensed Consolidated Statements of Comprehensive Income	6
	Unaudited Interim Condensed Consolidated Statements of Stockholders' Equity	7
	Unaudited Interim Condensed Consolidated Statements of Cash Flows	8
	Notes to Unaudited Interim Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	48
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 6.	Exhibits	63
Signatures

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
AVC	Advanced Video Coding
AVR	Audio/Video Receiver
CE	Consumer Electronics
CES	Consumer Electronics Show
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
HD	High Definition
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
LIFO	Last-in, First-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, & 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
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)

(unaudited)

	December 28, 2018			September 28, 2018 (as adjusted)
ASSETS
Current assets:
Cash and cash equivalents	$	790,787		$	918,063
Restricted cash	8,999			7,187
Short-term investments	175,557			178,138
Accounts receivable, net of allowance for doubtful accounts of $6,860 and $5,258	181,614			200,933
Contract assets	199,480			165,959
Inventories	27,765			26,206
Prepaid expenses and other current assets	39,601			34,890
Total current assets	1,423,803			1,531,376
Long-term investments	201,428			187,782
Property, plant, and equipment, net	523,193			514,182
Intangible assets, net	189,476			184,019
Goodwill	326,856			327,982
Deferred taxes	107,313			74,766
Other non-current assets	50,991			42,280
Total assets	$	2,823,060		$	2,862,387
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,811		$	21,922
Accrued liabilities	265,091			272,967
Income taxes payable	121			2,680
Contract liabilities	19,562			20,502
Total current liabilities	294,585			318,071
Non-current contract liabilities	23,115			22,853
Other non-current liabilities	156,406			150,960
Total liabilities	474,106			491,884
Stockholders’ equity:
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 64,270,978 shares issued and outstanding at December 28, 2018 and 63,978,752 at September 28, 2018	60			61
Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 38,229,820 shares issued and outstanding at December 28, 2018 and 39,261,035 at September 28, 2018	41			41
Additional paid-in capital	—			66,127
Retained earnings	2,361,843			2,313,539
Accumulated other comprehensive (loss)	(18,639		)	(15,832		)
Total stockholders’ equity – Dolby Laboratories, Inc.	2,343,305			2,363,936
Controlling interest	5,649			6,567
Total stockholders’ equity	2,348,954			2,370,503
Total liabilities and stockholders’ equity	$	2,823,060		$	2,862,387

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
	December 28, 2018			December 29, 2017
Revenue:
Licensing	$	260,279		$	270,172
Products and services	42,097			29,355
Total revenue	302,376			299,527
Cost of revenue:
Cost of licensing	11,397			9,259
Cost of products and services	27,232			21,634
Total cost of revenue	38,629			30,893
Gross margin	263,747			268,634
Operating expenses:
Research and development	58,647			56,444
Sales and marketing	85,602			70,149
General and administrative	50,813			48,285
Restructuring charges/(credits)	14			(197		)
Total operating expenses	195,076			174,681
Operating income	68,671			93,953
Other income/expense:
Interest income	5,185			3,781
Interest expense	(45		)	(35		)
Other income/(expense), net	443			(1,152		)
Total other income	5,583			2,594
Income before income taxes	74,254			96,547
Provision for income tax (expense)/benefit	24,104			(149,705		)
Net income/(loss) including controlling interest	98,358			(53,158		)
Less: net (income) attributable to controlling interest	(139		)	(144		)
Net income/(loss) attributable to Dolby Laboratories, Inc.	$	98,219		$	(53,302	)
Net income/(loss) per share:
Basic	$	0.96		$	(0.52	)
Diluted	$	0.93		$	(0.52	)
Weighted-average shares outstanding:
Basic	102,677			102,552
Diluted	106,130			102,552
Related party rent expense:
Included in operating expenses	$	880		$	784
Included in net income attributable to controlling interest	$	176		$	177
Cash dividend declared per common share	$	0.19		$	0.16
Cash dividend paid per common share	$	0.19		$	0.16

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
	December 28, 2018			December 29, 2017 (as adjusted)
Net income/(loss) including controlling interest	$	98,358		$	(53,158	)
Other comprehensive income:
Currency translation adjustments, net of tax	(3,728		)	1,218
Unrealized gains/(losses) on investments, net of tax	770			(1,593		)
Comprehensive income/(loss)	95,400			(53,533		)
Less: comprehensive (income)/loss attributable to controlling interest	12			(138		)
Comprehensive income/(loss) attributable to Dolby Laboratories, Inc.	$	95,412		$	(53,671	)

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 28, 2018 (as adjusted)	$	102		$	66,127		$	2,313,539		$	(15,832	)	$	2,363,936		$	6,567		$	2,370,503
Net income							98,219						98,219			139			98,358
Currency translation adjustments, net of tax of $0										(3,577		)	(3,577		)	(151		)	(3,728		)
Unrealized losses on investments, net of tax of $40										770			770						770
Distributions to controlling interest													—			(906		)	(906		)
Stock-based compensation expense				21,482									21,482						21,482
Repurchase of common stock				(82,203		)	(30,342		)				(112,545		)				(112,545		)
Cash dividends declared and paid on common stock							(19,573		)				(19,573		)				(19,573		)
Common stock issued under employee stock plans				14,272									14,272						14,272
Tax withholdings on vesting of restricted stock	(1		)	(19,678		)							(19,679		)				(19,679		)
Balance at December 28, 2018	$	101		$	—		$	2,361,843		$	(18,639	)	$	2,343,305		$	5,649		$	2,348,954

	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 29, 2017 (as adjusted)	$	101	$	61,331		$	2,337,948		$	(7,753	)	$	2,391,627		$	7,100		$	2,398,727
Net income/(loss)						(53,302		)				(53,302		)	144			(53,158		)
Currency translation adjustments, net of tax of $(274)									1,224			1,224			(6		)	1,218
Unrealized losses on investments, net of tax of $83									(1,593		)	(1,593		)				(1,593		)
Distributions to controlling interest												—			(1,021		)	(1,021		)
Stock-based compensation expense			18,684									18,684						18,684
Repurchase of common stock			(29,993		)							(29,993		)				(29,993		)
Cash dividends declared and paid on common stock						(16,377		)				(16,377		)				(16,377		)
Common stock issued under employee stock plans	1		41,462									41,463						41,463
Tax withholdings on vesting of restricted stock			(18,821		)							(18,821		)				(18,821		)
Balance at December 29, 2017 (as adjusted)	$	102	$	72,663		$	2,268,269		$	(8,122	)	$	2,332,912		$	6,217		$	2,339,129

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 Quarter-To-Date Ended
	December 28, 2018			December 29, 2017
Operating activities:
Net income/(loss) including controlling interest	$	98,358		$	(53,158	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	20,029			19,882
Stock-based compensation	21,482			18,684
Amortization of premium on investments	309			742
Provision for doubtful accounts	1,605			1,119
Deferred income taxes	(32,571		)	32,725
Other non-cash items affecting net income	3,393			587
Changes in operating assets and liabilities:
Accounts receivable	17,736			(41,526		)
Inventories	(2,709		)	(1,491		)
Contract assets	(33,519		)	(22,449		)
Prepaid expenses and other assets	(13,157		)	(6,591		)
Accounts payable and other liabilities	(26,332		)	(33,006		)
Income taxes, net	1,546			99,551
Contract liabilities	(678		)	1,984
Other non-current liabilities	1,460			96
Net cash provided by operating activities	56,952			17,149
Investing activities:
Purchases of investment securities	(63,329		)	(74,479		)
Proceeds from sales of investment securities	32,582			28,383
Proceeds from maturities of investment securities	19,785			49,476
Purchases of PP&E	(18,539		)	(19,275		)
Purchase of intangible assets	(12,065		)	(11,198		)
Net cash used in investing activities	(41,566		)	(27,093		)
Financing activities:
Proceeds from issuance of common stock	14,272			41,463
Repurchase of common stock	(112,545		)	(29,993		)
Payment of cash dividend	(19,573		)	(16,377		)
Distribution to controlling interest	(906		)	(1,021		)
Shares repurchased for tax withholdings on vesting of restricted stock	(19,679		)	(15,346		)
Net cash used in financing activities	(138,431		)	(21,274		)
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash	(2,419		)	870
Net decrease in cash, cash equivalents, and restricted cash	(125,464		)	(30,348		)
Cash, cash equivalents, and restricted cash at beginning of period	925,250			634,368
Cash, cash equivalents, and restricted cash at end of period	$	799,786		$	604,020
Supplemental disclosure:
Cash paid for income taxes, net of refunds received	$	10,722		$	17,355
Non-cash investing activities:
Net change in PP&E purchased and unpaid at period-end	$	6,642		$	2,333

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 28, 2018 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 28, 2018, which are included in our Annual Report on Form 10-K filed with the SEC.

The results for the fiscal quarter ended December 28, 2018 are not necessarily indicative of the results to be expected for any subsequent quarterly or annual financial period, including the fiscal year ending September 27, 2019.

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

Since we operate as a single reporting segment, all required financial segment information is included in our unaudited interim condensed consolidated financial statements. This reflects the fact that our CODM, our Chief Executive Officer, evaluates our financial information and resources, and assesses the performance of these resources on a consolidated basis.

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 shipments by our licensees for which we are owed a sales–based royalty, estimated selling prices for performance obligations within 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 periods ended December 28, 2018 and December 29, 2017. Our fiscal year ending September 27, 2019 (fiscal 2019) and our fiscal year ended September 28, 2018 (fiscal 2018) both consist of 52 weeks.

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, or net income.

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

During the first quarter of fiscal 2019, we adopted the following standards:

Revenue Recognition. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASC 606"), which outlines a comprehensive revenue recognition model. The standard requires revenue recognition to account for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services, and in our case, requires the use of more judgment and estimates than the previous accounting requirements. ASC 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, under which the incremental costs associated with obtaining a contract are required to be capitalized and amortized as expense as the contract’s performance obligations are satisfied. We do not capitalize sales commission costs because our performance obligations on which we pay commissions are complete at contract execution.

We adopted ASC 606 utilizing the full retrospective method of transition which requires a recast of each prior reporting period presented. The most significant impacts of adopting ASC 606 are as follows:

• We estimate and record per-unit royalty-based revenue earned from our licensees’ shipments in the same period in which those shipments occur, instead of recognizing our per-unit royalty-based revenue in the quarter in which it is reported to us by our licensees, which is generally in the quarter after those shipments have occurred. To the extent that our revenues are influenced by seasonal trends, the trends will impact revenue one fiscal quarter earlier than was previously the case;

• We record a favorable or unfavorable adjustment based on the difference between estimated and actual sales when we receive reporting of sales–based royalties on royalty statements from the licensees, generally in the subsequent fiscal quarter;

• For certain transactions that have extended payment and minimum commitment terms with no further performance obligations, we recognize licensing revenues on the later of contract execution or effective date regardless of when the amounts are due and payable;

• We recorded a one-time adjustment of $174.4 millionto the period ending September 29, 2018 retained earnings to reflect the full impact of the accounting upon adoption.

We adjusted our condensed consolidated financial statements from amounts previously reported to reflect the adoption of the new standard. Select unaudited condensed consolidated statement of income line items, which reflect the adoption of the new standard, are as follows (in thousands, except per share data):

	Fiscal Quarter Ended December 29, 2017 (as previously reported)			Effect of Adopting ASC 606		Fiscal Quarter Ended December 29, 2017 (as adjusted)
Revenue	$	287,797		$	11,730	$	299,527
Gross margin	256,921			11,713		268,634
Provision for income taxes	(166,312		)	16,607		(149,705		)
Net income/(loss) attributable to Dolby Laboratories, Inc.	(81,622		)	28,320		(53,302		)
Diluted earnings per share	$	(0.80	)	$	0.28	$	(0.52	)

Select condensed consolidated balance sheet line items, which reflect the adoption of the new standard, are as follows (in thousands):

10

	September 28, 2018 (as previously reported)		Effect of Adopting ASC 606			September 28, 2018 (as adjusted)
ASSETS
Accounts receivable, net	$	137,151	$	63,782		$	200,933
Contract assets	—		165,959			165,959
Prepaid expenses and other current assets	35,209		(319		)	34,890
Deferred taxes	101,070		(26,304		)	74,766
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued liabilities	223,594		49,373			272,967
Contract liabilities	23,931		(3,429		)	20,502
Non-current contract liabilities	40,064		(17,211		)	22,853
Retained earnings	2,139,154		174,385			2,313,539

Select condensed consolidated statement of cash flows line items, which reflect the adoption of the new standard, are as follows (in thousands):

	Fiscal Quarter Ended December 29, 2017 (as previously reported)¹			Effect of Adopting ASC 606			Fiscal Quarter Ended December 29, 2017 (as adjusted)
Operating activities:
Net income/(loss) including controlling interest	$	(81,478	)	$	28,320		$	(53,158	)
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	51,074			(18,349		)	32,725
Changes in operating assets and liabilities:
Accounts receivable	(50,268		)	8,742			(41,526		)
Contract assets	—			(22,449		)	(22,449		)
Prepaid expenses and other assets	(6,609		)	18			(6,591		)
Accounts payable and other liabilities	(35,390		)	2,384			(33,006		)
Deferred revenue	650			1,334			1,984
Net cash provided by operating activities	17,149			—			17,149

¹ Previously reported statement of cash flows in the table above reflects the adoption of ASU 2016-18. The impact to our previously reported condensed consolidated statement of cash flows is not material. Refer to disclosure below for further detail.

In our adoption and as allowed by ASC 606, we:

• used the transaction price at the date on which the contract was completed rather than estimating variable consideration amounts in the comparative reporting period;

• did not disclose the amount of the transaction price allocated to the remaining performance obligations or provide an explanation of when we expect to recognize that amount as revenue for reporting periods presented before the date of initial adoption;

• reflected the aggregate effect of contract modifications in accounting for the contracts open as of the earliest reporting period presented;

• did not adjust transaction prices for the effects of a significant financing component, if at contract inception, we expected the period between customer payment and the transfer of goods or services to be one year or less.

In March 2016, the FASB also issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers ("ASC 606"), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ("ASU 2016-08"), which amended the principal-versus-agent implementation guidance and illustrations in ASU 2014-09. ASU 2016-08 clarifies that an entity should evaluate when it is the principal or agent for each specified good or service promised in a contract with a customer. We evaluated our contracts executed with and on our behalf with VIA Licensing Corporation, our wholly-owned subsidiary that manages patent pools on behalf of third party patent owners and concluded that VIA performs its functions as an agent to the patent pool licensors, which includes Dolby.

11

Accordingly, we recognize our administrative fees and royalties net of the consideration paid to the patent licensors in the pool.

Cash Flow Classification. During the first quarter of fiscal 2019, we adopted ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new standard addresses eight specific cash flow issues related to the classification and presentation of cash receipts and payments in the statement of cash flows. The adoption of these updates did not have a material impact on Dolby’s consolidated financial statements.

Income Taxes: Intra-Entity Asset Transfers. During the first quarter of fiscal 2019, we adopted ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new standard 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 adoption of the guidance did not have a material impact on Dolby's consolidated financial statements.

Restricted Cash.  During the first quarter of fiscal 2019, we adopted 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 standard 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. We adopted the new guidance using the retrospective transition approach. The reclassified restricted cash balances from investing activities to changes in cash, cash equivalents, and restricted cash on the condensed consolidated statements of cash flows were not material for all periods presented. The adjusted condensed consolidated statement of cash flows for the prior comparative period conforms with the new standard.

Accounting for Hedging Activities. During the first quarter of fiscal 2019, we adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new standard eliminates the requirement to separately measure and report hedge ineffectiveness. The adoption of the standard did not have a material impact on Dolby's consolidated financial statements.

Standards Not Yet Effective

Leases.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends the existing accounting standards for leases. Under the new standard, a lessee will be required to recognize a lease liability and right-of-use asset for most leases. The new standard 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. Topic 842 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 lease arrangements. We anticipate adoption of the standard will not have a material impact on our consolidated income statements. We plan to elect the practice expedients upon transition that will retain the lease classification and initial direct costs for any leases that exist prior to adoption of the standard. We will not reassess whether any contracts entered into prior to adoption are leases. We are in the process of evaluating our existing lease contracts and implementing changes to our systems. ASU 2016-02 is effective for Dolby beginning September 28, 2019, and we do not currently plan to early adopt.

Income Taxes: Comprehensive Income. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("Tax Act"). In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act and requires entities to provide certain disclosures regarding stranded tax effects. The ASU is effective for Dolby beginning September 28, 2019, and we do not currently plan to early adopt. We are currently evaluating the timing and impact of the standard on our consolidated financial statements.

Collaborative Arrangements. In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, ASU 2018-18 precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. This standard will be effective for Dolby beginning September 29, 2020, and we do not currently plan to early adopt. We do not believe that this standard will have a material impact on our consolidated financial position, results of operation, and cash flows.

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3. Revenue Recognition

We enter into revenue arrangements with our customers to license technologies, trademarks and patents for sound, imaging and voice solutions, and to sell products and services. We recognize revenue when we satisfy a performance obligation by transferring control over the use of a license, product, or service to a customer.

A. Identification of the Contract or Contracts with Customers

We generally determine that a contract with a customer exists upon the execution of an agreement and after consideration of collectability, which could include an evaluation of the customer's payment history, the existence of a standby letter-of-credit between the customer’s financial institution and our financial institution, public financial information, and other factors. At contract inception, we also evaluate whether two or more non-standard agreements with a customer should be combined and accounted for as a single contract.

B. Identification of Performance Obligations in a Contract

We generate revenues principally from the following sources, which represent performance obligations in our contracts with customers:

• Licensing.   We license our technologies, including patents, to a range of customers who incorporate them into their products for enhanced audio, imaging and voice functionality across broadcast, mobile, CE, PC, gaming, and other markets.

• Product Sales. We design and provide audio and imaging products for the cinema, television, broadcast, communications, and entertainment industries.

• Services.  We provide various services to support theatrical and television production for cinema exhibition, broadcast, and home entertainment, including equipment training, mixing room alignment, equalization, as well as audio, color and light image calibration.

• PCS. We provide PCS for products sold and for the equipment leased, and we support the implementation of our licensing technologies in our licensees’ products.

• Equipment Leases. We collaborate with established cinema exhibitors to offer Dolby Cinema, a branded premium cinema offering for movie audiences by leasing equipment and licensing our intellectual property.

• Licensing Administration Fees. We generate service fees for managing patent pools on behalf of third party patent owners through our wholly-owned subsidiary, Via Licensing Corporation.

Some of our revenue arrangements include multiple performance obligations, such as hardware, software, support and maintenance, and extended warranty services. We evaluate whether promised products and services are distinct performance obligations.

The majority of our arrangements with multiple performance obligations pertain to our digital cinema server and processor sales that include the following distinct performance obligations to which we allocate portions of the transaction price based on their stand-alone selling price:

• Digital cinema server hardware and embedded software, which is highly dependent on and highly interrelated with the hardware. Accordingly, the hardware and embedded software represent a single performance obligation.

• The right to support and maintenance, which is included with the purchase of the digital cinema server hardware, is a distinct performance obligation.

• The right to receive commissioning services is a distinct performance obligation within the sale of the Dolby Atmos Cinema Processor. 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.

C. Determination of Transaction Price for Performance Obligations in a Contract

After identifying the distinct performance obligations, we determine the transaction price in accordance with the terms of the underlying executed contract which may include variable consideration such as discounts, rebates, refunds, rights of returns, and incentives. We assess and update, if necessary, the amount of variable consideration to

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which we are entitled for each reporting period. At the end of each reporting period, we estimate and accrue a liability for returns and adjustments as a reduction to revenue based on several factors, including past returns history.

With the exception of our sales-based royalties, we evaluate whether a significant financing component exists when we recognize revenue in advance of customer payments that occur over time. For example, some of our licensing arrangements include payment terms greater than one year from when we transfer control of our IP to a licensee and the receipt of the final payment for that IP. If a significant financing component exists, we classify a portion of the transaction price as interest income, instead of recognizing all the transaction price as revenue. We do not adjust the transaction price for the effects of financing if, at contract inception, the period between the transfer of control to a customer and final payment is expected to be one year or less.

D. Allocation of Transaction Price to Distinct Performance Obligations in a Contract

For our sales-based royalties wherethe license is the predominant item to which the royalties relate, we present all revenues as licensing.

For revenue arrangements that include multiple performance obligations, we determine the stand-alone selling price for each distinct performance obligation based on the actual selling prices made to customers. If the performance obligation is not sold separately, we estimate the stand-alone selling price. We do so by considering market conditions such as competitor pricing strategies, customer specific information and industry technology lifecycles, internal conditions such as cost and pricing practices, or applying the residual approach method when the selling price of the good, most commonly a license, is highly variable or uncertain.

Once the transaction price - including any variable consideration - has been determined, we allocate the transaction price to the performance obligations identified in the contract, and recognize revenue as or when control is transferred for each distinct performance obligation.

E. Revenue Recognition as Control is Transferred to a Customer

We generate our licensing revenue by licensing our technologies and patents to various types of licensees, such as chip manufacturers ("implementation licensees"), consumer product manufacturers, software vendors, and communications service providers. Our revenue recognition policies for each of these arrangements are summarized below.

Initial fees from implementation licensees.   Implementation licensees incorporate our technologies into their chipsets that, once approved by Dolby, are available for purchase by OEMs for use in end-user products. Implementation licensees only pay us a nominal initial fee on contract execution as consideration for the ongoing services that we provide to assist in their implementation process. Revenues from these initial fees are recognized ratably over the contractual term as a component of licensing revenue.

Sales-based licensing fees.   In our royalty bearing licensing agreements with OEMs, control is transferred upon the later of contract execution or the contract’s effective date.We apply the royalty exception, which requires that we recognize sales-based royalties at the later of when the sales occur based on our estimates or the completion of our performance obligations. These estimates involve the use of historical data and judgment for several key attributes including industry estimates of expected shipments, the percentage of markets using our technologies, and average sale prices. Generally, our estimates represent the current period’s shipments to which we expect our licensees to submit royalty statements in the following quarter. Upon receipt of royalty statements from the licensees with the actual reporting of sales-based royalties that we estimated previously, we record a favorable or unfavorable adjustment based on the difference between estimated and actual sales.

Fixed and guaranteed licensing fees.   In certain cases, our arrangements require the licensee to pay fixed, non-refundable fees independent of the actual number of units they may distribute in the future. In these cases, control is transferred and fees are recognized upon the later of contract execution or the effective date. Additionally and separate from initial fees from implementation licensees, our sales- and usage-based licensing agreements include a nominal fee, which is also recognized at a point in time in which control of the IP has been transferred. Revenues from these arrangements are included as a component of licensing revenue.

Recoveries.  Through compliance efforts, we identify under-reported licensed activity related to non-current periods. We may record a favorable or unfavorable revenue adjustment in connection with the findings from these compliance efforts generally upon resolution with the licensee through agreement of the findings, or upon receipt of the licensee’s correction statement. Revenues from these arrangements are included as a component of licensing

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revenue.

We undertake activities aimed at identifying potential unauthorized uses of our technologies, which when successful result in the recognition of revenue. Recoveries stem from third parties who agree to remit payments to us based on past use of our technology. In these scenarios, a legally binding contract did not exist at time of use of our technology, and therefore, we recognize revenue recoveries upon execution of the settlement contract as that is the point in time to which control is transferred. These revenues are classified as licensing revenue.

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.

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.

In addition to our licensing arrangements, we also enter into arrangements to deliver products and services.

Product Sales.   Revenue from the sale of products is recognized when the risk of ownership is transferred to the customer, which is generally upon shipment. Payments are generally made within 90 days of sale.

Services.  We provide various services, such as engineering services related to movie soundtrack print mastering, equipment training and maintenance, mixing room alignment, equalization, and image calibration, which we bill on a fixed fee and time and materials basis. Most of these services are of a short duration and are recognized as control of the performance obligations are transferred which is when the related services are performed.

Collaborative Arrangements.   We collaborate with established cinema exhibitors to offer Dolby Cinema, a branded premium cinema offering for movie audiences. Under such collaborations, Dolby and the exhibitor are both active participants, and share the risks and rewards associated with the business. Accordingly, these collaborations are governed by revenue sharing arrangements under which Dolby receives revenue based on monthly box office reports from exhibitors in exchange for the use of our imaging and sound technologies, our proprietary designs and trademark 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 based on monthly box office reports from exhibitors. In subsequent periods, for the portion of revenue share that we estimated, we record a favorable or unfavorable adjustment for the difference between our estimated and actual share of box office receipts once the box office receipts reports become available from exhibitor partners. Our revenue share is recognized as licensing revenue in our consolidated statements of operations.

In addition, we also enter into agreements where a portion involves guaranteed payments, which in some cases result in classifying the payments as a sales-type lease. In such arrangements, we consider control to transfer at the point in time to which we have installed and tested the equipment, at which point we record such guaranteed payments as product revenue.

VIA Administration Fee. We generate service fees for managing patent pools on behalf of third party patent owners through our wholly-owned subsidiary, Via Licensing Corporation. As an agent to licensors in the patent pool, Via receives a share of the sales-based royalty that the patent pool licensors earn from licensees. As such, we apply the sales-based royalty exception as the service provided is directly related to the patent pool licensors’ provision of IP, which results in recognition based on estimates of the licensee’s quarter shipments that use the pool’s patents. In addition to sales-based royalties, Via also has contracts where the fees are fixed. The revenue share Via receives from licensors on fixed fee contracts is recognized over the term in which we are providing services associated with the fixed fee contract. We recognize our administrative fees net of the consideration paid to the patent licensors in the pool as licensing revenue.

Deferred revenue, which is a component of Contract liabilities, represents amounts that are ultimately expected to be recognized as revenue, but for which we have yet to satisfy the performance obligation. On December 28, 2018, we had $40.1 million of remaining performance obligations, 33% of which we expect to recognize as revenue in fiscal 2019, 22% in fiscal 2020, and the balance of 45% in fiscal years beyond 2020.

F. Disaggregation of revenue

The following table presents a summary of the composition of our revenue for all periods presented:

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	Fiscal Quarter Ended
	December 28, 2018				December 29, 2017
Revenue					(as adjusted)
Licensing	$	260,279	86	%	$	270,172	90	%
Products and services	42,097		14	%	29,355		10	%
Total revenue	$	302,376	100	%	$	299,527	100	%

The following table presents the composition of our licensing revenue for all periods presented:

	Fiscal Quarter Ended
	December 28, 2018				December 29, 2017
Market					(as adjusted)
Broadcast	$	100,138	38	%	$	110,484	41	%
PC	23,157		9	%	20,351		8	%
Mobile	34,173		13	%	58,645		22	%
CE	43,750		17	%	37,730		14	%
Other	59,061		23	%	42,962		15	%
Total licensing revenue	$	260,279	100	%	$	270,172	100	%

We license our technologies in approximately 50 countries, and our licensees distribute products that incorporate our technologies throughout the world. As shown in the table below, we generate the majority of our revenue from outside the United States. Geographic data for our licensing revenue is based on the location of our licensees’ headquarters, products revenue is based on the destination to which we ship our products, and services revenue is based on the location where services are performed.

	Fiscal Quarter Ended
	December 28, 2018				December 29, 2017
Revenue By Geographic Location					(as adjusted)
United States	$	119,799	40	%	$	78,746	26	%
International	182,577		60	%	220,781		74	%
Total revenue	$	302,376	100	%	$	299,527	100	%

G. Contract assets and liabilities

Our contract assets represent rights to consideration from licensees for the use of our IP that we have estimated and recognized as revenue in a given quarter in the absence of receiving actual royalty statements from licensees. These estimates reflect our best judgment at that time, and are developed using a number of inputs, including historical experience, anticipated performance, and third-party data. In the event that our estimates differ from actual amounts reported, we record an appropriate adjustment in the quarter in which the report is received which is typically the quarter following our estimate. Actual amounts reported are typically paid within sixty days. Our contract liabilities consist of advance payments and billings in excess of amounts earned, deferred revenue that is typically satisfied within one year, and deferred interest where we have significant financing. The non-current portion of contract liabilities is separately disclosed in our consolidated balance sheets. We present the net contract asset or liability when we have both contract assets and contract liabilities for a single contract.

The following table presents a summary of the balances to which contract assets and liabilities related to revenue are recorded for all periods presented:

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	December 28, 2018		September 28, 2018		Change ($)			Change (%)
			(as adjusted)
Accounts receivable, net	$	181,614	$	200,933	$	(19,319	)	(10	)%
Contract assets	199,480		165,959		33,521			20	%
Contract liabilities - current	19,562		20,502		(940		)	(5	)%
Contract liabilities - non-current	23,115		22,853		262			1	%

4. Composition of Certain Financial Statement Captions

The following tables present detailed information from our consolidated balance sheets as of December 28, 2018 and September 28, 2018 (amounts displayed in thousands, except as otherwise noted).

Accounts Receivable

	December 28, 2018			September 28, 2018 (as adjusted)
Trade accounts receivable	$	115,333		$	108,929
Accounts receivable from patent administration program licensees	73,141			97,262
Accounts receivable, gross	188,474			206,191
Less: allowance for doubtful accounts	(6,860		)	(5,258		)
Total	$	181,614		$	200,933

Trade accounts receivable includes unbilled accounts receivable balances related to amounts that are contractually owed.

Inventories

	December 28, 2018		September 28, 2018
Raw materials	$	8,087	$	6,095
Work in process	4,116		4,044
Finished goods	15,562		16,067
Total	$	27,765	$	26,206

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 $3.0 millionand $2.6 million of raw materials inventory within other non-current assets in our consolidated balance sheets as of December 28, 2018 and September 28, 2018, 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

	December 28, 2018		September 28, 2018 (as adjusted)
Prepaid expenses	$	22,316	$	18,508
Other current assets	14,936		13,946
Income tax receivable	2,349		2,436
Total	$	39,601	$	34,890

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Accrued Liabilities

	December 28, 2018		September 28, 2018 (as adjusted)
Accrued royalties	$	3,257	$	2,648
Amounts payable to patent administration program partners	75,458		98,900
Accrued compensation and benefits	56,662		84,491
Accrued professional fees	14,252		9,749
Unpaid PP&E additions	20,253		13,956
Other accrued liabilities	95,209		63,223
Total	$	265,091	$	272,967

Other Non-Current Liabilities

	December 28, 2018		September 28, 2018
Supplemental retirement plan obligations	$	3,190	$	3,388
Non-current tax liabilities	133,322		129,253
Other liabilities	19,894		18,319
Total	$	156,406	$	150,960

5. 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.

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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):

	December 28, 2018
	Cost		Unrealized							Estimated Fair Value
			Gains		Losses			Total		Level 1		Level 2		Level 3
Cash and cash equivalents:
Cash	$	676,484						$	676,484	$	676,484
Cash equivalents:
Commercial paper	1,996		—		—			1,996				1,996
Money market funds	112,307		—		—			112,307		112,307
Cash and cash equivalents	790,787		—		—			790,787		788,791		1,996		—
Short-term investments:
Certificate of deposit (1)	12,645		8		(1		)	12,652				12,652
U.S. agency securities	15,498		—		(147		)	15,351				15,351
Government bonds	10,394		2		(11		)	10,385		10,385
Commercial paper	8,450		1		(1		)	8,450				8,450
Corporate bonds	100,814		5		(384		)	100,435				100,435
Municipal debt securities	28,343		1		(60		)	28,284				28,284
Short-term investments	176,144		17		(604		)	175,557		10,385		165,172		—
Long-term investments:
Certificate of deposit (1)	430		—					430				430
U.S. agency securities	6,791		23		(74		)	6,740				6,740
Government bonds	14,673		4		(184		)	14,493		14,493
Corporate bonds	158,367		152		(1,493		)	157,026				157,026
Municipal debt securities	21,852		42		(37		)	21,857				21,857
Other long-term investments (2)	783		99					882		99		—
Long-term investments	202,896		320		(1,788		)	201,428		14,592		186,053		—
Total cash, cash equivalents, and investments	$	1,169,827	$	337	$	(2,392	)	$	1,167,772	$	813,768	$	353,221	$	—
Investments held in supplemental retirement plan:
Assets	3,288							3,288		3,288
Included in prepaid expenses and other current assets & other non-current assets
Liabilities	3,288							3,288		3,288
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 December 28, 2018 are classified within long-term investments.

(2) Other long-term investments as of December 28, 2018 include a marketable equity security of $0.1 million, and other investments that are not carried at fair value including an equity method investment of $0.8 million.

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	September 28, 2018
	Cost		Unrealized							Estimated Fair Value
			Gains		Losses			Total		Level 1		Level 2		Level 3
Cash and cash equivalents:
Cash	$	905,660						$	905,660	$	905,660
Cash equivalents:
Commercial paper	5,058		—		—			5,058				5,058
Corporate bonds	1,005				—			1,005				1,005
Money market funds	3,301							3,301		3,301
Municipal debt securities	545				(1		)	544				544
Government bonds	2,495		—					2,495		2,495
Cash and cash equivalents	918,064		—		(1		)	918,063		911,456		6,607		—
Short-term investments:
Certificate of deposit (1)	12,875		14					12,889				12,889
U.S. agency securities	11,997				(135		)	11,862				11,862
Government bonds	7,970		—		(15		)	7,955		7,955
Commercial paper	4,276		—		—			4,276				4,276
Corporate bonds	111,245		50		(494		)	110,801				110,801
Municipal debt securities	30,475				(120		)	30,355				30,355
Short-term investments	178,838		64		(764		)	178,138		7,955		170,183		—
Long-term investments:
U.S. agency securities	9,791				(166		)	9,625				9,625
Government bonds	15,966				(317		)	15,649		15,649
Corporate bonds	146,561		33		(1,810		)	144,784				144,784
Municipal debt securities	17,235				(112		)	17,123				17,123
Other long-term investments (2)	355		246					601		246
Long-term investments	189,908		279		(2,405		)	187,782		15,895		171,532		—
Total cash, cash equivalents, and investments	$	1,286,810	$	343	$	(3,170	)	$	1,283,983	$	935,306	$	348,322	$	—
Investments held in supplemental retirement plan:
Assets	3,486							3,486		3,486
Included in prepaid expenses and other current assets & other non-current assets
Liabilities	3,486							3,486		3,486
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 28, 2018are classified within long-term investments.

(2) Other long-term investments as of September 28, 2018 include a marketable equity security of $0.2 million, and other investments that are not carried at fair value including an equity method investment of $0.4 million. During fiscal 2018, we recorded write-off charges to reduce the carrying value of two cost method equity investments to zero in recognition of an other-than-temporary impairment for each investment.

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.

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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.

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 December 28, 2018 and September 28, 2018 (in thousands):

	December 28, 2018										September 28, 2018
	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	$	1,299	$	—		$	—	$	—		$	—	$	—		$	—	$	—
U.S. agency securities	—		—			20,069		(221		)	—		—			21,486		(302		)
Government bonds	5,455		(37		)	9,519		(157		)	16,633		(332		)	—		—
Commercial paper	7,047		(1		)	—		—			5,737		(1		)	—		—
Corporate bonds	80,200		(381		)	124,808		(1,497		)	143,051		(1,680		)	52,162		(624		)
Municipal debt securities	17,250		(29		)	18,731		(67		)	41,058		(191		)	6,965		(41		)
Total	$	111,251	$	(448	)	$	173,127	$	(1,942	)	$	206,479	$	(2,204	)	$	80,613	$	(967	)

Although we had certain securities that were in an unrealized loss position as of December 28, 2018, we expect to recover the full carrying value of these securities. As a result, we do not consider any portion of the unrealized losses at either December 28, 2018 or September 28, 2018 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 December 28, 2018 and September 28, 2018, which are recorded within cash equivalents and both short and long-term investments in our consolidated balance sheets (in thousands):

	December 28, 2018				September 28, 2018
Range of maturity	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within 1 year	$	290,447	$	289,860	$	191,241	$	190,541
Due in 1 to 2 years	138,303		136,797		122,131		120,545
Due in 2 to 3 years	63,810		63,749		67,423		66,637
Total	$	492,560	$	490,406	$	380,795	$	377,723

6. Property, Plant, & Equipment

Property, plant, and equipment are recorded at cost, with depreciation expense included in cost of licensing, cost of products and services, R&D, S&M, and G&A expenses in our consolidated statements of operations. PP&E consist of the following (in thousands):

	December 28, 2018			September 28, 2018
Land	$	43,292		$	43,342
Buildings and building improvements	283,519			283,474
Leasehold improvements	68,015			66,866
Machinery and equipment	118,045			111,603
Computer equipment and software	196,724			194,079
Furniture and fixtures	30,592			30,556
Equipment provided under operating leases	147,653			139,201
Construction-in-progress	10,721			7,342
Property, plant, and equipment, gross	898,561			876,463
Less: accumulated depreciation	(375,368		)	(362,281		)
Property, plant, & equipment, net	$	523,193		$	514,182

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7. Goodwill & Intangible Assets

Goodwill

The following table outlines changes to the carrying amount of goodwill (in thousands):

	Goodwill
Balance at September 28, 2018	$	327,982
Acquired goodwill	—
Translation adjustments	(1,126		)
Balance at December 28, 2018	$	326,856

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):

	December 28, 2018							September 28, 2018
Intangible Assets	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Acquired patents and technology	$	330,705	$	(158,107	)	$	172,598	$	319,082	$	(152,775	)	$	166,307
Customer relationships	58,327		(41,812		)	16,515		58,342		(41,012		)	17,330
Other intangibles	22,723		(22,360		)	363		22,742		(22,360		)	382
Total	$	411,755	$	(222,279	)	$	189,476	$	400,166	$	(216,147	)	$	184,019

We purchase various patents and developed technologies that enable us to further develop our audio, imaging, and potential product offerings.

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 in our consolidated statements of operations:

Fiscal Period	Total Purchase Consideration (1)	Weighted-Average Useful Life
	(in millions)	(in years)
Fiscal 2018
Q1 - Quarter ended December 29, 2017	$12.0	14.1
Fiscal 2019
Q1 - Quarter ended December 28, 2018	$12.1	11.6

(1) Amortization expense on the intangible assets from patent portfolio and business acquisitions is included within cost of revenue, R&D, and G&A in our consolidated statements of operations.

Amortization expense for our intangible assets is included in cost of licensing, cost of products, R&D, S&M, and G&A expenses in our consolidated statements of operations. Amortization expense was $6.6 million and $6.5 million in the first quarter of fiscal 2019 and 2018, respectively. As of December 28, 2018, estimated amortization expense in future fiscal periods was as follows (in thousands):

Fiscal Year	Amortization Expense
	(in thousands)
Remainder of 2019	$	21,402
2020	28,227
2021	28,201
2022	25,630
2023	22,284
Thereafter	63,732
Total	$	189,476

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8. 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 December 28, 2018, we had authorized 500,000,000 Class A shares and 500,000,000 Class B shares. At December 28, 2018, we had 64,270,978 shares of Class A common stock and 38,229,820 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 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 shares 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.

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On December 15, 2018, we granted PSOs to our executive officers exercisable for an aggregate of 241,100 shares at the target award amount, which would be exercisable up to an aggregate of 301,375 shares at 125% of the target award amount. On December 15, 2017, we granted PSOs to our executive officers exercisable for an aggregate of 264,000 shares at the target award amount, which would be exercisable up to an aggregate of 330,000 shares at 125% of the target award amount. 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 up to an aggregate of 345,248 shares at 125% of the target award amount. On December 15, 2015, we granted PSOs to our executive officers, which vested in December 2018 at 125% of the target award amount, for an aggregate of 334,623 shares. As of December 28, 2018, PSOs which would be exercisable for an aggregate of 758,299 shares at the target award amount (1,282,496 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 28, 2018	7,365		$	43.61
Grants	1,241		64.60
Exercises	(190	)	38.43
Forfeitures and cancellations	(34	)	48.93
Options outstanding at December 28, 2018	8,382		46.73		6.75	$	125,013
Options vested and expected to vest at December 28, 2018	7,867		45.79		6.63	123,860
Options exercisable at December 28, 2018	4,579		$	39.07	5.50	100,025

(1) Aggregate intrinsic value is based on the closing price of our Class A common stock on December 28, 2018 of $60.83 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 vested over three years, with equal annual cliff-vesting. Awards granted after November 2010 and prior to fiscal 2014 to new directors vested 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 December 28, 2018. 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 28, 2018	2,806		$	51.62
Granted	1,155		65.08
Vested	(876	)	46.82
Forfeitures	(36	)	50.29
Non-vested at December 28, 2018	3,049		$	58.11

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

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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 Quarter Ended
	December 28, 2018		December 29, 2017
Expected life (in years)	4.90		5.06
Risk-free interest rate	2.7	%	2.2	%
Expected stock price volatility	22.9	%	22.6	%
Dividend yield	1.1	%	1.1	%

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):

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Expense - By Award Type

	Fiscal Quarter Ended
	December 28, 2018			December 29, 2017
Compensation expense - by type
Stock options	$	5,022		$	6,964
Restricted stock units	15,375			10,780
Employee stock purchase plan	1,085			940
Total stock-based compensation	21,482			18,684
Benefit from income taxes	(3,760		)	(3,896		)
Total stock-based compensation, net of tax	$	17,722		$	14,788

Expense - By Income Statement Line Item Classification

	Fiscal Quarter Ended
	December 28, 2018			December 29, 2017
Compensation expense - by classification
Cost of products and services	$	488		$	380
Research and development	6,241			4,877
Sales and marketing	8,217			5,951
General and administrative	6,536			7,476
Total stock-based compensation expense	21,482			18,684
Benefit from income taxes	(3,760		)	(3,896		)
Total stock-based compensation, net of tax	$	17,722		$	14,788

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
	December 28, 2018		December 29, 2017
Tax benefit - shares issued under ESPP	$	142	$	305

Unrecognized Compensation Expense.    At December 28, 2018, total unrecorded compensation expense associated with employee stock options expected to vest was approximately $37.3 million, which is expected to be recognized over a weighted-average period of 2.6 years. At December 28, 2018, total unrecorded compensation expense associated with RSUs expected to vest was approximately $143.8 million, which is expected to be recognized over a weighted-average period of 2.9 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 December 28, 2018 (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
Fiscal 2018: July 2018	350,000
Total	$	1,650,000

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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 December 28, 2018, the remaining authorization to purchase additional shares is approximately $239.0 million.

The following table provides information regarding share repurchase activity under the program during fiscal 2019:

Quarterly Repurchase Activity	Shares Repurchased	Cost in thousands (1)		Average Price Paid Per Share (2)
Q1 - Quarter ended December 28, 2018	1,642,107	$	112,570	$	68.54

(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

The following table summarizes dividends declared under the program in relation to fiscal 2019:

Fiscal Period	Announcement Date	Record Date	Payment Date	Cash Dividend Per Common Share		Dividend Payment
Fiscal 2019
Q1 - Quarter ended December 28, 2018	January 30, 2019	February 12, 2019	February 21, 2019	$	0.19	$19.5 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.

9. Accumulated Other Comprehensive Income

Other comprehensive income consists of two components: unrealized gains or losses on our AFS marketable investment securities and the gains and losses from the translation of assets and liabilities denominated in non-U.S. dollar functional currencies. 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 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.

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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 December 28, 2018
	Investment Securities			Currency Translation Adjustments			Total
Beginning Balance	$	(2,948	)	$	(12,884	)	$	(15,832	)
Other comprehensive income before reclassifications:							—
Unrealized gains/(losses) - investment securities	931						931
Foreign currency translation gains/(losses) (1)				(3,577		)	(3,577		)
Income tax effect - benefit/(expense)	—			—			—
Net of tax	931			(3,577		)	(2,646		)
Amounts reclassified from AOCI into earnings:
Realized gains/(losses) - investment securities (1)	(201		)				(201		)
Income tax effect - benefit/(expense) (2)	40						40
Net of tax	(161		)	—			(161		)
Net current-period other comprehensive income/(loss)	770			(3,577		)	(2,807		)
Ending Balance	$	(2,178	)	$	(16,461	)	$	(18,639	)

	Fiscal Quarter Ended December 29, 2017
	Investment Securities			Currency Translation Adjustments			Total
Beginning Balance	$	(377	)	$	(7,376	)	$	(7,753	)
Other comprehensive income before reclassifications:
Unrealized gains/(losses) - investment securities	(1,696		)