dlb-20200327

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 27, 2020


☐			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	California	94103-1410
(Address of principal executive offices)			(Zip Code)

(415) 558-0200

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, $0.001 par value	DLB	The New York Stock Exchange

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 ☒ No ☐

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). Yes ☒ No ☐

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 Filer

☒

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 ☐ No ☒

On April 24, 2020, the registrant had 64,434,421 shares of Class A common stock, par value $0.001 per share, and 36,224,220 shares of Class B common stock, par value $0.001 per share, outstanding.

Table of Contents

DOLBY LABORATORIES, INC.

FORM 10-Q

For the Fiscal Quarter Ended March 27, 2020

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	9

	Notes to Unaudited Interim Condensed Consolidated Financial Statements	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54

Item 4.	Controls and Procedures	56

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	57

Item 1A.	Risk Factors	57

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72

Item 6.	Exhibits	73

Signatures

Table of Contents

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

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)

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

G&A

General & Administrative

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

Integrated Circuit

IBR

Incremental Borrowing Rate

Intellectual Property

IPO

Initial Public Offering

IPTV

Internet Protocol Television

Information Technology

Limited Partner/Partnership

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

OTT

Over-The-Top

Personal Computer

PCS

Post-Contract Support

PP&E

Property, Plant, & Equipment

PSO

Performance-Based Stock Option

PSU

Performance-Based Restricted Stock Unit

R&D

Research & Development

ROU

Right-Of-Use

RSU

Restricted Stock Unit

S&M

Sales & Marketing

SERP

Supplemental Executive Retirement Plan

SoC

System(s)-On-A-Chip

SSP

Standalone Selling Price

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

Table of Contents

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)


	March 27, 2020		September 27, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	724,931	$	797,210
Restricted cash	9,513		8,383
Short-term investments	174,859		119,146
Accounts receivable, net of allowance for doubtful accounts of $11,262 and $9,775	247,043		189,115
Contract assets	223,739		195,651
Inventories, net	28,331		32,331
Prepaid expenses and other current assets	51,156		39,704
Total current assets	1,459,572		1,381,540
Long-term investments	127,294		179,587
Property, plant, and equipment, net	551,027		537,432
Operating lease right-of-use assets	79,439		—
Intangible assets, net	167,917		180,891
Goodwill	332,979		334,829
Deferred taxes	129,252		114,075
Other non-current assets	97,353		93,395
Total assets	$	2,944,833	$	2,821,749

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,041	$	15,212
Accrued liabilities	245,869		268,144
Income taxes payable	15,186		3,506
Contract liabilities	19,745		19,991
Operating lease liabilities	17,413		—
Total current liabilities	307,254		306,853
Non-current contract liabilities	25,074		24,404

Non-current operating lease liabilities	64,423		—
Other non-current liabilities	178,805		177,462
Total liabilities	575,556		508,719

Stockholders’ equity:
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 64,422,131 shares issued and outstanding at March 27, 2020 and 63,911,270 at September 27, 2019	58		58
Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 36,224,820 shares issued and outstanding at March 27, 2020 and 36,229,820 at September 27, 2019	41		41

Retained earnings	2,395,575		2,327,877
Accumulated other comprehensive (loss)	(31,615)		(20,625)
Total stockholders’ equity – Dolby Laboratories, Inc.	2,364,059		2,307,351
Controlling interest	5,218		5,679
Total stockholders’ equity	2,369,277		2,313,030
Total liabilities and stockholders’ equity	$	2,944,833	$	2,821,749

See accompanying notes to unaudited interim condensed consolidated financial statements

Table of Contents

DOLBY LABORATORIES, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)


	Fiscal Quarter Ended						Fiscal Year-To-Date Ended

	March 27, 2020		March 29, 2019		March 27, 2020		March 29, 2019
Revenue:
Licensing	$	328,865	$	310,308	$	586,548	$	570,587
Products and services	22,950		27,950		57,144		70,047
Total revenue	351,815		338,258		643,692		640,634

Cost of revenue:
Cost of licensing	13,243		16,074		25,585		27,471
Cost of products and services	23,587		20,501		48,560		47,733
Total cost of revenue	36,830		36,575		74,145		75,204

Gross margin	314,985		301,683		569,547		565,430

Operating expenses:
Research and development	60,086		58,625		117,736		117,272
Sales and marketing	88,485		92,694		183,603		178,296
General and administrative	60,800		47,416		113,329		98,229
Restructuring charges/(credits)	(331)		18		344		32
Total operating expenses	209,040		198,753		415,012		393,829

Operating income	105,945		102,930		154,535		171,601

Other income/expense:
Interest income	4,721		7,494		9,653		12,679
Interest expense	(25)		(32)		(97)		(77)
Other income/(expense), net	138		(390)		1,142		53
Total other income	4,834		7,072		10,698		12,655

Income before income taxes	110,779		110,002		165,233		184,256
Provision for income taxes	(22,105)		(36,427)		(27,968)		(12,323)
Net income including controlling interest	88,674		73,575		137,265		171,933
Less: net income attributable to controlling interest	(178)		(135)		(16)		(274)
Net income attributable to Dolby Laboratories, Inc.	$	88,496	$	73,440	$	137,249	$	171,659

Net income per share:
Basic	$	0.88	$	0.72	$	1.36	$	1.68
Diluted	$	0.86	$	0.70	$	1.33	$	1.63
Weighted-average shares outstanding:
Basic	100,854		102,141		100,595		102,409
Diluted	102,773		104,587		103,133		105,529

Related party rent expense:
Included in operating expenses	$	78	$	768	$	148	$	1,648
Included in net income attributable to controlling interest	$	327	$	176	$	221	$	352

Cash dividend declared per common share	$	0.22	$	0.19	$	0.44	$	0.38
Cash dividend paid per common share	$	0.22	$	0.19	$	0.44	$	0.38

See accompanying notes to unaudited interim condensed consolidated financial statements

Table of Contents

DOLBY LABORATORIES, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)


	Fiscal Quarter Ended						Fiscal Year-To-Date Ended
	March 27, 2020		March 29, 2019		March 27, 2020		March 29, 2019

Net income including controlling interest	$	88,674	$	73,575	$	137,265	$	171,933
Other comprehensive income:
Currency translation adjustments, net of tax expense/(benefit) of ($40), $0, $0, and $0	(10,191)		2,015		(6,571)		(1,713)
Unrealized gains/(losses) on investments, net of tax expense/(benefit) of $54, $84, ($207), and $124	273		2,098		(889)		2,868
Unrealized gains on cash flow hedges, net of tax of $37, $0, $0, and $0	(4,008)		—		(3,724)		—
Total other comprehensive income/(loss), net of tax	(13,926)		4,113		(11,184)		1,155

Total comprehensive income	74,748		77,688		126,081		173,088
Less: comprehensive (income)/loss attributable to controlling interest	193		(292)		178		(280)
Comprehensive income attributable to Dolby Laboratories, Inc.	$	74,941	$	77,396	$	126,259	$	172,808

See accompanying notes to unaudited interim condensed consolidated financial statements

Table of Contents

DOLBY LABORATORIES, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)


	Fiscal Quarter-To-Date
	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 December 27, 2019	$	99	$	—	$	2,351,251	$	(18,060)	$	2,333,290	$	5,411	$	2,338,701
Net income	—		—		88,496		—		88,496		178		88,674
Other comprehensive loss, net of tax	—		—		—		(13,555)		(13,555)		(371)		(13,926)
Distributions to controlling interest	—		—		—		—		—		—		—
Stock-based compensation expense	—		20,951		—		—		20,951		—		20,951
Repurchase of common stock	(1)		(49,751)		(21,917)		—		(71,669)		—		(71,669)
Cash dividends declared and paid on common stock	—		—		(22,255)		—		(22,255)		—		(22,255)

Common stock issued under employee stock plans	1		29,612		—		—		29,613		—		29,613
Tax withholdings on vesting of restricted stock	—		(812)		—		—		(812)		—		(812)

Balance at March 27, 2020	$	99	$	—	$	2,395,575	$	(31,615)	$	2,364,059	$	5,218	$	2,369,277


	Fiscal Year-To-Date
	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 27, 2019	$	99	$	—	$	2,327,877	$	(20,625)	$	2,307,351	$	5,679	$	2,313,030
Net income	—		—		137,249		—		137,249		16		137,265
Other comprehensive loss, net of tax	—		—		—		(10,990)		(10,990)		(194)		(11,184)
Distributions to controlling interest	—		—		—		—		—		(283)		(283)
Stock-based compensation expense	—		43,565		—		—		43,565		—		43,565
Repurchase of common stock	(1)		(76,456)		(25,215)		—		(101,672)		—		(101,672)
Cash dividends declared and paid on common stock	—		—		(44,336)		—		(44,336)		—		(44,336)

Common stock issued under employee stock plans	1		53,985		—		—		53,986		—		53,986
Tax withholdings on vesting of restricted stock	—		(21,094)		—		—		(21,094)		—		(21,094)

Balance at March 27, 2020	$	99	$	—	$	2,395,575	$	(31,615)	$	2,364,059	$	5,218	$	2,369,277


	Fiscal Quarter-To-Date
	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 December 28, 2018	$	101	$	—	$	2,361,843	$	(18,639)	$	2,343,305	$	5,649	$	2,348,954
Net income	—		—		73,440		—		73,440		135		73,575
Other comprehensive income, net of tax	—		—		—		3,956		3,956		157		4,113
Distributions to controlling interest	—		—		—		—		—		(108)		(108)
Stock-based compensation expense	—		19,235		—		—		19,235		—		19,235
Repurchase of common stock	(3)		(31,118)		(54,214)		—		(85,335)		—		(85,335)
Cash dividends declared and paid on common stock	—		—		(19,462)		—		(19,462)		—		(19,462)

Common stock issued under employee stock plans	1		12,885		—		—		12,886		—		12,886
Tax withholdings on vesting of restricted stock	1		(1,002)		—		—		(1,001)		—		(1,001)

Balance at March 29, 2019	$	100	$	—	$	2,361,607	$	(14,683)	$	2,347,024	$	5,833	$	2,352,857


	Fiscal Year-To-Date
	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	—		—	171,659	—	171,659	274	171,933
Other comprehensive income, net of tax	—		—	—	1,149	1,149	6	1,155
Distributions to controlling interest	—		—	—	—	—	(1,014)	(1,014)
Stock-based compensation expense	—		40,717	—	—	40,717	—	40,717
Repurchase of common stock	(3)		(113,321)	(84,556)	—	(197,880)	—	(197,880)
Cash dividends declared and paid on common stock	—		—	(39,035)	—	(39,035)	—	(39,035)

Common stock issued under employee stock plans	1		27,157	—	—	27,158	—	27,158
Tax withholdings on vesting of restricted stock	—		(20,680)	—	—	(20,680)	—