10-Q - Q3 '14
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 27, 2014
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.)
100 Potrero Avenue
San Francisco, CA
94103-4813
(415) 558-0200
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý
 
Accelerated filer  ¨
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý
On July 18, 2014, the registrant had 49,224,360 shares of Class A common stock, par value $0.001 per share, and 52,902,285 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 June 27, 2014
TABLE OF CONTENTS
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 


2

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)


 
June 27,
2014
September 27,
2013
ASSETS
(unaudited)
 
Current assets:
 
 
Cash and cash equivalents
$
590,097

$
454,397

Restricted cash
3,334

3,175

Short-term investments
181,446

140,267

Accounts receivable, net of allowance for doubtful accounts of $1,118 and $514
95,259

97,460

Inventories
9,185

10,093

Deferred taxes
85,183

84,238

Prepaid expenses and other current assets
22,446

28,949

Total current assets
986,950

818,579

Long-term investments
313,505

306,338

Property, plant and equipment, net
252,389

242,917

Intangible assets, net
50,225

41,315

Goodwill
279,966

279,724

Deferred taxes
46,200

37,434

Other non-current assets
9,541

11,638

Total assets
$
1,938,776

$
1,737,945

 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
Accounts payable
$
11,626

$
10,695

Accrued liabilities
153,070

137,795

Income taxes payable
7,310

3,394

Deferred revenue
13,167

20,931

Total current liabilities
185,173

172,815

Long-term deferred revenue
19,471

19,663

Other non-current liabilities
47,968

45,441

Total liabilities
252,612

237,919

 
 
 
Stockholders’ equity:
 
 
Class A common stock, $0.001 par value, one vote per share, 500,000,000 shares authorized: 49,199,196 shares issued and outstanding at June 27, 2014 and 46,862,893 at September 27, 2013
50

47

Class B common stock, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 52,902,393 shares issued and outstanding at June 27, 2014 and 54,876,494 at September 27, 2013
53

55

Additional paid-in capital
41,289

18,812

Retained earnings
1,614,544

1,454,382

Accumulated other comprehensive income
8,678

7,814

Total stockholders’ equity – Dolby Laboratories, Inc.
1,664,614

1,481,110

Controlling interest
21,550

18,916

Total stockholders’ equity
1,686,164

1,500,026

Total liabilities and stockholders’ equity
$
1,938,776

$
1,737,945

See accompanying notes to unaudited interim condensed consolidated financial statements

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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
 
June 27,
2014
June 28,
2013
 
June 27,
2014
June 28,
2013
Revenue:
 
 
 
 
 
Licensing
$
205,625

$
184,707

 
$
669,901

$
616,038

Products
12,971

17,381

 
45,638

60,605

Services
4,754

4,986

 
17,680

16,379

Total revenue
223,350

207,074

 
733,219

693,022

 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
Cost of licensing
4,389

4,053

 
12,132

13,542

Cost of products
10,860

16,269

 
34,941

47,964

Cost of services
3,620

4,018

 
10,683

11,722

Total cost of revenue
18,869

24,340

 
57,756

73,228

 
 
 
 
 
 
Gross margin
204,481

182,734

 
675,463

619,794

 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
Research and development
46,786

42,915

 
136,047

127,299

Sales and marketing
63,602

58,528

 
188,809

175,079

General and administrative
44,205

38,413

 
132,570

123,324

Restructuring charges/(credits)
(688
)
5,930

 
2,613

5,930

Total operating expenses
153,905

145,786

 
460,039

431,632

 
 
 
 
 
 
Operating income
50,576

36,948

 
215,424

188,162

 
 
 
 
 
 
Other income/expense:
 
 
 
 
 
Interest income
959

820

 
2,533

3,063

Interest expense
(251
)
(77
)
 
(456
)
(504
)
Other income/(expense), net
530

156

 
(2,064
)
1,057

Total other income/expense
1,238

899


13

3,616

 









Income before income taxes
51,814

37,847


215,437

191,778

Provision for income taxes
(11,251
)
(7,345
)
 
(53,079
)
(47,560
)
Net income including controlling interest
40,563

30,502

 
162,358

144,218

Less: net (income) attributable to controlling interest
(784
)
(286
)
 
(2,196
)
(742
)
Net income attributable to Dolby Laboratories, Inc.
$
39,779

$
30,216

 
$
160,162

$
143,476

 
 
 
 
 
 
Net Income Per Share:
 
 
 
 
 
Basic
$
0.39

$
0.30

 
$
1.57

$
1.41

Diluted
$
0.38

$
0.29

 
$
1.55

$
1.39

Weighted-Average Shares Outstanding:
 
 
 
 
 
Basic
102,350

101,751

 
102,131

101,917

Diluted
103,942

103,031

 
103,605

102,999

 
 
 
 
 
 
Related party rent expense:
 
 
 
 
 
Included in operating expenses
$
640

$
1,494

 
$
1,332

$
2,180

Included in net income attributable to controlling interest
$
1,164

$
831

 
$
3,669

$
2,467

See accompanying notes to unaudited interim condensed consolidated financial statements

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Table of Contents


DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)


 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
June 27,
2014
June 28,
2013
 
June 27,
2014
June 28,
2013
Net income including controlling interest
$
40,563

$
30,502

 
$
162,358

$
144,218

Other comprehensive income:
 
 
 




Foreign currency translation adjustments, net of tax
(75
)
(2,008
)
 
846

(3,878
)
Unrealized gains/(losses) on available-for-sale securities, net of tax
279

(852
)
 
456

(1,414
)
Comprehensive income
40,767

27,642

 
163,660

138,926

Less: comprehensive (income) attributable to controlling interest
(1,004
)
(388
)
 
(2,634
)
(326
)
Comprehensive income attributable to Dolby Laboratories, Inc.
$
39,763

$
27,254

 
$
161,026

$
138,600

See accompanying notes to unaudited interim condensed consolidated financial statements


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Table of Contents


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
Total Dolby
Laboratories,
Inc.
Controlling
Interest
Total
Balance at September 27, 2013
$
102

$
18,812

$
1,454,382

$
7,814

$
1,481,110

$
18,916

$
1,500,026

Net income


160,162


160,162

2,196

162,358

Currency translation adjustments, net of tax of $7



408

408

438

846

Unrealized gains on investments, net of tax of $(254)



456

456


456

Stock-based compensation expense

48,773



48,773


48,773

Repurchase of common stock
(1
)
(40,957
)


(40,958
)

(40,958
)
Tax (deficiency) from employee stock plans

(263
)


(263
)

(263
)
Class A common stock issued under employee stock plans
2

23,856



23,858


23,858

Tax withholdings on vesting of restricted stock

(9,221
)


(9,221
)

(9,221
)
Exercise of Class B stock options

289



289


289

Balance at June 27, 2014
$
103

$
41,289

$
1,614,544

$
8,678

$
1,664,614

$
21,550

$
1,686,164



 
Dolby Laboratories, Inc.
 
 
 
Common Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total Dolby
Laboratories,
Inc.
Controlling
Interest
Total
Balance at September 28, 2012
$
103

$

$
1,709,479

$
10,687

$
1,720,269

$
22,964

$
1,743,233

Net income


143,476


143,476

742

144,218

Currency translation adjustments, net of tax of $1,037



(3,461
)
(3,461
)
(417
)
(3,878
)
Unrealized losses on investments, net of tax of $793



(1,414
)
(1,414
)

(1,414
)
Distributions to controlling interest





(5,039
)
(5,039
)
Stock-based compensation expense

49,932



49,932


49,932

Repurchase of common stock
(1
)
(37,979
)
(36,162
)

(74,142
)

(74,142
)
Cash dividends declared and paid on common stock


(408,206
)

(408,206
)

(408,206
)
Tax (deficiency) from employee stock plans

(2,749
)


(2,749
)

(2,749
)
Class A common stock issued under employee stock plans

13,313



13,313


13,313

Tax withholdings on vesting of restricted stock

(5,709
)


(5,709
)

(5,709
)
Exercise of Class B stock options

303



303


303

Balance at June 28, 2013
$
102

$
17,111

$
1,408,587

$
5,812

$
1,431,612

$
18,250

$
1,449,862

See accompanying notes to unaudited interim condensed consolidated financial statements

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Table of Contents


DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
Fiscal Year-To-Date Ended
 
June 27,
2014
June 28,
2013
Operating activities:
 
 
Net income including controlling interest
$
162,358

$
144,218

Adjustments to reconcile net income to net cash provided by operating activities:


Depreciation and amortization
38,991

39,615

Stock-based compensation
48,773

49,932

Amortization of premium on investments
7,056

8,101

Excess tax benefit from exercise of stock options
(1,857
)
(621
)
Provision for doubtful accounts
625

(89
)
Deferred income taxes
(9,936
)
(12,973
)
Other non-cash items affecting net income
2,455

(800
)
Changes in operating assets and liabilities:


Accounts receivable
1,581

(30,829
)
Inventories
2,654

5,636

Prepaid expenses and other assets
(1,801
)
8,881

Accounts payable and other liabilities
17,033

(840
)
Income taxes, net
11,830

(3,164
)
Deferred revenue
(7,956
)
655

Other non-current liabilities
162

1,723

Net cash provided by operating activities
271,968

209,445

 


Investing activities:


Purchase of investments
(303,350
)
(416,688
)
Proceeds from sales of investment securities
140,297

534,109

Proceeds from maturities of investment securities
105,602

92,850

Purchases of property, plant and equipment
(37,122
)
(17,801
)
Purchases of intangible assets
(19,950
)
(4,050
)
Proceeds from sale of property, plant and equipment and assets held for sale
3,355

376

Change in restricted cash
(159
)
(1,957
)
Net cash provided by/(used in) investing activities
(111,327
)
186,839

 


Financing activities:


Proceeds from issuance of common stock
24,147

13,616

Repurchase of common stock
(40,958
)
(74,142
)
Payment of cash dividend

(408,206
)
Distribution to controlling interest

(5,039
)
Excess tax benefit from the exercise of stock options
1,857

621

Shares repurchased for tax withholdings on vesting of restricted stock
(9,221
)
(5,709
)
Net cash used in financing activities
(24,175
)
(478,859
)
Effect of foreign exchange rate changes on cash and cash equivalents
(766
)
(1,464
)
Net increase/(decrease) in cash and cash equivalents
135,700

(84,039
)
Cash and cash equivalents at beginning of period
454,397

492,600

Cash and cash equivalents at end of period
$
590,097

$
408,561

 
 

Supplemental disclosure:
 

Cash paid for income taxes, net of refunds received
$
50,194

$
64,155

Cash paid for interest
$
3

$
66

See accompanying notes to unaudited interim condensed consolidated financial statements

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Table of Contents


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 accounting principles generally accepted in the United States (“GAAP”), and with Securities and Exchange Commission (“SEC”) rules and regulations, which allow for certain information and footnote disclosures that are normally included in annual financial statements prepared in accordance with 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 27, 2013 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 27, 2013, which are included in our Annual Report on Form 10-K filed with the SEC.
The results for the fiscal quarter ended June 27, 2014 are not necessarily indicative of the results to be expected for any subsequent quarterly or annual financial period, including the fiscal year ending September 26, 2014.
Principles of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of Dolby Laboratories and our wholly owned subsidiaries. In addition, we have consolidated the financial results of jointly owned affiliated companies in which our principal stockholder has a controlling interest. We report these controlling interests as a separate line in our consolidated statements of operations as net income attributable to controlling interest and in our consolidated balance sheets as a controlling interest. We eliminate all intercompany accounts and transactions upon consolidation.
Operating Segments
We operate as a single reporting segment, and thus all required financial segment information is included in our unaudited interim condensed consolidated financial statements. This determination reflects the fact that our chief operating decision-maker ("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 GAAP requires management to make certain estimates and assumptions that affect the amounts reported and disclosed in our unaudited interim condensed consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include estimated selling prices for elements sold in multiple-element 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 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 and 39 week periods ended June 27, 2014 and June 28, 2013. Our fiscal year ending September 26, 2014 (fiscal 2014) and our fiscal year ended September 27, 2013 (fiscal 2013) both consist of 52 weeks.
Reclassifications
We have reclassified certain prior period amounts within our unaudited interim condensed 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.


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2. Summary of Significant Accounting Policies
We continually assess any Accounting Standards Updates ("ASUs") or other new accounting pronouncements issued by the Financial Accounting Standards Board ("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
Accumulated Other Comprehensive Income.  In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. This new standard, which we adopted in the first quarter of fiscal 2014, adds enhanced disclosure requirements for items reclassified out of Accumulated Other Comprehensive Income ("AOCI") with the intent of helping entities improve the transparency of changes in Other Comprehensive Income ("OCI") and items reclassified out of AOCI in their financial statements. The standard is to be applied on a prospective basis, and requires registrants to disclose either in a single note, or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of AOCI based on its source and the income statement line items affected by the reclassification. Since this new standard only results in changes to our financial statement presentation and does not amend any existing requirements for reporting net income or OCI in the financial statements, adoption of this standard does not impact our financial position or results of operations.
The adoption of new accounting pronouncements has not had a significant impact on our unaudited interim condensed consolidated financial statements or notes thereto, and has not resulted in a change to our significant accounting policies. Furthermore, there have not been any changes to our significant accounting policies from those that were described in our Form 10-K for the prior fiscal year ended September 27, 2013.
Standards Not Yet Effective
Revenue Recognition.  On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on October 1, 2017 and early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that this standard will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method or determined the effect of the standard on our ongoing financial reporting.

3. Composition of Certain Financial Statement Captions
The following tables present detailed information from our consolidated balance sheets as of June 27, 2014 and September 27, 2013 (amounts displayed in thousands, except as otherwise noted).

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Table of Contents


Cash, Cash Equivalents, and Investments
 
June 27,
2014
 
September 27,
2013
 
Cash and cash equivalents:
 
 
 
 
Cash
$554,315
 
$420,069
 
Cash equivalents:
 
 
 
 
Money market funds
833
 
16,193
 
U.S. agency securities
32,927
 
13,135
 
Commercial paper
 
5,000
 
Corporate bonds
2,022
 
 
Total cash and cash equivalents
590,097
 
454,397
 
 
 
 
 
 
Short-term investments:
 
 
 
 
U.S. agency securities
32,449
 
6,007
 
Commercial paper
4,985
 
5,991
 
Corporate bonds
22,997
 
43,847
 
Municipal debt securities
121,015
 
84,422
 
Total short-term investments
181,446
 
140,267
 
 
 
 
 
 
Long-term investments:
 
 
 
 
U.S. agency securities
24,982
 
40,924
 
Corporate bonds
128,889
 
90,391
 
Municipal debt securities
159,134
 
172,023
 
Other long-term investments
500
(2)
3,000
(3)
Total long-term investments
313,505
 
306,338
 
Total cash, cash equivalents and investments (1)
$1,085,048
 
$901,002
 
(1)
Total cash, cash equivalents, and investments exclude $3.3 million and $3.2 million of restricted cash as of June 27, 2014 and September 27, 2013.
(2)
Other long-term investments include a cost method investment of $0.5 million as of June 27, 2014 that was made during the second quarter of fiscal 2014.
(3)
Other long-term investments include a cost method investment of $3.0 million as of September 27, 2013. During the second quarter of fiscal 2014, we recorded a write-off charge to reduce the carrying value to zero in recognition of an other-than-temporary impairment.
Our investment portfolio, which is recorded as cash equivalents and both short and long-term investments, consists of the following:
 
June 27, 2014
 
Cost
Unrealized
Gains
Unrealized
Losses
Estimated Fair
Value
Money market funds
$833
$—
$—
$833
U.S. agency securities
90,359
10
(11)
90,358
Commercial paper
4,985
4,985
Corporate bonds
153,498
436
(26)
153,908
Municipal debt securities
279,540
639
(30)
280,149
Cash equivalents and investments
$529,215
$1,085
$(67)
$530,233
 
September 27, 2013
 
Cost
Unrealized
Gains
Unrealized
Losses
Estimated Fair
Value
Money market funds
$16,193
$—
$—
$16,193
U.S. agency securities
60,126
16
(76)
60,066
Commercial paper
10,991
10,991
Corporate bonds
134,097
315
(174)
134,238
Municipal debt securities
256,218
384
(157)
256,445
Cash equivalents and investments
$477,625
$715
$(407)
$477,933

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The following tables show the gross unrealized losses and the fair value for those available-for-sale securities that were in an unrealized loss position:
 
June 27, 2014
 
Less than 12 months
 
12 months or greater
 
Total
 
Fair Value
Gross Unrealized Losses
 
Fair Value
Gross Unrealized Losses
 
Fair Value
Gross Unrealized Losses
U.S. agency securities
$28,438
$(11)
 
$5,000
$—
 
$33,438
$(11)
Corporate bonds
41,047
(26)
 
 
41,047
(26)
Municipal debt securities
46,354
(19)
 
2,500
(11)
 
48,854
(30)
Total
$115,839
$(56)
 
$7,500
$(11)
 
$123,339
$(67)
 
September 27, 2013
 
Less than 12 months
 
12 months or greater
 
Total
 
Fair Value
Gross Unrealized
Losses
 
Fair Value
Gross Unrealized
Losses
 
Fair Value
Gross Unrealized
Losses
U.S. agency securities
$21,407
$(76)
 
$—
$—
 
$21,407
$(76)
Corporate bonds
53,350
(174)
 
 
53,350
(174)
Municipal debt securities
72,485
(157)
 
 
72,485
(157)
Total
$147,242
$(407)
 
$—
$—
 
$147,242
$(407)
The unrealized losses on our available-for-sale securities were primarily as a result of unfavorable changes in interest rates subsequent to the initial purchase of these securities. Although we had certain securities that were in an unrealized loss position as of June 27, 2014, we expect to recover the full carrying value of these securities as we do not intend to, nor do we currently anticipate a need to sell these securities prior to recovering the associated unrealized losses. As a result, we do not consider any portion of the unrealized losses at June 27, 2014 or September 27, 2013 to be an other-than-temporary impairment, nor do we consider any of the unrealized losses to be credit losses.
The following table summarizes the amortized cost and estimated fair value of the available-for-sale securities within our investment portfolio based on stated maturities as of June 27, 2014 and September 27, 2013, which are recorded within cash equivalents and both short and long-term investments in our consolidated balance sheets:
 
June 27, 2014
 
September 27, 2013
 
Amortized Cost
Fair Value
 
Amortized Cost
Fair Value
Due within 1 year
$214,161
$214,330
 
$158,275
$158,402
Due in 1 to 2 years
189,504
190,087
 
172,993
173,373
Due in 2 to 3 years
124,716
124,986
 
130,164
129,965
Total
$528,381
$529,403
 
$461,432
$461,740
Accounts Receivable
Accounts Receivable, Net
June 27,
2014
September 27,
2013
Trade accounts receivable
$73,699
$86,823
Accounts receivable related to patent administration program
22,678
11,151
Accounts Receivable, Gross
96,377
97,974
Less: allowance for doubtful accounts
(1,118)
(514)
Accounts Receivable, Net
$95,259
$97,460
Inventories
Inventory
June 27,
2014
September 27,
2013
Raw materials
$936
$2,050
Work in process
94
Finished goods
8,155
8,043
Total
$9,185
$10,093

Inventories are stated at the lower of cost (first-in, first-out) or market. 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 $2.2 million and $4.0 million of raw materials inventory within other non-current assets in our

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consolidated balance sheets as of June 27, 2014 and September 27, 2013, respectively. The majority of the inventory included in non-current assets was purchased in bulk in fiscal 2012 to obtain a significant volume discount, and is expected to be consumed over a period that exceeds twelve months. Based on anticipated inventory consumption rates, and aside from existing write-downs due to excess inventory, we do not believe that material risk of obsolescence exists prior to ultimate sale.
Prepaid Expenses and Other Current Assets
Prepaid Expenses And Other Current Assets
June 27,
2014
September 27,
2013
Prepaid expenses
$13,041
$10,195
Other current assets
7,501
10,863
Income tax receivable
1,904
7,891
Total
$22,446
$28,949

During the third quarter of fiscal 2014, we sold the land and building from one of our properties located in Wootton Bassett, U.K for $3.3 million. In connection with the sale, we recognized a gain of $0.4 million in other income. Prior to sale, the carrying value of both the land and building sold as part of this transaction as well as a parcel of adjacent land not part of the sale were classified as held for sale and included in other current assets as management had previously committed to a plan to sell these properties. Management still intends to sell the remaining unsold parcel of land within the next twelve months, and will therefore continue to classify it as held for sale. Accordingly, other current assets as of June 27, 2014 includes the carrying value of this parcel of land of $1.0 million.

Property, Plant and Equipment
Property, Plant And Equipment
June 27,
2014
September 27,
2013
Land
$46,208
$46,049
Buildings
32,665
32,305
Leasehold improvements
67,499
64,991
Machinery and equipment
45,089
38,408
Computer systems and software
102,155
91,939
Furniture and fixtures
13,589
13,490
Construction in progress
107,378
88,872
Property, Plant And Equipment, Gross
414,583
376,054
Less: accumulated depreciation
(162,194)
(133,137)
Property, Plant And Equipment, Net
$252,389
$242,917
Property, plant and equipment are recorded at cost, with depreciation expense included in cost of products, cost of services, research and development expenses, sales and marketing expenses and general and administrative expenses in our consolidated statements of operations.
During fiscal 2012, we purchased commercial office property in San Francisco, California for approximately $109.8 million. Based on a fair value analysis, we allocated $35.5 million of the property's purchase price to the land and $74.3 million to the building. We are currently in the process of making substantial improvements to the property in order to prepare the building for its intended use as our new worldwide headquarters. As such, construction in progress as of the end of both fiscal periods presented above includes the book value of the building and related costs of construction.
Additionally, we purchased a commercial office building in Sunnyvale, California for $19.7 million subsequent to the June 27, 2014 fiscal quarter-end. Refer to Note 13Subsequent Events” for additional information on this transaction.
Goodwill and Intangible Assets
We completed our annual goodwill impairment assessment in the fiscal quarter ended June 27, 2014 related to our consolidated balance of goodwill of $280.0 million. We determined, after performing step one of the two-step goodwill impairment assessment, that there was no goodwill impairment. We did not incur any goodwill impairment losses in either the fiscal year-to-date period ended June 27, 2014 or June 28, 2013.

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The following table outlines changes to the carrying amount of goodwill:
 
Goodwill
Balance at September 27, 2013
$279,724
Translation adjustments
242
Balance at June 27, 2014
$279,966
Intangible assets subject to amortization consist of the following:
 
June 27, 2014
 
September 27, 2013
Intangible Assets, Net
Cost
Accumulated
Amortization
Net
 
Cost
Accumulated
Amortization
Net
Acquired patents and technology
$100,012
$(59,195)
$40,817
 
$79,925
$(51,267)
$28,658
Customer relationships
30,725
(21,983)
8,742
 
30,723
(19,592)
11,131
Other intangibles
21,000
(20,334)
666
 
20,992
(19,466)
1,526
Total
$151,737
$(101,512)
$50,225
 
$131,640
$(90,325)
$41,315
Amortization expense for our intangible assets is included in cost of licensing, cost of products, research and development and sales and marketing expenses in our consolidated statements of operations. As of June 27, 2014, expected amortization expense of our intangible assets in future periods is as follows:
Fiscal Year
 Amortization Expense
Remainder of Fiscal 2014
$4,008
2015
13,626
2016
11,445
2017
8,302
2018
2,999
Thereafter
9,845
Total
$50,225
Accrued Liabilities
Accrued Liabilities
June 27,
2014
September 27,
2013
Accrued royalties
$9,293
$6,075
Amounts payable to joint licensing program partners
46,185
40,091
Accrued compensation and benefits
58,684
54,423
Accrued professional fees
6,840
4,402
Other accrued liabilities
32,068
32,804
Total
$153,070
$137,795
Other Non-Current Liabilities
Other Non-Current Liabilities
June 27,
2014
September 27,
2013
Supplemental retirement plan obligations
$2,315
$2,144
Non-current tax liabilities
33,188
30,986
Other liabilities
12,465
12,311
Total
$47,968
$45,441
4. Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income attributable to Dolby Laboratories, Inc. by the number of weighted-average shares of Class A and Class B common stock outstanding during the period. Through application of the treasury stock method, diluted EPS is computed in the same manner, except that the number of weighted-average shares outstanding is increased by the number of potentially dilutive shares from employee incentive plans during the period. Potentially dilutive shares include the hypothetical number of shares issued under the assumed exercise of outstanding stock options, vesting of outstanding restricted stock units, and shares issued under our employee stock purchase plan.
Basic and diluted EPS are computed independently for each fiscal quarter and year-to-date period presented, which involves the use of different weighted-average share count figures relating to quarterly and annual periods. As a result, and after factoring the effect of rounding to the nearest cent per share, the sum of all four quarter-to-date EPS figures may not equal year-to-date EPS.

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The following table sets forth the computation of basic and diluted EPS attributable to Dolby Laboratories, Inc. (in thousands, except per share amounts):
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
June 27,
2014
June 28,
2013
 
June 27,
2014
June 28,
2013
Numerator:
 
 
 
 
 
Net income attributable to Dolby Laboratories, Inc.
$39,779
$30,216
 
$160,162
$143,476
 
 
 
 
 
 
Denominator:
 

 
 
 
Weighted-average shares outstanding—basic
102,350
101,751
 
102,131
101,917
Potential common shares from options to purchase common stock
616
307
 
500
293
Potential common shares from restricted stock units
976
973
 
974
789
Weighted-average shares outstanding—diluted
103,942
103,031
 
103,605
102,999
 
 
 
 
 
 
Net income per share attributable to Dolby Laboratories, Inc.:
 
 
 
 
 
Basic
$0.39
$0.30
 
$1.57
$1.41
Diluted
$0.38
$0.29
 
$1.55
$1.39
 
 
 
 
 
 
Antidilutive awards excluded from calculation:
 
 
 
 
 
Stock options
3,563
5,048
 
3,915
5,274
Restricted stock units
184
354
 
1,756
1,769

5. Fair Value Measurements
Under our investment management strategy, we use cash holdings to purchase investment grade securities that are diversified among security types, industries and issuers. Each of the investments within our investment portfolio is measured at fair value, and is recorded within cash equivalents and both short and long-term investments in our consolidated balance sheets. With the exception of our mutual fund investments held in our supplemental retirement plan which are classified as trading securities, all of our investments are classified as available-for-sale securities. Our investments primarily consist of municipal debt securities, commercial paper, corporate bonds and United States agency securities. In addition to the security types noted above, our cash and cash equivalents also consist of highly-liquid money market funds. Consistent with our investment policy, none of the municipal debt investments that we hold are supported by letters of credit or standby purchase agreements.
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.
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.
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.

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The following tables present information about the fair value of our financial assets and liabilities measured on a recurring basis, and indicates the classification within the fair value hierarchy of the valuation inputs utilized to determine fair value (in thousands):
 
June 27, 2014
 
Level 1
Level 2
Level 3
Total
Assets:
 
 
 
 
Investments held in supplemental retirement plan (1)
$2,413
$—
$—
$2,413
Money market funds (2)
833
833
U.S. agency securities (2), (3), (4)
90,358
90,358
Commercial paper (3)
4,985
4,985
Corporate bonds (2), (3), (4)
153,908
153,908
Municipal debt securities (3), (4)
280,149
280,149
Total
$93,604
$439,042
$—
$532,646
 
 
 
 
 
Liabilities:
 
 
 
 
Investments held in supplemental retirement plan (5)
$2,413
$—
$—
$2,413
Total
$2,413
$—
$—
$2,413
 
September 27, 2013
 
Level 1
Level 2
Level 3
Total
Assets:
 
 
 
 
Investments held in supplemental retirement plan (1)
$2,242
$—
$—
$2,242
Money market funds (2)
16,193
16,193
U.S. agency securities (2), (3), (4)
60,066
60,066
Commercial paper (2), (3)
10,991
10,991
Corporate bonds (3), (4)
134,238
134,238
Municipal debt securities (3), (4)
256,445
256,445
Total
$78,501
$401,674
$—
$480,175
 
 
 
 
 
Liabilities:
 
 
 
 
Investments held in supplemental retirement plan (5)
$2,242
$—
$—
$2,242
Total
$2,242
$—
$—
$2,242
(1)
These assets are included within prepaid expenses and other current assets and within other non-current assets.
(2)
These assets are included within cash and cash equivalents.
(3)
These assets are included within short-term investments.
(4)
These assets are included within long-term investments.
(5)
These liabilities are included within accrued liabilities and within other non-current 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.
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.
We did not own any Level 3 financial assets or liabilities as of June 27, 2014 or September 27, 2013.

6. Stockholders’ Equity and 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, restricted stock units ("RSUs") and stock appreciation rights ("SARs") under our equity incentive plans, as well as shares under our Employee Stock Purchase Plan (“ESPP”).

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Common Stock - Class A and Class B
Our Board of Directors has authorized two classes of common stock, Class A and Class B. At June 27, 2014, we had authorized 500,000,000 Class A shares and 500,000,000 Class B shares. At June 27, 2014, we had 49,199,196 shares of Class A common stock and 52,902,393 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
2000 Stock Incentive Plan.    Effective October 2000, we adopted the 2000 Stock Incentive Plan. The 2000 Stock Incentive Plan, as amended, provides for the issuance of incentive and non-qualified stock options to our employees, directors, and consultants to purchase up to 15.1 million shares of Class B common stock. Under the terms of this plan, options became exercisable as established by the Board of Directors (ratably over four years), and expire ten years after the date of the grant. Options issued under the plan were made at their grant-date fair market value. Subsequent to fiscal 2005, no further options were granted under this plan. The 2000 Stock Incentive Plan terminated on October 1, 2010 and no shares of our common stock remained available for future issuance under that plan other than pursuant to outstanding options. As of June 27, 2014, there were options outstanding to purchase 17,611 shares of Class B common stock, all of which were vested and exercisable, with a remaining weighted-average contractual life of 0.3 years.
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 ("ISOs"), nonstatutory stock options ("NQs"), restricted stock, RSUs, SARs, deferred stock units, performance units, performance bonus awards and performance shares. A total of 29.0 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.
As of June 27, 2014, there were options outstanding to purchase 7.9 million shares of Class A common stock, of which 3.3 million were vested and exercisable. The options outstanding have a remaining weighted-average contractual life of 7.6 years.
Stock Options.    Stock options are generally granted at fair market value on the date of grant. Options granted to employees and officers prior to June 2008 generally vest over four years, with equal annual cliff-vesting and expire on the earlier of 10 years after the date of grant or 3 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 10 years after the date of grant or 3 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 and new shares of Class B common stock under the 2000 Stock Incentive Plan. Our 2005 Stock Plan also allows us to grant stock awards which vest based on the satisfaction of specific performance criteria.

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The following table summarizes information about stock options issued under our 2000 Stock Incentive Plan and 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 27, 2013
6,385
$29.82
 
 
Grants
2,442
37.96
 
 
Exercises
(669)
25.58
 
 
Forfeitures and cancellations
(246)
31.24
 
 
Options outstanding at June 27, 2014
7,912
32.65
7.6
$76,481
Options vested and expected to vest at June 27, 2014
7,581
32.60
7.6
73,678
Options exercisable at June 27, 2014
3,278
30.01
5.9
40,842
(1)
Aggregate intrinsic value is based on the closing price of our common stock on June 27, 2014 of $42.18 and excludes the impact of options that were not in-the-money.
Restricted Stock Units.    Beginning in fiscal 2008, we began granting RSUs to certain directors, officers and employees under our 2005 Stock Plan. Awards granted to employees and officers generally vest over four years, with equal annual cliff-vesting. Awards granted to directors prior to November 2010 generally vest over three years, with equal annual cliff-vesting. Awards granted after November 2010 and prior to fiscal 2014 to new directors vest over approximately two years, with 50% vesting per year, while awards granted from November 2010 onward to ongoing directors generally vest over approximately one year. Awards granted to new directors from fiscal 2014 onward vest on the earlier of the first anniversary of the award’s date of grant, or the day immediately preceding the date of the next annual meeting of stockholders that occurs after the award’s date of grant. Our 2005 Stock Plan also allows us to grant RSUs which vest based on the satisfaction of specific performance criteria, although no such awards have been granted as of June 27, 2014. 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 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 27, 2013
2,853
$34.66
Granted
1,237
38.21
Vested
(746)
36.65
Forfeitures
(187)
34.84
Non-vested at June 27, 2014
3,157
35.57
Stock Appreciation Rights.    We have previously granted stock appreciation rights to certain of our foreign employees. These awards are settled in cash rather than stock, and are classified as liability awards.
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 closing price of our common stock on the New York Stock Exchange on the last day of the purchase period and for overlapping one-year offering periods. The plan also includes an automatic reset feature that provides for an offering period to be reset and recommenced to a new lower-priced offering if the offering price of a new offering period is less than that of the immediately preceding offering period.
Stock Option Valuation Assumptions
We use the Black-Scholes option pricing model to determine the estimated fair value of employee stock options at the date of the grant. The Black-Scholes model includes inputs that require us to make certain estimates and assumptions regarding the expected term of the award, as well as the future risk-free interest rate and volatility of our stock price over this expected term of the award.

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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 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 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 since our initial public offering. Implied volatility is based upon externally traded option contracts of our common stock.
Dividend Yield.    The dividend yield is based on our anticipated dividend payout over the expected term of our option awards. As we do not currently intend to pay dividends, the expected dividend yield is zero for all equity awards granted.
The weighted-average assumptions used in the determination of the fair value of our stock options were as follows:
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
June 27,
2014
June 28,
2013
 
June 27,
2014
June 28,
2013
Expected term (in years)
4.58
4.37
 
4.58
4.37
Risk-free interest rate
1.5%
0.6%
 
1.4%
0.5%
Expected stock price volatility
31.5%
35.3%
 
32.0%
40.4%
Dividend yield
 
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. We determine our estimated forfeiture rate based on an evaluation of historical forfeitures and revise our estimate, if necessary, in subsequent periods if actual forfeitures differ from our estimate.
The two tables shown below separately present stock-based compensation expense both by award type and classification in our consolidated statements of operations (in thousands). No compensation cost was capitalized in either the fiscal quarter or year-to-date periods ended June 27, 2014 or June 28, 2013.
Compensation Expense - By Award Type
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
June 27,
2014
June 28,
2013
 
June 27,
2014
June 28,
2013
Compensation Expense - By Type
 
 
 
 
 
Stock options
$5,121
$5,438
 
$14,378
$17,437
Restricted stock units
9,899
10,967
 
31,721
29,826
Employee stock purchase plan
946
878
 
2,674
2,669
Total stock-based compensation
15,966
17,283
 
48,773
49,932
Benefit from income taxes
(4,700)
(5,143)
 
(14,386)
(15,053)
Total stock-based compensation, net of tax
$11,266
$12,140
 
$34,387
$34,879

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Compensation Expense - By Income Statement Line Item Classification
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
June 27,
2014
June 28,
2013
 
June 27,
2014
June 28,
2013
Compensation Expense - By Classification
 
 
 
 
Cost of products
$193
$187
 
$600
$585
Cost of services
97
84
 
297
308
Research and development
4,476
4,133
 
13,672
13,033
Sales and marketing
5,764
5,569
 
17,121
16,736
General and administrative
5,436
5,443
 
17,083
17,403
Restructuring
1,867
 
1,867
Total stock-based compensation expense
$15,966
$17,283
 
$48,773
$49,932
The tax benefit that we recognize from certain exercises of ISOs and shares issued under our ESPP are excluded from the tables above. This benefit was as follows (in thousands):
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
June 27,
2014
June 28,
2013
 
June 27,
2014
June 28,
2013
Tax benefit - stock option exercises & shares issued under ESPP
$148
$220
 
$458
$360
Unrecognized Compensation Expense.    At June 27, 2014, total unrecorded compensation expense associated with employee stock options expected to vest was approximately $48.8 million, which is expected to be recognized over a weighted-average period of 2.7 years. At June 27, 2014, total unrecorded compensation expense associated with RSUs expected to vest was approximately $82.3 million, which is expected to be recognized over a weighted-average period of 2.7 years.
Special Dividend and Equity Award Modification
On December 11, 2012, our Board of Directors declared a special dividend ("dividend") in the amount of $4.00 per share on our Class A and Class B common stock. Payment of the dividend was made on December 27, 2012 to all stockholders of record as of the close of business on December 21, 2012 ("Record Date"). Based on the 102,051,386 shares of Class A and Class B common stock outstanding as of the record date, the total dividend payment was $408.2 million.
In connection with the declaration of this dividend in the first quarter of fiscal 2013, we adjusted the number and exercise price of certain eligible outstanding stock options and SARs granted under our 2005 Stock Plan and 2000 Stock Incentive Plan in a manner intended to preserve the pre-cash dividend economic value of these awards. Eligible awards include stock options and SARs that were granted prior to December 2012 and were outstanding as of the day following the record date, with the exception of stock options held by employees in Australia that were not adjusted due to tax considerations. The modification of these existing awards at the dividend declaration date resulted in a total net incremental compensation cost of approximately $7.9 million, which is being recognized over the vesting periods of the original awards, determined on a grant-by-grant basis, based on the extent to which the awards were vested as of the date of modification. The incremental charge related to all fully-vested awards as of the modification date was recognized immediately in the first quarter of fiscal 2013, while the vesting period for those awards not fully-vested at the time of modification range from one to four years. Of the total incremental charge, approximately $0.9 million and $4.2 million was recognized in the fiscal year-to-date period ended June 27, 2014 and June 28, 2013, respectively.
Additionally, all outstanding RSUs under the 2005 Stock Plan that were unvested on the day following the record date, including RSUs that were granted on the record date, were modified to allow for the granting of a dividend equivalent (as such term is defined in the 2005 Stock Plan) with respect to each share of our Class A common stock underlying the unvested RSU. The dividend equivalent is payable in cash in a per share amount equal to the per share cash dividend on the same date that the related underlying RSU shares vest. The granting of the dividend equivalent for all outstanding RSUs resulted in a total net incremental compensation cost of approximately $11.9 million, which is being recognized over the remaining vesting periods of the RSUs at the date of modification, determined on a grant-by-grant basis. These vesting periods range from one to four years beginning on the first anniversary of the grant. Of the total incremental charge, approximately $2.4 million and $3.5 million was recognized in the fiscal year-to-date period ended June 27, 2014 and June 28, 2013, respectively.

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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 (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
Total
$900,000
Stock repurchases under the program may be made through open market transactions, negotiated purchases, or otherwise, at times and in amounts that we consider appropriate. The timing of repurchases and the number of shares repurchased depend upon a variety of factors, including price, regulatory requirements, the rate of dilution from our equity compensation plans and other market conditions. The program does not have a specified expiration date, and can be limited, suspended or terminated at our discretion at any time without prior notice. Shares repurchased under the program will be returned to the status of authorized but unissued shares of Class A common stock. As of June 27, 2014, the remaining authorization to purchase additional shares is approximately $75.1 million.
The following table provides information regarding share repurchase activity under the program during fiscal 2014:
Quarterly Repurchase Activity
Shares
Repurchased
Cost (1)
Average Price Paid Per Share (2)
 
 
(in thousands)
 
Q1 - Quarter ended December 27, 2013
330,000
$11,660
$35.32
Q2 - Quarter ended March 28, 2014
Q3 - Quarter ended June 27, 2014
730,000
29,298
40.12
Total
1,060,000
$40,958
 
(1)
Cost of share repurchases includes the price paid per share and applicable commissions.
(2)
Average price paid per share excludes commission costs.

7. Restructuring
Fiscal 2014 Restructuring Plan.    In October 2013, we implemented a plan to reorganize and consolidate certain activities and positions within our global business infrastructure. As a result, we recorded $3.3 million in restructuring costs during the fiscal year-to-date period ended June 27, 2014, representing severance and other related benefits offered to approximately 50 employees that were affected as a result of this action.
Changes in restructuring accruals under this restructuring plan were as follows (in thousands):
 
Severance and associated costs
Restructuring charges
$3,301
Cash payments
(3,025)
Non-cash and other adjustments
(5)
Balance at June 27, 2014
$271
During the fiscal quarter ended June 27, 2014, we recognized a $0.7 million credit representing the release of a facility exit obligation accrued under our Fiscal 2013 Restructuring Plan following the sale of certain property located in Wootton Bassett, U.K during the quarter. Aside from the release of this liability, there was no other activity relating to our Fiscal 2013 Restructuring Plan during the fiscal quarter ended June 27, 2014.
Accruals for restructuring charges are included within accrued liabilities in the accompanying consolidated balance sheets while restructuring charges are included within restructuring charges in the accompanying consolidated statements of operations.
 

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8. Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.
Unrecognized Tax Benefit
Our gross unrecognized tax benefit is reduced by a liability recorded so that our unrecognized tax benefit represents the amount that we ultimately expect to be realized. As of June 27, 2014, the total amount of gross unrecognized tax benefits was $33.9 million, of which $22.1 million, if recognized, would reduce our effective tax rate. Our net liability for unrecognized tax benefits is classified within other non-current liabilities in our consolidated balance sheets.
Withholding Taxes
We recognize licensing revenue gross of withholding taxes, which our licensees remit directly to their local tax authorities, and for which we receive a related foreign tax credit in our income tax provision. The foreign current tax includes this withholding tax expense while the appropriate foreign tax credit benefit is included in current federal and foreign taxes. Withholding taxes were as follows (in thousands):
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
June 27,
2014
June 28,
2013
 
June 27,
2014
June 28,
2013
Withholding Taxes
$12,022
$8,970
 
$35,120
$30,261
Effective Tax Rate
Each period, the combination of multiple different factors can impact our effective tax rate. These factors include both recurring items such as tax rates and the relative amount of income earned in foreign jurisdictions, as well as discrete items that may occur in, but are not necessarily consistent between periods.
Our effective tax rate increased from 19% in the third quarter of fiscal 2013 to 22% in the third quarter of fiscal 2014, which reflects reduced benefits from federal R&D tax credits that were retroactively reinstated in January 2013 and which expired in December 2013. Additionally, we received a benefit to our effective tax rate in the third quarter of fiscal 2013 related to the re-organization of a foreign subsidiary which resulted in the release of certain deferred tax liabilities. The overall increase in the rate was partially offset by the benefit received during the third quarter of fiscal 2014 from a higher proportion of overall earnings attributable to lower tax-rate jurisdictions.
On a year-to-date basis, our effective tax rate remained unchanged as it was 25% in both the fiscal year-to-date period ended June 27, 2014 and 25% in the fiscal year-to-date period ended June 28, 2013 and reflects the same factors as discussed above.
9. Accumulated Other Comprehensive Income
Other comprehensive income ("OCI") consists of two components: unrealized gains or losses on our available-for-sale marketable investment securities and the gain or loss from foreign currency translation adjustments. Until realized and reported as a component of net income, these comprehensive income items accumulate and are included within accumulated other comprehensive income ("AOCI"), a subsection within stockholders’ equity in our consolidated balance sheet. Unrealized gains and losses on our investment securities are reclassified from AOCI into earnings when realized upon sale, and are determined based on specific identification of securities sold. Gains and losses from the translation of assets and liabilities denominated in non-U.S. dollar functional currencies are included in AOCI.

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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 June 27, 2014
 
Fiscal Year-To-Date Ended June 27, 2014
 
Unrealized Gain/Loss - Investments
Currency Translation Adjustments
Total
 
Unrealized Gain/Loss - Investments
Currency Translation Adjustments
Total
Balance, Beginning Of Period
$380
$8,314
$8,694
 
$203
$7,611
$7,814
Other Comprehensive Income Before Reclassifications:
 
 
 
 
 
 
 
Unrealized Gains - Investment Securities
484

484
 
1,055

1,055
Foreign Currency Translation Gains/(Losses) (1)

(366)
(366)
 

401
401
Income Tax Effect - Benefit/(Expense) (2)
(173)
71
(102)
 
(377)
7
(370)
Net Of Tax
311
(295)
16
 
678
408
1,086
Amounts Reclassified From AOCI Into Earnings:



 



Realized (Gains) - Investment Securities (1)
(49)

(49)
 
(345)

(345)
Income Tax Effect - Expense (2)
17

17
 
123

123
Net Of Tax
279
(295)
(16)
 
456
408
864
Balance, End Of Period
$659
$8,019
$8,678
 
$659
$8,019
$8,678
(1)
Realized gains or losses from the sale of our available-for-sale investment securities or from foreign currency translation adjustments are included within other income/expense, net in our consolidated statements of operations.
(2)
The income tax benefit or expense is included within provision for income taxes in our consolidated statements of operations.

10. Commitments and Contingencies
In the ordinary course of business, we enter into contractual agreements with third parties that include non-cancelable payment obligations, for which we are liable in future periods. These arrangements can include terms binding us to minimum payments and/or penalties if we terminate the agreement for any reason other than an event of default as described by the agreement. The following table presents a summary of our contractual obligations and commitments as of June 27, 2014 (in thousands):
 
Payments Due By Fiscal Period
 
Remainder Of Fiscal 2014
Fiscal
2015
Fiscal
2016
Fiscal
2017
Fiscal
2018
Thereafter
Total
Naming rights
$—
$7,432
$7,525
$7,619
$7,715
$118,699
$148,990
Operating leases
4,625
15,481
10,458
9,056
7,939
40,329
87,888
Purchase obligations
1,681
3,082
1,454
67
6,284
Total
$6,306
$25,995
$19,437
$16,742
$15,654
$159,028
$243,162
Naming Rights.     In fiscal 2012, we entered into an agreement for naming rights and related benefits with respect to the Dolby Theatre in Hollywood, California, the location of the Academy Awards®. The term of the agreement is 20 years, over which we will make payments on a semi-annual basis. Our payment obligations are conditioned in part on the Academy Awards® being held and broadcast from the Dolby Theatre.
Operating Lease Payments.     Operating lease payments represent our commitments for future minimum rent made under non-cancellable leases for office space, including those payable to our principal stockholder and portions attributable to the controlling interests in our wholly owned subsidiaries.
Purchase Obligations.     Purchase obligations primarily consist of our commitments made under agreements to purchase goods and services for purposes that include IT and telecommunications, marketing and professional services, and manufacturing and other research and development activities.
Indemnification Clauses.     On a limited basis, our contractual agreements will contain a clause under which we have agreed to provide indemnification to the counterparty, most commonly to licensees in connection with licensing arrangements that include our intellectual property. Additionally, and although not a contractual requirement, we have at times elected to defend our licensees from third party intellectual property infringement claims. Since the terms and conditions of the indemnification clauses vary in scope and duration, we are unable to make a reasonable estimate of the maximum amount of exposure that we could potentially have for such clauses. Furthermore, we have not historically made any payments in connection with any such obligation and believe there to be a remote likelihood that any potential exposure in future periods would be of a material amount. As a result, no amounts have been accrued in our unaudited interim condensed consolidated financial statements with respect to the contingent aspect of these indemnities.

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11. Legal Proceedings
In December 2013, the Korean Fair Trade Commission (“KFTC”) initiated a review of the Company under Korean competition law. In March 2014, the National Development and Reform Commission of China (“NDRC”) initiated a review under the Chinese competition laws. The KFTC and NDRC have requested information relating to our business practices in Korea and China, respectively. We are cooperating with the KFTC and NDRC as they conduct their reviews.
We are involved in various legal proceedings that occasionally arise in the normal course of business. These can include claims of alleged infringement of intellectual property rights, commercial, employment and other matters. In our opinion, resolution of these proceedings is not expected to have a material adverse impact on our operating results or financial condition. Given the unpredictable nature of legal proceedings, it is possible that an unfavorable resolution of one or more such proceedings could materially affect our future operating results or financial condition in a particular period; however, based on the information known by us as of the date of this filing and the rules and regulations applicable to the preparation of our unaudited interim condensed financial statements, any such amount is either immaterial, or it is not possible to provide an estimated amount of any such potential loss.

12. Acquisitions
On February 23, 2014, we entered into a definitive agreement to acquire Doremi Labs ("Doremi"), a privately held company, for $92.5 million in cash and up to an additional $20.0 million in contingent consideration that may be earned over a four-year period. Headquartered in Burbank, California, Doremi is a leading developer and manufacturer of digital cinema servers and format converters for the broadcast, postproduction, and professional audio/visual markets and is a world leader in digital cinema technology. The acquisition is subject to customary closing conditions, including review by United States and international regulators, and it is anticipated to close by the end of the 2014 calendar year.

13. Subsequent Events

Purchase Of Commercial Office Building In Sunnyvale, CA.    On July 14, 2014, we completed the purchase of a commercial office building in Sunnyvale, California for $19.7 million that we were occupying under a 7.5 year lease that had not yet run its full term. Purchase of the building prior to expiration of the lease term requires that we recognize existing deferred credits from rent concessions and other allowances. Thus, the building’s new carrying value will comprise the acquisition price plus the carrying value of existing leasehold improvements, less existing deferred rent credits.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations and are subject to risks and uncertainties, including, but not limited to statements regarding: operating results and underlying measures; demand and acceptance for our technologies and products; market growth opportunities and trends; our plans, strategies and expected opportunities; and future competition. Use of words such as may, will, should, expect, plan, anticipate, believe, estimate, predict, potential, continue or similar expressions indicates a forward-looking statement. Such forward-looking statements are based on managements reasonable current assumptions and expectations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform our prior statements to new developments or actual results.
OVERVIEW
Dolby Laboratories creates audio, video, and voice technologies that transform entertainment and communications at the cinema, at home, at work and on mobile devices. Founded in 1965, our core strengths stem from expertise in digital signal processing and compression technologies that have transformed the ability of artists to convey entertainment experiences to their audiences through recorded media. Such technologies led to the development of our noise-reduction systems for analog tape recordings, and have since evolved into multichannel sound for cinema, digital television transmissions and devices, and DVD and Blu-ray discs and devices. More recently, our technologies have played a prominent role in the development of the next generation of audio technologies for the cinema, home entertainment, mobile and gaming experiences. Today, we derive the majority of our revenue from licensing our audio technologies. We have also been developing technologies aimed at enhancing voice conferencing communications and imaging. For example, in early 2014, we introduced Dolby Vision, a new imaging technology that offers more realistic distinctions in color, brighter highlights and improved shadow details that is expected to be incorporated in televisions by the end of 2014. We also provide products and services that enable entertainment content creators and distributors to produce, encode, transmit and playback content for superior consumer experiences.
Revenue Generation
We generate revenue primarily from licensing our technologies and from the sale of our products. We license our technologies to various third parties who incorporate them into devices to enable and enhance both audio and video capabilities. Collectively, licensed devices and our products cover a wide range of end-user experiences:
At Home: Software vendors and OEMs of devices such as digital televisions, set-top boxes ("STBs"), audio/video receivers ("AVRs"), home-theater-in-a-box systems ("HTIBs"), DVD and Blu-ray devices and gaming consoles;
At Work: OEMs of PCs as well as an audio and video conference service provider that incorporates specified digital audio technologies into their solutions for superior spatial perception and voice clarity;
At the Cinema: Movie theatres that use our Dolby Atmos, 3D, and surround sound digital audio technology to provide immersive sound and images; and
On Mobile Devices: Software vendors and OEMs of devices such as smartphones, tablets and other mobile entertainment systems.
The following table presents a summary of the composition of our revenues for all periods presented:
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
Revenue
June 27,
2014
June 28,
2013
 
June 27,
2014
June 28,
2013
   Licensing
92%
89%
 
92%
89%
   Products
6%
8%
 
6%
9%
   Services
2%
3%
 
2%
2%
Total
100%
100%
 
100%
100%

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We license our technologies in 49 countries, and our licensees distribute products that incorporate our technologies throughout the world. We sell our products and services in over 80 countries. As shown in the table below, we generate a significant portion 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, while services revenue is based on the location where services are performed.
 
Fiscal Year-To-Date Ended
Revenue By Geographic Location
June 27,
2014
June 28,
2013
United States
29%
30%
International
71%
70%
Licensing
We have three primary licensing models: a two-tier model, an integrated licensing model, and a patent licensing model.
Two-Tier Licensing Model.   Most of our consumer entertainment licensing business consists of a two-tier licensing model whereby our decoding technologies, included in reference software and firmware code, are first provided under license to a semiconductor manufacturer. The manufacturer then incorporates our technologies in integrated circuits (“ICs”). Licensed semiconductor manufacturers, whom we refer to as “implementation licensees,” sell their ICs to OEMs of consumer entertainment products, which we refer to as “system licensees.” System licensees separately obtain licenses from us that allow them to make and sell finished end-user products that incorporate our technologies in ICs purchased from our implementation licensees.
Implementation licensees pay us a one-time, up-front fee per license. In exchange, the licensee receives a licensing package which includes information useful in implementing our technologies into their chipsets. Once implemented, the licensee will send us a sample chipset for quality control evaluation and after we validate the design, the licensee is permitted to sell the chipset for use solely by our system licensees.
System licensees are required to provide us with prototypes of products that incorporate our technologies for which they are licensed for quality control evaluation, or under certain circumstances, with self-test results for our review. If the prototype or test results are approved, the licensee is permitted to buy ICs from any Dolby implementation licensee with a license for the same Dolby technology, and to sell approved products to retailers, distributors, and consumers. For the use of our technologies, our system licensees pay an initial licensing fee as well as royalties, which represent the majority of the revenue recognized from these arrangements. The amount of royalties we collect from a system licensee on a particular product depends on a number of factors including the mix of Dolby technologies used, the nature of the implementations, and the volume of products incorporating our technologies that are shipped by the system licensee.
Integrated Licensing Model.    We also license our technologies to software operating system vendors and independent software vendors ("ISVs"), and to certain other OEMs that act as combined implementation and system licensees. These licensees incorporate our technologies in their software used on PCs, in mobile applications, or in ICs they manufacture and incorporate into their products. As with the two-tier licensing model, the combined implementation and system licensee pays us an initial licensing fee in addition to royalties as determined by the mix of Dolby technologies used, the nature of the implementations and the volume of products incorporating our technologies that are shipped, and is subject to the same quality control evaluation process.
Patent Licensing.    We license our patents directly to manufacturers that use our intellectual property in their products. We also license our patents indirectly through patent pools, arrangements between multiple patent owners to jointly offer and license pooled patents to licensees. Finally, we generate service fees for managing patent pools on behalf of third party patent owners through our wholly owned subsidiary, Via Licensing Corporation. The Via Licensing patent pools enable product manufacturers to efficiently secure patent licenses for audio coding, interactive television, digital radio and wireless technologies.
We have active licensing arrangements with over 570 electronics product OEMs and software developer licensees, with corporate headquarters located in 49 countries.
As of June 27, 2014, we had approximately 4,200 issued patents relating to technologies from which we derive a significant portion of our licensing revenue. We have approximately 910 trademark registrations throughout the world

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for a variety of wordmarks, logos, and slogans. These trademarks are an integral part of our technology licensing program as licensees typically place them on their products which incorporate our technologies to inform consumers that they have met our quality specifications.
Products
We design and manufacture audio and video products for the film production, cinema, and television broadcast industries. Distributed in over 70 countries, these products are used in content creation, distribution, and playback to enhance image and sound quality, and improve transmission and playback. Revenue from our cinema products tends to fluctuate based on the underlying trends in the cinema industry, including technology adoption and replacement cycles.
Services
We offer a variety of services to support film production and television broadcast. Our engineers assist in the use of our products and technologies to create and reproduce content. Such assistance can involve equipment calibration, mixing room alignment, and equalization. To ensure movie playback with optimal quality, our engineers also provide equipment training, system and venue design consultation, as well as on-site technical expertise to cinema operators throughout the world.

OPPORTUNITIES, CHALLENGES, AND RISKS
Today, content is captured, delivered, and played back in more ways than ever before. Consumers access content at will and on the go through multiple channels, including cinema, optical disc, digital broadcast, Internet, and cellular networks. The breadth of options available to consumers for receiving content has resulted in significant competition across delivery channels. As such, our licensing and product markets are characterized by rapid technological changes, new product introductions, changing customer and licensee demands and evolving industry standards that present a high risk of obsolescence.
Licensing
The following table presents the composition of our licensing business and revenues for all periods presented:
 
Fiscal Quarter
Ended
 
Fiscal Year-To-Date Ended
 
Market
June 27,
2014
June 28,
2013
 
June 27,
2014
June 28,
2013
Main Products Incorporating Our Technologies
Broadcast
43%
38%
 
42%
37%
Televisions & STBs
PC
19%
22%
 
19%
25%
Windows operating systems & DVD software players
Consumer Electronics
14%
15%
 
15%
16%
DVD and Blu-ray Disc devices, AVRs, & HTIBs
Mobile
13%
12%
 
13%
11%
Smartphones, tablets & other mobile devices
Other
11%
13%
 
11%
11%
Video game consoles & automobile entertainment devices
Total
100%
100%
 
100%
100%
 
Content creators and distributors are increasingly focused on delivering content for online consumption across a multitude of media and devices with varying bandwidth and performance capabilities, including PCs, connected TVs, STBs, gaming consoles, connected Blu-ray Disc players, and various mobile devices. Many mobile devices now designed for enhanced capture and playback present a challenge for content creators and device manufacturers seeking consistent audio quality. We believe this challenge provides opportunities whereby we can provide solutions designed to optimize the audio experience across the online and portable device markets.

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With the continued evolution of consumer entertainment choices and our efforts to provide competitive audio and video technologies for a wide variety of devices, the composition of our optical and non-optical based licensing revenue has shifted over time. Our optical disc-based revenue is generated from the licensing of technologies that enable DVD or Blu-ray Disc playback, including those incorporated in the Microsoft Windows 7 and 8 operating systems, independent PC DVD software players, and consumer DVD and Blu-ray Disc players. Non-optical disc based licensing revenue includes revenue derived from products such as TVs, set-top boxes, and mobile devices. The portion of our total licensing revenue comprised of our non-optical disc based licensing has increased over time, as shown in the following table:
 
Fiscal Year-To-Date Ended
Licensing Revenue
June 27,
2014
June 28,
2013
Non-Optical
73%
71%
Optical
27%
29%
Broadcast Market
In our broadcast market we derive the majority of our revenue from licensing our technologies to OEMs of televisions and set-top boxes. The efficiency and quality of our multichannel technologies are well suited to digital broadcast bandwidth requirements and to delivering content for an enhanced experience. A high percentage of global sales of TV and STBs are shipped with our technologies, especially in North America and Europe.
As countries within emerging markets convert to digital television, we are well positioned to benefit from this transition, and our growth in this market is dependent in part upon continued adoption of our technologies. Broadcast services that operate under bandwidth constraints, such as terrestrial broadcast or Internet protocol television (“IPTV”) services, benefit from Dolby technologies, which enable the delivery of high quality audio content at reduced bit rates, thereby conserving bandwidth.
PC Market
Our technologies are included in the majority of PCs sold today due to their incorporation in the current versions of Microsoft's Windows and Apple's Mac operating systems for disc and online content playback. Under the Windows 8 arrangement, our technologies are embedded in the entire operating system for tablets and PCs, for which we receive royalty payments primarily from PC OEMs in addition to royalties from Microsoft. For versions prior to Windows 8, our technologies were only included in certain configurations of these operating system versions, and we were paid a royalty by Microsoft. Additionally, other PC licensees such as ISVs paid us a royalty for the inclusion of their software that incorporate our technologies.
Historically, we have licensed our technologies to a range of PC licensees, including ISVs, PC OEMs, and operating system providers. The release of new versions of major PC operating systems has sometimes resulted in changes in the mix of our PC licensees. In recent quarters preceding the third quarter of fiscal 2014, PC revenue declined much faster than the decline in the overall PC market due in part to our transition to the Windows 8 business model. Now that this transition is largely complete, changes to our PC market revenue should be more closely aligned with the overall PC market, with some differences due primarily to timing between quarters.
Consumer Electronics ("CE") Market
Our CE market is primarily driven by revenue attributable to Blu-ray Disc players and recorders, DVD, AVRs and HTIBs. Sales of DVD players are declining as a result of the maturity of the DVD platform and a shift to Blu-ray players and other connected devices capable of delivering content. The decline in DVD revenue is only partially offset by revenue from Blu-ray players which have not reached the annual volumes generated by DVD players in prior periods. This is partially due to the large number of alternative products and services that currently deliver content over the Internet.
Mobile Market
Our mobile market is largely driven by sales of smartphones, tablets and other mobile devices that incorporate our technologies. Our growth in this market is dependent on several factors, including the performance of the mobile device market as a whole, our success in collaborating with manufacturers of mobile devices to incorporate our technologies, and the development of various ecosystems, which includes availability of content in Dolby formats being streamed to mobile devices. Currently, Dolby sound is featured on various smartphones and tablets in the

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Android, Windows 8 and Amazon ecosystems. Historically, our growth in smartphones has stemmed primarily from high-end models. We are focused on the adoption of our technology into a broader range of models. At the same time, the rate of new product development in this sector continues to be rapid and can result in dramatic swings in consumer trends. In the current mobile market, we see smartphone manufacturers modifying feature sets in order to reduce costs, even in high-end devices. In April 2014, we indicated that our Dolby Digital Plus technology was one of several third party features that Samsung elected not to include in their recently released Galaxy line of smartphones and tablets. As a result, we expect our Mobile revenue to decline as a percentage of our licensing revenue from 13% in both the fiscal quarter and fiscal year-to-date period ended June 27, 2014 to approximately 12% in the fourth quarter of fiscal 2014.
Other Markets
Revenue generated from our other markets typically stems from gaming devices and peripherals, automotive, licensing administration fees, and voice technologies. Revenue attributable to gaming and automotive is primarily driven by sales of video game consoles and in-car entertainment systems that incorporate our audio and video technologies. Revenue from the administration of patent pools through our wholly-owned subsidiary Via Licensing Corporation is primarily driven by demand for standards-based audio compression technologies for broadcast, CE, and mobile products.
Products
The following table presents the composition of our products revenue for all periods presented:
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
Market
June 27,
2014
June 28,
2013
 
June 27,
2014
June 28,
2013
Cinema
87%
87%
 
86%
87%
Broadcast
11%
9%
 
10%
9%
Other
2%
4%
 
4%
4%
Total
100%
100%
 
100%
100%
Digital Cinema Products
Our digital cinema products include our Dolby Digital Cinema Integrated Media Block (“IMB”) and central library servers, which store, decode and playback digital content, as well as our digital audio processors that provide multichannel surround playback. As the industry's transition from film to digital nears completion, revenue from our cinema products has declined and we expect this trend to continue until the industry’s replacement cycle accelerates. We continue to focus on strengthening our product portfolio through this cycle while also striving to provide improved technological solutions for the cinema.
Our Dolby Atmos object-oriented sound platform enhances the cinema experience and provides more flexibility and control for sound designers and mixers to deliver more natural and realistic sound. To date, no standards exist for object-oriented audio playback in cinema. However, both the North American Theatre Owners ("NATO") and Digital Cinema Initiative ("DCI"), a group representing the top Hollywood studios, have encouraged the development of an industry standard for object-oriented audio. We will continue to collaborate with these industry participants since the outcome may impact future adoption of our products.
Digital Cinema 3D Products
Our digital cinema 3D products provide 3D image capabilities when combined with a digital cinema projector and server. Our revenue in this area has been negatively impacted by declines in unit shipments and lower selling prices for 3D products, as the market adoption rate for 3D cinema equipment has slowed.
Broadcast Products
Our broadcast products are used to encode, transmit, and decode multiple channels of high quality audio content for DTV and HDTV program production and broadcast distribution and to measure the subjective loudness of audio content within broadcast programming. Since our broadcast products support the use of our encoding technologies, revenue from these products will be affected by the level of adoption of our encoding technologies especially in new and emerging markets.

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Film-Based Cinema Products
Our film-based cinema products are used primarily to read, decode, and play back film soundtracks, to calibrate cinema sound systems, and to enable soundtracks encoded in digital audio to be played back on analog cinema audio systems. As the cinema industry has increasingly adopted digital-based formats, revenue from our film cinema products has declined, and we anticipate this trend to continue.
Services
Services revenue is primarily tied to activity in the cinema industry, and has been adversely impacted by the industry's transition from film to digital-based production. Services are also dependent upon the volume of film production by studios and independent filmmakers. Several factors influence the number of movies produced in a given fiscal period, including strikes and work stoppages within the cinema industry and budgetary constraints and changes in cinema industry business models. Our services revenue continues to face significant competition from full-service post-production companies.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), and pursuant to Securities and Exchange Commission (“SEC”) rules and regulations. The preparation of these financial statements requires us to establish accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the financial statements, and the reported amounts of revenue and expenses during a fiscal period. The SEC considers an accounting policy and estimate to be critical if it is both important to a company’s financial condition and/or results of operations and requires significant judgment on the part of management in its application. On a regular basis, we evaluate our assumptions, judgment, and estimates. We have discussed the selection and development of the critical accounting policies and estimates with the Audit Committee of our Board of Directors. The Audit Committee has reviewed our related disclosures in our Annual Report on Form 10-K for the fiscal year ended September 27, 2013. Although we believe that our judgments and estimates are appropriate and correct, actual results may differ from these estimates.
We consider the following accounting policies and estimates listed below to be the most critical due to both their importance on our financial condition and results of operations and the level of management judgment required. If actual results or events differ materially, our reported financial condition and results of operation for future periods could be materially affected. Historically, our estimates and assumptions have not significantly differed from actual results. The estimates and/or assumptions relevant to these critical policies have not significantly changed in recent years, nor do we anticipate them to significantly change in the future. For additional information describing all of our significant accounting policies and methods used in the preparation of our financial statements, refer to our Annual Report on Form 10-K for the fiscal year ended September 27, 2013 in addition to Note 2, “Summary of Significant Accounting Policies” of the Notes to the Unaudited Interim Condensed Consolidated Financial Statements in Part I, Item 1. Further information regarding the potential risks to our future results of operations are included within “Risk Factors” in Part II, Item 1A of this Form 10-Q.


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Goodwill, Intangible Assets, and Long-Lived Assets
Description
We test goodwill for impairment annually during our third fiscal quarter and whenever events or changes in circumstances indicate that the carrying amount may be impaired. Intangible assets with definite lives are amortized over their estimated useful lives. Our intangible assets principally consist of acquired technology, patents, trademarks, customer relationships and contracts, which are amortized on a straight-line basis over their useful lives ranging from three to seventeen years.

We review long-lived assets, including intangible assets, for impairment whenever events or a change in circumstances indicate that an asset’s carrying value may not be recoverable. Recoverability of an asset is measured by comparing its carrying value to the total future undiscounted cash flows that the asset is expected to generate. If it is determined that an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying value of the asset exceeds its estimated fair value.
Judgments And Uncertainties
Beginning in the third quarter of fiscal 2012, we adopted the provisions of the FASB's recently issued accounting standard (ASU 2011-08) which permits the execution of a qualitative assessment as a determinant for whether the two-step annual goodwill impairment test should be performed. In performing our annual goodwill impairment test, we first assess qualitative factors to determine whether it is more likely than not that the fair value of reporting units is less than their carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill test. In performing the qualitative assessment, we consider events and circumstances, including but not limited to, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, changes in the composition or carrying amount of a reporting unit's net assets and changes in the price of our common stock. If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then the two-step goodwill impairment test is not performed.

If the two-step goodwill test is performed, we evaluate and test our goodwill for impairment at a reporting-unit level using its fair value which is based on its expected future cash flows. Expected future cash flows reflect our best estimate of future revenue using our historical information, third-party industry data, and review of our internal operations. We also estimate operating costs using these sources. Expected future cash flows were adjusted by discount rates based on our weighted average cost of capital and related considerations. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the calculated fair value of the goodwill. A reporting unit is an operating segment or one level below.

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Revenue Recognition
Description
We enter into revenue arrangements with our customers to license technologies, trademarks and know-how and to sell products and services. We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been completed, the seller's price to the buyer is fixed or determinable and collectability is probable.
Multiple-Element Arrangements.   Some of our revenue arrangements include multiple elements (“MEs”), such as hardware, software, maintenance and other services. We evaluate each element in a multiple element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when it has standalone value and delivery of an undelivered element is both probable and within our control. When these criteria are not met, the delivered and undelivered elements are combined and the arrangement fees are allocated to this combined single unit. If the unit separation criteria are met, we account for each element within a ME arrangement (such as hardware, software, maintenance and other services) separately, whereby the total arrangement fees are allocated to each element based on its relative selling price, which we establish using a selling price hierarchy. We determine the selling price of each element based on its vendor specific objective evidence (“VSOE”), if available, third party evidence (“TPE”), if VSOE is not available, or estimated selling price (“ESP”), if neither VSOE nor TPE is available.
For some arrangements, customers receive certain elements over a period of time, after delivery of the initial product. These elements may include support and maintenance and/or the right to receive upgrades. Revenue allocated to the undelivered element is recognized either over its estimated service period or when the upgrade is delivered. We do not recognize revenue that is contingent upon the future delivery of products or services or upon future performance obligations. We recognize revenue for delivered elements only when we have completed all contractual obligations.
We determine our ESP for an individual element within a ME revenue arrangement using the same methods used to determine the selling price of an element sold on a standalone basis. If we sell the element on a standalone basis, we estimate the selling price by considering actual sales prices. Otherwise, we estimate the selling price by considering internal factors such as pricing practices and margin objectives. Consideration is also given to market conditions such as competitor pricing.
We account for the majority of our digital cinema server and processor sales as ME arrangements that may include up to four separate units, or elements, of accounting.

1. The first element consists of our digital cinema server hardware and the accompanying software, which is essential to the functionality of the hardware. This element is typically delivered at the time of sale.
2. The second element is the right to receive support and maintenance, which is included with the purchase of the hardware element and is typically delivered over a service period subsequent to the initial sale.
3. The third element is the right to receive specified upgrades, which is included with the purchase of the hardware element and is typically delivered when a specified upgrade is available, subsequent to the initial sale. Under revenue recognition accounting standards, sales of our digital cinema servers typically result in the allocation of a substantial majority of the arrangement fees to the delivered hardware element based on its ESP, which we recognize as revenue at the time of sale once delivery has occurred. A small portion of the arrangement fees are allocated to the undelivered support and maintenance element, and in some cases to the undelivered specified upgrade element, based on the VSOE or ESP of each element. The portion of the arrangement fees allocated to the support and maintenance element are recognized as revenue ratably over the estimated service period, and the portion of the arrangement fees allocated to specified upgrades are recognized as revenue upon delivery of the upgrade.
4. The fourth element is the right to receive commissioning services performed solely in connection with our digital servers necessary for the installation of Dolby Atmos-enabled theatres. These services consist of the review of venue designs specifying proposed speaker placement, as well as calibration services performed for installed speakers to ensure optimal playback. A small portion of the arrangement fee is allocated to these services based on their ESP which we recognize as revenue once the services have been completed.
Software Arrangements.  Revenue recognition for transactions that involve software, such as fees we earn from certain system licensees, may include multiple elements. For some of our ME arrangements, customers receive certain elements over a period of time or after delivery of the initial software. These elements may include support and maintenance. The fair values of these elements are recognized over the estimated period for which these elements will be delivered, which is sometimes the estimated life of the software. If we do not have VSOE of fair value for any undelivered element included in these ME arrangements for software, we defer revenue until all elements are delivered and/or services have been performed, or until we have VSOE of fair value for all remaining undelivered elements. If the undelivered element is support and we do not have fair value for the support element, revenue for the entire arrangement is bundled and recognized ratably over the support period.

In certain cases, our arrangements require the licensee to pay a fixed fee for units they may distribute in the future. These fees are generally recognized upon contract execution, unless the arrangement includes contingency terms or is considered a ME arrangement.

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Judgments And Uncertainties
Revenue recognition for transactions that may include multiple elements, such as fees we earn from certain system licensees, requires judgment in several possible areas including the following:
• Identifying the significant deliverables within the arrangements and determining whether the significant deliverables constitute separate units of accounting;
• Timing of delivery or performance of service for the significant deliverables;
• The assumptions and inputs used to determine selling price (whether vendor-specific objective evidence, third-party evidence, or estimated selling price) for the significant deliverables;
• To the extent that customers receive certain elements of the arrangement over a period of time following initial delivery, as necessary, we estimate the period of time over which revenue is recognized; and
• Whether collectability is probable. We determine collectability based on an evaluation of our customer's recent payment history, the existence of a standby letter of credit between the customer's financial institution and our financial institution, and other factors.
Income Taxes
Description
We use the asset and liability method, under which deferred income tax assets and liabilities are determined based upon the difference between the financial statement carrying amounts and the tax bases of assets and liabilities and net operating loss carryforwards and tax credits are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed.

Our policy is to recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position is sustainable upon examination by tax authorities. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets is additionally dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. We record a valuation allowance to reduce our deferred tax assets when uncertainty regarding their realizability exists.

We include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued are reduced in the period that such determination is made and are reflected as a reduction of the overall income tax provision.
Judgments And Uncertainties
We make estimates and judgments that affect our accounting for income taxes. This includes estimating actual tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences, including the timing of the recognition of stock-based compensation expense, result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent that we believe that recovery is not likely, we establish a valuation allowance.

Significant judgment is required in determining the provision for income taxes, the deferred tax asset and liability balances, the valuation allowance against our deferred tax assets and the reserve resulting from uncertainties in income tax positions. Our financial position and results of operations may be materially affected if actual results differ significantly from these estimates or if the estimates are adjusted in future periods.

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Investments
Description
Valuation.   Our investments are recorded at fair value in our consolidated balance sheets. 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 evaluate our investment portfolio for credit losses and other-than-temporary impairments by comparing the fair value with the cost basis for each of our investment securities. An investment is impaired if the fair value is less than its cost basis. If any portion of the impairment is deemed to be the result of a credit loss, the credit loss portion of the impairment is included as a component of net income. If we deem it probable that we will not recover the full cost basis of the security, the security is other-than-temporarily impaired and the impairment loss is recognized as a component of net income. The degree to which estimates and judgment are used in determining fair value is generally dependent upon the market pricing information available for the investments, the availability of observable inputs and input from independent third parties, the frequency of trading in the investments, and the investment’s complexity. If different judgments regarding inputs were made, we could potentially reach different conclusions regarding the fair value of our investments.

Classification.   All of our investments are classified as available-for-sale securities, with the exception of our investments held in our supplemental retirement plan, which are classified as trading securities. Investments that have an original maturity of 91 days or more at the date of purchase and a current maturity of less than one year are classified as short-term investments, while investments with a current maturity of more than one year are classified as long-term investments.

We classify our financial assets and liabilities measured at fair value using a three-level hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that reflect the assumptions market participants would use in pricing the investment that are based on market data obtained from sources independent of the reporting entity, such as market quoted prices.
Judgments And Uncertainties
The degree to which estimates and judgment are used in determining fair value, is generally dependent upon the market pricing information available for the investments, the availability of observable inputs, the frequency of trading in the investments and the investment’s complexity. If different judgments regarding inputs were made, we could potentially reach different conclusions regarding the fair value of our investments.

GAAP establishes a three-level hierarchy prioritizing the observable inputs used in measuring the fair value of financial assets and liabilities as follows: the fair value hierarchy gives the highest priority to quoted prices in active markets that are accessible by us at the measurement date for identical investments, described as Level 1, and the lowest priority to valuation techniques using unobservable inputs, described as Level 3. 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. Fair value from this professional pricing source can also be based on pricing models whereby all significant inputs, including maturity dates, issue dates, settlement dates, benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and other market related data, are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset.

Stock-Based Compensation
Description
We determine the expense for all employee stock-based compensation awards by estimating their fair value and recognizing that value as an expense, on a ratable basis, in our consolidated financial statements over the requisite service period in which our employees earn the awards. We use the Black-Scholes option pricing model to determine the fair value of employee stock options at the date of the grant.
Judgments And Uncertainties
To determine the fair value of a stock-based award using the Black-Scholes option pricing model, we make assumptions regarding the expected term of the award, the expected future volatility of our stock price over the expected term of the award, and the risk-free interest rate over the expected term of the award. We estimate the expected term of our stock-based awards by evaluating historical exercise patterns of our employees. We use a blend of the historical volatility of our common stock and the implied volatility of our traded options as an estimate of the expected volatility of our stock price over the expected term of the awards. We use an average interest rate based on U.S. Treasury instruments with terms consistent with the expected term of our awards to estimate the risk-free interest rate. We reduce the stock-based compensation expense for estimated forfeitures based on our historical experience. We are required to estimate forfeitures at the time of the grant and revise our estimate, if necessary, in subsequent periods if actual forfeitures differ from our estimate.
Recently Issued Accounting Standards
With the exception of the FASB's newly issued standard on Revenue Recognition that becomes effective for us beginning in fiscal 2018, there have not been any new accounting pronouncements which are not yet effective that have significance, or potential significance, to our unaudited interim condensed consolidated financial statements.


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RESULTS OF OPERATIONS
For each line item included on our consolidated statement of operations, we have provided both quarter and year-to-date comparative analysis within this section. The "Quarter-To-Date: Q3'14 vs. Q3'13" analysis compares results from the fiscal quarter ended June 27, 2014 with those of the fiscal quarter ended June 28, 2013, while the "Year-To-Date: Q3'14 vs. Q3'13" analysis compares results from the fiscal year-to-date period ended June 27, 2014 with those from the fiscal year-to-date period ended June 28, 2013. The significant factors identified as the leading drivers contributing to the fluctuation are presented in descending order according to the magnitude of their impact on the overall change.
Revenue and Gross Margin
Licensing
Licensing revenue consists of fees earned from licensing our technologies to customers who incorporate them into their products to enable and enhance audio and video capabilities. The technologies that we license are either internally developed, acquired, or licensed from third parties. Our cost of licensing consists mainly of amortization of purchased intangible assets and intangible assets acquired in business combinations as well as third party royalty obligations paid to license intellectual property that we then sublicense to our customers.
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
Licensing
June 27,
2014
June 28,
2013
$
%
 
June 27,
2014
June 28,
2013
$
%
Revenue
$205,625
$184,707
$20,918
11%
 
$669,901
$616,038
$53,863
9%
Percentage Of Total Revenue
92%
89%
 
 
 
92%
89%
 
 
Cost Of Licensing
4,389
4,053
336
8%
 
12,132
13,542
(1,410)
(10)%
Gross Margin
201,236
180,654
20,582
11%
 
657,769
602,496
55,273
9%
Gross Margin Percentage
98%
98%
 
 
 
98%
98%
 
 

Quarter-To-Date: Q3'14 vs. Q3'13
Factor
Revenue
Gross Margin
Broadcast
á
Higher volumes of TV and STB shipments that incorporate our technologies and an increase in back payments received for royalties and settlements
ßà
Unchanged
Mobile
á
Increase in shipment volumes of mobile devices that incorporate our technologies, including tablet unit growth and mobile phone revenue
PC
â
Lower unit shipments from continued declines in the underlying PC market
Other
â
Non-recurring revenue recognized in the third quarter of fiscal 2013 from a licensing arrangement for certain imaging technologies outside of our core markets
á
Higher revenues from our gaming market largely attributable to the new PlayStation 4 and Xbox One video game consoles that were launched in late 2013
CE
á
Net overall increase in shipment volumes of products that incorporate our technologies

Year-To-Date: Q3'14 vs. Q3'13
Factor
Revenue
Gross Margin
Broadcast
á
Increase in net back payments received for royalties and settlements and higher volumes of TV and STB shipments that incorporate our technologies
ßà
Unchanged
PC
â
Lower unit shipments from continued declines in the underlying PC market and the transition to the Windows 8 business model
Mobile
á
Increase in shipment volumes of mobile devices, including unit growth of tablets and mobile phones that incorporate our technologies
CE
á
Increase in revenue from DVD, digital media adapters and other products that incorporate our technologies, partially offset by a decrease in shipment volumes of Blu-ray Disc devices
Other
á
Higher revenues from our gaming market largely attributable to the new PlayStation 4 and Xbox One video game consoles that were launched in late 2013
â
Non-recurring revenue recognized in the third quarter of fiscal 2013 from a licensing arrangement for certain imaging technologies outside of our core markets

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Products
Products revenue is generated from the sale of audio and video products for the film production, cinema, and television broadcast industries. Cost of products consists primarily of the cost of materials related to products sold, applied labor and manufacturing overhead, and, to a lesser extent, amortization of certain intangible assets. Our cost of products also includes third party royalty obligations paid to license intellectual property that we include in our products.
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
Products
June 27,
2014
June 28,
2013
$
%
 
June 27,
2014
June 28,
2013
$
%
Revenue
$12,971
$17,381
$(4,410)
(25)%
 
$45,638
$60,605
$(14,967)
(25)%
Percentage Of Total Revenue
6%
8%
 
 
 
6%
9%
 
 
Cost Of Products
10,860
16,269
(5,409)
(33)%
 
34,941
47,964
(13,023)
(27)%
Gross Margin
2,111
1,112
999
90%
 
10,697
12,641
(1,944)
(15)%
Gross Margin Percentage
16%
6%
 
 
 
23%
21%
 
 

Quarter-To-Date: Q3'14 vs. Q3'13
Factor
Revenue
Gross Margin
Digital Cinema - Video
â
Lower unit shipments and lower average selling prices
á
Lower unit costs, partially offset by lower average selling prices
3D Cinema
â
Lower shipments of 3D adapter equipment and lower average selling prices for glasses
â
Less favorable product mix and lower average selling prices, partially offset by lower unit costs
Digital Cinema - Audio
â
Lower unit shipments and lower average selling prices
á
Improved product mix as well as lower unit costs, partially offset by lower average selling prices
Other
No material fluctuations
á
Lower overhead costs, lower excess manufacturing capacity, and a decrease in amortization expense

Year-To-Date: Q3'14 vs. Q3'13
Factor
Revenue
Gross Margin
Digital Cinema - Video
â
Lower unit shipments and lower average selling prices
á
Lower unit costs, improved product mix, and to a lesser extent, recognition of previously deferred revenue in the current fiscal year-to-date period which had only minimal associated deferred costs
Digital Cinema - Audio
â
Lower unit shipments and lower average selling prices on digital cinema audio processors
á
Improved product mix with shift toward higher margin products
á
Increased shipments of Dolby Atmos processors and recognition of previously deferred revenue
3D Cinema
â
Lower shipments of glasses and adapter equipment and lower average selling prices for adapter equipment, partially offset by the recognition of previously deferred revenue in the current fiscal year
â
Less favorable product mix, partially offset by higher average selling prices and lower unit costs
â
Lower average selling prices for 3D adapter equipment
Other
No material fluctuations
á
Lower excess manufacturing capacity and lower amortization expense, partially offset by higher overhead costs
Services
Services revenues consists of fees for consulting, commissioning and training services in support of film production and television broadcast. Cost of services primarily consists of personnel and personnel-related costs for employees performing our professional services, the cost of outside consultants, and other direct expenses incurred on behalf of customers.
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
Services
June 27,
2014
June 28,
2013
$
%
 
June 27,
2014
June 28,
2013
$
%
Revenue
$4,754
$4,986
$(232)
(5)%
 
$17,680
$16,379
$1,301
8%
Percentage Of Total Revenue
2%
3%
 
 
 
2%
2%
 
 
Cost Of Services
3,620
4,018
(398)
(10)%
 
10,683
11,722
(1,039)
(9)%
Gross Margin
1,134
968
166
17%
 
6,997
4,657
2,340
50%
Gross Margin Percentage
24%
19%
 
 
 
40%
28%
 
 


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Quarter-To-Date: Q3'14 vs. Q3'13
Factor
Revenue
Gross Margin
Configuration & Post-Production
â
Lower revenue from mastering services, partially offset by an increase in Dolby Atmos commissioning services
á
Decreased installation expenses as the prior comparative period reflected higher labor costs to prepare exhibitor facilities

Year-To-Date: Q3'14 vs. Q3'13
Factor
Revenue
Gross Margin
Film-Based Production
á
Driven by the release of deferred revenue, partially offset by declines in film-based production services
á
Lower labor and other related costs.
Configuration & Post-Production
â
Lower revenue from mastering services, partially offset by an increase in Dolby Atmos commissioning services and maintenance and support services
á
Decreased installation expenses as the prior comparative period reflected higher labor costs to prepare exhibitor facilities
Operating Expenses
Research & Development
Research and Development ("R&D") expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, consulting and contract labor costs, depreciation and amortization, facilities costs, costs for outside materials and services, and information technology expenses.
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
June 27,
2014
June 28,
2013
$
%
 
June 27,
2014
June 28,
2013
$
%
Research and Development
$46,786
$42,915
$3,871
9%
 
$136,047
$127,299
$8,748
7%
Percentage of total revenue
21%
21%
 
 
 
19%
18%
 
 

Quarter-To-Date: Q3'14 vs. Q3'13
Category
Key Drivers
Compensation & Benefits
á
Higher employee headcount aimed at developing new product and technology offerings and related expenses, merit increases and higher variable compensation costs
Consulting & External Labor
â
Lower one-time costs related primarily to the funding of various research projects and initiatives

Year-To-Date: Q3'14 vs. Q3'13
Category
Key Drivers
Compensation & Benefits
á
Higher employee headcount aimed at developing new product and technology offerings and related expenses, merit increases and higher variable compensation costs
Consulting & External Labor
â
Lower one-time costs related primarily to the funding of various research projects and initiatives
Travel-related Expenses
á
Higher travel-related expenses in connection with developing new offerings

Sales & Marketing
Sales and Marketing ("S&M") expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, marketing and promotional expenses particularly for events such as trade shows and conferences, travel-related expenses for our sales and marketing personnel, consulting fees, facilities costs, depreciation and amortization, and information technology expenses.
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
June 27,
2014
June 28,
2013
$
%
 
June 27,
2014
June 28,
2013
$
%
Sales and Marketing
$63,602
$58,528
$5,074
9%
 
$188,809
$175,079
$13,730
8%
Percentage of total revenue
29%
28%
 
 
 
26%
25%
 
 


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Quarter-To-Date: Q3'14 vs. Q3'13
Category
Key Drivers
Compensation & Benefits
á