10-Q - Q1 '15
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 December 26, 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 January 23, 2015, the registrant had 51,511,456 shares of Class A common stock, par value $0.001 per share, and 51,081,217 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 December 26, 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)


 
December 26,
2014
September 26,
2014
ASSETS
(unaudited)
 
Current assets:
 
 
Cash and cash equivalents
$
409,115

$
568,472

Restricted cash
2,040

2,142

Short-term investments
211,443

231,208

Accounts receivable, net of allowance for doubtful accounts of $1,203 and $1,615
117,240

86,168

Inventories
28,291

8,536

Deferred taxes
86,937

86,445

Prepaid expenses and other current assets
37,092

22,880

Total current assets
892,158

1,005,851

Long-term investments
318,448

296,335

Property, plant and equipment, net
330,249

289,755

Intangible assets, net
108,220

63,700

Goodwill
315,791

277,574

Deferred taxes
48,212

41,746

Other non-current assets
9,341

9,051

Total assets
$
2,022,419

$
1,984,012

 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
Accounts payable
$
9,973

$
15,898

Accrued liabilities
159,360

158,376

Income taxes payable
1,754

2,600

Deferred revenue
21,236

12,496

Total current liabilities
192,323

189,370

Long-term deferred revenue
23,203

19,279

Other non-current liabilities
55,793

43,715

Total liabilities
271,319

252,364

 
 
 
Stockholders’ equity:
 
 
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 51,482,817 shares issued and outstanding at December 26, 2014 and 50,658,627 at September 26, 2014
52

51

Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 51,081,624 shares issued and outstanding at December 26, 2014 and 51,610,239 at September 26, 2014
51

52

Additional paid-in capital
45,479

46,415

Retained earnings
1,691,614

1,660,485

Accumulated other comprehensive income
(2,188
)
3,014

Total stockholders’ equity – Dolby Laboratories, Inc.
1,735,008

1,710,017

Controlling interest
16,092

21,631

Total stockholders’ equity
1,751,100

1,731,648

Total liabilities and stockholders’ equity
$
2,022,419

$
1,984,012

See accompanying notes to unaudited interim condensed consolidated financial statements

3

Table of Contents


DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

 
 
Fiscal Quarter Ended
 
December 26,
2014
December 27,
2013
Revenue:
(unaudited)
(unaudited)
Licensing
$
216,598

$
205,660

Products
13,263

18,104

Services
4,377

7,513

Total revenue
234,238

231,277

 
 
 
Cost of revenue:
 
 
Cost of licensing
3,481

4,001

Cost of products
12,584

13,788

Cost of services
3,345

3,593

Total cost of revenue
19,410

21,382

 
 
 
Gross margin
214,828

209,895

 
 
 
Operating expenses:
 
 
Research and development
48,594

44,463

Sales and marketing
68,018

60,379

General and administrative
44,716

41,908

Restructuring charges/(credits)
(39
)
3,215

Total operating expenses
161,289

149,965

 
 
 
Operating income
53,539

59,930

 
 
 
Other income/expense:
 
 
Interest income
900

654

Interest expense
(15
)
(112
)
Other income/(expense), net
(108
)
229

Total other income/expense
777

771

 




Income before income taxes
54,316

60,701

Provision for income taxes
(12,379
)
(15,455
)
Net income including controlling interest
41,937

45,246

Less: net (income) attributable to controlling interest
(580
)
(731
)
Net income attributable to Dolby Laboratories, Inc.
$
41,357

$
44,515

 
 
 
Net Income Per Share:
 
 
Basic
$
0.40

$
0.44

Diluted
$
0.40

$
0.43

Weighted-Average Shares Outstanding:
 
 
Basic
102,303

101,750

Diluted
104,275

103,192

 
 
 
Related party rent expense:
 
 
Included in operating expenses
$
788

$
346

Included in net income attributable to controlling interest
$
1,153

$
1,255

 
 
 
Cash dividend declared per common share
$
0.10

$

See accompanying notes to unaudited interim condensed consolidated financial statements

4

Table of Contents


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

 
Fiscal Quarter Ended
 
December 26,
2014
December 27,
2013
 
(unaudited)
(unaudited)
Net income including controlling interest
$
41,937

$
45,246

Other comprehensive income:
 
 
Foreign currency translation adjustments, net of tax
(5,553
)
(390
)
Unrealized gains/(losses) on available-for-sale securities, net of tax
(177
)
105

Comprehensive income
36,207

44,961

Less: comprehensive (income) attributable to controlling interest
(52
)
(875
)
Comprehensive income attributable to Dolby Laboratories, Inc.
$
36,155

$
44,086


See accompanying notes to unaudited interim condensed consolidated financial statements


5

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 26, 2014
$
103

$
46,415

$
1,660,485

$
3,014

$
1,710,017

$
21,631

$
1,731,648

Net income


41,357


41,357

580

41,937

Currency translation adjustments, net of tax of $528



(5,025
)
(5,025
)
(528
)
(5,553
)
Unrealized gains on investments, net of tax of $180



(177
)
(177
)

(177
)
Distributions to controlling interest





(5,591
)
(5,591
)
Stock-based compensation expense

17,842



17,842


17,842

Repurchase of common stock
(1
)
(16,952
)


(16,953
)

(16,953
)
Cash dividends declared and paid on common stock


(10,228
)

(10,228
)

(10,228
)
Tax benefit from employee stock plans

1,509



1,509


1,509

Common stock issued under employee stock plans
1

7,510



7,511


7,511

Tax withholdings on vesting of restricted stock

(10,846
)


(10,846
)

(10,846
)
Exercise of Class B stock options

1



1


1

Balance at December 26, 2014
$
103

$
45,479

$
1,691,614

$
(2,188
)
$
1,735,008

$
16,092

$
1,751,100



 
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


44,515


44,515

731

45,246

Currency translation adjustments, net of tax of $(61)



(534
)
(534
)
144

(390
)
Unrealized losses on investments, net of tax of $(58)



105

105


105

Stock-based compensation expense

15,054



15,054


15,054

Repurchase of common stock

(11,660
)


(11,660
)

(11,660
)
Tax deficiency from employee stock plans

(11
)


(11
)

(11
)
Common stock issued under employee stock plans
1

8,088



8,089


8,089

Tax withholdings on vesting of restricted stock

(6,727
)


(6,727
)

(6,727
)
Exercise of Class B stock options

38



38


38

Balance at December 27, 2013
$
103

$
23,594

$
1,498,897

$
7,385

$
1,529,979

$
19,791

$
1,549,770


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)
 
Fiscal Quarter Ended
 
December 26,
2014
December 27,
2013
Operating activities:
(unaudited)
(unaudited)
Net income including controlling interest
$
41,937

$
45,246

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
16,524

12,409

Stock-based compensation
17,842

15,054

Amortization of premium on investments
2,391

2,266

Excess tax benefit from exercise of stock options
(1,944
)
(1,010
)
Provision for doubtful accounts
(376
)
374

Deferred income taxes
(6,310
)
(1,322
)
Other non-cash items affecting net income
653

105

Changes in operating assets and liabilities:
 
 
Accounts receivable
(22,442
)
21,148

Inventories
(2,997
)
2,225

Prepaid expenses and other assets
(4,473
)
(1,631
)
Accounts payable and other liabilities
(46,801
)
(16,696
)
Income taxes, net
3,692

4,795

Deferred revenue
4,452

(5,897
)
Other non-current liabilities
1,297

216

Net cash provided by operating activities
3,445

77,282

 
 
 
Investing activities:
 
 
Purchase of investments
(110,508
)
(102,717
)
Proceeds from sales of investment securities
63,454

27,426

Proceeds from maturities of investment securities
42,700

46,739

Purchases of property, plant and equipment
(21,661
)
(8,967
)
Payments for business acquisitions, net of cash acquired
(93,516
)

Purchase of intangible assets
(6,416
)

Proceeds from sale of property, plant and equipment and assets held for sale
3

42

Change in restricted cash
102

(174
)
Net cash used in investing activities
(125,842
)
(37,651
)
 
 
 
Financing activities:
 
 
Proceeds from issuance of common stock
7,512

8,127

Repurchase of common stock
(16,953
)
(11,660
)
Payment of cash dividend
(10,228
)

Distribution to controlling interest
(5,591
)

Excess tax benefit from the exercise of stock options
1,944

1,010

Shares repurchased for tax withholdings on vesting of restricted stock
(10,846
)
(6,727
)
Net cash used in financing activities
(34,162
)
(9,250
)
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
(2,798
)
(138
)
Net increase/(decrease) in cash and cash equivalents
(159,357
)
30,243

Cash and cash equivalents at beginning of period
568,472

454,397

Cash and cash equivalents at end of period
$
409,115

$
484,640

 
 
 
Supplemental disclosure:
 
 
Cash paid for income taxes, net of refunds received
$
13,739

$
11,593

Cash paid for interest
$
3

$
1

 
 
 
Non-cash investing and financing activities:
 
 
Capital expenditures incurred, not yet paid
$
33,260

$
8,770

Receivable for working capital adjustment from acquisition
$
4,220

$

Purchase consideration payable for acquisition
$
740

$

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 26, 2014 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 26, 2014, which are included in our Annual Report on Form 10-K filed with the SEC.
The results for the fiscal quarter ended December 26, 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 25, 2015.
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 week periods ended December 26, 2014 and December 27, 2013. Our fiscal year ending September 25, 2015 (fiscal 2015) and our fiscal year ended September 26, 2014 (fiscal 2014) both consist of 52 weeks.

8

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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
All recently pronounced accounting standards applicable to, and adopted by Dolby have been previously disclosed as part of a quarterly or annual filing from prior periods. Accounting pronouncements that were adopted and disclosed in prior periods have not had a significant impact on our unaudited interim condensed consolidated financial statements or notes thereto, and have 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 26, 2014.
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 December 26, 2014 and September 26, 2014 (amounts displayed in thousands, except as otherwise noted).
Accounts Receivable
Accounts Receivable, Net
December 26,
2014
September 26,
2014
Trade accounts receivable
$109,825
$78,189
Accounts receivable from patent administration program partners
8,618
9,594
Accounts Receivable, Gross
118,443
87,783
Less: allowance for doubtful accounts
(1,203)
(1,615)
Total
$117,240
$86,168
Inventories
Inventories
December 26,
2014
September 26,
2014
Raw materials
$9,960
$1,013
Work in process
5,087
47
Finished goods
13,244
7,476
Total
$28,291
$8,536

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 $1.8 million and $1.7 million of raw materials inventory within other non-current assets in our consolidated balance sheets as of December 26, 2014 and September 26, 2014, respectively. Based on anticipated inventory consumption rates, and aside from existing write-downs due to excess inventory, we do not believe that material risk of obsolescence exists prior to ultimate sale.

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Prepaid Expenses And Other Current Assets
Prepaid Expenses And Other Current Assets
December 26,
2014
September 26,
2014
Prepaid expenses
$13,774
$11,665
Other current assets
13,367
7,152
Income tax receivable
9,951
4,063
Total
$37,092
$22,880

Other current assets as of December 26, 2014 include the $0.9 million carrying value of a parcel of land that we intend to sell within the next twelve months. As of September 26, 2014, the carrying value of this parcel of land was $1.0 million.
Accrued Liabilities
Accrued Liabilities
December 26,
2014
September 26,
2014
Accrued royalties
$2,568
$2,526
Amounts payable to patent administration program partners
41,998
43,438
Accrued compensation and benefits
45,483
71,677
Accrued professional fees
4,439
6,162
Other accrued liabilities
64,872
34,573
Total
$159,360
$158,376
Other accrued liabilities include the accrual for unpaid property, plant and equipment additions of $33.3 million and $8.7 million as of December 26, 2014 and September 26, 2014, respectively.
Other Non-Current Liabilities
Other Non-Current Liabilities
December 26,
2014
September 26,
2014
Supplemental retirement plan obligations
$2,372
$2,409
Non-current tax liabilities
39,690
30,715
Other liabilities
13,731
10,591
Total
$55,793
$43,715

4. Investments & Fair Value Measurements
Investment Strategy.    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, short-term investments, 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, corporate and government bonds (domestic and international), United States agency securities and commercial paper. 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.

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Our cash and investment portfolio, which is recorded as cash equivalents and both short and long-term investments, consists of the following (in thousands):
 
December 26,
2014
 
Cost
Unrealized
 
 
Estimated Fair Value
 
Gains
Losses
Total
 
Level 1
Level 2
Level 3
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash
$
406,849

 
 
$
406,849

 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
2,266



2,266

 
2,266

 
 
Cash and cash equivalents
409,115



409,115


2,266



 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Government bonds
3,509

4


3,513

 
3,513

 
 
Commercial paper
8,996

1

(1
)
8,996

 
 
8,996

 
Corporate bonds
88,447

57

(56
)
88,448

 
 
88,448

 
Municipal debt securities
110,310

176


110,486

 
 
110,486

 
Short-term investments
211,262

238

(57
)
211,443


3,513

207,930


 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
U.S. agency securities
4,999


(1
)
4,998

 
4,998

 
 
Government bonds
13,733


(40
)
13,693

 
13,693

 
 
Corporate bonds
140,883

95

(263
)
140,715

 
 
140,715

 
Municipal debt securities
157,419

217

(144
)
157,492

 
 
157,492

 
Other long-term investments (2)
500

1,050


1,550

 
1,050

 


Long-term investments
317,534

1,362

(448
)
318,448


19,741

298,207


 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, and investments (1)
$
937,911

$
1,600

$
(505
)
$
939,006

 
$
25,520

$
506,137

$

 
 
 
 
 
 
 
 
 
Investments held in supplemental retirement plan:
 
 
 
 
 
 
 
 
Assets
2,554



2,554

 
2,554

 
 
Included in prepaid expenses and other current assets & other non-current assets
 
 
 
 
 
Liabilities
2,554



2,554

 
2,554

 
 
Included in accrued liabilities & other non-current liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration related to acquisition:
 
 
 
 
 
 
 
 
Liabilities
740



740

 


 
740

Included in accrued liabilities
 
 
 
 
 
(1)
Total cash, cash equivalents, and investments exclude $2.0 million of restricted cash as of December 26, 2014.
(2)
Other long-term investments as of December 26, 2014 include a cost method investment of $0.5 million that was made during fiscal 2014 in addition to a $1.1 million fair value write-up adjustment made during the first quarter of fiscal 2015 for a marketable equity security.

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Table of Contents


 
September 26,
2014
 
Cost
Unrealized
 
 
Estimated Fair Value
 
Gains
Losses
Total
 
Level 1
Level 2
Level 3
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash
$
564,745





$
564,745

 






Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
1,727



1,727

 
1,727





Commercial paper
2,000



2,000

 


2,000



Cash and cash equivalents
568,472



568,472

 
1,727

2,000


 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
U.S. agency securities
35,443

5

(3
)
35,445

 
35,445





Commercial paper
21,788



21,788

 


21,788



Corporate bonds
56,106

81

(10
)
56,177

 


56,177



Municipal debt securities
117,606

197

(5
)
117,798

 


117,798



Short-term investments
230,943

283

(18
)
231,208

 
35,445

195,763


 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
U.S. agency securities
31,980

19

(6
)
31,993

 
31,993





Corporate bonds
117,063

226

(80
)
117,209

 


117,209



Municipal debt securities
146,337

326

(30
)
146,633

 


146,633



Other long-term investments (2)
500



500

 






Long-term investments
295,880

571

(116
)
296,335

 
31,993

263,842


 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, and investments (1)
$
1,095,295

$
854

$
(134
)
$
1,096,015

 
$
69,165

$
461,605

$

 
 
 
 
 
 
 
 
 
Investments held in supplemental retirement plan:
 
 
 
 
 
 
 
 
Assets
2,507



2,507

 
2,507





Included in prepaid expenses and other current assets & other non-current assets
 
 
 
 
 
Liabilities
2,507



2,507

 
2,507





Included in accrued liabilities & other non-current liabilities
 
 
 
 
 
(1)
Total cash, cash equivalents, and investments exclude $2.1 million of restricted cash as of September 26, 2014.
(2)
Other long-term investments as of September 26, 2014 include a cost method investment of $0.5 million that was made during fiscal 2014.
Fair Value Hierarchy.    Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. We minimize the use of unobservable inputs and use observable market data, if available, when determining fair value. We classify our inputs to measure fair value using the following three-level hierarchy:
Level 1: Quoted prices in active markets at the measurement date for identical assets and liabilities. We base the fair value of our Level 1 financial instruments, which are traded in active markets, using quoted market prices for identical instruments.
Level 2: Prices may be based upon quoted prices in active markets or inputs not quoted on active markets but are corroborated by market data. We obtain the fair value of our Level 2 financial instruments from a professional pricing service, which may use quoted market prices for identical or comparable instruments, or model driven valuations using observable market data or inputs corroborated by observable market data. To validate the fair value determination provided by our primary pricing service, we perform quality controls over values received which include comparing our pricing service provider’s assessment of the fair values of our investment securities against the fair values of our investment securities obtained from another independent source, reviewing the pricing movement in the context of overall market trends, and reviewing trading information from our investment managers. In addition, we assess the inputs and methods used in determining the fair value in order to determine the classification of securities in the fair value hierarchy.
Level 3: Unobservable inputs are used when little or no market data is available and reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. We have not historically owned any Level 3 financial assets or liabilities, as was the case at September 26, 2014. As of December 26, 2014, the estimated fair value of our contingent consideration liability related to the Doremi acquisition was classified as a level 3 investment. For additional information on the contingent consideration liability, refer to Note 13Acquisitions” to our consolidated financial statements.

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Securities In Gross Unrealized Loss Position.    We periodically evaluate our investments for other-than- temporary declines in fair value. 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. The following table presents the gross unrealized losses and fair value for those available-for-sale securities that were in an unrealized loss position as of December 26, 2014 and September 26, 2014 (in thousands):
 
December 26, 2014
 
September 26, 2014
Investment Type
Fair Value
Gross Unrealized Losses (1)
 
Fair Value
Gross Unrealized Losses (1)
U.S. agency securities
$18,692
$(41)
 
$31,930
$(9)
Commercial paper
3,996
(1)
 
Corporate bonds
177,838
(319)
 
78,166
(90)
Municipal debt securities
76,981
(144)
 
55,979
(35)
Total
$277,507
$(505)
 
$166,075
$(134)
(1)
Our available-for-sale securities in an unrealized loss position were in such position for less than twelve months as of both December 26, 2014 and September 26, 2014.
Although we had certain securities that were in an unrealized loss position as of December 26, 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 either December 26, 2014 or September 26, 2014 to represent an other-than-temporary impairment, nor do we consider any of the unrealized losses to be credit losses.
Investment Maturities.    The following table summarizes the amortized cost and estimated fair value of the available-for-sale securities within our investment portfolio based on stated maturities as of December 26, 2014 and September 26, 2014, which are recorded within cash equivalents and both short and long-term investments in our consolidated balance sheets (in thousands):
 
December 26, 2014
 
September 26, 2014
Range of maturity
Amortized Cost
Fair Value
 
Amortized Cost
Fair Value
Due within 1 year
$
211,262

$
211,443

 
$
232,944

$
233,208

Due in 1 to 2 years
176,989

177,073

 
179,177

179,536

Due in 2 to 3 years
140,023

139,803

 
116,204

116,299

Total
$
528,274

$
528,319

 
$
528,325

$
529,043


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5. Property, Plant & Equipment
Property, plant and equipment are recorded at cost, with depreciation expense included in cost of products, cost of services, research & development expenses, sales & marketing expenses and general & administrative expenses in our consolidated statements of operations. Property, plant and equipment consist of the following (in thousands):
Property, Plant And Equipment
December 26,
2014
 
September 26,
2014
Land
$
49,697

 
$
45,842

Buildings and building improvements
175,055

 
61,712

Leasehold improvements
56,251

 
56,665

Machinery and equipment
49,323

 
47,639

Computer systems and software
112,437

 
108,225

Furniture and fixtures
13,441

 
13,540

Construction-in-progress
54,453

 
127,569

Property, Plant And Equipment, Gross
510,657

 
461,192

Less: accumulated depreciation
(180,408
)
 
(171,437
)
Property, Plant And Equipment, Net
$
330,249

 
$
289,755

Purchase Of 1275 Market Commercial Office Building In San Francisco, CA.    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. Following the purchase, we began a process of making substantial improvements to the building in order to prepare it for its intended use as our new worldwide headquarters. While we are still in the process of making these improvements, the first phase of construction was completed and we occupied a portion of the building during the first quarter of fiscal 2015. As of September 26, 2014, construction-in-progress included both the book value of the building and costs for ongoing construction while as of December 26, 2014, construction-in-progress included only costs for ongoing construction.

6. Goodwill & Intangible Assets
Goodwill
The following table outlines changes to the carrying amount of goodwill (in thousands):
 
Goodwill
Balance at September 26, 2014
$
277,574

Acquired goodwill (preliminary) (1)
40,600

Translation adjustments
(2,383
)
Balance at December 26, 2014
$
315,791

(1)
Total acquired goodwill recorded during the first quarter of fiscal 2015 consists of $39.9 million from the acquisition of Doremi Labs and $0.7 million related to an immaterial acquisition completed during the quarter.
Intangible Assets
Intangible assets subject to amortization consist of the following (in thousands):
 
December 26, 2014
 
September 26, 2014
Intangible Assets, Net
Cost
Accumulated
Amortization
Net
 
Cost
Accumulated
Amortization
Net
Acquired patents and technology
$
140,830

$
(64,708
)
$
76,122

 
$
99,262

$
(61,678
)
$
37,584

Customer relationships
53,723

(23,894
)
29,829

 
30,717

(22,739
)
7,978

Other intangibles
23,470

(21,201
)
2,269

 
38,694

(20,556
)
18,138

Total
$
218,023

$
(109,803
)
$
108,220

 
$
168,673

$
(104,973
)
$
63,700

During the first quarter of fiscal 2015, we purchased various patents and developed technology for total cash consideration of approximately $6.4 million. These intangible assets have a weighted-average useful life of 18 years. These acquisitions facilitate our research & development efforts, technologies and potential product offerings.
Amortization expense for our intangible assets is included in cost of licensing, cost of products, research & development and sales & marketing expenses in our consolidated statements of operations. As of December 26,

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2014, expected amortization expense in future fiscal periods was as follows (in thousands):
Fiscal Year
 Amortization Expense
Remainder Of 2015
$
14,979

2016
17,253

2017
14,250

2018
8,870

2019
8,198

Thereafter
44,670

Total
$
108,220


7. Stockholders' Equity & Stock-Based Compensation
We provide stock-based awards as a form of compensation for employees, officers and directors. We have issued stock-based awards in the form of stock options and restricted stock units ("RSUs") under our equity incentive plans, as well as shares under our Employee Stock Purchase Plan (“ESPP”).
Common Stock - Class A and Class B
Our Board of Directors has authorized two classes of common stock, Class A and Class B. At December 26, 2014, we had authorized 500,000,000 Class A shares and 500,000,000 Class B shares. At December 26, 2014, we had 51,482,817 shares of Class A common stock and 51,081,624 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 December 26, 2014, there were options outstanding to purchase 372 shares of Class B common stock, all of which were vested and exercisable, with a remaining weighted-average contractual life of 0.1 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 December 26, 2014, there were options outstanding to purchase 9.8 million shares of Class A common stock, of which 3.8 million were vested and exercisable. The options outstanding have a remaining weighted-average contractual life of 7.9 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

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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.
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 26, 2014
7,611

$
32.96

 
 
Grants
2,326

42.91

 
 
Exercises
(122
)
28.70

 
 
Forfeitures and cancellations
(49
)
33.57

 
 
Options outstanding at December 26, 2014
9,766

35.30

7.9
$
86,537

Options vested and expected to vest at December 26, 2014
9,519

35.28

7.9
85,285

Options exercisable at December 26, 2014
3,826

$
30.96

6.2
51,138

(1)
Aggregate intrinsic value is based on the closing price of our common stock on December 26, 2014 of $44.17 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 December 26, 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 26, 2014
2,903
$35.79
Granted
1,047
42.89
Vested
(686)
35.80
Forfeitures
(36)
33.59
Non-vested at December 26, 2014
3,228
$38.12
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.

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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.
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 quarterly dividend payout over the expected term of our option awards.
The weighted-average assumptions used in the determination of the fair value of our stock options were as follows:
 
Fiscal Quarter Ended
 
December 26,
2014
December 27,
2013
Expected term (in years)
4.58
4.57
Risk-free interest rate
1.5%
1.4%
Expected stock price volatility
29.7%
31.9%
Dividend yield
0.9%
—%
Compensation Expense
Stock-based compensation expense for equity awards granted to employees is determined by estimating their fair value on the date of grant, and recognizing that value as an expense on a straight-line basis over the requisite service period in which our employees earn the awards. Compensation expense related to these equity awards is recognized net of estimated forfeitures, which reduce the expense recorded in the consolidated statements of operations. The selection of applicable estimated forfeiture rates is based on an evaluation of trends in our historical forfeiture data with consideration for other potential driving factors. If in subsequent periods actual forfeitures significantly differ from our initial estimates, we will revise such estimates accordingly.
The following two tables separately present stock-based compensation expense both by award type and classification in our consolidated statements of operations (in thousands):

17

Table of Contents


Compensation Expense - By Award Type
 
Fiscal Quarter Ended
 
December 26,
2014
December 27,
2013
Compensation Expense - By Type
 
 
Stock options
$6,283
$3,870
Restricted stock units
10,215
10,257
Employee stock purchase plan
1,344
927
Total stock-based compensation
17,842
15,054
Benefit from income taxes
(5,151)
(4,396)
Total stock-based compensation, net of tax
$12,691
$10,658
Compensation Expense - By Income Statement Line Item Classification
 
Fiscal Quarter Ended
 
December 26,
2014
December 27,
2013
Compensation Expense - By Classification
 
 
Cost of products
$246
$190
Cost of services
122
87
Research and development
5,274
4,307
Sales and marketing
5,909
5,025
General and administrative
6,291
5,445
Total stock-based compensation
17,842
15,054
Benefit from income taxes
(5,151)
(4,396)
Total stock-based compensation, net of tax
$12,691
$10,658
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
 
December 26,
2014
December 27,
2013
Tax benefit - stock option exercises & shares issued under ESPP
$168
$175
Unrecognized Compensation Expense.    At December 26, 2014, total unrecorded compensation expense associated with employee stock options expected to vest was approximately $39.8 million, which is expected to be recognized over a weighted-average period of 2.4 years. At December 26, 2014, total unrecorded compensation expense associated with RSUs expected to vest was approximately $103.1 million, which is expected to be recognized over a weighted-average period of 3.1 years.
Common Stock Repurchase Program
In November 2009, we announced a stock repurchase program ("program"), providing for the repurchase of up to $250.0 million of our Class A common stock. The following table summarizes the initial amount of authorized repurchases as well as additional repurchases approved by our Board of Directors as of December 26, 2014 (in thousands):
Authorization Period
Authorization Amount
Fiscal 2010: November 2009
$
250,000

Fiscal 2010: July 2010
300,000

Fiscal 2011: July 2011
250,000

Fiscal 2012: February 2012
100,000

Fiscal 2015: October 2014
200,000

Total
$
1,100,000


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Stock repurchases under the program may be made through open market transactions, negotiated purchases, or otherwise, at times and in amounts that we consider appropriate. The timing of repurchases and the number of shares repurchased depend upon a variety of factors, including price, regulatory requirements, the rate of dilution from our equity compensation plans and other market conditions. The program does not have a specified expiration date, and can be limited, suspended or terminated at our discretion at any time without prior notice. Shares repurchased under the program will be returned to the status of authorized but unissued shares of Class A common stock. As of December 26, 2014, the remaining authorization to purchase additional shares is approximately $243.1 million.
The following table provides information regarding share repurchase activity under the program during fiscal 2015:
Quarterly Repurchase Activity
Shares
Repurchased
Cost (1)
Average Price Paid Per Share (2)
 
 
(in thousands)
 
Q1 - Quarter ended December 26, 2014
389,500

$
16,953

$
43.51

(1)
Cost of share repurchases includes the price paid per share and applicable commissions.
(2)
Average price paid per share excludes commission costs.
Dividend
In October 2014, our Board of Directors initiated a recurring quarterly dividend program for its stockholders. The first dividend payment of $10.2 million pertaining to fiscal 2014 representing $0.10 per share of Class A and Class B Common Stock, was paid on November 20, 2014 to stockholders of record as of the close of business on November 3, 2014. We announced another $0.10 per share quarterly dividend payment on January 21, 2015, payable on February 10, 2015 to stockholders of record as of the close of business on February 2, 2015.

8. 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.
The following table summarizes the changes in the accumulated balances during the period, and includes information regarding the manner in which the reclassifications out of AOCI into earnings affect our consolidated statements of operations (in thousands):
 
Fiscal Quarter Ended
December 26, 2014
 
Fiscal Quarter Ended
December 27, 2013
 
Unrealized Gain/Loss - Investments
Currency Translation Adjustments
Total
 
Unrealized Gain/Loss - Investments
Currency Translation Adjustments
Total
Balance, Beginning Of Period
$505
$2,509
$3,014
 
$
203

$
7,611

$
7,814

Other Comprehensive Income Before Reclassifications:
 
 
 
 
 
 
 
Unrealized Gains/(Losses) - Investment Securities
(385)

(385)
 
235



235

Foreign Currency Translation (Losses) (1)

(5,553)
(5,553)
 


(473
)
(473
)
Income Tax Effect - Benefit/(Expense)
180
528
708
 
(84
)
(61
)
(145
)
Net Of Tax
(205)
(5,025)
(5,230)
 
151

(534
)
(383
)
Amounts Reclassified From AOCI Into Earnings:



 
 
 
 
Realized (Gains)/Losses - Investment Securities (1)
28

28
 
(72
)


(72
)
Income Tax Effect - Expense (2)

 
26



26

Net Of Tax
(177)
(5,025)
(5,202)
 
105

(534
)
(429
)
Balance, End Of Period
$328
$(2,516)
$(2,188)
 
$
308

$
7,077

$
7,385

(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.
9. 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.
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
 
December 26,
2014
December 27,
2013
Numerator:
 
 
Net income attributable to Dolby Laboratories, Inc.
$41,357
$44,515
 
 
 
Denominator:
 
 
Weighted-average shares outstanding—basic
102,303
101,750
Potential common shares from options to purchase common stock
992
328
Potential common shares from restricted stock units
980
1,114
Weighted-average shares outstanding—diluted
104,275
103,192
 
 
 
Net income per share attributable to Dolby Laboratories, Inc.:
 
 
Basic
$0.40
$0.44
Diluted
$0.40
$0.43
 
 
 
Antidilutive awards excluded from calculation:
 
 
Stock options
2,683
6,791
Restricted stock units
159
1,038
 

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10. Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.
Unrecognized Tax Benefit
As of December 26, 2014, the total amount of gross unrecognized tax benefits was $40.3 million, of which $29.9 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
 
December 26,
2014
December 27,
2013
Withholding Taxes
$12,200
$10,425
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 decreased from 25% in the first quarter of fiscal 2014 to 23% in the first quarter of fiscal 2015, which reflects a discrete benefit from federal R&D tax credits that were retroactively reinstated for the 2014 calendar year only. The overall decrease in the rate was partially offset by the fact that our estimated fiscal 2015 tax provision included reduced benefits from U.S. manufacturing tax incentives as a higher proportion of overall earnings were attributable to foreign jurisdictions.

11. 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 fiscal 2014, representing severance and other related benefits offered to approximately 50 employees that were affected as a result of this action. The table presented below summarizes the changes in our accrued liability under this restructuring plan during the fiscal quarter ended December 26, 2014 (in thousands) as the first quarter of fiscal 2015 marked the completion of activity under the Fiscal 2014 Restructuring Plan.
 
Severance and associated costs
Balance at September 26, 2014
$
146

Restructuring charges/(credits)
(39
)
Cash payments
(10
)
Non-cash and other adjustments
(97
)
Balance at December 26, 2014
$

Accruals for restructuring charges are included within accrued liabilities in our consolidated balance sheets while restructuring charges/(credits) are included within restructuring charges/(credits) in our consolidated statements of operations.

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12. Commitments & Contingencies
In the ordinary course of business, we enter into contractual agreements with third parties that include non-cancelable payment obligations, for which we are liable in future periods. These arrangements can include terms binding us to minimum payments and/or penalties if we terminate the agreement for any reason other than an event of default as described by the agreement. The following table presents a summary of our contractual obligations and commitments as of December 26, 2014 (in thousands):
 
Payments Due By Fiscal Period
 
Remainder Of Fiscal 2015
Fiscal
2016
Fiscal
2017
Fiscal
2018
Fiscal
2019
Thereafter
Total
Naming rights
$3,716
$7,525
$7,619
$7,715
$7,811
$110,888
$145,274
Donation commitments
6,045
67
67
805
6,984
Operating leases
10,714
11,474
9,731
8,404
7,422
36,181
83,926
Purchase obligations
7,275
2,183
451
9,909
Total
$21,705
$21,182
$23,846
$16,186
$15,300
$147,874
$246,093
Naming Rights.     We are party to an agreement for naming rights and related benefits with respect to the Dolby Theatre in Hollywood, California, the location of the Academy Awards®. The term of the agreement is 20 years, over which we will make payments on a semi-annual basis until fiscal 2032. Our payment obligations are conditioned in part on the Academy Awards® being held and broadcast from the Dolby Theatre.
Donation Commitments.     During fiscal 2014, we entered into a non-cancelable obligation to donate and install imaging and audio products to the Museum of the Academy of Motion Picture Arts and Sciences in Los Angeles, California, and provide maintenance services for a fifteen-year period following the Academy's expected opening date in 2017.
Operating Leases.     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 our contractual indemnification clauses do not explicitly specify our obligations, we are unable to reasonably estimate the maximum potential exposure for which we could be liable. Furthermore, we have not historically made any payments in connection with any such obligation and believe there to be a remote likelihood that any potential exposure in future periods would be of a material amount. As a result, no amounts have been accrued in our consolidated financial statements with respect to the contingent aspect of these indemnities.

13. Acquisitions
Doremi Labs.
On October 31, 2014 ("acquisition date"), we completed our acquisition of all outstanding interests of Doremi Labs ("Doremi"), a privately held company. Doremi is a leading developer and manufacturer of digital cinema servers and the acquisition is expected to accelerate the delivery and deployment of innovative solutions to exhibitors. Doremi's operating results from the acquisition date through December 26, 2014 are included in our consolidated financial statements for the first quarter of fiscal 2015, however these results did not have a material impact on our total consolidated revenues or net income for the period.

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We acquired Doremi for cash consideration of $92.5 million, adjusted for specified negotiated terms including excess working capital, and up to an additional $20.0 million in contingent consideration that may be earned over a four-year period following the closing of the acquisition. We estimated the fair value of contingent consideration by applying a discounted and probability-weighted approach to potential shipments of specified products during the four years following the acquisition date. As of December 26, 2014, we have recorded $0.7 million as a contingent consideration liability that, along with cash paid to the sellers of $98.4 million in the first quarter of fiscal 2015, comprised the preliminary purchase price of $99.1 million.
We have accounted for the transaction under the acquisition method of accounting for business combinations. Additionally, we have estimated the fair values of the net tangible and intangible assets acquired, and liabilities assumed as of the acquisition date, with any amounts paid in excess of the net assets recorded as goodwill. The purchase price allocation is preliminary, and subject to further change during the measurement period until the working capital adjustment is finalized.
The following table summarizes the acquisition date fair values allocated to the net assets acquired, including cash of $8.4 million and liabilities assumed. Included in current assets is a separately recognized receivable of $4.2 million related to the preliminary estimated working capital adjustment to the purchase price as of December 26, 2014 (in thousands):
Recognized Identifiable Assets Acquired and Liabilities Assumed
Purchase Price Allocation (Preliminary)
Current assets
$21,088
Inventories
16,485
Intangible assets
41,000
Goodwill
39,884
Current liabilities
(10,898)
Non-current liabilities
(8,417)
Purchase consideration
$99,142
Goodwill is representative of our expectation of the benefits and synergies from the integration of Doremi technology with our existing technology and the assembled workforce of the Doremi, which does not qualify for separate recognition as an intangible asset.
The following table summarizes the fair values allocated to the various intangible assets acquired (in thousands), the weighted-average useful lives over which they will be amortized using the straight-line method, and the classification of their amortized expense in our consolidated statements of operations:
Intangible Assets Acquired
Purchase Price Allocation
Weighted-Average Useful Life (Years)
Income Statement Classification: Amortization Expense
Customer relationships
$22,400
10
Sales & Marketing
Developed technology
16,200
7.5
Cost of Sales
Trade name
1,300
1
Sales & Marketing
Backlog
1,100
1
Cost of Sales
Total
$41,000
 
 
The fair values of the intangible assets at the acquisition date were measured primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820. The value of acquired intangibles was determined based on the present value of estimated future cash flows using the following valuation techniques and inputs:
Customer relationships and backlog - Primarily the excess earnings method using inputs such as probability-weighted revenue attributable to existing customer relationships, customer attrition, estimated expenses, effective income tax rate, and discount rate.
Developed technology and Trade name - Primarily the relief-from-royalty method using inputs such as estimated revenues attributable to the digital cinema server technology, estimated net royalty rate, maintenance R&D expenses, effective income tax rate, and discount rate.
Acquisition-related costs of $0.4 million and $0.8 million were incurred during the first quarter of fiscal 2015 and first quarter of fiscal 2014, respectively, and were included in general and administrative expenses in the consolidated statements of operations. Total acquisition-related costs of $5.9 million were incurred during fiscal 2014.


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14. Legal Matters
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 consolidated financial statements, any such amount is either immaterial, or it is not possible to provide an estimated amount of any such potential loss.

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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, imaging, 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 also provide products and services that enable content creators and distributors to produce, encode, transmit and playback content for superior consumer experiences, and are focused on further developing our technologies for new applications, most recently for enhancing voice conferencing communications and imaging.
On October 31, 2014, we completed our acquisition of Doremi Labs, a privately held company. Doremi is a leading developer and manufacturer of digital cinema servers and the acquisition is expected to accelerate the delivery and deployment of innovative solutions to exhibitors. Doremi's operating results from the acquisition date through December 26, 2014 are included in our consolidated financial statements for the first quarter of fiscal 2015, however these results did not have a material impact on our total consolidated revenues or net income for the period. Refer to Note 13Acquisitions” to our unaudited interim condensed consolidated financial statements contained under Item 1 of Part I of this Form 10-Q for additional information regarding the acquisition.
Revenue Generation
The following table presents a summary of the composition of our revenues for all periods presented:
 
Fiscal Quarter Ended
Revenue
December 26,
2014
December 27,
2013
   Licensing
92%
89%
   Products
6%
8%
   Services
2%
3%
Total
100%
100%
We license our technologies in over 40 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.

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Fiscal Quarter Ended
Revenue By Geographic Location
December 26,
2014
December 27,
2013
United States
26%
25%
International
74%
75%
Licensing
The following table presents the composition of our licensing business and revenues for all periods presented:
 
Fiscal Quarter Ended
 
Market
December 26,
2014
December 27,
2013
Main Products Incorporating Our Technologies
Broadcast
41%
36%
Televisions & STBs
PC
16%
21%
Windows operating systems & DVD software players
Consumer Electronics
15%
19%
DVD and Blu-ray Disc devices, AVRs, & HTIBs
Mobile
16%
15%
Smartphones, tablets & other mobile devices
Other
12%
9%
Video game consoles, automobile entertainment & audio conferencing
Total
100%
100%
 
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 original equipment manufacturers (“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 which are 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.

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Settlements & Back Payments From Licensees.   Due to ongoing collection efforts, licensing revenue recognized in any given quarter may include back payments and/or settlements with licensees. Such collections have become a recurring part of our business which we cannot predict with certainty.
We have active licensing arrangements with over 570 electronics product OEMs and software developer licensees, with corporate headquarters located in over 40 countries.
As of December 26, 2014, we had approximately 4,500 issued patents relating to technologies from which we derive a significant portion of our licensing revenue. We have approximately 930 trademark registrations throughout the world 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 imaging products for the film production, cinema, television, broadcast, and entertainment 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. We also design, manufacture and market products for the voice conferencing industry.
The following table presents the composition of our products revenue for all periods presented:
 
Fiscal Quarter Ended
Market
December 26,
2014
December 27,
2013
Cinema
87%
86%
Broadcast
10%
10%
Other
3%
4%
Total
100%
100%
Services
We offer a broad array of services to support theatrical and television production for cinema exhibition, broadcast, and home entertainment. The nature of these support services include current and next generation formats for Digital Cinema, Mastering and Distribution services. Our engineers assist in the integration and support of our technologies and products to create and reproduce both audio and imaging content. The specific areas in which their assistance is provided can involve equipment calibration, mixing room alignment, equalization, as well as color and light image calibration. Our engineers also provide equipment training, system and venue design consultation, as well as on-site technical expertise to cinema operators, film festivals, movie premieres, and trade shows throughout the world. These support services include movie premieres and special events at the Dolby Theatre® in Hollywood, California. We maintain a global presence in key creative markets and offer state of the art screening room facilities with Dolby Atmos, Dolby 3D, and high quality image projection for rent.

OPPORTUNITIES, CHALLENGES, AND RISKS
We are focused on several key objectives including:
Developing New Growth Drivers
We continue to invest significant resources to develop technologies and successfully bring solutions to market.
Dolby Voice
With outstanding fidelity, spatial perception, and background noise suppression, Dolby Voice is an audio conferencing solution that enables virtual meetings to sound and feel more like in-person meetings. Launched in the first quarter of fiscal 2014 in global partnership with BT, a leading provider of audio and imaging conferencing systems, deployment of Dolby Voice continues with numerous companies in trial with the solution, and others in the implementation process. We created a Dolby Voice mobile application to extend the in-person experience to mobile devices, and we recently announced the Dolby Voice conference phone which became available in the first quarter of fiscal 2015. With these additions, we further extend the overall quality of the experience we can offer through Dolby Voice. Ultimately, our success in this market will depend on our ability to differentiate this service on its technical

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merits, and encourage customer adoption.
Dolby Vision
In the second quarter of fiscal 2014, we introduced our high dynamic range ("HDR") imaging technology, Dolby Vision, which offers more realistic distinctions in color, brighter highlights and improved shadow details. The technology focuses on the image quality each pixel represents and is not entirely dependent on the number of pixels. Recently, Warner Bros. Entertainment Inc. announced plans to release movie titles mastered in Dolby Vision. We are also participating in the Ultra High-Definition ("UHD") alliance aimed at establishing standards to support innovation in video technologies, including HDR.
Dolby Cinema
In the first quarter of fiscal 2015, we launched Dolby Cinema, a branded premium cinema offering for exhibitors and movie audiences that combines spectacular image and sound technologies with inspired design. Dolby Cinema locations are expected to be collaborative efforts with established cinema exhibitors that will be equipped with Dolby Vision and Dolby Atmos, some or all of which will be provided by us. The collaborations will include revenue-sharing arrangements with the exhibitors.
Increasing The Adoption Of Our Technologies
Many devices now designed for enhanced capture and playback present a challenge for content creators and device manufacturers seeking consistent audio and image quality, especially amid bandwidth constraints. We believe this challenge provides opportunities for us to provide solutions designed to optimize the audio and visual experience across the broadcast and mobile markets.
Broadcast Market
Broadcast services that operate under bandwidth constraints, such as terrestrial broadcast or Internet protocol television (“IPTV”) services, benefit from Dolby technologies. These technologies enable the delivery of high quality audio content at reduced bit rates, thereby conserving bandwidth. We derive significant revenue from licensing our technologies to OEMs of televisions and set-top boxes since a high percentage of global sales of TV and STBs are shipped with our technologies, especially in North America and Europe. As emerging markets convert to digital television, particularly in China and India, we are well positioned to benefit from this transition. Our growth in these markets is dependent, in part, upon continued adoption of our technologies. To this end, we continue to develop, maintain and strengthen relationships across the broad spectrum of entertainment industry participants, professional organizations, and global standards-setting bodies. To the extent that we are unable to succeed in these efforts, incorporation of our technologies into these products will be impacted and future revenues will be adversely affected.
Mobile Market
Our mobile market is largely driven by sales of smartphones, tablets and other mobile devices that use our technologies. 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 the availability of content in Dolby formats. Currently, Dolby audio technologies are featured on various smartphones and tablets in the Android, Windows 8 and Amazon ecosystems. However, the rate of new product development in this sector continues to be rapid and can result in dramatic swings in consumer trends and design changes that may exclude our technologies. By working with existing and additional partners to further enhance the content, distribution and playback on all ecosystems, we hope to drive further growth across these markets.
Expanding The Dolby Atmos Ecosystem
Dolby Atmos, the immersive, object-based sound technology originally developed for the cinema environment, is now available for the living room. Using Dolby Atmos-enabled hardware to customize soundtracks over a speaker array, we can deliver full Dolby Atmos playback by using either Blu-ray Disc media or streaming content services. To this end, several manufacturers have announced Dolby Atmos-compatible AV receivers and pre-processors as well as speaker add-on modules, and a home theater-in-a-box offering. In addition, we have worked with major studios to release feature titles via streaming services and Blu-ray Disc, and will continue to work with content developers and distributors to expand entertainment selections using the Dolby Atmos format. This technology can also be extended

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to the mobile market, and the recent release of the Amazon Fire HDX 8.9 tablet marks the first mobile device to offer the Dolby Atmos sound experience. Expanding this ecosystem depends on several factors including market acceptance of Dolby Atmos for immersive audio entertainment in content creation, distribution and playback across various channels and devices.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a description of the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements, refer to Item 7 on Management Discussion and Analysis in our Fiscal 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).

RESULTS OF OPERATIONS
For each line item included on our consolidated statement of operations, 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, imaging and voice 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
Licensing
December 26,
2014
December 27,
2013
$
%
Revenue
$216,598
$205,660
$10,938
5%
Percentage Of Total Revenue
92%
89%
 
 
Cost Of Licensing
3,481
4,001
(520)
(13)%
Gross Margin
213,117
201,659
11,458
6%
Gross Margin Percentage
98%
98%
 
 

Q1'15 vs. Q1'14
Factor
Revenue
Gross Margin
Broadcast
á
Increase due to higher attach rates in STB and TV shipments that incorporate our technologies
ßà
No significant fluctuations
CE
â
Decrease in net back payments, and lower shipment volumes of Blu-ray, DVD, AVRs and other products that incorporate our technologies
Other
á
Increase in revenues from our gaming market largely attributable to higher revenues from PlayStation 4 and Xbox One game consoles
á
Increase in revenues attributed to Dolby Voice arising from contractual payments earned relating to milestones achieved
PC
â
Lower average selling prices from a product mix with fewer optical disc-based technologies as well as lower direct licensing and OEM revenues
Mobile
á
Net increase in revenues due to timing from higher HEAAC royalty streams from a licensee as well as higher shipments of mobile products that incorporate our technologies
Products
Products revenue is generated from the sale of audio and imaging 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.

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Fiscal Quarter Ended
Products
December 26,
2014
December 27,
2013
$
%
Revenue
$13,263
$18,104
$(4,841)
(27)%
Percentage Of Total Revenue
6%
8%
 
 
Cost Of Products
12,584
13,788
(1,204)
(9)%
Gross Margin
679
4,316
(3,637)
(84)%
Gross Margin Percentage
5%
24%
 
 

Q1'15 vs. Q1'14
Factor
Revenue
Gross Margin
Digital Cinema - Audio
â
Lower shipments of digital cinema audio processors
ßà
No significant fluctuations
3D Cinema
â
Lower shipments of 3D glasses and 3D projector kits
â
Less favorable product mix and lower average selling prices on 3D projector kits
Digital Cinema - Video
ßà
Marginally lower since the decline in Dolby revenues was partially offset by inclusion of Doremi product sales for two months
â
Higher write-downs of excess and obsolete inventory and amortization on newly-acquired intangible assets (refer to footnote 13 for additional information)
Services
Services revenues consists of fees for consulting, commissioning and training services in support of film production and television broadcast, as well as maintenance and support for our products. 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
Services
December 26,
2014
December 27,
2013
$
%
Revenue
$4,377
$7,513
$(3,136)
(42)%
Percentage Of Total Revenue
2%
3%
 
 
Cost Of Services
3,345
3,593
(248)
(7)%
Gross Margin
1,032
3,920
(2,888)
(74)%
Gross Margin Percentage
24%
52%
 
 

Q1'15 vs. Q1'14
Factor
Revenue
Gross Margin
Configuration & Post-Production
â
Lower revenues from digital mastering services as the first quarter of fiscal 2014 included the recognition of previously deferred revenue of $1.8M
â
The first quarter of fiscal 2014 included the recognition of previously deferred revenue with no associated COGS while the current fiscal quarter included no such transaction
Other
á
Increase in revenue from support and maintenance services
á
Lower labor and other related costs
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
 
December 26,
2014
December 27,
2013
$
%
Research and Development
$48,594
$44,463
$4,131
9%
Percentage of total revenue
21%
19%
 
 


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Q1'15 vs. Q1'14
Category
Key Drivers
Compensation & Benefits
á
Higher employee headcount including personnel from the acquisition of Doremi LLC (refer to footnote 13 for additional information), related expenses, merit increases and higher variable compensation costs
Professional & Consulting Fees
â
Lower one-time costs related primarily to the funding of various research projects and initiatives that were included in the prior year quarter and which did not recur in the current quarter
Stock-Based Compensation
á
Higher employee headcount
Depreciation & Amortization
á
Higher depreciation expense primarily from assets placed into service

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
 
December 26,
2014
December 27,
2013
$
%
Sales and Marketing
$68,018
$60,379
$7,639
13%
Percentage of total revenue
29%
26%
 
 

Q1'15 vs. Q1'14
Category
Key Drivers
Compensation & Benefits
á
Merit increases across the existing employee base and higher variable compensation costs
Stock-Based Compensation
á
Higher employee headcount
Depreciation & Amortization
á
Higher depreciation expense primarily from amortization on newly-acquired intangible assets (refer to footnote 13 for additional information) recorded and from assets placed into service

General & Administrative
General and Administrative ("G&A") expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, depreciation, facilities and information technology costs, as well as professional fees and other costs associated with external consulting and contract labor.
 
Fiscal Quarter Ended
 
December 26,
2014
December 27,
2013
$
%
General and Administrative
$44,716
$41,908
$2,808
7%
Percentage of total revenue
19%
18%
 
 

Q1'15 vs. Q1'14
Category
Key Drivers
Depreciation & Amortization
á
Higher depreciation expense primarily from assets placed into service including the partial occupation of our new worldwide headquarters
Stock-Based Compensation
á
Higher employee headcount
Legal, Professional & Consulting Fees
á
Costs incurred in connection with our acquisition of Doremi Labs and an increase in costs associated with patent filings and other legal activities
Compensation & Benefits
á
Higher employee headcount, in addition to the impact of merit increases across the existing employee base and higher variable compensation costs

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Restructuring
 
Fiscal Quarter Ended
 
December 26,
2014
December 27,
2013
$
%
Restructuring
$(39)
$3,215
$(3,254)
(101)%
Percentage of total revenue
—%
1%
 
 
Restructuring charges recorded in the fiscal periods presented above represent amounts recorded in relation to separate restructuring plans implemented in each of these fiscal years. The extent of restructuring charges recorded and fluctuations in a given fiscal year as compared to other fiscal years are attributed to differences in the nature of activities under the various plans.
There were no material restructuring charges incurred during the first quarter of fiscal 2015 as the restructuring credit recorded in the current fiscal quarter pertains to the Fiscal 2014 Restructuring Plan. Restructuring charges incurred in relation to our Fiscal 2014 Restructuring Plan represent costs to reorganize and consolidate certain activities and positions within our global business infrastructure. These charges primarily related to severance and other related benefits provided to employees that were affected as a result of this action. For additional information on this restructuring plan, refer to Note 11Restructuring” to our unaudited interim condensed consolidated financial statements.
Other Income/Expense
Other income/(expense) primarily consists of interest income earned on cash, cash equivalents, and investments and the net gains/(losses) from foreign currency transactions, derivative instruments, and sales of marketable securities from our investment portfolio.
 
Fiscal Quarter Ended
Other Income/Expense
December 26,
2014
December 27,
2013
$
%
Interest Income
$900
$654
$246
38%
Interest Expense
(15)
(112)
97
(87)%
Other Income/(Expense), Net
(108)
229
(337)
(147)%
Total
$777
$771
$6
1%

Q1'15 vs. Q1'14
Category
Key Drivers
Other Expense
â
Higher losses attributes to foreign exchange rate fluctuations due to currency volatility
Interest Income
á
Increase in interest income earned due to higher overall investment balances and higher yields during the current fiscal quarter-to-date period
Income Taxes
Our effective tax rate is based on a projection of our annual fiscal year results, and is affected each quarter-end by several factors. These include changes in our projected fiscal year results, recurring items such as tax rates and relative income earned in foreign jurisdictions as well as discrete items that may occur in, but are not necessarily consistent between periods. For additional information related to effective tax rates, see Note 10Income Taxes” to our unaudited interim condensed consolidated financial statements.
 
Fiscal Quarter Ended
 
December 26,
2014
December 27,
2013
Provision for income taxes
$(12,379)
$(15,455)
Effective tax rate
23%
25%


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Q1'15 vs. Q1'14
Factor
Impact On Effective Tax Rate
Federal R&D Credits
â
Increase in discrete benefits from federal R&D credits that were retroactively reinstated for the 2014 calendar year
U.S. Manufacturing Tax Incentives
á
Decrease attributed to reduced benefits from U.S. manufacturing tax incentives as a higher proportion of overall earnings were attributable to foreign jurisdictions

LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
Our principal sources of liquidity are cash, cash equivalents, and investments, as well as cash flows from operations. We believe that these sources will be sufficient to satisfy our currently anticipated cash requirements through at least the next twelve months. As of December 26, 2014, we had cash and cash equivalents of $409.1 million, which consisted of cash and highly-liquid money market funds. In addition, we had short and long-term investments of $529.9 million, which consisted primarily of municipal debt securities, commercial paper, corporate bonds, and U.S. agency securities.
Our policy is to indefinitely reinvest a portion of our undistributed earnings in certain foreign subsidiaries to support the operations and growth of these subsidiaries. Of our total cash, cash equivalents, and investments held as of December 26, 2014, approximately $397 million, or 42%, was held by our foreign subsidiaries. This represented a $20 million decrease from the $417 million that was held by our foreign subsidiaries as of September 26, 2014. If these undistributed earnings held by foreign subsidiaries are repatriated to the U.S., they may be subject to U.S. federal income taxes and foreign withholding taxes, less the applicable foreign tax credits.
 
December 26,
2014
September 26,
2014
 
(in thousands)
Cash and cash equivalents
$
409,115

$
568,472

Short-term investments
211,443

231,208

Long-term investments
318,448

296,335

Accounts receivable, net
117,240

86,168

Accounts payable and accrued liabilities
169,333

174,274

Working capital (1)
699,835

816,481

(1)
Working capital consists of total current assets less total current liabilities.
Capital Expenditures and Uses of Capital
Our capital expenditures consist of purchases of land, building, building fixtures, laboratory equipment, office equipment, computer hardware and software, leasehold improvements, and production and test equipment. We continue to invest in sales and marketing and research and development that contribute to the overall growth of our business and technological innovation. In fiscal 2012, we purchased an approximately 354,000 square foot property in San Francisco, California for $109.8 million, using existing cash. In the first quarter of fiscal 2015, the first phase of construction was completed and we occupied a portion of the building. We are still making substantial improvements to the building for its intended use as our new worldwide headquarters.
During the first quarter of fiscal 2015, we completed the acquisition of Doremi Labs for total purchase consideration of $98.4 million, net of cash acquired. For additional details, see Note 13Acquisitions” to our consolidated financial statements.
In October 2014, our Board of Directors initiated a recurring quarterly dividend program for its stockholders. The first dividend payment of $10.2 million pertaining to fiscal 2014 representing $0.10 per share of Class A and Class B Common Stock, was paid on November 20, 2014 to stockholders of record as of the close of business on November 3, 2014. We announced another $0.10 per share quarterly dividend payment on January 21, 2015, payable on February 10, 2015 to stockholders of record as of the close of business on February 2, 2015.
We retain sufficient cash holdings to support our operations and we also purchase investment grade securities diversified among security types, industries, and issuers. We have used cash generated from our operations to fund a variety of activities related to our business in addition to our ongoing operations, including business expansion and growth, acquisitions, and repurchases of our common stock. We have historically generated significant cash from operations, however these cash flows and the value of our investment portfolio could be affected by various risks and uncertainties, as described in Part I, Item 1ARisk Factors.”

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Indemnification Clauses
We are party to certain contractual agreements under which we have agreed to provide indemnifications of varying scope and duration to the other party relating to our licensed intellectual property. Historically, we have not made any payments for these indemnification obligations and no amounts have been accrued in our consolidated financial statements with respect to these obligations. Since the terms and conditions of the indemnification clauses do not explicitly specify our obligations, we are unable to reasonably estimate the maximum potential exposure for which we could be liable. For additional details regarding indemnification clauses within our contractual agreements, see Note 12Commitments & Contingencies” to our consolidated financial statements.
Cash Flows
For the following year-to-date comparative analysis performed for each of the sections of the statement of cash flows within this section, 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 (amounts displayed in thousands, except as otherwise noted).
Operating Activities
 
Fiscal Quarter Ended
 
December 26,
2014
December 27,
2013
Net cash provided by operating activities
$
3,445

$
77,282

Net cash provided by operating activities decreased $73.8 million from the first quarter of fiscal 2014 as compared to the first quarter of fiscal 2015, primarily due to the following:
Factor
Impact On Cash Flows
Changes in operating assets and liabilities
â
Increase in accounts receivable primarily due to timing differences and a large decrease in accounts payable and accrual liabilities due to timing of payments during the quarter
Investing Activities
 
Fiscal Quarter Ended
 
December 26,
2014
December 27,
2013
Net cash used in investing activities
$
(125,842
)
$
(37,651
)
Capital expenditures
(21,661
)
(8,967
)
Net cash used in investing activities was higher by $88.2 million in the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014, primarily due to the following:
Factor
Impact On Cash Flows
Business Combination & Other Asset Acquisitions
â
Significant cash outflows during the first quarter of fiscal 2015 for and related to the acquisition of Doremi Labs which closed in the current quarter (see footnote 13) as well as payments made to acquire other intangible assets while the prior comparable period did not include any similar transactions
Proceeds from sales of investments
á
Higher cash inflows from sales of marketable securities in the first quarter of fiscal 2015 relative to the prior comparable period
Capital Expenditures
â
Higher cash outflows for PP&E primarily related to improvements being made to our new worldwide headquarters at 1275 Market Street
Financing Activities
 
Fiscal Quarter Ended
 
December 26,
2014
December 27,
2013
Net cash used in financing activities
$
(34,162
)
$
(9,250
)
Repurchase of common stock
(16,953
)
(11,660
)

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