10-Q - Q2 '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 March 27, 2015
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 April 24, 2015, the registrant had 51,647,278 shares of Class A common stock, par value $0.001 per share, and 51,068,661 shares of Class B common stock, par value $0.001 per share, outstanding.


Table of Contents


DOLBY LABORATORIES, INC.
FORM 10-Q
For the Fiscal Quarter Ended March 27, 2015
TABLE OF CONTENTS
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 


2

Table of Contents


GLOSSARY OF TERMS

The following table summarizes certain terms and abbreviations that may be used within the text of this report:
Abbreviation
 
Term
AAC
 
Advanced Audio Coding
AOCI
 
Accumulated Other Comprehensive Income
APIC
 
Additional-Paid In-Capital
ASP
 
Average Selling Price
ASU
 
Accounting Standards Update
ATSC
 
Advanced Television Systems Committee
AVR
 
Audio/Video Receiver
CODM
 
Chief Operating Decision-Maker
COSO
 
Committee Of Sponsoring Organizations (Of The Treadway Commission)
DCI
 
Digital Cinema Initiative
DMA
 
Digital Media Adapter
DTV
 
Digital Television
DVD
 
Digital Versatile Disc
EPS
 
Earnings Per Share
ESP
 
Estimated Selling Price
ESPP
 
Employee Stock Purchase Plan
FASB
 
Financial Accounting Standards Board
FCPA
 
Foreign Corrupt Practices Act
G&A
 
General & Administrative
GAAP
 
Generally Accepted Accounting Principles
HDR
 
High Dynamic Range
HDTV
 
High Definition Television
HE AAC
 
High Efficiency Advanced Audio Coding
HEVC
 
High Efficiency Video Coding
HFR
 
High Frame Rate
HTIB
 
Home Theatre In-A-Box
IC
 
Integrated Circuit
IMB
 
Integrated Media Block
IPTV
 
Internet Protocol Television
ISO
 
Incentive Stock Option
ISV
 
Independent Software Vendor
IT
 
Information Technology
LCD
 
Liquid Crystal Display
ME
 
Multiple Element
NATO
 
North American Theatre Owners
NOL
 
Net Operating Loss
NQ
 
Non-Qualified/Non-Statutory Stock Option
OCI
 
Other Comprehensive Income
OECD
 
Organization For Economic Co-Operation & Development
OEM
 
Original Equipment Manufacturer
OTT
 
Over-The-Top
PC
 
Personal Computer
PCS
 
Post-Contract Support
PP&E
 
Property, Plant And Equipment
R&D
 
Research & Development
RSU
 
Restricted Stock Unit
S&M
 
Sales & Marketing
SAR
 
Stock Appreciation Rights
SERP
 
Supplemental Executive Retirement Plan
STB
 
Set-Top Box
TAM
 
Total Available Market
TPE
 
Third Party Evidence
UHD
 
Ultra High Definition
U.S. GAAP
 
Generally Accepted Accounting Principles In The United States
VSOE
 
Vendor Specific Objective Evidence

3

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)


 
March 27,
2015
September 26,
2014
ASSETS
(unaudited)
 
Current assets:
 
 
Cash and cash equivalents
$
513,994

$
568,472

Restricted cash
2,156

2,142

Short-term investments
188,164

231,208

Accounts receivable, net of allowance for doubtful accounts of $1,046 and $1,615
98,562

86,168

Inventories
23,761

8,536

Deferred taxes
80,858

86,445

Prepaid expenses and other current assets
34,523

22,880

Total current assets
942,018

1,005,851

Long-term investments
330,298

296,335

Property, plant and equipment, net
358,368

289,755

Intangible assets, net
106,369

63,700

Goodwill
312,869

277,574

Deferred taxes
55,340

41,746

Other non-current assets
9,342

9,051

Total assets
$
2,114,604

$
1,984,012

 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
Accounts payable
$
14,130

$
15,898

Accrued liabilities
189,507

158,376

Income taxes payable
1,144

2,600

Deferred revenue
16,371

12,496

Total current liabilities
221,152

189,370

Long-term deferred revenue
29,678

19,279

Other non-current liabilities
64,715

43,715

Total liabilities
315,545

252,364

 
 
 
Stockholders’ equity:
 
 
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 51,383,446 shares issued and outstanding at March 27, 2015 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: 51,073,661 shares issued and outstanding at March 27, 2015 and 51,610,239 at September 26, 2014
51

52

Additional paid-in capital
50,662

46,415

Retained earnings
1,739,346

1,660,485

Accumulated other comprehensive income
(7,532
)
3,014

Total stockholders’ equity – Dolby Laboratories, Inc.
1,782,579

1,710,017

Controlling interest
16,480

21,631

Total stockholders’ equity
1,799,059

1,731,648

Total liabilities and stockholders’ equity
$
2,114,604

$
1,984,012

See accompanying notes to unaudited interim condensed consolidated financial statements

4

Table of Contents


DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 27,
2015
March 28,
2014
 
March 27,
2015
March 28,
2014
Revenue:
 
 
 
 
 
Licensing
$
243,333

$
258,616

 
$
459,931

$
464,276

Products
22,985

14,563

 
36,248

32,667

Services
5,632

5,413

 
10,009

12,926

Total revenue
271,950

278,592

 
506,188

509,869

 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
Cost of licensing
3,787

3,742

 
7,268

7,743

Cost of products
18,237

10,293

 
30,821

24,081

Cost of services
3,125

3,470

 
6,470

7,063

Total cost of revenue
25,149

17,505

 
44,559

38,887

 
 
 
 
 
 
Gross margin
246,801

261,087

 
461,629

470,982

 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
Research and development
56,601

44,798

 
105,195

89,261

Sales and marketing
65,940

64,828

 
133,958

125,207

General and administrative
45,653

46,457

 
90,369

88,365

Restructuring charges/(credits)

86

 
(39
)
3,301

Total operating expenses
168,194

156,169

 
329,483

306,134

 
 
 
 
 
 
Operating income
78,607

104,918

 
132,146

164,848

 
 
 
 
 
 
Other income/expense:
 
 
 
 
 
Interest income
1,091

920

 
1,991

1,574

Interest expense
(31
)
(93
)
 
(46
)
(205
)
Other income/(expense), net
218

(2,823
)
 
110

(2,594
)
Total other income/(expense)
1,278

(1,996
)
 
2,055

(1,225
)
 
 
 
 
 
 
Income before income taxes
79,885

102,922

 
134,201

163,623

Provision for income taxes
(21,353
)
(26,373
)
 
(33,732
)
(41,828
)
Net income including controlling interest
58,532

76,549

 
100,469

121,795

Less: net (income) attributable to controlling interest
(558
)
(681
)
 
(1,138
)
(1,412
)
Net income attributable to Dolby Laboratories, Inc.
$
57,974

$
75,868

 
$
99,331

$
120,383

 
 
 
 
 
 
Net Income Per Share:
 
 
 
 
 
Basic
$
0.57

$
0.74

 
$
0.97

$
1.18

Diluted
$
0.56

$
0.73

 
$
0.95

$
1.16

Weighted-Average Shares Outstanding:
 
 
 
 
 
Basic
102,509

102,291

 
102,406

102,021

Diluted
103,904

103,934

 
104,097

103,460

 
 
 
 
 
 
Related party rent expense:
 
 
 
 
 
Included in operating expenses
$
755

$
346

 
$
1,543

$
692

Included in net income attributable to controlling interest
$
1,151

$
1,250

 
$
2,304

$
2,505

 
 
 
 
 
 
Cash dividend declared per common share
$
0.10

$

 
$
0.20

$

See accompanying notes to unaudited interim condensed consolidated financial statements

5

Table of Contents


DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 27,
2015
March 28,
2014
 
March 27,
2015
March 28,
2014
Net income including controlling interest
$
58,532

$
76,549

 
$
100,469

$
121,795

Other comprehensive income:
 
 
 




Foreign currency translation adjustments, net of tax
(6,319
)
1,311

 
(11,872
)
921

Unrealized gains on available-for-sale securities, net of tax
842

72

 
665

177

Comprehensive income
53,055

77,932

 
89,262

122,893

Less: comprehensive (income) attributable to controlling interest
(425
)
(755
)
 
(477
)
(1,630
)
Comprehensive income attributable to Dolby Laboratories, Inc.
$
52,630

$
77,177

 
$
88,785

$
121,263


See accompanying notes to unaudited interim condensed consolidated financial statements


6

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


99,331


99,331

1,138

100,469

Currency translation adjustments, net of tax of $829



(11,211
)
(11,211
)
(661
)
(11,872
)
Unrealized gains on investments, net of tax of $(327)



665

665


665

Distributions to controlling interest





(5,628
)
(5,628
)
Stock-based compensation expense

34,509



34,509


34,509

Repurchase of common stock
(1
)
(32,363
)


(32,364
)

(32,364
)
Cash dividends declared and paid on common stock


(20,470
)

(20,470
)

(20,470
)
Tax benefit from employee stock plans

1,273



1,273


1,273

Common stock issued under employee stock plans
1

12,630



12,631


12,631

Tax withholdings on vesting of restricted stock

(11,809
)


(11,809
)

(11,809
)
Exercise of class B stock options

7



7


7

Balance at March 27, 2015
$
103

$
50,662

$
1,739,346

$
(7,532
)
$
1,782,579

$
16,480

$
1,799,059



 
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


120,383


120,383

1,412

121,795

Currency translation adjustments, net of tax of $(64)



703

703

218

921

Unrealized gains on investments, net of tax of $(98)



177

177


177

Stock-based compensation expense

32,807



32,807


32,807

Repurchase of common stock

(11,660
)


(11,660
)

(11,660
)
Tax benefit from employee stock plans

10



10


10

Common stock issued under employee stock plans
1

17,308



17,309


17,309

Tax withholdings on vesting of restricted stock

(8,358
)


(8,358
)

(8,358
)
Exercise of class B stock options

155



155


155

Balance at March 28, 2014
$
103

$
49,074

$
1,574,765

$
8,694

$
1,632,636

$
20,546

$
1,653,182


See accompanying notes to unaudited interim condensed consolidated financial statements

7

Table of Contents


DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Fiscal Year-To-Date Ended
 
March 27,
2015
March 28,
2014
Operating activities:
 
 
Net income including controlling interest
$
100,469

$
121,795

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
33,578

25,114

Stock-based compensation
34,509

32,807

Amortization of premium on investments
4,811

4,594

Excess tax benefit from exercise of stock options
(2,095
)
(1,562
)
Provision for doubtful accounts
(487
)
507

Deferred income taxes
(7,681
)
(6,302
)
Other non-cash items affecting net income
1,252

2,943

Changes in operating assets and liabilities:
 
 
Accounts receivable
(3,457
)
(12,186
)
Inventories
1,397

1,640

Prepaid expenses and other assets
(6,045
)
(1,139
)
Accounts payable and other liabilities
3,223

5,337

Income taxes, net
12,064

13,386

Deferred revenue
5,486

(7,776
)
Other non-current liabilities
916

262

Net cash provided by operating activities
177,940

179,420

 
 
 
Investing activities:
 
 
Purchase of investments
(194,613
)
(178,830
)
Proceeds from sales of investment securities
120,074

63,424

Proceeds from maturities of investment securities
79,885

81,402

Purchases of property, plant and equipment
(78,491
)
(17,872
)
Payments for business acquisitions, net of cash acquired
(93,516
)

Purchase of intangible assets
(6,416
)
(12,400
)
Proceeds from sale of property, plant and equipment and assets held for sale
3

42

Change in restricted cash
(14
)
(169
)
Net cash used in investing activities
(173,088
)
(64,403
)
 
 
 
Financing activities:
 
 
Proceeds from issuance of common stock
12,638

17,464

Repurchase of common stock
(32,364
)
(11,660
)
Payment of cash dividend
(20,470
)

Distribution to controlling interest
(5,628
)

Excess tax benefit from the exercise of stock options
2,095

1,562

Shares repurchased for tax withholdings on vesting of restricted stock
(11,809
)
(8,358
)
Net cash used in financing activities
(55,538
)
(992
)
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
(3,792
)
477

Net increase/(decrease) in cash and cash equivalents
(54,478
)
114,502

Cash and cash equivalents at beginning of period
568,472

454,397

Cash and cash equivalents at end of period
$
513,994

$
568,899

 
 
 
Supplemental disclosure:
 
 
Cash paid for income taxes, net of refunds received
$
26,885

$
34,092

 
 
 
Non-cash investing and financing activities:
 
 
Capital expenditures incurred, not yet paid
$
27,824

$
2,662

Purchase consideration payable for acquisition
$
740

$

See accompanying notes to unaudited interim condensed consolidated financial statements

8

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 U.S. GAAP, and with SEC rules and regulations, which allow for certain information and footnote disclosures that are normally included in annual financial statements prepared in accordance with 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 March 27, 2015 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, Inc. and our wholly owned subsidiaries. In addition, we have consolidated the financial results of jointly owned affiliated companies in which our principal stockholder has a controlling interest. We report these controlling interests as a separate line in our consolidated statements of operations as net income attributable to controlling interest and in our consolidated balance sheets as a controlling interest. We eliminate all intercompany accounts and transactions upon consolidation.
Operating Segments
We operate as a single 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 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 ME revenue arrangements; valuation allowances for accounts receivable; carrying values of inventories and certain property, plant, and equipment, goodwill and intangible assets; fair values of investments; accrued liabilities including liabilities for unrecognized tax benefits, deferred income tax assets and stock-based compensation. Actual results could differ from our estimates.
Fiscal Year
Our fiscal year is a 52 or 53 week period ending on the last Friday in September. The fiscal periods presented herein include the 13 and 26 week periods ended March 27, 2015 and March 28, 2014. Our fiscal year ending September 25, 2015 (fiscal 2015) and our fiscal year ended September 26, 2014 (fiscal 2014) both consist of 52 weeks.

9

Table of Contents



2. Summary of Significant Accounting Policies
We continually assess any ASUs or other new accounting pronouncements issued by the FASB to determine their applicability and impact on us. Where it is determined that a new accounting pronouncement will result in a change to our financial reporting, we take the appropriate steps to ensure that such changes are properly reflected in our consolidated financial statements or notes thereto.
Recently Issued Accounting Standards
Adopted Standards
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, initially effective for us on October 1, 2017, has been tentatively deferred by one year, 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.
Consolidation.  On February 18, 2015, the FASB issued ASU No. 2015-02, Consolidation: Amendments to the Consolidation Analysis, which amends the consolidation requirements in ASC 810 and significantly changes the consolidation analysis required under U.S. GAAP. Among others, the ASU significantly amends how variable interests held by a reporting entity’s related parties or de facto agents affect its consolidation conclusion. The amendments in this Update are effective for us on October 1, 2016. Early adoption is permitted, including adoption in an interim period. We have not yet selected the timing, the 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 March 27, 2015 and September 26, 2014 (amounts displayed in thousands, except as otherwise noted).
Accounts Receivable
Accounts Receivable, Net
March 27,
2015
September 26,
2014
Trade accounts receivable
$
91,792

$
78,189

Accounts receivable from patent administration program customers
7,816

9,594

Accounts receivable, gross
99,608

87,783

Less: allowance for doubtful accounts
(1,046
)
(1,615
)
Total
$
98,562

$
86,168

Inventories
Inventories
March 27,
2015
September 26,
2014
Raw materials
$
9,752

$
1,013

Work in process
2,950

47

Finished goods
11,059

7,476

Total
$
23,761

$
8,536



10

Table of Contents


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 March 27, 2015 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.
Prepaid Expenses And Other Current Assets
Prepaid Expenses And Other Current Assets
March 27,
2015
September 26,
2014
Prepaid expenses
$
16,371

$
11,665

Other current assets
7,982

7,152

Income tax receivable
10,170

4,063

Total
$
34,523

$
22,880

Accrued Liabilities
Accrued Liabilities
March 27,
2015
September 26,
2014
Accrued royalties
$
3,040

$
2,526

Amounts payable to patent administration program partners
60,427

43,438

Accrued compensation and benefits
57,852

71,677

Accrued professional fees
4,386

6,162

Other accrued liabilities
63,802

34,573

Total
$
189,507

$
158,376

Other accrued liabilities include the accrual for unpaid property, plant and equipment additions of $27.8 million and $8.7 million as of March 27, 2015 and September 26, 2014, respectively.
Other Non-Current Liabilities
Other Non-Current Liabilities
March 27,
2015
September 26,
2014
Supplemental retirement plan obligations
$
2,400

$
2,409

Non-current tax liabilities
49,180

30,715

Other liabilities
13,135

10,591

Total
$
64,715

$
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.

11

Table of Contents


The following table summarizes unrealized gains and losses on our cash and investment portfolio and our financial assets and liabilities measured at fair value on a recurring basis (in thousands):
 
March 27,
2015
 
Cost
Unrealized
 
 
Estimated Fair Value
 
Gains
Losses
Total
 
Level 1
Level 2
Level 3
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash
$
498,556

 
 
$
498,556

 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
15,438



15,438

 
15,438

 
 
Cash and cash equivalents
513,994



513,994


15,438



 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Government bonds
1,999

7


2,006

 
2,006

 
 
Commercial paper
3,999



3,999

 
 
3,999

 
Corporate bonds
79,485

86

(15
)
79,556

 
 
79,556

 
Municipal debt securities
102,480

129

(6
)
102,603

 
 
102,603

 
Short-term investments
187,963

222

(21
)
188,164


2,006

186,158


 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
U.S. agency securities
5,000

6


5,006

 
5,006

 
 
Government bonds
20,290

4

(33
)
20,261

 
20,261

 
 
Corporate bonds
144,666

376

(22
)
145,020

 
 
145,020

 
Municipal debt securities
158,079

236

(54
)
158,261

 
 
158,261

 
Other long-term investments (1)
1,750



1,750

 
1,050

 
700

Long-term investments
329,785

622

(109
)
330,298


26,317

303,281

700

 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, and investments
$
1,031,742

$
844

$
(130
)
$
1,032,456

 
$
43,761

$
489,439

$
700

 
 
 
 
 
 
 
 
 
Investments held in supplemental retirement plan:
 
 
 
 
 
 
 
 
Assets
2,560



2,560

 
2,560

 
 
Included in prepaid expenses and other current assets & other non-current assets
 
 
 
 
 
Liabilities
2,560



2,560

 
2,560

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



740

 


 
740

Included in accrued liabilities
 
 
 
 
 
(1)
Other long-term investments as of March 27, 2015 include a marketable equity security of $1.1 million and cost method investments of $0.7 million.

12

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 (1)
500



500

 






Long-term investments
295,880

571

(116
)
296,335

 
31,993

263,842


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

13

Table of Contents


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 March 27, 2015 and September 26, 2014 (in thousands):
 
March 27, 2015
 
September 26, 2014
Investment Type
Fair Value
Gross Unrealized Losses (1)
 
Fair Value
Gross Unrealized Losses (1)
U.S. agency securities
$
17,758

$
(33
)
 
$
31,930

$
(9
)
Corporate bonds
64,387

(37
)
 
78,166

(90
)
Municipal debt securities
47,479

(60
)
 
55,979

(35
)
Total
$
129,624

$
(130
)
 
$
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 March 27, 2015 and September 26, 2014.
Although we had certain securities that were in an unrealized loss position as of March 27, 2015, 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 March 27, 2015 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 March 27, 2015 and September 26, 2014, which are recorded within cash equivalents and both short and long-term investments in our consolidated balance sheets (in thousands):
 
March 27, 2015
 
September 26, 2014
Range of maturity
Amortized Cost
Fair Value
 
Amortized Cost
Fair Value
Due within 1 year
$
187,963

$
188,164

 
$
232,944

$
233,208

Due in 1 to 2 years
207,097

207,445

 
179,177

179,536

Due in 2 to 3 years
120,938

121,103

 
116,204

116,299

Total
$
515,998

$
516,712

 
$
528,325

$
529,043


5. Property, Plant & Equipment
Property, plant and equipment are recorded at cost, with depreciation expense included in cost of products, cost of services, R&D, S&M, and G&A expenses in our consolidated statements of operations. Property, plant and equipment consist of the following (in thousands):
Property, Plant And Equipment
March 27,
2015
 
September 26,
2014
Land
$
49,629

 
$
45,842

Buildings and building improvements
176,877

 
61,712

Leasehold improvements
55,574

 
56,665

Machinery and equipment
53,108

 
47,639

Computer systems and software
116,773

 
108,225

Furniture and fixtures
14,530

 
13,540

Construction-in-progress
82,656

 
127,569

Property, plant and equipment, gross
549,147

 
461,192

Less: accumulated depreciation
(190,779
)
 
(171,437
)
Property, plant and equipment, net
$
358,368

 
$
289,755

Purchase Of Commercial Office Building In San Francisco, CA.    During fiscal 2012, we purchased an approximately 354,000 square foot commercial office property at 1275 Market Street in San Francisco, California for approximately $109.8 million. Based on a fair value analysis performed at the time of purchase, $35.5 million of the property's purchase price was allocated to the land and $74.3 million allocated to the building. Following our partial occupation of the building during the first quarter of fiscal 2015, we continue to make improvements to prepare it for its intended use as our new worldwide headquarters. As of September 26, 2014, construction-in-progress included both the book value of the building and costs for ongoing construction. As of March 27, 2015, construction-in-progress only included costs for ongoing construction.

14

Table of Contents



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 (1)
40,372

Translation adjustments
(5,077
)
Balance at March 27, 2015
$
312,869

(1)
Total acquired goodwill recorded during fiscal 2015 consists of $39.7 million from the acquisition of Doremi Labs and $0.7 million from an immaterial acquisition.
Intangible Assets
Intangible assets subject to amortization consist of the following (in thousands):
 
March 27, 2015
 
September 26, 2014
Intangible Assets, Net
Cost
Accumulated
Amortization
Net
 
Cost
Accumulated
Amortization
Net
Acquired patents and technology
$
142,215

$
(68,063
)
$
74,152

 
$
99,262

$
(61,678
)
$
37,584

Customer relationships
56,912

(25,357
)
31,555

 
30,717

(22,739
)
7,978

Other intangibles
21,917

(21,255
)
662

 
38,694

(20,556
)
18,138

Total
$
221,044

$
(114,675
)
$
106,369

 
$
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 R&D efforts, technologies and potential product offerings.
Amortization expense for our intangible assets is included in cost of licensing, cost of products, R&D and S&M expenses in our consolidated statements of operations. As of March 27, 2015, expected amortization expense in future fiscal periods was as follows (in thousands):
Fiscal Year
 Amortization Expense
Remainder Of 2015
$
9,617

2016
17,486

2017
14,535

2018
9,338

2019
8,668

Thereafter
46,725

Total
$
106,369

 
7. Stockholders' Equity & Stock-Based Compensation
We provide stock-based awards as a form of compensation for employees, officers and directors. We have issued stock-based awards in the form of stock options and RSUs under our equity incentive plans, as well as shares under our ESPP.
Common Stock - Class A and Class B
Our Board of Directors has authorized two classes of common stock, Class A and Class B. At March 27, 2015, we had authorized 500,000,000 Class A shares and 500,000,000 Class B shares. At March 27, 2015, we had 51,383,446 shares of Class A common stock and 51,073,661 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.

15

Table of Contents


Stock Incentive Plans
2000 Stock Incentive Plan.    Effective October 2000, we adopted the 2000 Stock Incentive Plan. The 2000 Stock Incentive Plan, as amended, provided 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 March 27, 2015, there were no outstanding options to purchase shares of Class B common stock.
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 38.0 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 March 27, 2015, there were options outstanding to purchase 9.2 million shares of Class A common stock, of which 4.2 million were vested and exercisable. The options outstanding have a remaining weighted-average contractual life of 7.5 years.
Stock Options.    Stock options are generally granted at fair market value on the date of grant. Options granted to employees and officers prior to June 2008 generally vest over four years, with equal annual cliff-vesting and expire on the earlier of 10 years after the date of grant or 3 months after termination of service. Options granted to employees and officers from June 2008 onward generally vest over four years, with 25% of the shares subject to the option becoming exercisable on the one-year anniversary of the date of grant and the balance of the shares vesting in equal monthly installments over the following 36 months. These options expire on the earlier of 10 years after the date of grant or 3 months after termination of service. All options granted vest over the requisite service period and upon the exercise of stock options, we issue new shares of Class A common stock under the 2005 Stock Plan and new shares of Class B common stock under the 2000 Stock Incentive Plan. Our 2005 Stock Plan also allows us to grant stock awards which vest based on the satisfaction of specific performance criteria.
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
2,418

42.80

 
 
Exercises
(298
)
28.76

 
 
Forfeitures and cancellations
(498
)
36.40

 
 
Options outstanding at March 27, 2015
9,233

35.49

7.6
$
38,754

Options vested and expected to vest at March 27, 2015
8,719

35.11

7.5
38,542

Options exercisable at March 27, 2015
4,180

$
31.66

6.1
29,167

(1)
Aggregate intrinsic value is based on the closing price of our common stock on March 27, 2015 of $38.10 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

16

Table of Contents


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 March 27, 2015. 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
1,180

42.49

Vested
(815
)
36.41

Forfeitures
(173
)
30.60

Non-vested at March 27, 2015
3,095

$
38.47

Employee Stock Purchase Plan.   Our plan allows eligible employees to have up to 10 percent of their eligible compensation withheld and used to purchase Class A common stock, subject to a maximum of $25,000 worth of stock purchased in a calendar year or no more than 1,000 shares in an offering period, whichever is less. An offering period consists of successive six-month purchase periods, with a look back feature to our stock price at the commencement of a one-year offering period. The plan provides for a discount equal to 15 percent of the closing price of our common stock on the New York Stock Exchange on the last day of the purchase period and for overlapping one-year offering periods. The plan also includes an automatic reset feature that provides for an offering period to be reset and recommenced to a new lower-priced offering if the offering price of a new offering period is less than that of the immediately preceding offering period.
Stock Option Valuation Assumptions
We use the Black-Scholes option pricing model to determine the estimated fair value of employee stock options at the date of the grant. The Black-Scholes model includes inputs that require us to make certain estimates and assumptions regarding the expected term of the award, as well as the future risk-free interest rate and volatility of our stock price over this expected term of the award.
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.

17

Table of Contents


The weighted-average assumptions used in the determination of the fair value of our stock options were as follows:
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 27,
2015
March 28,
2014
 
March 27,
2015
March 28,
2014
Expected term (in years)
5.21

4.58

 
4.60

4.58

Risk-free interest rate
1.6
%
1.5
%
 
1.5
%
1.4
%
Expected stock price volatility
29.5
%
32.4
%
 
29.7
%
32.0
%
Dividend yield
1.0
%
%
 
0.9
%
%
Stock-Based Compensation Expense
Stock-based compensation expense for equity awards granted to employees is determined by estimating their fair value on the date of grant, and recognizing that value as an expense on a straight-line basis over the requisite service period in which our employees earn the awards. Compensation expense related to these equity awards is recognized net of estimated forfeitures, which reduce the expense recorded in the consolidated statements of operations. The selection of applicable estimated forfeiture rates is based on an evaluation of trends in our historical forfeiture data with consideration for other potential driving factors. If in subsequent periods actual forfeitures significantly differ from our initial estimates, we will revise such estimates accordingly.
The following two tables separately present stock-based compensation expense both by award type and classification in our consolidated statements of operations (in thousands):
Expense - By Award Type
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 27,
2015
March 28,
2014
 
March 27,
2015
March 28,
2014
Compensation Expense - By Type
 
 
 
 
 
Stock options
$
5,729

$
5,387

 
$
12,012

$
9,257

Restricted stock units
10,077

11,565

 
20,292

21,822

Employee stock purchase plan
861

801

 
2,205

1,728

Total stock-based compensation
16,667

17,753

 
34,509

32,807

Benefit from income taxes
(4,890
)
(5,290
)
 
(10,041
)
(9,686
)
Total stock-based compensation, net of tax
$
11,777

$
12,463

 
$
24,468

$
23,121

Expense - By Income Statement Line Item Classification
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 27,
2015
March 28,
2014
 
March 27,
2015
March 28,
2014
Compensation Expense - By Classification
 
 
 
 
Cost of products
$
224

$
217

 
$
470

$
407

Cost of services
115

113

 
237

200

Research and development
4,938

4,889

 
10,212

9,196

Sales and marketing
5,576

6,332

 
11,485

11,357

General and administrative
5,814

6,202

 
12,105

11,647

Total stock-based compensation
16,667

17,753

 
34,509

32,807

Benefit from income taxes
(4,890
)
(5,290
)
 
(10,041
)
(9,686
)
Total stock-based compensation, net of tax
$
11,777

$
12,463

 
$
24,468

$
23,121

The tax benefit that we recognize from certain exercises of ISOs and shares issued under our ESPP are excluded from the tables above. This benefit was as follows (in thousands):
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 27,
2015
March 28,
2014
 
March 27,
2015
March 28,
2014
Tax benefit - stock option exercises & shares issued under ESPP
$
19

$
135

 
$
187

$
310

Unrecognized Compensation Expense.    At March 27, 2015, total unrecorded compensation expense associated with employee stock options expected to vest was approximately $34.0 million, which is expected to be recognized over a weighted-average period of 2.2 years. At March 27, 2015, total unrecorded compensation expense

18

Table of Contents


associated with RSUs expected to vest was approximately $89.6 million, which is expected to be recognized over a weighted-average period of 2.9 years.
Common Stock Repurchase Program
In November 2009, we announced a stock repurchase program ("program"), providing for the repurchase of up to $250.0 million of our Class A common stock. The following table summarizes the initial amount of authorized repurchases as well as additional repurchases approved by our Board of Directors as of March 27, 2015 (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

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 March 27, 2015, the remaining authorization to purchase additional shares is approximately $227.7 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

Q2 - Quarter ended March 27, 2015
390,000

15,411

39.47

Total
779,500

$
32,364

 
(1)
Cost of share repurchases includes the price paid per share and applicable commissions.
(2)
Average price paid per share excludes commission costs.
Dividend
In October 2014, our Board of Directors initiated a recurring quarterly dividend program for our stockholders. The following table summarizes the dividend payments made under the program:
Fiscal Period
Declaration Date
Record Date
Payment Date
Cash Dividend Per Common Share
Dividend Payment
Fiscal 2014
 
 
 
 
 
Q4 - Quarter ended September 26, 2014
October 21, 2014
November 3, 2014
November 20, 2014
$
0.10

$
10.2
 million
 
 
 
 
 
 
Fiscal 2015
 
 
 
 
 
Q1 - Quarter ended December 26, 2014
January 19, 2015
February 2, 2015
February 10, 2015
$
0.10

$
10.3
 million
Q2 - Quarter ended March 27, 2015
April 20, 2015
May 4, 2015
May 12, 2015
$
0.10

$
10.3
 million (1)
(1)
The amount of the dividend payment is estimated based on the number of shares of our Class A and Class B common stock that we estimate will be outstanding as of the Record Date.

8. Accumulated Other Comprehensive Income
Other comprehensive income consists of two components: unrealized gains or losses on our 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, a subsection within stockholders’ equity in our consolidated balance

19

Table of Contents


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
March 27, 2015
 
Fiscal Year-To-Date Ended
March 27, 2015
 
Unrealized Gain/Loss - Investments
Currency Translation Adjustments
Total
 
Unrealized Gain/Loss - Investments
Currency Translation Adjustments
Total
Balance, beginning of period
$
328

$
(2,516
)
$
(2,188
)
 
$
505

$
2,509

$
3,014

Other comprehensive income before reclassifications:
 
 
 
 
 
 
 
Unrealized gains - investment securities
1,554



1,554

 
1,169



1,169

Foreign currency translation (losses) (1)


(6,487
)
(6,487
)
 


(12,040
)
(12,040
)
Income tax effect - benefit/(expense) (2)
(507
)
301

(206
)
 
(327
)
829

502

Net of tax
1,047

(6,186
)
(5,139
)
 
842

(11,211
)
(10,369
)
Amounts reclassified from AOCI into earnings:






 






Realized (gains) - investment securities (1)
(218
)


(218
)
 
(204
)


(204
)
Income tax effect - expense (2)
13



13

 
27



27

Net of tax
842

(6,186
)
(5,344
)
 
665

(11,211
)
(10,546
)
Balance, end of period
$
1,170

$
(8,702
)
$
(7,532
)
 
$
1,170

$
(8,702
)
$
(7,532
)
 
Fiscal Quarter Ended
March 28, 2014
 
Fiscal Year-To-Date Ended
March 28, 2014
 
Unrealized Gain/Loss - Investments
Currency Translation Adjustments
Total
 
Unrealized Gain/Loss - Investments
Currency Translation Adjustments
Total
Balance, beginning of period
$
308

$
7,077

$
7,385

 
$
203

$
7,611

$
7,814

Other comprehensive income before reclassifications:
 
 
 
 
 
 
 
Unrealized gains - investment securities
336

 
336

 
571

 
571

Foreign currency translation gains (1)
 
1,240

1,240

 
 
767

767

Income tax effect - (expense) (2)
(120
)
(3
)
(123
)
 
(204
)
(64
)
(268
)
Net of tax
216

1,237

1,453

 
367

703

1,070

Amounts reclassified from AOCI into earnings:
 
 
 
 
 
 
 
Realized (gains) - investment securities (1)
(224
)
 
(224
)
 
(296
)
 
(296
)
Income tax effect - expense (2)
80

 
80

 
106

 
106

Net of tax
72

1,237

1,309

 
177

703

880

Balance, end of period
$
380

$
8,314

$
8,694

 
$
380

$
8,314

$
8,694

(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 EPS is computed by dividing net income attributable to Dolby Laboratories, Inc. by the number of weighted-average shares of Class A and Class B common stock outstanding during the period. Through application of the treasury stock method, diluted EPS is computed in the same manner, except that the number of weighted-average shares outstanding is increased by the number of potentially dilutive shares from employee incentive plans during the period. Potentially dilutive shares include the hypothetical number of shares issued under the assumed exercise of outstanding stock options, vesting of outstanding restricted stock units, and shares issued under our employee stock purchase plan.
Basic and diluted EPS are computed independently for each fiscal quarter and year-to-date period presented, which involves the use of different weighted-average share count figures relating to quarterly and annual periods. As a result, and after factoring the effect of rounding to the nearest cent per share, the sum of all four quarter-to-date EPS figures may not equal year-to-date EPS.

20

Table of Contents


The following table sets forth the computation of basic and diluted EPS attributable to Dolby Laboratories, Inc. (in thousands, except per share amounts):
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 27,
2015
March 28,
2014
 
March 27,
2015
March 28,
2014
Numerator:
 
 
 
 
 
Net income attributable to Dolby Laboratories, Inc.
$
57,974

$
75,868

 
$
99,331

$
120,383

 
 
 
 
 
 
Denominator:
 
 
 
 
 
Weighted-average shares outstanding—basic
102,509

102,291

 
102,406

102,021

Potential common shares from options to purchase common stock
889

637

 
941

445

Potential common shares from restricted stock units
506

1,006

 
750

994

Weighted-average shares outstanding—diluted
103,904

103,934

 
104,097

103,460

 
 
 
 
 
 
Net income per share attributable to Dolby Laboratories, Inc.:
 
 
 
 
 
Basic
$
0.57

$
0.74

 
$
0.97

$
1.18

Diluted
$
0.56

$
0.73

 
$
0.95

$
1.16

 
 
 
 
 
 
Antidilutive awards excluded from calculation:
 
 
 
 
 
Stock options
4,604

3,597

 
3,684

4,075

Restricted stock units
934

290

 
106

1,170

 
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 March 27, 2015, the total amount of gross unrecognized tax benefits was $49.8 million, of which $39.1 million, if recognized, would reduce our effective tax rate. Our net liability for unrecognized tax benefits is classified within other non-current liabilities in our consolidated balance sheets.
Withholding Taxes
We recognize licensing revenue gross of withholding taxes, which our licensees remit directly to their local tax authorities, and for which we receive a partial foreign tax credit in our income tax provision. The foreign current tax includes this withholding tax expense while the appropriate foreign tax credit benefit is included in current federal and foreign taxes. Withholding taxes were as follows (in thousands):
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 27,
2015
March 28,
2014
 
March 27,
2015
March 28,
2014
Withholding taxes
$
11,942

$
12,673

 
$
24,142

$
23,098

Effective Tax Rate
Each period, the combination of multiple different factors can impact our effective tax rate. These factors include both recurring items such as tax rates and the relative amount of income earned in foreign jurisdictions, as well as discrete items that may occur in, but are not necessarily consistent between periods.
Our effective tax rate increased from 26% in the second quarter of fiscal 2014 to 27% in the second quarter of fiscal 2015, which reflects an increase in our estimated fiscal 2015 tax provision due to reduced benefits from U.S. manufacturing tax incentives.
On a year-to-date basis, our effective tax rate decreased from 26% in the fiscal year-to-date period ended March 28, 2014 to 25% in the fiscal year-to-date period ended March 27, 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.

21

Table of Contents



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 first quarter of fiscal 2015 marked the completion of activity under the Fiscal 2014 Restructuring Plan and the table below summarizes the changes in our accrued liability during the fiscal year-to-date period ended March 27, 2015 (in thousands).
 
Severance and associated costs
Balance at September 26, 2014
$
146

Restructuring (credits)
(39
)
Cash payments
(10
)
Non-cash and other adjustments
(97
)
Balance at March 27, 2015
$

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.

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 March 27, 2015 (in thousands):
 
Payments Due By Fiscal Period
 
Remainder Of Fiscal 2015
Fiscal
2016
Fiscal
2017
Fiscal
2018
Fiscal
2019
Thereafter
Total
Naming rights
$

$
7,525

$
7,619

$
7,715

$
7,811

$
110,888

$