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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 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From              To             
Commission File Number: 001-32431

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12225750&doc=11
DOLBY LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
90-0199783
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1275 Market Street
San Francisco, CA
94103-1410
(415) 558-0200
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý
 
Accelerated filer  ¨
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company  ¨
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý
On April 27, 2018, the registrant had 62,434,488 shares of Class A common stock, par value $0.001 per share, and 41,677,918 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 30, 2018
TABLE OF CONTENTS
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 


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GLOSSARY OF TERMS
The following table summarizes certain terms and abbreviations that may be used within the text of this report:
Abbreviation
 
Term
AAC
 
Advanced Audio Coding
AFS
 
Available-For-Sale (Securities)
AOCI
 
Accumulated Other Comprehensive Income
APIC
 
Additional-Paid In-Capital
ASC
 
Accounting Standards Codification
ASP
 
Average Selling Price
ASU
 
Accounting Standards Update
ATSC
 
Advanced Television Systems Committee
AVR
 
Audio/Video Receiver
CE
 
Consumer Electronics
CES
 
Consumer Electronics Show
CODM
 
Chief Operating Decision Maker
COGS
 
Cost Of Goods Sold
COSO
 
Committee Of Sponsoring Organizations (Of The Treadway Commission)
DD
 
Dolby Digital®
DD+
 
Dolby Digital Plus™
DMA
 
Digital Media Adapter
DTV
 
Digital Television
DVB
 
Digital Video Broadcasting
DVD
 
Digital Versatile Disc
EPS
 
Earnings Per Share
ESP
 
Estimated Selling Price
ESPP
 
Employee Stock Purchase Plan
FASB
 
Financial Accounting Standards Board
FCPA
 
Foreign Corrupt Practices Act
FIFO
 
First-in, First-out
G&A
 
General & Administrative
HD
 
High Definition
HDR
 
High-Dynamic Range
HDTV
 
High Definition Television
HE-AAC
 
High Efficiency Advanced Audio Coding
HEVC
 
High Efficiency Video Coding
HFR
 
High Frame Rate
HTIB
 
Home Theater In-A-Box
IC
 
Integrated Circuit
IMB
 
Integrated Media Block
IP
 
Intellectual Property
IPO
 
Initial Public Offering
IPTV
 
Internet Protocol Television
IT
 
Information Technology
LIFO
 
Last-in, First-out
LP
 
Limited Partner/Partnership
ME
 
Multiple Element
NOL
 
Net Operating Loss
OCI
 
Other Comprehensive Income
ODD
 
Optical Disc Drive
OECD
 
Organization For Economic Co-Operation & Development
OEM
 
Original Equipment Manufacturer
OLED
 
Organic Light-Emitting Diode
OTT
 
Over-The-Top
PC
 
Personal Computer
PCS
 
Post-Contract Support
PP&E
 
Property, Plant, & Equipment
PSO
 
Performance-Based Stock Option
R&D
 
Research & Development
RSU
 
Restricted Stock Unit
S&M
 
Sales & Marketing
SERP
 
Supplemental Executive Retirement Plan
SoC
 
System(s)-On-A-Chip
STB
 
Set-Top Box
TPE
 
Third Party Evidence
TSR
 
Total Stockholder Return
UHD
 
Ultra High Definition
U.S. GAAP
 
Generally Accepted Accounting Principles In The United States
VSOE
 
Vendor Specific Objective Evidence

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PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)

 
March 30,
2018
September 29,
2017
ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
$
705,519

$
627,017

Restricted cash
8,082

7,351

Short-term investments
240,497

247,757

Accounts receivable, net of allowance for doubtful accounts of $4,585 and $2,967
141,257

73,750

Inventories
24,066

25,051

Prepaid expenses and other current assets
35,244

30,508

Total current assets
1,154,665

1,011,434

Long-term investments
262,062

314,364

Property, plant, and equipment, net
500,981

485,275

Intangible assets, net
191,340

189,648

Goodwill
316,558

311,087

Deferred taxes
141,580

190,915

Other non-current assets
39,453

30,831

Total assets
$
2,606,639

$
2,533,554

 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
Accounts payable
$
18,200

$
14,373

Accrued liabilities
167,793

207,034

Income taxes payable
4,614

1,216

Deferred revenue
22,542

23,150

Total current liabilities
213,149

245,773

Long-term deferred revenue
37,430

36,425

Other non-current liabilities
202,082

107,514

Total liabilities
452,661

389,712

 
 
 
Stockholders’ equity:
 
 
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 61,364,751 shares issued and outstanding at March 30, 2018 and 59,281,837 at September 29, 2017
59

58

Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 42,733,038 shares issued and outstanding at March 30, 2018 and 42,873,597 at September 29, 2017
43

43

Additional paid-in capital
113,827

61,331

Retained earnings
2,039,116

2,083,063

Accumulated other comprehensive (loss)
(5,616
)
(7,753
)
Total stockholders’ equity – Dolby Laboratories, Inc.
2,147,429

2,136,742

Controlling interest
6,549

7,100

Total stockholders’ equity
2,153,978

2,143,842

Total liabilities and stockholders’ equity
$
2,606,639

$
2,533,554

See accompanying notes to unaudited interim condensed consolidated financial statements

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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 30,
2018
March 31,
2017
 
March 30,
2018
March 31,
2017
Revenue:
 
 
 
 
 
Licensing
$
273,143

$
241,617

 
$
531,159

$
474,316

Products
22,665

20,713

 
47,598

48,924

Services
5,547

5,144

 
10,395

10,501

Total revenue
301,355

267,474

 
589,152

533,741

 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
Cost of licensing
10,610

8,796

 
19,869

16,917

Cost of products
15,603

13,988

 
32,638

31,708

Cost of services
4,746

4,193

 
9,328

8,319

Total cost of revenue
30,959

26,977

 
61,835

56,944

 
 
 
 
 
 
Gross margin
270,396

240,497

 
527,317

476,797

 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
Research and development
59,493

58,341

 
115,937

115,859

Sales and marketing
74,019

75,620

 
144,168

146,795

General and administrative
50,747

43,253

 
99,032

84,793

Restructuring charges/(credits)
(167
)

 
(364
)

Total operating expenses
184,092

177,214

 
358,773

347,447

 
 
 
 
 
 
Operating income
86,304

63,283

 
168,544

129,350

 
 
 
 
 
 
Other income/expense:
 
 
 
 
 
Interest income
3,892

2,186

 
7,673

4,000

Interest expense
(29
)
(37
)
 
(64
)
(63
)
Other income/(expense), net
(684
)
762

 
(1,836
)
563

Total other income
3,179

2,911

 
5,773

4,500

 
 
 
 
 
 
Income before income taxes
89,483

66,194

 
174,317

133,850

Provision for income taxes
(18,718
)
(15,467
)
 
(185,030
)
(29,549
)
Net income/(loss) including controlling interest
70,765

50,727

 
(10,713
)
104,301

Less: net (income) attributable to controlling interest
(134
)
(137
)
 
(278
)
(337
)
Net income/(loss) attributable to Dolby Laboratories, Inc.
$
70,631

$
50,590

 
$
(10,991
)
$
103,964

 
 
 
 
 
 
Net income/(loss) per share:
 
 
 
 
 
Basic
$
0.68

$
0.50

 
$
(0.11
)
$
1.02

Diluted
$
0.66

$
0.49

 
$
(0.11
)
$
1.00

Weighted-average shares outstanding:
 
 
 
 
 
Basic
103,771

101,787

 
103,162

101,635

Diluted
107,001

103,883

 
103,162

103,867

 
 
 
 
 
 
Related party rent expense:
 
 
 
 
 
Included in operating expenses
$
784

$
793

 
$
1,568

$
1,575

Included in net income attributable to controlling interest
$
179

$
175

 
$
356

$
350

 
 
 
 
 
 
Cash dividend declared per common share
$
0.16

$
0.14

 
$
0.32

$
0.28

Cash dividend paid per common share
$
0.16

$
0.14

 
$
0.32

$
0.28

See accompanying notes to unaudited interim condensed consolidated financial statements

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DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 30,
2018
March 31,
2017
 
March 30,
2018
March 31,
2017
Net income/(loss) including controlling interest
$
70,765

$
50,727

 
$
(10,713
)
$
104,301

Other comprehensive income:
 
 
 
 
 
Currency translation adjustments, net of tax
4,264

4,445

 
5,482

(3,279
)
Unrealized gains/(losses) on investments, net of tax
(1,559
)
581

 
(3,152
)
(1,438
)
Comprehensive income/(loss)
73,470

55,753

 
(8,383
)
99,584

Less: comprehensive (income)/loss attributable to controlling interest
(333
)
(192
)
 
(471
)
(131
)
Comprehensive income/(loss) attributable to Dolby Laboratories, Inc.
$
73,137

$
55,561

 
$
(8,854
)
$
99,453

See accompanying notes to unaudited interim condensed consolidated financial statements

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DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)

 
Dolby Laboratories, Inc.
 
 
 
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss)
Total Dolby
Laboratories,
Inc.
Controlling
Interest
Total
Balance at September 29, 2017
$
101

$
61,331

$
2,083,063

$
(7,753
)
$
2,136,742

$
7,100

$
2,143,842

Net income/(loss)




(10,991
)


(10,991
)
278

(10,713
)
Currency translation adjustments, net of tax of $(1,141)






5,289

5,289

193

5,482

Unrealized losses on investments, net of tax of $144






(3,152
)
(3,152
)

(3,152
)
Distributions to controlling interest









(1,022
)
(1,022
)
Stock-based compensation expense


36,375





36,375



36,375

Repurchase of common stock
(1
)
(34,992
)




(34,993
)


(34,993
)
Cash dividends declared and paid on common stock




(32,956
)


(32,956
)


(32,956
)
Common stock issued under employee stock plans
2

71,059





71,061



71,061

Tax withholdings on vesting of restricted stock


(19,946
)




(19,946
)


(19,946
)
Balance at March 30, 2018
$
102

$
113,827

$
2,039,116

$
(5,616
)
$
2,147,429

$
6,549

$
2,153,978


 
Dolby Laboratories, Inc.
 
 
 
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss)
Total Dolby
Laboratories,
Inc.
Controlling
Interest
Total
Balance at September 30, 2016
$
101

$
42,032

$
1,938,320

$
(10,197
)
$
1,970,256

$
8,479

$
1,978,735

Net income




103,964



103,964

337

104,301

Currency translation adjustments, net of tax of $666






(3,073
)
(3,073
)
(206
)
(3,279
)
Unrealized losses on investments, net of tax of $2






(1,438
)
(1,438
)

(1,438
)
Distributions to controlling interest









(2,094
)
(2,094
)
Stock-based compensation expense


33,198





33,198



33,198

Repurchase of common stock
(1
)
(49,999
)




(50,000
)


(50,000
)
Cash dividends declared and paid on common stock




(28,494
)


(28,494
)


(28,494
)
Tax benefit from employee stock plans


3,818





3,818



3,818

Common stock issued under employee stock plans
2

24,208





24,210



24,210

Tax withholdings on vesting of restricted stock
(1
)
(15,798
)




(15,799
)


(15,799
)
Balance at March 31, 2017
$
101

$
37,459

$
2,013,790

$
(14,708
)
$
2,036,642

$
6,516

$
2,043,158


See accompanying notes to unaudited interim condensed consolidated financial statements

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DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Fiscal Year-To-Date Ended
 
March 30,
2018
March 31,
2017
Operating activities:
 
 
Net income/(loss) including controlling interest
$
(10,713
)
$
104,301

Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
 
 
Depreciation and amortization
40,684

44,061

Stock-based compensation
36,375

33,198

Amortization of premium on investments
1,472

1,376

Provision for doubtful accounts
1,607

1,010

Deferred income taxes
48,332

(8,856
)
Other non-cash items affecting net income
977

160

Changes in operating assets and liabilities:


Accounts receivable
(69,018
)
(13,538
)
Inventories
(352
)
(3,253
)
Prepaid expenses and other assets
(12,732
)
(11,280
)
Accounts payable and other liabilities
(38,124
)
495

Income taxes, net
99,861

11,089

Deferred revenue
324

85

Other non-current liabilities
(652
)
480

Net cash provided by operating activities
98,041

159,328

 
 
 
Investing activities:
 
 
Purchases of investment securities
(129,456
)
(98,789
)
Proceeds from sales of investment securities
64,698

23,071

Proceeds from maturities of investment securities
118,874

66,171

Purchases of PP&E
(39,734
)
(51,230
)
Payments for business acquisitions, net of cash acquired
(6,563
)

Purchase of intangible assets
(11,893
)
(5,250
)
Change in restricted cash
(731
)
(2,107
)
Net cash used in investing activities
(4,805
)
(68,134
)
 
 
 
Financing activities:
 
 
Proceeds from issuance of common stock
71,061

24,210

Repurchase of common stock
(34,993
)
(50,000
)
Payment of cash dividend
(32,956
)
(28,494
)
Distribution to controlling interest
(1,022
)
(2,094
)
Shares repurchased for tax withholdings on vesting of restricted stock
(19,946
)
(15,799
)
Net cash used in financing activities
(17,856
)
(72,177
)
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
3,122

(2,621
)
Net increase in cash and cash equivalents
78,502

16,396

Cash and cash equivalents at beginning of period
627,017

516,112

Cash and cash equivalents at end of period
$
705,519

$
532,508

 
 
 
Supplemental disclosure:
 
 
Cash paid for income taxes, net of refunds received
$
37,412

$
28,093

 
 
 
Non-cash investing activities:
 
 
Net change in PP&E purchased and unpaid at period-end
$
1,538

$
2,248

Purchase consideration payable for acquisition
$
750

$


See accompanying notes to unaudited interim condensed consolidated financial statements

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DOLBY LABORATORIES, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation
Unaudited Interim Condensed Consolidated Financial Statements
We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with U.S. GAAP, and with SEC rules and regulations, which allow for certain information and footnote disclosures that are normally included in annual financial statements prepared in accordance with U.S. GAAP to be condensed or omitted. In our opinion, these unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended September 29, 2017 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 29, 2017, which are included in our Annual Report on Form 10-K filed with the SEC.
The results for the fiscal quarter ended March 30, 2018 are not necessarily indicative of the results to be expected for any subsequent quarterly or annual financial period, including the fiscal year ending September 28, 2018.
Principles of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of Dolby Laboratories, Inc. and our wholly owned subsidiaries. In addition, we have consolidated the financial results of jointly owned affiliated companies in which our principal stockholder has a controlling interest. We report these controlling interests as a separate line in our consolidated statements of operations as net income attributable to controlling interest and in our consolidated balance sheets as a controlling interest. We eliminate all intercompany accounts and transactions upon consolidation.
Operating Segments
Since we operate as a single reporting segment, all required financial segment information is included in our unaudited interim condensed consolidated financial statements. This 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 U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported and disclosed in our unaudited interim condensed consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include estimated 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 liabilities, and stock-based compensation. Actual results could differ from our estimates.
Fiscal Year
Our fiscal year is a 52 or 53 week period ending on the last Friday in September. The fiscal periods presented herein include the 13 week periods ended March 30, 2018 and March 31, 2017. Our fiscal year ending September 28, 2018 (fiscal 2018) and our fiscal year ended September 29, 2017 (fiscal 2017) both consist of 52 weeks.
Reclassifications
We have reclassified certain prior period amounts within our consolidated financial statements and accompanying notes to conform to our current period presentation. These reclassifications did not affect total revenue, operating income, or net income.

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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
Share-Based Compensation.  During the first quarter of fiscal 2018, we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory withholding requirements, as well as classification in the statement of cash flows. Upon adoption, excess tax benefits or deficiencies from stock-based awards are recorded as a component of the income tax provision, whereas they previously were recorded as additional paid-in capital. In the fiscal quarter and year-to-date periods ended March 30, 2018, we recognized an excess tax benefit of $3.4 million and $9.4 million, respectively, related to stock-based awards in the provision for income taxes. We elected to continue to account for forfeitures based on an estimate of expected forfeitures, rather than to account for forfeitures as they occur. Additionally, we adopted the aspects of the guidance affecting the cash flow presentation retrospectively, which results in a reclassification of excess tax benefits from financing activities to operating activities in the consolidated statements of cash flows.
Standards Not Yet Effective
Revenue Recognition.  In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new standard defines a five-step approach for recognizing revenue, which may require a company to use more judgment and make more estimates than under the current guidance. Amongst the elements in the new standard are requirements for 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, to capitalize certain direct costs associated with revenues and contract acquisition costs, and to provide expanded disclosures.
We have evaluated the impact of adoption of Topic 606 on all of our revenue streams and believe that the following are the most significant changes that could occur:

Estimating and recording royalty-based revenue earned from our licensees’ shipments in the same period in which those shipments occurred, rather than recognizing our royalty-based revenue in the quarter in which it is reported to us by our licensees, which is typically in the quarter after those shipments have occurred;
For certain transactions that have minimum commitment or fixed fee terms, recognizing licensing revenues on contract execution instead of over the contract term;
Specified performance obligations for which we have not historically had VSOE and which resulted in the deferral of revenue balances may accelerate revenue recognition as VSOE for the undelivered elements is no longer required to separately recognize revenue for the delivered elements;
Recording a one-time adjustment to retained earnings to reflect the cumulative impact of the changes noted above for the periods prior to adoption.
We have not yet quantified the impact of these anticipated changes.
We plan to adopt the new standard using the full retrospective method, whereby the standard is applied to all periods presented, on the adoption date. Although permitted, we do not intend to early-adopt the new standard, but will adopt it on September 29, 2018, which is the beginning of our first quarter of fiscal 2019.
In addition to our ongoing evaluation of the accounting changes and of our transition options, we are also addressing the impact of the new accounting standard and its expanded disclosure requirements on our policies, processes, controls, and systems.
Leases.  In February 2016, the FASB issued ASU 2016-02, Leases, which amends the existing accounting standards for leases. Under the new guidance, a lessee will be required to recognize a lease liability and right-of-use asset for most leases. The new guidance also modifies the classification criteria and accounting for sales-type and

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direct financing leases, and requires additional disclosures to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. The ASU must be applied using a modified retrospective approach. Upon adoption, we will recognize a lease liability and right-of-use asset for each of our long-term lease arrangements, which exceed 70 as of March 30, 2018. We intend to early adopt this new standard concurrently with the adoption of the new revenue recognition standard beginning September 29, 2018.
We continue to refine our quantification and anticipate this standard will have a material impact on our consolidated balance sheets, but will not have a material impact on our consolidated income statements. We currently expect the most significant impact will be the recognition of right-of-use assets and lease liabilities for operating leases. Our accounting for capital leases is expected to remain substantially unchanged.
Going Concern.  In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards as specified in the guidance. The ASU is effective for us beginning September 29, 2018. Early adoption is permitted, including adoption in an interim period. We do not anticipate that the new standard will materially impact our consolidated financial statements.
Financial Instruments.  In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance requires certain equity investments that are not consolidated or accounted for under the equity method of accounting to be measured at fair value with changes in fair value recognized in net income. Additionally, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The ASU is effective for us beginning September 29, 2018. Early adoption is permitted, including adoption in an interim period. We do not anticipate that the new standard will materially impact our consolidated financial statements.
Cash Flow Classification.  In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance addresses eight specific cash flow issues, with the objective of reducing an existing diversity in practices regarding the manner in which certain cash receipts and payments are presented and classified in the statement of cash flows. The ASU is effective for us beginning September 29, 2018. Early adoption is permitted, including adoption in an interim period, and we are currently evaluating the timing and impact of the standard on our consolidated financial statements.
Income Taxes: Intra-Entity Asset Transfers.  In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The ASU is effective for us beginning September 29, 2018. Early adoption is permitted, including adoption in an interim period. We do not anticipate that the new standard will materially impact our consolidated financial statements.
Restricted Cash.  In November 2016, the FASB issued ASU 2016-18, Restricted Cash — a consensus of the FASB Emerging Issues Task Force, which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The ASU is effective for us beginning September 29, 2018. Early adoption is permitted, including adoption in an interim period. Aside from conforming to new cash flow presentation and restricted cash disclosure requirements, we do not anticipate that the new standard will materially impact our consolidated financial statements.
Accounting for Hedging Activities. In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which enables entities to better portray the economics of their risk management activities in the financial statements while enhancing the transparency and understandability of hedge results. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness. The ASU is effective for us beginning September 29, 2018 and we do not currently plan to early adopt. We do not anticipate that the new standard will materially impact our consolidated financial statements.
Income Taxes: Comprehensive Income. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("Tax Act"). In February 2018, the

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FASB issued ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act and requires entities to provide certain disclosures regarding stranded tax effects. The ASU is effective for us beginning September 28, 2019 and we do not currently plan to early adopt. We are currently evaluating the timing and impact of the standard on our consolidated financial statements.

3. Composition of Certain Financial Statement Captions
The following tables present detailed information from our consolidated balance sheets as of March 30, 2018 and September 29, 2017 (amounts displayed in thousands, except as otherwise noted).
Accounts Receivable
 
March 30,
2018
 
September 29,
2017
Trade accounts receivable
$
117,351

 
$
62,305

Accounts receivable from patent administration program customers
28,491

 
14,412

Accounts receivable, gross
145,842

 
76,717

Less: allowance for doubtful accounts
(4,585
)
 
(2,967
)
Total
$
141,257

 
$
73,750


Trade accounts receivable includes unbilled accounts receivable balances related to amounts that are contractually owed.
Inventories
 
March 30,
2018
 
September 29,
2017
Raw materials
$
3,787

 
$
6,812

Work in process
4,432

 
4,954

Finished goods
15,847

 
13,285

Total
$
24,066

 
$
25,051


Inventories are stated at the lower of cost and net realizable value. Inventory with a consumption period expected to exceed twelve months is recorded within other non-current assets in our consolidated balance sheets. In addition to the amounts shown in the table above, we have included $3.0 million and $1.8 million of raw materials inventory within other non-current assets in our consolidated balance sheets as of March 30, 2018 and September 29, 2017, respectively. We write-down inventory at the time it is deemed excess or obsolete.
Prepaid Expenses And Other Current Assets
 
March 30,
2018
 
September 29,
2017
Prepaid expenses
$
19,686

 
$
16,681

Other current assets
14,542

 
11,383

Income tax receivable
1,016

 
2,444

Total
$
35,244

 
$
30,508

Accrued Liabilities
 
March 30,
2018
 
September 29,
2017
Accrued royalties
$
2,308

 
$
2,274

Amounts payable to patent administration program partners
45,940

 
49,141

Accrued compensation and benefits
63,973

 
92,277

Accrued professional fees
8,347

 
5,530

Unpaid PP&E additions
9,809

 
10,096

Other accrued liabilities
37,416

 
47,716

Total
$
167,793

 
$
207,034


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Other Non-Current Liabilities
 
March 30,
2018
 
September 29,
2017
Supplemental retirement plan obligations
$
3,190

 
$
2,928

Non-current tax liabilities
185,932

 
91,013

Other liabilities
12,960

 
13,573

Total
$
202,082

 
$
107,514


4. Investments & Fair Value Measurements
We use cash holdings to purchase investment grade securities diversified among security types, industries, and issuers. All of our investment securities are measured at fair value, and are recorded within cash equivalents and both short-term and long-term investments in our consolidated balance sheets. With the exception of our mutual fund investments held in our SERP and classified as trading securities, all of our investments are classified as AFS securities.
Our investment securities primarily consist of government bonds, certificates of deposit, municipal debt securities, corporate bonds, U.S. agency securities, and commercial paper. In addition, our cash and cash equivalents may also consist of corporate bonds, money market funds, and municipal debt securities that meet the high liquidity requirements set forth in our accounting policy. Consistent with our investment policy, none of our municipal debt investments are supported by letters of credit or standby purchase agreements. Our cash and investment portfolio consisted of the following (in thousands):
 
March 30, 2018
 
Cost
Unrealized
 
 
Estimated Fair Value
 
Gains
Losses
Total
 
Level 1
Level 2
Level 3
Cash and cash equivalents:








 






Cash
$
642,640





$
642,640

 






Cash equivalents:








 






Commercial paper
44,065

4

(1
)
44,068

 


44,068



Corporate bonds
16,398



(3
)
16,395

 


16,395



Money market funds
2,416



2,416

 
2,416





Cash and cash equivalents
705,519

4

(4
)
705,519


2,416

60,463


 
 
 
 
 
 
 
 
 
Short-term investments:








 






Certificate of deposit (1)
23,848

7

(5
)
23,850

 


23,850



U.S. agency securities
7,305



(22
)
7,283

 


7,283



Government bonds
535



(1
)
534

 
534





Commercial paper
8,575


(16
)
8,559

 


8,559



Corporate bonds
166,141

62

(578
)
165,625

 


165,625



Municipal debt securities
34,736


(90
)
34,646

 


34,646



Short-term investments
241,140

69

(712
)
240,497


534

239,963


 
 
 
 
 
 
 
 
 
Long-term investments:








 






Certificate of deposit (1)
4,845

5


4,850

 


4,850



U.S. agency securities
20,284



(324
)
19,960

 


19,960



Government bonds
15,356



(253
)
15,103

 
15,103





Corporate bonds
196,848

51

(2,473
)
194,426

 


194,426



Municipal debt securities
23,976



(143
)
23,833

 


23,833



Other long-term investments (2)
3,619

271



3,890

 
271





Long-term investments
264,928

327

(3,193
)
262,062


15,374

243,069


 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, and investments
$
1,211,587

$
400

$
(3,909
)
$
1,208,078

 
$
18,324

$
543,495

$

 
 
 
 
 
 
 
 
 
Investments held in supplemental retirement plan:
 
 
 
 
 
 
 
Assets
3,288





3,288

 
3,288





Included in prepaid expenses and other current assets & other non-current assets
 
 
 
 
 
Liabilities
3,288





3,288

 
3,288





Included in accrued liabilities & other non-current liabilities
 
 
 
 
 
(1)
Certificates of deposit include marketable securities, while those with a maturity in excess of one year as of March 30, 2018 are classified within long-term investments.
(2)
Other long-term investments as of March 30, 2018 include a marketable equity security of $0.3 million, and other investments that are not carried at fair value including an equity method investment of $0.1 million and two cost method equity investments of $3.0 million and $0.5 million.

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September 29, 2017
 
Cost
Unrealized
 
 
Estimated Fair Value
 
Gains
Losses
Total
 
Level 1
Level 2
Level 3
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash
$
623,244





$
623,244

 






Cash equivalents:






 
 






Commercial paper
1,223



1,223

 


1,223



Money market funds
2,550



2,550

 
2,550





Cash and cash equivalents
627,017



627,017

 
2,550

1,223


 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Certificate of deposit (1)
17,236

9

(1
)
17,244

 


17,244



U.S. agency securities
9,518


(20
)
9,498

 


9,498



Government bonds
2,034


(6
)
2,028

 
2,028





Commercial paper
15,160

2

(1
)
15,161

 


15,161



Corporate bonds
174,750

54

(163
)
174,641

 


174,641



Municipal debt securities
29,178

16

(9
)
29,185

 


29,185



Short-term investments
247,876

81

(200
)
247,757

 
2,028

245,729


 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
Certificate of deposit (1)
22,940

5

(6
)
22,939

 


22,939



U.S. agency securities
21,779


(178
)
21,601

 


21,601



Government bonds
17,839


(107
)
17,732

 
17,732





Corporate bonds
218,857

327

(537
)
218,647

 


218,647



Municipal debt securities
28,913

29

(25
)
28,917

 


28,917



Other long-term investments (2)
4,171

357


4,528

 
357




Long-term investments
314,499

718

(853
)
314,364

 
18,089

292,104


 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, and investments
$
1,189,392

$
799

$
(1,053
)
$
1,189,138

 
$
22,667

$
539,056

$

 
 
 
 
 
 
 
 
 
Investments held in supplemental retirement plan:
 
 
 
 
 
 
 
Assets
3,026





3,026

 
3,026





Included in prepaid expenses and other current assets & other non-current assets
 
 






Liabilities
3,026





3,026

 
3,026





Included in accrued liabilities & other non-current liabilities
 
 
 
 
 

(1)
Certificates of deposit include marketable securities, while those with a maturity in excess of one year as of September 29, 2017 are classified within long-term investments.
(2)
Other long-term investments as of September 29, 2017 include a marketable equity security of $0.4 million, and other investments that are not carried at fair value including an equity method investment of $0.6 million and two cost method equity investments of $3.0 million and $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.

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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 AFS securities were primarily the result of unfavorable changes in interest rates subsequent to the initial purchase of these securities. The following table presents the gross unrealized losses and fair value for those AFS securities that were in an unrealized loss position for less than twelve months and for twelve months or greater as of March 30, 2018 and September 29, 2017 (in thousands):
 
March 30, 2018
 
September 29, 2017
 
Less Than 12 Months
12 Months Or Greater
 
Less Than 12 Months
12 Months Or Greater
Investment Type
Fair Value
Gross Unrealized Losses
Fair Value
Gross Unrealized Losses
 
Fair Value
Gross Unrealized Losses
Fair Value
Gross Unrealized Losses
Certificate of deposit
$
15,288

$
(5
)
$



 
$
19,750

$
(6
)
$

$

U.S. agency securities
4,704

(85
)
22,539

(261
)
 
19,713

(91
)
11,386

(108
)
Government bonds
13,730

(229
)
1,906

(26
)
 
15,029

(64
)
4,729

(49
)
Commercial paper
19,822

(16
)


 
4,292

(1
)


Corporate bonds
212,227

(2,070
)
106,413

(984
)
 
125,890

(251
)
109,806

(449
)
Municipal debt securities
56,927

(217
)
1,553

(15
)
 
26,749

(24
)
3,625

(10
)
Total
$
322,698

$
(2,622
)
$
132,411

$
(1,286
)
 
$
211,423

$
(437
)
$
129,546

$
(616
)
Although we had certain securities that were in an unrealized loss position as of March 30, 2018, 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 30, 2018 or September 29, 2017 to represent an other-than-temporary impairment, nor do we consider any of the unrealized losses to be credit losses.
Investment Maturities.    The following table summarizes the amortized cost and estimated fair value of the AFS securities within our investment portfolio based on stated maturities as of March 30, 2018 and September 29, 2017, which are recorded within cash equivalents and both short and long-term investments in our consolidated balance sheets (in thousands):
 
March 30, 2018
 
September 29, 2017
Range of maturity
Amortized Cost
Fair Value
 
Amortized Cost
Fair Value
Due within 1 year
$
304,019

$
303,376

 
$
251,649

$
251,530

Due in 1 to 2 years
138,508

137,073

 
213,555

213,154

Due in 2 to 3 years
122,802

121,099

 
96,773

96,682

Total
$
565,329

$
561,548

 
$
561,977

$
561,366


5. Property, Plant, & Equipment
Property, plant, and equipment are recorded at cost, with depreciation expense included in cost of licensing, cost of products, cost of services, R&D, S&M, and G&A expenses in our consolidated statements of operations. PP&E consist of the following (in thousands):
 
March 30,
2018
 
September 29,
2017
Land
$
43,430

 
$
43,364

Buildings and building improvements
283,037

 
281,196

Leasehold improvements
65,981

 
65,034

Machinery and equipment
105,593

 
98,437

Computer equipment and software
185,097

 
173,341

Furniture and fixtures
30,066

 
28,118

Equipment provided under operating leases
117,060

 
97,456

Construction-in-progress
4,197

 
3,673

Property, plant, and equipment, gross
834,461

 
790,619

Less: accumulated depreciation
(333,480
)
 
(305,344
)
Property, plant, & equipment, net
$
500,981

 
$
485,275


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6. Goodwill & Intangible Assets
Goodwill
The following table outlines changes to the carrying amount of goodwill (in thousands):
 
Goodwill
Balance at September 29, 2017
$
311,087

Acquired goodwill
4,807

Translation adjustments
664

Balance at March 30, 2018
$
316,558

Intangible Assets
Our intangible assets are stated at their original cost less accumulated amortization, and principally consist of acquired technology, patents, trademarks, customer relationships and contracts. Intangible assets subject to amortization consist of the following (in thousands):
 
March 30, 2018
 
September 29, 2017
Intangible Assets
Cost
Accumulated
Amortization
Net
 
Cost
Accumulated
Amortization
Net
Acquired patents and technology
$
315,125

$
(141,355
)
$
173,770

 
$
299,707

$
(128,986
)
$
170,721

Customer relationships
56,866

(39,713
)
17,153

 
56,843

(38,368
)
18,475

Other intangibles
22,770

(22,353
)
417

 
22,742

(22,290
)
452

Total
$
394,761

$
(203,421
)
$
191,340

 
$
379,292

$
(189,644
)
$
189,648

We purchase various patents and developed technologies that enable us to further develop our audio, imaging and potential product offerings.
With regard to our purchase of intangible assets during the periods presented, the following table summarizes the consideration paid, the weighted-average useful lives over which the acquired assets will be amortized using the greater of either the straight-line basis or a ratio-to-revenue method, and the classification of their amortized expense in our consolidated statements of operations:
Fiscal Period
Total Purchase Consideration (1)
Weighted-Average
Useful Life
 
(in millions)
(in years)
Fiscal 2017
 
 
Q1 - Quarter ended December 30, 2016
None
Q2 - Quarter ended March 31, 2017
5.3
18.0
 
$5.3
18.0
Fiscal 2018
 
 
Q1 - Quarter ended December 29, 2017
$12.0
14.1
Q2 - Quarter ended March 30, 2018
$2.8
5.3
 
$14.8
12.5
(1) Amortization expense on the intangible assets from patent portfolio and business acquisitions is included within cost of revenue, R&D, and G&A in our consolidated statements of operations.
Amortization expense for our intangible assets is included in cost of licensing, cost of products, R&D, S&M, and G&A expenses in our consolidated statements of operations. Amortization expense was $6.6 million and $8.4 million in the second quarter of fiscal 2018 and 2017, respectively, and $13.1 million and $16.8 million in the fiscal year-to-date period ended March 30, 2018 and March 31, 2017, respectively. As of March 30, 2018, estimated amortization

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expense in future fiscal periods was as follows (in thousands):
Fiscal Year
 Amortization Expense
Remainder of 2018
$
13,468

2019
26,415

2020
25,952

2021
25,926

2022
23,261

Thereafter
76,318

Total
$
191,340


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 30, 2018, we had authorized 500,000,000 Class A shares and 500,000,000 Class B shares. At March 30, 2018, we had 61,364,751 shares of Class A common stock and 42,733,038 shares of Class B common stock issued and outstanding. Holders of our Class A and Class B common stock have identical rights, except that holders of our Class A common stock are entitled to one vote per share and holders of our Class B common stock are entitled to ten votes per share. Shares of Class B common stock can be converted to shares of Class A common stock at any time at the option of the stockholder and automatically convert upon sale or transfer, except for certain transfers specified in our amended and restated certificate of incorporation.
Stock Incentive Plans
2005 Stock Plan.    In January 2005, our stockholders approved our 2005 Stock Plan, which our Board of Directors adopted in November 2004. The 2005 Stock Plan became effective on February 16, 2005, the day prior to the completion of our initial public offering. Our 2005 Stock Plan, as amended and restated, provides for the ability to grant incentive stock options, non-qualified stock options, restricted stock, RSUs, stock appreciation rights, deferred stock units, performance units, performance bonus awards, and performance shares. A total of 46.0 million shares of our Class A common stock is authorized for issuance under the 2005 Stock Plan. For awards granted prior to February 2011, any shares subject to an award with a per share price less than the fair market value of our Class A common stock on the date of grant and any shares subject to an outstanding RSU award will be counted against the authorized share reserve as two shares for every one share subject to the award, and if returned to the 2005 Stock Plan, such shares will be counted as two shares for every one share returned. For those awards granted from February 2011 onward, any shares subject to an award with a per share price less than the fair market value of our Class A common stock on the date of grant and any shares subject to an outstanding RSU award will be counted against the authorized share reserve as 1.6 shares for every one share subject to the award, and if returned to the 2005 Stock Plan, such shares will be counted as 1.6 shares for every one share returned.
Stock Options.    Stock options are granted at fair market value on the date of grant. Options granted to employees and officers prior to June 2008 generally vested over four years, with equal annual cliff-vesting and expire on the earlier of ten years after the date of grant or three months after termination of service. Options granted to employees and officers from June 2008 onward generally vest over four years, with 25% of the shares subject to the option becoming exercisable on the one-year anniversary of the date of grant and the balance of the shares vesting in equal monthly installments over the following 36 months. These options expire on the earlier of ten years after the date of grant or three months after termination of service. All options granted vest over the requisite service period and upon the exercise of stock options, we issue new shares of Class A common stock under the 2005 Stock Plan. Our 2005 Stock Plan also allows us to grant stock awards which vest based on the satisfaction of specific performance criteria.
Performance-Based Stock Options (PSOs).    In fiscal 2016, we began granting PSOs to our executive officers with shares of our Class A common stock underlying such options. The contractual term for the PSOs is seven years, with vesting contingent upon market-based performance conditions, representing the achievement of specified Dolby annualized TSR targets at the end of a three-year measurement period following the date of grant. If the minimum conditions are met, the PSOs earned will cliff vest on the third anniversary of the grant date, upon certification of

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achievement of the performance conditions by our Compensation Committee. Anywhere from 0% to 125% of the shares subject to a PSO may vest based on achievement of the performance conditions at the end of the three-year performance period.
In valuing the PSOs, which will be recognized as compensation cost, we used a Monte Carlo valuation model. Aside from the use of an expected term for the PSOs commensurate with their shorter contractual term, the nature of the valuation inputs used in the Monte Carlo valuation model were consistent with those used to value our non-performance based options granted under the 2005 Plan. Compensation cost is being amortized on a straight-line basis over the requisite service period.
On December 15, 2017, we granted PSOs to our executive officers exercisable for an aggregate of 264,000 shares at the target award amount, which would be exercisable up to an aggregate of 330,000 shares at 125% of the target award amount. On December 15, 2016, we granted PSOs to our executive officers exercisable for an aggregate of 276,199 shares at the target award amount, which would be exercisable up to an aggregate of 345,248 shares at 125% of the target award amount. On December 15, 2015, we granted PSOs to our executive officers exercisable for an aggregate of 335,699 shares at the target award amount, which would be exercisable up to an aggregate of 419,623 shares at 125% of the target award amount. As of March 30, 2018, PSOs which would be exercisable for an aggregate of 784,898 shares at the target award amount (981,121 at 125% of the target award amount) were outstanding.
The following table summarizes information about all stock options issued under our 2005 Stock Plan:
 
Shares
Weighted-Average
Exercise Price
Weighted-Average
Remaining
Contractual Life
Aggregate
Intrinsic
Value (1)
 
(in thousands)
 
(in years)
(in thousands)
Options outstanding at September 29, 2017
8,741

$
38.65

 
 
Grants
1,281

62.33

 
 
Exercises
(1,736
)
37.17

 
 
Forfeitures and cancellations
(366
)
40.46

 
 
Options outstanding at March 30, 2018
7,920

42.72

7.0
$
165,037

Options vested and expected to vest at March 30, 2018
7,443

42.01

6.9
160,387

Options exercisable at March 30, 2018
4,015

$
37.29

5.9
105,478

(1)
Aggregate intrinsic value is based on the closing price of our Class A common stock on March 30, 2018 of $63.56 and excludes the impact of options that were not in-the-money.
Restricted Stock Units.    Beginning in fiscal 2008, we began granting RSUs to certain directors, officers, and employees under our 2005 Stock Plan. Awards granted to employees and officers generally vest over four years, with equal annual cliff-vesting. Awards granted to directors prior to November 2010 generally vested over three years, with equal annual cliff-vesting. Awards granted after November 2010 and prior to fiscal 2014 to new directors vested over approximately two years, with 50% vesting per year, while awards granted from November 2010 onward to ongoing directors generally vest over approximately one year. Awards granted to new directors from fiscal 2014 onward vest on the earlier of the first anniversary of the award’s date of grant, or the day immediately preceding the date of the next annual meeting of stockholders that occurs after the award’s date of grant. Our 2005 Stock Plan also allows us to grant RSUs that vest based on the satisfaction of specific performance criteria, although no such awards had been granted as of March 30, 2018. At each vesting date, the holder of the award is issued shares of our Class A common stock. Compensation expense from these awards is equal to the fair market value of our Class A common stock on the date of grant and is recognized on a straight-line basis over the requisite service period.
The following table summarizes information about RSUs issued under our 2005 Stock Plan:
 
Shares
Weighted-Average
Grant Date
Fair Value 
 
(in thousands)
 
Non-vested at September 29, 2017
2,839

$
44.38

Granted
1,144

62.42

Vested
(943
)
40.28

Forfeitures
(246
)
42.98

Non-vested at March 30, 2018
2,794

$
53.27


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Employee Stock Purchase Plan.   Our plan allows eligible employees to have up to 10 percent of their eligible compensation withheld and used to purchase Class A common stock, subject to a maximum of $25,000 worth of stock purchased in a calendar year or no more than 1,000 shares in an offering period, whichever is less. An offering period consists of successive six-month purchase periods, with a look back feature to our stock price at the commencement of a one-year offering period. The plan provides for a discount equal to 15 percent of the lower of the closing price of our Class A common stock on the New York Stock Exchange on the first and last day of the offering periods. The plan also includes an automatic reset feature that provides for an offering period to be reset and recommenced to a new lower-priced offering if the offering price of a new offering period is less than that of the immediately preceding offering period.
Stock Option Valuation Assumptions
We use the Black-Scholes option pricing model to determine the estimated fair value of employee stock options at the date of the grant. The Black-Scholes model includes inputs that require us to make certain estimates and assumptions regarding the expected term of the award, as well as the future risk-free interest rate, and the volatility of our stock price over the expected term of the award.
Expected Term.    The expected term of an award represents the estimated period of time that options granted will remain outstanding, and is measured from the grant date to the date at which the option is either exercised or canceled. Our determination of the expected term involves an evaluation of historical terms and other factors such as the exercise and termination patterns of our employees who hold options to acquire our Class A common stock, and is based on certain assumptions made regarding the future exercise and termination behavior.
Risk-Free Interest Rate.    The risk-free interest rate is based on the yield curve of United States Treasury instruments in effect on the date of grant. In determining an estimate for the risk-free interest rate, we use average interest rates based on these instruments’ constant maturities with a term that approximates and corresponds with the expected term of our awards.
Expected Stock Price Volatility.    The expected volatility represents the estimated volatility in the price of our Class A common stock over a time period that approximates the expected term of the awards, and is determined using a blended combination of historical and implied volatility. Historical volatility is representative of the historical trends in our stock price for periods preceding the measurement date for a period that is commensurate with the expected term. Implied volatility is based upon externally traded option contracts of our Class A common stock.
Dividend Yield.    The dividend yield is based on our anticipated dividend payout over the expected term of our option awards. Dividend declarations and the establishment of future record and payment dates are subject to the Board of Directors’ continuing determination that the dividend policy is in the best interests of our stockholders. The dividend policy may be changed or canceled at the discretion of the Board of Directors at any time.
The weighted-average assumptions used in the determination of the fair value of our stock options were as follows:
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 30,
2018
March 31,
2017
 
March 30,
2018
March 31,
2017
Expected life (in years)
5.06

5.13

 
5.06

5.13

Risk-free interest rate
2.5
%
1.9
%
 
2.2
%
2.1
%
Expected stock price volatility
21.9
%
27.0
%
 
22.6
%
27.5
%
Dividend yield
1.0
%
1.2
%
 
1.1
%
1.1
%
Stock-Based Compensation Expense
Stock-based compensation expense for equity awards granted to employees is determined by estimating their fair value on the date of grant, and recognizing that value as an expense on a straight-line basis over the requisite service period in which our employees earn the awards. Compensation expense related to these equity awards is recognized net of estimated forfeitures, which reduce the expense recorded in the consolidated statements of operations. The selection of applicable estimated forfeiture rates is based on an evaluation of trends in our historical forfeiture data with consideration for other potential driving factors. If in subsequent periods actual forfeitures significantly differ from our initial estimates, we will revise such estimates accordingly.

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Table of Contents


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 30,
2018
March 31,
2017
 
March 30,
2018
March 31,
2017
Compensation Expense - By Type
 
 
 
 
 
Stock options
$
5,090

$
4,575

 
$
12,054

$
9,378

Restricted stock units
11,632

10,514

 
22,412

22,097

Employee stock purchase plan
969

894

 
1,909

1,723

Total stock-based compensation
17,691

15,983

 
36,375

33,198

Benefit from income taxes
(3,657
)
(4,635
)
 
(7,553
)
(9,663
)
Total stock-based compensation, net of tax
$
14,034

$
11,348

 
$
28,822

$
23,535


Expense - By Income Statement Line Item Classification
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 30,
2018
March 31,
2017
 
March 30,
2018
March 31,
2017
Compensation Expense - By Classification
 
 
 
 
Cost of products
$
245

$
223

 
$
507

$
481

Cost of services
142

123

 
260

257

Research and development
4,750

4,506

 
9,627

9,436

Sales and marketing
5,846

6,509

 
11,797

13,376

General and administrative
6,708

4,622

 
14,184

9,648

Total stock-based compensation expense
17,691

15,983

 
36,375

33,198

Benefit from income taxes
(3,657
)
(4,635
)
 
(7,553
)
(9,663
)
Total stock-based compensation, net of tax
$
14,034

$
11,348

 
$
28,822

$
23,535

The tax benefit that we recognize from shares issued under our ESPP is excluded from the tables above. This benefit was as follows (in thousands):
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 30,
2018
March 31,
2017
 
March 30,
2018
March 31,
2017
Tax benefit - shares issued under ESPP
$
52

$
95

 
$
357

$
419

Unrecognized Compensation Expense.    At March 30, 2018, 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 2.4 years. At March 30, 2018, total unrecorded compensation expense associated with RSUs expected to vest was approximately $108.3 million, which is expected to be recognized over a weighted-average period of 2.7 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 30, 2018 (in thousands):
Authorization Period
Authorization Amount
Fiscal 2010: November 2009
$
250,000

Fiscal 2010: July 2010
300,000

Fiscal 2011: July 2011
250,000

Fiscal 2012: February 2012
100,000

Fiscal 2015: October 2014
200,000

Fiscal 2017: January 2017
200,000

Total
$
1,300,000


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Table of Contents


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 30, 2018, the remaining authorization to purchase additional shares is approximately $117.0 million.
The following table provides information regarding share repurchase activity under the program during fiscal 2018:
Quarterly Repurchase Activity
Shares
Repurchased
Cost in thousands (1)
Average Price Paid Per Share (2)
 
 
 
 
Q1 - Quarter ended December 29, 2017
493,884

$
29,999

$
60.73

Q2 - Quarter ended March 30, 2018
77,705

5,001

64.33

Total
571,589

$
35,000

 
(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 dividends declared under the program in relation to fiscal 2018:
Fiscal Period
Announcement Date
Record Date
Payment Date
Cash Dividend Per Common Share
Dividend Payment
 
Fiscal 2018
 
 
 
 
 
 
Q1 - Quarter ended December 29, 2017
January 24, 2018
February 5, 2018
February 14, 2018
$
0.16

$16.6 million
 
Q2 - Quarter ended March 30, 2018
April 24, 2018
May 7, 2018
May 16, 2018
$
0.16

$16.7 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 AFS marketable investment securities and the gains and losses from the translation of assets and liabilities denominated in non-U.S. dollar functional currencies. Until realized and reported as a component of net income, these comprehensive income items accumulate and are included within accumulated other comprehensive income, a subsection within stockholders’ equity in our consolidated balance sheets. Unrealized gains and losses on our investment securities are reclassified from AOCI into earnings when realized upon sale, and are determined based on specific identification of securities sold.

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Table of Contents


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 30, 2018
 
Fiscal Year-To-Date Ended
March 30, 2018
 
Investment Securities
Currency Translation Adjustments
Total
 
Investment Securities
Currency Translation Adjustments
Total
Beginning Balance
$
(1,970
)
$
(6,152
)
$
(8,122
)
 
$
(377
)
$
(7,376
)
$
(7,753
)
Other comprehensive income before reclassifications:





 




 
Unrealized gains/(losses) - investment securities
(1,393
)


(1,393
)
 
(3,089
)


(3,089
)
Foreign currency translation gains/(losses) (1)


4,932

4,932

 


6,430

6,430

Income tax effect - benefit/(expense)
16

(867
)
(851
)
 
103

(1,141
)
(1,038
)
Net of tax
(1,377
)
4,065

2,688

 
(2,986
)
5,289

2,303

Amounts reclassified from AOCI into earnings:




 
 




 
Realized gains/(losses) - investment securities (1)
(227
)


(227
)
 
(207
)


(207
)
Income tax effect - benefit/(expense) (2)
45



45

 
41



41

Net of tax
(182
)

(182
)
 
(166
)

(166
)
Net current-period other comprehensive income/(loss)
(1,559
)
4,065

2,506

 
(3,152
)
5,289

2,137

Ending Balance
$
(3,529
)
$
(2,087
)
$
(5,616
)
 
$
(3,529
)
$
(2,087
)
$
(5,616
)
 
Fiscal Quarter Ended
March 31, 2017
 
Fiscal Year-To-Date
March 31, 2017
 
Investment Securities
Currency Translation Adjustments
Total
 
Investment Securities
Currency Translation Adjustments
Total
Beginning Balance
$
(1,277
)
$
(18,402
)
$
(19,679
)
 
$
742

$
(10,939
)
$
(10,197
)
Other comprehensive income before reclassifications: