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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 December 28, 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

https://cdn.kscope.io/798d11abf8db052aeec9013f1c8be9ec-image0a23.jpg
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý
 
Accelerated filer  ¨
Non-accelerated filer  ¨ 
 
Smaller reporting company  ¨
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý
On January 25, 2019, the registrant had 64,386,897 shares of Class A common stock, par value $0.001 per share, and 38,229,820 shares of Class B common stock, par value $0.001 per share, outstanding.


Table of Contents


DOLBY LABORATORIES, INC.
FORM 10-Q
For the Fiscal Quarter Ended December 28, 2018
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
AFS
 
Available-For-Sale (Securities)
AOCI
 
Accumulated Other Comprehensive Income
APIC
 
Additional-Paid In-Capital
ASC
 
Accounting Standards Codification
ASP
 
Average Selling Price
ASU
 
Accounting Standards Update
ATSC
 
Advanced Television Systems Committee
AVC
 
Advanced Video Coding
AVR
 
Audio/Video Receiver
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)

 
December 28,
2018
September 28, 2018
(as adjusted)
ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
$
790,787

$
918,063

Restricted cash
8,999

7,187

Short-term investments
175,557

178,138

Accounts receivable, net of allowance for doubtful accounts of $6,860 and $5,258
181,614

200,933

Contract assets
199,480

165,959

Inventories
27,765

26,206

Prepaid expenses and other current assets
39,601

34,890

Total current assets
1,423,803

1,531,376

Long-term investments
201,428

187,782

Property, plant, and equipment, net
523,193

514,182

Intangible assets, net
189,476

184,019

Goodwill
326,856

327,982

Deferred taxes
107,313

74,766

Other non-current assets
50,991

42,280

Total assets
$
2,823,060

$
2,862,387

 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
Accounts payable
$
9,811

$
21,922

Accrued liabilities
265,091

272,967

Income taxes payable
121

2,680

Contract liabilities
19,562

20,502

Total current liabilities
294,585

318,071

Non-current contract liabilities
23,115

22,853

Other non-current liabilities
156,406

150,960

Total liabilities
474,106

491,884

 
 
 
Stockholders’ equity:
 
 
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 64,270,978 shares issued and outstanding at December 28, 2018 and 63,978,752 at September 28, 2018
60

61

Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 38,229,820 shares issued and outstanding at December 28, 2018 and 39,261,035 at September 28, 2018
41

41

Additional paid-in capital

66,127

Retained earnings
2,361,843

2,313,539

Accumulated other comprehensive (loss)
(18,639
)
(15,832
)
Total stockholders’ equity – Dolby Laboratories, Inc.
2,343,305

2,363,936

Controlling interest
5,649

6,567

Total stockholders’ equity
2,348,954

2,370,503

Total liabilities and stockholders’ equity
$
2,823,060

$
2,862,387

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
 
December 28,
2018
December 29,
2017
Revenue:
 
 
Licensing
$
260,279

$
270,172

Products and services
42,097

29,355

Total revenue
302,376

299,527

 
 
 
Cost of revenue:
 
 
Cost of licensing
11,397

9,259

Cost of products and services
27,232

21,634

Total cost of revenue
38,629

30,893

 
 
 
Gross margin
263,747

268,634

 
 
 
Operating expenses:
 
 
Research and development
58,647

56,444

Sales and marketing
85,602

70,149

General and administrative
50,813

48,285

Restructuring charges/(credits)
14

(197
)
Total operating expenses
195,076

174,681

 
 
 
Operating income
68,671

93,953

 
 
 
Other income/expense:
 
 
Interest income
5,185

3,781

Interest expense
(45
)
(35
)
Other income/(expense), net
443

(1,152
)
Total other income
5,583

2,594

 
 
 
Income before income taxes
74,254

96,547

Provision for income tax (expense)/benefit
24,104

(149,705
)
Net income/(loss) including controlling interest
98,358

(53,158
)
Less: net (income) attributable to controlling interest
(139
)
(144
)
Net income/(loss) attributable to Dolby Laboratories, Inc.
$
98,219

$
(53,302
)
 
 
 
Net income/(loss) per share:
 
 
Basic
$
0.96

$
(0.52
)
Diluted
$
0.93

$
(0.52
)
Weighted-average shares outstanding:
 
 
Basic
102,677

102,552

Diluted
106,130

102,552

 
 
 
Related party rent expense:
 
 
Included in operating expenses
$
880

$
784

Included in net income attributable to controlling interest
$
176

$
177

 
 
 
Cash dividend declared per common share
$
0.19

$
0.16

Cash dividend paid per common share
$
0.19

$
0.16

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
 
December 28,
2018
December 29, 2017
(as adjusted)
Net income/(loss) including controlling interest
$
98,358

$
(53,158
)
Other comprehensive income:
 
 
Currency translation adjustments, net of tax
(3,728
)
1,218

Unrealized gains/(losses) on investments, net of tax
770

(1,593
)
Comprehensive income/(loss)
95,400

(53,533
)
Less: comprehensive (income)/loss attributable to controlling interest
12

(138
)
Comprehensive income/(loss) attributable to Dolby Laboratories, Inc.
$
95,412

$
(53,671
)
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 28, 2018 (as adjusted)
$
102

$
66,127

$
2,313,539

$
(15,832
)
$
2,363,936

$
6,567

$
2,370,503

Net income




98,219



98,219

139

98,358

Currency translation adjustments, net of tax of $0






(3,577
)
(3,577
)
(151
)
(3,728
)
Unrealized losses on investments, net of tax of $40






770

770


770

Distributions to controlling interest









(906
)
(906
)
Stock-based compensation expense


21,482





21,482



21,482

Repurchase of common stock


(82,203
)
(30,342
)


(112,545
)


(112,545
)
Cash dividends declared and paid on common stock




(19,573
)


(19,573
)


(19,573
)
Common stock issued under employee stock plans


14,272





14,272



14,272

Tax withholdings on vesting of restricted stock
(1
)
(19,678
)




(19,679
)


(19,679
)
Balance at December 28, 2018
$
101

$

$
2,361,843

$
(18,639
)
$
2,343,305

$
5,649

$
2,348,954


 
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 (as adjusted)
$
101

$
61,331

$
2,337,948

$
(7,753
)
$
2,391,627

$
7,100

$
2,398,727

Net income/(loss)




(53,302
)


(53,302
)
144

(53,158
)
Currency translation adjustments, net of tax of $(274)






1,224

1,224

(6
)
1,218

Unrealized losses on investments, net of tax of $83






(1,593
)
(1,593
)

(1,593
)
Distributions to controlling interest









(1,021
)
(1,021
)
Stock-based compensation expense


18,684





18,684



18,684

Repurchase of common stock


(29,993
)




(29,993
)


(29,993
)
Cash dividends declared and paid on common stock




(16,377
)


(16,377
)


(16,377
)
Common stock issued under employee stock plans
1

41,462





41,463



41,463

Tax withholdings on vesting of restricted stock


(18,821
)




(18,821
)


(18,821
)
Balance at December 29, 2017 (as adjusted)
$
102

$
72,663

$
2,268,269

$
(8,122
)
$
2,332,912

$
6,217

$
2,339,129


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 Quarter-To-Date Ended
 
December 28,
2018
December 29,
2017
Operating activities:
 
 
Net income/(loss) including controlling interest
$
98,358

$
(53,158
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
20,029

19,882

Stock-based compensation
21,482

18,684

Amortization of premium on investments
309

742

Provision for doubtful accounts
1,605

1,119

Deferred income taxes
(32,571
)
32,725

Other non-cash items affecting net income
3,393

587

Changes in operating assets and liabilities:


Accounts receivable
17,736

(41,526
)
Inventories
(2,709
)
(1,491
)
Contract assets
(33,519
)
(22,449
)
Prepaid expenses and other assets
(13,157
)
(6,591
)
Accounts payable and other liabilities
(26,332
)
(33,006
)
Income taxes, net
1,546

99,551

Contract liabilities
(678
)
1,984

Other non-current liabilities
1,460

96

Net cash provided by operating activities
56,952

17,149

 
 
 
Investing activities:
 
 
Purchases of investment securities
(63,329
)
(74,479
)
Proceeds from sales of investment securities
32,582

28,383

Proceeds from maturities of investment securities
19,785

49,476

Purchases of PP&E
(18,539
)
(19,275
)
Purchase of intangible assets
(12,065
)
(11,198
)
Net cash used in investing activities
(41,566
)
(27,093
)
 
 
 
Financing activities:
 
 
Proceeds from issuance of common stock
14,272

41,463

Repurchase of common stock
(112,545
)
(29,993
)
Payment of cash dividend
(19,573
)
(16,377
)
Distribution to controlling interest
(906
)
(1,021
)
Shares repurchased for tax withholdings on vesting of restricted stock
(19,679
)
(15,346
)
Net cash used in financing activities
(138,431
)
(21,274
)
 
 
 
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash
(2,419
)
870

Net decrease in cash, cash equivalents, and restricted cash
(125,464
)
(30,348
)
Cash, cash equivalents, and restricted cash at beginning of period
925,250

634,368

Cash, cash equivalents, and restricted cash at end of period
$
799,786

$
604,020

 
 
 
Supplemental disclosure:
 
 
Cash paid for income taxes, net of refunds received
$
10,722

$
17,355

 
 
 
Non-cash investing activities:
 
 
Net change in PP&E purchased and unpaid at period-end
$
6,642

$
2,333


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 28, 2018 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 28, 2018, which are included in our Annual Report on Form 10-K filed with the SEC.
The results for the fiscal quarter ended December 28, 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 27, 2019.
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 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 shipments by our licensees for which we are owed a sales–based royalty, estimated selling prices for performance obligations within 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 December 28, 2018 and December 29, 2017. Our fiscal year ending September 27, 2019 (fiscal 2019) and our fiscal year ended September 28, 2018 (fiscal 2018) 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
During the first quarter of fiscal 2019, we adopted the following standards:
Revenue Recognition In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASC 606"), which outlines a comprehensive revenue recognition model. The standard requires revenue recognition to account for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services, and in our case, requires the use of more judgment and estimates than the previous accounting requirements. ASC 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, under which the incremental costs associated with obtaining a contract are required to be capitalized and amortized as expense as the contract’s performance obligations are satisfied. We do not capitalize sales commission costs because our performance obligations on which we pay commissions are complete at contract execution.
We adopted ASC 606 utilizing the full retrospective method of transition which requires a recast of each prior reporting period presented. The most significant impacts of adopting ASC 606 are as follows:
We estimate and record per-unit royalty-based revenue earned from our licensees’ shipments in the same period in which those shipments occur, instead of recognizing our per-unit royalty-based revenue in the quarter in which it is reported to us by our licensees, which is generally in the quarter after those shipments have occurred. To the extent that our revenues are influenced by seasonal trends, the trends will impact revenue one fiscal quarter earlier than was previously the case;
We record a favorable or unfavorable adjustment based on the difference between estimated and actual sales when we receive reporting of sales–based royalties on royalty statements from the licensees, generally in the subsequent fiscal quarter;
For certain transactions that have extended payment and minimum commitment terms with no further performance obligations, we recognize licensing revenues on the later of contract execution or effective date regardless of when the amounts are due and payable;
We recorded a one-time adjustment of $174.4 million to the period ending September 29, 2018 retained earnings to reflect the full impact of the accounting upon adoption.
We adjusted our condensed consolidated financial statements from amounts previously reported to reflect the adoption of the new standard. Select unaudited condensed consolidated statement of income line items, which reflect the adoption of the new standard, are as follows (in thousands, except per share data):
 
Fiscal Quarter Ended December 29, 2017
(as previously reported)
Effect of Adopting ASC 606
Fiscal Quarter Ended December 29, 2017
(as adjusted)
Revenue
$
287,797

$
11,730

$
299,527

Gross margin
256,921

11,713

268,634

Provision for income taxes
(166,312
)
16,607

(149,705
)
Net income/(loss) attributable to Dolby Laboratories, Inc.
(81,622
)
28,320

(53,302
)
Diluted earnings per share
$
(0.80
)
$
0.28

$
(0.52
)

Select condensed consolidated balance sheet line items, which reflect the adoption of the new standard, are as follows (in thousands):

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Table of Contents


 
September 28, 2018
(as previously reported)
Effect of Adopting ASC 606
September 28, 2018
(as adjusted)
ASSETS
 
 
 
Accounts receivable, net
$
137,151

$
63,782

$
200,933

Contract assets

165,959

165,959

Prepaid expenses and other current assets
35,209

(319
)
34,890

Deferred taxes
101,070

(26,304
)
74,766

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Accrued liabilities
223,594

49,373

272,967

Contract liabilities
23,931

(3,429
)
20,502

Non-current contract liabilities
40,064

(17,211
)
22,853

Retained earnings
2,139,154

174,385

2,313,539


Select condensed consolidated statement of cash flows line items, which reflect the adoption of the new standard, are as follows (in thousands):
 
Fiscal Quarter Ended December 29, 2017
(as previously reported)¹
Effect of Adopting ASC 606
Fiscal Quarter Ended December 29, 2017
(as adjusted)
Operating activities:
 
 
 
Net income/(loss) including controlling interest
$
(81,478
)
$
28,320

$
(53,158
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Deferred income taxes
51,074

(18,349
)
32,725

Changes in operating assets and liabilities:
 


 
Accounts receivable
(50,268
)
8,742

(41,526
)
Contract assets

(22,449
)
(22,449
)
Prepaid expenses and other assets
(6,609
)
18

(6,591
)
Accounts payable and other liabilities
(35,390
)
2,384

(33,006
)
Deferred revenue
650

1,334

1,984

Net cash provided by operating activities
17,149


17,149

¹ Previously reported statement of cash flows in the table above reflects the adoption of ASU 2016-18. The impact to our previously reported condensed consolidated statement of cash flows is not material. Refer to disclosure below for further detail.

In our adoption and as allowed by ASC 606, we:
used the transaction price at the date on which the contract was completed rather than estimating variable consideration amounts in the comparative reporting period;
did not disclose the amount of the transaction price allocated to the remaining performance obligations or provide an explanation of when we expect to recognize that amount as revenue for reporting periods presented before the date of initial adoption;
reflected the aggregate effect of contract modifications in accounting for the contracts open as of the earliest reporting period presented;
did not adjust transaction prices for the effects of a significant financing component, if at contract inception, we expected the period between customer payment and the transfer of goods or services to be one year or less.

In March 2016, the FASB also issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers ("ASC 606"), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ("ASU 2016-08"), which amended the principal-versus-agent implementation guidance and illustrations in ASU 2014-09. ASU 2016-08 clarifies that an entity should evaluate when it is the principal or agent for each specified good or service promised in a contract with a customer. We evaluated our contracts executed with and on our behalf with VIA Licensing Corporation, our wholly-owned subsidiary that manages patent pools on behalf of third party patent owners and concluded that VIA performs its functions as an agent to the patent pool licensors, which includes Dolby.

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Accordingly, we recognize our administrative fees and royalties net of the consideration paid to the patent licensors in the pool.
Cash Flow Classification. During the first quarter of fiscal 2019, we adopted ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new standard addresses eight specific cash flow issues related to the classification and presentation of cash receipts and payments in the statement of cash flows. The adoption of these updates did not have a material impact on Dolby’s consolidated financial statements.
Income Taxes: Intra-Entity Asset Transfers. During the first quarter of fiscal 2019, we adopted ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new standard 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 adoption of the guidance did not have a material impact on Dolby's consolidated financial statements.
Restricted Cash.  During the first quarter of fiscal 2019, we adopted 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 standard 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. We adopted the new guidance using the retrospective transition approach. The reclassified restricted cash balances from investing activities to changes in cash, cash equivalents, and restricted cash on the condensed consolidated statements of cash flows were not material for all periods presented. The adjusted condensed consolidated statement of cash flows for the prior comparative period conforms with the new standard.
Accounting for Hedging Activities. During the first quarter of fiscal 2019, we adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new standard eliminates the requirement to separately measure and report hedge ineffectiveness. The adoption of the standard did not have a material impact on Dolby's consolidated financial statements.
Standards Not Yet Effective
Leases.  In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends the existing accounting standards for leases. Under the new standard, a lessee will be required to recognize a lease liability and right-of-use asset for most leases. The new standard also modifies the classification criteria and accounting for sales-type and 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. Topic 842 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 lease arrangements. We anticipate adoption of the standard will not have a material impact on our consolidated income statements. We plan to elect the practice expedients upon transition that will retain the lease classification and initial direct costs for any leases that exist prior to adoption of the standard. We will not reassess whether any contracts entered into prior to adoption are leases. We are in the process of evaluating our existing lease contracts and implementing changes to our systems. ASU 2016-02 is effective for Dolby beginning September 28, 2019, and we do not currently plan to early adopt.
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 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 Dolby 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.
Collaborative Arrangements. In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, ASU 2018-18 precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. This standard will be effective for Dolby beginning September 29, 2020, and we do not currently plan to early adopt. We do not believe that this standard will have a material impact on our consolidated financial position, results of operation, and cash flows.

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3. Revenue Recognition
We enter into revenue arrangements with our customers to license technologies, trademarks and patents for sound, imaging and voice solutions, and to sell products and services. We recognize revenue when we satisfy a performance obligation by transferring control over the use of a license, product, or service to a customer.
A.
Identification of the Contract or Contracts with Customers
We generally determine that a contract with a customer exists upon the execution of an agreement and after consideration of collectability, which could include an evaluation of the customer's payment history, the existence of a standby letter-of-credit between the customer’s financial institution and our financial institution, public financial information, and other factors. At contract inception, we also evaluate whether two or more non-standard agreements with a customer should be combined and accounted for as a single contract.
B.
Identification of Performance Obligations in a Contract
We generate revenues principally from the following sources, which represent performance obligations in our contracts with customers:
Licensing.   We license our technologies, including patents, to a range of customers who incorporate them into their products for enhanced audio, imaging and voice functionality across broadcast, mobile, CE, PC, gaming, and other markets.
Product Sales. We design and provide audio and imaging products for the cinema, television, broadcast, communications, and entertainment industries.
Services.  We provide various services to support theatrical and television production for cinema exhibition, broadcast, and home entertainment, including equipment training, mixing room alignment, equalization, as well as audio, color and light image calibration.
PCS. We provide PCS for products sold and for the equipment leased, and we support the implementation of our licensing technologies in our licensees’ products.
Equipment Leases. We collaborate with established cinema exhibitors to offer Dolby Cinema, a branded premium cinema offering for movie audiences by leasing equipment and licensing our intellectual property.
Licensing Administration Fees. We generate service fees for managing patent pools on behalf of third party patent owners through our wholly-owned subsidiary, Via Licensing Corporation.
Some of our revenue arrangements include multiple performance obligations, such as hardware, software, support and maintenance, and extended warranty services. We evaluate whether promised products and services are distinct performance obligations.
The majority of our arrangements with multiple performance obligations pertain to our digital cinema server and processor sales that include the following distinct performance obligations to which we allocate portions of the transaction price based on their stand-alone selling price:
Digital cinema server hardware and embedded software, which is highly dependent on and highly interrelated with the hardware. Accordingly, the hardware and embedded software represent a single performance obligation.
The right to support and maintenance, which is included with the purchase of the digital cinema server hardware, is a distinct performance obligation.
The right to receive commissioning services is a distinct performance obligation within the sale of the Dolby Atmos Cinema Processor. These services consist of the review of venue designs specifying proposed speaker placement as well as calibration services performed for installed speakers to ensure optimal playback.
C.
Determination of Transaction Price for Performance Obligations in a Contract
After identifying the distinct performance obligations, we determine the transaction price in accordance with the terms of the underlying executed contract which may include variable consideration such as discounts, rebates, refunds, rights of returns, and incentives. We assess and update, if necessary, the amount of variable consideration to

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which we are entitled for each reporting period. At the end of each reporting period, we estimate and accrue a liability for returns and adjustments as a reduction to revenue based on several factors, including past returns history.
With the exception of our sales-based royalties, we evaluate whether a significant financing component exists when we recognize revenue in advance of customer payments that occur over time. For example, some of our licensing arrangements include payment terms greater than one year from when we transfer control of our IP to a licensee and the receipt of the final payment for that IP. If a significant financing component exists, we classify a portion of the transaction price as interest income, instead of recognizing all the transaction price as revenue. We do not adjust the transaction price for the effects of financing if, at contract inception, the period between the transfer of control to a customer and final payment is expected to be one year or less.
D.
Allocation of Transaction Price to Distinct Performance Obligations in a Contract
For our sales-based royalties where the license is the predominant item to which the royalties relate, we present all revenues as licensing.
For revenue arrangements that include multiple performance obligations, we determine the stand-alone selling price for each distinct performance obligation based on the actual selling prices made to customers. If the performance obligation is not sold separately, we estimate the stand-alone selling price. We do so by considering market conditions such as competitor pricing strategies, customer specific information and industry technology lifecycles, internal conditions such as cost and pricing practices, or applying the residual approach method when the selling price of the good, most commonly a license, is highly variable or uncertain.
Once the transaction price - including any variable consideration - has been determined, we allocate the transaction price to the performance obligations identified in the contract, and recognize revenue as or when control is transferred for each distinct performance obligation.
E.
Revenue Recognition as Control is Transferred to a Customer
We generate our licensing revenue by licensing our technologies and patents to various types of licensees, such as chip manufacturers ("implementation licensees"), consumer product manufacturers, software vendors, and communications service providers. Our revenue recognition policies for each of these arrangements are summarized below.
Initial fees from implementation licensees.   Implementation licensees incorporate our technologies into their chipsets that, once approved by Dolby, are available for purchase by OEMs for use in end-user products. Implementation licensees only pay us a nominal initial fee on contract execution as consideration for the ongoing services that we provide to assist in their implementation process. Revenues from these initial fees are recognized ratably over the contractual term as a component of licensing revenue.
Sales-based licensing fees.   In our royalty bearing licensing agreements with OEMs, control is transferred upon the later of contract execution or the contract’s effective date. We apply the royalty exception, which requires that we recognize sales-based royalties at the later of when the sales occur based on our estimates or the completion of our performance obligations. These estimates involve the use of historical data and judgment for several key attributes including industry estimates of expected shipments, the percentage of markets using our technologies, and average sale prices. Generally, our estimates represent the current period’s shipments to which we expect our licensees to submit royalty statements in the following quarter. Upon receipt of royalty statements from the licensees with the actual reporting of sales-based royalties that we estimated previously, we record a favorable or unfavorable adjustment based on the difference between estimated and actual sales.
Fixed and guaranteed licensing fees.   In certain cases, our arrangements require the licensee to pay fixed, non-refundable fees independent of the actual number of units they may distribute in the future. In these cases, control is transferred and fees are recognized upon the later of contract execution or the effective date. Additionally and separate from initial fees from implementation licensees, our sales- and usage-based licensing agreements include a nominal fee, which is also recognized at a point in time in which control of the IP has been transferred. Revenues from these arrangements are included as a component of licensing revenue.
Recoveries.  Through compliance efforts, we identify under-reported licensed activity related to non-current periods. We may record a favorable or unfavorable revenue adjustment in connection with the findings from these compliance efforts generally upon resolution with the licensee through agreement of the findings, or upon receipt of the licensee’s correction statement. Revenues from these arrangements are included as a component of licensing

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revenue.
We undertake activities aimed at identifying potential unauthorized uses of our technologies, which when successful result in the recognition of revenue. Recoveries stem from third parties who agree to remit payments to us based on past use of our technology. In these scenarios, a legally binding contract did not exist at time of use of our technology, and therefore, we recognize revenue recoveries upon execution of the settlement contract as that is the point in time to which control is transferred. These revenues are classified as licensing revenue.
In general, we classify legal costs associated with activities aimed at identifying potential unauthorized uses of our technologies, auditing existing licensees, and on occasion, pursuing litigation as S&M in our consolidated statements of operations.
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.
In addition to our licensing arrangements, we also enter into arrangements to deliver products and services.
Product Sales.   Revenue from the sale of products is recognized when the risk of ownership is transferred to the customer, which is generally upon shipment. Payments are generally made within 90 days of sale.
Services.  We provide various services, such as engineering services related to movie soundtrack print mastering, equipment training and maintenance, mixing room alignment, equalization, and image calibration, which we bill on a fixed fee and time and materials basis. Most of these services are of a short duration and are recognized as control of the performance obligations are transferred which is when the related services are performed.
Collaborative Arrangements.   We collaborate with established cinema exhibitors to offer Dolby Cinema, a branded premium cinema offering for movie audiences. Under such collaborations, Dolby and the exhibitor are both active participants, and share the risks and rewards associated with the business. Accordingly, these collaborations are governed by revenue sharing arrangements under which Dolby receives revenue based on monthly box office reports from exhibitors in exchange for the use of our imaging and sound technologies, our proprietary designs and trademark as well as for the use of our equipment at the exhibitor’s venue. The use of our equipment meets the definition of a lease, and for the related portion of Dolby's share of revenue, we apply ASC 840, Leases, and recognize revenue based on monthly box office reports from exhibitors. In subsequent periods, for the portion of revenue share that we estimated, we record a favorable or unfavorable adjustment for the difference between our estimated and actual share of box office receipts once the box office receipts reports become available from exhibitor partners. Our revenue share is recognized as licensing revenue in our consolidated statements of operations.
In addition, we also enter into agreements where a portion involves guaranteed payments, which in some cases result in classifying the payments as a sales-type lease. In such arrangements, we consider control to transfer at the point in time to which we have installed and tested the equipment, at which point we record such guaranteed payments as product revenue.
VIA Administration Fee. We generate service fees for managing patent pools on behalf of third party patent owners through our wholly-owned subsidiary, Via Licensing Corporation. As an agent to licensors in the patent pool, Via receives a share of the sales-based royalty that the patent pool licensors earn from licensees. As such, we apply the sales-based royalty exception as the service provided is directly related to the patent pool licensors’ provision of IP, which results in recognition based on estimates of the licensee’s quarter shipments that use the pool’s patents. In addition to sales-based royalties, Via also has contracts where the fees are fixed. The revenue share Via receives from licensors on fixed fee contracts is recognized over the term in which we are providing services associated with the fixed fee contract. We recognize our administrative fees net of the consideration paid to the patent licensors in the pool as licensing revenue.
Deferred revenue, which is a component of Contract liabilities, represents amounts that are ultimately expected to be recognized as revenue, but for which we have yet to satisfy the performance obligation. On December 28, 2018, we had $40.1 million of remaining performance obligations, 33% of which we expect to recognize as revenue in fiscal 2019, 22% in fiscal 2020, and the balance of 45% in fiscal years beyond 2020.
F.
Disaggregation of revenue
The following table presents a summary of the composition of our revenue for all periods presented:

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Fiscal Quarter Ended
 
December 28, 2018
 
December 29, 2017
Revenue
 
 
(as adjusted)
Licensing
$
260,279

86
%
 
$
270,172

90
%
Products and services
42,097

14
%
 
29,355

10
%
Total revenue
$
302,376

100
%
 
$
299,527

100
%
The following table presents the composition of our licensing revenue for all periods presented:
 
Fiscal Quarter Ended
 
December 28, 2018
 
December 29, 2017
Market
 
 
(as adjusted)
Broadcast
$
100,138

38
%
 
$
110,484

41
%
PC
23,157

9
%
 
20,351

8
%
Mobile
34,173

13
%
 
58,645

22
%
CE
43,750

17
%
 
37,730

14
%
Other
59,061

23
%
 
42,962

15
%
Total licensing revenue
$
260,279

100
%
 
$
270,172

100
%
We license our technologies in approximately 50 countries, and our licensees distribute products that incorporate our technologies throughout the world. As shown in the table below, we generate the majority of our revenue from outside the United States. Geographic data for our licensing revenue is based on the location of our licensees’ headquarters, products revenue is based on the destination to which we ship our products, and services revenue is based on the location where services are performed.
 
Fiscal Quarter Ended
 
December 28, 2018
 
December 29, 2017
Revenue By Geographic Location
 
 
(as adjusted)
United States
$
119,799

40
%
 
$
78,746

26
%
International
182,577

60
%
 
220,781

74
%
Total revenue
$
302,376

100
%
 
$
299,527

100
%
G.
Contract assets and liabilities
Our contract assets represent rights to consideration from licensees for the use of our IP that we have estimated and recognized as revenue in a given quarter in the absence of receiving actual royalty statements from licensees. These estimates reflect our best judgment at that time, and are developed using a number of inputs, including historical experience, anticipated performance, and third-party data. In the event that our estimates differ from actual amounts reported, we record an appropriate adjustment in the quarter in which the report is received which is typically the quarter following our estimate. Actual amounts reported are typically paid within sixty days. Our contract liabilities consist of advance payments and billings in excess of amounts earned, deferred revenue that is typically satisfied within one year, and deferred interest where we have significant financing. The non-current portion of contract liabilities is separately disclosed in our consolidated balance sheets. We present the net contract asset or liability when we have both contract assets and contract liabilities for a single contract.
The following table presents a summary of the balances to which contract assets and liabilities related to revenue are recorded for all periods presented:

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December 28, 2018
September 28, 2018
Change ($)
Change (%)
 
 
(as adjusted)
 
 
Accounts receivable, net
$
181,614

$
200,933

$
(19,319
)
(10
)%
Contract assets
199,480

165,959

33,521

20
 %
Contract liabilities - current
19,562

20,502

(940
)
(5
)%
Contract liabilities - non-current
23,115

22,853

262

1
 %


4. Composition of Certain Financial Statement Captions
The following tables present detailed information from our consolidated balance sheets as of December 28, 2018 and September 28, 2018 (amounts displayed in thousands, except as otherwise noted).
Accounts Receivable
 
December 28,
2018
 
September 28, 2018
(as adjusted)
Trade accounts receivable
$
115,333

 
$
108,929

Accounts receivable from patent administration program licensees
73,141

 
97,262

Accounts receivable, gross
188,474

 
206,191

Less: allowance for doubtful accounts
(6,860
)
 
(5,258
)
Total
$
181,614

 
$
200,933


Trade accounts receivable includes unbilled accounts receivable balances related to amounts that are contractually owed.
Inventories
 
December 28,
2018
 
September 28,
2018
Raw materials
$
8,087

 
$
6,095

Work in process
4,116

 
4,044

Finished goods
15,562

 
16,067

Total
$
27,765

 
$
26,206


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. We have included $3.0 million and $2.6 million of raw materials inventory within other non-current assets in our consolidated balance sheets as of December 28, 2018 and September 28, 2018, 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
 
December 28,
2018
 
September 28, 2018
(as adjusted)
Prepaid expenses
$
22,316

 
$
18,508

Other current assets
14,936

 
13,946

Income tax receivable
2,349

 
2,436

Total
$
39,601

 
$
34,890


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Accrued Liabilities
 
December 28,
2018
 
September 28, 2018
(as adjusted)
Accrued royalties
$
3,257

 
$
2,648

Amounts payable to patent administration program partners
75,458

 
98,900

Accrued compensation and benefits
56,662

 
84,491

Accrued professional fees
14,252

 
9,749

Unpaid PP&E additions
20,253

 
13,956

Other accrued liabilities
95,209

 
63,223

Total
$
265,091

 
$
272,967

Other Non-Current Liabilities
 
December 28,
2018
 
September 28,
2018
Supplemental retirement plan obligations
$
3,190

 
$
3,388

Non-current tax liabilities
133,322

 
129,253

Other liabilities
19,894

 
18,319

Total
$
156,406

 
$
150,960


5. 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.

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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 also consist of highly-liquid money market funds. 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):
 
December 28, 2018
 
Cost
Unrealized
 
 
Estimated Fair Value
 
Gains
Losses
Total
 
Level 1
Level 2
Level 3
Cash and cash equivalents:








 






Cash
$
676,484





$
676,484

 
$
676,484





Cash equivalents:








 






Commercial paper
1,996



1,996

 


1,996



Money market funds
112,307



112,307

 
112,307





Cash and cash equivalents
790,787



790,787


788,791

1,996


 
 
 
 
 
 
 
 
 
Short-term investments:








 






Certificate of deposit (1)
12,645

8

(1
)
12,652

 


12,652



U.S. agency securities
15,498


(147
)
15,351

 


15,351



Government bonds
10,394

2

(11
)
10,385

 
10,385





Commercial paper
8,450

1

(1
)
8,450

 


8,450



Corporate bonds
100,814

5

(384
)
100,435

 


100,435



Municipal debt securities
28,343

1

(60
)
28,284

 


28,284



Short-term investments
176,144

17

(604
)
175,557


10,385

165,172


 
 
 
 
 
 
 
 
 
Long-term investments:








 






Certificate of deposit (1)
430




430

 


430



U.S. agency securities
6,791

23

(74
)
6,740

 


6,740



Government bonds
14,673

4

(184
)
14,493

 
14,493





Corporate bonds
158,367

152

(1,493
)
157,026

 


157,026



Municipal debt securities
21,852

42

(37
)
21,857

 


21,857



Other long-term investments (2)
783

99



882

 
99




Long-term investments
202,896

320

(1,788
)
201,428


14,592

186,053


 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, and investments
$
1,169,827

$
337

$
(2,392
)
$
1,167,772

 
$
813,768

$
353,221

$

 
 
 
 
 
 
 
 
 
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 December 28, 2018 are classified within long-term investments.
(2)
Other long-term investments as of December 28, 2018 include a marketable equity security of $0.1 million, and other investments that are not carried at fair value including an equity method investment of $0.8 million.

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September 28, 2018
 
Cost
Unrealized
 
 
Estimated Fair Value
 
Gains
Losses
Total
 
Level 1
Level 2
Level 3
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash
$
905,660





$
905,660

 
$
905,660





Cash equivalents:






 
 






Commercial paper
5,058



5,058

 


5,058



Corporate bonds
1,005




1,005

 


1,005



Money market funds
3,301





3,301

 
3,301





Municipal debt securities
545



(1
)
544

 


544



Government bonds
2,495




2,495

 
2,495





Cash and cash equivalents
918,064


(1
)
918,063

 
911,456

6,607


 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Certificate of deposit (1)
12,875

14



12,889

 


12,889



U.S. agency securities
11,997



(135
)
11,862

 


11,862



Government bonds
7,970


(15
)
7,955

 
7,955





Commercial paper
4,276



4,276

 


4,276



Corporate bonds
111,245

50

(494
)
110,801

 


110,801



Municipal debt securities
30,475



(120
)
30,355

 


30,355



Short-term investments
178,838

64

(764
)
178,138

 
7,955

170,183


 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
U.S. agency securities
9,791



(166
)
9,625

 


9,625



Government bonds
15,966



(317
)
15,649

 
15,649





Corporate bonds
146,561

33

(1,810
)
144,784

 


144,784



Municipal debt securities
17,235



(112
)
17,123

 


17,123



Other long-term investments (2)
355

246



601

 
246





Long-term investments
189,908

279

(2,405
)
187,782

 
15,895

171,532


 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, and investments
$
1,286,810

$
343

$
(3,170
)
$
1,283,983

 
$
935,306

$
348,322

$

 
 
 
 
 
 
 
 
 
Investments held in supplemental retirement plan:
 
 
 
 
 
 
 
Assets
3,486





3,486

 
3,486





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






Liabilities
3,486





3,486

 
3,486





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 28, 2018 are classified within long-term investments.
(2)
Other long-term investments as of September 28, 2018 include a marketable equity security of $0.2 million, and other investments that are not carried at fair value including an equity method investment of $0.4 million. During fiscal 2018, we recorded write-off charges to reduce the carrying value of two cost method equity investments to zero in recognition of an other-than-temporary impairment for each investment.
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.

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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.
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 December 28, 2018 and September 28, 2018 (in thousands):
 
December 28, 2018
 
September 28, 2018
 
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
$
1,299

$

$

$

 
$

$

$

$

U.S. agency securities


20,069

(221
)
 


21,486

(302
)
Government bonds
5,455

(37
)
9,519

(157
)
 
16,633

(332
)


Commercial paper
7,047

(1
)


 
5,737

(1
)


Corporate bonds
80,200

(381
)
124,808

(1,497
)
 
143,051

(1,680
)
52,162

(624
)
Municipal debt securities
17,250

(29
)
18,731

(67
)
 
41,058

(191
)
6,965

(41
)
Total
$
111,251

$
(448
)
$
173,127

$
(1,942
)
 
$
206,479

$
(2,204
)
$
80,613

$
(967
)
Although we had certain securities that were in an unrealized loss position as of December 28, 2018, we expect to recover the full carrying value of these securities. As a result, we do not consider any portion of the unrealized losses at either December 28, 2018 or September 28, 2018 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 December 28, 2018 and September 28, 2018, which are recorded within cash equivalents and both short and long-term investments in our consolidated balance sheets (in thousands):
 
December 28, 2018
 
September 28, 2018
Range of maturity
Amortized Cost
Fair Value
 
Amortized Cost
Fair Value
Due within 1 year
$
290,447

$
289,860

 
$
191,241

$
190,541

Due in 1 to 2 years
138,303

136,797

 
122,131

120,545

Due in 2 to 3 years
63,810

63,749

 
67,423

66,637

Total
$
492,560

$
490,406

 
$
380,795

$
377,723


6. Property, Plant, & Equipment
Property, plant, and equipment are recorded at cost, with depreciation expense included in cost of licensing, cost of products and services, R&D, S&M, and G&A expenses in our consolidated statements of operations. PP&E consist of the following (in thousands):
 
December 28,
2018
 
September 28,
2018
Land
$
43,292

 
$
43,342

Buildings and building improvements
283,519

 
283,474

Leasehold improvements
68,015

 
66,866

Machinery and equipment
118,045

 
111,603

Computer equipment and software
196,724

 
194,079

Furniture and fixtures
30,592

 
30,556

Equipment provided under operating leases
147,653

 
139,201

Construction-in-progress
10,721

 
7,342

Property, plant, and equipment, gross
898,561

 
876,463

Less: accumulated depreciation
(375,368
)
 
(362,281
)
Property, plant, & equipment, net
$
523,193

 
$
514,182


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7. Goodwill & Intangible Assets
Goodwill
The following table outlines changes to the carrying amount of goodwill (in thousands):
 
Goodwill
Balance at September 28, 2018
$
327,982

Acquired goodwill

Translation adjustments
(1,126
)
Balance at December 28, 2018
$
326,856

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):
 
December 28, 2018
 
September 28, 2018
Intangible Assets
Cost
Accumulated
Amortization
Net
 
Cost
Accumulated
Amortization
Net
Acquired patents and technology
$
330,705

$
(158,107
)
$
172,598

 
$
319,082

$
(152,775
)
$
166,307

Customer relationships
58,327

(41,812
)
16,515

 
58,342

(41,012
)
17,330

Other intangibles
22,723

(22,360
)
363

 
22,742

(22,360
)
382

Total
$
411,755

$
(222,279
)
$
189,476

 
$
400,166

$
(216,147
)
$
184,019

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 2018
 
 
Q1 - Quarter ended December 29, 2017
$12.0
14.1
Fiscal 2019
 
 
Q1 - Quarter ended December 28, 2018
$12.1
11.6
(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 $6.5 million in the first quarter of fiscal 2019 and 2018, respectively. As of December 28, 2018, estimated amortization expense in future fiscal periods was as follows (in thousands):
Fiscal Year
 Amortization Expense
 
(in thousands)
Remainder of 2019
$
21,402

2020
28,227

2021
28,201

2022
25,630

2023
22,284

Thereafter
63,732

Total
$
189,476



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8. 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 December 28, 2018, we had authorized 500,000,000 Class A shares and 500,000,000 Class B shares. At December 28, 2018, we had 64,270,978 shares of Class A common stock and 38,229,820 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 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.

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On December 15, 2018, we granted PSOs to our executive officers exercisable for an aggregate of 241,100 shares at the target award amount, which would be exercisable up to an aggregate of 301,375 shares at 125% of the target award amount. 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, which vested in December 2018 at 125% of the target award amount, for an aggregate of 334,623 shares. As of December 28, 2018, PSOs which would be exercisable for an aggregate of 758,299 shares at the target award amount (1,282,496 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 28, 2018
7,365

$
43.61

 
 
Grants
1,241

64.60

 
 
Exercises
(190
)
38.43

 
 
Forfeitures and cancellations
(34
)
48.93

 
 
Options outstanding at December 28, 2018
8,382

46.73

6.75
$
125,013

Options vested and expected to vest at December 28, 2018
7,867

45.79

6.63
123,860

Options exercisable at December 28, 2018
4,579

$
39.07

5.50
100,025

(1)
Aggregate intrinsic value is based on the closing price of our Class A common stock on December 28, 2018 of $60.83 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 December 28, 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 28, 2018
2,806

$
51.62

Granted
1,155

65.08

Vested
(876
)
46.82

Forfeitures
(36
)
50.29

Non-vested at December 28, 2018
3,049

$
58.11

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

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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
 
December 28,
2018
December 29,
2017
Expected life (in years)
4.90

5.06

Risk-free interest rate
2.7
%
2.2
%
Expected stock price volatility
22.9
%
22.6
%
Dividend yield
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.
The following two tables separately present stock-based compensation expense both by award type and classification in our consolidated statements of operations (in thousands):

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Expense - By Award Type
 
Fiscal Quarter Ended
 
December 28,
2018
December 29,
2017
Compensation expense - by type
 
 
Stock options
$
5,022

$
6,964

Restricted stock units
15,375

10,780

Employee stock purchase plan
1,085

940

Total stock-based compensation
21,482

18,684

Benefit from income taxes
(3,760
)
(3,896
)
Total stock-based compensation, net of tax
$
17,722

$
14,788


Expense - By Income Statement Line Item Classification
 
Fiscal Quarter Ended
 
December 28,
2018
December 29,
2017
Compensation expense - by classification
 
 
Cost of products and services
$
488

$
380

Research and development
6,241

4,877

Sales and marketing
8,217

5,951

General and administrative
6,536

7,476

Total stock-based compensation expense
21,482

18,684

Benefit from income taxes
(3,760
)
(3,896
)
Total stock-based compensation, net of tax
$
17,722

$
14,788

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
 
December 28,
2018
December 29,
2017
Tax benefit - shares issued under ESPP
$
142

$
305

Unrecognized Compensation Expense.    At December 28, 2018, total unrecorded compensation expense associated with employee stock options expected to vest was approximately $37.3 million, which is expected to be recognized over a weighted-average period of 2.6 years. At December 28, 2018, total unrecorded compensation expense associated with RSUs expected to vest was approximately $143.8 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 December 28, 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

Fiscal 2018: July 2018
350,000

Total
$
1,650,000


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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 December 28, 2018, the remaining authorization to purchase additional shares is approximately $239.0 million.
The following table provides information regarding share repurchase activity under the program during fiscal 2019:
Quarterly Repurchase Activity
Shares
Repurchased
Cost in thousands (1)
Average Price Paid Per Share (2)
 
 
 
 
Q1 - Quarter ended December 28, 2018
1,642,107

$
112,570

$
68.54

(1)
Cost of share repurchases includes the price paid per share and applicable commissions.
(2)
Average price paid per share excludes commission costs.
Dividend Program
The following table summarizes dividends declared under the program in relation to fiscal 2019:
Fiscal Period
Announcement Date
Record Date
Payment Date
Cash Dividend Per Common Share
Dividend Payment
 
Fiscal 2019
 
 
 
 
 
 
Q1 - Quarter ended December 28, 2018
January 30, 2019
February 12, 2019
February 21, 2019
$
0.19

$19.5 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.

9. 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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The following table summarizes the changes in the accumulated balances during the period, and includes information regarding the manner in which the reclassifications out of AOCI into earnings affect our consolidated statements of operations (in thousands):
 
Fiscal Quarter Ended
December 28, 2018
 
Investment Securities
Currency Translation Adjustments
Total
Beginning Balance
$
(2,948
)
$
(12,884
)
$
(15,832
)
Other comprehensive income before reclassifications:





Unrealized gains/(losses) - investment securities
931



931

Foreign currency translation gains/(losses) (1)


(3,577
)
(3,577
)
Income tax effect - benefit/(expense)



Net of tax
931

(3,577
)
(2,646
)
Amounts reclassified from AOCI into earnings:




 
Realized gains/(losses) - investment securities (1)
(201
)


(201
)
Income tax effect - benefit/(expense) (2)
40



40

Net of tax
(161
)

(161
)
Net current-period other comprehensive income/(loss)
770

(3,577
<