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Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 29, 2019
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/23b560c245c3541588903f733029347d-image0a25.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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A common stock, $0.001 par value
DLB
The New York Stock Exchange
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 April 26, 2019, the registrant had 64,255,607 shares of Class A common stock, par value $0.001 per share, and 37,393,979 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 29, 2019
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

3

Table of Contents


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

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

 
March 29,
2019
September 28, 2018
(as adjusted)
ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
$
726,596

$
918,063

Restricted cash
8,270

7,187

Short-term investments
158,679

178,138

Accounts receivable, net of allowance for doubtful accounts of $7,207 and $5,258
178,617

166,133

Contract assets
244,917

165,959

Inventories
34,632

26,206

Prepaid expenses and other current assets
44,050

34,890

Total current assets
1,395,761

1,496,576

Long-term investments
199,302

187,782

Property, plant, and equipment, net
537,641

514,182

Intangible assets, net
187,029

184,019

Goodwill
326,721

327,982

Deferred taxes
113,409

74,766

Other non-current assets
87,088

80,080

Total assets
$
2,846,951

$
2,865,387

 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
Accounts payable
$
14,626

$
21,922

Accrued liabilities
230,708

243,128

Income taxes payable
102

2,680

Contract liabilities
20,014

17,468

Total current liabilities
265,450

285,198

Non-current contract liabilities
24,445

25,887

Other non-current liabilities
204,199

183,799

Total liabilities
494,094

494,884

 
 
 
Stockholders’ equity:
 
 
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 63,979,294 shares issued and outstanding at March 29, 2019 and 63,978,752 at September 28, 2018
59

61

Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 37,635,152 shares issued and outstanding at March 29, 2019 and 39,261,035 at September 28, 2018
41

41

Additional paid-in capital

66,127

Retained earnings
2,361,607

2,313,539

Accumulated other comprehensive (loss)
(14,683
)
(15,832
)
Total stockholders’ equity – Dolby Laboratories, Inc.
2,347,024

2,363,936

Controlling interest
5,833

6,567

Total stockholders’ equity
2,352,857

2,370,503

Total liabilities and stockholders’ equity
$
2,846,951

$
2,865,387

See accompanying notes to unaudited interim condensed consolidated financial statements

4

Table of Contents


DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 29,
2019
March 30, 2018
(as adjusted)
 
March 29,
2019
March 30, 2018
(as adjusted)
Revenue:
 
 
 
 
 
Licensing
$
310,308

$
272,135

 
$
570,587

$
542,307

Products and services
27,950

27,587

 
70,047

56,942

Total revenue
338,258

299,722

 
640,634

599,249

 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
Cost of licensing
16,074

10,610

 
27,471

19,869

Cost of products and services
20,501

20,417

 
47,733

42,051

Total cost of revenue
36,575

31,027

 
75,204

61,920

 
 
 
 
 
 
Gross margin
301,683

268,695

 
565,430

537,329

 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
Research and development
58,625

59,493

 
117,272

115,937

Sales and marketing
92,694

74,019

 
178,296

144,168

General and administrative
47,416

50,747

 
98,229

99,032

Restructuring charges/(credits)
18

(167
)
 
32

(364
)
Total operating expenses
198,753

184,092

 
393,829

358,773

 
 
 
 
 
 
Operating income
102,930

84,603

 
171,601

178,556

 
 
 
 
 
 
Other income/expense:
 
 
 
 
 
Interest income
7,494

3,892

 
12,679

7,673

Interest expense
(32
)
(29
)
 
(77
)
(64
)
Other income/(expense), net
(390
)
(684
)
 
53

(1,836
)
Total other income
7,072

3,179

 
12,655

5,773

 
 
 
 
 
 
Income before income taxes
110,002

87,782

 
184,256

184,329

Provision for income taxes
(36,427
)
(22,432
)
 
(12,323
)
(172,137
)
Net income including controlling interest
73,575

65,350

 
171,933

12,192

Less: net (income) attributable to controlling interest
(135
)
(134
)
 
(274
)
(278
)
Net income attributable to Dolby Laboratories, Inc.
$
73,440

$
65,216

 
$
171,659

$
11,914

 
 
 
 
 
 
Net income per share:
 
 
 
 
 
Basic
$
0.72

$
0.63

 
$
1.68

$
0.12

Diluted
$
0.70

$
0.61

 
$
1.63

$
0.11

Weighted-average shares outstanding:
 
 
 
 
 
Basic
102,141

103,771

 
102,409

103,162

Diluted
104,587

107,001

 
105,529

106,805

 
 
 
 
 
 
Related party rent expense:
 
 
 
 
 
Included in operating expenses
$
768

$
784

 
$
1,648

$
1,568

Included in net income attributable to controlling interest
$
176

$
179

 
$
352

$
356

 
 
 
 
 
 
Cash dividend declared per common share
$
0.19

$
0.16

 
$
0.38

$
0.32

Cash dividend paid per common share
$
0.19

$
0.16

 
$
0.38

$
0.32

See accompanying notes to unaudited interim condensed consolidated financial statements

5

Table of Contents


DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 29,
2019
March 30, 2018
(as adjusted)
 
March 29,
2019
March 30, 2018
(as adjusted)
Net income including controlling interest
$
73,575

$
65,350

 
$
171,933

$
12,192

Other comprehensive income:
 
 
 
 
 
Currency translation adjustments, net of tax
2,015

4,264

 
(1,713
)
5,482

Unrealized gains/(losses) on investments, net of tax
2,098

(1,559
)
 
2,868

(3,152
)
Comprehensive income
77,688

68,055

 
173,088

14,522

Less: comprehensive (income) attributable to controlling interest
(292
)
(333
)
 
(280
)
(471
)
Comprehensive income attributable to Dolby Laboratories, Inc.
$
77,396

$
67,722

 
$
172,808

$
14,051

See accompanying notes to unaudited interim condensed consolidated financial statements

6

Table of Contents


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

 
Dolby Laboratories, Inc.
 
 
 
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(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




171,659



171,659

274

171,933

Currency translation adjustments, net of tax of $0






(1,719
)
(1,719
)
6

(1,713
)
Unrealized losses on investments, net of tax of $124






2,868

2,868


2,868

Distributions to controlling interest









(1,014
)
(1,014
)
Stock-based compensation expense


40,717





40,717



40,717

Repurchase of common stock
(3
)
(113,321
)
(84,556
)


(197,880
)


(197,880
)
Cash dividends declared and paid on common stock




(39,035
)


(39,035
)


(39,035
)
Common stock issued under employee stock plans
1

27,157





27,158



27,158

Tax withholdings on vesting of restricted stock


(20,680
)




(20,680
)


(20,680
)
Balance at March 29, 2019
$
100

$

$
2,361,607

$
(14,683
)
$
2,347,024

$
5,833

$
2,352,857


 
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




11,914



11,914

278

12,192

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 (as adjusted)
$
102

$
113,827

$
2,316,906

$
(5,616
)
$
2,425,219

$
6,549

$
2,431,768


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 29,
2019
March 30, 2018
(as adjusted)
Operating activities:
 
 
Net income including controlling interest
$
171,933

$
12,192

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
40,799

40,684

Stock-based compensation
40,717

36,375

Amortization of premium on investments
338

1,472

Provision for doubtful accounts
1,963

1,607

Deferred income taxes
(38,548
)
36,475

Other non-cash items affecting net income
1,355

977

Changes in operating assets and liabilities:


Accounts receivable
(14,221
)
(39,296
)
Contract assets
(78,949
)
(44,172
)
Inventories
(7,983
)
(352
)
Prepaid expenses and other assets
(15,273
)
(12,647
)
Accounts payable and other liabilities
(14,190
)
(35,530
)
Income taxes, net
18,414

99,861

Contract liabilities
1,061

1,047

Other non-current liabilities
(1,572
)
(652
)
Net cash provided by operating activities
105,844

98,041

 
 
 
Investing activities:
 
 
Purchases of investment securities
(152,499
)
(129,456
)
Proceeds from sales of investment securities
83,478

64,698

Proceeds from maturities of investment securities
78,714

118,874

Purchases of PP&E
(56,082
)
(39,734
)
Payments for business acquisitions, net of cash acquired

(6,563
)
Purchase of intangible assets
(17,065
)
(11,893
)
Net cash used in investing activities
(63,454
)
(4,074
)
 
 
 
Financing activities:
 
 
Proceeds from issuance of common stock
27,158

71,061

Repurchase of common stock
(197,880
)
(34,993
)
Payment of cash dividend
(39,035
)
(32,956
)
Distribution to controlling interest
(1,014
)
(1,022
)
Shares repurchased for tax withholdings on vesting of restricted stock
(20,680
)
(19,946
)
Net cash used in financing activities
(231,451
)
(17,856
)
 
 
 
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash
(1,323
)
3,122

Net increase/(decrease) in cash, cash equivalents, and restricted cash
(190,384
)
79,233

Cash, cash equivalents, and restricted cash at beginning of period
925,250

634,368

Cash, cash equivalents, and restricted cash at end of period
$
734,866

$
713,601

 
 
 
Supplemental disclosure:
 
 
Cash paid for income taxes, net of refunds received
$
27,612

$
37,412

 
 
 
Non-cash investing activities:
 
 
Net change in PP&E purchased and unpaid at period-end
$
(5,500
)
$
1,538

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 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 March 29, 2019 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 March 29, 2019 and March 30, 2018. 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.
The consolidated balance sheet and notes included in this Quarterly Report as of September 28, 2018 differ from our Form 10-Q for the quarterly period ended December 28, 2018, reflecting immaterial error corrections, in

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cluding the reclassification of $34.8 million from accounts receivable to other non-current assets, $29.8 million from accrued liabilities to non-current liabilities, $3.0 million from contract liabilities to non-current contract liabilities, and a gross up of $3.0 million to other non-current assets and non-current liabilities. These reclassifications relate to amounts due to Dolby and owed to third parties, relating to certain long-term contracts, which we determined should have been classified as non-current. Our statement of operations and cash provided by operating activities on the statement of cash flows were not affected by these reclassifications.

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
At the beginning of fiscal 2019, we adopted the following standards:
Revenue Recognition We adopted 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 we expect 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):



Table of Contents


 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 30, 2018
(as previously reported)
Effect of Adopting ASC 606
March 30, 2018
(as adjusted)
 
March 30, 2018
(as previously reported)
Effect of Adopting ASC 606
March 30, 2018
(as adjusted)
Revenue
$
301,355

$
(1,633
)
$
299,722

 
$
589,152

$
10,097

$
599,249

Gross margin
270,396

(1,701
)
268,695

 
527,317

10,012

537,329

Provision for income taxes
(18,718
)
(3,714
)
(22,432
)
 
(185,030
)
12,893

(172,137
)
Net income/(loss) attributable to Dolby Laboratories, Inc.
70,631

(5,415
)
65,216

 
(10,991
)
22,905

11,914

Diluted earnings per share
$
0.66

$
(0.05
)
$
0.61

 
$
(0.11
)
$
0.22

$
0.11


Select condensed consolidated balance sheet line items, which reflect the adoption of the new standard, are as follows (in thousands):
 
September 28, 2018
(as previously reported)
Effect of Adopting ASC 606
September 28, 2018
(as adjusted)
ASSETS
 
 
 
Accounts receivable, net
$
137,151

$
28,982

$
166,133

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

Other non-current assets
42,280

37,800

80,080

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Accrued liabilities
223,594

19,534

243,128

Contract liabilities
23,931

(6,463
)
17,468

Non-current contract liabilities
40,064

(14,177
)
25,887

Other non-current liabilities
150,960

32,839

183,799

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 Year-To-Date March 30, 2018
(as previously reported)¹
Effect of Adopting ASC 606
Fiscal Year-To-Date March 30, 2018
(as adjusted)
Operating activities:
 
 
 
Net income/(loss) including controlling interest
$
(10,713
)
$
22,905

$
12,192

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Deferred income taxes
48,332

(11,857
)
36,475

Changes in operating assets and liabilities:
 


 
Accounts receivable
(69,018
)
29,722

(39,296
)
Contract assets

(44,172
)
(44,172
)
Prepaid expenses and other assets
(12,732
)
85

(12,647
)
Accounts payable and other liabilities
(38,124
)
2,594

(35,530
)
Deferred revenue
324

723

1,047

Net cash provided by operating activities
98,041


98,041

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;

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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.

We adopted 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. 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

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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 statements.

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.

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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 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

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adjustment based on the difference, if any, between estimated and actual sales. In the second quarter of fiscal 2019, we recorded a favorable adjustment of approximately $8.0 million related to October through December shipments, based on actual royalty statements received from licensees.
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 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 agreement 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. 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

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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 March 29, 2019, we had $42.5 million of remaining performance obligations, 31% of which we expect to recognize as revenue in fiscal 2019, 25% in fiscal 2020, and the balance of 44% 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:
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 29, 2019
 
March 30, 2018
 
March 29, 2019
 
March 30, 2018
Revenue
 
 
(as adjusted)
 
 
 
 
(as adjusted)
Licensing
$
310,308

92
%
 
$
272,135

91
%
 
$
570,587

89
%
 
$
542,307

90
%
Products and services
27,950

8
%
 
27,587

9
%
 
70,047

11
%
 
56,942

10
%
Total revenue
$
338,258

100
%
 
$
299,722

100
%
 
$
640,634

100
%
 
$
599,249

100
%
The following table presents the composition of our licensing revenue for all periods presented:
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
March 29, 2019
 
March 30, 2018
 
March 29, 2019
 
March 30, 2018
Market
 
 
(as adjusted)
 
 
 
 
(as adjusted)
Broadcast
$
122,424

39
%
 
$
88,783

33
%
 
$
222,562

39
%
 
$
199,267

37
%
Mobile
66,759

22
%
 
68,232

25
%
 
100,932

18
%
 
126,877

23
%
CE
44,776

14
%
 
37,980

14
%
 
88,526

16
%
 
75,710

14
%
PC
41,193

13
%
 
43,905

16
%
 
64,350

11
%
 
64,256

12
%
Other
35,156

12
%
 
33,235

12
%
 
94,217

16
%
 
76,197

14
%
Total licensing revenue
$
310,308

100
%
 
$
272,135

100
%
 
$
570,587

100
%
 
$
542,307

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
 
Fiscal Year-To-Date Ended
 
March 29, 2019
 
March 30, 2018
 
March 29, 2019
 
March 30, 2018
Revenue By Geographic Location
 
 
(as adjusted)
 
 
 
 
(as adjusted)
United States
$
158,000

47
%
 
$
122,280

41
%
 
$
277,799

43
%
 
$
201,026

34
%
International
180,258

53
%
 
177,442

59
%
 
362,835

57
%
 
398,223

66
%
Total revenue
$
338,258

100
%
 
$
299,722

100
%
 
$
640,634

100
%
 
$
599,249

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 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. The main drivers for change in the contract assets account are variances in quarterly estimates, and to lesser degree, timing of receipt of actual royalty statements.
Our contract liabilities consist of advance payments and billings in excess of amounts earned, deferred revenue

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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. In the second quarter of fiscal 2019, we recognized $7.5 million from prior period deferred revenue.
The following table presents a summary of the balances to which contract assets and liabilities related to revenue are recorded for all periods presented:
 
March 29, 2019
September 28, 2018
Change ($)
Change (%)
 
 
(as adjusted)
 
 
Accounts receivable, net
$
178,617

$
166,133

$
12,484

8
 %
Contract assets
244,917

165,959

78,958

48
 %
Other non-current assets
87,088

80,080

7,008

9