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Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 28, 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/71267b2b835f67d80c2e1159598d8db9-image0a26.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
California
94103-1410
(Address of principal executive offices)
 
 
(Zip Code)

(415) 558-0200
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 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 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
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 
On July 26, 2019, the registrant had 64,493,982 shares of Class A common stock, par value $0.001 per share, and 36,276,393 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 June 28, 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)

 
June 28,
2019
September 28, 2018
(as adjusted)
ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
$
716,560

$
918,063

Restricted cash
7,485

7,187

Short-term investments
120,737

178,138

Accounts receivable, net of allowance for doubtful accounts of $10,448 and $5,258
231,185

166,133

Contract assets
182,912

165,959

Inventories, net
38,908

26,206

Prepaid expenses and other current assets
41,030

34,890

Total current assets
1,338,817

1,496,576

Long-term investments
211,352

187,782

Property, plant, and equipment, net
524,641

514,182

Intangible assets, net
189,304

184,019

Goodwill
335,936

327,982

Deferred taxes
109,208

74,766

Other non-current assets
100,550

80,080

Total assets
$
2,809,808

$
2,865,387

 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
Accounts payable
$
14,304

$
21,922

Accrued liabilities
243,738

243,128

Income taxes payable
862

2,680

Contract liabilities
19,435

17,468

Total current liabilities
278,339

285,198

Non-current contract liabilities
24,428

25,887

Other non-current liabilities
186,765

183,799

Total liabilities
489,532

494,884

 
 
 
Stockholders’ equity:
 
 
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 63,716,563 shares issued and outstanding at June 28, 2019 and 63,978,752 at September 28, 2018
58

61

Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 36,952,512 shares issued and outstanding at June 28, 2019 and 39,261,035 at September 28, 2018
41

41

Additional paid-in capital

66,127

Retained earnings
2,328,918

2,313,539

Accumulated other comprehensive (loss)
(14,496
)
(15,832
)
Total stockholders’ equity – Dolby Laboratories, Inc.
2,314,521

2,363,936

Controlling interest
5,755

6,567

Total stockholders’ equity
2,320,276

2,370,503

Total liabilities and stockholders’ equity
$
2,809,808

$
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
 
June 28,
2019
June 29, 2018
(as adjusted)
 
June 28,
2019
June 29, 2018
(as adjusted)
Revenue:
 
 
 
 
 
Licensing
$
271,897

$
183,771

 
$
842,484

$
726,078

Products and services
30,262

31,009

 
100,309

87,951

Total revenue
302,159

214,780

 
942,793

814,029

 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
Cost of licensing
13,290

12,111

 
40,761

31,980

Cost of products and services
26,400

22,272

 
74,133

64,323

Total cost of revenue
39,690

34,383

 
114,894

96,303

 
 
 
 
 
 
Gross margin
262,469

180,397

 
827,899

717,726

 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
Research and development
60,408

60,357

 
177,680

176,294

Sales and marketing
83,390

79,834

 
261,686

224,002

General and administrative
54,183

47,893

 
152,412

146,925

Restructuring charges/(credits)
30,232

(82
)
 
30,264

(446
)
Total operating expenses
228,213

188,002

 
622,042

546,775

 
 
 
 
 
 
Operating income/(Loss)
34,256

(7,605
)
 
205,857

170,951

 
 
 
 
 
 
Other income/expense:
 
 
 
 
 
Interest income
6,551

5,487

 
19,230

13,160

Interest expense
(29
)
(87
)
 
(106
)
(151
)
Other income/(expense), net
1,022

(3,603
)
 
1,075

(5,439
)
Total other income
7,544

1,797

 
20,199

7,570

 
 
 
 
 
 
Income/(loss) before income taxes
41,800

(5,808
)
 
226,056

178,521

Provision for income taxes
(2,163
)
9,067

 
(14,486
)
(163,070
)
Net income including controlling interest
39,637

3,259

 
211,570

15,451

Less: net (income) attributable to controlling interest
(63
)
(143
)
 
(337
)
(421
)
Net income attributable to Dolby Laboratories, Inc.
$
39,574

$
3,116

 
$
211,233

$
15,030

 
 
 
 
 
 
Net income per share:
 
 
 
 
 
Basic
$
0.39

$
0.03

 
$
2.07

$
0.15

Diluted
$
0.38

$
0.03

 
$
2.01

$
0.14

Weighted-average shares outstanding:
 
 
 
 
 
Basic
101,218

103,836

 
102,012

103,386

Diluted
103,717

106,950

 
105,025

106,943

 
 
 
 
 
 
Related party rent expense:
 
 
 
 
 
Included in operating expenses
$
13,107

$
1,017

 
$
14,755

$
2,585

Included in net income attributable to controlling interest
$
111

$
179

 
$
463

$
535

 
 
 
 
 
 
Cash dividend declared per common share
$
0.19

$
0.16

 
$
0.57

$
0.48

Cash dividend paid per common share
$
0.19

$
0.16

 
$
0.57

$
0.48

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
 
June 28,
2019
June 29, 2018
(as adjusted)
 
June 28,
2019
June 29, 2018
(as adjusted)
Net income including controlling interest
$
39,637

$
3,259

 
$
211,570

$
15,451

Other comprehensive income:
 
 
 
 
 
Currency translation adjustments, net of tax of $0, $1,251, $0, and $110
(2,005
)
(8,297
)
 
(3,718
)
(2,815
)
Unrealized gains/(losses) on investments, net of tax of ($30), $11, $94, and $155
1,918

339

 
4,786

(2,813
)
Unrealized gains on cash flow hedges, net of tax of $0, $0, $0, and $0
134


 
134


Total other comprehensive income/(loss), net of tax
47

(7,958
)
 
1,202

(5,628
)
 
 
 
 
 
 
Total comprehensive income/(loss)
39,684

(4,699
)
 
212,772

9,823

Less: comprehensive (income) attributable to controlling interest
77

130

 
(203
)
(341
)
Comprehensive income/(loss) attributable to Dolby Laboratories, Inc.
$
39,761

$
(4,569
)
 
$
212,569

$
9,482

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)
 
Fiscal Quarter-To-Date
 
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 March 29, 2019
$
100

$

$
2,361,607

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

$
5,833

$
2,352,857

Net income




39,574



39,574

63

39,637

Other comprehensive income, net of tax






187

187

(140
)
47

Distributions to controlling interest









(1
)
(1
)
Stock-based compensation expense


18,863





18,863



18,863

Repurchase of common stock
(1
)
(35,651
)
(52,980
)


(88,632
)


(88,632
)
Cash dividends declared and paid on common stock




(19,283
)


(19,283
)


(19,283
)
Common stock issued under employee stock plans


17,869





17,869



17,869

Tax withholdings on vesting of restricted stock


(1,081
)




(1,081
)


(1,081
)
Balance at June 28, 2019
$
99

$

$
2,328,918

$
(14,496
)
$
2,314,521

$
5,755

$
2,320,276



 
Fiscal Year-To-Date
 
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




211,233



211,233

337

211,570

Other comprehensive income, net of tax






1,336

1,336

(134
)
1,202

Distributions to controlling interest









(1,015
)
(1,015
)
Stock-based compensation expense


59,580





59,580



59,580

Repurchase of common stock
(4
)
(148,972
)
(137,536
)


(286,512
)


(286,512
)
Cash dividends declared and paid on common stock




(58,318
)


(58,318
)


(58,318
)
Common stock issued under employee stock plans
1

45,026





45,027



45,027

Tax withholdings on vesting of restricted stock


(21,761
)




(21,761
)


(21,761
)
Balance at June 28, 2019
$
99

$

$
2,328,918

$
(14,496
)
$
2,314,521

$
5,755

$
2,320,276


 
Fiscal Quarter-To-Date
 
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 March 30, 2018 (as adjusted)
$
102

$
113,827

$
2,316,906

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

$
6,549

$
2,431,768

Net income




3,116



3,116

143

3,259

Other comprehensive income, net of tax






(7,685
)
(7,685
)
(273
)
(7,958
)
Stock-based compensation expense


17,101





17,101



17,101

Repurchase of common stock


(55,487
)




(55,487
)


(55,487
)
Cash dividends declared and paid on common stock




(16,640
)


(16,640
)


(16,640
)
Common stock issued under employee stock plans
1

14,879





14,880



14,880

Tax withholdings on vesting of restricted stock


(1,243
)




(1,243
)


(1,243
)
Balance at June 29, 2018 (as adjusted)
$
103

$
89,077

$
2,303,382

$
(13,301
)
$
2,379,261

$
6,419

$
2,385,680



 
Fiscal Year-To-Date
 
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




15,030



15,030

421

15,451

Other comprehensive income, net of tax






(5,548
)
(5,548
)
(80
)
(5,628
)
Distributions to controlling interest









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


53,476





53,476



53,476

Repurchase of common stock
(1
)
(90,479
)




(90,480
)


(90,480
)
Cash dividends declared and paid on common stock




(49,596
)


(49,596
)


(49,596
)
Common stock issued under employee stock plans
3

85,938





85,941



85,941

Tax withholdings on vesting of restricted stock


(21,189
)




(21,189
)


(21,189
)
Balance at June 29, 2018 (as adjusted)
$
103

$
89,077

$
2,303,382

$
(13,301
)
$
2,379,261

$
6,419

$
2,385,680


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
 
June 28,
2019
June 29, 2018
(as adjusted)
Operating activities:
 
 
Net income including controlling interest
$
211,570

$
15,451

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
62,814

61,398

Stock-based compensation
59,580

53,476

Amortization of premium on investments
319

2,046

Provision for doubtful accounts
5,201

2,465

Deferred income taxes
(34,872
)
15,163

Restructuring charge for exit of leased building
27,463


Other non-cash items affecting net income
2,100

5,147

Changes in operating assets and liabilities:


Accounts receivable, net
(70,022
)
1,975

Contract assets
(16,942
)
12,897

Inventories
(15,976
)
(508
)
Prepaid expenses and other assets
(13,719
)
(13,718
)
Accounts payable and accrued liabilities
(10,733
)
(16,368
)
Income taxes, net
(5,226
)
102,422

Contract liabilities
491

(838
)
Other non-current liabilities
(4,854
)
(537
)
Net cash provided by operating activities
197,194

240,471

 
 
 
Investing activities:
 
 
Purchases of investment securities
(220,321
)
(151,585
)
Proceeds from sales of investment securities
149,023

72,090

Proceeds from maturities of investment securities
109,821

194,038

Purchases of property, plant, and equipment
(79,670
)
(54,869
)
Payments for business acquisitions, net of cash acquired
(14,919
)
(6,563
)
Purchase of intangible assets
(17,255
)
(12,543
)
Net cash (used in)/provided by investing activities
(73,321
)
40,568

 
 
 
Financing activities:
 
 
Proceeds from issuance of common stock
45,027

85,941

Repurchase of common stock
(286,512
)
(90,480
)
Payment of cash dividend
(58,318
)
(49,596
)
Distribution to controlling interest
(1,015
)
(1,022
)
Shares repurchased for tax withholdings on vesting of restricted stock
(21,761
)
(21,189
)
Net cash used in financing activities
(322,579
)
(76,346
)
 
 
 
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash
(2,499
)
(1,598
)
Net increase/(decrease) in cash, cash equivalents, and restricted cash
(201,205
)
203,095

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

634,368

Cash, cash equivalents, and restricted cash at end of period
$
724,045

$
837,463

 
 
 
Supplemental disclosure:
 
 
Cash paid for income taxes, net of refunds received
$
43,549

$
48,931

 
 
 
Non-cash investing activities:
 
 
Property, plant, and equipment purchased and unpaid at period-end
$
(10,785
)
$
4,820

Purchase consideration payable for acquisition
$
1,700

$
750

Purchase consideration payable for intangibles
$
1,881

$
200


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/A filed with the SEC.
The results for the fiscal quarter ended June 28, 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 June 28, 2019 and June 29, 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.

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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
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):
 
Fiscal Quarter Ended
 
Fiscal Year-To-Date Ended
 
June 29, 2018
(as previously reported)
Effect of Adopting ASC 606
June 29, 2018
(as adjusted)
 
June 29, 2018
(as previously reported)
Effect of Adopting ASC 606
June 29, 2018
(as adjusted)
Revenue
$
317,447

$
(102,667
)
$
214,780

 
$
906,599

$
(92,570
)
$
814,029

Gross margin
282,982

(102,585
)
180,397

 
810,299

(92,573
)
717,726

Provision for income taxes
(13,302
)
22,369

9,067

 
(198,332
)
35,262

(163,070
)
Net income attributable to Dolby Laboratories, Inc.
83,145

(80,029
)
3,116

 
72,154

(57,124
)
15,030

Diluted earnings per share
$
0.78

$
(0.75
)
$
0.03

 
$
0.67

$
(0.53
)
$
0.14



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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 June 29, 2018
(as previously reported)¹
Effect of Adopting ASC 606
Fiscal Year-To-Date June 29, 2018
(as adjusted)
Operating activities:
 
 
 
Net income including controlling interest
$
72,575

$
(57,124
)
$
15,451

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Deferred income taxes
47,145

(31,982
)
15,163

Changes in operating assets and liabilities:
 


 
Accounts receivable
(78,480
)
80,455

1,975

Contract assets

12,897

12,897

Prepaid expenses and other assets
(13,719
)
1

(13,718
)
Accounts payable and other liabilities
(12,781
)
(3,587
)
(16,368
)
Contract liabilities
(366
)
(472
)
(838
)
Net cash provided by operating activities
240,471


240,471

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.

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

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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 has been reclassified as a result of the adoption of 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. In the third quarter of fiscal 2019, we implemented a cash flow hedging program using forward currency contracts. This standard applies to the presentation and disclosure of the cash flow hedging program, which was not material in relation to our consolidated financial statements as a whole. 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.
We will adopt the new standard using the modified retrospective transition method, thereby recognizing the cumulative effect of initially applying Topic 842 as an adjustment to opening retained earnings on the adoption date, without revising the balances in comparative periods. 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 to utilize the transition guidance within the new standard which allows us to retain the historical 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.
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.

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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.
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

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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.