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 July 1, 2016
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From To
Commission File Number: 001-32431
DOLBY LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 90-0199783 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1275 Market Street San Francisco, CA | 94103-1410 | (415) 558-0200 |
(Address of principal executive offices) | (Zip Code) | (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer ¨ | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
On July 29, 2016, the registrant had 55,272,713 shares of Class A common stock, par value $0.001 per share, and 45,682,736 shares of Class B common stock, par value $0.001 per share, outstanding.
DOLBY LABORATORIES, INC.
FORM 10-Q
For the Fiscal Quarter Ended July 1, 2016
TABLE OF CONTENTS
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 6. | ||
2
GLOSSARY OF TERMS
The following table summarizes certain terms and abbreviations that may be used within the text of this report:
Abbreviation | Term | |
AAC | Advanced Audio Coding | |
AOCI | Accumulated Other Comprehensive Income | |
APIC | Additional-Paid In-Capital | |
ASP | Average Selling Price | |
ASU | Accounting Standards Update | |
ATSC | Advanced Television Systems Committee | |
AVR | Audio/Video Receiver | |
CE | Consumer Electronics | |
CODM | Chief Operating Decision-Maker | |
COGS | Cost Of Goods Sold | |
COSO | Committee Of Sponsoring Organizations (Of The Treadway Commission) | |
DCI | Digital Cinema Initiative | |
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 | |
G&A | General & Administrative | |
GAAP | Generally Accepted Accounting Principles | |
HDR | High Dynamic Range | |
HDTV | High Definition Television | |
HE AAC | High Efficiency Advanced Audio Coding | |
HEVC | High Efficiency Video Coding | |
HFR | High Frame Rate | |
HTIB | Home Theater In-A-Box | |
IC | Integrated Circuit | |
IMB | Integrated Media Block | |
IPO | Initial Public Offering | |
IPTV | Internet Protocol Television | |
ISO | Incentive Stock Option | |
ISV | Independent Software Vendor | |
IT | Information Technology | |
LCD | Liquid Crystal Display | |
LP | Limited Partner/Partnership | |
ME | Multiple Element | |
NATO | North American Theatre Owners | |
NOL | Net Operating Loss | |
NQ | Non-Qualified/Non-Statutory Stock Option | |
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 And Equipment | |
PSO | Performance-Based Stock Option | |
R&D | Research & Development | |
RSU | Restricted Stock Unit | |
S&M | Sales & Marketing | |
SAR | Stock Appreciation Rights | |
SERP | Supplemental Executive Retirement Plan | |
SoC | System(s)-On-A-Chip | |
STB | Set-Top Box | |
TAM | Total Available Market | |
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
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)
July 1, 2016 | September 25, 2015 | |||||
ASSETS | (unaudited) | |||||
Current assets: | ||||||
Cash and cash equivalents | $ | 599,991 | $ | 531,926 | ||
Restricted cash | 5,673 | 2,936 | ||||
Short-term investments | 118,778 | 138,901 | ||||
Accounts receivable, net of allowance for doubtful accounts of $2,534 and $1,542 | 91,637 | 101,563 | ||||
Inventories | 18,544 | 13,872 | ||||
Prepaid expenses and other current assets | 37,306 | 32,031 | ||||
Total current assets | 871,929 | 821,229 | ||||
Long-term investments | 266,431 | 321,015 | ||||
Property, plant and equipment, net | 428,225 | 403,091 | ||||
Intangible assets, net | 222,868 | 127,507 | ||||
Goodwill | 309,020 | 307,708 | ||||
Deferred taxes | 149,633 | 143,279 | ||||
Other non-current assets | 15,247 | 9,464 | ||||
Total assets | $ | 2,263,353 | $ | 2,133,293 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable | $ | 14,762 | $ | 20,710 | ||
Accrued liabilities | 174,573 | 169,307 | ||||
Income taxes payable | 212 | 754 | ||||
Deferred revenue | 22,530 | 18,910 | ||||
Total current liabilities | 212,077 | 209,681 | ||||
Long-term deferred revenue | 34,903 | 30,581 | ||||
Other non-current liabilities | 76,053 | 77,024 | ||||
Total liabilities | 323,033 | 317,286 | ||||
Stockholders’ equity: | ||||||
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 54,978,917 shares issued and outstanding at July 1, 2016 and 50,291,426 at September 25, 2015 | 56 | 51 | ||||
Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 45,888,962 shares issued and outstanding at July 1, 2016 and 50,743,311 at September 25, 2015 | 46 | 51 | ||||
Additional paid-in capital | 15,380 | 17,571 | ||||
Retained earnings | 1,926,528 | 1,800,857 | ||||
Accumulated other comprehensive (loss) | (10,205 | ) | (11,462 | ) | ||
Total stockholders’ equity – Dolby Laboratories, Inc. | 1,931,805 | 1,807,068 | ||||
Controlling interest | 8,515 | 8,939 | ||||
Total stockholders’ equity | 1,940,320 | 1,816,007 | ||||
Total liabilities and stockholders’ equity | $ | 2,263,353 | $ | 2,133,293 | ||
See accompanying notes to unaudited interim condensed consolidated financial statements
4
DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Fiscal Quarter Ended | Fiscal Year-To-Date Ended | ||||||||||||
July 1, 2016 | June 26, 2015 | July 1, 2016 | June 26, 2015 | ||||||||||
Revenue: | |||||||||||||
Licensing | $ | 253,026 | $ | 204,855 | $ | 713,491 | $ | 664,786 | |||||
Products | 20,638 | 22,596 | 65,510 | 58,844 | |||||||||
Services | 3,923 | 4,251 | 13,740 | 14,260 | |||||||||
Total revenue | 277,587 | 231,702 | 792,741 | 737,890 | |||||||||
Cost of revenue: | |||||||||||||
Cost of licensing | 6,620 | 1,347 | 19,851 | 8,615 | |||||||||
Cost of products | 14,098 | 20,027 | 47,114 | 50,848 | |||||||||
Cost of services | 3,903 | 3,506 | 11,795 | 9,976 | |||||||||
Total cost of revenue | 24,621 | 24,880 | 78,760 | 69,439 | |||||||||
Gross margin | 252,966 | 206,822 | 713,981 | 668,451 | |||||||||
Operating expenses: | |||||||||||||
Research and development | 54,977 | 45,508 | 160,393 | 150,703 | |||||||||
Sales and marketing | 74,234 | 70,782 | 220,503 | 204,740 | |||||||||
General and administrative | 42,570 | 45,587 | 129,130 | 135,956 | |||||||||
Restructuring charges/(credits) | (10 | ) | — | 1,245 | (39 | ) | |||||||
Total operating expenses | 171,771 | 161,877 | 511,271 | 491,360 | |||||||||
Operating income | 81,195 | 44,945 | 202,710 | 177,091 | |||||||||
Other income/expense: | |||||||||||||
Interest income | 1,464 | 1,453 | 4,011 | 3,444 | |||||||||
Interest expense | (26 | ) | (69 | ) | (88 | ) | (115 | ) | |||||
Other income/(expense), net | (849 | ) | 1,049 | (1,542 | ) | 1,159 | |||||||
Total other income | 589 | 2,433 | 2,381 | 4,488 | |||||||||
Income before income taxes | 81,784 | 47,378 | 205,091 | 181,579 | |||||||||
Provision for income taxes | (18,017 | ) | (11,522 | ) | (42,768 | ) | (45,254 | ) | |||||
Net income including controlling interest | 63,767 | 35,856 | 162,323 | 136,325 | |||||||||
Less: net (income) attributable to controlling interest | (139 | ) | (350 | ) | (396 | ) | (1,488 | ) | |||||
Net income attributable to Dolby Laboratories, Inc. | $ | 63,628 | $ | 35,506 | $ | 161,927 | $ | 134,837 | |||||
Net Income Per Share: | |||||||||||||
Basic | $ | 0.63 | $ | 0.35 | $ | 1.61 | $ | 1.32 | |||||
Diluted | $ | 0.62 | $ | 0.34 | $ | 1.59 | $ | 1.29 | |||||
Weighted-Average Shares Outstanding: | |||||||||||||
Basic | 100,533 | 102,670 | 100,578 | 102,494 | |||||||||
Diluted | 102,677 | 104,105 | 101,979 | 104,127 | |||||||||
Related party rent expense: | |||||||||||||
Included in operating expenses | $ | 778 | $ | 815 | $ | 2,315 | $ | 2,358 | |||||
Included in net income attributable to controlling interest | $ | 179 | $ | 1,159 | $ | 529 | $ | 3,463 | |||||
Cash dividend declared per common share | $ | 0.12 | $ | 0.10 | $ | 0.36 | $ | 0.30 | |||||
Cash dividend paid per common share | $ | 0.12 | $ | 0.10 | $ | 0.36 | $ | 0.30 | |||||
See accompanying notes to unaudited interim condensed consolidated financial statements
5
DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Fiscal Quarter Ended | Fiscal Year-To-Date Ended | ||||||||||||
July 1, 2016 | June 26, 2015 | July 1, 2016 | June 26, 2015 | ||||||||||
Net income including controlling interest | $ | 63,767 | $ | 35,856 | $ | 162,323 | $ | 136,325 | |||||
Other comprehensive income: | |||||||||||||
Foreign currency translation adjustments, net of tax | (2,875 | ) | 1,146 | (753 | ) | (10,726 | ) | ||||||
Unrealized gains/(losses) on available-for-sale securities, net of tax | 701 | (729 | ) | 1,404 | (64 | ) | |||||||
Comprehensive income | 61,593 | 36,273 | 162,974 | 125,535 | |||||||||
Less: comprehensive (income)/loss attributable to controlling interest | 172 | (626 | ) | 210 | (1,103 | ) | |||||||
Comprehensive income attributable to Dolby Laboratories, Inc. | $ | 61,765 | $ | 35,647 | $ | 163,184 | $ | 124,432 | |||||
See accompanying notes to unaudited interim condensed consolidated financial statements
6
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 25, 2015 | $ | 102 | $ | 17,571 | $ | 1,800,857 | $ | (11,462 | ) | $ | 1,807,068 | $ | 8,939 | $ | 1,816,007 | ||||||
Net income | — | — | 161,927 | — | 161,927 | 396 | 162,323 | ||||||||||||||
Currency translation adjustments, net of tax of $476 | — | — | — | (147 | ) | (147 | ) | (606 | ) | (753 | ) | ||||||||||
Unrealized gains on investments, net of tax of $(26) | — | — | — | 1,404 | 1,404 | — | 1,404 | ||||||||||||||
Distributions to controlling interest | — | — | — | — | — | (214 | ) | (214 | ) | ||||||||||||
Stock-based compensation expense | — | 51,473 | — | — | 51,473 | — | 51,473 | ||||||||||||||
Repurchase of common stock | (2 | ) | (84,852 | ) | — | — | (84,854 | ) | — | (84,854 | ) | ||||||||||
Cash dividends declared and paid on common stock | — | — | (36,256 | ) | — | (36,256 | ) | — | (36,256 | ) | |||||||||||
Tax (deficiency) from employee stock plans | — | (724 | ) | — | — | (724 | ) | — | (724 | ) | |||||||||||
Common stock issued under employee stock plans | 2 | 44,066 | — | — | 44,068 | — | 44,068 | ||||||||||||||
Tax withholdings on vesting of restricted stock | — | (12,154 | ) | — | — | (12,154 | ) | — | (12,154 | ) | |||||||||||
Balance at July 1, 2016 | $ | 102 | $ | 15,380 | $ | 1,926,528 | $ | (10,205 | ) | $ | 1,931,805 | $ | 8,515 | $ | 1,940,320 | ||||||
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 26, 2014 | $ | 103 | $ | 46,415 | $ | 1,660,485 | $ | 3,014 | $ | 1,710,017 | $ | 21,631 | $ | 1,731,648 | |||||||
Net income | — | — | 134,837 | — | 134,837 | 1,488 | 136,325 | ||||||||||||||
Currency translation adjustments, net of tax of $641 | — | — | — | (10,341 | ) | (10,341 | ) | (385 | ) | (10,726 | ) | ||||||||||
Unrealized losses on investments, net of tax of $(165) | — | — | — | (64 | ) | (64 | ) | — | (64 | ) | |||||||||||
Distributions to controlling interest | — | — | — | — | — | (5,628 | ) | (5,628 | ) | ||||||||||||
Stock-based compensation expense | — | 50,822 | — | — | 50,822 | — | 50,822 | ||||||||||||||
Repurchase of common stock | (1 | ) | (47,955 | ) | — | — | (47,956 | ) | — | (47,956 | ) | ||||||||||
Cash dividends declared and paid on common stock | — | — | (30,744 | ) | — | (30,744 | ) | — | (30,744 | ) | |||||||||||
Tax benefit from employee stock plans | — | 1,167 | — | — | 1,167 | — | 1,167 | ||||||||||||||
Common stock issued under employee stock plans | 2 | 28,048 | — | — | 28,050 | — | 28,050 | ||||||||||||||
Tax withholdings on vesting of restricted stock | — | (12,918 | ) | — | — | (12,918 | ) | — | (12,918 | ) | |||||||||||
Exercise of class B stock options | — | 7 | — | — | 7 | — | 7 | ||||||||||||||
Balance at June 26, 2015 | $ | 104 | $ | 65,586 | $ | 1,764,578 | $ | (7,391 | ) | $ | 1,822,877 | $ | 17,106 | $ | 1,839,983 | ||||||
See accompanying notes to unaudited interim condensed consolidated financial statements
7
DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Fiscal Year-To-Date Ended | ||||||
July 1, 2016 | June 26, 2015 | |||||
Operating activities: | ||||||
Net income including controlling interest | $ | 162,323 | $ | 136,325 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation and amortization | 63,829 | 50,767 | ||||
Stock-based compensation | 51,473 | 50,822 | ||||
Amortization of premium on investments | 3,288 | 7,224 | ||||
Excess tax benefit from exercise of stock options | (1,313 | ) | (2,532 | ) | ||
Provision for doubtful accounts | 1,133 | (30 | ) | |||
Deferred income taxes | (5,838 | ) | (15,088 | ) | ||
Other non-cash items affecting net income | 306 | 1,928 | ||||
Changes in operating assets and liabilities: | ||||||
Accounts receivable | 8,798 | (9,317 | ) | |||
Inventories | (6,024 | ) | 5,238 | |||
Prepaid expenses and other assets | (11,075 | ) | (6,179 | ) | ||
Accounts payable and other liabilities | 10,808 | (18,909 | ) | |||
Income taxes, net | (1,612 | ) | 18,290 | |||
Deferred revenue | 8,052 | 7,158 | ||||
Other non-current liabilities | (193 | ) | 420 | |||
Net cash provided by operating activities | 283,955 | 226,117 | ||||
Investing activities: | ||||||
Purchase of investments | (247,680 | ) | (357,096 | ) | ||
Proceeds from sales of investment securities | 242,141 | 220,636 | ||||
Proceeds from maturities of investment securities | 77,668 | 117,545 | ||||
Purchases of PP&E | (77,079 | ) | (119,769 | ) | ||
Payments for business acquisitions, net of cash acquired | — | (93,516 | ) | |||
Purchase of intangible assets | (118,770 | ) | (22,716 | ) | ||
Change in restricted cash | (2,737 | ) | 223 | |||
Net cash used in investing activities | (126,457 | ) | (254,693 | ) | ||
Financing activities: | ||||||
Proceeds from issuance of common stock | 44,067 | 28,057 | ||||
Repurchase of common stock | (84,854 | ) | (47,956 | ) | ||
Payment of cash dividend | (36,256 | ) | (30,744 | ) | ||
Distribution to controlling interest | (214 | ) | (5,628 | ) | ||
Excess tax benefit from exercise of stock options | 1,313 | 2,532 | ||||
Shares repurchased for tax withholdings on vesting of restricted stock | (12,153 | ) | (12,918 | ) | ||
Net cash used in financing activities | (88,097 | ) | (66,657 | ) | ||
Effect of foreign exchange rate changes on cash and cash equivalents | (1,336 | ) | (2,371 | ) | ||
Net increase/(decrease) in cash and cash equivalents | 68,065 | (97,604 | ) | |||
Cash and cash equivalents at beginning of period | 531,926 | 568,472 | ||||
Cash and cash equivalents at end of period | $ | 599,991 | $ | 470,868 | ||
Supplemental disclosure: | ||||||
Cash paid for income taxes, net of refunds received | $ | 50,235 | $ | 39,509 | ||
Non-cash investing and financing activities: | ||||||
Change in PP&E purchased and unpaid at period-end | $ | (13,911 | ) | $ | 29,839 | |
Purchase consideration payable for acquisition | $ | 95 | $ | 740 | ||
See accompanying notes to unaudited interim condensed consolidated financial statements
8
DOLBY LABORATORIES, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Unaudited Interim Condensed Consolidated Financial Statements
We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with U.S. GAAP, and with SEC rules and regulations, which allow for certain information and footnote disclosures that are normally included in annual financial statements prepared in accordance with GAAP to be condensed or omitted. In our opinion, these unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended September 25, 2015 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 25, 2015, which are included in our Annual Report on Form 10-K filed with the SEC.
The results for the fiscal quarter ended July 1, 2016 are not necessarily indicative of the results to be expected for any subsequent quarterly or annual financial period, including the fiscal year ending September 30, 2016.
Principles of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of Dolby Laboratories, Inc. and our wholly owned subsidiaries. In addition, we have consolidated the financial results of jointly owned affiliated companies in which our principal stockholder has a controlling interest. We report these controlling interests as a separate line in our consolidated statements of operations as net income attributable to controlling interest and in our consolidated balance sheets as a controlling interest. We eliminate all intercompany accounts and transactions upon consolidation.
Operating Segments
We operate as a single reporting segment, and thus all required financial segment information is included in our unaudited interim condensed consolidated financial statements. This determination reflects the fact that our CODM, our Chief Executive Officer, evaluates our financial information and resources, and assesses the performance of these resources on a consolidated basis.
Use of Estimates
The preparation of our financial statements in accordance with GAAP requires management to make certain estimates and assumptions that affect the amounts reported and disclosed in our unaudited interim condensed consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include estimated selling prices for elements sold in ME revenue arrangements; valuation allowances for accounts receivable; carrying values of inventories and certain property, plant, and equipment, goodwill and intangible assets; fair values of investments; accrued liabilities including liabilities for unrecognized tax benefits, deferred income tax assets and 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 and 40 week periods ended July 1, 2016 and the 13 and 39 week periods ended June 26, 2015. Our fiscal year ended September 25, 2015 (fiscal 2015) consisted of 52 weeks while our fiscal year ending September 30, 2016 (fiscal 2016) will consist of 53 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, operating cash flows or net income.
9
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
Balance Sheet Classification - Deferred Taxes. During the first quarter of fiscal 2016, we elected to early-adopt ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The new standard requires classification of all deferred tax assets and liabilities as non-current, which represents a change from our historical presentation whereby certain of our deferred tax assets and liabilities were classified as current, and the remainder were classified as non-current. We elected a transition method to apply the changes from the new standard on a retrospective basis, and upon adoption, reclassified $97.1 million of deferred tax assets from current assets to non-current assets on our consolidated balance sheet as of September 25, 2015.
With the exception of the impact from the adoption of ASU 2015-17 discussed above, there have not been any changes to our significant accounting policies from those that were described in our Form 10-K for the prior fiscal year ended September 25, 2015.
Standards Not Yet Effective
Revenue Recognition. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new standard will replace existing revenue recognition guidance in U.S. GAAP when it becomes effective, and may also impact the accounting for certain direct costs associated with revenues. The new standard permits the use of either the retrospective or cumulative effect transition method.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard, ASU 2014-09. The effective date for this ASU coincides with the effective date for ASU 2014-09.
We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures, and have yet to select a transition method or determine the effect of the standard on our ongoing financial reporting. Although permitted, we do not intend to early-adopt the new standard, but we will adopt it beginning September 30, 2018.
Consolidation. In February 2015, the FASB issued ASU No. 2015-02, Consolidation: Amendments to the Consolidation Analysis, which amends the consolidation requirements in ASC 810 and significantly changes the consolidation analysis required under U.S. GAAP. Among others, the ASU significantly amends how variable interests held by a reporting entity’s related parties or de facto agents affect its consolidation conclusion. We will adopt the standard beginning October 1, 2016.
Inventory. In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which affects reporting entities that measure inventory using first-in, first-out (FIFO) or average cost. Specifically, ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The ASU is effective for us beginning September 30, 2017. Early adoption is permitted, and we are currently evaluating the timing and impact of the standard on our consolidated financial statements.
Leases. In February 2016, the FASB issued ASU 2016-02, Leases, which amends the existing accounting standards for leases. Under the new guidance, a lessee will be required to recognize a lease liability and right-of-use asset for all leases with terms in excess of twelve months. The new guidance 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. Consistent
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with current guidance, a lessee's recognition, measurement, and presentation of expenses and cash flows arising from a lease will continue to depend primarily on its classification. The ASU is effective for us beginning September 28, 2019, and must be applied using a modified retrospective approach. Early adoption is permitted, including adoption in an interim period, and we are currently evaluating the timing and impact of the standard on our consolidated financial statements.
Share-Based Compensation. In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory withholding requirements, as well as classification in the statement of cash flows. The ASU is effective for us beginning September 30, 2017. Early adoption is permitted, including adoption in an interim period, and we are currently evaluating the timing and impact of the standard on our consolidated financial statements.
3. Composition of Certain Financial Statement Captions
The following tables present detailed information from our consolidated balance sheets as of July 1, 2016 and September 25, 2015 (amounts displayed in thousands, except as otherwise noted).
Accounts Receivable
Accounts Receivable, Net | July 1, 2016 | September 25, 2015 | ||||
Trade accounts receivable | $ | 83,505 | $ | 94,559 | ||
Accounts receivable from patent administration program customers | 10,666 | 8,546 | ||||
Accounts receivable, gross | 94,171 | 103,105 | ||||
Less: allowance for doubtful accounts | (2,534 | ) | (1,542 | ) | ||
Total | $ | 91,637 | $ | 101,563 | ||
Inventories
Inventories | July 1, 2016 | September 25, 2015 | ||||
Raw materials | $ | 4,849 | $ | 3,246 | ||
Work in process | 5,696 | 3,279 | ||||
Finished goods | 7,999 | 7,347 | ||||
Total | $ | 18,544 | $ | 13,872 | ||
Inventories are stated at the lower of cost or market. Inventory with a consumption period expected to exceed twelve months is recorded within other non-current assets in our consolidated balance sheets. In addition to the amounts shown in the table above, we have included $1.6 million and $1.4 million of raw materials inventory within other non-current assets in our consolidated balance sheets as of July 1, 2016 and September 25, 2015, respectively. Based on anticipated inventory consumption rates, and aside from existing write-downs due to excess and obsolete inventory, we do not believe that material risk of obsolescence exists prior to ultimate sale.
Prepaid Expenses And Other Current Assets
Prepaid Expenses And Other Current Assets | July 1, 2016 | September 25, 2015 | ||||
Prepaid expenses | $ | 17,860 | $ | 13,680 | ||
Other current assets | 8,859 | 7,525 | ||||
Income tax receivable | 10,587 | 10,826 | ||||
Total | $ | 37,306 | $ | 32,031 | ||
Accrued Liabilities
Accrued Liabilities | July 1, 2016 | September 25, 2015 | ||||
Accrued royalties | $ | 2,100 | $ | 1,951 | ||
Amounts payable to patent administration program partners | 56,706 | 40,466 | ||||
Accrued compensation and benefits | 62,407 | 70,317 | ||||
Accrued professional fees | 6,169 | 6,523 | ||||
Other accrued liabilities | 47,191 | 50,050 | ||||
Total | $ | 174,573 | $ | 169,307 | ||
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Other accrued liabilities include the accrual for unpaid PP&E additions of $9.1 million and $20.5 million as of July 1, 2016 and September 25, 2015, respectively.
Other Non-Current Liabilities
Other Non-Current Liabilities | July 1, 2016 | September 25, 2015 | ||||
Supplemental retirement plan obligations | $ | 2,576 | $ | 2,400 | ||
Non-current tax liabilities | 62,305 | 62,843 | ||||
Other liabilities | 11,172 | 11,781 | ||||
Total | $ | 76,053 | $ | 77,024 | ||
4. Investments & Fair Value Measurements
We use cash holdings to purchase investment grade securities diversified among security types, industries and issuers. All investments are measured at fair value, and are recorded within cash equivalents and both short-term and long-term investments in our consolidated balance sheets. With the exception of our mutual fund investments held in our SERP and classified as trading securities, all of our investments are classified as available-for-sale securities.
Our investments primarily consist of municipal debt securities, corporate bonds, U.S. agency securities and commercial paper. In addition, our cash and cash equivalents also consist of highly-liquid money market funds. Consistent with our investment policy, none of our held municipal debt investments are supported by letters of credit or standby purchase agreements. Our cash and investment portfolio consists of the following (in thousands):
July 1, 2016 | ||||||||||||||||||||||
Cost | Unrealized | Estimated Fair Value | ||||||||||||||||||||
Gains | Losses | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||
Cash and cash equivalents: | ||||||||||||||||||||||
Cash | $ | 534,912 | $ | 534,912 | ||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||
Money market funds | 65,004 | — | — | 65,004 | 65,004 | |||||||||||||||||
Corporate bonds | 75 | — | — | 75 | 75 | |||||||||||||||||
Cash and cash equivalents | 599,991 | — | — | 599,991 | 65,004 | 75 | — | |||||||||||||||
Short-term investments: | ||||||||||||||||||||||
Certificate of deposit (1) | 9,950 | — | (1 | ) | 9,949 | 9,949 | ||||||||||||||||
Government bonds | 2,999 | 4 | — | 3,003 | 3,003 | |||||||||||||||||
Commercial paper | 8,467 | 2 | — | 8,469 | 8,469 | |||||||||||||||||
Corporate bonds | 74,354 | 39 | (6 | ) | 74,387 | 74,387 | ||||||||||||||||
Municipal debt securities | 22,972 | 9 | (11 | ) | 22,970 | 22,970 | ||||||||||||||||
Short-term investments | 118,742 | 54 | (18 | ) | 118,778 | 3,003 | 115,775 | — | ||||||||||||||
Long-term investments: | ||||||||||||||||||||||
Certificate of deposit (1) | 4,500 | — | — | 4,500 | 4,500 | |||||||||||||||||
U.S. agency securities | 10,041 | 31 | — | 10,072 | 10,072 | |||||||||||||||||
Government bonds | 13,478 | 129 | — | 13,607 | 13,607 | |||||||||||||||||
Corporate bonds | 200,704 | 1,253 | (47 | ) | 201,910 | 201,910 | ||||||||||||||||
Municipal debt securities | 32,535 | 220 | — | 32,755 | 32,755 | |||||||||||||||||
Other long-term investments (2) | 3,231 | 356 | — | 3,587 | 356 | |||||||||||||||||
Long-term investments | 264,489 | 1,989 | (47 | ) | 266,431 | 24,035 | 239,165 | — | ||||||||||||||
Total cash, cash equivalents, and investments | $ | 983,222 | $ | 2,043 | $ | (65 | ) | $ | 985,200 | $ | 92,042 | $ | 355,015 | $ | — | |||||||
Investments held in supplemental retirement plan: | ||||||||||||||||||||||
Assets | 2,563 | 2,563 | 2,563 | |||||||||||||||||||
Included in prepaid expenses and other current assets & other non-current assets | ||||||||||||||||||||||
Liabilities | 2,563 | 2,563 | 2,563 | |||||||||||||||||||
Included in accrued liabilities & other non-current liabilities | ||||||||||||||||||||||
Contingent consideration related to acquisition: | ||||||||||||||||||||||
Liabilities | 95 | 95 | 95 | |||||||||||||||||||
Included in accrued liabilities | ||||||||||||||||||||||
(1) | Certificates of deposit include marketable securities, while those with a maturity in excess of one year as of July 1, 2016 classified within long-term investments. |
(2) | Other long-term investments as of July 1, 2016 include a marketable equity security of $0.4 million, and other investments that are not carried at fair value including an equity method investment of $0.7 million and two cost method investments of $2.0 million and $0.5 million. |
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September 25, 2015 | ||||||||||||||||||||||
Cost | Unrealized | Estimated Fair Value | ||||||||||||||||||||
Gains | Losses | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||
Cash and cash equivalents: | ||||||||||||||||||||||
Cash | $ | 511,736 | $ | 511,736 | ||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||
Money market funds | 19,014 | — | — | 19,014 | 19,014 | |||||||||||||||||
Corporate bonds | 1,176 | — | — | 1,176 | 1,176 | |||||||||||||||||
Cash and cash equivalents | 531,926 | — | — | 531,926 | 19,014 | 1,176 | — | |||||||||||||||
Short-term investments: | ||||||||||||||||||||||
Government bonds | 2,000 | 1 | — | 2,001 | 2,001 | |||||||||||||||||
Commercial paper | 6,478 | — | — | 6,478 | 6,478 | |||||||||||||||||
Corporate bonds | 86,543 | 46 | (11 | ) | 86,578 | 86,578 | ||||||||||||||||
Municipal debt securities | 43,746 | 98 | — | 43,844 | 43,844 | |||||||||||||||||
Short-term investments | 138,767 | 145 | (11 | ) | 138,901 | 2,001 | 136,900 | — | ||||||||||||||
Long-term investments: | ||||||||||||||||||||||
U.S. agency securities | 1,999 | 1 | — | 2,000 | 2,000 | |||||||||||||||||
Government bonds | 30,505 | 19 | (17 | ) | 30,507 | 30,507 | ||||||||||||||||
Corporate bonds | 167,394 | 138 | (392 | ) | 167,140 | 167,140 | ||||||||||||||||
Municipal debt securities | 117,552 | 189 | (60 | ) | 117,681 | 117,681 | ||||||||||||||||
Other long-term investments (1) | 2,961 | 726 | — | 3,687 | 726 | |||||||||||||||||
Long-term investments | 320,411 | 1,073 | (469 | ) | 321,015 | 33,233 | 284,821 | — | ||||||||||||||
Total cash, cash equivalents, and investments | $ | 991,104 | $ | 1,218 | $ | (480 | ) | $ | 991,842 | $ | 54,248 | $ | 422,897 | $ | — | |||||||
Investments held in supplemental retirement plan: | ||||||||||||||||||||||
Assets | 2,498 | 2,498 | 2,498 | |||||||||||||||||||
Included in prepaid expenses and other current assets & other non-current assets | ||||||||||||||||||||||
Liabilities | 2,498 | 2,498 | 2,498 | |||||||||||||||||||
Included in accrued liabilities & other non-current liabilities | ||||||||||||||||||||||
Contingent consideration related to acquisition: | ||||||||||||||||||||||
Liabilities | 95 | 95 | 95 | |||||||||||||||||||
Included in accrued liabilities | ||||||||||||||||||||||
(1) | Other long-term investments as of September 25, 2015 include a marketable equity security of $0.7 million, and other investments that are not carried at fair value including an equity method investment of $0.5 million and two cost method investments of $2.0 million and $0.5 million. |
Fair Value Hierarchy. Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. We minimize the use of unobservable inputs and use observable market data, if available, when determining fair value. We classify our inputs to measure fair value using the following three-level hierarchy:
Level 1: Quoted prices in active markets at the measurement date for identical assets and liabilities. We base the fair value of our Level 1 financial instruments, which are traded in active markets, using quoted market prices for identical instruments.
Level 2: Prices may be based upon quoted prices in active markets or inputs not quoted on active markets but are corroborated by market data. We obtain the fair value of our Level 2 financial instruments from a professional pricing service, which may use quoted market prices for identical or comparable instruments, or model driven valuations using observable market data or inputs corroborated by observable market data. To validate the fair value determination provided by our primary pricing service, we perform quality controls over values received which include comparing our pricing service provider’s assessment of the fair values of our investment securities against the fair values of our investment securities obtained from another independent source, reviewing the pricing movement in the context of overall market trends, and reviewing trading information from our investment managers. In addition, we assess the inputs and methods used in determining the fair value in order to determine the classification of securities in the fair value hierarchy.
Level 3: Unobservable inputs are used when little or no market data is available and reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
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Securities In Gross Unrealized Loss Position. We periodically evaluate our investments for other-than- temporary declines in fair value. The unrealized losses on our available-for-sale securities were primarily the result of unfavorable changes in interest rates subsequent to the initial purchase of these securities. The following table presents the gross unrealized losses and fair value for those available-for-sale securities that were in an unrealized loss position as of July 1, 2016 and September 25, 2015 (in thousands):
July 1, 2016 | September 25, 2015 | ||||||||||||||||||
Less Than 12 Months | 12 Months Or Greater | Less Than 12 Months (1) | |||||||||||||||||
Investment Type | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||
Certificate of deposit | $ | 8,500 | $ | (1 | ) | $ | — | $ | — | $ | — | $ | — | ||||||
U.S. agency securities | — | — | — | — | 19,005 | (17 | ) | ||||||||||||
Corporate bonds | 41,844 | (38 | ) | 7,999 | (15 | ) | 148,034 | (403 | ) | ||||||||||
Municipal debt securities | 8,261 | (9 | ) | 998 | (2 | ) | 35,476 | (60 | ) | ||||||||||
Total | $ | 58,605 | $ | (48 | ) | $ | 8,997 | $ | (17 | ) | $ | 202,515 | $ | (480 | ) | ||||
(1) As of September 25, 2015, no available-for-sale securities were in an unrealized loss position for 12 months or greater.
Although we had certain securities that were in an unrealized loss position as of July 1, 2016, we expect to recover the full carrying value of these securities as we do not intend to, nor do we currently anticipate a need to sell these securities prior to recovering the associated unrealized losses. As a result, we do not consider any portion of the unrealized losses at either July 1, 2016 or September 25, 2015 to represent an other-than-temporary impairment, nor do we consider any of the unrealized losses to be credit losses.
Investment Maturities. The following table summarizes the amortized cost and estimated fair value of the available-for-sale securities within our investment portfolio based on stated maturities as of July 1, 2016 and September 25, 2015, which are recorded within cash equivalents and both short and long-term investments in our consolidated balance sheets (in thousands):
July 1, 2016 | September 25, 2015 | ||||||||||||
Range of maturity | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||
Due within 1 year | $ | 183,339 | $ | 183,375 | $ | 158,957 | $ | 159,090 | |||||
Due in 1 to 2 years | 185,070 | 185,835 | 173,571 | 173,577 | |||||||||
Due in 2 to 3 years | 76,689 | 77,508 | 143,879 | 143,752 | |||||||||
Total | $ | 445,098 | $ | 446,718 | $ | 476,407 | $ | 476,419 | |||||
5. Property, Plant & Equipment
Property, plant and equipment are recorded at cost, with depreciation expense included in cost of products, cost of services, R&D, S&M and G&A expenses in our consolidated statements of operations. PP&E consist of the following (in thousands):
Property, Plant And Equipment | July 1, 2016 | September 25, 2015 | |||||
Land | $ | 43,373 | $ | 43,537 | |||
Buildings and building improvements | 269,838 | 248,390 | |||||
Leasehold improvements | 63,173 | 61,455 | |||||
Machinery and equipment | 88,059 | 70,143 | |||||
Computer equipment and software | 150,720 | 136,666 | |||||
Furniture and fixtures | 28,211 | 25,489 | |||||
Equipment provided under operating leases | 24,945 | 7,638 | |||||
Construction-in-progress | 5,149 | 11,448 | |||||
Property, plant and equipment, gross | 673,468 | 604,766 | |||||
Less: accumulated depreciation | (245,243 | ) | (201,675 | ) | |||
Property, plant and equipment, net | $ | 428,225 | $ | 403,091 | |||
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6. Goodwill & Intangible Assets
Goodwill
The following table outlines changes to the carrying amount of goodwill (in thousands):
Goodwill | |||
Balance at September 25, 2015 | $ | 307,708 | |
Translation adjustments | 1,312 | ||
Balance at July 1, 2016 | $ | 309,020 | |
Intangible Assets
Our intangible assets are stated at their original cost less accumulated amortization, and principally consist of acquired technology, patents, trademarks, customer relationships and contracts. Intangible assets subject to amortization consist of the following (in thousands):
July 1, 2016 | September 25, 2015 | ||||||||||||||||||
Intangible Assets, Net | Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | |||||||||||||
Acquired patents and technology | $ | 292,971 | $ | (94,777 | ) | $ | 198,194 | $ | 172,787 | $ | (74,398 | ) | $ | 98,389 | |||||
Customer relationships | 56,818 | (32,681 | ) | 24,137 | 56,933 | (28,275 | ) | 28,658 | |||||||||||
Other intangibles | 22,712 | (22,175 | ) | 537 | 22,564 | (22,104 | ) | 460 | |||||||||||
Total | $ | 372,501 | $ | (149,633 | ) | $ | 222,868 | $ | 252,284 | $ | (124,777 | ) | $ | 127,507 | |||||
During both the fiscal year-to-date period ended July 1, 2016 and June 26, 2015, we purchased various patents and developed technologies that enable us to further develop our audio, imaging and potential product offerings.
Patent Portfolio Acquisition. On September 30, 2015, we completed an asset purchase of a patent portfolio that fits within our existing patent licensing programs for consideration of $105.0 million. These assets are categorized within the "Acquired patents and technology" intangible asset class, and will be amortized over their weighted-average useful life of 9.0 years.
Other. During the first quarter of fiscal 2016, we also acquired other intangible assets for consideration of $0.3 million, which will be amortized over their weighted-average useful life of 18.0 years. During the third quarter of fiscal 2016, we also acquired other intangible assets for consideration of $15.0 million, which will be amortized over their weighted-average useful life of 18.0 years.
With regard to our purchase of intangible assets during the periods presented, the following table summarizes the consideration paid, the weighted-average useful lives over which the acquired assets will be amortized using the greater of either the straight-line basis or a ratio-to-revenue method, and the classification of their amortized expense in our consolidated statements of operations:
Fiscal Period | Total Purchase Consideration (1) | Weighted-Average Useful Life |
(in millions) | (in years) | |
Fiscal 2015 | ||
Q1 - Quarter ended December 26, 2014 | $6.4 | 18.0 |
Q2 - Quarter ended March 27, 2015 | — | 0 |
Q3 - Quarter ended June 26, 2015 | 16.3 | 7.0 |
$22.7 | 10.1 | |
Fiscal 2016 | ||
Q1 - Quarter ended January 1, 2016 | $105.3 | 9.0 |
Q2 - Quarter ended April 1, 2016 | — | 0 |
Q3 - Quarter ended July 1, 2016 | $15.0 | 18.0 |
$120.3 | 10.1 | |
(1) Amortization expense on the intangible assets from patent portfolio acquisitions is included within cost of revenue in our consolidated statements of operations.
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Amortization expense for our intangible assets is included in cost of licensing, cost of products, R&D and S&M expenses in our consolidated statements of operations. Amortization expense was $8.2 million and $5.0 million in the third quarter of fiscal 2016 and 2015, respectively, and $24.9 million and $16.0 million in the fiscal year-to-date period ended July 1, 2016 and June 26, 2015, respectively. As of July 1, 2016, estimated amortization expense in future fiscal periods was as follows (in thousands):
Fiscal Year | Amortization Expense | ||
Remainder of 2016 | $ | 8,256 | |
2017 | 30,471 | ||
2018 | 25,062 | ||
2019 | 24,479 | ||
2020 | 24,253 | ||
Thereafter | 110,347 | ||
Total | $ | 222,868 | |
7. Stockholders' Equity & Stock-Based Compensation
We provide stock-based awards as a form of compensation for employees, officers and directors. We have issued stock-based awards in the form of stock options and RSUs under our equity incentive plans, as well as shares under our ESPP.
Common Stock - Class A and Class B
Our Board of Directors has authorized two classes of common stock, Class A and Class B. At July 1, 2016, we had authorized 500,000,000 Class A shares and 500,000,000 Class B shares. At July 1, 2016, we had 54,978,917 shares of Class A common stock and 45,888,962 shares of Class B common stock issued and outstanding. Holders of our Class A and Class B common stock have identical rights, except that holders of our Class A common stock are entitled to one vote per share and holders of our Class B common stock are entitled to ten votes per share. Shares of Class B common stock can be converted to shares of Class A common stock at any time at the option of the stockholder and automatically convert upon sale or transfer, except for certain transfers specified in our amended and restated certificate of incorporation.
Stock Incentive Plans
2005 Stock Plan. In January 2005, our stockholders approved our 2005 Stock Plan, which our Board of Directors adopted in November 2004. The 2005 Stock Plan became effective on February 16, 2005, the day prior to the completion of our initial public offering. Our 2005 Stock Plan, as amended and restated, provides for the ability to grant ISOs, NQs, restricted stock, RSUs, SARs, deferred stock units, performance units, performance bonus awards and performance shares. A total of 29.0 million shares of our Class A common stock is authorized for issuance under the 2005 Stock Plan. For awards granted prior to February 2011, any shares subject to an award with a per share price less than the fair market value of our Class A common stock on the date of grant and any shares subject to an outstanding RSU award will be counted against the authorized share reserve as two shares for every one share subject to the award, and if returned to the 2005 Stock Plan, such shares will be counted as two shares for every one share returned. For those awards granted from February 2011 onward, any shares subject to an award with a per share price less than the fair market value of our Class A common stock on the date of grant and any shares subject to an outstanding RSU award will be counted against the authorized share reserve as 1.6 shares for every one share subject to the award, and if returned to the 2005 Stock Plan, such shares will be counted as 1.6 for every one share returned.
Stock Options. Stock options are generally granted at fair market value on the date of grant. Options granted to employees and officers prior to June 2008 generally vest over four years, with equal annual cliff-vesting and expire on the earlier of 10 years after the date of grant or 3 months after termination of service. Options granted to employees and officers from June 2008 onward generally vest over four years, with 25% of the shares subject to the option becoming exercisable on the one-year anniversary of the date of grant and the balance of the shares vesting in equal monthly installments over the following 36 months. These options expire on the earlier of 10 years after the date of grant or 3 months after termination of service. All options granted vest over the requisite service period and upon the exercise of stock options, we issue new shares of Class A common stock under the 2005 Stock Plan. Our 2005 Stock Plan also allows us to grant stock awards which vest based on the satisfaction of specific performance criteria.
Performance-Based Stock Options. On December 15, 2015, we granted 419,623 PSOs to our executive officers with shares of our Class A common stock underlying such options. The contractual term for the PSOs is seven
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years, with vesting contingent upon market-based performance conditions, representing the achievement of specified Dolby annualized TSR targets at the end of a three-year measurement period ending December 15, 2018. If the minimum conditions are met, the PSOs earned will cliff vest on the third anniversary of the grant date, upon certification of achievement of the performance conditions by our Compensation Committee. Anywhere from 0% to 125% of the shares subject to a PSO may vest based on achievement of the performance conditions at the end of the three-year performance period.
In valuing the PSOs which will be recognized as compensation cost, we used a Monte Carlo valuation model. Aside from the use of an expected term for the PSOs commensurate with their shorter contractual term, the nature of the valuation inputs used in the Monte Carlo valuation model were consistent with those used to value our non-performance based options granted under the 2005 Plan. Compensation cost is being amortized on a straight-line basis over the requisite service period.
The following table summarizes information about all stock options issued under our 2005 Stock Plan:
Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Life | Aggregate Intrinsic Value (1) | ||||||
(in thousands) | (in years) | (in thousands) | |||||||
Options outstanding at September 25, 2015 | 8,835 | $ | 35.85 | ||||||
Grants | 2,203 | 33.30 | |||||||
Exercises | (1,102 | ) | 31.18 | ||||||
Forfeitures and cancellations | (483 | ) | 36.25 | ||||||
Options outstanding at July 1, 2016 | 9,453 | 35.72 | 7.2 | $ | 114,121 | ||||
Options vested and expected to vest at July 1, 2016 | 8,922 | 35.69 | 7.1 | 106,896 | |||||
Options exercisable at July 1, 2016 | 4,986 | $ | 34.54 | 6.0 | 64,591 | ||||
(1) | Aggregate intrinsic value is based on the closing price of our Class A common stock on July 1, 2016 of $47.64 and excludes the impact of options that were not in-the-money. |
Restricted Stock Units. Beginning in fiscal 2008, we began granting RSUs to certain directors, officers and employees under our 2005 Stock Plan. Awards granted to employees and officers generally vest over four years, with equal annual cliff-vesting. Awards granted to directors prior to November 2010 generally vest over three years, with equal annual cliff-vesting. Awards granted after November 2010 and prior to fiscal 2014 to new directors vest over approximately two years, with 50% vesting per year, while awards granted from November 2010 onward to ongoing directors generally vest over approximately one year. Awards granted to new directors from fiscal 2014 onward vest on the earlier of the first anniversary of the award’s date of grant, or the day immediately preceding the date of the next annual meeting of stockholders that occurs after the award’s date of grant. Our 2005 Stock Plan also allows us to grant RSUs that vest based on the satisfaction of specific performance criteria, although no such awards had been granted as of July 1, 2016. At each vesting date, the holder of the award is issued shares of our Class A common stock. Compensation expense from these awards is equal to the fair market value of our Class A common stock on the date of grant and is recognized on a straight-line basis over the requisite service period.
The following table summarizes information about RSUs issued under our 2005 Stock Plan:
Shares | Weighted-Average Grant Date Fair Value | ||||
(in thousands) | |||||
Non-vested at September 25, 2015 | 2,830 | $ | 40.73 | ||
Granted | 1,334 | 34.23 | |||
Vested | (1,043 | ) | 36.74 | ||
Forfeitures | (165 | ) | 38.21 | ||
Non-vested at July 1, 2016 | 2,956 | $ | 39.35 | ||
Employee Stock Purchase Plan. Our plan allows eligible employees to have up to 10 percent of their eligible compensation withheld and used to purchase Class A common stock, subject to a maximum of $25,000 worth of stock purchased in a calendar year or no more than 1,000 shares in an offering period, whichever is less. An offering period consists of successive six-month purchase periods, with a look back feature to our stock price at the commencement of a one-year offering period. The plan provides for a discount equal to 15 percent of the lower of the closing price of our Class A common stock on the New York Stock Exchange on the first and last day of the offering periods. The plan also includes an automatic reset feature that provides for an offering period to be reset and recommenced to a new
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lower-priced offering if the offering price of a new offering period is less than that of the immediately preceding offering period.
Stock Option Valuation Assumptions
We use the Black-Scholes option pricing model to determine the estimated fair value of employee stock options at the date of the grant. The Black-Scholes model includes inputs that require us to make certain estimates and assumptions regarding the expected term of the award, as well as the future risk-free interest rate, and the volatility of our stock price over the expected term of the award.
Expected Term. The expected term of an award represents the estimated period of time that options granted will remain outstanding, and is measured from the grant date to the date at which the option is either exercised or canceled. Our determination of the expected term involves an evaluation of historical terms and other factors such as the exercise and termination patterns of our employees who hold options to acquire our Class A common stock, and is based on certain assumptions made regarding the future exercise and termination behavior.
Risk-Free Interest Rate. The risk-free interest rate is based on the yield curve of United States Treasury instruments in effect on the date of grant. In determining an estimate for the risk-free interest rate, we use average interest rates based on these instruments’ constant maturities with a term that approximates and corresponds with the expected term of our awards.
Expected Stock Price Volatility. The expected volatility represents the estimated volatility in the price of our Class A common stock over a time period that approximates the expected term of the awards, and is determined using a blended combination of historical and implied volatility. Historical volatility is representative of the historical trends in our stock price for periods preceding the measurement date for a period that is commensurate with the expected term. Implied volatility is based upon externally traded option contracts of our Class A common stock.
Dividend Yield. The dividend yield is based on our anticipated dividend payout over the expected term of our option awards. Dividend declarations and the establishment of future record and payment dates are subject to the Board of Directors’ continuing determination that the dividend policy is in the best interests of our stockholders. The dividend policy may be changed or canceled at the discretion of the Board of Directors at any time.
The weighted-average assumptions used in the determination of the fair value of our stock options were as follows:
Fiscal Quarter Ended | Fiscal Year-To-Date Ended | ||||||||
July 1, 2016 | June 26, 2015 | July 1, 2016 | June 26, 2015 | ||||||
Expected term (in years) | 5.24 | 5.21 | 5.24 | 4.79 | |||||
Risk-free interest rate | 1.2 | % | 1.5 | % | 1.7 | % | 1.5 | % | |
Expected stock price volatility | 30.1 | % | 29.0 | % | 29.8 | % | 29.7 | % | |
Dividend yield | 1.1 | % | 1.0 | % | 1.4 | % | 0.9 | % | |
Stock-Based Compensation Expense
Stock-based compensation expense for equity awards granted to employees is determined by estimating their fair value on the date of grant, and recognizing that value as an expense on a straight-line basis over the requisite service period in which our employees earn the awards. Compensation expense related to these equity awards is recognized net of estimated forfeitures, which reduce the expense recorded in the consolidated statements of operations. The selection of applicable estimated forfeiture rates is based on an evaluation of trends in our historical forfeiture data with consideration for other potential driving factors. If in subsequent periods actual forfeitures significantly differ from our initial estimates, we will revise such estimates accordingly.
The following two tables separately present stock-based compensation expense both by award type and classification in our consolidated statements of operations (in thousands):
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Expense - By Award Type
Fiscal Quarter Ended | Fiscal Year-To-Date Ended | ||||||||||||
July 1, 2016 | June 26, 2015 | July 1, 2016 | June 26, 2015 | ||||||||||
Compensation Expense - By Type | |||||||||||||
Stock options | $ | 4,980 | $ | 5,501 | $ | 16,344 | $ | 17,513 | |||||
Restricted stock units | 10,080 | 10,005 | 32,423 | 30,297 | |||||||||
Employee stock purchase plan | 947 | 807 | 2,706 | 3,012 | |||||||||
Total stock-based compensation | 16,007 | 16,313 | 51,473 | 50,822 | |||||||||
Benefit from income taxes | (4,655 | ) | (4,774 | ) | (15,067 | ) | (14,815 | ) | |||||
Total stock-based compensation, net of tax | $ | 11,352 | $ | 11,539 | $ | 36,406 | $ | 36,007 | |||||
Expense - By Income Statement Line Item Classification
Fiscal Quarter Ended | Fiscal Year-To-Date Ended | ||||||||||||
July 1, 2016 | June 26, 2015 | July 1, 2016 | June 26, 2015 | ||||||||||
Compensation Expense - By Classification | |||||||||||||
Cost of products | $ | 220 | $ | 241 | $ | 719 | $ | 711 | |||||
Cost of services | 113 | 111 | 356 | 348 | |||||||||
Research and development | 4,243 | 4,261 | 13,618 | 14,473 | |||||||||
Sales and marketing | 6,451 | 6,405 | 20,602 | 17,890 | |||||||||
General and administrative | 4,980 | 5,295 | 16,178 | 17,400 | |||||||||
Total stock-based compensation | 16,007 | 16,313 | 51,473 | 50,822 | |||||||||
Benefit from income taxes | (4,655 | ) | (4,774 | ) | (15,067 | ) | (14,815 | ) | |||||
Total stock-based compensation, net of tax | $ | 11,352 | $ | 11,539 | $ | 36,406 | $ | 36,007 | |||||
The tax benefit that we recognize from certain exercises of ISOs and shares issued under our ESPP are excluded from the tables above. This benefit was as follows (in thousands):
Fiscal Quarter Ended | Fiscal Year-To-Date Ended | ||||||||||||
July 1, 2016 | June 26, 2015 | July 1, 2016 | June 26, 2015 | ||||||||||
Tax benefit - stock option exercises & shares issued under ESPP | $ | 358 | $ | 121 | $ | 481 | $ | 308 | |||||
Unrecognized Compensation Expense. At July 1, 2016, total unrecorded compensation expense associated with employee stock options expected to vest was approximately $37.2 million, which is expected to be recognized over a weighted-average period of 2.4 years. At July 1, 2016, total unrecorded compensation expense associated with RSUs expected to vest was approximately $77.7 million, which is expected to be recognized over a weighted-average period of 2.6 years.
Common Stock Repurchase Program
In November 2009, we announced a stock repurchase program ("program"), providing for the repurchase of up to $250.0 million of our Class A common stock. The following table summarizes the initial amount of authorized repurchases as well as additional repurchases approved by our Board of Directors as of July 1, 2016 (in thousands):
Authorization Period | Authorization Amount | ||
Fiscal 2010: November 2009 | $ | 250,000 | |
Fiscal 2010: July 2010 | 300,000 | ||
Fiscal 2011: July 2011 | 250,000 | ||
Fiscal 2012: February 2012 | 100,000 | ||
Fiscal 2015: October 2014 | 200,000 | ||
Total | $ | 1,100,000 | |
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Stock repurchases under the program may be made through open market transactions, negotiated purchases, or otherwise, at times and in amounts that we consider appropriate. The timing of repurchases and the number of shares repurchased depend upon a variety of factors, including price, regulatory requirements, the rate of dilution from our equity compensation plans and other market conditions. The program does not have a specified expiration date, and can be limited, suspended or terminated at our discretion at any time without prior notice. Shares repurchased under the program will be returned to the status of authorized but unissued shares of Class A common stock. As of July 1, 2016, the remaining authorization to purchase additional shares is approximately $67.9 million.
The following table provides information regarding share repurchase activity under the program during fiscal 2016:
Quarterly Repurchase Activity | Shares Repurchased | Cost (1) | Average Price Paid Per Share (2) | |||||
(in thousands) | ||||||||
Q1 - Quarter ended January 1, 2016 | 1,140,700 | $ | 39,449 | $ | 34.57 | |||
Q2 - Quarter ended April 1, 2016 | 975,745 | 37,407 | 38.32 | |||||
Q3 - Quarter ended July 1, 2016 | 176,854 | 7,998 | 45.22 | |||||
Total | 2,293,299 | $ | 84,854 | |||||
(1) | Cost of share repurchases includes the price paid per share and applicable commissions. |
(2) | Average price paid per share excludes commission costs. |
Dividend
In October 2014, our Board of Directors initiated a recurring quarterly dividend program for our stockholders. The following table summarizes the dividend payments made under the program during fiscal 2016:
Fiscal Period | Declaration Date | Record Date | Payment Date | Cash Dividend Per Common Share | Dividend Payment | |||
Fiscal 2016 | ||||||||
Q1 - Quarter ended January 1, 2016 | January 25, 2016 | February 8, 2016 | February 17, 2016 | $ | 0.12 | $12.1 million | ||
Q2 - Quarter ended April 1, 2016 | April 25, 2016 | May 9, 2016 | May 18, 2016 | $ | 0.12 | $12.0 million | ||
Q3 - Quarter ended July 1, 2016 | July 25, 2016 | August 8, 2016 | August 17, 2016 | $ | 0.12 | $12.1 million | (1) | |
(1) | The amount of the dividend payment is estimated based on the number of shares of our Class A and Class B common stock that we estimate will be outstanding as of the Record Date. |
8. Accumulated Other Comprehensive Income
Other comprehensive income consists of two components: unrealized gains or losses on our available-for-sale marketable investment securities and the gain or loss from foreign currency translation adjustments. Until realized and reported as a component of net income, these comprehensive income items accumulate and are included within accumulated other comprehensive income, a subsection within stockholders’ equity in our consolidated balance sheet. Unrealized gains and losses on our investment securities are reclassified from AOCI into earnings when realized upon sale, and are determined based on specific identification of securities sold. Gains and losses from the translation of assets and liabilities denominated in non-U.S. dollar functional currencies are included in AOCI.
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The following table summarizes the changes in the accumulated balances during the period, and includes information regarding the manner in which the reclassifications out of AOCI into earnings affect our consolidated statements of operations (in thousands):
Fiscal Quarter Ended July 1, 2016 | Fiscal Year-To-Date Ended July 1, 2016 | ||||||||||||||||||
Investment Securities | Currency Translation Adjustments | Total | Investment Securities | Currency Translation Adjustments | Total | ||||||||||||||
Balance, beginning of period | $ | 1,053 | $ | (9,395 | ) | $ | (8,342 | ) | $ | 350 | $ | (11,812 | ) | $ | (11,462 | ) | |||
Other comprehensive income/(loss) before reclassifications: | |||||||||||||||||||
Unrealized gains - investment securities | 695 | 695 | 937 | 937 | |||||||||||||||
Foreign currency translation (losses) (1) | (2,852 | ) | (2,852 | ) | (623 | ) | (623 | ) | |||||||||||
Income tax effect - benefit/(expense) | (6 | ) | 288 | 282 | 99 | 476 | 575 | ||||||||||||
Net of tax | 689 | (2,564 | ) | (1,875 | ) | 1,036 | (147 | ) | 889 | ||||||||||
Amounts reclassified from AOCI into earnings: | |||||||||||||||||||
Realized gains - investment securities (1) | 15 | 15 | 493 | 493 | |||||||||||||||
Income tax effect - (expense) (2) | (3 | ) | (3 | ) | (125 | ) | (125 | ) | |||||||||||
Net of tax | 12 | — | 12 | 368 | — | 368 | |||||||||||||
Net current-period other comprehensive income | 701 | (2,564 | ) | (1,863 | ) | 1,404 | (147 | ) | 1,257 | ||||||||||
Balance, end of period | $ | 1,754 | $ | (11,959 | ) | $ | (10,205 | ) | $ | 1,754 | $ | (11,959 | ) | $ | (10,205 | ) | |||
Fiscal Quarter Ended June 26, 2015 | Fiscal Year-To-Date Ended June 26, 2015 | ||||||||||||||||||
Investment Securities | Currency Translation Adjustments | Total | Investment Securities | Currency Translation Adjustments | Total | ||||||||||||||
Balance, beginning of period | $ | 1,170 | $ | (8,702 | ) | $ | (7,532 | ) | $ | 505 | $ | 2,509 | $ | 3,014 | |||||
Other comprehensive income/(loss) before reclassifications: | |||||||||||||||||||
Unrealized gains/(losses) - investment securities | (787 | ) | (787 | ) | 382 | 382 | |||||||||||||
Foreign currency translation gains/(losses) (1) | 1,058 | 1,058 | (10,982 | ) | (10,982 | ) | |||||||||||||
Income tax effect - benefit/(expense) | 162 | (188 | ) | (26 | ) | (165 | ) | 641 | 476 | ||||||||||
Net of tax | (625 | ) | 870 | 245 | 217 | (10,341 | ) | (10,124 | ) | ||||||||||
Amounts reclassified from AOCI into earnings: | |||||||||||||||||||
Realized (losses) - investment securities (1) | (138 | ) | (138 | ) | (342 | ) | (342 | ) | |||||||||||
Income tax effect - benefit (2) | 34 | 34 | 61 | 61 | |||||||||||||||
Net of tax | (104 | ) | — | (104 | ) | (281 | ) | — | (281 | ) | |||||||||
Net current-period other comprehensive income/(loss) | (729 | ) | 870 | 141 | (64 | ) | (10,341 | ) | (10,405 | ) | |||||||||
Balance, end of period | $ | 441 | $ | (7,832 | ) | $ | (7,391 | ) | $ | 441 | $ | (7,832 | ) | $ | (7,391 | ) | |||
(1) | Realized gains or losses from the sale of our available-for-sale investment securities or from foreign currency translation adjustments are included within other income/expense, net in our consolidated statements of operations. |
(2) | The income tax benefit or expense is included within provision for income taxes in our consolidated statements of operations. |
9. Earnings Per Share
Basic EPS is computed by dividing net income attributable to Dolby Laboratories, Inc. by the number of weighted-average shares of Class A and Class B common stock outstanding during the period. Through application of the treasury stock method, diluted EPS is computed in the same manner, except that the number of weighted-average shares outstanding is increased by the number of potentially dilutive shares from employee incentive plans during the period.
Basic and