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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2020-11-16 compared with 2019-11-25 · 423 added, 475 removed, 1078 unchanged (45% of the section changed)

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agency securities.

Our investment policy is focused on the preservation of capital and support for our liquidity requirements.

investment policy is focused on the preservation of capital and support for our liquidity requirements.

Under the policy, we invest in highly rated securities with a minimum credit rating of A- while limiting the amount of credit exposure to any one issuer other than the U.S.

At September 27, 2019 , the weighted-average credit quality of our investment portfolio was AA- , with a weighted-average maturity of approximately sixteen months .

At September 25, 2020, the weighted-average credit quality of our investment portfolio was AA, with a weighted-average maturity of approximately fourteen months.

We do not invest in financial instruments for trading or speculative purposes, nor do we use leveraged financial instruments.

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We maintain business operations in foreign countries, most significantly in Australia, China, Germany, the Netherlands, Poland and the United Kingdom.

Additionally, a growing portion of our business is conducted outside of the U.S.

Additionally, a portion of our business is conducted outside of the U.S.

through subsidiaries with functional currencies other than the U.S.

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• British Pound

• Chinese Yuan

• Polish Zloty

As a result, we face exposure to adverse movements in currency exchange rates as the financial results of our international operations are translated from local currency into U.S.

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A 10% increase in the value of the U.S.

dollar would lead to an increase in the fair value of our financial instruments by $0.1 million .

dollar would lead to a decrease in the fair value of our financial instruments by $5.8 million.

Conversely, a 10% decrease in the value of the U.S.

dollar would result in a decrease in the fair value of these financial instruments by $0.1 million .

dollar would result in an increase in the fair value of these financial instruments by $5.8 million.

CONSOLIDATED FINANCIAL STATEMENTS

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We have audited the accompanying consolidated balance sheets of Dolby Laboratories, Inc.

and subsidiaries (the Company) as of September 27, 2019 and September 28, 2018, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended September 27, 2019, and the related notes (collectively, the consolidated financial statements).

and subsidiaries (the Company) as of September 25, 2020 and September 27, 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended September 25, 2020 and the related notes (collectively, the consolidated financial statements).

We also have audited the Company’s internal control over financial reporting as of September 25, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers due to the adoption of FASB Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) .

The Company adopted Topic 606 using the full retrospective approach.

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of September 28, 2019 due to the adoption of the FASB Accounting Standards Codification No.

842, Leases .

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting in Item 9A.

Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

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The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the (consolidated) financial statements and (2) involved our especially challenging, subjective, or complex judgment.

The communication of a critical audit matter does not alter in any way our opinion on the (consolidated) financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Assessment of revenue estimate related to sales-based licensing arrangements

As discussed in Notes 2 and 3 to the consolidated financial statements, revenue is derived principally from the licensing of technologies and patents to various types of licensees.

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.

Revenue estimate related to sales-based licensing arrangements

As discussed in Note 3 to the consolidated financial statements, revenue is derived principally from the licensing of technologies and patents to various types of licensees.

The Company recognized total licensing revenue of $1.08 billion for the year ended September 25, 2020.

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After receiving the royalty statements from the licensees, which is generally in the quarter after those shipments have occurred, the Company will record an adjustment based on the difference between the estimated and actual sales-based licensing revenue.

We identified the assessment of the revenue estimate related to the Company’s sales-based licensing arrangements as a critical audit matter.

Auditor judgment was required to evaluate the Company’s estimation of sales-based licensing revenue, which included the Company’s use of historical data, industry estimates of expected shipments, market penetration, and average sale prices.

The primary procedures we performed to address this critical audit matter included the following.

We tested certain internal controls over the Company’s sales-based licensing revenue estimation process, including controls over (1) the review of historical data, (2) third-party industry expectations for shipments of units, (3) the estimated percentage of market penetration, and (4) estimated average sales prices.

We identified the assessment of the revenue estimate related to sales-based licensing arrangements as a critical audit matter.

Auditor judgment was required to evaluate the Company’s estimation of sales-based licensing revenue, which included the use of historical data, industry estimates of expected shipments, market penetration, and average sales prices.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s sales-based licensing revenue estimation process.

This included controls related to the review of (1) historical data, (2) third-party industry expectations for shipments of units, (3) the estimated percentage of market penetration, and (4) estimated average sales prices.

We tested the Company’s process to develop the sales-based licensing revenue estimate.

Specifically, we evaluated the sources of the historical data and assumptions that the Company used by considering their relevance and reliability.

We performed sensitivity analyses over key assumptions to assess the impact on the sales-based licensing revenue estimate of reasonably possible changes to the assumptions.

We performed sensitivity analyses over certain assumptions to assess the impact on the sales-based licensing revenue estimate of reasonably possible changes to the assumptions.

In addition, we compared the Company’s historical sales-based licensing revenue estimates to actual sales-based licensing royalties received from licensees during the year, to assess the Company’s ability to accurately estimate.

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2020 September 27,

(as adjusted)

Current assets:

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Accounts receivable, net of allowance for doubtful accounts of $ 15,908 and $ 9,775

180,340 189,115

Contract assets 161,357 195,651

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Property, plant and equipment, net 541,963 537,432

Operating lease right-of-use assets 76,515 —

Intangible assets, net 152,431 180,891

Goodwill 336,945 334,829

Deferred taxes 118,881 114,075

Other non-current assets 91,245 93,395

Total assets $ 2,917,325 $ 2,821,749

LIABILITIES AND STOCKHOLDERS’ EQUITY

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Contract liabilities 15,436 19,991

Operating lease liabilities 15,822 —

Total current liabilities 267,109 306,853

Non-current contract liabilities 24,342 24,404

Non-current operating lease liabilities 65,315 —

Other non-current liabilities 122,154 177,462

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36,128,720 shares issued and outstanding at September 25, 2020 and 36,229,820 at September 27, 2019

Additional paid-in capital

Retained earnings 2,443,138 2,327,877

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Total stockholders’ equity – Dolby Laboratories, Inc.

2,432,643 2,307,351

Controlling interest 5,762 5,679

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2020 September 27,

(as adjusted)

2019 September 28,

(as adjusted)

Licensing $ 1,078,577 $ 1,107,280 $ 940,777

Products and services 83,215 134,340 113,823

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Total cost of revenue 146,498 160,854 127,562

Gross margin 1,015,294 1,080,766 927,038

Operating expenses:

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Net income attributable to Dolby Laboratories, Inc.

$ 231,363 $ 255,151 $ 41,746

Net income per share:

Basic $ 2.30 $ 2.51 $ 0.40

Diluted $ 2.25 $ 2.44 $ 0.39

Weighted-average shares outstanding:

Basic 100,564 101,629 103,377

Diluted 102,944 104,572 106,978

Related party rent expense and restructuring charges:

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2020 September 27,

(as adjusted)

2019 September 28,

(as adjusted)

Net income including controlling interest $ 231,619 $ 255,505 $ 42,305

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Currency translation adjustments, net of tax of $ 22 , $( 439 ), and $ 106

7,552 ( 10,166 ) ( 5,578 )

Unrealized gains/(losses) on investments, net of tax of $( 926 ), $ 58 , and $ 89

( 1,380 ) 5,146 ( 2,571 )

Unrealized gains on cash flow hedges, net of tax of $( 407 ), $ 0 , and $ 0

Total other comprehensive income/(loss), net of tax 10,141 ( 5,020 ) ( 8,149 )

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Comprehensive income attributable to Dolby Laboratories, Inc.

$ 241,394 $ 250,358 $ 33,667

See accompanying notes to consolidated financial statements

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Dolby Laboratories, Inc.

Total Stockholders’ Equity

Balance at September 30, 2016 (as adjusted) (1)

Other comprehensive income, net of tax

Class A Class B APIC Retained

Earnings AOCI Total Stockholders’ Equity Controlling

Interest Total

Shares Amount Shares Amount

Balance at September 29, 2017 59,282 $ 58 42,874 $ 43 $ 61,331 $ 2,337,948 $ ( 7,753 ) $ 2,391,627 $ 7,100 $ 2,398,727

Net income — — — — — 41,746 — 41,746 559 42,305

Other comprehensive (loss), net of tax — — — — — — ( 8,079 ) ( 8,079 ) ( 70 ) ( 8,149 )

Distributions to controlling interest — — — — — — — — ( 1,022 ) ( 1,022 )

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Cash dividends declared and paid on common stock — — — — — ( 66,155 ) — ( 66,155 ) — ( 66,155 )

Tax benefit from employee stock plans

Common stock issued under employee stock plans 3,823 3 — — 106,159 — — 106,162 — 106,162

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Common stock transfers - Class B to Class A 3,613 2 ( 3,613 ) ( 2 ) — — — — — —

Balance at September 29, 2017 (as adjusted)

Other comprehensive income, net of tax

Balance at September 28, 2018 63,979 61 39,261 41 66,127 2,313,539 ( 15,832 ) 2,363,936 6,567 2,370,503

Net income — — — — — 255,151 — 255,151 354 255,505

Other comprehensive (loss), net of tax — — — — — — ( 4,793 ) ( 4,793 ) ( 227 ) ( 5,020 )

Distributions to controlling interest — — — — — — — — ( 1,015 ) ( 1,015 )

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Cash dividends declared and paid on common stock — — — — — ( 77,496 ) — ( 77,496 ) — ( 77,496 )

Tax benefit from employee stock plans

Common stock issued under employee stock plans 2,514 1 — — 57,345 — — 57,346 — 57,346

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Common stock transfers - Class B to Class A 3,031 — ( 3,031 ) — — — — — — —

Balance at September 28, 2018 (as adjusted)

Balance at September 27, 2019 63,911 58 36,230 41 — 2,327,877 ( 20,625 ) 2,307,351 5,679 2,313,030

Net income — — — — — 231,363 — 231,363 256 231,619

Other comprehensive income, net of tax — — — — — — 10,031 10,031 110 10,141

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Cash dividends declared and paid on common stock — — — — — ( 88,581 ) — ( 88,581 ) — ( 88,581 )

Tax benefit from employee stock plans

Common stock issued under employee stock plans 3,063 3 — — 82,655 — — 82,658 — 82,658

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Balance at September 25, 2020 64,168 $ 58 36,129 $ 41 $ — $ 2,443,138 $ ( 10,594 ) $ 2,432,643 $ 5,762 $ 2,438,405

The cumulative effect of the adoption of ASU 2014-09, Revenue from Contracts with Customers ("ASC 606") resulted in an adjustment to retained earnings of $ 250.2 million as of September 30, 2016.

See accompanying notes to consolidated financial statements

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2020 September 27,

(as adjusted)

2019 September 28,

(as adjusted)

Operating activities:

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Contract assets 34,297 ( 29,708 ) ( 2,502 )

Inventories ( 11,784 ) ( 16,098 ) ( 6,602 )

Operating lease right-of-use assets ( 13,516 ) — —

Prepaid expenses and other assets ( 5,680 ) ( 6,200 ) ( 52,485 )

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Contract liabilities ( 4,621 ) 1,084 ( 59 )

Operating lease liabilities 15,618 — —

Other non-current liabilities ( 845 ) ( 13,996 ) 34,650

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Shares repurchased for tax withholdings on vesting of restricted stock ( 23,065 ) ( 22,788 ) ( 22,144 )

Payment related to prior purchases of intangible assets ( 91 ) — —

Payment of deferred consideration for prior business combination ( 4,671 ) ( 743 ) —

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Non-cash investing and financing activities:

Property, plant, and equipment purchased and unpaid at period-end

Change in property, plant, and equipment purchased, unpaid at period-end $ ( 3,417 ) $ ( 324 ) $ 7,990

Purchase consideration payable for acquisition $ — $ 1,700 $ 3,750

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GAAP requires management to make certain estimates and assumptions that affect the amounts reported and disclosed in our consolidated financial statements and accompanying notes.

Actual results could differ from our estimates.

Significant items subject to such estimates and assumptions include:

Estimates of sales-based royalty revenue that has not been reported by our licensees at period end

Estimation of variable consideration from our customers

Estimated standalone selling prices of distinct performance obligations in an customer contract

Significant items subject to such estimates and assumptions include estimated shipments by our licensees for which we are owed a sales–based royalty.

These estimates involve the use of historical data and judgment for several key attributes including industry estimates of expected shipments, the percentage of markets using our technologies, and average sale prices.

Our estimates of royalty-based revenue also take into consideration the macroeconomic effect of global events, such as the COVID-19 pandemic or other natural disasters which may impact our licensees' supply chain activities as well as demand for shipments.

Additional significant items subject to such estimates and assumptions include estimated selling prices for performance obligations within revenue arrangements;

valuation allowances for accounts receivable;

Carrying values of inventories and certain PP&E, goodwill, and intangible assets

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

Stock-based compensation

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.

Our fiscal year is a 52 or 53 week period ending on the last Friday in September.

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Treasury, and we believe no significant concentration risk exists with respect to these investments.

We also mitigate counterparty risk through entering into derivative contracts with high-credit-quality financial institutions.

The majority of our licensing revenue is generated from customers outside of the U.S.

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Depreciation expense is recognized on a straight-line basis according to estimated useful lives assigned to each of our different categories of PP&E as summarized within the following table:

PP&E Category

Computer equipment and software

Machinery and equipment

Furniture and fixtures

Leasehold improvements

Lesser of useful life or related lease term

Equipment provided under operating leases

Buildings and building improvements

20 to 40 years

PP&E Category Useful Life

Computer equipment and software 3 to 5 years

Machinery and equipment 3 to 8 years

Furniture and fixtures 5 to 8 years

Leasehold improvements Lesser of useful life or related lease term

Equipment provided under operating leases 15 years

Buildings and building improvements 20 to 40 years

We capitalize certain costs incurred during the construction phase of a project or asset into construction-in-progress until the construction process is complete.

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Equipment Provided Under Operating Leases.

We account for our cinema equipment installed at third party sites under collaborative or other arrangements as operating leases, and depreciate these assets on a straight-line basis over their estimated useful life.

In arrangements that we assess as operating leases, we recognize our cinema equipment installed at third party sites as a fixed asset and depreciate the asset on a straight-line basis.

Internal Use Software.

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We perform a qualitative assessment as a determinant for whether the two-step annual goodwill impairment test should be performed.

In performing the qualitative assessment, we consider events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, changes in the composition or carrying amount of a reporting unit's net assets, and changes in the price of our common stock.

If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then the two-step goodwill impairment test is not performed.

If the two-step goodwill test is performed, we evaluate and test our goodwill for impairment at a reporting-unit level using expected future cash flows to be generated by the reporting unit.

If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the calculated fair value of the goodwill.

A reporting unit is an operating segment or one level below.

Our operating segment is aligned with the management principles of our business.

For fiscal 2020, we completed our annual goodwill impairment assessment in the fiscal quarter ended June 26, 2020.

We determined in our qualitative review that it is more likely than not that the fair value of our reporting unit is substantially in excess of the respective carrying amount.

Accordingly, there was no impairment, and the "Step One" goodwill impairment test was not required.

Accordingly, there was no impairment, and the two-step goodwill impairment test was not required.

We did not incur any goodwill impairment losses in any of the periods presented.

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Foreign currency transaction (losses) $ ( 1,361 ) $ ( 260 ) $ ( 823 )

Foreign Currency Exchange Risk.

In an effort to reduce the risk that our earnings will be adversely affected by foreign currency exchange rate fluctuations, we enter into foreign currency forward contracts to hedge against assets and liabilities for which we have foreign currency exchange rate exposure.

Non-designated Hedges.

In an effort to reduce the risk that our earnings will be adversely affected by foreign currency exchange rate fluctuations, we enter into foreign currency forward contracts exclusively to hedge against assets and liabilities for which we have foreign currency exchange rate exposure.

These derivative instruments are carried at fair value with changes in the fair value recorded to other income/(expense), net, in our consolidated statements of operations.

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The fair values of these contracts were nominal as of September 25, 2020 and September 27, 2019, and were included within prepaid expenses and other current assets and within accrued liabilities in our consolidated balance sheets.

Cash Flow Hedges.

We also enter into forward currency contracts exclusively designated as cash flow hedges, which have a maturity of thirteen months or less, to reduce the impact of currency volatility on U.S.

dollar operating expenses and margins.

Our cash flow hedge program was entered into in fiscal 2019.

The gains and losses from the effective portions of cash flow hedges are recorded at fair value as a component of AOCI, until the hedged item is subsequently reclassified into earnings in the same period in which the hedged transaction affects earnings, with the corresponding hedged item.

Amounts reclassified are recorded to the same line item in the consolidated statements of operations as the impact of the hedge transaction, concurrently with the hedged costs.

The pre-tax gain attributed to the effective portion of cash flow hedges recognized in AOCI was $ 5.3 million in fiscal 2020, and was immaterial in fiscal 2019.

The pre-tax effective portion of gains or losses reclassified to the consolidated statements of income was not material during fiscal 2020 and fiscal 2019.

We use the asset and liability method, under which deferred income tax assets and liabilities are determined based upon the difference between the financial statement carrying amounts and the tax bases of assets and liabilities, and NOL carryforwards are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed.

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The realization of deferred tax assets is additionally dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

The realization of deferred tax assets is additionally dependent upon the generation of future taxable income during the

periods in which those temporary differences become deductible.

We consider the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment, and we record a valuation allowance to reduce our deferred tax assets when it's more-likely-than-not that some portion or all of the deferred tax assets will not be realized.

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We include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes.

To the extent accrued interest and penalties do not ultimately become payable, amounts accrued are reduced in the period that such determination is made and are reflected as a reduction of the overall income tax provision.

To the extent accrued interest and penalties do not ultimately become payable, amounts accrued are reversed in the period that such determination is made and are reflected as a reduction of the overall income tax provision.

Repatriation of Undistributed Foreign Earnings.

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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 consolidated financial statements from amounts previously reported to reflect the adoption of the new standard.

Select 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 Year-To-Date Ended

September 28, 2018

(as previously reported)

Effect of Adopting ASC 606

September 28, 2018

(as adjusted)

Provision for income taxes

Net income attributable to Dolby Laboratories, Inc.

Diluted earnings per share

Select 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)

Accounts receivable, net

Contract assets

Prepaid expenses and other current assets

Deferred taxes

Other non-current assets

LIABILITIES AND STOCKHOLDERS' EQUITY

Accrued liabilities

Contract liabilities

Non-current contract liabilities

Other non-current liabilities

Retained earnings

Select consolidated statement of cash flows line items, which reflect the adoption of the new standard, are as follows (in thousands):

Fiscal Year-to-Date Ended

September 28, 2018

(as previously reported)¹

Effect of Adopting ASC 606

September 28, 2018

(as adjusted)

Operating activities:

Net income including controlling interest

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for doubtful accounts

Deferred income taxes

Changes in operating assets and liabilities:

Accounts receivable

Contract assets

Prepaid expenses and other assets

Accounts payable and other liabilities

Contract liabilities

Other non-current liabilities

Net cash provided by operating activities

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 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 consolidated statements of cash flows were not material for all periods presented.

The adjusted 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 Adopted

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.

We have evaluated the impact of Topic 842, and upon adoption, we will recognize a lease liability and right-of-use asset for each of our existing lease arrangements, which we anticipate to be material on our consolidated balance sheet.

Adoption of the standard will not have a material impact on our consolidated income statement or our consolidated statement of cash flow.

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.

All new leases executed subsequent to adoption will be evaluated, and accounted for under Topic 842.

ASU 2016-02 is effective for Dolby beginning September 28, 2019.

We are still completing our assessment of the remaining lease term of our existing leases, assessing the completeness of our population of leases, and finalizing our determination of the discount rate used to calculate the right of use asset and lease liability.

In the first quarter of fiscal 2020, we adopted ASU 2016-02, Leases (ASC 842 ) along with all subsequent applicable ASU clarifications and improvements , which requires lessees to recognize leases on balance sheet and disclose key information about leasing arrangements.

We adopted ASC 842 using the modified retrospective transition method and used the effective date as the date of initial application.

Consequently, financial information is not updated and the disclosures required under ASC 842 are not provided for dates and periods prior to implementation.

ASC 842 provides a number of optional practical expedients in transition.

We elected the “package of practical expedients,” which permits us not to reassess under ASC 842 our prior conclusions about lease identification, lease classification and initial direct costs.

In addition, we account for lease and non-lease components as a single lease component.

Operating leases are included in operating lease right-of-use assets and in current and non-current operating lease liabilities on our consolidated balance sheets.

As a lessee, the adoption of ASC 842 resulted in the recording of Operating lease right-of-use ("ROU") assets and Operating lease liabilities of $ 62.1 million and $ 64.6 million, respectively, as of September 28, 2019.

The difference between the operating lease assets and liabilities was recorded as an adjustment to Other non-current liabilities, primarily related to deferred rent and other lease incentives.

As a lessor, the adoption of ASC 842 did not have a material impact.

The adoption of ASC 842 did not impact Retained Earnings.

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.

We do not believe that this standard will have a material impact on our consolidated financial statements.

In the first quarter of fiscal 2020, we adopted ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220):

We elected to not reclassify the stranded tax effects to retained earnings as they were not material to Dolby's consolidated financial statements.

Standards Not Yet Adopted

Collaborative Arrangements.

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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 26, 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.

This standard will be effective for Dolby beginning September 26, 2020.

While we have a number of collaborative arrangements, we do not believe that this standard will have a material impact on our consolidated financial statements.

Financial Instruments.

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Measurement of Credit Losses on Financial Instruments , which modifies the measurement of expected credit losses of certain financial instruments, including trade receivables, contract assets, and lease receivables.

This standard will be effective for Dolby beginning September 26, 2020, and we do not currently plan to early adopt.

This standard will be effective for Dolby beginning September 26, 2020.

We do not believe that this standard will have a material impact on our consolidated financial statements.

Income Taxes.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes , which modifies and eliminates certain exceptions to the general principles of ASC 740, Income Taxes.

This standard will be effective for Dolby beginning September 25, 2021.

We are currently evaluating the impact of the standard on our consolidated financial statements.

Revenue Recognition

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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.

We provide PCS for products sold and for the equipment leased, and we support the implementation of our licensing technologies in our licensees’ products.

We provide PCS for products sold and for 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.

We also lease hardware that facilitates the Dolby conferencing experience, including the Dolby Conference Phone, and the Dolby Voice Room solution.

• Licensing Administration Fees.

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In our royalty bearing licensing agreements with OEMs, control is transferred upon the later of contract execution or the contract’s effective date.

We apply the royalty exception, which requires that we recognize sales-based royalties at the later of when the sales occur based on our estimates or the completion of our performance obligations.

We apply the royalty exception, which requires that we recognize sales-based royalties when the sales occur based on our estimates.

These estimates involve the use of historical data and judgment for several key attributes including industry estimates of expected shipments, the

percentage of markets using our technologies, and average sale prices.

Generally, our estimates represent the current period’s shipments to which we expect our licensees to submit royalty statements in the following quarter.

Upon receipt of royalty statements from the licensees with the actual reporting of sales-based royalties that we estimated previously, we record a favorable or unfavorable adjustment based on the difference, if any, between estimated and actual sales.

In the fourth quarter of fiscal 2019 , we recorded a favorable adjustment of approximately $ 9 million , which was primarily related to January through March shipments and largely based on actual royalty statements received from licensees.

In the first quarter of fiscal 2020, we recorded a favorable adjustment of approximately $ 9 million, which was primarily related to shipments that occurred in our fourth quarter of fiscal 2019 (July through September) and largely based on actual royalty statements received from licensees.

In the second, third, and fourth quarters of fiscal 2020 we recorded favorable adjustments of $ 7 million, $ 11 million, and $ 26 million, respectively, each primarily related to shipments that occurred in the preceding fiscal quarter, and largely based on actual royalty statements received from licensees.

Fixed and guaranteed licensing fees.

In certain cases, our arrangements require the licensee to pay fixed, non-refundable fees independent of the actual number of units they may distribute in the future.

In certain cases, our arrangements require the licensee to pay fixed, non-refundable fees.

In these cases, control is transferred, and fees are recognized upon the later of contract execution or the effective date.

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Under such collaborations, Dolby and the exhibitor are both active participants, and share the risks and rewards associated with the business.

Accordingly, these collaborations are governed by revenue sharing arrangements under which Dolby receives revenue based on monthly box office reports from exhibitors in exchange for the use of our imaging and sound technologies, our proprietary designs and trademarks as well as for the use of our equipment at the exhibitor’s venue.

The use of our equipment meets the definition of a lease, and for the related portion of Dolby's share of revenue, we apply ASC 840, Leases , and recognize revenue based on monthly box office reports from exhibitors.

Accordingly, these collaborations are governed by revenue sharing arrangements under which Dolby receives revenue based on box office receipts, reported to Dolby by exhibitor partners on a monthly or quarterly basis, our proprietary designs and trademarks as well as for the use of our equipment at the exhibitor’s venue.

The use of our product solution meets the definition of a lease, and for the related portion of Dolby's share of revenue, we apply ASC 842, Leases , and recognize revenue based on monthly box office reports from exhibitors.

Our revenue share is recognized as licensing revenue in our consolidated statements of operations.

In addition, we also enter into agreements where a portion involves guaranteed payments, which in some cases result in classifying the payments as a sales-type lease.

In addition, we also enter into hybrid agreements where a portion involves guaranteed payments, which in some cases result in classifying the arrangement as a sales-type lease.

In such arrangements, we consider control to transfer at the point in time to which we have installed and tested the equipment, at which point we record such guaranteed payments as product revenue.

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Fiscal Year-To-Date Ended

September 27, 2019

September 28, 2018

(as adjusted)

September 25, 2020 September 27, 2019

Licensing $ 1,078,577 93 % $ 1,107,280 89 %

Products and services 83,215 7 % 134,340 11 %

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Fiscal Year-To-Date Ended

September 27, 2019

September 28, 2018

September 25, 2020 September 27, 2019

Revenue By Market

(as adjusted)

Broadcast $ 439,415 41 % $ 474,147 43 %

Mobile 226,972 21 % 193,052 17 %

CE 152,608 14 % 154,399 14 %

PC 132,302 12 % 113,597 10 %

Other 127,280 12 % 172,085 16 %

Total licensing revenue $ 1,078,577 100 % $ 1,107,280 100 %

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Fiscal Year-To-Date Ended

September 27, 2019

September 28, 2018

September 25, 2020 September 27, 2019

Revenue By Geographic Location

(as adjusted)

United States $ 460,972 40 % $ 449,203 36 %

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Contract balances

Our contract assets represent rights to consideration from licensees for the use of our IP that we have estimated in a given quarter in the absence of receiving actual royalty statements from licensees.

Our contract assets represent rights to consideration from licensees for the use of our IP that we have estimated in a given period in the absence of receiving actual royalty statements from licensees.

These estimates reflect our best judgment at that time, and are developed using a number of inputs, including historical data, industry estimates of expected shipments, anticipated sales price and performance, and third-party data supporting the percentage of markets using our technologies.

In the event that our estimates differ from actual amounts reported, we record an adjustment in the quarter in which the report is received which is typically the quarter following our estimate.

Actual amounts reported are typically paid within sixty days following the end of the quarter of shipment.

amounts reported are typically paid within sixty days following the end of the quarter of shipment.

The main drivers for change in the contract assets account are variances in quarterly estimates, and to a lesser degree, timing of receipt of actual royalty statements.

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We present the net contract asset or liability when we have both contract assets and contract liabilities for a single contract.

In the fourth quarter of fiscal 2019 , we recognized $ 6.6 million from prior period deferred revenue and deferred interest from arrangements which include a significant financing component.

In fiscal year 2020, we recognized $ 17.7 million from prior period deferred revenue.

The following table presents a summary of the balances to which contract assets and liabilities related to revenue are recorded for all periods presented:

September 27, 2019

September 28, 2018

(as adjusted)

September 25, 2020 September 27, 2019 Change ($) Change (%)

Accounts receivable, net $ 180,340 $ 189,115 $ ( 8,775 ) ( 5 ) %

Contract assets 161,357 195,651 ( 34,294 ) ( 18 ) %

Other non-current assets

Contract liabilities - current 15,436 19,991 ( 4,555 ) ( 23 ) %

Contract liabilities - non-current 24,342 24,404 ( 62 ) — %

Other non-current liabilities

Composition of Certain Financial Statement Captions

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Accounts Receivable

Accounts Receivable, Net

September 27,

Accounts Receivable, Net September 25,

2020 September 27,

(as adjusted)

Trade accounts receivable $ 147,618 $ 151,996

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allowance for doubtful accounts ( 15,908 ) ( 9,775 )

Trade accounts receivable includes unbilled accounts receivable balances of $ 57.2 million as of September 27, 2019 related to amounts that are contractually owed.

Total $ 180,340 $ 189,115

Accounts receivable, gross includes unbilled accounts receivable balances of $ 62.1 million and $ 82.3 million as of September 25, 2020 and September 27, 2019, respectively, related to amounts that are contractually owed.

The unbilled balance represents our unconditional right to consideration related to fixed fee contracts which we are entitled to as a result of satisfying, or partially satisfying, performance obligations, as well as Via's unconditional right to consideration related to their patent administration programs.

Allowance for Doubtful Accounts

Beginning Balance

Ending Balance

Allowance for Doubtful Accounts Beginning Balance Charged to

G&A Deductions Ending Balance

For fiscal year ended:

September 28, 2018 $ 2,967 $ 2,413 $ ( 122 ) $ 5,258

September 28, 2018 (as adjusted)

September 27, 2019 5,258 4,523 ( 6 ) 9,775

September 25, 2020 9,775 7,689 ( 1,556 ) 15,908

Inventories September 25,

2020 September 27,

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Finished goods 12,566 19,428

Total $ 25,550 $ 32,331

Inventories are stated at the lower of cost and net realizable value.

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We have included $ 2.6 million and $ 3.0 million of raw materials inventory within other non-current assets in our consolidated balance sheets as of September 25, 2020 and September 27, 2019, respectively.

Based on anticipated inventory consumption rates, and aside from existing write-downs due to excess inventory, we do not believe that material risk of obsolescence exists prior to ultimate sale.

Prepaid Expenses And Other Current Assets

Based on anticipated

inventory consumption rates, and aside from existing write-downs due to excess inventory, we do not believe that material risk of obsolescence exists prior to ultimate sale.

Prepaid Expenses And Other Current Assets

September 27,

Prepaid Expenses And Other Current Assets September 25,

2020 September 27,

(as adjusted)

Prepaid expenses $ 17,884 $ 17,997

Other current assets 35,138 21,707

Income tax receivable

Total $ 53,022 $ 39,704

As of September 25, 2020, other current assets include the carrying value of $ 2.2 million of land and building that are currently held for sale.

Management has committed to a plan to sell the property.

In fiscal year 2019, management committed to a plan to sell the property.

There have been no changes to this plan in the current period.

Based on current estimated selling prices in the market, we have determined that no indicators of potential impairment exist.

Accrued Liabilities

September 27,

Accrued Liabilities September 25,

2020 September 27,

(as adjusted)

Accrued royalties $ 901 $ 2,957

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Unpaid PP&E additions 15,102 15,332

Accrued customer refunds 10,053 24,299

Other accrued liabilities 33,463 68,725

Other Non-Current Liabilities

Total $ 219,974 $ 268,144

Other Non-Current Liabilities

September 27,

Other Non-Current Liabilities September 25,

2020 September 27,

(as adjusted)

Supplemental retirement plan obligations $ 4,181 $ 3,466

Non-current tax liabilities (1)

85,943 136,323

Other liabilities 32,030 37,673

Total $ 122,154 $ 177,462

(1) Refer to Note 12 “ Income Taxes ” for additional information related to tax liabilities.

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September 25,

Estimated Fair Value

Cost Unrealized Estimated Fair Value

Gains Losses Total Level 1 Level 2 Level 3

Cash and cash equivalents:

Cash $ 856,740 $ — $ — $ 856,740 $ 856,740 $ — $ —

Cash equivalents:

Corporate bonds

Commercial paper 900 — — 900 — 900 —

Money market funds 214,111 — — 214,111 214,111 — —

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Long-term investments:

Asset backed securities

agency securities 2,214 56 — 2,270 — 2,270 —

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Investments held in supplemental retirement plan:

Assets 4,279 — — 4,279 4,279 — —

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

Liabilities 4,279 — — 4,279 4,279 — —

Included in accrued liabilities & other non-current liabilities

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Included in other current assets — 4,267 — 4,267 — 4,267 —

included in other non-current assets — 369 — 369 — 369 —

Included in other accrued expenses — — ( 79 ) ( 79 ) — ( 79 ) —

Other long-term investments as of September 27, 2019 includes an investment that is not carried at fair value including an equity method investment of $ 1.7 million .

(1) Other long-term investments as of September 25, 2020 is comprised of one equity method investment which is not carried at fair value of $ 4.2 million.

September 27,

Estimated Fair Value

Cost Unrealized Estimated Fair Value

Gains Losses Total Level 1 Level 2 Level 3

Cash and cash equivalents:

Cash $ 680,287 $ — $ — $ 680,287 $ 680,287 $ — $ —

Cash equivalents:

Commercial paper

Corporate bonds 1,000 — — 1,000 — 1,000 —

Money market funds 115,270 — — 115,270 115,270 — —

Municipal debt securities

Government bonds 653 — — 653 653 — —

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Long-term investments:

Asset backed securities 400 2 — 402 — 402 —

agency securities 7,102 146 — 7,248 — 7,248 —

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Investments held in supplemental retirement plan:

Assets 3,564 — — 3,564 3,564 — —

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

Liabilities 3,564 — — 3,564 3,564 — —

Included in accrued liabilities & other non-current liabilities

Other long-term investments as of September 28, 2018 include a marketable equity security of $ 0.2 million , and other investments that are not carried at fair value including an equity method investment of $ 0.4 million .

During fiscal 2018, we recorded write-off charges to reduce the carrying value of two cost method equity investments to zero in recognition of an other-than-temporary impairment for each investment.

Currency derivatives as hedge instruments:

Included in other accrued expenses — — ( 242 ) ( 242 ) — ( 242 ) —

(1) Other long-term investments as of September 27, 2019 is comprised of one equity method investment which is not carried at fair value of $ 1.7 million.

Fair Value Hierarchy.

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The following table describes the valuation techniques and inputs applicable to each class of security held within our investment portfolio as of September 25, 2020:

Primary Source

Update Frequency

Fair Value Methodology

Secondary Source

Money Market Funds

ICE (Intercontinental Exchange)

Not Applicable

Government Bonds

ICE (Intercontinental Exchange)

Institutional Bond Quotes - evaluations based on various market and industry inputs

Certificates of Deposit

ICE (Intercontinental Exchange)

Market Prices

Commercial Paper

Bank Pricing Unit

Matrix Pricing

Not Applicable

Corporate Bonds

ICE (Intercontinental Exchange)

Institutional Bond Quotes - evaluations based on various market and industry inputs

Municipal Debt Securities

ICE (Intercontinental Exchange)

Evaluations based on various market and industry inputs

Agency Securities

ICE (Intercontinental Exchange)

Institutional Bond Quotes - evaluations based on various market and industry inputs

Int'l Government Bonds

ICE (Intercontinental Exchange)

Extel Financial Ltd

Evaluations based on various market factors

Asset Type Primary Source Update Frequency Fair Value Methodology Secondary Source

Money Market Funds ICE (Intercontinental Exchange) Daily $1 per share Not Applicable

Government Bonds ICE (Intercontinental Exchange) Daily Institutional Bond Quotes - evaluations based on various market and industry inputs Bloomberg

Certificates of Deposit ICE (Intercontinental Exchange) Monthly Market Prices Bloomberg

Commercial Paper U.S.

Bank Pricing Unit Daily Matrix Pricing Not Applicable

Corporate Bonds ICE (Intercontinental Exchange) Daily Institutional Bond Quotes - evaluations based on various market and industry inputs Bloomberg

Municipal Debt Securities ICE (Intercontinental Exchange) Daily Evaluations based on various market and industry inputs Bloomberg

Agency Securities ICE (Intercontinental Exchange) Daily Institutional Bond Quotes - evaluations based on various market and industry inputs Bloomberg

Int'l Government Bonds ICE (Intercontinental Exchange)

Extel Financial Ltd Daily Evaluations based on various market factors Bloomberg

Securities In Gross Unrealized Loss Position.

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The following table presents the gross unrealized losses and fair value for those AFS securities that were in an unrealized loss position as of September 25, 2020 and September 27, 2019 (in thousands):

September 27, 2019

September 28, 2018

Less Than 12 Months

Greater Than 12 Months

Less Than 12 Months

Greater Than 12 Months

Investment Type

Gross Unrealized Losses

September 25, 2020 September 27, 2019

Less Than 12 Months Greater Than 12 Months Less Than 12 Months Greater Than 12 Months

Investment Type Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses

Certificate of deposit $ — $ — $ — $ — $ 300 $ — $ — $ —

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Government bonds — — — — 1,426 — — —

Commercial paper

Corporate bonds 7,076 ( 10 ) — — 7,647 ( 3 ) 27,078 ( 32 )

Municipal debt securities 2,505 ( 6 ) — — 9,552 ( 13 ) 900 —

Total $ 9,581 $ ( 16 ) $ — $ — $ 18,925 $ ( 16 ) $ 32,765 $ ( 41 )

Although we had certain securities that were in an unrealized loss position as of September 25, 2020, 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.

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The following table summarizes the amortized cost and estimated fair value of the AFS securities within our investment portfolio based on stated maturities as of September 25, 2020 and September 27, 2019, which are recorded within cash equivalents and both short and long-term investments in our consolidated balance sheets (in thousands):

September 27, 2019

September 28, 2018

Range of maturity

Amortized Cost

September 25, 2020 September 27, 2019

Range of maturity Amortized Cost Fair Value Amortized Cost Fair Value

Due within 1 year $ 261,839 $ 262,085 $ 238,186 $ 238,354

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Due in 2 to 3 years 17,900 18,159 81,793 82,957

Total $ 309,067 $ 310,058 $ 413,927 $ 416,210

Property, Plant, & Equipment

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As of September 25, 2020 and September 27, 2019, PP&E consisted of the following (in thousands):

Property, Plant, & Equipment

September 27,

Property, Plant, & Equipment September 25,

2020 September 27,

Land $ 41,955 $ 41,918

Buildings and building improvements 283,617 282,924

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Property, plant, & equipment, net $ 541,963 $ 537,432

As a lessee, we enter into contracts to access and utilize office space, including those payable to our principal stockholder and portions attributable to the controlling interests in our wholly owned subsidiaries.

We determine if a contract contains a lease based on whether we have the right to obtain substantially all of the economic benefits from the use of an identified asset and whether we have the right to direct the use of an identified asset in exchange for consideration, which relates to an asset which we do not own.

Right of use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

ROU assets are recognized as the lease liability, adjusted for lease incentives received.

Lease liabilities are recognized at the present value of the future lease payments at the lease commencement date.

The interest rate used to determine the present value of the future lease payments is our Incremental Borrowing Rate, because the interest rate implicit in our leases is not readily determinable.

The IBR is a hypothetical rate based on our understanding of what our credit rating would be to borrow and resulting interest we would pay to borrow an amount equal to the lease payments in a similar economic environment over the lease term on a collateralized basis.

Lease payments may be fixed or variable, however, only fixed payments are included in our lease liability calculation.

Variable lease payments are recognized in operating expenses in the period in which the obligation for those payments are incurred.

The lease term of operating leases vary from less than a year to 12 years.

We have leases that include one or more options to extend the lease term for up to 9 years as well as options to terminate the lease within one year .

Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.

The components of lease expense were as follows (in thousands):

September 25, 2020

Operating lease cost $ 23,570

Variable lease cost 1,175

Total lease cost $ 24,745

Total rent expense incurred under operating leases, including the portion of total rent expense which is payable to our principal stockholder, was $ 20.6 million and $ 17.2 million in fiscal 2019 and 2018, respectively.

Supplemental cash flow information related to leases was as follows (in thousands):

September 25, 2020

Other information

Cash paid for amounts included in the measurement of operating lease liabilities $ 22,043

Right-of-use assets obtained in exchange for operating lease obligations 34,198

Supplemental balance sheet information related to leases was as follows:

September 25, 2020

Operating Leases

Weighted-average remaining lease term 6.5 years

Weighted-average discount rate 3.1 %

The following tables presents the maturity analysis of lease liabilities (in thousands):

September 25, 2020

Operating Leases

Fiscal 2021 $ 18,098

Fiscal 2022 14,868

Fiscal 2023 13,299

Fiscal 2024 12,718

Fiscal 2025 8,898

Thereafter 22,484

Total undiscounted lease payments 90,365

imputed interest ( 9,228 )

Total lease liabilities $ 81,137

September 27, 2019

Operating Leases

Remainder of Fiscal 2020 $ 17,231

Fiscal 2021 9,329

Fiscal 2022 7,191

Fiscal 2023 6,218

Fiscal 2024 4,499

Thereafter 12,355

Total undiscounted lease payments $ 56,823

As a lessor, we lease our Dolby Cinema product solution to exhibitors, Dolby Voice equipment to cloud conferencing service providers, and lease or sublease real estate properties.

The terms of these leases vary from 4 to 10 years.

Lease components consist of fixed payments and/or variable lease payments based on contracted percentages of revenue.

Generally, leases do not grant any right to the lessee to purchase the underlying asset at the end of the lease term, with the exception of certain leases of Dolby Voice equipment for which the customer has the option to purchase the equipment at fair value.

Dolby Cinema lease arrangements have options to extend the lease term at expiration by increments ranging from 1 to 5 years.

Assets provided under an operating lease are carried at cost within property, plant and equipment and depreciated over the useful life of these asset using the straight-line method.

Fixed operating lease payments are recognized on a straight-line basis over the lease term to other income for our real estate property and to revenue for all other leases.

Variable lease payments received under our Dolby Cinema operating leases are computed as shares of lessees' box office revenues and recognized to revenue in the period that box office sales occur.

Lease incentive payments we make to lessees are amortized as a reduction in revenue over the lease term.

For the year ended September 25, 2020, variable operating lease income was $ 10.4 million and fixed operating lease income was $ 3.7 million.

If a lease is classified as a sales-type lease, the carrying amount of the asset is derecognized from property, plant and equipment and a net investment in the lease is recorded.

The net investment in the lease is measured at commencement date as the sum of the lease receivable and the estimated residual value of the equipment.

The unguaranteed residual value of the equipment was determined as the estimated carrying value of the asset at the end of the lease term had the asset been depreciated on a straight-line basis.

At September 25, 2020, the unguaranteed residual value of sales-type leases was $ 0.7 million.

Selling profit or loss arising from a sales-type lease is recorded at lease commencement and presented on a gross basis.

Over the term of the lease, we recognize interest income on the net investment in the lease and any variable lease payments, which is not material and not included in the net investment in the lease.

The following table presents the maturity analysis of fixed lease payments due to Dolby (in thousands):

September 25, 2020

Operating Leases Sales-Type Leases

Fiscal 2021 $ 3,361 $ 1,605

Fiscal 2022 3,393 1,605

Fiscal 2023 3,354 1,603

Fiscal 2024 1,821 796

Fiscal 2025 78 395

Thereafter 346 395

Total undiscounted cash flows 12,353 6,399

present value of lease payments (recognized as lease receivables) ( 4,821 )

Difference $ 1,578

Goodwill & Intangible Assets

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Intangible assets subject to amortization consisted of the following (in thousands):

September 27, 2019

September 28, 2018

Intangible Assets, Net

September 25, 2020 September 27, 2019

Intangible Assets, Net Cost Accumulated

Amortization Net Cost Accumulated

Amortization Net

Acquired patents and technology $ 342,637 $ ( 206,123 ) $ 136,514 $ 338,075 $ ( 176,867 ) $ 161,208

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Other intangibles 22,969 ( 22,730 ) 239 22,902 ( 22,437 ) 465

Total $ 430,346 $ ( 277,915 ) $ 152,431 $ 425,705 $ ( 244,814 ) $ 180,891

During fiscal 2020 and 2019, we purchased various patents and developed technology for purchase consideration of $ 2.9 million and $ 27.3 million, and upon acquisition, these intangible assets had a weighted-average useful life of 14.0 years and 7.9 years, respectively.

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As of September 25, 2020, expected amortization expense of our intangible assets in future periods was as follows (in thousands):

Amortization Expense

Fiscal Year Amortization Expense

2021 $ 30,913

Thereafter 40,538

Total $ 152,431

Stockholders' Equity & Stock-Based Compensation

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2020 Stock Incentive Plan

Following shareholder approval in January 2005, our 2005 Stock Plan was adopted by our Board of Directors on February 16, 2005, the day prior to the completion of our IPO.

Following shareholder approval in January 2005, our 2005 Stock Plan was adopted by our Board of Directors on February 16, 2005.

In February 2020, our stockholders approved the name change of our 2005 Stock Plan to the 2020 Stock Plan and certain other changes described in our proxy statement for our 2020 annual meeting of stockholders.

Our 2020 Stock Plan, as amended and restated, provides for the ability to grant incentive stock options, non-qualified stock options, restricted stock, RSUs, stock appreciation rights, deferred stock units, performance units, performance bonus awards, and performance shares.

A total of 46.0 million shares of our Class A common stock is authorized for issuance under the 2005 Stock Plan.

A total of 55.0 million shares of our Class A common stock have been authorized for issuance under the 2020 Stock Plan in total since inception of the 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 2020 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.

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 2020 Stock Plan, such shares will be counted as 1.6 shares for every one share returned.

Stock Options.

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In valuing the PSOs, which will be recognized as compensation cost, we used a Monte Carlo valuation model.

Aside from the use of an expected term for the PSOs commensurate with their shorter contractual term, the nature of the valuation inputs used in the Monte Carlo valuation model were consistent with those used to value our non-performance based options granted under the 2005 Plan.

Compensation cost is being amortized on a straight-line basis over the requisite service period.

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On December 15, 2016, we granted PSOs to our executive officers exercisable for an aggregate of 276,199 shares at the target award amount, which would be exercisable for an aggregate of up to 345,248 shares at 125 % of the target award amount.

On December 15, 2015, we granted PSOs to our executive officers, which vested in December 2018 at 125 % of the target award amount, for an aggregate of 334,623 shares.

On December 15, 2015, we granted PSOs to

our executive officers, which vested in December 2018 at 125 % of the target award amount, for an aggregate of 334,623 shares.

As of September 25, 2020, PSOs which would be exercisable for an aggregate of 726,639 shares at the target award amount ( 994,455 shares at 125 % of the target award amount) were outstanding.

The following table summarizes information about stock options issued under our 2020 Stock Plan:

Weighted-Average

Exercise Price

Weighted-Average

Contractual Life

(in thousands)

Shares Weighted-Average

Exercise Price Weighted-Average

Contractual Life Aggregate

(in thousands) (in years) (in thousands)

Options outstanding at September 27, 2019 7,201 $ 48.03

Grants 1,150 67.77

Exercises ( 1,671 ) 40.16

Forfeitures and cancellations ( 81 ) 62.20

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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 September 27, 2019 .

Our 2020 Stock Plan also allows us to grant RSUs that vest based on the satisfaction of specific performance criteria.

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.

Compensation expense from these awards is equal to the adjusted fair market value of our Class A common stock on the date of grant, discounted to account for dividend payments forgone during the vesting period, and recognized on a straight-line basis over the requisite service period.

Performance-Based Restricted Stock Units (PSUs).

In the first quarter of fiscal 2020, we began granting PSUs to our executive officers with shares of our Class A common stock underlying such awards, which would vest for an aggregate of 62,000 shares at the target amount ( 124,000 shares at 200 % of the target award amount).

The terms of the PSU Agreement adopted in the first quarter fiscal 2020 provide for the grant of performance-based restricted stock units to our executive officers contingent on Dolby's achievement of annualized TSR targets measured against a comparator index over a three-year performance period following the date of grant.

Anywhere from 0 % to 200 % of eligible restricted stock units may vest based on achievement of the performance conditions at the end of the three-year performance period.

In valuing the PSUs which will be recognized as compensation cost, we used a Monte Carlo valuation model.

Compensation cost is being amortized on a straight-line basis over the requisite service period.

The following table summarizes information about RSUs issued under our 2020 Stock Plan:

Weighted-Average

Shares Weighted-Average

(in thousands)

Non-vested at September 27, 2019 2,805 $ 58.84

Granted 1,395 65.76

Vested ( 1,078 ) 52.71

Forfeitures ( 143 ) 61.16

Non-vested at September 25, 2020 2,979 $ 62.70

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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 t ime.

The weighted-average assumptions used in the determination of the fair value of our stock options were as follow s:

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 Year Ended

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Total stock-based compensation, net of tax $ 72,538 $ 63,696 $ 58,654

Expense - By Income Statement Classificati on

Expense - By Income Statement Classification

Fiscal Year Ended

Compensation Expense - By Classification

September 25,

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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.

In November 2009, we announced a stock repurchase program ("program"), providing for the repurchase 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 September 25, 2020 (in thousands):

Authorization Period

Authorization Amount

Authorization Period Authorization Amount

November 2009 $ 250,000

July 2010 300,000

July 2011 250,000

February 2012 100,000

October 2014 200,000

January 2017 200,000

July 2018 350,000

July 2019 350,000

Total $ 2,000,000

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.

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Shares repurchased under the program will be returned to the status of authorized but unissued shares of Class A common stock.

As of September 27, 2019 , the remaining authorization to purchase additional shares is approximatel y $ 361 million .

As of September 25, 2020, the remaining authorization to purchase additional shares is approximately $ 187 million.

The following table provides information regarding share repurchase activity under the program in fiscal 2020:

Quarterly Repurchase Activity

Quarterly Repurchase Activity Shares

Repurchased Cost (1)

Average Price Paid Per Share (2)

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Q4 - Quarter ended September 25, 2020 642,696 44,989 70.00

Total 2,564,559 $ 173,742

(1) Cost of share repurchases includes the price paid per share and applicable commissions.

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The following table summarizes dividends declared under the program during fiscal 2020:

Fiscal Period

Announcement Date

Cash Dividend Per Common Share

Dividend Payment

Q1 - Quarter ended December 28, 2018

January 30, 2019

February 12, 2019

February 21, 2019

$ 19.5 million

Q2 - Quarter ended March 29, 2019

$ 19.3 million

Q3 - Quarter ended June 28, 2019

August 1, 2019

August 12, 2019

August 20, 2019

$ 19.2 million

Q4 - Quarter ended September 27, 2019

November 14, 2019

November 26, 2019

December 4, 2019

$ 22.0 million

Fiscal Period Announcement Date Record Date Payment Date Cash Dividend Per Common Share Dividend Payment

Q1 - Quarter ended December 27, 2019 January 29, 2020 February 10, 2020 February 20, 2020 $ 0.22 $ 22.2 million

Q2 - Quarter ended March 27, 2020 May 4, 2020 May 18, 2020 May 27, 2020 $ 0.22 $ 22.1 million

Q3 - Quarter ended June 26, 2020 August 3, 2020 August 17, 2020 August 26, 2020 $ 0.22 $ 22.1 million

Q4 - Quarter ended September 25, 2020 November 12, 2020 November 24, 2020 December 4, 2020 $ 0.22 $ 22.1 million (1)

(1) The dividend payment amount 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.

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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.

Unrealized gains and losses on our cash flow hedges are reclassified from AOCI into earnings when the hedged operating expenses are recognized.

Unrealized gains and losses on our cash flow hedges are reclassified from AOCI into earnings when the hedged operating expenses are recognized which is also when the gains and losses are realized.

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 Year Ended

September 27, 2019

September 28, 2018

Investment Securities

Cash Flow Hedges

Currency Translation Adjustments

Investment Securities

Cash Flow Hedges

Currency Translation Adjustments

Fiscal Year Ended Fiscal Year Ended

September 25, 2020 September 27, 2019

Investment Securities Cash Flow Hedges Currency Translation Adjustments Total Investment Securities Cash Flow Hedges Currency Translation Adjustments Total

Beginning Balance $ 2,198 $ — $ ( 22,823 ) $ ( 20,625 ) $ ( 2,948 ) $ — $ ( 12,884 ) $ ( 15,832 )

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Foreign currency translation gains/(losses) (1)

— — 7,420 7,420 — — ( 9,500 ) ( 9,500 )

Income tax effect - benefit/(expense) ( 87 ) ( 581 ) 22 ( 646 ) 37 — ( 439 ) ( 402 )

Net of tax ( 5,480 ) 4,689 7,442 6,651 5,168 ( 176 ) ( 9,939 ) ( 4,947 )

Amounts reclassified from AOCI into earnings:

Realized gains/(losses) (1)

4,939 ( 894 ) — 4,045 ( 43 ) 176 — 133

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

( 839 ) 174 — ( 665 ) 21 — — 21

Net of tax 4,100 ( 720 ) — 3,380 ( 22 ) 176 — 154

Net current-period other comprehensive income/(loss) ( 1,380 ) 3,969 7,442 10,031 5,146 — ( 9,939 ) ( 4,793 )

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(1) Realized gains or losses, if any, from the sale of our AFS investment securities or from foreign currency translation adjustments are included within other income/expense, net in our consolidated statements of operations .

Realized gains or losses on foreign currency contracts designated as cash flow hedges are included in operating expenses on the consolidated statements of operations.

(2) The income tax benefit or expense is included within provision for income taxes in our consolidated statements of operations.

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Potentially dilutive shares represent the hypothetical number of incremental shares issuable under the assumed exercise of outstanding stock options (both vested and unvested) and vesting of outstanding RSUs.

The calculation of dilutive shares outstanding excludes out-of-the-money stock options (e.g., such options' exercise prices were greater than the average market price of our common stock for the period) because their inclusion would have been antidilutive.

The calculation of dilutive shares outstanding excludes securities that would have an antidilutive effect on EPS.

The following table sets forth the computation of basic and diluted EPS attributable to Dolby Laboratories, Inc.

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2020 September 27,

(as adjusted)

2019 September 28,

(as adjusted)

Net income attributable to Dolby Laboratories, Inc.

$ 231,363 $ 255,151 $ 41,746

Weighted-average shares outstanding—basic 100,564 101,629 103,377

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Potential common shares from restricted stock units 941 1,021 1,231

Potential common shares from ESPP 39 — —

Weighted-average shares outstanding—diluted 102,944 104,572 106,978

Net income per share attributable to Dolby Laboratories, Inc.:

Basic $ 2.30 $ 2.51 $ 0.40

Diluted $ 2.25 $ 2.44 $ 0.39

Antidilutive awards excluded from calculation:

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Restricted stock units 2 1 6

Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid.

Our income tax expense, deferred tax assets and liabilities, and unrecognized tax benefits reflect management's best assessment of estimated current and future liabilities.

We are subject to income taxes in both the United States and numerous foreign jurisdictions.

Significant judgments and estimates are required in determining the consolidated income tax expense.

Tax Act Enacted in 2017

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Act.

The Tax Act makes broad and complex changes to the U.S.

tax code, including, but not limited to, (1) reducing the U.S.

federal corporate income tax rate from 35 percent to 21 percent;

(2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries;

(3) generally eliminating U.S.

federal corporate income taxes on dividends from foreign subsidiaries;

(4) capitalizing specific R&D expenses which are amortized over five to 15 years;

and (5) other changes to how foreign and domestic earnings are taxed.

Our accounting for the impact of the Tax Act was completed in the first quarter of fiscal 2019 in accordance with the Staff Accounting Bulletin No.

118 measurement period.

As of September 28, 2018, we had recorded a provisional amount for the Tax Act of $ 121.4 million .

During the period ended December 28, 2018, we recorded a $ 36.0 million reduction to our provisional Tax Act amount resulting primarily from completion of our evaluation of the income tax effects of indirect taxes related to the Deemed Repatriation Transition Tax ("Transition Tax") on our deferred tax assets.

During the quarter ended March 29, 2019, the U.S.

Department of the Treasury issued final regulations on the Transition Tax related to deemed paid foreign taxes eliminating a benefit we previously expected to realize.

As a result, we recorded an additional $ 19.0 million tax expense.

During the quarter ended June 28, 2019, we recorded a $ 2.3 million reduction related to the impact of the Tax Act.

The final amount recorded for the Tax Act was $ 102.1 million as of the period ended September 27, 2019, which reflects the $ 121.4 million recorded as of September 28, 2018, reduced by $ 36 million as of December 28, 2018, increased by $ 19 million as of March 29, 2019, and reduced by $ 2.3 million as of June 28, 2019.

There may be additional tax effects of the Tax Act that may change the final recorded tax expense associated with the Tax Act upon finalization of the law, regulations, and additional guidance.

We have included the impact of new provisions effective in our fiscal 2019 in our effective tax rate.

The Tax Act imposes a minimum tax on certain foreign earnings ("minimum foreign tax") in the year earned.

Our accounting policy is to treat the minimum foreign tax as a current expense in the year incurred and we have not provided deferred taxes on temporary differences related to such minimum foreign tax.

The adoption of ASC 606 impacted the timing in which we record per-unit royalty-based revenue earned from our licensees’ shipments.

This change in accounting principle also impacted the recognition of deferred tax assets related to licensing revenue.

As a result, we reduced our deferred tax assets by $ 26.3 million at the beginning of our first quarter of fiscal 2019.

Income Tax Provision

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2020 September 27,

(as adjusted)

2019 September 28,

(as adjusted)

United States $ 32,426 $ 60,500 $ 27,819

Foreign 207,289 221,807 168,555

Total $ 239,715 $ 282,307 $ 196,374

Fiscal Year Ended

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2020 September 27,

(as adjusted)

2019 September 28,

(as adjusted)

Federal $ ( 48,517 ) $ 14,144 $ 40,624

State 735 394 333

Foreign 61,153 64,335 59,383

Total current 13,371 78,873 100,340

Federal ( 4,674 ) ( 55,793 ) 43,377

State ( 111 ) 1,007 17,484

Foreign ( 490 ) 2,715 ( 7,132 )

Total deferred ( 5,275 ) ( 52,071 ) 53,729

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The Tax Act moves towards a modified territorial tax system through the provision of a 100% dividend received deduction for the foreign-source portions of dividends received from controlled foreign subsidiaries.

As a result, we continue to evaluate the

indefinite reinvestment assertions with regards to unremitted earnings for certain of our foreign subsidiaries.

As a result, we have reevaluated our historical assertion and determined that we no longer consider a vast majority of these earnings to be indefinitely reinvested.

During the fiscal year, we repatriated $ 300 million of foreign subsidiary earnings which were exempt from foreign withholding tax.

As of September 27, 2019 , the total undistributed earnings of our non-U.S.

subsidiaries were approximately $ 380 million .

Historically, we have asserted our intention to indefinitely reinvest a portion of the undistributed earnings of certain foreign subsidiaries.

However, we have reevaluated our historical assertion as a result of the Tax Act and determined that we no longer consider a vast majority of these earnings to be indefinitely reinvested.

As of September 25, 2020, the total undistributed earnings of our foreign subsidiaries were approximately $ 244 million.

The unrecognized deferred tax liability on the portion of the undistributed earnings considered indefinitely reinvested is not material.

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2020 September 27,

(as adjusted)

Deferred income tax assets:

Investments $ 1,899 $ 2,099

Inventories 6,863 4,041

Net operating loss 3,450 2,050

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Depreciation and amortization 45,572 19,988

Lease liability 17,655 —

Research and development credits 31,795 28,777

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Deemed repatriated earnings tax benefit 9,788 33,357

Other 4,765 4,705

Total gross deferred income tax assets 169,558 141,310

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Deferred income tax liabilities:

Deferred income tax assets, net (non-current)

NOL and Tax Credit Carryforwards

At September 27, 2019 , the NOL carried forward for California tax purposes was $ 4.9 million and will expire in fiscal 2029 if unused.

Additionally, we had total foreign NOL carryforwards of $ 8.3 million as of September 27, 2019 , an amount which is not subject to expiration.

At September 27, 2019 , we had foreign tax credit and federal R&D tax credit carryforwards of $ 8.3 million and $ 8.4 million , respectively, which will expire between fiscal 2029 and fiscal 2039.

We had California R&D tax credits of $ 30.3 million , which will be carried forward indefinitely, and foreign R&D tax credits of $ 3.1 million , which will expire between fiscal 2020 and fiscal 2029.

Right of use asset ( 17,360 ) —

Intangibles ( 2,901 ) ( 2,351 )

Deferred income tax assets, net $ 118,881 $ 114,075

Net Operating Losses ("NOL") and Tax Credit Carryforwards

At September 25, 2020, the NOL carryforwards for U.S.

federal and California were $ 4.5 million and $ 9.0 million, respectively, and will start to expire in fiscal 2034 and 2029, respectively.

Additionally, we had foreign NOL carryforwards of $ 9.8 million as of September 25, 2020, an amount which is not subject to expiration.

At September 25, 2020, we had foreign tax credit and federal R&D tax credit carryforwards of $ 8.5 million and $ 6.9 million, respectively, which will start to expire in fiscal 2029 and fiscal 2039.

We had California R&D tax credits of $ 34.7 million, which will carry forward indefinitely, and foreign R&D tax credits of $ 2.6 million, which will start to expire in fiscal 2021 and fiscal 2029.

Valuation Allowance

As of September 27, 2019 , a $ 21.2 million valuation allowance was recorded against California deferred tax assets.

In fiscal 2019, a $ 3.7 million valuation allowance was established for foreign deferred tax assets for which ultimate realization of its future benefits is uncertain.

As of September 25, 2020, a $ 25.8 million valuation allowance was recorded against California deferred tax assets and a $ 4.6 million valuation allowance was recorded against foreign deferred tax assets for which ultimate realization of its future benefits is uncertain.

Effective Tax Rate

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These factors include both recurring items such as tax rates and the relative amount of income earned in foreign jurisdictions, as well as discrete items that may occur in, but are not necessarily consistent between periods.

The benefit associated with the foreign rate differential shown below is net of the impact of uncertain tax positions affecting the amount of income subject to foreign taxation.

A reconciliation of the federal statutory tax rate to our effective tax rate on income from continuing operations was as follows:

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2020 September 27,

(as adjusted)

2019 September 28,

(as adjusted)

Federal statutory rate 21.0 % 21.0 % 24.6 %

State income taxes, net of federal effect 0.2 0.2 0.7

Stock-based compensation expense rate

Stock-based compensation ( 2.7 ) ( 1.9 ) ( 5.2 )

Research and development tax credits ( 3.0 ) ( 4.7 ) ( 4.0 )

Tax exempt interest

manufacturing tax incentives

Foreign-derived intangible income deduction ( 2.2 ) ( 0.7 ) —

tax on foreign entities 3.1 0.6 —

Foreign rate differential ( 1.8 ) ( 4.4 ) ( 9.4 )

Audit settlements

Increase (decrease) unrecognized tax benefit ( 12.9 ) 3.4 3.7

Tax Act — ( 7.6 ) 53.3

Change in Valuation Allowance — 1.5 8.3

Other 1.7 2.1 6.5

Effective tax rate 3.4 % 9.5 % 78.5 %

Our effective tax rate was 3.4 % in fiscal 2020, compared with our federal statutory rate of 21.0%, and with our effective tax rate in fiscal 2019 of 9.5 %.

The decrease in our effective tax rate reflects the impact from the Tax Act, most notably the remeasurement of net deferred tax assets and the Transition Tax on the accumulated earnings of our foreign subsidiaries, and the establishment of a valuation allowance against California tax credits in fiscal 2018.

In addition, our federal statutory tax rate decreased from a blended rate of 24.6% in fiscal 2018 to 21% in fiscal 2019.

The decrease in our effective tax rate is primarily related to a benefit in fiscal 2020 from reversals of unrecognized tax benefits.

Our effective tax rate was 78.5 % in fiscal 2018 and was 9.5 % in fiscal 2019.

The effective tax rate in fiscal 2018 compared to fiscal 2017 reflects a detriment from the impact from the Tax Act, most notably the remeasurement of net deferred tax assets and the Transition Tax on the accumulated earnings of our foreign subsidiaries, and the establishment of a valuation allowance against California tax credits in fiscal 2018, offset by a reduction in federal statutory tax rate and increase in excess benefit related to stock-based awards.

The effective tax rate in fiscal 2018 reflects the impact from the Tax Act, most notably the remeasurement of net deferred tax assets and the Transition Tax on the accumulated earnings of our foreign subsidiaries, and the establishment of a valuation allowance against California tax credits in fiscal 2018.

In addition, our federal statutory tax rate decreased from a blended rate of 24.6% in fiscal 2018 to 21% in fiscal 2019.

Uncertain Tax Positions

As of September 25, 2020, the total amount of gross unrecognized tax benefits was $ 60.7 million, of which $ 42.0 million, if recognized, would reduce our effective tax rate.

Our liability decreased from fiscal 2019 primarily due to lapse in the statute of limitations in fiscal 2020.

Our liability for unrecognized tax benefits is classified within other non-current liabilities in our consolidated balance sheets.

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In fiscal year 2019 , our current tax provision was increased by interest expense of $ 3.5 million , while in fiscal year 2018 , our current tax provision was increased by interest expense of $ 3.0 million .

In fiscal year 2020, our current tax provision was decreased by interest expense of $ 6.3 million, while in fiscal year 2019, our current tax provision was increased by interest expense of $ 3.5 million.

Accrued interest and penalties are included within the related tax liability line item in our consolidated balance sheets.

O ur accrued interest and penalties on unrecognized tax benefits as of September 27, 2019 and September 28, 2018 were as follows (in thousands):

Our accrued interest and penalties on unrecognized tax benefits as of September 25, 2020 and September 27, 2019 were as follows (in thousands):

Fiscal Year Ended

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Accrued penalties 45 44

W e continue to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected tolling of the statute of limitations in various taxing jurisdictions.

Total $ 4,062 $ 10,359

We continue to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected tolling of the statute of limitations in various taxing jurisdictions.

We file income tax returns in the U.S.

federal jurisdiction and in many state and foreign jurisdictions.

The material income tax jurisdictions are the United States federal, California, New York, and the Netherlands.

We are currently under audit by the State of New York for fiscal years 2014 and 2015 and Spain for fiscal years 2012 through 2015.

In the U.S federal jurisdiction, other major states, and major foreign jurisdictions, the fiscal years subsequent to 2014, 2014, and 2012, respectively, remain open and could be subject to examination by the taxing authorities.

federal, states, and foreign jurisdictions.

The material income tax jurisdictions are the U.S.

federal, California, New York, and the Netherlands.

We are currently under audit by the State of Oregon for fiscal years 2016 through 2018 and Spain for fiscal years 2014 and 2015.

The statute remains open for fiscal years subsequent to 2014 for U.S.

federal, and 2014 and onward for state and foreign purposes.

Therefore, these periods may be subject to examination by the tax authorities.

Management does not believe that the outcome of any ongoing examination will have a material impact on our consolidated financial statements.

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The table presented below summarizes changes in restructuring accruals under these plans (in thousands):

Leased facility exit costs

Fixed assets write-off

Other associated costs

Balance at September 28, 2018

Restructuring charges/(credits)

Cash payments

Non-cash and other adjustments

Balance at September 27, 2019

Fiscal 2017 Restructuring Plan.

In September 2017, we implemented a plan to reduce certain activities in order to reallocate those resources towards higher priority investment areas.

As a result, we recorded $ 12.9 million in restructuring costs during fiscal 2017, representing severance and other related benefits offered to approximately 80 employees that were affected by this action.

The table presented below summarizes changes in restructuring accruals under this plan (in thousands):

Severance and associated costs

Restructuring charges

Cash payments

Non-cash and other adjustments

Severance Leased facility exit costs Fixed assets write-off Other associated costs Total

Balance at September 27, 2019 $ 128 $ 15,723 $ — $ — $ 15,851

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Balance at September 25, 2020 $ — $ — $ — $ — $ —

Accruals for restructuring charges incurred for the restructuring plans described above are included within accrued liabilities in our consolidated balance sheets while restructuring charges are included within restructuring charges in our consolidated statements of operations.

Commitments & Contingencies

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Payments Due By Fiscal Period

2025 Thereafter Total

Naming rights $ 7,915 $ 8,015 $ 8,116 $ 8,219 $ 8,322 $ 61,277 $ 101,864

Operating leases

Purchase obligations 17,305 2,991 139 — — — 20,435

Donation commitments 4,803 155 155 155 155 1,002 6,425

Total $ 30,023 $ 11,161 $ 8,410 $ 8,374 $ 8,477 $ 62,279 $ 128,724

Naming Rights.

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Our payment obligations are conditioned in part on the Academy Awards being held and broadcast from the Dolby Theatre.

Operating Leases.

Operating lease payments represent our commitments for future minimum rent made under non-cancelable leases for office space, including those payable to our principal stockholder and portions attributable to the controlling interests in our wholly owned subsidiaries.

The following table summarizes information about our total rental expenses under operating leases, including the portion of this total rent expense which is payable to our principal stockholder (in thousands):

Fiscal Year Ended

September 27,

September 28,

September 29,

Total rent expense

Our payment obligations may be suspended or reduced in certain circumstances, including protracted closure of the Dolby Theatre.

Purchase Obligations.

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Donation Commitments.

O ur donation commitments relate to non-cancelable obligations to the Museum of the Academy of Motion Picture Arts and Sciences in Los Angeles, California, and the Smithsonian Institution in Washington, DC.

Our commitment to the Museum of the Academy of Motion Picture Arts and Sciences is for 15 years from its expected opening date in fiscal 2020 , and the Smithsonian Institution is for the next 5 years.

Both donation commitments consist of the installation of imaging and audio products in its theaters and providing maintenance services in exchange for various marketing, branding, and publicity benefits.

Our donation commitments relate to non-cancelable obligations that consist of maintenance services and installation of imaging and audio products in exchange for various marketing, branding, and publicity benefits.

The recipients of these donations participate in or promote the cinema and entertainment industry and our commitments vary in length, lasting up to 15 years.

Indemnification Clauses.

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Geographic Information

The methods to determine revenue by geographic region for each of the three categories included within total revenue in our consolidated statements of operations are described within the table presented below.

Revenue Category

Basis For Determining Geographic Location

Region in which our licensees’ headquarters are located

Destination to which our products are shipped

Location in which the relevant services are performed

The methods to determine revenue by geographic region for each of the three categories included within total

revenue in our consolidated statements of operations are described within the table presented below.

Revenue Category Basis For Determining Geographic Location

Licensing Region in which our licensees’ headquarters are located

Products Destination to which our products are shipped

Services Location in which the relevant services are performed

The following tables present selected information regarding total revenue by geographic location (amounts presented in thousands).

1 unchanged sentence

Fiscal Year Ended

September 27,

Location September 25,

2020 September 27,

(as adjusted)

2019 September 28,

(as adjusted)

United States $ 460,972 $ 449,203 $ 353,235

3 unchanged sentences

Fiscal Year Ended

September 27,

Location September 25,

2020 September 27,

(as adjusted)

2019 September 28,

(as adjusted)

United States 40 % 36 % 33 %

South Korea 12 % 12 % 17 %

China 20 % 20 % 15 %

Japan 9 % 11 % 13 %

Europe 10 % 12 % 12 %

Taiwan 2 % 4 % 3 %

Other 7 % 5 % 7 %

Total 100 % 100 % 100 %

Long-lived tangible assets, net of accumulated depreciation, by geographic region were as follows (in thousands):

September 27,

Location September 25,

2020 September 27,

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Our interests in these consolidated affiliated entities and the location of the property leased to Dolby Laboratories as of September 25, 2020 were as follows:

Minority Ownership Interest

Location Of Properties

Dolby Properties Brisbane, LLC

Brisbane, California

Dolby Properties Burbank, LLC

Burbank, California

Dolby Properties, LP

Wootton Bassett, England

Entity Name Minority Ownership Interest Location Of Properties

Dolby Properties Brisbane, LLC 49.0 % Brisbane, California

Dolby Properties Burbank, LLC 49.0 % Burbank, California

Dolby Properties, LP 10.0 % Wootton Bassett, England

We lease from our principal stockholder a commercial office building located at 100 Potrero Avenue in San Francisco, California under a term that expires on October 31, 2024.

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Under the plan, employees are eligible to receive matching contributions and profit-sharing contributions.

We also maintain a SERP, a non-qualified, employer-funded retirement plan for certain senior executives employed in the United States.

The plan was adopted in October 2004 prior to our IPO and was terminated in fiscal 2005 .

We have not made any contributions to the SERP since fiscal 2006 .

The purpose of the plan was to provide these executives with the opportunity to receive retirement income benefits in addition to the benefits generally available to all employees.

The benefits provided to participants were based on defined contributions that we made to the plan and the gains and losses on the investment of those contributions.

At September 27, 2019 , the balance in the SERP account represents amounts contributed prior to the plan's termination, with the underlying plan investments consisting primarily of mutual fund investments.

SERP assets are included within prepaid expenses and other current assets and within other non-current assets, while SERP liabilities are included within accrued liabilities and within other non-current liabilities in our consolidated balance sheets.

We also maintain a SERP, a non-qualified, employer-funded defined contribution retirement plan which was terminated in fiscal 2005.

Retirement plan expenses, which are included in cost of products, cost of services, R&D, S&M, and G&A expense in our consolidated statements of operations, were as follows (in thousands):

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The following table presents selected unaudited quarterly financial information from fiscal 2020 and 2019 (in thousands, except per share amounts):

Fiscal Year 2019

Fiscal Year 2018 (as adjusted)

Fiscal Year 2020 Fiscal Year 2019

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Licensing $ 257,683 $ 328,865 $ 235,125 $ 256,904 $ 260,279 $ 310,308 $ 271,897 $ 264,796

Products and services 34,194 22,950 11,784 14,287 42,097 27,950 30,262 34,031

1 unchanged sentence

Cost of revenue 37,315 36,830 29,888 42,465 38,629 36,575 39,690 45,960

Gross margin 254,562 314,985 217,021 228,726 263,747 301,683 262,469 252,867

Income/(loss) before taxes and controlling interest 54,454 110,779 39,990 34,492 74,254 110,002 41,800 56,251

1 unchanged sentence

Earnings per share:

Basic $ 0.49 $ 0.88 $ 0.67 $ 0.27 $ 0.96 $ 0.72 $ 0.39 $ 0.44

Diluted $ 0.47 $ 0.86 $ 0.66 $ 0.26 $ 0.93 $ 0.70 $ 0.38 $ 0.43

Weighted-average shares outstanding:

Basic 100,336 100,854 100,593 100,473 102,677 102,141 101,218 100,481

Diluted 103,078 102,773 102,075 102,722 106,130 104,587 103,717 102,945

Subsequent Events

Fiscal 2021 Restructuring Program.

Subsequent to the fiscal year ended September 25, 2020, we approved a plan to reduce certain activities, such as winding down our conferencing hardware business, in order to reallocate those resources towards higher priority investment areas and growth opportunities for the future of our business.

As a result, we expect to record approximately $ 10 million in restructuring costs that will be reflected in the fiscal 2021 financial statements, representing severance and other related benefits offered to approximately 100 employees that were impacted by this action.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk