Dolby Laboratories, Inc. 10-K

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity As of September 30, 2022, we had cash and cash equivalents of $620.1 million, which consisted of cash and highly liquid money market funds and U.S. agency securities. In addition, we had both short and long-term investments of $291.7 million, which consisted primarily of corporate bonds, municipal debt securities, government bonds, commercial paper, U.S. agency securities, and certificates of deposit. Our 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. government. As of September 30, 2022, the weighted-average credit quality of our investment portfolio was AA+, with a weighted-average maturity of approximately ten months. We do not invest in financial instruments for trading or speculative purposes, nor do we use leveraged financial instruments. We utilize external investment managers who adhere to the guidelines of our investment policy. The investments within our fixed-income portfolio are subject to fluctuations in interest rates, which could affect our financial position, and to a lesser extent, results of operations. Based on our investment portfolio balance as of September 30, 2022, hypothetical changes in interest rates of 1% and 0.5% would have an impact on the carrying value of our portfolio of approximately $2.3 million and $1.1 million, respectively. Foreign Currency Exchange Risk We maintain business operations in foreign countries, most significantly in Australia, China, Germany, the Netherlands, Poland, and the U.K. Additionally, a portion of our business is conducted outside of the U.S. through subsidiaries with functional currencies other than the U.S. dollar, most notably: • Australian Dollar • British Pound • Chinese Yuan • Euro • 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. dollars upon consolidation. The majority of our revenue generated from international markets is denominated in U.S. dollars, while the operating expenses of our foreign subsidiaries are predominantly denominated in local currencies. Therefore, our operating expenses will increase when the U.S. dollar weakens against the local currency and decrease when the U.S. dollar strengthens against the local currency. Additionally, foreign exchange rate fluctuations on transactions denominated in currencies 44 Table of Contents other than the functional currency result in gains or losses that are reflected in our consolidated statements of operations. Our foreign operations are subject to the same risks present when conducting business internationally, including, but not limited to, changes in economic conditions and geopolitical climate, differing tax structures, foreign exchange rate volatility and other regulations and restrictions. 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. 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 loss attributed to the effective portion of cash flow hedges recognized in AOCI was $2.6 million in fiscal 2022. The pre-tax loss attributed to the effective portion of cash flow hedges recognized in AOCI was $12.7 million in fiscal 2021. The pre-tax effective portion of the loss reclassified to the consolidated statements of operations was $2.1 million in fiscal 2022, and the pre-tax effective portion of the gain reclassified to the consolidated statements of operations was $9.0 million in fiscal 2021. We also enter into foreign currency forward contracts to hedge against assets and liabilities for which we have foreign currency exchange rate exposure and selected anticipated expenses. The contracts hedging receivables and payables are carried at fair value with changes in the fair value recorded to other income/(expense), net, in our consolidated statements of operations. The contracts hedging foreign currency denominated operating expenses are carried at fair value with changes in the fair value recorded to other comprehensive income until the hedged expenses are reported in our consolidated statements of operations. As of September 30, 2022, the outstanding derivative instruments had maturities of equal to or less than 12 months. As of September 30, 2022 and September 24, 2021, the total notional amounts of outstanding contracts were $130.8 million and $51.0 million, respectively. For additional information related to our foreign currency forward contracts, see Note 2 " Summary of Significant Accounting Policies " to our consolidated financial statements. A sensitivity analysis was performed on all of our foreign currency forward contracts as of September 30, 2022. This sensitivity analysis was based on a modeling technique that measures the hypothetical market value resulting from a 10% shift in the value of exchange rates relative to the U.S. dollar. For these forward contracts, duration modeling was used where hypothetical changes were made to the spot rates of the currency. A 10% increase in the value of the U.S. dollar would lead to a decrease in the fair value of our financial instruments by $7.1 million. Conversely, a 10% decrease in the value of the U.S. dollar would result in an increase in the fair value of these financial instruments by $7.1 million. 45 Table of Contents ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS DOLBY LABORATORIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID: 185 ) 47 Consolidated Balance Sheets 49 Consolidated Statements of Operations 50 Consolidated Statements of Comprehensive Income 51 Consolidated Statements of Stockholders’ Equity 52 Consolidated Statements of Cash Flows 53 Notes to Consolidated Financial Statements 54 46 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Dolby Laboratories, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Dolby Laboratories, Inc. and subsidiaries (the Company) as of September 30, 2022 and September 24, 2021, 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 30, 2022 and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and September 24, 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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. 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. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in 47 Table of Contents accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter 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 judgments. 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 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 $1.2 billion for the year ended September 30, 2022. The Company estimates and records sales-based licensing revenue from its licensees’ shipments in the same period in which those shipments occur. 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 estimates related to the Company’s sales-based licensing arrangements as a critical audit matter. Auditor judgement 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 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. /s/ KPMG LLP We have served as the Company’s auditor since 2002. San Francisco, California November 17, 2022 48 Table of Contents DOLBY LABORATORIES, INC. CONSOLIDATED BALANCE SHEETS ( in thousands, except share and per share amounts ) September 30, 2022 September 24, 2021 ASSETS Current assets: Cash and cash equivalents $ 620,127 $ 1,225,380 Restricted cash 8,244 7,652 Short-term investments 189,213 38,839 Accounts receivable, net of allowance for credit losses of $ 11,834 and $ 8,744 243,593 232,609 Contract assets, net of allowance for credit losses of $ 125 and $ 208 176,093 182,316 Inventories, net 23,549 10,965 Prepaid expenses and other current assets 50,075 62,737 Total current assets 1,310,894 1,760,498 Long-term investments 102,514 62,819 Property, plant, and equipment, net 513,481 534,381 Operating lease right-of-use assets 46,530 67,128 Intangible assets, net 112,265 122,890 Goodwill 365,147 340,694 Deferred taxes 183,568 156,020 Other non-current assets 55,149 61,257 Total assets $ 2,689,548 $ 3,105,687 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 14,171 $ 17,779 Accrued liabilities 230,237 262,728 Income taxes payable 1,265 1,334 Contract liabilities 18,588 18,473 Operating lease liabilities 13,257 15,403 Total current liabilities 277,518 315,717 Non-current contract liabilities 23,203 23,713 Non-current operating lease liabilities 37,685 56,715 Other non-current liabilities 100,122 105,310 Total liabilities 438,528 501,455 Stockholders’ equity: Class A, $ 0.001 par value, one vote per share, 500,000,000 shares authorized: 59,798,862 shares issued and outstanding at September 30, 2022 and 64,986,316 at September 24, 2021 53 59 Class B, $ 0.001 par value, ten votes per share, 500,000,000 shares authorized: 36,085,779 shares issued and outstanding at September 30, 2022 and 36,086,779 at September 24, 2021 41 41 Retained earnings 2,297,730 2,607,909 Accumulated other comprehensive loss ( 51,641 ) ( 10,030 ) Total stockholders’ equity – Dolby Laboratories, Inc. 2,246,183 2,597,979 Controlling interest 4,837 6,253 Total stockholders’ equity 2,251,020 2,604,232 Total liabilities and stockholders’ equity $ 2,689,548 $ 3,105,687 See accompanying notes to consolidated financial statements 49 Table of Contents DOLBY LABORATORIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS ( in thousands, except per share amounts ) Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Revenue: Licensing $ 1,164,533 $ 1,214,147 $ 1,078,577 Products and services 89,260 67,109 83,215 Total revenue 1,253,793 1,281,256 1,161,792 Cost of revenue: Cost of licensing 61,597 55,421 50,822 Cost of products and services 79,763 74,604 95,676 Total cost of revenue 141,360 130,025 146,498 Gross margin 1,112,433 1,151,231 1,015,294 Operating expenses: Research and development 261,174 253,640 239,045 Sales and marketing 358,716 332,671 335,933 General and administrative 275,315 224,161 219,753 Gain on sale of assets — ( 13,871 ) — Restructuring charges 10,623 10,240 1,821 Total operating expenses 905,828 806,841 796,552 Operating income 206,605 344,390 218,742 Other income/(expense): Interest income 6,568 3,493 12,725 Interest expense ( 394 ) ( 479 ) ( 186 ) Other income, net 2,500 7,108 8,434 Total other income 8,674 10,122 20,973 Income before income taxes 215,279 354,512 239,715 Provision for income taxes ( 31,381 ) ( 36,689 ) ( 8,096 ) Net income including controlling interest 183,898 317,823 231,619 Less: net (income)/loss attributable to controlling interest 189 ( 7,596 ) ( 256 ) Net income attributable to Dolby Laboratories, Inc. $ 184,087 $ 310,227 $ 231,363 Net income per share: Basic $ 1.84 $ 3.07 $ 2.30 Diluted $ 1.81 $ 2.97 $ 2.25 Weighted-average shares outstanding: Basic 99,990 101,190 100,564 Diluted 101,983 104,622 102,944 Related party rent expense: Included in operating expenses $ — $ ( 392 ) $ 126 Included in net income attributable to controlling interest $ 284 $ 381 $ 455 Cash dividend declared per common share $ 1.02 $ 0.91 $ 0.88 Cash dividend paid per common share $ 1.00 $ 0.88 $ 0.88 See accompanying notes to consolidated financial statements 50 Table of Contents DOLBY LABORATORIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ( in thousands) Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Net income including controlling interest $ 183,898 $ 317,823 $ 231,619 Other comprehensive income: Currency translation adjustments gains/(losses), net of tax benefit/(expense) of ($ 245 ), ($ 501 ), and $ 22 ( 31,586 ) 5,510 7,552 Unrealized losses on investments, net of tax benefit/(expense) of $ 50 , $ 108 , and ($ 926 ) ( 6,206 ) ( 598 ) ( 1,380 ) Unrealized gains/(losses) on cash flow hedges, net of tax benefit/(expense) of $ 324 , ($ 419 ), and ($ 407 ) ( 4,361 ) ( 4,091 ) 3,969 Total other comprehensive income/(loss), net of tax ( 42,153 ) 821 10,141 Total comprehensive income 141,745 318,644 241,760 Less: comprehensive (income)/loss attributable to controlling interest 731 ( 7,853 ) ( 366 ) Comprehensive income attributable to Dolby Laboratories, Inc. $ 142,476 $ 310,791 $ 241,394 See accompanying notes to consolidated financial statements 51 Table of Contents DOLBY LABORATORIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ( in thousands ) Dolby Laboratories, Inc. Class A Class B APIC Retained Earnings AOCI Total Stockholders’ Equity Controlling Interest Total Shares Amount Shares Amount 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 Distributions to controlling interest — — — — — — — — ( 283 ) ( 283 ) Stock-based compensation expense — — — — 86,628 — — 86,628 — 86,628 Repurchase of common stock ( 2,564 ) ( 3 ) — — ( 146,218 ) ( 27,521 ) — ( 173,742 ) — ( 173,742 ) Cash dividends declared and paid on common stock — — — — — ( 88,581 ) — ( 88,581 ) — ( 88,581 ) Common stock issued under employee stock plans 3,063 3 — — 82,655 — — 82,658 — 82,658 Tax withholdings on vesting of restricted stock ( 343 ) — — — ( 23,065 ) — — ( 23,065 ) — ( 23,065 ) Common stock transfers - Class B to Class A 101 — ( 101 ) — — — — — — — Balance at September 25, 2020 64,168 58 36,129 41 — 2,443,138 ( 10,594 ) 2,432,643 5,762 2,438,405 Net income — — — — — 310,227 — 310,227 7,596 317,823 Other comprehensive income, net of tax — — — — — — 564 564 257 821 Distributions to controlling interest — — — — — — — — ( 7,362 ) ( 7,362 ) Stock-based compensation expense — — — — 99,698 — — 99,698 — 99,698 Repurchase of common stock ( 2,584 ) ( 3 ) — — ( 189,577 ) ( 56,284 ) — ( 245,864 ) — ( 245,864 ) Cash dividends declared and paid on common stock — — — — — ( 89,172 ) — ( 89,172 ) — ( 89,172 ) Common stock issued under employee stock plans 3,714 4 — — 122,084 — — 122,088 — 122,088 Tax withholdings on vesting of restricted stock ( 354 ) — — — ( 32,205 ) — — ( 32,205 ) — ( 32,205 ) Common stock transfers - Class B to Class A 42 — ( 42 ) — — — — — — — Balance at September 24, 2021 64,986 59 36,087 41 — 2,607,909 ( 10,030 ) 2,597,979 6,253 2,604,232 Net income — — — — — 184,087 — 184,087 ( 189 ) 183,898 Other comprehensive loss, net of tax — — — — — — ( 41,611 ) ( 41,611 ) ( 542 ) ( 42,153 ) Distributions to controlling interest — — — — — — — — ( 1,435 ) ( 1,435 ) Stock-based compensation expense — — — — 114,925 — — 114,925 — 114,925 Capitalized stock-based compensation expense — — — — 746 — — 746 — 746 Repurchase of common stock ( 7,003 ) ( 7 ) — — ( 137,100 ) ( 393,379 ) — ( 530,486 ) — ( 530,486 ) Cash dividends declared and paid on common stock — — — — — ( 100,067 ) — ( 100,067 ) — ( 100,067 ) Common stock issued under employee stock plans 2,224 2 — — 57,846 — — 57,848 — 57,848 Tax withholdings on vesting of restricted stock ( 409 ) (1) — — ( 36,417 ) — — ( 36,418 ) — ( 36,418 ) Common stock transfers - Class B to Class A 1 — ( 1 ) — — — — — — — Deconsolidation of subsidiary — — — — — ( 820 ) — ( 820 ) 750 ( 70 ) Balance at September 24, 2021 59,799 $ 53 36,086 $ 41 $ — $ 2,297,730 $ ( 51,641 ) $ 2,246,183 $ 4,837 $ 2,251,020 See accompanying notes to consolidated financial statements 52 Table of Contents DOLBY LABORATORIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS ( in thousands ) Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Operating activities: Net income including controlling interest $ 183,898 $ 317,823 $ 231,619 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 88,461 95,860 90,878 Stock-based compensation 114,925 99,698 86,628 Amortization of operating lease right-of-use assets 15,148 16,897 21,006 Amortization of premium on investments 1,440 1,373 800 Provision for/(benefit from) credit losses 5,460 ( 2,889 ) 7,689 Deferred income taxes ( 29,465 ) ( 37,048 ) ( 5,274 ) Gain on sale of assets — ( 13,871 ) — Other non-cash items affecting net income ( 5,037 ) ( 5,452 ) 10,920 Changes in operating assets and liabilities: Accounts receivable, net ( 14,314 ) ( 49,034 ) 1,251 Contract assets, net 6,300 ( 21,154 ) 34,297 Inventories ( 11,759 ) 17,154 ( 11,784 ) Operating lease right-of-use assets 266 ( 5,199 ) ( 34,522 ) Prepaid expenses and other assets 8,760 17,165 ( 5,680 ) Accounts payable and accrued liabilities ( 33,542 ) 44,230 ( 43,545 ) Income taxes, net 8,446 ( 2,975 ) ( 50,586 ) Contract liabilities ( 413 ) 2,361 ( 4,621 ) Operating lease liabilities ( 15,399 ) ( 11,369 ) 15,618 Other non-current liabilities ( 4,599 ) ( 15,817 ) ( 845 ) Net cash provided by operating activities 318,576 447,753 343,849 Investing activities: Purchases of marketable securities ( 311,313 ) ( 67,101 ) ( 287,777 ) Proceeds from sales of marketable securities 9,459 10,892 244,517 Proceeds from maturities of marketable securities 108,546 53,893 246,621 Purchases of property, plant, and equipment ( 47,928 ) ( 54,454 ) ( 66,347 ) Proceeds from sale of assets — 16,365 — Payments for business combinations, net of cash acquired ( 38,171 ) ( 4,500 ) — Purchases of intangible assets ( 11,528 ) — ( 2,640 ) Purchases of other investments ( 5,000 ) — — Net cash provided by/(used in) investing activities ( 295,935 ) ( 44,905 ) 134,374 Financing activities: Proceeds from issuance of common stock 57,848 122,088 82,658 Repurchase of common stock ( 530,486 ) ( 245,864 ) ( 173,742 ) Payment of cash dividend ( 100,067 ) ( 89,172 ) ( 88,581 ) Distribution to controlling interest ( 1,435 ) ( 7,362 ) ( 283 ) Shares repurchased for tax withholdings on vesting of restricted stock ( 36,418 ) ( 32,205 ) ( 23,065 ) Payment related to prior purchases of intangible assets — — ( 91 ) Payment of deferred consideration for prior business combinations — — ( 4,671 ) Net cash used in financing activities ( 610,558 ) ( 252,515 ) ( 207,775 ) Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash ( 16,744 ) 2,720 3,938 Net increase/(decrease) in cash, cash equivalents, and restricted cash ( 604,661 ) 153,053 274,386 Cash, cash equivalents, and restricted cash at beginning of period 1,233,032 1,079,979 805,593 Cash, cash equivalents, and restricted cash at end of period $ 628,371 $ 1,233,032 $ 1,079,979 Supplemental disclosure: Cash paid for income taxes, net of refunds received $ 40,340 $ 70,737 $ 52,869 Non-cash investing and financing activities: Change in property, plant, and equipment purchased, unpaid at period-end $ ( 1,481 ) $ 2,772 $ ( 3,417 ) Purchase consideration payable for business combinations $ — $ 500 $ — Purchase consideration payable for intangible assets $ — $ 30 $ 260 See accompanying notes to consolidated financial statements 53 Table of Contents DOLBY LABORATORIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 . Basis of Presentation Principles of Consolidation The consolidated financial statements include the accounts of Dolby Laboratories, Inc. and our wholly owned subsidiaries. In addition, we have consolidated the financial results of jointly owned affiliated companies in which our principal stockholder has a controlling interest. We report these controlling interests as a separate line in our consolidated statements of operations as net income attributable to controlling interest and in our consolidated balance sheets as a controlling interest. We eliminate all intercompany accounts and transactions upon consolidation. Use of Estimates The preparation of our financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported and disclosed in our consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include estimated shipments by our licensees for which we are owed a sales-based royalty. 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 that may impact our licensees' supply chain activities as well as demand for shipments. Additional significant items subject to such estimates and assumptions include ESPs for performance obligations within revenue arrangements; allowance for credit losses for accounts receivable; carrying values of inventories and certain PP&E, goodwill and intangible assets; fair values of investments; accrued liabilities including unrecognized tax benefits, deferred income tax assets and liabilities, and contingent liabilities: and stock-based compensation. Actual results could differ from our estimates. Fiscal Year Our fiscal year is a 52 or 53 week period ending on the last Friday in September. The fiscal years presented herein include the 53 week period ended September 30, 2022 (fiscal 2022), and the 52 week periods ended September 24, 2021 (fiscal 2021) and September 25, 2020 (fiscal 2020). Our fiscal year ending September 29, 2023 (fiscal 2023) will consist of 52 weeks. 2 . Summary of Significant Accounting Policies Concentration of Credit Risk Our financial instruments that are exposed to concentrations of credit risk principally consist of cash, cash equivalents, investments, and accounts receivable. Our investment portfolio consists of investment grade securities diversified amongst security types, industries, and issuers. All our securities are held in custody by a recognized financial institution. Our policy limits the amount of credit exposure to a maximum of 5 % to any one issuer, except for the U.S. 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. We manage this risk by performing regular evaluations of the creditworthiness of our licensing customers. In fiscal 2022, revenue from one individual customer accounted for 10% of our total revenue. For fiscal 2021 and 2020, we did not have any individual customers whose revenue exceeded 10% of our total revenue. Cash and Cash Equivalents We consider all short-term highly liquid investments with original maturities of 90 days or less from the date of purchase to be cash equivalents. Cash and cash equivalents primarily consist of funds held in general checking accounts, money market accounts, and U.S. agency securities. 54 Table of Contents Restricted Cash Restricted cash on our consolidated balance sheets consists of cash contributed by Dolby and third-party licensors to Via, our wholly-owned subsidiary, that may only be used for licensor enforcement actions or licensee compliance activities related to certain Via-administered patent pools, as well as to disperse costs associated with any audit of Via for the Wideband Code Division Multiple Access (W-CDMA) patent pool . Investments All of our investments are classified as AFS, with the exception of our mutual fund investments held in our SERP, which are classified as trading securities, and our equity securities. Investments that have an original maturity of 91 days or more at the date of purchase and a current maturity of less than one year are classified as short-term investments, while investments with a current maturity of more than one year are classified as long-term investments. Our AFS securities and trading securities are recorded at fair value in our consolidated balance sheets. Unrealized gains and losses on our AFS securities are reported as a component of AOCI, while realized gains and losses and credit losses are reported as a component of net income. Upon sale, gains and losses are reclassified from AOCI into earnings, and are determined based on specific identification of securities sold. We evaluate our investment portfolio for impairment by comparing the fair value with the cost basis for each of our investment securities. If the fair value of our AFS securities is less than amortized cost, such securities are considered impaired. If we have the intent to sell the debt security, or if it is more likely than not that we will be required to sell the debt security before recovery of its amortized cost, the difference between the amortized cost (net of allowance, if any) and the fair value of the securities is reported as an impairment loss in net income. Impaired AFS securities that we intend to hold are evaluated to determine whether we need to recognize an allowance for credit losses, limited to the difference between the fair value and amortized cost of the security. Equity Securities Equity securities for which we possess the ability to exercise significant influence, but not control, over operating and financing decisions are accounted for under the equity method. In applying the equity method, we record the investment at cost and subsequently increase or decrease the carrying amount by our proportionate share of the investee's net earnings or losses. We record dividends or other equity distributions as reductions in the carrying value of the investment. Our share of the equity method investee's net income or loss is included in other income/(expense), net in the consolidated statements of operations, and was $ 5.0 million, $ 4.7 million, and $ 2.4 million in fiscal 2022, fiscal 2021, and fiscal 2020, respectively. Our equity method investment is included within long-term investments in our consolidated balance sheets. We also hold an investment in an equity security of a privately-held company without a readily determinable fair value. We elected to account for this investment using the measurement alternative, which is cost, less any impairment, adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the same issuer. We perform a qualitative assessment at each reporting date to determine whether there are triggering events for impairment. This equity security is included within long-term investments in our consolidated balance sheets. Allowance for Credit Losses We maintain a provision for estimated credit losses on receivables resulting from our customers' inability to make required payments. In determining the provision, we pool receivables with similar risk characteristics to evaluate the collectability of our receivables. Risk characteristics considered in creating these risk pools include assessing historical or expected loss patterns, credit ratings, current macroeconomic conditions that could impact collectability of cash flows, and structure of customer agreements. In cases where circumstances have changed such that specific customers no longer share similar risk characteristics, customers are excluded from their current pool and their risk profiles are evaluated separately. We recognize allowances for credit losses based on our actual historical loss information, the current business environment, and reasonable and supportable forecasts. Actual future losses from uncollectible accounts may differ from our estimates. Inventories Inventories are accounted for using the first-in, first-out method, and are valued at the lower of cost and net realizable value. We evaluate our ending inventories for estimated excess quantities and obsolescence. Our evaluation includes the analysis of future sales demand by product within specific time horizons. Inventories in excess 55 Table of Contents of projected future demand are written down to their net realizable value. In addition, we assess the impact of changing technology on our inventory balances and write-off inventories that are considered obsolete. Write-downs and write-offs of inventory are recorded as a cost of products in our consolidated statements of operations. We classify inventory that we do not expect to sell within twelve months as other non-current assets in our consolidated balance sheets. Property, Plant, and Equipment PP&E is stated at cost less accumulated depreciation. 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 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 may encounter scenarios where assets we acquire may deviate from the established standard useful life provided above. Such occurrences are evaluated on a case by case basis, and are assigned a useful life commensurate with the facts and circumstances associated with the specific PP&E being acquired. We capitalize certain costs incurred during the construction phase of a project or asset into construction-in-progress until the construction process is complete. Once the related asset is placed into service, we transfer its carrying value into the appropriate fixed asset category and begin depreciating the value over its useful life. Equipment Provided Under Operating Leases. In arrangements that we assess as operating leases, we recognize our equipment installed at third-party sites as a fixed asset and depreciate the asset on a straight-line basis. Internal Use Software. We capitalize qualifying internal-use software development costs, consisting primarily of external and internal labor, including stock based compensation, incurred during the application development stage. Costs incurred during the preliminary project and post-implementation stages are charged to expense. Capitalized costs are included in PP&E, net of accumulated amortization in our consolidated balance sheets. Our capitalized internal use software costs are amortized on a straight-line basis over estimated useful lives of three years, unless another systematic and rational basis is more representative of the software’s useful life. Goodwill, Intangible Assets, and Long-Lived Assets We perform an assessment of goodwill for potential impairment annually during our third fiscal quarter or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. For our annual goodwill test as of the fiscal quarter ended July 1, 2022, a qualitative assessment was performed and we concluded that it was more likely than not that its fair value was in excess of its carrying amount. Accordingly, no quantitative assessment was performed and no impairment was recorded. We did not incur any goodwill impairment losses in any of the periods presented. Intangible assets are stated at their original cost less accumulated amortization, and those with definite lives are amortized over their estimated useful lives. Our intangible assets principally consist of acquired technology, patents, trademarks, customer relationships and contracts, the majority of which are amortized on a straight-line basis over their useful lives using a range from three to eighteen years . We review long-lived assets, including intangible assets, for impairment whenever events or a change in circumstances indicate an asset’s carrying value may not be recoverable. Recoverability of an asset is measured by comparing its carrying value to the total future undiscounted cash flows that the asset is expected to generate. If it is determined that an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying value of the asset exceeds its estimated fair value. Revenue Recognition We enter into revenue arrangements with our customers to license technologies, trademarks and patents for sound, imaging and voice solutions, and to sell products and services. We recognize revenue when we satisfy a performance obligation by transferring control over the use of a license, product, or service to a customer. 56 Table of Contents For additional financial information and a summary of our accounting policy, refer to Note 3. "Revenue Recognition" to our consolidated financial statements. Cost of Revenue Cost of licensing. Cost of licensing primarily consists of amortization expenses associated with purchased intangible assets and intangible assets acquired in business combinations. Cost of licensing also includes IP royalty obligations to third parties, depreciation of our Dolby Cinema equipment provided under operating leases in collaborative arrangements, and direct fees incurred. Cost of products and services. Cost of products primarily consists of the cost of materials related to products sold, applied labor, and manufacturing overhead. Our cost of products also includes third party royalty obligations paid to license IP that we include in our products. Cost of services primarily consists of the personnel and personnel-related costs of employees performing our professional services, and those of outside consultants, and reimbursable expenses incurred on behalf of customers. Stock-Based Compensation We measure expenses associated with all employee stock-based compensation awards using a fair-value method and record such expense in our consolidated financial statements on a straight-line basis over the requisite service period. Advertising and Promotional Costs Advertising and promotional costs are charged to S&M expense as incurred. Our advertising and promotional costs were as follows (in thousands): Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Advertising and promotional costs $ 51,422 $ 52,253 $ 61,125 Foreign Currency Activities Foreign Currency Translation. We maintain business operations in foreign countries. We translate the assets and liabilities of our international subsidiaries, the majority of which are denominated in non-U.S. dollar functional currencies, into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses of these subsidiaries are translated using the average rates for the period. Gains and losses from these translations are included in AOCI within stockholders’ equity. Foreign Currency Transactions. Certain of our foreign subsidiaries transact in currencies other than their functional currency. Therefore, we re-measure non-functional currency assets and liabilities of these subsidiaries using exchange rates at the end of each period. As a result, we recognize foreign currency transaction and re-measurement gains and losses, which are recorded within other income, net in our consolidated statements of operations. These losses were as follows (in thousands): Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Foreign currency transaction losses $ ( 1,283 ) $ ( 749 ) $ ( 1,361 ) 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. While not designated as hedging instruments, these foreign currency forward contracts are used to reduce the exchange rate risk associated primarily with intercompany receivables and payables. These contracts do not subject us to material balance sheet risk due to exchange rate movements as gains and losses on these derivatives are intended to offset gains and losses on the related receivables and payables for which we have foreign currency exchange rate exposure. As of September 30, 2022 and September 24, 2021, the outstanding derivative instruments had maturities of equal to or less than 31 days and 38 days, respectively, and the total notional amounts of outstanding contracts were $ 56.6 million and $ 35.3 million, respectively. The fair values of these contracts 57 Table of Contents are 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. As of September 30, 2022 and September 24, 2021, the outstanding derivative instruments had maturities of equal to or less than 12 months and 3 months, respectively, and the total notional amounts of outstanding contracts were $ 74.1 million and $ 15.7 million, respectively. 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 loss attributed to the effective portion of cash flow hedges recognized in AOCI was $ 2.6 million in fiscal 2022. The pre-tax loss attributed to the effective portion of cash flow hedges recognized in AOCI was $ 12.7 million in fiscal 2021. The pre-tax effective portion of the loss reclassified to the consolidated statements of operations was $ 2.1 million in fiscal 2022, and the pre-tax effective portion of the gain reclassified to the consolidated statements of operations was $ 9.0 million in fiscal 2021. Income Taxes 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. 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. We record an unrecognized tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the tax authorities. 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 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. The Tax Act provides an exemption from federal income taxes for distributions by foreign subsidiaries made after December 31, 2017 that were not subject to the Transition Tax. U.S. state income taxes and foreign withholding taxes on undistributed earnings of certain foreign subsidiaries, that are no longer considered to be indefinitely reinvested, are not material. We consider the earnings of certain other foreign subsidiaries to be indefinitely reinvested outside the U.S. on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs, and our specific plans for reinvestment of those subsidiary earnings. Recently Issued Accounting Standards We continually assess any ASUs or other new accounting pronouncements issued by the FASB to determine their applicability and impact on us. Where it is determined that a new accounting pronouncement will result in a change to our financial reporting, we take the appropriate steps to ensure that such changes are properly reflected in our consolidated financial statements or notes thereto. Adopted Standards 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. We adopted this standard in the first quarter of fiscal 2022, and it did not have a material impact on our consolidated financial statements. Standards Not Yet Adopted 58 Table of Contents Business Combinations. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): A ccounting for Contract Assets and Contract Liabilities from Contracts with Customers , which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by an acquirer in accordance with ASC 606, Revenue from Contracts with Customers . Currently, we recognize acquired contract assets and contract liabilities at fair value as of the acquisition date, in accordance with ASC 805. This standard will be effective for Dolby beginning September 30, 2023 on a prospective basis, but early adoption is permitted. We do not expect the adoption of this standard to have a material impact on our condensed consolidated financial statements. 3. Revenue Recognition We enter into revenue arrangements with our customers to license technologies, trademarks and patents for sound, imaging and voice solutions, and to sell products and services. We recognize revenue when we satisfy a performance obligation by transferring control over the use of a license, product, or service to a customer. A. Identification of the Contract or Contracts with Customers We generally determine that a contract with a customer exists upon the execution of an agreement and after consideration of collectability, which could include an evaluation of the customer's payment history, the existence of a standby letter-of-credit between the customer’s financial institution and our financial institution, public financial information, and other factors. At contract inception, we also evaluate whether two or more non-standard agreements with a customer should be combined and accounted for as a single contract. B. Identification of Performance Obligations in a Contract We generate revenue principally from the following sources, which represent performance obligations in our contracts with customers: • Licensing. We license our technologies, including patents, to a range of customers who incorporate them into their products for enhanced audio, imaging and voice functionality across broadcast, mobile, CE, PC, gaming, and other markets. • Product Sales. We design and provide audio and imaging products for the cinema, television, broadcast, communications, and entertainment industries. • Services. We provide various services to support theatrical and television production for cinema exhibition, broadcast, and home entertainment, including equipment training, mixing room alignment, equalization, as well as audio, color and light image calibration. We also offer a developer platform, Dolby.io, that enables developers to access our technologies through audio and video APIs for building high-quality communications, media, and streaming solutions. • PCS. 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 IP. We also lease hardware that facilitates the Dolby conferencing experience, including the Dolby Conference Phone, and the Dolby Voice Room solution. • Licensing Administration Fees. We generate service fees for managing patent pools on behalf of third party patent owners through our wholly-owned subsidiary, Via. Some of our revenue arrangements include multiple performance obligations, such as hardware, software, support and maintenance, and extended warranty services. We evaluate whether promised products and services are distinct performance obligations. The majority of our arrangements with multiple performance obligations pertain to our digital cinema server and processor sales that include the following distinct performance obligations to which we allocate portions of the transaction price based on their stand-alone selling price: • Digital cinema server hardware and embedded software, which is dependent on and interrelated with the hardware. Accordingly, the hardware and embedded software represent a single performance obligation. 59 Table of Contents • The right to support and maintenance, which is included with the purchase of the digital cinema server hardware, is a distinct performance obligation. • The right to receive commissioning services is a distinct performance obligation within the sale of the Dolby Atmos Cinema Processor. These services consist of the review of venue designs specifying proposed speaker placement as well as calibration services performed for installed speakers to ensure optimal playback. C. Determination of Transaction Price for Performance Obligations in a Contract After identifying the distinct performance obligations, we determine the transaction price in accordance with the terms of the underlying executed contract which may include variable consideration such as discounts, rebates, refunds, rights of returns, and incentives. We assess and update, if necessary, the amount of variable consideration to which we are entitled for each reporting period. At the end of each reporting period, we estimate and accrue a liability for returns and adjustments as a reduction to revenue based on several factors, including past returns history. With the exception of our sales-based royalties, we evaluate whether a significant financing component exists when we recognize revenue in advance of customer payments that occur over time. For example, some of our licensing arrangements include payment terms greater than one year from when we transfer control of our IP to a licensee and the receipt of the final payment for that IP. If a significant financing component exists, we classify a portion of the transaction price as interest income, instead of recognizing all of the transaction price as revenue. We do not adjust the transaction price for the effects of financing if, at contract inception, the period between the transfer of control to a customer and final payment is expected to be one year or less. D. Allocation of Transaction Price to Distinct Performance Obligations in a Contract For our sales-based royalties where the license is the predominant item to which the royalties relate, we present all revenue as licensing. For revenue arrangements that include multiple performance obligations, we determine the stand-alone selling price for each distinct performance obligation based on the actual selling prices made to customers. If the performance obligation is not sold separately, we estimate the stand-alone selling price. We do so by considering market conditions such as competitor pricing strategies, customer specific information and industry technology lifecycles, internal conditions such as cost and pricing practices, or applying the residual approach method when the selling price of the good, most commonly a license, is highly variable or uncertain. Once the transaction price, including any variable consideration, has been determined, we allocate the transaction price to the performance obligations identified in the contract and recognize revenue as or when control is transferred for each distinct performance obligation. E. Revenue Recognition as Control is Transferred to a Customer We generate our licensing revenue by licensing our technologies and patents to various types of licensees, such as chip manufacturers ("implementation licensees"), consumer product manufacturers, software vendors, and communications service providers. Our revenue recognition policies for each of these arrangements are summarized below. Initial fees from implementation licensees. Implementation licensees incorporate our technologies into their chipsets that, once approved by Dolby, are available for purchase by OEMs for use in end-user products. Implementation licensees only pay us a nominal initial fee on contract execution as consideration for the ongoing services that we provide to assist in their implementation process. Revenue from these initial fees are recognized ratably over the contractual term as a component of licensing revenue. Sales-based licensing fees. In our royalty bearing licensing agreements with OEMs, control is transferred upon the later of contract execution or the contract’s effective date. We apply the royalty exception, which requires that we recognize sales-based royalties 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 60 Table of Contents estimated and actual sales. In the first quarter of fiscal 2022, we recorded an unfavorable adjustment of approximately $ 6 million, which was primarily related to shipments that occurred in our fourth quarter of fiscal 2021 (July through September) and largely based on actual royalty statements received from licensees. In the second quarter of fiscal 2022, we recorded an unfavorable adjustment of $ 3 million, and in the third and fourth quarter of fiscal 2022, we recorded a favorable adjustment of $ 3 million and $ 3 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. In these cases, control is transferred and fees are recognized upon the later of contract execution or the effective date. Additionally and separate from initial fees from implementation licensees, our sales- and usage-based licensing agreements include a nominal fee, which is also recognized at a point in time in which control of the IP has been transferred. Revenue from these arrangements is included as a component of licensing revenue. Recoveries. Through compliance efforts, we identify misreported licensed activity related to non-current periods. We may record a favorable or unfavorable revenue adjustment in connection with the findings from these compliance efforts generally upon resolution with the licensee through agreement of the findings, or upon receipt of the licensee’s correction statement. Revenue from these arrangements is included as a component of licensing revenue. We undertake activities aimed at identifying potential unauthorized uses of our technologies, which when successful result in the recognition of revenue. Recoveries stem from third parties who agree to remit payments to us based on past use of our technology. In these scenarios, a legally binding contract did not exist at time of use of our technology, and therefore, we recognize revenue recoveries upon execution of the agreement as that is the point in time to which a contract exists and control is transferred. This revenue is classified as licensing revenue. In general, we classify legal costs associated with activities aimed at identifying potential unauthorized uses of our technologies, auditing existing licensees, and on occasion, pursuing litigation as S&M in our consolidated statements of operations. We recognize licensing revenue gross of withholding taxes, which our licensees remit directly to their local tax authorities, and for which we receive a partial foreign tax credit in our income tax provision. In addition to our licensing arrangements, we also enter into arrangements to deliver products and services. Product Sales. Revenue from the sale of products is recognized when the customer obtains control of the promised good or service, which is generally upon shipment. Payments are generally made within 90 days of sale. Services. We provide various services, such as engineering services related to movie soundtrack print mastering, equipment training and maintenance, mixing room alignment, equalization, and image calibration, which we bill on a fixed fee and time and materials basis. Most of these services are of a short duration and are recognized as control of the performance obligations are transferred which is when the related services are performed. Cloud Services. We provide access to audio and video APIs through our developer platform as well as cloud encoding services, generally, on either a consumption or subscription basis. Revenue related to cloud services provided on a consumption basis is recognized when the customer utilizes the services, based on the quantity of services consumed. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract term as the customer receives and consumes the benefits of the cloud services. Collaborative Arrangements. We collaborate with established cinema exhibitors to offer Dolby Cinema, a branded premium cinema offering for movie audiences. Under such collaborations, Dolby and the exhibitor are both active participants, and share the risks and rewards associated with the business. Accordingly, these collaborations are governed by revenue sharing arrangements under which Dolby receives revenue based on 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 hybrid agreements where a portion of our revenue share involves guaranteed payments, which in some cases result in classifying the arrangement as a sales-type lease. In such arrangements, we 61 Table of Contents consider control to transfer at the point in time to which we have installed and tested the equipment, at which point we record such guaranteed payments as product revenue. Via Administration Fee. We generate service fees for managing patent pools on behalf of third party patent owners through our wholly-owned subsidiary, Via. As an agent to licensors in the patent pool, Via receives a share of the sales-based royalty that the patent pool licensors earn from licensees. As such, we apply the sales-based royalty exception as the service provided is directly related to the patent pool licensors’ provision of IP, which results in recognition based on estimates of the licensee’s quarter shipments that use the pool’s patents. In addition to sales-based royalties, Via also has contracts where the fees are fixed. The revenue share Via receives from licensors on fixed fee contracts is recognized over the term in which we are providing services associated with the fixed fee contract. We recognize our administrative fees net of the consideration paid to the patent licensors in the pool as licensing revenue. Deferred revenue, which is a component of contract liabilities, represents amounts that are ultimately expected to be recognized as revenue, but for which we have yet to satisfy the performance obligation. On September 30, 2022, we had $ 41.5 million of remaining performance obligations, 45 % of which we expect to recognize as revenue in fiscal 2023, 18 % in fiscal 2024, and the balance of 37 % in fiscal years beyond 2024. F. Disaggregation of revenue The following table presents a summary of the composition of our revenue for all periods presented (in thousands, except percentage amounts): Fiscal Year Ended Revenue September 30, 2022 September 24, 2021 September 25, 2020 Licensing $ 1,164,533 93 % $ 1,214,147 95 % $ 1,078,577 93 % Products and services 89,260 7 % 67,109 5 % 83,215 7 % Total revenue $ 1,253,793 100 % $ 1,281,256 100 % $ 1,161,792 100 % The following table presents the composition of our licensing revenue for all periods presented (in thousands, except percentage amounts): Fiscal Year Ended Licensing Revenue By Market September 30, 2022 September 24, 2021 September 25, 2020 Broadcast $ 433,992 37 % $ 475,648 39 % $ 439,415 41 % Mobile 238,735 21 % 261,232 22 % 226,972 21 % CE 186,285 16 % 181,944 15 % 152,608 14 % PC 151,079 13 % 141,919 12 % 132,302 12 % Other 154,442 13 % 153,404 12 % 127,280 12 % Total licensing revenue $ 1,164,533 100 % $ 1,214,147 100 % $ 1,078,577 100 % We license our technologies in approximately 70 countries, and our licensees distribute products that incorporate our technologies throughout the world. We generate the majority of our revenue from outside the U.S. Geographic data for our licensing revenue is based on the location of our licensees’ headquarters, products revenue is based on the destination to which we ship our products, and services revenue is based on the location where services are performed. The following table presents the composition of our revenue by geographic location for all periods presented (in thousands, except percentage amounts): Fiscal Year Ended Revenue By Geographic Location September 30, 2022 September 24, 2021 September 25, 2020 United States $ 468,246 37 % $ 419,901 33 % $ 460,972 40 % International 785,547 63 % 861,355 67 % 700,820 60 % Total revenue $ 1,253,793 100 % $ 1,281,256 100 % $ 1,161,792 100 % G. Contract balances 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 royalty statement is received, which is typically the quarter following our 62 Table of Contents estimate. Actual amounts reported are typically paid within 60 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. Our contract liabilities consist of advance payments and billings in advance of performance, deferred revenue that is typically satisfied within one year, and deferred interest where we have significant financing. The non-current portion of contract liabilities is separately disclosed in our consolidated balance sheets. We present the net contract asset or liability when we have both contract assets and contract liabilities for a single contract. In fiscal 2022, we recognized $ 16.8 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 (in thousands, except percentage amounts): September 30, 2022 September 24, 2021 Change ($) Change (%) Accounts receivable, net $ 243,593 $ 232,609 $ 10,984 5 % Contract assets, net 176,093 182,316 ( 6,223 ) ( 3 ) % Contract liabilities - current 18,588 18,473 115 1 % Contract liabilities - non-current 23,203 23,713 ( 510 ) ( 2 ) % 4. Composition of Certain Financial Statement Captions The following tables present detailed information from our consolidated balance sheets as of September 30, 2022 and September 24, 2021 (in thousands). Accounts Receivable and Contract Assets September 30, 2022 September 24, 2021 Trade accounts receivable $ 162,531 $ 160,112 Accounts receivable from patent administration program licensees 92,896 81,241 Contract assets 176,218 182,524 Accounts receivable and contract assets, gross 431,645 423,877 Less: allowance for credit losses on accounts receivable and contract assets ( 11,959 ) ( 8,952 ) Total accounts receivable and contract assets, net $ 419,686 $ 414,925 Trade accounts receivable of $ 162.5 million includes unbilled accounts receivable balances of $ 106.9 million and $ 97.5 million as of September 30, 2022 and September 24, 2021, 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 Credit Losses Beginning Balance Charges/(Credits) to S&M and G&A Additions/(Deductions) Ending Balance For fiscal year ended: September 25, 2020 $ 9,775 $ 7,689 $ ( 1,556 ) $ 15,908 September 24, 2021 15,908 ( 2,889 ) ( 4,067 ) 8,952 September 30, 2022 8,952 5,460 ( 7 ) 14,405 Allowance for credit losses includes the provision for estimated credit losses on our sales-type leases, which was not material as of September 30, 2022 and as of September 24, 2021. Inventories September 30, 2022 September 24, 2021 Raw materials $ 10,026 $ 2,792 Work in process 4,955 3,461 Finished goods 8,568 4,712 Total inventories $ 23,549 $ 10,965 Inventories are stated at the lower of cost and net realizable value. Inventory with a consumption period expected to exceed twelve months is recorded within other non-current assets in our consolidated balance sheets. We have included $ 2.8 million and $ 1.9 million of raw materials inventory within non-current assets as of 63 Table of Contents September 30, 2022 and September 24, 2021, 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 September 30, 2022 September 24, 2021 Prepaid expenses $ 26,851 $ 29,964 Other current assets 23,224 32,773 Total prepaid expenses and other current assets $ 50,075 $ 62,737 Accrued Liabilities September 30, 2022 September 24, 2021 Amounts payable to patent administration program partners $ 63,106 $ 72,847 Accrued compensation and benefits 84,111 107,322 Accrued professional fees 13,057 11,737 Unpaid property, plant, and equipment additions 15,428 17,839 Accrued customer refunds 3,674 14,151 Accrued market development funds 7,206 7,777 Other accrued liabilities 43,655 31,055 Total accrued liabilities $ 230,237 $ 262,728 Other Non-Current Liabilities September 30, 2022 September 24, 2021 Supplemental retirement plan obligations $ 4,127 $ 4,877 Non-current tax liabilities (1) 83,758 85,063 Other liabilities 12,237 15,370 Total other non-current liabilities $ 100,122 $ 105,310 (1) Refer to Note 12 " Income Taxes" for additional information related to our tax liabilities. 5. Investments and Fair Value Measurements We use cash holdings to purchase investment grade securities diversified among security types, industries, and issuers. All of our investments in debt securities are measured at fair value, and are recorded within cash equivalents and both short-term and long-term investments in our consolidated balance sheets. With the exception of our mutual fund investments held in our SERP and classified as trading securities and our other long-term investments, all of our investments are classified as AFS securities. Derivative contracts are used to hedge currency risk, and these are carried at fair value and classified as other assets and other liabilities. Our investment in debt securities primarily consist of corporate bonds, government bonds, municipal debt securities, certificates of deposit, commercial paper, and U.S. agency securities. In addition, our cash and cash equivalents also consist of highly-liquid money market funds and U.S. agency securities. Consistent with our investment policy, none of our municipal debt investments are supported by letters of credit or standby purchase agreements. Our cash and investment portfolio consisted of the following (in thousands): 64 Table of Contents September 30, 2022 Cost Unrealized Estimated Fair Value Gains Losses Total Level 1 Level 2 Level 3 Cash and cash equivalents: Cash $ 474,813 $ — $ — $ 474,813 $ 474,813 $ — $ — Cash equivalents: Money market funds 134,987 — — 134,987 134,987 — — U.S. agency securities 10,328 — (1) 10,327 — 10,327 — Cash and cash equivalents 620,128 — ( 1 ) 620,127 609,800 10,327 — Short-term investments: Certificate of deposit 23,033 8 ( 47 ) 22,994 — 22,994 — U.S. agency securities 3,412 — ( 21 ) 3,391 — 3,391 — Government bonds 57,417 — ( 705 ) 56,712 52,833 3,879 — Commercial paper 8,786 1 ( 15 ) 8,772 — 8,772 — Corporate bonds 72,730 — ( 734 ) 71,996 — 71,996 — Municipal debt securities 25,589 — ( 241 ) 25,348 — 25,348 — Short-term investments 190,967 9 ( 1,763 ) 189,213 52,833 136,380 — Long-term investments: U.S. agency securities 861 — ( 39 ) 822 — 822 — Government bonds 43,816 — ( 2,222 ) 41,594 38,055 3,539 — Corporate bonds 29,684 4 ( 1,349 ) 28,339 — 28,339 — Municipal debt securities 21,483 — ( 626 ) 20,857 — 20,857 — Other investments (1) 10,902 — — 10,902 — — — Long-term investments 106,746 4 ( 4,236 ) 102,514 38,055 53,557 — Total cash, cash equivalents, and investments $ 917,841 $ 13 $ ( 6,000 ) $ 911,854 $ 700,688 $ 200,264 $ — Investments held in supplemental retirement plan: Assets $ 4,225 $ — $ — $ 4,225 $ 4,225 $ — $ — Included in prepaid expenses and other current assets and other non-current assets Liabilities $ 4,225 $ — $ — $ 4,225 $ 4,225 $ — $ — Included in accrued liabilities and other non-current liabilities Currency derivatives as hedge instruments: Liabilities: Included in other accrued liabilities $ — $ — $ ( 4,882 ) $ ( 4,882 ) $ — $ ( 4,882 ) $ — Liabilities: Included in other non-current liabilities — — ( 420 ) ( 420 ) — ( 420 ) — (1) Other investments as of September 30, 2022 is comprised of an equity method investment of $ 5.9 million and an equity security without a readily determinable fair value of $ 5.0 million. 65 Table of Contents September 24, 2021 Cost Unrealized Estimated Fair Value Gains Losses Total Level 1 Level 2 Level 3 Cash and cash equivalents: Cash $ 990,182 $ — $ — $ 990,182 $ 990,182 $ — $ — Cash equivalents: Money market funds 235,198 — — 235,198 235,198 — — Cash and cash equivalents 1,225,380 — — 1,225,380 1,225,380 — — Short-term investments: Certificate of deposit 1,795 — — 1,795 — 1,795 — U.S. agency securities 1,096 6 — 1,102 — 1,102 — Government bonds 100 2 — 102 102 — — Commercial paper 5,184 2 — 5,186 — 5,186 — Corporate bonds 18,850 116 — 18,966 — 18,966 — Municipal debt securities 11,660 29 ( 1 ) 11,688 — 11,688 — Short-term investments 38,685 155 ( 1 ) 38,839 102 38,737 — Long-term investments: U.S. agency securities 2,264 13 ( 2 ) 2,275 — 2,275 — Government bonds 11,784 38 ( 16 ) 11,806 4,966 6,840 — Corporate bonds 32,116 61 ( 25 ) 32,152 — 32,152 — Municipal debt securities 10,080 58 ( 8 ) 10,130 — 10,130 — Other investments (1) 6,456 — — 6,456 — — — Long-term investments 62,700 170 ( 51 ) 62,819 4,966 51,397 — Total cash, cash equivalents, and investments $ 1,326,765 $ 325 $ ( 52 ) $ 1,327,038 $ 1,230,448 $ 90,134 $ — Investments held in supplemental retirement plan: Assets $ 4,975 $ — $ — $ 4,975 $ 4,975 $ — $ — Included in prepaid expenses and other current assets and other non-current assets Liabilities $ 4,975 $ — $ — $ 4,975 $ 4,975 $ — $ — Included in accrued liabilities and other non-current liabilities Currency derivatives as hedge instruments: Assets: Included in other current assets $ — $ 689 $ — $ 689 $ — $ 689 $ — Liabilities: Included in other accrued liabilities — — ( 197 ) ( 197 ) — ( 197 ) — (1) Other investments as of September 24, 2021 is comprised of one equity method investment. Fair Value Hierarchy. Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. We minimize the use of unobservable inputs and use observable market data, if available, when determining fair value. We classify our inputs to measure fair value using the following three-level hierarchy: Level 1: Quoted prices in active markets at the measurement date for identical assets and liabilities. We base the fair value of our Level 1 financial instruments, which are traded in active markets, using quoted market prices for identical instruments. Level 2: Prices may be based upon quoted prices in active markets or inputs not quoted on active markets but are corroborated by market data. We obtain the fair value of our Level 2 financial instruments from a professional pricing service, which may use quoted market prices for identical or comparable instruments, or model driven valuations using observable market data or inputs corroborated by observable market data. To validate the fair value determination provided by our primary pricing service, we perform quality controls over values received which include comparing our pricing service provider’s assessment of the fair values of our investment securities against the fair values of our investment securities obtained from another independent source, reviewing the pricing movement in the context of overall market trends, and reviewing trading information from our investment managers. In addition, we assess the inputs and methods used in determining the fair value in order to determine the classification of securities in the fair value hierarchy. The fair value of the currency derivatives are calculated from market spot rates, forward rates, interest rates, and credit ratings at the end of the period. 66 Table of Contents Level 3: Unobservable inputs are used when little or no market data is available and reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The following table describes the valuation techniques and inputs applicable to each class of security held within our investment portfolio as of September 30, 2022: Asset Type Primary Source Update Frequency Fair Value Methodology Secondary Source Level 1 Money Market Funds Not Applicable Daily $1 per share Not Applicable U.S. Government Bonds ICE (Intercontinental Exchange) Daily Institutional Bond Quotes - evaluations based on various market and industry inputs Bloomberg Level 2 Certificates of Deposit ICE (Intercontinental Exchange) Daily Institutional Bond Quotes - evaluations based on various market and industry inputs 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 U.S. 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. We periodically evaluate our investments for impairment by comparing the fair value with the cost basis for each of our investment securities. The unrealized losses on our AFS securities were primarily the result of unfavorable changes in interest rates subsequent to the initial purchase of these securities. The following table presents the gross unrealized losses and fair value for those AFS securities that were in an unrealized loss position for less than twelve months and for greater than twelve months as of September 30, 2022 and September 24, 2021 (in thousands): September 30, 2022 September 24, 2021 Less Than 12 Months Greater Than 12 Months Less Than 12 Months Investment Type Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Certificate of deposit $ 10,352 $ ( 47 ) $ — $ — $ 600 $ — U.S. agency securities 13,144 ( 5 ) 1,395 ( 55 ) 1,449 ( 2 ) Government bonds 89,741 ( 2,593 ) 8,566 ( 332 ) 8,940 ( 16 ) Commercial paper 5,770 ( 15 ) — — — — Corporate bonds 81,044 ( 1,523 ) 18,306 ( 561 ) 22,964 ( 25 ) Municipal debt securities 40,119 ( 712 ) 3,336 ( 156 ) 7,031 ( 9 ) Total $ 240,170 $ ( 4,895 ) $ 31,603 $ ( 1,104 ) $ 40,984 $ ( 52 ) As of September 24, 2021, there were no AFS securities that were in an unrealized loss position for twelve months or greater. Although we had certain securities that were in an unrealized loss position as of September 30, 2022 and September 24, 2021, we expect to recover the full carrying value of these securities. Investment Maturities. The following table summarizes the amortized cost and estimated fair value of the AFS securities within our investment portfolio based on stated maturities as of September 30, 2022 and September 24, 2021, which are recorded within cash equivalents and both short and long-term investments in our consolidated balance sheets (in thousands): September 30, 2022 September 24, 2021 Range of maturity Amortized Cost Fair Value Amortized Cost Fair Value Due within 1 year $ 336,291 $ 334,537 $ 273,884 $ 274,037 Due in 1 to 2 years 53,721 51,332 40,739 40,874 Due in 2 to 5 years 42,122 40,280 15,506 15,490 Total $ 432,134 $ 426,149 $ 330,129 $ 330,401 67 Table of Contents 6. Property, Plant, and Equipment PP&E are recorded at cost, with depreciation expense included in cost of licensing, cost of products and services, R&D, S&M, and G&A expenses in our consolidated statements of operations. Depreciation expense was $ 59.5 million, $ 66.4 million, and $ 61.4 million in fiscal 2022, 2021, and 2020, respectively. As of September 30, 2022 and September 24, 2021, PP&E consisted of the following (in thousands): Property, Plant, and Equipment September 30, 2022 September 24, 2021 Land $ 41,774 $ 42,041 Buildings and building improvements 287,544 284,146 Leasehold improvements 86,793 88,549 Machinery and equipment 136,995 128,008 Computer equipment and software 232,108 258,981 Furniture and fixtures 33,797 33,565 Equipment provided under operating leases 229,177 214,109 Construction-in-progress 23,037 22,923 Property, plant, and equipment, gross 1,071,225 1,072,322 Less: accumulated depreciation ( 557,744 ) ( 537,941 ) Property, plant, and equipment, net $ 513,481 $ 534,381 7. Leases As Lessee 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 consolidated 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. ROU 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 IBR, 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 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 is incurred. The lease term of operating leases vary from less than a year to 10 years. We have leases that include one or more options to extend the lease term for up to 5 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): Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Lease cost Operating lease cost $ 17,260 $ 19,261 $ 23,570 Variable lease cost 1,560 755 1,175 Total lease cost $ 18,820 $ 20,016 $ 24,745 68 Table of Contents Supplemental cash flow information related to leases was as follows (in thousands): Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Other information Cash paid for amounts included in the measurement of operating lease liabilities $ 16,957 $ 19,173 $ 22,043 Right-of-use assets obtained in exchange for operating lease obligations 1,737 5,225 34,198 Supplemental balance sheet information related to leases was as follows: September 30, 2022 September 24, 2021 Operating Leases Weighted-average remaining lease term 5.5 years 5.8 years Weighted-average discount rate 3.2 % 3.1 % The following tables presents the maturity analysis of lease liabilities (in thousands): September 30, 2022 Operating Leases Fiscal 2023 $ 15,995 Fiscal 2024 12,529 Fiscal 2025 9,097 Fiscal 2026 5,957 Fiscal 2027 4,638 Thereafter 12,240 Total undiscounted lease payments 60,456 Less: imputed interest ( 9,514 ) Total lease liabilities $ 50,942 As Lessor As a lessor, we lease our Dolby Cinema product solution to exhibitors and Dolby Voice equipment to cloud conferencing service providers. 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. 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, net on the consolidated balance sheets, and depreciated over the useful life of the asset using the straight-line method. Fixed operating lease payments are recognized on a straight-line basis over the lease term to revenue. Variable lease payments received under our Dolby Cinema operating leases are computed as shares of lessees' box office revenue 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. The components of lease income were as follows (in millions): Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Operating Lease Income Variable operating lease income $ 31.6 $ 9.5 $ 10.4 Fixed operating lease income 3.0 4.2 3.7 If a lease is classified as a sales-type lease, the carrying amount of the asset is derecognized from property, plant and equipment, net, 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 is 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. The unguaranteed residual value of sales-type leases was $ 1.1 million and $ 0.8 million as of September 30, 2022 and September 24, 2021, respectively. Selling 69 Table of Contents 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 variable lease payments, which are not included in the net investment in the lease. The variable lease payments are not material. The following table presents the maturity analysis of fixed lease payments due to Dolby (in thousands): September 30, 2022 Operating Leases Sales-Type Leases Fiscal 2023 $ 767 $ 1,595 Fiscal 2024 787 795 Fiscal 2025 807 395 Fiscal 2026 732 395 Fiscal 2027 — — Thereafter — — Total undiscounted cash flows $ 3,093 3,180 Less: present value of lease payments (recognized as lease receivables) ( 2,801 ) Difference $ 379 8. Goodwill and Intangible Assets Goodwill The following table outlines changes to the carrying amount of goodwill (in thousands): Goodwill Balance at September 25, 2020 $ 336,945 Acquired goodwill 3,345 Translation adjustments 404 Balance at September 24, 2021 $ 340,694 Acquired goodwill (1) 31,695 Translation adjustments ( 7,185 ) Measurement period adjustments ( 57 ) Balance at September 30, 2022 $ 365,147 (1) Refer to Note 15 " Business Combination " for additional information related to our acquired goodwill Intangible Assets Intangible assets are stated at their original cost less accumulated amortization, and principally consist of acquired patents, technology, customer relationships and contracts, and trademarks. Intangible assets subject to amortization consisted of the following (in thousands): September 30, 2022 September 24, 2021 Intangible Assets, Net Cost Accumulated Amortization Net Cost Accumulated Amortization Net Acquired patents and technology $ 355,622 $ ( 253,080 ) $ 102,542 $ 343,280 $ ( 233,789 ) $ 109,491 Customer relationships 66,142 ( 56,572 ) 9,570 65,822 ( 52,730 ) 13,092 Other intangible assets 22,973 ( 22,820 ) 153 22,972 ( 22,665 ) 307 Total $ 444,737 $ ( 332,472 ) $ 112,265 $ 432,074 $ ( 309,184 ) $ 122,890 During fiscal 2022, we purchased various patents for purchase consideration of $ 11.5 million, and upon acquisition, these intangible assets had a weighted-average useful life of 16 years. These intangible assets facilitate our R&D efforts, technologies, and potential product offerings. In addition, we acquired intangible assets in connection with a business combination completed in fiscal 2022. Refer to Note 15 "Business Combination" for additional information. 70 Table of Contents Amortization expense for our intangible assets is included in cost of licensing, cost of products and services, R&D, S&M, and G&A expenses in our consolidated statements of operations. Amortization expense was $ 29.0 million, $ 29.5 million, and $ 29.5 million in fiscal 2022, 2021 and 2020, respectively. As of September 30, 2022, expected amortization expense of our intangible assets in future periods was as follows (in thousands): Fiscal Year Amortization Expense 2023 $ 26,057 2024 23,930 2025 8,860 2026 7,969 2027 7,285 Thereafter 38,164 Total $ 112,265 9 . Stockholders' Equity and Stock-Based Compensation We provide stock-based awards as a form of compensation for employees, officers and directors. We issue stock-based awards in the form of stock options and RSUs under our equity incentive plans, as well as shares under our ESPP. Common Stock - Class A and Class B Our Board of Directors has authorized two classes of common stock, Class A and Class B. As of September 30, 2022, we had authorized 500,000,000 Class A shares and 500,000,000 Class B shares. As of September 30, 2022, we had 59,798,862 shares of Class A common stock and 36,085,779 shares of Class B common stock issued and outstanding. Holders of our Class A and Class B common stock have identical rights, except that holders of our Class A common stock are entitled to one vote per share and holders of our Class B common stock are entitled to ten votes per share. Shares of Class B common stock can be converted to shares of Class A common stock at any time at the option of the stockholder and automatically convert upon sale or transfer, except for certain transfers specified in our amended and restated certificate of incorporation. Stock Incentive Plans 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 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 2020 Stock Plan, such shares will be counted as 1.6 shares for every one share returned. Stock Options. Stock options are granted at fair market value on the date of grant. Options granted to employees and officers generally vest over four years , with 25 % of the options becoming exercisable on the one-year anniversary of the date of grant and the balance of the shares vesting in equal monthly installments over the following 36 months. These options expire on the earlier of ten years after the date of grant or three months after termination of service. All options granted vest over the requisite service period and upon the exercise of stock options, we issue new shares of Class A common stock under the 2020 Stock Plan. Our 2020 Stock Plan also allows us to grant stock awards which vest based on the satisfaction of specific performance criteria. Performance-Based Stock Options. From fiscal 2016 through fiscal 2019, we granted PSOs to our executive officers with shares of our Class A common stock underlying such options. The contractual term for the PSOs was seven years, with vesting contingent upon market-based performance conditions, representing the achievement of specified Dolby annualized TSR targets at the end of a three-year measurement period following the date of grant. 71 Table of Contents Anywhere from 0 % to 125 % of the shares subject to a PSO vested based on achievement of the performance conditions at the end of the three-year performance period. In valuing the PSOs, which will be recognized as compensation cost, we used a Monte Carlo valuation model. Aside from the use of an expected term for the PSOs commensurate with their shorter contractual term, the nature of the valuation inputs used in the Monte Carlo valuation model were consistent with those used to value our non-performance based options granted under the 2020 Stock Plan. Compensation cost is being amortized on a straight-line basis over the requisite service period. The following table summarizes information about PSOs granted to our executive officers that have vested during the periods presented: Grant Date Aggregate Shares Granted at Target Award Aggregate Shares Exercisable at Vest Date (1) Percentage Vested of Target Award Vested Date December 15, 2016 276,199 240,539 95 % December 2019 December 15, 2017 264,000 253,440 96 % December 2020 December 15, 2018 241,100 158,700 75 % December 2021 (1) Aggregate shares exercisable at vest date does not include any shares that were cancelled before the vest date after they were granted. As of September 30, 2022, an aggregate of 424,249 shares of PSOs were exercisable and outstanding. The following table summarizes information about stock options, including PSOs, issued under our 2020 Stock Plan: Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life Aggregate Intrinsic Value (1) (in thousands) (in years) (in thousands) Options outstanding at September 25, 2021 4,577 $ 59.18 Grants 369 88.37 Exercises ( 766 ) 52.88 Forfeitures and cancellations ( 121 ) 73.58 Options outstanding at September 30, 2022 4,059 62.59 5.42 $ 29,902 Options vested and expected to vest at September 30, 2022 3,912 62.15 5.36 29,896 Options exercisable at September 30, 2022 3,091 57.16 4.60 29,690 (1) Aggregate intrinsic value is based on the closing stock price of our Class A common stock on September 30, 2022 of $ 65.15 and excludes the impact of options that were not in-the-money. Restricted Stock Units. In fiscal 2008, we began granting RSUs to certain directors, officers and employees. Awards granted to employees and officers generally vest over four years , with equal annual cliff-vesting. Awards granted from November 2010 onward to ongoing directors generally vest over approximately one year . Awards granted to new directors from fiscal 2014 onward vest on the earlier of the first anniversary of the award’s date of grant, or the day immediately preceding the date of the next annual meeting of stockholders that occurs after the award’s date of grant. 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 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 is recognized on a straight-line basis over the requisite service period. Certain grants may have other vesting conditions or other award terms as approved by the Compensation Committee of our Board of Directors. Our 2020 Stock Plan also allows us to grant RSUs that vest based on the satisfaction of specific performance criteria. Performance-Based Restricted Stock Units. In fiscal 2020, we began granting PSUs to our executive officers with shares of our Class A common stock underlying such awards. The terms of the PSU Agreement adopted in the first quarter fiscal 2020 provide for the grant of PSUs 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. The value of the PSUs, which is recognized as compensation cost, is calculated using a Monte Carlo valuation model. Compensation cost is being amortized on a straight-line basis over the requisite service period. Certain grants may have other vesting conditions or other award terms as approved by the Compensation Committee of our Board of Directors. On December 15, 2021, we granted PSUs to our executive officers vesting for an aggregate of 60,301 shares at the target award amount, which would vest at 120,602 shares at 200% of the target award amount. On December 15, 72 Table of Contents 2020, we granted PSUs to our executive officers vesting for an aggregate of 66,138 shares at the target award amount, which would vest at 132,276 shares at 200 % of the target award amount. On December 16, 2019, we granted PSUs to our executive officers vesting for an aggregate of 62,000 shares at the target award amount, which would vest at 124,000 shares at 200 % of the target award amount. As of September 30, 2022, PSUs which would vest for an aggregate of 162,846 shares at the target award amount ( 325,692 shares at 200 % of the target award amount) were outstanding. The following table summarizes information about RSUs, including PSUs, issued under our 2020 Stock Plan: Shares Weighted-Average Grant Date Fair Value (in thousands) Non-vested at September 24, 2021 3,335 $ 77.46 Granted 1,737 86.42 Vested ( 1,205 ) 72.92 Forfeitures ( 365 ) 81.10 Non-vested at September 30, 2022 3,502 $ 83.09 The fair value as of the respective vesting dates of RSUs were as follows (in thousands): Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Restricted stock units - vest date fair value $ 106,919 $ 101,108 $ 72,426 Employee Stock Purchase Plan . Our plan allows eligible employees to have up to 10 percent of their eligible compensation withheld and used to purchase Class A common stock, subject to a maximum of $ 25,000 worth of stock purchased in a calendar year or no more than 1,000 shares in an offering period, whichever is less. An offering period consists of successive six-month purchase periods, with a look back feature to our stock price at the commencement of a one-year offering period. The plan provides for a discount equal to 15 percent of the lower of the closing price of our Class A common stock on the NYSE on the first and last day of the offering periods. The plan also includes an automatic reset feature that provides for an offering period to be reset and recommenced to a new lower-priced offering if the offering price of a new offering period is less than that of the immediately preceding offering period. Stock Option Valuation Assumptions We use the Black-Scholes option pricing model to determine the estimated fair value of employee stock options at the date of the grant. The Black-Scholes model includes inputs that require us to make certain estimates and assumptions regarding the expected term of the award, as well as the future risk-free interest rate, and the volatility of our stock price over the expected term of the award. Expected Term. The expected term of an award represents the estimated period of time that options granted will remain outstanding, and is measured from the grant date to the date at which the option is either exercised or canceled. Our determination of the expected term involves an evaluation of historical terms and other factors such as the exercise and termination patterns of our employees who hold options to acquire our Class A common stock, and is based on certain assumptions made regarding the future exercise and termination behavior. Risk-Free Interest Rate. The risk-free interest rate is based on the yield curve of U.S. Treasury instruments in effect on the date of grant. In determining an estimate for the risk-free interest rate, we use average interest rates based on these instruments’ constant maturities with a term that approximates and corresponds with the expected term of our awards. Expected Stock Price Volatility. The expected volatility represents the estimated volatility in the price of our Class A common stock over a time period that approximates the expected term of the awards, and is determined using a blended combination of historical and implied volatility. Historical volatility is representative of the historical trends in our stock price for periods preceding the measurement date for a period that is commensurate with the expected term. Implied volatility is based upon externally traded option contracts of our Class A common stock. Dividend Yield. The dividend yield is based on our anticipated dividend payout over the expected term of our option awards. Dividend declarations and the establishment of future record and payment dates are subject to the Board of Directors’ continuing determination that the dividend policy is in the best interests of our stockholders. The dividend policy may be changed or canceled at the discretion of the Board of Directors at any time. 73 Table of Contents The weighted-average assumptions used in the determination of the fair value of our stock options were as follows: Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Expected term (in years) 4.78 4.88 4.91 Risk-free interest rate 1.5 % 0.4 % 1.6 % Expected stock price volatility 28.8 % 28.5 % 24.2 % Dividend yield 1.1 % 1.1 % 1.3 % The following table summarizes the weighted-average fair value (per share) of stock options granted and the total intrinsic value of stock options exercised (in thousands): Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Stock options granted - weighted-average grant date fair value $ 21.17 $ 20.93 $ 13.76 Stock options exercised - intrinsic value 22,885 102,812 47,267 Stock-Based Compensation Expense Stock-based compensation expense for equity awards granted to employees is determined by estimating their fair value on the date of grant, and recognizing that value as an expense on a straight-line basis over the requisite service period in which our employees earn the awards. Compensation expense related to these equity awards is recognized net of estimated forfeitures, which reduce the expense recorded in the consolidated statements of operations. The selection of applicable estimated forfeiture rates is based on an evaluation of trends in our historical forfeiture data with consideration for other potential driving factors. If in subsequent periods actual forfeitures significantly differ from our initial estimates, we will revise such estimates accordingly. The estimated annual forfeiture rates used for awards granted were 8.63 %, 8.85 %, and 9.74 % in fiscal 2022, 2021, and 2020, respectively. The following two tables separately present stock-based compensation expense both by award type and classification in our consolidated statements of operations (in thousands): Expense - By Award Type Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Compensation expense Stock options $ 10,244 $ 13,724 $ 16,718 Restricted stock units (1) (2) 98,433 80,705 65,235 Employee stock purchase plan 6,248 5,269 4,675 Total stock-based compensation 114,925 99,698 86,628 Estimated benefit from income taxes ( 17,581 ) ( 15,790 ) ( 14,090 ) Total stock-based compensation, net of tax $ 97,344 $ 83,908 $ 72,538 (1) Stock-based compensation expense incurred by restricted stock units includes expense from PSUs. (2) Excludes $ 0.7 million of capitalized stock-based compensation related to internal use software in fiscal 2022. Expense - By Income Statement Line Item Classification Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Compensation expense Cost of products and services $ 1,819 $ 2,033 $ 2,072 Research and development 37,061 29,733 25,634 Sales and marketing 41,326 36,432 31,915 General and administrative 34,719 31,500 27,007 Total stock-based compensation 114,925 99,698 86,628 Estimated benefit from income taxes ( 17,581 ) ( 15,790 ) ( 14,090 ) Total stock-based compensation, net of tax $ 97,344 $ 83,908 $ 72,538 74 Table of Contents The tax benefit that we recognize from shares issued under our ESPP is excluded from the tables above. The tax benefit recognized was no t material in fiscal 2022 and fiscal 2020, and was $ 1.2 million in fiscal 2021. Unrecognized Compensation Expense. As of September 30, 2022, total unrecognized compensation expense associated with employee stock options expected to vest was approximately $ 13.4 million, which is expected to be recognized over a weighted-average period of 2.3 years. As of September 30, 2022, total unrecognized compensation expense associated with RSUs expected to vest was approximately $ 190.8 million, which is expected to be recognized over a weighted-average period of 2.4 years. Common Stock Repurchase Program In November 2009, we announced a stock repurchase 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 30, 2022 (in thousands): Authorization Period Authorization Amount Fiscal 2010: November 2009 $ 250,000 Fiscal 2010: July 2010 300,000 Fiscal 2011: July 2011 250,000 Fiscal 2012: February 2012 100,000 Fiscal 2015: October 2014 200,000 Fiscal 2017: January 2017 200,000 Fiscal 2018: July 2018 350,000 Fiscal 2019: July 2019 350,000 Fiscal 2021: July 2021 350,000 Fiscal 2022: February 2022 250,000 Fiscal 2022: August 2022 350,000 Total $ 2,950,000 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. The timing of repurchases and the number of shares repurchased depend upon a variety of factors, including price, regulatory requirements, the rate of dilution from our equity compensation plans, and other market conditions. The program does not have a specified expiration date, and can be limited, suspended, or terminated at our discretion at any time without prior notice. Shares repurchased under the program will be returned to the status of authorized but unissued shares of Class A common stock. As of September 30, 2022, the remaining authorization to purchase additional shares was $ 360.9 million. The following table provides information regarding share repurchase activity under the program during fiscal 2022: Quarterly Repurchase Activity Shares Repurchased Cost (1) Average Price Paid Per Share (2) (in thousands) Q1 - Quarter ended December 31, 2021 408,508 $ 35,573 $ 87.08 Q2 - Quarter ended April 1, 2022 1,116,032 84,913 76.08 Q3 - Quarter ended July 1, 2022 2,549,474 190,000 74.53 Q4 - Quarter ended September 30, 2022 2,928,536 220,000 75.12 Total 7,002,550 $ 530,486 (1) Cost of share repurchases includes the price paid per share, and excludes commission costs. (2) Average price paid per share excludes commission costs. Dividend Program The following table summarizes dividends declared under the program during fiscal 2022: Fiscal Period Announcement Date Record Date Payment Date Cash Dividend Per Common Share Dividend Payment Q1 - Quarter ended December 31, 2021 February 3, 2022 February 16, 2022 February 23, 2022 $ 0.25 $ 25.3 million Q2 - Quarter ended April 1, 2022 May 5, 2022 May 17, 2022 May 25, 2022 $ 0.25 $ 25.1 million Q3 - Quarter ended July 1, 2022 August 9, 2022 August 23, 2022 August 31, 2022 $ 0.25 $ 24.3 million Q4 - Quarter ended September 30, 2022 November 17, 2022 November 30, 2022 December 8, 2022 $ 0.27 $ 25.9 million (1) 75 Table of Contents (1) The dividend payment amount for the dividend declared in the fourth quarter of fiscal 2022 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. 10. Accumulated Other Comprehensive Loss Other comprehensive income/loss consists of three components: unrealized gains or losses on our AFS marketable investment securities, gains and losses on derivatives in cash flow hedge relationships not yet recognized in earnings, and the gains and losses from the translation of assets and liabilities denominated in non-U.S. dollar functional currencies. Until realized and reported as a component of net income, these comprehensive income items accumulate and are included within accumulated other comprehensive loss, a subsection within stockholders’ equity in our consolidated balance sheets. Unrealized gains and losses on our investment securities are reclassified from AOCI into earnings when realized upon sale, and are determined based on specific identification of securities sold. 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 Fiscal Year Ended September 30, 2022 September 24, 2021 Investment Securities Cash Flow Hedges Currency Translation Adjustments Total Investment Securities Cash Flow Hedges Currency Translation Adjustments Total Beginning Balance $ 220 $ ( 122 ) $ ( 10,128 ) $ ( 10,030 ) $ 818 $ 3,969 $ ( 15,381 ) $ ( 10,594 ) Other comprehensive income before reclassifications: Unrealized gains/(losses) ( 6,783 ) ( 2,588 ) — ( 9,371 ) ( 917 ) ( 12,704 ) — ( 13,621 ) Foreign currency translation gains/(losses) (1) — — ( 30,799 ) ( 30,799 ) — — 5,754 5,754 Income tax effect - benefit/(expense) 52 ( 8 ) ( 245 ) ( 201 ) 120 415 ( 501 ) 34 Net of tax ( 6,731 ) ( 2,596 ) ( 31,044 ) ( 40,371 ) ( 797 ) ( 12,289 ) 5,253 ( 7,833 ) Amounts reclassified from AOCI into earnings: Realized gains/(losses) (2) 527 ( 2,097 ) — ( 1,570 ) 211 9,032 — 9,243 Income tax effect - benefit/(expense) (3) ( 2 ) 332 — 330 ( 12 ) ( 834 ) — ( 846 ) Net of tax 525 ( 1,765 ) — ( 1,240 ) 199 8,198 — 8,397 Net current-period other comprehensive income/(loss) ( 6,206 ) ( 4,361 ) ( 31,044 ) ( 41,611 ) ( 598 ) ( 4,091 ) 5,253 564 Ending Balance $ ( 5,986 ) $ ( 4,483 ) $ ( 41,172 ) $ ( 51,641 ) $ 220 $ ( 122 ) $ ( 10,128 ) $ ( 10,030 ) (1) The foreign currency translation losses during fiscal 2022 were primarily due the strengthening of the U.S. dollar compared to other foreign currencies. (2) 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 in the consolidated statements of operations. (3) The income tax benefit or expense is included within provision for income taxes in our consolidated statements of operations. 11. Earnings Per Share Basic EPS is computed by dividing net income attributable to Dolby Laboratories, Inc. by the number of weighted-average shares of Class A and Class B common stock outstanding during the period. Through application of the treasury stock method, diluted EPS is computed in the same manner, except that the number of weighted-average shares outstanding is increased by the number of potentially dilutive shares from employee incentive plans during the period. Basic and diluted EPS are computed independently for each fiscal quarter and year-to-date period, which involves the use of different weighted-average share count figures relating to quarterly and annual periods. As a result, and after factoring the effect of rounding to the nearest cent per share, the sum of all four quarter-to-date EPS figures may not equal year-to-date EPS. 76 Table of Contents 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 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. (in thousands, except per share amounts): Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Numerator: Net income attributable to Dolby Laboratories, Inc. $ 184,087 $ 310,227 $ 231,363 Denominator: Weighted-average shares outstanding—basic 99,990 101,190 100,564 Potential common shares from options to purchase common stock 958 1,994 1,400 Potential common shares from restricted stock units 912 1,376 941 Potential common shares from employee stock purchase plan 123 62 39 Weighted-average shares outstanding—diluted 101,983 104,622 102,944 Net income per share attributable to Dolby Laboratories, Inc.: Basic $ 1.84 $ 3.07 $ 2.30 Diluted $ 1.81 $ 2.97 $ 2.25 Antidilutive awards excluded from calculation: Stock options 587 235 3,209 Restricted stock units 1,158 48 2 Employee stock purchase plan — 2 1 12. Income Taxes 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 U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense. 77 Table of Contents Income Tax Provision The following two tables present the components of our income before provision for income taxes by geographic region and the portion of our provision for income taxes classified as current and deferred (in thousands): Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 United States $ 33,318 $ 104,741 $ 32,426 Foreign 181,961 249,771 207,289 Total income before income taxes $ 215,279 $ 354,512 $ 239,715 Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Current: Federal $ 2,008 $ 7,216 $ ( 48,517 ) State 553 953 735 Foreign 58,285 65,568 61,153 Total current 60,846 73,737 13,371 Deferred: Federal ( 29,990 ) ( 36,035 ) ( 4,674 ) State 8 ( 63 ) ( 111 ) Foreign 517 ( 950 ) ( 490 ) Total deferred ( 29,465 ) ( 37,048 ) ( 5,275 ) Provision for income taxes $ 31,381 $ 36,689 $ 8,096 Repatriation of Undistributed Foreign Earnings As a result of the Tax Act, foreign accumulated earnings that were subject to the mandatory Transition Tax as of December 31, 2017, can be repatriated to the U.S. without incurring further U.S. federal tax. The Tax Act changed to 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 have reevaluated our historical assertion and determined that we no longer consider a vast majority of these earnings to be indefinitely reinvested. During fiscal 2022, we repatriated $ 175 million of foreign subsidiary earnings which were exempt from foreign withholding tax. As of September 30, 2022, the total undistributed earnings of our foreign subsidiaries were approximately $ 207 million. The unrecognized deferred tax liability on the portion of the undistributed earnings considered indefinitely reinvested is not material. Deferred Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, using enacted tax rates in effect for the year in which the differences are expected to reverse. A summary of the tax effects of the 78 Table of Contents temporary differences were as follows (in thousands): Fiscal Year Ended September 30, 2022 September 24, 2021 Deferred income tax assets: Investments $ 1,339 $ 1,439 Inventories 6,851 6,551 Net operating loss 2,507 3,305 Accrued expenses 11,536 17,686 Stock-based compensation 17,295 16,926 Revenue recognition 4,275 4,245 Depreciation and amortization 105,114 81,963 Lease liability 10,589 15,377 Research and development credits 40,149 31,635 Foreign tax credits 21,244 12,793 Deemed repatriated earnings tax benefit 10,724 9,788 Other 5,657 4,801 Total gross deferred income tax assets 237,280 206,509 Less: valuation allowance ( 41,087 ) ( 33,284 ) Total deferred income tax assets 196,193 173,225 Deferred income tax liabilities: Right of use asset ( 10,046 ) ( 14,288 ) Intangible assets ( 2,579 ) ( 2,917 ) Deferred income tax assets, net $ 183,568 $ 156,020 Net Operating Losses and Tax Credit Carryforwards As of September 30, 2022, the NOL carryforwards for U.S. federal and California were $ 2.6 million and $ 5.6 million, respectively, and will start to expire in fiscal 2034 and 2029, respectively. Additionally, we had foreign NOL carryforwards of $ 7.7 million as of September 30, 2022, an amount which is not subject to expiration. As of September 30, 2022, we had foreign tax credit and federal R&D tax credit carryforwards of $ 16.4 million and $ 19.8 million, respectively, which will start to expire in fiscal 2029 and fiscal 2035, respectively. We had California R&D tax credits of $ 40.6 million, which will carry forward indefinitely, and foreign R&D tax credits of $ 4.0 million, which will start to expire in fiscal 2028. Valuation Allowance As of September 30, 2022, a $ 31.7 million valuation allowance was recorded against California deferred tax assets, a $ 2.9 million valuation allowance was recorded against federal foreign tax credit deferred tax assets, and a $ 6.5 million valuation allowance was recorded against foreign deferred tax assets for which ultimate realization of its future benefits is uncertain. 79 Table of Contents Effective Tax Rate Each period, the combination of multiple different factors can impact our effective tax rate. 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. A reconciliation of the federal statutory tax rate to our effective tax rate on income from continuing operations was as follows: Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Federal statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal effect 0.2 0.2 0.2 Stock-based compensation ( 0.1 ) ( 5.1 ) ( 2.2 ) Research and development tax credits ( 5.0 ) ( 2.6 ) ( 3.0 ) Foreign-derived intangible income deduction ( 2.3 ) ( 2.2 ) ( 2.2 ) U.S. tax on foreign entities 1.8 0.8 3.1 Foreign rate differential ( 1.8 ) ( 3.4 ) ( 1.8 ) Increase (decrease) unrecognized tax benefit 2.8 2.0 ( 12.9 ) Other ( 2.0 ) ( 0.4 ) 1.2 Effective tax rate 14.6 % 10.3 % 3.4 % Our effective tax rate was 14.6 % in fiscal 2022, compared with our federal statutory rate of 21.0 %, and with our effective tax rate in fiscal 2021 of 10.3 %. The increase in our effective tax rate was primarily due to a shift in the mix of earnings to jurisdictions with higher tax rates and lower tax benefits related to settlement of stock-based awards partially offset by benefit from additional research and development tax credits. Our effective tax rate was 10.3% in fiscal 2021, compared with our effective tax rate in fiscal 2020 of 3.4%. The increase in our effective tax rate is primarily related to a benefit in fiscal 2020 from reversals of unrecognized tax benefits that did not recur in fiscal 2021 partially offset by higher benefits in fiscal 2021 related to changes in jurisdictional mix of income and settlement of stock-based awards. Uncertain Tax Positions As of September 30, 2022, the total amount of gross unrecognized tax benefits was $ 69.7 million, of which $ 44.0 million, if recognized, would reduce our effective tax rate. Our liability increased from fiscal 2021 primarily due to additional accruals in fiscal 2022. Our liability for unrecognized tax benefits is classified within other non-current liabilities in our consolidated balance sheets. Over the next twelve months, we estimate that there will be no reduction to this amount. Aggregate changes in the balance of gross unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands): Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Beginning Balance $ 66,106 $ 60,691 $ 108,539 Gross increases - tax positions taken during prior years 822 220 5,504 Gross decreases - tax positions taken during prior years ( 178 ) ( 247 ) — Gross increases - tax positions taken during current year 7,784 6,979 7,509 Gross decreases - settlements with tax authorities during current year — ( 875 ) ( 37 ) Lapse of statute of limitations ( 4,852 ) ( 662 ) ( 60,824 ) Ending Balance $ 69,682 $ 66,106 $ 60,691 80 Table of Contents Classification of Interest and Penalties 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. In fiscal year 2022, our current tax provision was increased by interest expense of $ 1.7 million, while in fiscal year 2021, our current tax provision was increased by interest expense of $ 1.0 million. Accrued interest and penalties are included within the related tax liability line item in our consolidated balance sheets. Our accrued interest and penalties on unrecognized tax benefits as of September 30, 2022 and September 24, 2021 were as follows (in thousands): Fiscal Year Ended September 30, 2022 September 24, 2021 Accrued interest $ 6,748 $ 5,030 Accrued penalties 119 47 Total $ 6,867 $ 5,077 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, states, and foreign jurisdictions. Our major tax jurisdictions are the U.S. federal, California, New York, and the Netherlands. Our operations in certain jurisdictions remain subject to examination for fiscal 2015 to 2021, some of which are currently under audit or review. The resolution of each of these audits is not expected to be material to our consolidated financial statements. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If resolution of any tax issues addressed in our current audits are inconsistent with management’s expectations, we may be required to adjust our tax provision for income taxes in the period such resolution occurs. Provisions enacted in the Tax Act related to the capitalization of research and development expenditures are effective beginning with our fiscal 2023 for U.S. income tax purposes. In addition, the final U.S. foreign tax credit regulations introduced significant changes to foreign tax credit utilization. These provisions are expected to have a material adverse effect on our fiscal 2023 and future tax provisions unless postponed or modified. 13. Restructuring Restructuring charges recorded in our consolidated statements of operations represent costs associated with separate individual restructuring plans implemented in various fiscal periods. Costs arising from these actions, including fluctuations in related balances between fiscal periods, are based on the nature of activities under the various plans. Fiscal 2022 Restructuring Events. In January 2022, we implemented a restructuring plan within our entertainment organization to align resources with a revised business strategy and outlook, and to support our higher priority focus areas. As a result, we recorded $ 8.9 million in restructuring costs in the fiscal 2022, primarily representing severance and other related benefits offered to over 120 employees that were impacted by this action. Actions related to this plan are expected to be completed by the end of fiscal 2023. The table presented below summarizes the changes in our restructuring accruals (in thousands): Severance Leased facility exit costs and other costs Total Balance at September 25, 2020 $ — $ — $ — Restructuring charges 9,522 718 10,240 Cash payments and adjustments ( 9,359 ) ( 714 ) ( 10,073 ) Balance at September 24, 2021 $ 163 $ 4 $ 167 Restructuring charges 8,874 1,749 10,623 Cash payments and adjustments ( 3,256 ) ( 1,753 ) ( 5,009 ) Balance at September 30, 2022 $ 5,781 $ — $ 5,781 Accruals for restructuring charges incurred for the restructuring plan 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. 81 Table of Contents 14. Commitments and Contingencies In the ordinary course of business, we enter into contractual agreements with third parties that include non-cancelable payment obligations, for which we are liable in future periods. These arrangements can include terms binding us to minimum payments and/or penalties if we terminate the agreement for any reason other than an event of default as described by the agreement. The following table presents a summary of our contractual obligations and commitments as of September 30, 2022 (in thousands): Payments Due By Fiscal Period Fiscal 2023 Fiscal 2024 Fiscal 2025 Fiscal 2026 Fiscal 2027 Thereafter Total Naming rights $ 12,474 $ 12,794 $ 13,126 $ 13,472 $ 8,534 $ 44,316 $ 104,716 Purchase obligations 28,228 8,425 1,270 252 — — 38,175 Donation commitments 1,797 116 116 116 86 417 2,648 Total $ 42,499 $ 21,335 $ 14,512 $ 13,840 $ 8,620 $ 44,733 $ 145,539 Naming Rights. We are party to agreements for naming rights of certain facilities, most significantly for naming rights and related benefits with respect to the Dolby Theatre in Hollywood, California, the location of the Academy Awards®. The term of this agreement is 20 years, over which we will make payments on a semi-annual basis until fiscal 2032. Our ongoing annual payment obligations are conditioned in part on the Academy Awards being held and broadcast from the Dolby Theatre. Our payment obligations may be suspended or reduced in certain circumstances, including the protracted closure of the Dolby Theatre. Purchase Obligations. Purchase obligations primarily consist of our commitments made under agreements to purchase goods and services related to Dolby Cinema and for purposes that include information technology and telecommunications, marketing and professional services, and manufacturing and other R&D activities. Donation Commitments. 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. These donation agreements either transfer title of our audio and imaging products to the donee or offer use of the products free of charge for a specified period of time via a leasing arrangement. 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. On a limited basis, our contractual agreements contain a clause under which we agree to provide indemnification to the counterparty, most commonly to licensees in connection with licensing arrangements that include our IP. We have also entered into indemnification agreements with our officers, directors, and certain employees, and our certificate of incorporation and bylaws contain similar indemnification obligations. Additionally, and although not a contractual requirement, we have at times elected to defend our licensees from third party IP infringement claims. Since the terms and conditions of our contractual indemnification clauses do not explicitly specify our obligations, we are unable to reasonably estimate the maximum potential exposure for which we could be liable. On August 7, 2019, Intertrust filed complaints against each of our customers AMC Entertainment Holdings, Inc., Cinemark Holdings, Inc., and Regal Entertainment Group in the U.S. District Court for the Eastern District of Texas, alleging that the use of systems including certain cinema products, which were supplied under commercial agreements that we acquired as a part of an acquisition in 2014, infringed various Intertrust patents, and seeking damages based on the revenues of the defendants. Some of our customers asserted that we are obligated to defend and indemnify them under the agreements. As of September 30, 2022 we recorded $34.4 million within G&A expenses in our consolidated statements of operations, reflecting a settlement payment and an immaterial accrual. We believe that these amounts fully resolve all claims relating to Intertrust’s patent assertions. With the exception of this settlement, we have not made any payments to date in connection with any of our contractual indemnification obligations, and we believe the risk of material financial exposure in future periods from these indemnification obligations is remote. 15. Business Combination On January 31, 2022, we completed the acquisition of all outstanding interests of Millicast, a privately held company. Following the acquisition, Millicast is expected to enable developers to take the interactive events they build 82 Table of Contents with Dolby.io, and stream them from the presenter to large audiences. We have included the financial results of Millicast in our consolidated financial statements from the date of acquisition, and these results were not material. Additionally, the transaction costs associated with the acquisition were not material. The total purchase consideration of the acquisition was $ 38.8 million. We allocated $ 8.7 million in purchase consideration to identifiable intangible assets, which primarily consisted of developed technology, with estimated useful lives of 1.5 years to 8 years. We also recorded $ 31.7 million of goodwill, which is representative of our expectation of benefits and synergies from the integration of Millicast technology with our existing technology and the assembled workforce of Millicast. The fair values assigned to assets acquired and liabilities assumed are based on management’s estimates and assumptions and may be subject to change as additional information is received and certain tax returns are finalized, including potential changes to income tax-related accounts. We expect to finalize the valuation within the one year measurement period. 16. Operating Segments and Geographic Information Operating Segments Operating segments are defined as components of an enterprise for which separate financial information is available, and which are evaluated regularly by the CODM, or decision-making group, in deciding how to allocate resources and assess performance. Our CODM is our Chief Executive Officer. Reporting segments are operating segments exceeding specified revenue, profit or loss, or asset thresholds for which separate disclosure of information is necessary. We operate as a single reportable segment. This reflects the fact that our CODM continues to evaluate our financial information and resources, and continues to assess the performance of these resources, on a consolidated basis. All required financial segment information is therefore included in our consolidated financial statements. 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 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). Revenue Composition—U.S . and International Fiscal Year Ended Location September 30, 2022 September 24, 2021 September 25, 2020 United States $ 468,246 $ 419,901 $ 460,972 International 785,547 861,355 700,820 Total revenue $ 1,253,793 $ 1,281,256 $ 1,161,792 Revenue Concentration—Significant Individual Geographic Regions Fiscal Year Ended Location September 30, 2022 September 24, 2021 September 25, 2020 United States 37 % 33 % 40 % South Korea 13 % 14 % 12 % China 20 % 23 % 20 % Japan 8 % 11 % 9 % Europe 10 % 10 % 10 % Other 12 % 9 % 9 % Total 100 % 100 % 100 % 83 Table of Contents Long-lived tangible assets, net of accumulated depreciation, by geographic region were as follows (in thousands): Location September 30, 2022 September 24, 2021 United States $ 415,493 $ 432,968 International 97,988 101,413 Total long-lived tangible assets, net of accumulated depreciation $ 513,481 $ 534,381 17. Legal Matters We are involved in various legal proceedings that occasionally arise in the normal course of business. These can include claims of alleged infringement of IP rights, commercial, employment, and other matters. In our opinion, resolution of these proceedings is not expected to have a material adverse impact on our operating results or financial condition. On a quarterly basis, we evaluate based on the known facts and circumstances whether a potential loss or range of losses is considered probable and reasonably estimable in accordance with U.S. GAAP. We record a provision for a liability relating to these legal proceedings when a loss is both probable and the amount of the loss can be reasonably estimated. Legal costs associated with these legal proceedings are expensed as incurred. Given the unpredictable nature of legal proceedings, it is possible that an unfavorable resolution of one or more such proceedings could materially affect our future operating results or financial condition in a particular period, including as a result of required changes to our licensing terms, monetary penalties, and other potential consequences. However, based on the information known by us as of the date of this filing and the rules and regulations applicable to the preparation of our consolidated financial statements, other than the impact of the litigation matter discussed in Note 14, any such amounts are either immaterial, or it is not probable that a potential loss has been incurred or the amount of loss cannot be reasonably estimated. 18. Related Parties We maintain contractual agreements relating to certain entities affiliated with the Dolby family, who is considered a related party as our principal stockholder. These jointly-owned entities were established for the purpose of acquiring and leasing commercial property in the U.S. and U.K. primarily for our operational use. Although the entities affiliated with the Dolby family are the limited member or LP in each of these entities, they have a controlling interest based on holding majority economic ownership. We are the managing member or general partner in each of these affiliated entities, and with the exception of isolated instances where portions of these facilities are leased to third parties, we occupy the majority of the space. Therefore, we have consolidated the entities’ assets and liabilities and results of operations in our consolidated financial statements. The share of earnings and net assets of the entities attributable to the limited member or LP, as the case may be, is reflected as controlling interest in our consolidated financial statements. Our interests in these consolidated affiliated entities and the location of the properties leased to Dolby Laboratories as of September 30, 2022 were as follows: Entity Name Minority Ownership Interest Location Of Properties Dolby Properties Burbank, LLC 49.0 % Burbank, California We also own 10.0 % minority ownership interest in Dolby Properties, LP, which owns a facility in Wootton Bassett, England. As of September 30, 2022, we are no longer leasing the Wootton Bassett facility. The property leased to Dolby Laboratories through Dolby Properties Brisbane, LLC, located in Brisbane, California, was sold during fiscal 2021. We also 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. Related party rent expense included in operating expenses in our consolidated statements of operations were as follows (in thousands): Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Related party rent expense included in operating expenses $ — $ ( 392 ) $ 126 84 Table of Contents Distributions. Distributions made by the jointly-owned real estate entities to our principal stockholder were as follows (in thousands): Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Distributions to principal stockholder $ ( 1,435 ) $ ( 7,362 ) $ ( 283 ) 19. Retirement Plans We maintain a tax-qualified Section 401(k) retirement plan for employees in the U.S. and similar plans in foreign jurisdictions. Under the plan, employees are eligible to receive matching contributions and profit-sharing contributions. 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 and services, R&D, S&M, and G&A expense in our consolidated statements of operations, were as follows (in thousands): Fiscal Year Ended September 30, 2022 September 24, 2021 September 25, 2020 Retirement plan expenses $ 27,378 $ 26,379 $ 25,257 85 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.