Dolby Laboratories
Annual Report 2020

Plain-text annual report

2020 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES For the Fiscal Year Ended September 25, 2020 OR EXCHANGE ACT OF 1934 For the Transition Period From To Commission File Number: 001-32431 DOLBY LABORATORIES, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 1275 Market Street San Francisco, California (Address of principal executive offices) 90-0199783 (I.R.S. Employer Identification No.) 94103-1410 (Zip Code) Title of each class Class A common stock, $0.001 par value Name of each exchange on which registered The New York Stock Exchange (415)-558-0200 Registrant’s telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: Trading Symbol(s) DLB Securities registered pursuant to Section 12(g) of the Act: Title of each class Class B common stock, $0.001 par value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes È No ‘ Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer È Non-accelerated filer ‘ Accelerated filer ‘ Smaller reporting company ‘ Emerging growth company ‘ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes È No ‘ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È The aggregate market value of the voting common equity held by non-affiliates of the registrant as of March 27, 2020 was $3.1 billion. This calculation excludes the shares of Class A and Class B common stock held by executive officers, directors and stockholders whose ownership exceeds 5% of the combined shares of Class A and Class B common stock outstanding at March 27, 2020. This calculation does not reflect a determination that such persons are affiliates for any other purposes. On October 23, 2020, the registrant had 64,219,912 shares of Class A common stock, par value $0.001 per share, and 36,128,720 shares of Class B common stock, par value $0.001 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s 2021 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended September 25, 2020. Except with respect to information specifically incorporated by reference in this Form 10-K, the Definitive Proxy Statement is not deemed to be filed as part of this Form 10-K. [THIS PAGE INTENTIONALLY LEFT BLANK] DOLBY LABORATORIES, INC. FORM 10-K TABLE OF CONTENTS PART I Item 1 – Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A – Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B – Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2 – – Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4 PART II Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6 – Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . Item 7 Item 7A – Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . – Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 8 Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . Item 9A – Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B – Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Item 10 – Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Item 12 – Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13 – Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 14 – PART IV 4 11 28 28 28 29 30 32 33 48 50 95 95 96 97 98 99 99 99 Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 15 – Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 16 – Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 105 105 1 GLOSSARY OF TERMS The following table summarizes certain terms and abbreviations that may be used within the text of this report: Abbreviation AAC AFS AOCI APIC ASC ASP ASU ATSC AVC AVR CE CES CODM COGS COSO DD DD+ DMA DTV DVB DVD EPS ESP ESPP FASB FCPA G&A HD HDR HDTV HE-AAC HEVC HFR HTIB IC IBR IP IPO IPTV IT LP ME NOL OCI ODD OECD OEM OTT PC PCS PP&E PSO PSU R&D ROU RSU S&M SERP SoC SSP STB TPE TSR UHD U.S. GAAP Term Advanced Audio Coding Available-For-Sale (Securities) Accumulated Other Comprehensive Income Additional-Paid In-Capital Accounting Standards Codification Average Selling Price Accounting Standards Update Advanced Television Systems Committee Advanced Video Coding Audio/Video Receiver Consumer Electronics Consumer Electronics Show Chief Operating Decision Maker Cost Of Goods Sold Committee Of Sponsoring Organizations (Of The Treadway Commission) Dolby Digital® Dolby Digital Plus™ Digital Media Adapter Digital Television Digital Video Broadcasting Digital Versatile Disc Earnings Per Share Estimated Selling Price Employee Stock Purchase Plan Financial Accounting Standards Board Foreign Corrupt Practices Act General & Administrative High Definition High-Dynamic Range High Definition Television High Efficiency Advanced Audio Coding High Efficiency Video Coding High Frame Rate Home Theater In-A-Box Integrated Circuit Incremental Borrowing Rate Intellectual Property Initial Public Offering Internet Protocol Television Information Technology Limited Partner/Partnership Multiple Element Net Operating Loss Other Comprehensive Income Optical Disc Drive Organization For Economic Co-Operation & Development Original Equipment Manufacturer Over-The-Top Personal Computer Post-Contract Support Property, Plant, & Equipment Performance-Based Stock Option Performance-Based Restricted Stock Unit Research & Development Right-Of-Use Restricted Stock Unit Sales & Marketing Supplemental Executive Retirement Plan System(s)-On-A-Chip Standalone Selling Price Set-Top Box Third Party Evidence Total Stockholder Return Ultra High Definition Generally Accepted Accounting Principles In The United States 2 Forward Looking Statements This Annual Report on Form 10-K contains forward-looking statements including, but not limited to statements regarding: operating results and underlying measures; demand and acceptance for our technologies and products; the effect of the novel coronavirus pandemic (“COVID-19”) on our business; market growth opportunities and trends; our ability to maintain key partnership relationships; our plans, strategies, and expected opportunities; future competition; our stock repurchase program; and our dividend policy. Use of words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or similar expressions indicates a forward-looking statement. Such forward-looking statements are based on management’s reasonable and current assumptions and expectations. Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including the risks set forth in Item 1A, “Risk Factors” and key challenges set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We disclaim any duty to update any of the forward-looking statements to conform our prior statements to actual results. 3 PART I ITEM 1. BUSINESS OVERVIEW Dolby Laboratories creates audio and imaging technologies that transform entertainment and communications at the cinema, at home, at work, and on mobile devices. Founded in 1965, our strengths stem from expertise in analog and digital signal processing and digital compression technologies that have transformed the ability of artists to convey entertainment experiences to their audiences through recorded media. Such technologies led to the development of our noise-reduction systems for analog tape recordings, and have since evolved into multiple offerings that enable more immersive sound for cinema, digital television transmissions and devices, mobile devices, OTT video and music services, and home entertainment devices. Today, we derive the majority of our revenue from licensing our audio technologies. We also derive revenue from licensing our consumer imaging and communication technologies, as well as audio and imaging technologies for premium cinema offerings in collaboration with exhibitors. Finally, we provide products and services for a variety of applications in the cinema, broadcast, communications, and home entertainment markets. COVID-19 Please refer to the Executive Summary section of Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information concerning the continuing effect of COVID-19 on our business. OUR STRATEGY Key elements of our strategy include: Advancing the Science of Sight and Sound. We apply our understanding of the human senses, audio, and imaging engineering to develop technologies aimed at improving how people experience and interact with their entertainment and communications content. Providing Creative Solutions. We promote the use of our solutions as creative tools, and provide our products, services, and technologies to filmmakers, musical artists, sound mixers, and other content creators and providers. Our tools help showcase the quality and impact of their efforts and intent, which in turn may generate market demand. Delivering Superior Experiences. Our technologies and solutions optimize playback and communications so that users may enjoy richer, clearer, and more immersive sound and sight experiences. REVENUE GENERATION The following table presents a summary of the composition of our revenue for all periods presented. Previously reported revenues in the tables below reflect the adoption of ASU 2014-09. Refer to Note 2 “Summary of Significant Accounting Policies” and Note 3. “Revenue Recognition” for further detail. Revenue Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 Licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Products and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93% 7% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 89% 11% 100% 89% 11% 100% We generate revenue from licensing arrangements with over 500 electronics product OEM and software developer licensees. 4 Licensing We license our technologies to a range of customers who incorporate them into their products for enhanced audio and imaging functionality whether it be at home, at work, on mobile devices, or at the cinema. Our key technologies are summarized in the table below. As it relates to AAC, HE-AAC, AVC, and HEVC, we jointly participate in patent licensing programs with other patent owners. Technology AAC & HE-AAC AVC Dolby® AC-4 Dolby Atmos® Dolby Digital® Dolby Digital Plus™ Dolby® TrueHD Dolby Vision® Dolby Voice® HEVC An advanced digital audio codec solution with higher bandwidth efficiency used for a wide range of media applications. A digital video codec with high bandwidth efficiency used in a wide range of media devices. Description A next-generation digital audio coding technology that increases transmission efficiency while delivering new audio experiences, including Dolby Atmos, to a wide range of playback devices. An object-oriented audio technology for cinema and a wide range of media devices that allows sound to be precisely placed and moved anywhere in the listening environment including the overhead dimension. Dolby Atmos is an immersive experience that can be provided via multiple Dolby audio coding technologies. A digital audio coding technology that provides multichannel sound to a variety of media applications. An advanced digital audio coding technology that offers more efficient audio transmission for a wide range of media applications and devices. A digital audio coding technology providing lossless encoding for premium quality media applications. An imaging technology combining high dynamic range and dynamic metadata to deliver higher color contrast, brighter contrast, and improved details for cinema and a wide range of media devices. An audio communications technology with superior spatial perception, voice clarity, and background noise reduction that emulates the in-person meeting experience. A next-generation digital video codec with high bandwidth efficiency to support ultra-high definition experiences for a wide range of media devices. The following table presents the composition of our licensing business and revenues for all periods presented: Fiscal Year Ended Market Broadcast . . . . . . . . . . . . . . . . . . . . . . Mobile . . . . . . . . . . . . . . . . . . . . . . . . CE . . . . . . . . . . . . . . . . . . . . . . . . . . . September 25, 2020 41% 21% 14% September 27, 2019 43% 17% 14% September 28, 2018 41% 16% 15% PC . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . 12% 12% 10% 16% 11% 17% Main Offerings Incorporating Our Technologies Televisions & STBs Smartphones & Tablets DMAs, Blu-ray Disc devices, AVRs, Soundbars, DVDs, & HTIBs Windows and macOS operating systems Gaming consoles, Auto DVD, Dolby Cinema, & Dolby Voice Total . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% We have various licensing models: a two-tier model, an integrated licensing model, a patent licensing model, and collaboration arrangements. Two-Tier Licensing Model. Most of our consumer entertainment licensing business consists of a two-tier licensing model whereby our decoding technologies, included in reference software and firmware code, are first provided under license to semiconductor manufacturers whom we refer to as “implementation licensees.” Implementation licensees incorporate our technologies in ICs which they sell to OEMs of consumer entertainment products, whom we refer to as “system licensees.” System licensees separately obtain licenses from us that allow them to make and sell end-user products using ICs that incorporate our technologies. Implementation licensees incorporate our technologies into their chipsets that, once approved by Dolby, are available for purchase from implementation licensees by OEMs for use in end-user products. Implementation licensees only pay us a nominal initial fee on contract execution as consideration for the ongoing services that we provide to assist in their implementation process. Revenues from these initial fees are recognized ratably over the contractual term as a component of licensing revenue. 5 System licensees provide us with prototypes of products, or self-test results of products that incorporate our technologies. Upon our confirmation that our technologies are optimally and consistently incorporated, the system licensee may buy ICs under a license for the same Dolby technology from our network of implementation licensees, and may further sell approved products to retailers, distributors, and consumers. For the use of our technologies, our system licensees pay an initial licensing fee as well as royalties, which represent the majority of the revenue recognized from these arrangements. The amount of royalties we collect on a particular product depends on several factors including the nature of the implementations, the mix of Dolby technologies used, and the volume of products using our technologies that are shipped by the system licensee. Integrated Licensing Model. We also license our technologies to software operating system vendors and to certain other OEMs that act as combined implementation and system licensees. These licensees incorporate our technologies in their software used on PCs, in mobile applications, or in ICs they manufacture and incorporate into their products. As with the two-tier licensing model, the combined implementation and system licensee pays us an initial licensing fee in addition to royalties as determined by the mix of Dolby technologies used, the nature of the implementations, and the volume of products using our technologies that are shipped, and is subject to the same quality control evaluation process. Patent Licensing Model. We license our patents through patent pools which are arrangements between multiple patent owners to jointly offer and license pooled patents to licensees. We also license our patents directly to manufacturers that use our IP in their products. Finally, we generate service fees for managing patent pools on behalf of third party patent owners through our wholly-owned subsidiary, Via Licensing Corporation. By aggregating and offering pooled IP, patent pools deliver efficiencies that reduce transactional costs for both IP owners and licensees. The Via Licensing patent pools enable product manufacturers to efficiently and transparently secure patent licenses for audio coding, interactive television, digital radio, and wireless technologies. We offer our patents related to AAC, AVC, HE-AAC, HEVC, and other IP through a combination of patent pools and licensing directly to OEMs. Recoveries. Licensing revenue recognized in any given period may include revenue from licensees and/or settlements with third parties where the use of our technology occurred in previous periods. Within the Results of Operations section of Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” revenue attributable to previous periods’ usage including settlements are collectively referred to as “recoveries.” Such recoveries have become a recurring element of our business and are particularly subject to fluctuation and unpredictability. Collaboration Arrangements. Dolby Cinema: We partner with exhibitors to deliver a premium cinema offering with Dolby Vision and Dolby Atmos at new and pre-existing venues. We receive revenue at Dolby Cinema sites through a share of box office receipts, which is recognized as licensing revenue. Dolby Voice: We enter into arrangements with audio and video conferencing providers where, in return for licensing our IP and know-how, we earn revenue based on access to our technology and services. Products and Services We design and manufacture audio and imaging products for the cinema, television, broadcast, and entertainment industries. Distributed in over 90 countries, these products are used in content creation, distribution, and playback to enhance image and sound quality, and improve transmission and playback. Additionally, some of our Dolby Cinema arrangements involve fixed or minimum amounts, which are typically included in products sales. We had also sold or leased hardware that facilitates the Dolby conferencing experience. As of the first quarter of fiscal 2021, we are winding down our conferencing hardware business and will focus our efforts towards software-based solutions, including through our developer platform. 6 Key products from which we generate products revenue are summarized in the table below: Product Description Cinema Imaging Products Cinema Cinema Audio Products Dolby Conference Phone Dolby Voice Room Other Other Products Digital Cinema Servers used to load, store, decrypt, decode, watermark, and playback digital film files for presentation on digital cinema projectors and software used to encrypt, encode, and package digital media files for distribution. Cinema Processors, amplifiers, and loudspeakers used to decode, render, and optimally playback digital cinema soundtracks including those using Dolby Atmos. An integral hardware component of the Dolby Voice conferencing solution that enhances full-room voice capture, spatial voice separation, and playback. Video conferencing solution for huddle rooms and conference rooms that combines a camera product with the Dolby Conference Phone and Dolby Voice technology. 3-D glasses and kits, broadcast hardware and software used to encode, transmit, and decode multiple channels of high-quality audio for DTV and HDTV distribution, monitors, and accessibility solutions for hearing and visually impaired consumers. In addition, we offer various services to support theatrical and television production for cinema exhibition, broadcast, and home entertainment, including equipment training and maintenance, mixing room alignment, equalization, as well as audio, color, and light image calibration. We also provide PCS for products sold and equipment installed at Dolby Cinema theaters operated by exhibitor partners and support the implementation of our technologies into products manufactured by our licensees. INTELLECTUAL PROPERTY We have a substantial base of IP assets, including patents, trademarks, copyrights, and trade secrets developed based on our technical expertise. As of September 25, 2020, we had approximately 13,200 issued patents and approximately 4,100 pending patent applications in more than 100 jurisdictions throughout the world. Our currently issued patents expire at various times through May 2045. Some of our patents relating to DD technologies have expired, and others will expire over the next several years. While in the past we derived a significant portion of our licensing revenue from our DD technologies, this is no longer the case as revenues attributed to DD technologies have declined and are expected to continue to decline. The primary products where DD is widely used include DVD players (but not Blu-ray players), TVs, and STBs. We have transitioned a number of our DD licensees to DD+ technologies, an extension of our DD technologies, whose patents generally expire later than the DD patents. We are continuing to make progress in transitioning other DD licensees to DD+. We pursue a general practice of filing patent applications for our technologies in the U.S. and foreign countries where our customers manufacture, distribute, or sell licensed products. We actively pursue new applications to expand our patent portfolio to address new technological innovations, and we also make strategic acquisitions of technology and patents from time to time. We have multiple patents covering aspects and improvements for many of our technologies. We have approximately 1,200 trademark registrations throughout the world for a variety of wordmarks, logos, and slogans. Our trademarks cover our various products, technologies, improvements, and features, as well as the services that we provide. These trademarks are an integral part of our technology licensing program, and licensees typically elect to place our trademarks on their products to inform consumers that their products incorporate our technology and meet our quality specifications. 7 We protect our IP rights both domestically and internationally. From time to time, OEMs have failed to report or have underreported shipments of their products that incorporate our technologies. We have also had problems with implementation licensees selling ICs with our technologies to third parties that are not system licensees. We anticipate that such problems will continue to occur. Accordingly, we have taken steps in the past to enforce our IP rights and expect to continue doing so in the future. Moreover, in certain countries, we have relatively few or no issued patents. For example, in China, Taiwan, and India, we have only limited patent protection for our Dolby technologies. Consequently, we may realize less revenue from those regions in the future. Maintaining or growing our licensing revenue in developing countries such as China, Taiwan, and India will depend in part on our ability to obtain patent rights in these countries, which is uncertain. Further, because of the limitations of the legal systems in many countries, the effectiveness of patents obtained or that may in the future be obtained is uncertain. INDUSTRY STANDARDS Several Dolby technologies have been adopted as the explicit or de facto industry standard for broadcast, discrete media, and online delivery in various markets worldwide. Explicit industry standards are adopted through a standardization process whereby government entities, industry standards-setting bodies, trade associations, and others evaluate and then prescribe the use of a technology. For example, as global broadcast standards for digital, HD, and UHD television have developed, Dolby audio technologies have been adopted or mandated in various regions of the world, highlights of which are as follows: • DD+ and HE-AAC are mandated for use in terrestrial broadcast across many countries including France, Italy, the United Kingdom, Sweden, Germany, Poland, Turkey, and Russia. In addition, DD+ and HE-AAC are included in the digital terrestrial television specifications of emerging digital TV markets in Africa, Brazil, South-East Asia, and India while operators in China have selected DD and DD+ as optional technologies for transmissions using the country’s digital terrestrial television specification. In mobile devices, HE-AAC is specified for various applications in the 3GPP suite of standards, and is a de facto audio standard in entertainment services. • DD+ is the de facto technology used by a wide range of pay-TV operators and streaming services worldwide and is included in popular operating systems such as iOS and Windows. It is also widely used by major OTT services such as Apple TV+, Disney+, Netflix, and Amazon, and is included in the specifications of these services. • DD is mandated for HD broadcast in multiple regions including North America and South Korea, and for DVD players on a global basis. • AC-4 is Dolby’s next generation of audio coding technology that has been adopted for implementation in certain regions by worldwide standards organizations including the DVB and ATSC. AC-4 has also been adopted or proposed in forthcoming regional and country standards in North America, Europe, and Latin America. The transition for AC-4 continues to gain momentum, and is already being supported in a number of TVs that are available worldwide from major manufacturers. In addition, Dolby technologies have become de facto industry standards in many consumer entertainment products. De facto industry standards are adopted by industry participants when technologies are introduced to the marketplace and become widely used. For example, prior to the adoption of HD terrestrial broadcast standards mandating Dolby technologies, many European HD broadcasters began broadcasting in DD or DD+, leading OEMs to include these technologies in their televisions and STBs for the European market. RESEARCH AND DEVELOPMENT We conduct R&D activities at numerous locations in the U.S. and internationally. Dolby’s history of producing innovative technology has created many forms of IP. This IP generates licensing revenue that enables us to fund and pursue further innovation. 8 The majority of our R&D resources are focused on developing leading audio and imaging technologies for consumer entertainment. Each of these technologies can support many offerings, and we anticipate bringing new innovations to market in the future. R&D expenses included in our consolidated statements of operations were as follows (in thousands): Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 Research & Development . . . . . . . . . . . . . . . . . . . . . . . . $239,045 $237,871 $236,794 PRODUCT MANUFACTURING Our product quality is enabled through the use of well-established, and in some cases, highly automated, assembly processes along with rigorous testing of our products. Although we have some manufacturing facilities, we rely primarily upon contract manufacturers for the majority of our production capacity. We purchase components and fabricated parts from multiple suppliers; however, we rely on sole source suppliers for certain components used to manufacture our products. We source components and fabricated parts both domestically and internationally. SALES AND MARKETING Our marketing efforts focus on demonstrating how our solutions improve entertainment and communications experiences. We sell our solutions primarily using an internal sales organization to various customers in the markets where we operate. We promote our solutions and our brand through industry events such as trade-shows, film festivals, movie premieres, product launches, as well as through our website, public relations, direct marketing, co-marketing programs, and social media. In addition, we hold the naming rights to the Dolby Theatre, home to the Academy Awards® in Hollywood, California, where we showcase our technology and host high-profile events. We maintain more than 20 sales offices in key regions around the globe. S&M expenses included in our consolidated statements of operations were as follows (in thousands): Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 Sales & Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $335,933 $343,835 $309,762 CUSTOMERS We license our technologies to a broad set of customers that operate in a wide range of industries, and we sell our professional products either directly to the end user or, more commonly, through dealers and distributors. Users of our professional products and services include film studios, content creators, post-production facilities, cinema operators, broadcasters, and video game designers. COMPETITION The entertainment and communications industries are highly competitive, and we face aggressive competition in all areas of our business. Some of our current and future competitors may have significantly greater financial, technical, marketing, and other resources than we do, or may have more experience or advantages in the markets in which they compete. In addition, some of our current or potential competitors may be able to offer integrated systems in certain markets for entertainment technologies, including audio and imaging, which could make competing technologies that we develop or acquire obsolete. By offering an integrated system solution, these potential competitors may also be able to offer competing technologies at lower prices than we can, which could adversely affect our operating results. 9 Many products that include our audio and imaging technologies also include technologies developed by our competitors. We believe that the principal competitive factors in our markets include some or all of the following: • Degree of access and inclusion in industry standards; • Technological performance, flexibility, and range of application; • Brand recognition and reputation; • Timeliness and relevance of new product introductions; • Quality and reliability of products and services; • Relationships with producers, directors, and distributors in the film and television industry, with television broadcast industry leaders, with OTT industry leaders, and with the management of semiconductor and consumer electronics OEMs; • Availability of compatible high quality audio and video content; and • Price. Certain foreign governments, particularly in China, have advanced arguments under their competition laws that exert downward pressure on royalties for IP, which can impact the licensing fees that we are able to collect. The regulatory enforcement activities in such jurisdictions can be unpredictable, in some cases because these jurisdictions have only recently implemented competition laws. Our technologies, products, and services span the audio and imaging sectors of several distinct and diverse industries, including the broadcasting, mobile, consumer entertainment, personal computer, gaming, cinema, and communications industries. The lack of a clear definition of the markets in which our products, services, and technologies are sold or licensed, the nature of our technologies, their potential use for various commercial applications, and the diverse nature of and lack of detailed reporting by our competitors, make it impracticable to quantify our position. HUMAN CAPITAL RESOURCES As of September 25, 2020, we had 2,289 employees worldwide, of whom 1,037 employees were based outside of the U.S. None of our employees are subject to a collective bargaining agreement. Through our long operating history and experience with technological innovation, we appreciate the importance of retention, growth and development of our employees. We believe we offer competitive compensation (including salary, incentive bonus, and equity) and benefits packages in each of our locations around the globe. Further, from professional development opportunities to leadership training, we have development programs and on-demand opportunities to cultivate talent throughout the Company. We are also focused on understanding our diversity and inclusion strengths and opportunities and executing on a strategy to support further progress. We have created Employee Networks that are aligned around dimensions of diversity, such as gender, ethnicity, sexual orientation or other shared attributes, which we believe help build community and enable opportunities for development. We continue to focus on building a pipeline for talent to create more opportunities for workplace diversity and to support greater representation within the Company. CORPORATE AND AVAILABLE INFORMATION We were founded in London, England in 1965 and incorporated in the State of New York in 1967. We reincorporated in California in 1976 and reincorporated in Delaware in September 2004. Our principal corporate offices are located at 1275 Market Street, San Francisco, California 94103. Our telephone number is (415) 558-0200. Our Internet address is www.dolby.com. We make available on our website, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our SEC reports can be accessed through the Investor Relations section of our Internet website. The information found on our Internet website is not part of this or any other report we file with or furnish to the SEC. The SEC also maintains a website that contains our SEC filings at www.sec.gov. 10 ITEM 1A. RISK FACTORS The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us or that we currently deem less significant may also affect our business operations or financial results. If any of the following risks actually occur, our stock price, business, operating results and financial condition could be materially adversely affected. REVENUE GENERATION COVID-19 COVID-19 has had and will continue to have an adverse impact on our operations and financial performance. To date, the pandemic, which has affected nearly all regions around the world, and preventative measures taken to contain or mitigate the pandemic, are causing business slowdown or shutdown in affected areas and significant disruption in the financial markets. We cannot predict with any certainty the degree to, or the time period over, which our revenues and operations will be affected by this pandemic and related preventative measures. The spread of COVID-19 impacts several of our partners and has resulted in disruption of the supply chain of consumer products and delays in shipments, product development and product launches. In addition, consumer demand for products that include our technologies has been, and we expect to continue to be, negatively impacted due to economic uncertainty from COVID-19 and a decline in discretionary spending by consumers. These factors have resulted in decreased revenue pertaining to customer-shipment royalties. Further, these factors have and may continue to result in delays in the release of new products or services that contain our technologies by partners and licensees. These factors may also result in delays in royalty reporting by partners and licensees, and in cases where a partner or licensee’s financial condition has significantly worsened, we may have difficulty collecting or be unable to collect amounts owed to us. The overall cinema market has been, and we expect to continue to be, adversely impacted by COVID-19 social distancing recommendations. Our exhibition partners and customers have had to either partially or fully discontinue operations. This has resulted, and we expect will continue to result, in a significant reduction in box office receipts at Dolby Cinema sites and lower demand for our cinema products and services. Though select cinema locations have been permitted to resume operations, many such locations are operating significantly below capacity. It remains uncertain when the cinemas will be able to operate at full capacity. The spread of COVID-19 has caused us to modify our business practices (including temporary office closures, restricting employee travel, enabling and encouraging remote work, and cancellation of physical participation in meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, licensees, partners, and community. These actions may adversely impact our productivity and cause delays on new and existing projects. Such delays may negatively impact our revenues. Further, there is no certainty that the measures we have taken or will take will be sufficient to mitigate the risks posed by the virus to the well-being and productivity of our workforce. The degree to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted with any certainty, including, but not limited to, the duration and extent of the pandemic, its severity, the actions to contain the virus or its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after COVID-19 has subsided, we may continue to experience an adverse impact to our business as a result of its global economic impact, including any recession that has occurred or may occur. Specifically, difficult macroeconomic conditions, such as decreases in per capita income and level of disposable income, 11 increased and prolonged unemployment or a decline in consumer confidence as a result of COVID-19, could have a continuing adverse effect on demand for products and services that contain our technologies as well as limited or significantly reduced points of access to such products and services. Markets We Target Dependence on Sales by Licensees. Our licensing businesses depend on OEMs and other licensees to incorporate our technologies into their products. Our license agreements generally do not have minimum purchase commitments, are typically non-exclusive, and frequently do not require incorporation or use of our technologies. Our revenue will decline if our licensees choose not to incorporate our technologies into their products or if they sell fewer products incorporating our technologies. Trends in Media Content Distribution. For many years, a large portion of media content distribution has been through optical disc media, such as DVD and Blu-ray Disc, and cable and satellite television providers. However, the rapid advancement of online and mobile content delivery has resulted in a trend toward downloading and streaming services, resulting in decreased royalty revenue in certain of our end device markets. We expect the shift away from optical disc media to continue to result in a decline in revenue from the sale of devices that include DVD and Blu-ray Disc players. For example, the number of PCs that include optical disc drives has decreased significantly in recent years. Because PC OEMs are required to pay us a higher per-unit royalty for Windows PCs that include optical disc playback functionality than Windows PCs that do not include such functionality, the continued decreasing inclusion of optical disc drives in PCs will result in lower per-unit royalties. Further, consumers in certain markets are shifting away from subscription-based cable and satellite television providers toward streaming services, commonly referred to as “cord-cutting.” While cable and satellite television often require a STB, today consumers can also access streaming media through smart TVs or DMA devices. As consumers trend toward canceling subscriptions to these traditional cable and satellite providers and turn to streaming media, we expect demand for STBs in certain regions to continue to decline. If we are unable to derive additional revenue from the smart TV and DMA markets to make up for decreases in our STB-related revenue, our financial results may be negatively impacted. Mobile Industry Risks. Successful penetration of the mobile device market is important to our future growth. The mobile device market, particularly smartphones and tablets, is characterized by rapidly changing market conditions, frequent product introductions and intense competition based on features and price. Our technologies are not mandated as an industry standard for mobile devices. We must continually convince mobile device OEMs and end users of mobile devices of the value of our technologies. With shorter product lifecycles, it is easier for mobile device OEMs to add or remove our technologies from mobile devices than it is for TV OEMs and other hardware OEMs. In order to increase the value of our technologies in the mobile market, we have worked with online and mobile media content service providers to encode their content with our technologies, which could affect OEM and software vendor demand for our decoding technologies. However, the online and mobile media content services markets are also characterized by intense competition, evolving industry standards and business and distribution models, disruptive software and hardware technology developments, frequent product and service introductions and short life cycles, and price sensitivity on the part of consumers, all of which may result in downward pressure on pricing or the removal of our technologies by these providers and may result in decreased revenue from our mobile market. Further, COVID-19 may adversely impact consumer demand for mobile devices, the ability of our partners to manufacture such devices, impacts to supply chain and distribution, timing of the adoption of our technologies into products by partners and licensees, and the timing of launches for new products. 12 PC Industry Risks. Revenue from our PC market depends on several factors, including underlying PC unit shipment growth, the extent to which our technologies are included on computers, including through operating systems, the inclusion of optical disc drives or otherwise, and the terms of any royalties or other payments we receive. Further, we rely on a small number of partnerships with key participants in the PC market. If we are unable to maintain these key relationships, we may experience a decline in PCs incorporating our technologies. COVID-19 may also adversely impact consumer demand for PCs, PC manufacturing, supply chain and distribution, timing of the adoption of our technologies into products by partners and licensees, and the timing of launches for new products. Cinema Industry Risks. Revenue from Dolby Cinema and cinema product sales is subject to the pace of construction or upgrade of screens, the advent of new or competing technologies, the willingness of movie studios to produce films in our Dolby Atmos and Dolby Vision formats, consumer trends, box-office performance generally, and other events or conditions in the cinema industry. Although we have invested a substantial amount of time and resources developing Dolby Cinema, and expect to continue to invest and build partnerships in connection with the launch of Dolby Cinema locations, we may not continue to recognize a meaningful amount of revenue from these efforts in the near future. Additionally, we have collaborations with multiple exhibitors in foreign markets, including Asia, Europe, and the Middle East, and we may face a number of risks in expanding Dolby Cinema in these and other new international markets. The revenue we receive from Dolby Cinema exhibitors are based on a portion of box-office receipts from the installed theaters, and the timing of such theater installations is dependent upon a number of factors beyond our control. In addition, the success of our Dolby Cinema offering will be tied to the pipeline and success of motion pictures available at Dolby Cinema locations generally. The success of Dolby Cinema depends in large part on our ability to differentiate our offering, deploy new sites in accordance with plans, provide a compelling experience, and attract and retain a viewing audience. A decrease in our ability to develop and introduce new cinema products and services successfully could affect licensing of our consumer technologies, because the strength of our brand and our ability to use professional product developments to introduce new consumer technologies would be negatively impacted. These factors are subject to increased risk due to COVID-19 and related government actions, including the shutdown of cinemas and other non-essential businesses, social distancing restrictions, delays in cinematic releases, temporary suspensions of production of future releases, delay in royalty and other payments and solvency of our exhibitor partners. Further, though select cinema locations have been permitted to resume operations, many such locations are operating significantly below capacity. It remains uncertain when the cinemas will be able to operate at full capacity or how quickly moviegoers will return to theaters, which may depend on continued concerns over safety and continued social distancing and/or depressed consumer sentiment due to adverse economic conditions. Our revenue and associated demand from cinema product sales is dependent upon industry and economic cycles, which are subject to risks including delays in cinematic releases and closure of cinema locations related to COVID-19, along with our ability to develop and introduce new technologies, further our relationships with content creators, and promote new cinematic audio and imaging experiences. A significant portion of our growth opportunity lies in the China market, which is subject to economic risks as well as geo-political risks. Furthermore, future growth of our cinema products business also depends upon new theater construction and entering into an equipment replacement cycle whereby previously purchased cinema products are upgraded or replaced. To the extent that we do not make progress in these areas, or are faced with pricing pressures, competing technologies, or other global macroeconomic challenges our revenue may be adversely impacted. Customers and Distributors Loss of Key Licensee or Customer. A small number of our licensees or customers may represent a significant percentage of our licensing, products, or services revenue. Although we generally have agreements with these licensees or customers, these agreements typically do not require any minimum purchases or minimum royalty fees and do not prohibit licensees from using competing technologies or customers from purchasing products and services from competitors. Customer demand for our technologies and products can 13 shift quickly as many of our markets are rapidly evolving. As a result of our increased presence across consumer electronic device markets where our technologies are not mandated and are subject to significant competition, the risk that a large licensee may reduce or eliminate its use of our technologies has increased. Reliance on Semiconductor Manufacturers. Our licensing revenue from system licensees depends in large part upon the availability of ICs that implement our technologies. IC manufacturers incorporate our technologies into these ICs, which are then incorporated in consumer entertainment products. We do not manufacture these ICs, but rather depend on IC manufacturers to develop, produce, and then sell them to system licensees in accordance with their agreements. We do not control the IC manufacturers’ decisions on whether or not to incorporate our technologies into their ICs, and we do not control their product development or commercialization efforts. Consumer Spending Weakness. Weakness in general economic conditions may suppress consumer demand in our markets. Many of the products in which our technologies are incorporated are discretionary goods, such as PCs, TVs, STBs, Blu-ray Disc players, video game consoles, AVRs, mobile devices, in-car entertainment systems, and home-theater systems. Weakness in general economic conditions may also lead to licensees and customers becoming delinquent on their obligations to us or being unable to pay, resulting in a higher level of write-offs. Economic conditions, including business slowdown caused by COVID-19, may increase underreporting and non-reporting of royalty-bearing revenue by our licensees as well as increase the unauthorized use of our technologies. Reliance on Distributors. We rely significantly on a global network of independent, regional distributors to market and distribute our cinema, broadcast and voice products. Our distributor arrangements are non-exclusive and our distributors are not obligated to buy our products and can represent competing products, and they may be unwilling or unable to dedicate the resources necessary to promote our portfolio of products. Our distributors could retain product channel inventory levels that exceed future anticipated sales, which could affect our future sales to those distributors. In addition, failure of our distributors to adhere to our policies designed to promote compliance with global anticorruption laws, export controls, and local laws, could subject us to criminal or civil penalties and stockholder litigation. Marketing and Branding Importance of Brand Strength. Maintaining and strengthening the Dolby brand is critical to maintaining and expanding our licensing, products, and services business, as well as our ability to offer technologies for new markets, including Dolby Voice for the communications market, Dolby Cinema, Dolby Vision and other imaging offerings for the consumer market, and others. Our continued success depends on our reputation for providing high quality technologies, products, and services across a wide range of entertainment markets, including the consumer entertainment, PC, broadcast, and gaming markets. If we fail to promote and maintain the Dolby brand successfully in licensing, products or services, our business will suffer. Furthermore, we believe that the strength of our brand may affect the likelihood that our technologies are adopted as industry standards in various markets and for various applications. Our ability to maintain and strengthen our brand will depend heavily on our ability to develop innovative technologies for the entertainment industry, to enter into new markets successfully, and to provide high quality products and services in these new markets. Industry Standards The entertainment industry has historically depended upon industry standards to ensure compatibility across delivery platforms and a wide variety of consumer entertainment products. We make significant efforts to design our products and technologies to address capability, quality, and cost considerations so that they either meet, or more importantly, are adopted as industry standards across the broad range of entertainment industry markets in which we participate, as well as the markets in which we plan to compete in the future. To have our products and technologies adopted as industry standards, we must convince a broad spectrum of standards-setting organizations 14 throughout the world, as well as our major customers and licensees who are members of such organizations, to adopt them as such. The market for broadcast technologies has traditionally been heavily based on industry standards, often mandated by governments choosing from among alternative standards, and we expect this to continue to be the case in the future. The continued advancement of OTT media delivery and consumption may alter the landscape for broadcast standards and impact the importance of inclusion in certain broadcast standards in the future, and we cannot predict if and to what extent this may impact our revenues. Difficulty Becoming Incorporated in an Industry Standard. Standards-setting organizations establish technology standards for use in a wide range of consumer entertainment products. It can be difficult for companies to have their technologies adopted as an industry standard, as multiple companies, including ones that typically compete against one another, are involved in the development of new technology standards for use in entertainment-oriented products. Furthermore, some standards-setting organizations choose to adopt a set of optional standards or a combination of mandatory and optional standards; in such cases, our technologies may be adopted only as an optional standard and not a mandatory standard. Standards may also change in ways that are unfavorable to Dolby. Participants May Choose Among Alternative Technologies within Standards. Even when a standards- setting organization incorporates our technologies in an industry standard for a particular market, our technologies may not be the sole technologies adopted for that market. Furthermore, different standards may be adopted for different markets. Our operating results depend upon participants in that market choosing to adopt our technologies instead of competitive technologies that also may be acceptable under such standard. For example, the continued growth of our revenue from the broadcast market will depend upon both the continued global adoption of digital television generally, including in emerging markets, and the choice to use our technologies where it is one of several accepted industry standards. Being Part of a Standard May Limit Our Licensing Practices. When a standards-setting organization mandates our technologies, we generally must agree to license such technologies on a fair, reasonable, and non-discriminatory basis, which could limit our control over the use of these technologies. In these situations, we must often limit the royalty rates we charge for these technologies, and we may be unable to limit to whom we license such technologies or to restrict many terms of the license. We have in the past, and may in the future, be subject to claims that our licensing of industry standard technologies may not conform to the requirements of the standards-setting organization. Allegations such as these could be asserted in private actions seeking monetary damages and injunctive relief, or in regulatory actions. Claimants in such cases could seek to restrict or change our licensing practices or our ability to license our technologies. Royalty Reporting Our operating results fluctuate based on the risks set forth in this section, as well as, among other factors, on: • Royalty reports including positive or negative corrective adjustments; • Retroactive royalties that cover extended periods of time; and • Timing of revenue recognition under licensing agreements and other contractual arrangements, including recognition of unusually large amounts of revenue in any given quarter. Inaccurate Licensee Royalty Reporting. We generate licensing revenue primarily from OEMs who license our technologies and incorporate those technologies into their products. Our license agreements generally obligate our licensees to pay us a specified royalty for every product they ship that incorporates our technologies, and we rely on our licensees to report their shipments accurately. However, we have difficulty independently determining whether our licensees are reporting shipments accurately, particularly with respect to software incorporating our technologies because unauthorized copies of such software can be made relatively easily. A 15 third party may disagree with our interpretation of the terms of a license agreement or, as a result of an audit, a third party could challenge the accuracy of our calculation. We are regularly involved in discussions with third party technology licensees regarding license terms. Most of our license agreements permit us to audit our licensees’ records, and we routinely exercise these rights, but audits are generally expensive, time-consuming, and potentially detrimental to our ongoing business relationships with our licensees. In the past, licensees have understated or failed to report the number of products incorporating our technologies that they shipped, and we have not been able to collect and recognize revenue to which we were entitled. We expect that we will continue to experience understatement and non-reporting of royalties by our licensees. We have been able to obtain certain recovery payments from licensees (either in the form of back payments or settlements), and such recoveries have become a recurring element of our business; however, we are unable to predict with certainty the revenue that we may recover in the future or our ability to continue to obtain such recoveries at all. Further, as COVID-19 continues to impact our licensees, it may result in delays in royalty reporting or payment by some of our licensees. Royalties We Owe Others. In some cases, the products we sell and the technologies we license to our customers include IP that we have licensed from third parties. Our agreements with these third parties generally require us to pay them royalties for that use, and give the third parties the right to audit our calculation of those royalties. A third party may disagree with our interpretation of the terms of a license agreement or, as a result of an audit, a third party could challenge the accuracy of our calculation. We are regularly involved in discussions with third party technology licensors regarding license terms. A successful challenge by a third party could result in the termination of a license agreement or an increase in the amount of royalties we have to pay to the third party. Estimation of sales-based royalties. Under Accounting Standards Update 2014-09, Revenue from Contracts with Customers, or ASC 606, we recognize a material portion of our licensing revenue based on our estimate of shipments to which we expect our licensees to submit royalty statements. Upon receipt of actual reporting of sales-based royalties that we estimated previously, we record a favorable or unfavorable adjustment based on the difference, if any, between estimated and actual sales. This may cause volatility in our quarterly figures because of the estimation process and the corresponding true-up adjustments, which we disclose. Our reporting practices under ASC 606 could significantly affect our results of operations to the extent that actual revenues differ significantly from estimated revenues, or that we are required to accelerate recognition of revenue under certain arrangements, potentially causing the amount of revenue we recognize to vary materially from quarter to quarter. While our reporting practices do not change the cash flows or total revenues we receive from our contracts with customers, it could result in changes to the timing of our reported revenue and income, which in turn could cause volatility in the price of our Class A common stock. TECHNOLOGY TRENDS AND DEVELOPMENTS Technology Innovation. Our revenue growth will depend upon our success in new and existing markets for our technologies, such as digital broadcast, mobile devices, online and mobile media distribution, cinema, consumer imaging and communications. The markets for our technologies and products are defined by: • Rapid technological change; • New and improved technology and frequent product introductions; • Changing consumer and licensee demands; • Evolving industry standards; and • Technology and product obsolescence. Our future success depends on our ability to enhance our technologies and products and to develop new technologies and products that address the market needs in a timely manner. Technology development is a 16 complex, uncertain process requiring high levels of innovation, highly-skilled engineering and development personnel, and the accurate anticipation of technological and market trends. We may not be able to identify, develop, acquire, market, or support new or enhanced technologies or products on a timely basis, if at all. Experience with New Markets and Business Models. Our future growth will depend, in part, upon our continued expansion into areas beyond our audio licensing business. Over the past few years, we have introduced Dolby Cinema, our branded-theater experience, Dolby Vision for the home and cinema markets, and Dolby Voice technology for the communications market. In connection with entering into these new markets, we face new sources of competition, new business models, and new customer relationships. In order to be successful in these markets, we will need to cultivate new industry relationships and strengthen existing relationships to bring our products, services, and technologies to market. Our limited experience to date in one or more of these markets could limit our ability to successfully execute on our growth strategy. Incorporation of Dolby Formats into New Products & Availability of Content in Dolby Formats. The success of many of our newer initiatives, such as Dolby Atmos, Dolby Vision, and Dolby Cinema, is dependent upon the availability and success of (i) products that incorporate Dolby formats and (ii) content produced in Dolby formats. However, there is no guarantee that device makers will continue to incorporate Dolby formats into their products, that content creators will continue to release content in Dolby formats, or that either those products or that content will be commercially successful. For instance, to broaden adoption of Dolby Vision and Dolby Atmos, we will need to continue to expand the array of products and consumer devices that incorporate Dolby Atmos and Dolby Vision, expand the pipeline of Dolby Atmos and Dolby Vision content available from content creators, and encourage consumer adoption in the face of competing products and technologies. Similarly, the success of Dolby Cinema is dependent upon our ability to partner with movie theater exhibitors to launch new Dolby Cinema sites and deploy new sites in accordance with plans, as well as the continued release and box-office success of new films in the Dolby Vision and Dolby Atmos formats released through Dolby Cinemas. These factors are subject to increased risk due to COVID-19 and related government actions, including the shutdown of cinemas and other non-essential businesses, delay in royalty and other payments and solvency of our exhibitor partners. Further, the commercial success of products incorporating Dolby formats, content released in Dolby formats, and Dolby Cinemas generally, depends upon a number of factors outside of our control, including, but not limited to, consumer preferences, critical reception, timing of release, marketing efforts of third-parties, and general market conditions. Moreover, release and distribution of such products and content can be subject to delays in production or changes in release schedule, including delays in release and distribution related to COVID-19 and the global response to COVID-19, which can negatively impact the quantity, timing and quality of such products and content released in Dolby formats and available at Dolby Cinema theaters. INTELLECTUAL PROPERTY Our business is dependent upon protecting our patents, trademarks, trade secrets, copyrights, and other IP rights, the loss or expiration of which may significantly impact our results of operations and financial condition. Effective IP rights protection, however, may not be available under the laws of every country in which our products and services and those of our licensees are distributed. The efforts we have taken to protect our proprietary rights may not be sufficient or effective. We also seek to maintain select IP as trade secrets, and third parties or our employees could intentionally or accidentally compromise the IP that we maintain as trade secrets. In addition, protecting our IP rights is costly and time consuming. We have taken steps in the past to enforce our IP rights and expect to do so in the future. However, it may not be practicable or cost effective for us to enforce our IP rights fully, particularly in some countries or where the initiation of a claim might harm our business relationships. 17 We generally seek patent protection for our innovations. However, our patent program faces a number of challenges, including: • • • Possibility that innovations may not be protectable; Failure to protect innovations that later turn out to be important; Insufficient patent protection to prevent third parties from designing around our patent claims; • Our pending patent applications may not be approved; and • Possibility that an issued patent may later be found to be invalid or unenforceable. Patent Royalties and Expiration. Many of the technologies that we license to our system licensees are covered by patents, and the licensing revenue that we receive from those licenses depends in large part upon the life of such patents. In general, our agreements with our licensees require them to pay us a full royalty with respect to a particular technology only until the last patent covering that technology expires in a particular country. As of September 25, 2020, we had approximately 13,200 issued patents in addition to approximately 4,100 pending patent applications in more than 100 jurisdictions throughout the world. Our currently issued patents expire at various times through May 2045. If we are unable to expand on our patent portfolio or refresh our technology with new patented inventions, our revenues could decline. We seek to mitigate this risk in a variety of ways. We regularly look for opportunities to expand our patent portfolio through organic development and acquisitions. We develop proprietary technologies to replace licensing revenue from technologies covered by expiring patents with licensing revenue supported by patents with a longer remaining life. And, we develop and license our technologies in a manner designed to reduce the chance that a system licensee would develop competing technologies that do not include any Dolby IP. In the case of our patent coverage related to DD, some of our relevant patents have expired, but others continue to apply. DD is our solution that includes technology necessary to implement AC-3 as it has been updated over time. We have continued to innovate and develop intellectual property to support the standard and its implementation. Our customers use our DD implementation for quality, reliability, and performance, even in locations where we have not had applicable patent coverage. While in the past, we derived a significant portion of our licensing revenue from our DD technologies, this is no longer the case as revenues attributed to DD technologies have declined and are expected to continue to decline. Many of our partners have adopted newer generations of our offerings such as DD+, and the range of products incorporating DD solutions is now limited to DVD players (but not Blu-ray players) and some TVs, STBs and soundbars. To continue to be successful in our audio licensing business, we must keep transitioning our DD licensees to our newer technologies, including our DD+ and Dolby AC-4 technologies. Unauthorized Use of Our Intellectual Property. We have often experienced, and expect to continue to experience, problems with non-licensee OEMs and software vendors, particularly in China and certain emerging economies, incorporating our technologies and trademarks into their products without our authorization and without paying us any licensing fees. Manufacturers of ICs containing our technologies occasionally sell these ICs to third parties who are not our system licensees. These sales, and the failure of such manufacturers to report the sales, facilitate the unauthorized use of our IP. As emerging economies transition from analog to digital content, such as the transition from analog to digital broadcast, we expect to experience an increase in problems with this form of piracy. Intellectual Property Litigation. Companies in the technology and entertainment industries frequently engage in litigation based on allegations of infringement or other violations of IP rights. We have faced such claims in the past, and we expect to face similar claims in the future. Any IP claims, with or without merit, could be time-consuming, expensive to litigate or settle, and could divert management resources and attention. In the past, we have settled claims relating to infringement allegations and agreed to make payments in connection with 18 such settlements. An adverse determination in any IP claim could require that we pay damages or stop using technologies found to be in violation of a third party’s rights and could prevent us from offering our products and services to others. In order to avoid these restrictions, we may have to seek a license for the technology, which may not be available on reasonable terms or at all. Licensors could also require us to pay significant royalties. As a result, we may be required to develop alternative non-infringing technologies, which could require significant effort and expense. If we cannot license or develop technologies for any aspects of our business found to be infringing, we may be forced to limit our product and service offerings and may be unable to compete effectively. In some instances, we have contractually agreed to provide indemnifications to licensees relating to our IP. Additionally, at times we have chosen to defend our licensees from third party IP infringement claims even where such defense was not contractually required, and we may choose to take on such defense in the future. Licensee Disputes. At times, we are engaged in disputes regarding the licensing of our IP rights, including matters related to our royalty rates and other terms of our licensing arrangements. These types of disputes can be asserted by our customers or prospective customers or by other third parties as part of negotiations with us or in private actions seeking monetary damages or injunctive relief, or in regulatory actions. In the past, licensees have threatened to initiate litigation against us based on potential antitrust claims or regarding our licensing royalty rate practices. Damages and requests for injunctive relief asserted in claims like these could be significant, and could be disruptive to our business. U.S. and Foreign Patent Rights. Our licensing business depends in part on the uniform and consistent treatment of patent rights in the U.S. and abroad. Changes to the patent laws and regulations in the U.S. and abroad may limit our ability to obtain, license, and enforce our rights. Additionally, court and administrative rulings may interpret existing patent laws and regulations in ways that hurt our ability to obtain, license, and enforce our patents. We face challenges protecting our IP in foreign jurisdictions, including: • Our ability to enforce our contractual and IP rights, especially in countries that do not recognize and enforce IP rights to the same extent as the U.S., Japan, Korea, and European countries do, which increases the risk of unauthorized use of our technologies; • Limited or no patent protection for our DD technologies in countries such as China, Taiwan, and India, which may require us to obtain patent rights for new and existing technologies in order to grow or maintain our revenue; and • Because of limitations in the legal systems in many countries, our ability to obtain and enforce patents in many countries is uncertain, and we must strengthen and develop relationships with entertainment industry participants worldwide to increase our ability to enforce our IP and contractual rights without relying solely on the legal systems in the countries in which we operate. OPERATIONS Reliance on Key Suppliers. Our reliance on suppliers for some of the key materials and components we use in manufacturing our products involves risks, including limited control over the price, timely delivery, and quality of such components, as well as the risk of delay caused by COVID-19 and related interruptions to the supply chain. We generally have no formal agreements in place with our suppliers for the continued supply of materials and components. Although we have identified alternate suppliers for most of our key materials and components, any required changes in our suppliers could cause delays in our operations and increase our production costs. In addition, our suppliers may not be able to meet our production demands as to volume, quality, or timeliness. Moreover, we rely on sole source suppliers for some of the components that we use to manufacture our products, including specific charged coupled devices, light emitting diodes, and digital signal processors. These sole source suppliers may become unable or unwilling to deliver these components to us at an acceptable cost or 19 at all, which could force us to redesign those specific products. Our inability to obtain timely delivery of key components of acceptable quality, any significant increases in the prices of components, or the redesign of our products could result in production delays, increased costs, and reductions in shipments of our products. Product Quality. Our products, and products that incorporate our technologies, are complex and sometimes contain undetected software or hardware errors, particularly when first introduced or when new versions are released. In addition, we have limited control over manufacturing performed by contract manufacturers, which could result in quality problems. Furthermore, our products and technologies are sometimes combined with or incorporated into products from other vendors, sometimes making it difficult to identify the source of a problem or, in certain instances, making the quality of our implementation dependent in part upon the quality of such other vendors’ products. Any negative publicity or impact relating to these product problems could affect the perception of our brand and market acceptance of our products or technologies. These errors could result in a loss of or delay in market acceptance of our products or cause delays in delivering them and meeting customer demands, any of which could reduce our revenue and raise significant customer relations issues. In addition, if our products or technologies contain errors, we could be required to replace or reengineer them or rely upon parties who have incorporated our technologies into their products to implement updates to address such issues, which could cause delays or increase our costs. Moreover, if any such errors cause unintended consequences, we could incur substantial costs in defending and settling product liability claims. Although we generally attempt to contractually limit our liability, if these contract provisions are not enforced, or are unenforceable for any reason, or if liabilities arise that are not effectively limited, we could incur substantial costs in defending and settling product liability claims. Production Processes and Production. Production difficulties or inefficiencies can interrupt production, resulting in our inability to deliver products on time or in a cost effective manner, which could harm our competitive position. While we have three production facilities, we increasingly use contract manufacturers for a significant portion of our production capacity. Our reliance on contract manufacturers for the manufacture of our products involves risks, including limited control over timely delivery and quality of such products. If production of our products is interrupted, we may not be able to manufacture products on a timely basis. A shortage of manufacturing capacity for our products could negatively impact our operating results and damage our customer relationships. We may be unable to quickly adapt our manufacturing capacity to rapidly changing market conditions and a contract manufacturer may encounter similar difficulties. Likewise, we may be unable to quickly respond to fluctuations in customer demand or contract manufacturer interruptions. At times we underutilize our manufacturing facilities as a result of reduced demand for some of our products. Further, delays in production caused by business slowdown or shutdowns related to COVID-19 could harm our production capacity and the conduct of our business. Data Security. We rely on information technology systems in the conduct of our business, including systems designed and managed by third parties. Many of these systems contain sensitive and confidential information, including our trade secrets and proprietary business information, and personal data, as well as content and information owned by or pertaining to our customers, suppliers and business partners. The secure maintenance of this information is critical to our operations and business strategy. Increasingly, companies are subject to a wide variety of attacks on their networks and systems on an ongoing basis. Our information technology and infrastructure may be vulnerable to attacks by hackers, malware, software bugs or other technical malfunctions, or other disruptions. If we use a vendor that stores information as part of its service or product offerings, we assess the security of such services prior to using the service. Nevertheless, our sensitive, confidential or proprietary information may be misappropriated by that vendor or others who may inappropriately access or exfiltrate that information from the vendor’s system. While we have taken a number of steps to protect our information technology systems (including physical access controls, encryption, and authentication technologies), the number and sophistication of malicious attacks that companies have experienced has increased over the past few years. Measures we have undertaken to protect our information technology systems (including physical access controls, encryption, and authentication 20 technologies) may be unsuccessful in deterring or repelling malicious actors. In addition, because techniques used by hackers (many of whom are highly sophisticated and well-funded) to access or sabotage networks and computer systems change frequently and often are not recognized until after they are used, we may be unable to anticipate or immediately detect these techniques. This could delay our response or the effectiveness of our response and impede our operations and ability to limit our exposure to third-party claims and other potential liability. Attacks on our systems are sometimes successful, and, in some instances, we might be unaware of an incident or its nature, magnitude and effects. We also may suffer data security breaches and the unauthorized access to, misuse or acquisition of, personal data or other sensitive and confidential information as the result of intentional or inadvertent breaches or other compromises by our employees or service providers. Any data security breach or other incident, whether external or internal in origin, could compromise our networks and systems, creating system disruptions or slowdowns and exploiting security vulnerabilities of our products. Any such breach or other incident can result in the information stored on our networks and systems being improperly accessed or acquired, publicly disclosed, lost, or stolen, which could subject us to liability to our customers, suppliers, business partners and others. We seek to detect and investigate such attempts and incidents and to prevent their recurrence where practicable through changes to our internal processes and tools, but in some cases preventive and remedial action might not be successful. In addition, despite the implementation of network security measures, our networks also may be vulnerable to computer viruses, malware, ransomware, cyber extortion, social engineering, denial of service, and other similar disruptions. Disruptions to our information technology systems, due to outages, security breaches or other causes, could also have severe consequences to our business, including financial loss and reputational damage. A variety of provincial, state, national, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer and other processing of personal data. These laws and regulations are evolving and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. For example, the California Consumer Privacy Act of 2018, or CCPA, which went into effect on January 1, 2020, required us (among other obligations) to modify certain of our information practices, provide new disclosures to California consumers, and afford such consumers various privacy rights. In the short period of time since its original enactment, the CCPA has been the subject of several subsequent amendments, modifications and administrative rulemakings. Our actual or perceived failure to adequately comply with applicable laws and regulations relating to privacy and data protection (including regimes such as the CCPA that are rapidly evolving) could result in regulatory fines, investigations and enforcement actions, penalties and other liabilities, claims for damages by affected individuals, and damage to our reputation, any of which could have a material adverse effect on our operations, financial performance and business. Our commercial and cybersecurity insurance policies may be insufficient to insure us against these risks, and future escalations in premiums and deductibles under these policies may render them uneconomical. COMPETITION The markets for our technologies are highly competitive, and we face competitive threats and pricing pressure in our markets. Consumers may perceive the quality of the visual and audio experiences produced by some of our competitors’ technologies to be equivalent or superior to the sight and sound experiences produced by our technologies. Some of our current or future competitors may have significantly greater financial, technical, marketing, and other resources than we do, or may have more experience or advantages in the markets in which they compete. These competitors may also be able to offer integrated systems in markets for entertainment technologies on a royalty-free basis or at a lower price than our technologies, including audio, imaging, and other technologies, which could make competing technologies that we develop less attractive. Pricing Pressures. The markets for the consumer entertainment products in which our technologies are incorporated are intensely competitive and price sensitive. We expect to face increased royalty pricing pressure for our technologies as we seek to drive the adoption of our technologies into online content and portable devices, such as tablets and smartphones. Retail prices for consumer entertainment products that include our 21 sound technologies, such as DVD and Blu-ray players and home theater systems, have decreased significantly, and we expect prices to decrease for the foreseeable future. In response, OEMs have sought to reduce their product costs, which can result in additional downward pressure on the licensing fees we charge. Customers as Competitors. We face competitive risks in situations where our customers are also current or potential competitors. For example, Samsung and Technicolor are significant licensee customers, but are also competitors with respect to some of our consumer, broadcast, and cinema technologies. Our customers may choose to use competing technologies they have developed or in which they have an interest rather than use our technologies. The existence of important customer relationships may influence which strategic opportunities we pursue, as we may forgo some opportunities in the interests of preserving a critical customer relationship. Competition from Other Audio Formats, Imaging Solutions, and Integrated System Offerings. We believe that the success we have had licensing our audio technologies is due, in part, to the perception that our technologies provide a high quality solution for multichannel audio and the strength of our brand. However, both free and proprietary sound technologies are becoming increasingly prevalent, and we expect competitors to continue to enter this field with other offerings. Furthermore, to the extent that customers perceive our competitors’ products as providing the same or similar advantages as our technologies at a lower or comparable price, there is a risk that these customers may treat sound encoding technologies as commodities, resulting in loss of status of our technologies, decline in their use, and significant pricing pressure. For example, we face competition with respect to our HDR imaging technology, Dolby Vision, and there can be no assurance that additional consumers will adopt Dolby Vision in the near future, or at all, or that we will maintain our existing customers. In addition, some of our current or potential competitors may be able to offer integrated systems in certain markets for entertainment technologies, including audio and imaging, which could make competing technologies that we develop or acquire obsolete. By offering an integrated system solution, these potential competitors may also be able to offer competing technologies at lower prices than we can, which could adversely affect our operating results. STRATEGIC ACTIVITIES Importance of Industry Relationships. To be successful, we must maintain and grow our relationships with a broad range of industry participants, including: • Content creators, such as film directors, studios, mobile and online content producers, and music producers; • Content distributors, such as studios, film exhibitors, broadcasters, operators, and OTT video service providers and video game publishers; • Leading companies in the audio and video conferencing markets; and • Device manufacturers. Industry relationships have historically played an important role in the markets that we serve, particularly in the entertainment market. For example, sales of our products and services are particularly dependent upon our relationships with major film studios and broadcasters, and licensing of our technologies is particularly dependent upon our relationships with system licensees and IC manufacturers. If we fail to maintain and strengthen these relationships, these entertainment industry participants may be less likely to purchase and use our technologies, products, and services, or create content incorporating our technologies. Industry relationships also play an important role in other markets we serve; for instance, our partner relationships in the audio and video conferencing markets are important to our communications business. Consequences of M&A Activity. We evaluate a wide array of possible strategic transactions, including acquisitions. We consider these types of transactions in connection with, among other things, our efforts to 22 strengthen our audio and cinema businesses and expand beyond sound technologies. Although we cannot predict whether or not we will complete any such acquisitions or other transactions in the future, any of these transactions could be significant in relation to our market capitalization, financial condition, or results of operations. The process of integrating an acquired company, business, or technology may create unforeseen difficulties and expenditures. Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to integration of operations across different geographies, cultures, and languages; currency risks; and risks associated with the economic, political, and regulatory environment in specific countries, including delays related to COVID-19. Future acquisitions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses, and write-offs of goodwill. Future acquisitions may also require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all. Also, the anticipated benefits of our acquisitions may not materialize. We face various risks in integrating acquired businesses, including: • Diversion of management time and focus from operating our business to acquisition integration challenges; • Cultural and logistical challenges associated with integrating employees from acquired businesses into our organization; • Retaining employees, suppliers and customers from businesses we acquire; • The need to implement or improve internal controls, procedures, and policies appropriate for a public company at businesses that prior to the acquisition may have lacked effective controls, procedures, and policies; • Possible write-offs or impairment charges resulting from acquisitions; • Unanticipated or unknown liabilities relating to acquired businesses; and • The need to integrate acquired businesses’ accounting, management information, manufacturing, human resources, and other administrative systems to permit effective management. LEGAL AND REGULATORY COMPLIANCE International Business and Compliance. We are dependent on international sales for a substantial amount of our total revenue. Approximately 60%, 64% and 67% of our revenue was derived outside of the U.S. in fiscal 2020, 2019, and 2018, respectively. We are subject to a number of risks related to conducting business internationally, including: • U.S. and foreign government trade restrictions or sanctions, including those which may impose restrictions on the importation of programming, technology, or components to or from the U.S., and those which may put restrictions or prohibitions on the exportation, reexportation, sale, shipment or other transfer of programming, technology, components, and/or services to foreign persons; • Changes in trade relationships, including new tariffs, trade protection measures, import or export licensing requirements, trade embargoes and other trade barriers; • Tariffs imposed by the U.S. on goods from other countries or tariffs imposed by other countries on U.S. goods, including the tariffs imposed over the course of 2018 and 2019 by the U.S. government on various imports from China and by the Chinese government on certain U.S. goods, the scope and duration of which remain uncertain; • Compliance with applicable international laws and regulations, including antitrust and other competition laws, that may change unexpectedly, differ, or conflict with laws in other countries where we conduct business, or are otherwise not harmonized with one another; • Foreign government taxes, regulations, and permit requirements, including foreign taxes that we may not be able to offset against taxes imposed upon us in the U.S., and other laws limiting our ability to repatriate funds to the U.S.; 23 • Potential adverse changes in the political and/or economic stability of the regions in which we operate or in diplomatic relations between governments; • Difficulty in establishing, staffing, and managing foreign operations, including but not limited to restrictions on the ability to obtain or retain licenses required for operation, relationships with local labor unions and works councils, investment restrictions and/or requirements, and restrictions on foreign ownership of subsidiaries; • Adverse fluctuations in foreign currency exchange rates and interest rates, including risks related to any interest rate swap or other hedging activities we undertake; • Poor recognition of IP rights; • Difficulties in enforcing contractual rights; • Multi-jurisdictional data protection and privacy laws, including the European Union’s General Data Protection Regulation and restrictions on transferring personally identifiable information outside of a jurisdiction; • Political or social instability in the U.K. and Europe (including but not limited to uncertainty resulting from the Brexit referendum in the U.K.) and in Russia, the Middle East, North Africa, Latin America and other emerging markets; • The global macroeconomic environment and potential slowing of key markets we serve; and • Changes in the regulatory and compliance landscape resulting from COVID-19. Any or all of these factors may impact the demand for, and profitability of, our technologies and products, as well as our customers’ products that incorporate our technologies. Certain foreign governments, particularly in China, have advanced arguments under their competition laws that exert downward pressure on royalties for IP. The regulatory enforcement activities in such jurisdictions can be unpredictable, in some cases because these jurisdictions have only recently implemented competition laws. From time to time, we are the subject of requests for information, market conduct examinations, inquiries or investigations by industry groups and/or regulatory agencies in these jurisdictions. For instance, the Korean Fair Trade Commission has requested information relating to our business practices in South Korea on various occasions, and we have cooperated and are continuing to cooperate with such requests. In the event that we are involved in significant disputes or are the subject of a formal action by a regulatory agency, our results could be negatively impacted and we could be exposed to costly and time-consuming legal proceedings. In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by U.S. regulations applicable to us such as the FCPA and U.S. export controls. Although we implement policies and procedures designed to ensure compliance with the FCPA and U.S. export controls, there can be no assurance that all of our employees, distributors, dealers, and agents will not take actions in violation of our policies or these regulations. Costs of Environmental Laws and Regulation. Our operations use substances regulated under federal, state, local, and international laws governing the environment, including those governing the discharge of pollutants into the air and water, the management, disposal, and labeling of hazardous substances and wastes, and the cleanup of contaminated sites. In addition, future environmental laws and regulations have the potential to affect our operations, increase our costs, decrease our revenue, or change the way we design or manufacture our products. We face increasing complexity in our product design as we adjust to requirements relating to the materials composition of our products. For some products, substituting particular components containing regulated hazardous substances is more difficult or costly, and additional redesign efforts could result in production delays. We could incur costs, fines, and civil or criminal sanctions, third party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws. 24 Conflict Minerals. SEC rules require the disclosure of the use of tantalum, tin, tungsten, and gold (commonly referred to as “conflict minerals”) that are sourced from the Democratic Republic of the Congo and surrounding countries. This requirement could affect the sourcing, availability and pricing of materials used in our products as well as the companies we use to manufacture our products. In circumstances where sources of conflict minerals from the Democratic Republic of the Congo or surrounding countries are not validated as conflict free, we may take actions to change materials, designs or manufacturers to reduce the possibility that our contracts to manufacture products that contain conflict minerals finance or benefit local armed groups in the region. The SEC disclosure requirements could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers that can certify to us that they are offering “conflict free” conflict minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. These actions could also add engineering and other costs in connection with the manufacturing of our products. We may not be able to sufficiently verify the origins for the minerals used in our products. Our reputation may suffer if we determine that our products contain conflict minerals that are not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products. In addition, some customers may require that all of our products are certified to be conflict free and if we cannot satisfy these customers, they may choose a competitor’s products. Tax Rates and Liabilities. We are a U.S. multi-national company that is subject to tax in multiple U.S. and foreign jurisdictions. We must use judgment to determine our worldwide tax provision. We receive significant tax benefits from a portion of our foreign sales, and realizability of these benefits are contingent upon existing current tax laws and regulations in the U.S. and countries where we operate. The following could materially affect our effective tax rate: • Changes in geographic mix of earnings, where earnings are lower than anticipated in countries with lower tax rates and higher than anticipated in countries with higher tax rates; • Changes in the valuation of our deferred tax assets and liabilities; • Changes in transfer pricing arrangements; • Outcomes of tax audits; • Changes in accounting principles; or • Changes in tax laws and regulations in the countries in which we operate, including an increase in tax rates, or an adverse change in the treatment of an item of income or expense. The U.S. tax law changes enacted through the Tax Cuts and Jobs Act (“Tax Act”) require us to exercise significant judgment in interpreting its provisions. As we evaluate the full impact of current and future guidance that is introduced, our results may materially differ from previous estimates, and those differences may materially affect our financial position. The application of the Tax Act and any changes that we make to our corporate trading structure could adversely affect our tax rate and cash flow in future years. The Organization of Economic Cooperation and Development (“OECD”), an international association of many countries including the United States, has made changes to many long-standing transfer pricing and cross- border taxation rules. In addition, the European Union and its European Commission are proposing model legislation and investigating companies that might be in violation of European Union competition rules against unjustified state aid. Further, the OECD, European Union, European Commission, and individual countries have made and could make additional competing jurisdictional claims over the taxes owed on earnings of multinational companies in their respective countries or regions. To the extent these actions take place in the countries that we operate, it is possible that in the future, these efforts may increase uncertainty and have an adverse impact on our effective tax rates or operations. 25 We are subject to the periodic examination of our income tax returns by tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes, but an adverse decision by tax authorities exceeding our reserves could significantly impact our financial results. STOCK-RELATED ISSUES Controlling Stockholder. At September 25, 2020, the Dolby family and their affiliates owned 196,051 shares of our Class A common stock and 36,052,233 shares of our Class B common stock. As of September 25, 2020, the Dolby family and their affiliates had voting power of 99.8% of our outstanding Class B common stock, which combined with their shares of our Class A common stock, represented 84.8% of the combined voting power of our outstanding Class A and Class B common stock. Under our certificate of incorporation, holders of Class B common stock are entitled to ten votes per share while holders of Class A common stock are entitled to one vote per share. Generally, shares of Class B common stock automatically convert into shares of Class A common stock upon transfer of such Class B common stock, other than transfers to certain specified persons and entities, including the spouse and descendants of Ray Dolby and the spouses and domestic partners of such descendants. As a result of this dual class structure, the Dolby family and their affiliates will, for the foreseeable future, have significant influence over our management and affairs, and will be able to control virtually all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as mergers or other sales of our company or assets, even if they come to own considerably less than 50% of the total number of outstanding shares of our Class A and Class B common stock. Absent a transfer of Class B common stock that would trigger an automatic conversion as described above, there is no threshold or time deadline at which the shares of Class B common stock will automatically convert into shares of Class A common stock. Moreover, the Dolby family and their affiliates may take actions in their own interests that our other stockholders do not view as beneficial. Insider Sales of Common Stock. If our large shareholders, officers, directors or employees sell, or indicate an intention to sell, substantial amounts of our Class A common stock in the public market, including shares of Class A common stock issuable upon conversion of shares of Class B common stock, the trading price of our Class A common stock could decline. Stock Repurchase Program. Our stock repurchase program may reduce the public float of shares available for trading on a daily basis. Such purchases may be limited, suspended, or terminated at any time without prior notice. There can be no assurance that we will buy additional shares of our Class A common stock under our stock repurchase program or that any future repurchases will have a positive impact on our stock price or earnings per share. Important factors that could cause us to discontinue or decrease our share repurchases include, among others, unfavorable market conditions, the market price of our Class A common stock, the nature of other investment or strategic opportunities presented to us, the rate of dilution of our equity compensation programs, our ability to make appropriate, timely, and beneficial decisions as to when, how, and whether to purchase shares under the stock repurchase program, and the availability of funds necessary to continue purchasing stock. If we curtail our repurchase program, our stock price may be negatively affected. Dividend Program. We cannot provide assurance that we will continue to increase dividend payments and/or pay dividends. We are not obligated to pay dividends on our Class A and Class B common stock. In October 2014, we announced a quarterly cash dividend program for our stockholders that was initiated by our Board of Directors. Since the initial commencement of our dividend program, our Board of Directors has annually approved an increase to our cash dividend. Although we anticipate paying regular quarterly dividends for the foreseeable future, 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 26 stockholders. The dividend policy may be changed or canceled at the discretion of the Board of Directors at any time. If we do not pay dividends, the market price of our Class A common stock must appreciate for investors to realize a gain on their investment. This appreciation may not occur and our Class A common stock may in fact depreciate in value. GENERAL RISK FACTORS Fluctuations in Foreign Currency Exchange Rates. We earn revenues, pay expenses, own assets and incur liabilities in foreign countries using several currencies other than the U.S. dollar. 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 other than the functional currency result in gains or losses that are reflected in our consolidated statements of operations. Further, our hedging programs may not be effective to offset any, or more than a portion, of the adverse impact of currency exchange rate movements. Additional risks related to fluctuations in foreign currency exchange rates are described in the Foreign Currency Exchange Risk section of Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk.” Business Interruptions by Natural Disasters and Other Events Beyond Our Control. Although we maintain crisis management plans, our business operations are subject to interruption by natural disasters and catastrophic events beyond our control, including, but not limited to, earthquakes, hurricanes, typhoons, tropical storms, floods, tsunamis, fires, droughts, tornadoes, public health issues and pandemics, severe changes in climate, war, terrorism, and geo-political unrest and uncertainties. Further, outbreaks of pandemic diseases, or the fear of such events, could provoke (and in the case of COVID-19 has provoked) responses, including government-imposed travel restrictions and limits on access to entertainment venues. These responses could negatively affect consumer demand and our business, particularly in international markets. Additionally, several of our offices, including our corporate headquarters in San Francisco, are located in seismically active regions. Because we do not carry earthquake insurance for earthquake–related losses and significant recovery time could be required to resume operations, our financial condition and operating results could be materially adversely affected in the event of a major earthquake or catastrophic event. Competition for Employees. In order to be successful, we must attract, develop, and retain employees, including employees to work on our growth initiatives where our current employees may lack experience with the business models and markets we are pursuing. Competition for experienced employees in our markets can be intense. In order to attract and retain employees, we must provide a competitive compensation package, including cash and equity compensation. Our equity awards include stock options and restricted stock units. The future value of these awards is uncertain, and depends on our stock price performance over time. In order for our compensation packages to be viewed as competitive, prospective employees must perceive our equity awards to be a valuable benefit. 27 ITEM 1B. UNRESOLVED STAFF COMMENTS None. Our principal corporate office and worldwide headquarters, which we own, is at 1275 Market Street, ITEM 2. PROPERTIES San Francisco, California. Other Properties We also own a commercial office building located in Sunnyvale, California, and lease additional R&D, sales, product testing, and administrative facilities from third parties in California, New York, and internationally, including in Asia, Europe, Australia, the Middle East, and South America. We believe that our current facilities are adequate to meet our needs for the near future, and that suitable additional or alternative space will be available on commercially reasonable terms to accommodate our foreseeable future operations. Dolby Wootton Bassett, LLC, of which Dagmar Dolby as Trustee of the Dagmar Dolby Trust under the Dolby Family Trust Instrument dated May 7, 1999 (the “Dagmar Dolby Trust”) is the sole member, and the Dagmar Dolby Trust own a majority financial interest in real estate entities that own or from whom we lease certain facilities located in California and the U.K. We own the remaining financial interests in these real estate entities. Our ownership interest in these consolidated affiliated entities, in addition to information regarding the location of the property leased to Dolby Laboratories as of September 25, 2020 is summarized within the table below. The leases for these facilities expire at various times through 2025. Entity Name Minority Ownership Interest Dolby Properties Brisbane, LLC . . . . . . . . . Dolby Properties Burbank, LLC . . . . . . . . . . Dolby Properties, LP . . . . . . . . . . . . . . . . . . 49.0% 49.0% 10.0% Location Of Properties Brisbane, California Burbank, California Wootton Bassett, England Approximate Square Footage 43,500 22,000 17,500 100 Potrero Avenue, San Francisco, California Since 1980, we have leased a corporate office, warehouse space, and additional parking located at 100, 130, and 140 Potrero Avenue, San Francisco, California from the various Dolby family trusts. The lease for this office expires on October 31, 2024, and provides approximately 70,000 square feet of space. The Dolby family trusts retain the right to sublease approximately 1,099 square feet of office space in the premises with prior notice to us, at a rental rate equal to the then current base rent per square foot paid by us plus $14 per square foot per year (reflecting estimated costs payable by us for the operation and maintenance of the premises, subject to an annual increase of 1.5% per year during each year of the sublease term). We have ceased occupancy of the leased space at 100, 130, and 140 Potrero Avenue, and do not intend to re-occupy those locations. We remain responsible for operating expenses, taxes, and the condition, operation, repair, maintenance, security, and management of the premises. We have also agreed to indemnify and hold the Dolby family trusts, as landlord, harmless from and against certain liabilities, damages, claims, costs, penalties, and expenses arising from our conduct related to the premises. In fiscal 2019, we entered a sublease with a subtenant for the remaining lease term at 100 Potrero Avenue, pursuant to which the subtenant is required to reimburse us with respect to the foregoing expenses and taxes with respect to the subleased premises and to indemnify and hold us harmless with respect to the subleased premises in the same manner described above. We are involved in various legal proceedings from time to time arising from the normal course of business activities, including claims of alleged infringement of IP rights, commercial, employment, and other matters. In ITEM 3. LEGAL PROCEEDINGS 28 our opinion, resolution of these pending matters is not expected to have a material adverse impact on our operating results or financial condition. 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; 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, any such amounts are either immaterial or it is not possible to provide an estimated amount of any such potential losses. Not applicable. ITEM 4. MINE SAFETY DISCLOSURES 29 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our Class A common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “DLB.” Our Class B common stock is neither listed nor publicly traded. As of October 23, 2020, there were 47 holders of record of our Class A common stock and 38 holders of record of our Class B common stock. The number of Class A beneficial stockholders is substantially greater than the number of holders of record since a large portion of our common stock is held through brokerage firms. Dividend Policy In October 2014, we announced a quarterly cash dividend program for our stockholders that was initiated by our Board of Directors. Since the program was initiated, a quarterly dividend has been declared and paid to all eligible stockholders of Class A and Class B common stock. Most recently, on November 12, 2020, we announced a dividend in the amount of $0.22 per share, payable on December 4, 2020, to stockholders of record as of the close of business on November 24, 2020. 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. See Note 9 “Stockholders’ Equity & Stock-Based Compensation” to our consolidated financial statements for additional information related to the quarterly dividend. Further discussion of our recurring quarterly dividend is included within Shareholder Return in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Sales of Unregistered Securities None. Purchases of Equity Securities by the Issuer and Affiliated Purchasers In November 2009, our Board of Directors announced a stock repurchase program (“program”), providing for the repurchase of our Class A common stock. 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. The following table summarizes the initial amount of authorized repurchases as well as additional repurchases approved by our Board of Directors as of September 25, 2020 (in thousands): Authorization Period Authorization Amount Fiscal 2010: November 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2010: July 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2011: July 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2012: February 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2015: October 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2017: January 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2018: July 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2019: July 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 250,000 300,000 250,000 100,000 200,000 200,000 350,000 350,000 $2,000,000 30 The following table provides information regarding our share repurchases made under this program during the fourth quarter of fiscal 2020: Repurchase Activity Total Shares Purchased Average Price Paid Per Share (1) Total Shares Purchased As Part Of Publicly Announced Programs Remaining Authorized Repurchases (2) June 27, 2020 - July 24, 2020 . . . . . . . . . . July 25, 2020 - August 21, 2020 . . . . . . . . August 22, 2020 - September 25, 2020 . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 491,333 151,363 642,696 $ — 69.92 70.27 — 491,333 151,363 642,696 $232.2 million $197.8 million $187.2 million (1) Average price paid per share excludes commission costs. (2) Amounts represent the approximate dollar value of the maximum remaining number of shares that may yet be purchased under the stock repurchase program, and excludes commission costs. Stock Price Performance Graph The following graph compares the total cumulative return of our Class A common stock with the total cumulative return for the New York Stock Exchange Composite Index (“NYSE Composite”) and the Russell 3000 Index (“Russell 3000”) for the five fiscal years ended September 25, 2020. The figures represented below assume an investment of $100 in our Class A common stock at the closing price of $31.40 on September 25, 2015, and in the NYSE Composite and Russell 3000 on the same date and the reinvestment of dividends into shares of common stock. The comparisons in the table are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance of our Class A common stock. This graph shall not be deemed “filed” for purposes of Section 18 of Securities Exchange Act of 1934, as amended (“Exchange Act”) or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act or the Exchange Act. 31 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited consolidated financial statements and the accompanying notes included within this filing. The consolidated balance sheet data for the fiscal years ended September 25, 2020 and September 27, 2019, and consolidated statements of operations data for the fiscal years ended September 25, 2020, September 27, 2019, and September 28, 2018 were derived from our audited consolidated financial statements included in this report. The consolidated balance sheet data as of September 28, 2018, September 29, 2017, and September 30, 2016 and consolidated statements of operations data for the fiscal years ended September 29, 2017 and September 30, 2016 were derived from our audited consolidated financial statements not included in this report. The historical financial results presented below are not necessarily indicative of results to be achieved in future periods. Note that fiscal 2016 consisted of 53 weeks, while all other fiscal years presented consisted of 52 weeks. All amounts presented below are displayed in thousands, except per share amounts. September 25, 2020 September 27, 2019 September 28, 2018 September 29, 2017 September 30, 2016 (1) Fiscal Year Ended Operations: Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before provision for income taxes . . . . . . . . . . . Net income attributable to Dolby Laboratories, Inc. . . . . $1,161,792 1,015,294 796,552 239,715 231,363 Net Income Per Share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-Average Shares Outstanding: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared per common share . . . . . . . . . . . . . . Cash dividend paid per common share . . . . . . . . . . . . . . . . . . $ $ $ $ 2.30 2.25 100,564 102,944 0.88 0.88 $1,241,620 1,080,766 823,689 282,307 255,151 $ $ $ $ 2.51 2.44 101,629 104,572 0.79 0.76 $1,054,600 927,038 743,533 196,374 41,746 $ $ $ $ 0.40 0.39 103,377 106,978 0.67 0.64 $1,080,177 961,648 714,515 255,145 206,481 $ $ $ $ 2.03 2.00 101,784 103,286 0.58 0.56 $1,025,738 916,756 684,961 235,904 185,860 $ $ $ $ 1.85 1.81 100,717 102,424 0.50 0.48 September 25, 2020 September 27, 2019 September 28, 2018 September 29, 2017 September 30, 2016 (1) Fiscal Year Ended Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term and long-term investments . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity—Dolby Laboratories, Inc. $1,071,876 1,280,087 99,097 2,917,325 2,432,643 $ 797,210 1,074,687 298,733 2,821,749 2,307,351 $ 918,063 1,211,378 365,920 2,865,387 2,363,936 $ 627,017 1,061,218 562,121 2,836,463 2,391,627 $ 516,112 546,647 515,533 2,310,106 1,970,256 (1) The selected financial data for fiscal year ended September 30, 2016 presented in the table above reflects ASC 605, and has not been recast for, and does not reflect the adoption of ASC 606. 32 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to key challenges listed below and risks described in Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K. We disclaim any duty to update any of the forward-looking statements to conform our prior statements to actual results. Investors and others should note that we disseminate information to the public about our company, our products, services and other matters through various channels, including our website (www.dolby.com), our investor relations website (http://investor.dolby.com), SEC filings, press releases, public conference calls, and webcasts, in order to achieve broad, non-exclusionary distribution of information to the public. We encourage investors and others to review the information we make public through these channels, as such information could be deemed to be material information. COVID-19 In December 2019, a novel coronavirus disease was first reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On March 11, 2020, the WHO characterized COVID-19 as a pandemic. COVID-19 has triggered worldwide shutdowns, job losses, and other disruptions which in turn have negatively affected the global economy, including consumer purchasing activity. Because Dolby technologies are featured in a wide array of electronic products that are primarily purchased by consumers, our revenues have been negatively affected by COVID-19. The issues and circumstances relating to COVID-19 continue to change rapidly and are difficult to predict. We continue to monitor the evolving situation and the impact on our business. The outbreak of COVID-19 has also affected many of our partners, resulting in the disruption of consumer products’ supply chains and delays in shipments, product development, and product launches. Consumer demand for products that include our technologies may continue to be negatively impacted due to economic uncertainty resulting from COVID-19. These factors have resulted in decreased revenue pertaining to royalties on consumer devices and may cause delays in the adoption of our technologies by partners. The overall cinema market has been adversely impacted by COVID-19 shelter-in-place and social distancing mandates. Our exhibition partners and customers have had to either partially or fully discontinue operations. This has resulted in a significant reduction in box office receipts at Dolby Cinema sites and lower demand for our cinema products and services. Though select cinema locations have been permitted to resume operations, many such locations are operating significantly below capacity. It remains uncertain when the cinemas will be able to operate at full capacity. At Dolby, we implemented work-from-home policies within all our offices in locations with ongoing outbreaks and put in place additional safety measures and global travel restrictions to ensure the well-being of our employees. We have enabled our employees with the tools and infrastructure they need to carry on our critical operations and progress the business forward in this remote working environment. Select Dolby offices in certain locations have resumed in-office work at less than full capacity, dependent on local progress against COVID-19 and applicable rules and regulations in those jurisdictions, as well as the readiness of our facilities to accommodate appropriate safety measures for our employees. We expect COVID-19 will continue to have an impact for the foreseeable future. The degree of impact on our business will depend on several factors, such as the full duration and the extent of the pandemic, as well as actions taken by governments, businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. 33 Further discussion of the potential impacts of COVID-19 on our business can be found in Part I, Item 1A “Risk Factors.” EXPANDING OUR LEADERSHIP IN AUDIO AND IMAGING EXPERIENCES We are focused on expanding our leadership in audio and imaging solutions for premium entertainment content by increasing the number of Dolby experiences that people can enjoy, which will drive revenue growth across the markets we serve. We aim to drive revenue growth by broadening Dolby experiences to more types of content, such as music and gaming, that can increase our value proposition in our existing device categories and create opportunities in new device categories that can accelerate adoption of our technologies. We are also beginning to leverage our audio and imaging expertise to expand the reach of our technologies to address content beyond premium entertainment that can create new revenue generating opportunities. Following is a discussion of the key markets that we address and the various Dolby technologies and solutions that serve these markets. LICENSING The majority of our licensing revenue is derived from the licensing of audio and imaging technologies for premium entertainment playback. Our audio technologies are primarily comprised of DD+, Dolby Atmos, AC-4, and our AAC and HE-AAC technologies. Our imaging technologies are primarily comprised of Dolby Vision and our AVC and HEVC technologies. The following are certain highlights from fiscal 2020 and key challenges related to audio and imaging licensing, by market. Broadcast Highlights: We have an established global presence with respect to our DD+ and HE-AAC audio technologies in broadcast services and devices. In recent years, we have expanded our offerings in the broadcast market through the introduction of newer technologies, including our Dolby Atmos and AC-4 audio technologies, Dolby Vision, as well as AVC and HEVC imaging technologies which we license through patent pools. We continue to add new TV partners for Dolby Vision and Dolby Atmos. For example, during fiscal 2020, Xiaomi launched their first TV model that supports both Dolby Vision and Dolby Atmos. In addition, many of our existing partners expanded their support of the combined Dolby Vision and Dolby Atmos experience by releasing more models and expanding into international markets, such as India. As a result, the adoption of Dolby Vision and Dolby Atmos within 4K TV shipments grew compared to the previous year. Also this year, we launched Dolby Vision IQ along with our TV partners LG and Panasonic. Dolby Vision IQ automatically adjusts the TV picture according to the surrounding light and the type of content being viewed, creating an enhanced viewing experience. We continued to see engagement with partners supporting our newer technologies in STBs. In fiscal 2020, Free, a broadcast service provider in France, as well as Deutsche Telekom in Germany, both launched their first STBs supporting Dolby Vision and Dolby Atmos. Key Challenges: Our pursuit of growth and further adoption of our technologies may be impacted by a number of factors. In certain countries, such as China, we face difficulties enforcing our contractual and IP rights, including instances in which our licensees fail to accurately report the shipment of products using our technologies. We must continue to present compelling reasons for consumers to demand our audio and imaging technologies, including ensuring that there is a breadth of available content in our formats and such content is being widely distributed. To the extent that OEMs do not incorporate our technologies in current and future products, our revenue could be impacted. Additionally, in the broadcast market, as well as other markets, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements. Further, 34 COVID-19 is causing uncertainty about consumer demand for devices and services in the broadcast market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. Mobile Highlights: We continue to focus on adoption of our technologies across major mobile ecosystems, including Apple and Android. HE-AAC and HEVC are widely adopted audio and video technologies across mobile devices. We offer these technologies through our patent licensing programs. We also continue to focus on expanding adoption of our DD+, AC-4, Dolby Atmos, and Dolby Vision technologies in the mobile market. The breadth of mobile devices supporting Dolby technologies continues to increase globally. In fiscal 2020, Apple continued to adopt Dolby Vision and Dolby Atmos across their portfolio of devices, leading to support for Dolby Vision capture and playback on Apple’s newest iPhone, and AirPods Pro support of Dolby Atmos with the release of iOS14. In addition, a majority of Apple’s other iOS product offerings support the combined experience of Dolby Vision and Dolby Atmos. Additional Dolby Atmos-enabled mobile devices are available in the market from partners such as Samsung, Amazon, Oppo, and Sony. Key Challenges: Growth in this market is dependent on several factors. Due to short product life cycles, mobile device OEMs can readily add or remove certain of our technologies from their devices. Our success depends on our ability to address the rapid pace of change in mobile devices, and we must continuously collaborate with mobile device OEMs to incorporate our technologies. We rely on a small number of partnerships with key participants in the mobile market. If we are unable to maintain these key relationships, we may experience a decline in mobile devices incorporating our technologies. To the extent that OEMs do not incorporate our technologies in current and future products, our revenue could be impacted. Additionally, we must continue to support the development and distribution of Dolby enabled content via various ecosystems. Further, COVID-19 is causing uncertainty about consumer demand for devices in the mobile market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. Consumer Electronics Highlights: We have an established presence in the home entertainment market across devices such as AVRs, soundbars, smart speakers, Blu-Ray players, and DMAs, through the inclusion of our DD+ technology, and increasingly through the inclusion of our Dolby Atmos technology. AAC and HE-AAC technologies also have broad adoption through our patent licensing programs. These home entertainment devices can be paired with a growing array of Dolby enabled content via OTT services and Blu-ray discs. In fiscal 2020, the breadth of devices in the home entertainment market supporting Dolby Atmos continued to expand. Sonos launched a new soundbar that supports Dolby Atmos, and Roku launched their new DMA supporting Dolby Vision and Dolby Atmos. In addition, content available in Dolby Vision and Dolby Atmos continued to grow in fiscal 2020, broadening our opportunities for increased adoption in more devices. Google Play, Showtime, and CBS began supporting Dolby Vision content. Additional OTT services currently supporting the combined experience of Dolby Vision and Dolby Atmos include Netflix, Disney+, Amazon, and Apple TV+. We have also expanded our global presence with Hotstar supporting Dolby Vision within their Disney+ content in India, and Tencent and iQiYi supporting Dolby Vision and Dolby Atmos in China. We continue to focus on expanding the availability of Dolby technologies to new devices and new forms of content such as music, bringing new Dolby experiences to the market. In fiscal 2020, TIDAL began enabling Dolby Atmos for music to a growing number of TVs, soundbars, and AVR devices through their streaming app. In addition, Dolby Atmos music is available on the Amazon Echo Studio smart speaker streaming from Amazon Music HD. 35 Key Challenges: We must continue to present compelling reasons for consumers to demand our technologies wherever they enjoy entertainment content, while promoting creation and broad availability of content in our formats. To the extent that OEMs do not incorporate our technologies in current and future products, our revenue could be impacted. Further, COVID-19 is causing uncertainty about consumer demand for devices in the home entertainment market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. Personal Computers Highlights: DD+ continues to enhance playback in both Mac and Windows operating systems, including native support in their respective Safari and Microsoft Edge browsers. Dolby’s presence in these browsers enables us to reach more users through various types of content, including streaming video entertainment. In fiscal 2020, Lenovo and ASUS released a number of gaming laptops with Dolby Atmos broadening the consumer base that can experience Dolby technologies. Also during the year, a number of gaming titles enabled in Dolby Atmos were released across multiple gaming platforms such as PCs. In addition, a number of PCs from partners such as Apple, Lenovo, Dell, and ASUS support Dolby Vision and Dolby Atmos. Key Challenges: PC revenues have been impacted by a decline in the portion of PCs that have optical disc functionality in recent years, which has resulted in a decline in our ASPs, and we expect this decline in ASPs to continue. If declining conditions and trends persist, and OEMs do not incorporate our technologies in current and future products, our PC revenues will face continuing downward pressure. We must continuously collaborate and maintain our key partnership relationships with PC manufacturers to incorporate our technologies, and we must continue to support the development and distribution of Dolby content via various ecosystems. Further, COVID-19 is causing uncertainty about consumer demand for devices in the PC market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. Other Markets Highlights: DD+ is incorporated in the Xbox and PlayStation gaming consoles and streaming platforms for movie and television content. In fiscal 2020, Microsoft announced that their next generation Xbox Series X and Series S will be the first gaming consoles to support Dolby Vision and Dolby Atmos for gaming content. We also generate revenue from the automotive industry primarily through disc playback devices as well as other elements of the entertainment system, and are focused on expanding our presence in music in the automotive industry. Key Challenges: Consumer demand for devices in the gaming industry is impacted by the anticipation of console refresh cycles. In addition, the gaming console market has competition from mobile devices and gaming PCs, which have faster refresh cycles and appeal to a broader consumer base. These factors may impact our future revenues. If OEMs do not incorporate our technologies in current and future products, our revenues will face downward pressure. Further, COVID-19 is causing uncertainty about consumer demand for devices in the gaming industry, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. In addition to licensing revenue derived from the licensing of audio and imaging technologies from the markets discussed above, we offer our audio and imaging technologies to create Dolby experiences through Dolby Cinema. 36 Dolby Cinema Highlights: We continued to expand our global presence for Dolby Cinema. In fiscal 2020, the first Dolby Cinemas were opened in South Korea and Saudi Arabia, and we established more partnerships with global exhibitors. At the end of the fiscal year, we had over 250 Dolby Cinema locations established across 13 countries. The breadth of motion pictures for Dolby Cinema continues to grow with over 300 theatrical titles in Dolby Vision and Dolby Atmos having been announced or released from all the major studios. Key Challenges: Although the premium large format market for the cinema industry has been growing, Dolby Cinema competes with other existing offerings. Our success depends on our partners and their success and our ability to differentiate our offering, deploy new sites in accordance with plans, and attract and retain a global viewing audience. In addition, the success of our Dolby Cinema offering will be tied to global box office performance generally. COVID-19 has had, and is likely to continue to have, a significant effect on theatrical exhibition. The response to COVID-19 including the closure of cinemas, shelter-in-place mandates and government-imposed social-distancing restrictions have had, and are likely to continue to have, a negative impact on our cinema-related revenues and consumer demand. Further, studios have delayed the release of a number of new movie titles and temporarily suspended the production of future releases. It is uncertain whether consumer demand for the cinema and other forms of indoor recreation will return to previous levels. In addition, when cinemas reopen, exhibitor partners may operate fewer screens in response to decreased attendance. PRODUCTS & SERVICES A majority of our products and services revenues are derived from the sale of audio and imaging products for the cinema, television, broadcast, communication, and entertainment industries. Revenues from the sale of Dolby Conference Phones, Dolby Voice Room, as well as our recently launched Developer Platform are included in products and services. Cinema Products & Services Highlights: To help enable the playback of content in Dolby formats, we offer a range of servers and audio processors to cinema exhibitors globally. Dolby Atmos has been adopted broadly across studios, content creators, post-production facilities, and exhibitors. As of the end of fiscal 2020, there are over 6,000 Dolby Atmos screens installed or committed and over 1,800 Dolby Atmos theatrical titles have been announced or released. We also offer a variety of other cinema products, which include the IMS3000, an integrated imaging and audio server with Dolby Atmos, the Dolby Multichannel Amplifier, and our high-power flexible line of speakers. These products allow us to offer exhibitors a more complete Dolby Atmos solution that is often more cost effective than what was previously available to them. Key Challenges: Demand for our cinema products is dependent upon our partners and their success in the market, industry and economic cycles, box office performance, and our ability to develop and introduce new technologies, further our relationships with content creators, and promote new cinematic audio and imaging experiences. A significant portion of our growth opportunity lies in international markets, such as China, which are subject to economic risks as well as geo-political risks. We may also be faced with pricing pressures or competing technologies, which would affect our revenue. Additionally, the effects of COVID-19 such as the closure of cinemas, social distancing requirements, and shelter-in-place mandates have had, and are likely to continue to have, a negative impact on demand for cinema products and services. COVID-19 has also negatively impacted the financial health of our cinema customers and partners. If cinemas permanently close, our equipment may be available for resale on the secondary market, and erode the demand for new products. These conditions are likely to continue after the end of government-imposed restrictions. 37 Dolby Voice Highlights: In fiscal 2020, we sold hardware products such as the Dolby Conference Phone and the Dolby Voice Room, which include our Dolby Voice technology. In response to the changing market opportunities, in the first quarter of fiscal 2021 we decided to begin exiting the sale and leasing of conference hardware. Going forward, our Dolby Voice efforts will be focused on expanding the availability of our technologies through our developer platform and our software solutions for enterprise communications partners. Key Challenges: As we shift away from hardware solutions, we may face challenges in how we expand our technologies to new offerings and solutions. Our success will depend on our ability to attract a robust developer community and new industry relationships as we to bring our services and technologies to market. Other Services Highlights: We are focused on bringing our expertise in media and communications to a broader range of digital experiences. In fiscal 2020 we launched our developer platform, Dolby.io, which enables developers to access our technologies through APIs. The initial offerings include media processing APIs for analyzing and improving the sound of recorded audio files, and interactivity APIs for enabling developers to embed enhanced communications experiences within their applications. Following the initial launch of Dolby.io, we have seen increased customer engagement with our media and interactivity APIs for use cases such as entertainment, online education and telehealth. For example, we have partnered with SoundCloud to incorporate our music mastering APIs within their online music distribution platform. Key Challenges: Our success in this market will depend on the number of developers we are able to attract, the volume of usage of the service, and our ability to monetize our services. Although the market for online experiences has been growing, Dolby’s interactivity API technologies compete with other offerings. In addition, our pursuit of growth and further adoption depends on our ability to continue to innovate and add additional value to our services. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements and accompanying notes are prepared in accordance with U.S. GAAP, pursuant to SEC rules and regulations. The preparation of these financial statements requires us to establish accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses. The SEC considers an accounting policy and estimate to be critical if it is both important to a company’s financial condition or results of operations and requires significant judgment by management in its application. On a regular basis, we evaluate our assumptions, judgments, and estimates, and historically, actual results have not differed significantly from them. If actual results or events differ materially from our judgments and estimates, our reported financial condition and results of operation for future periods could be materially affected. We have reviewed the selection and development of the critical accounting policies and estimates discussed below with the Audit Committee of our Board of Directors. Revenue Recognition We derive our revenue primarily from the licensing of our technologies and patents. In determining how revenue should be recognized, a five-step process is used, which requires judgment and estimates within the revenue recognition process. Generally, revenue is recognized upon transfer of control of promised products, services or intellectual property and technologies (“IP”) rights to customers in an amount that reflects the consideration that we expect to receive in exchange for those products, services or licensing of the IP rights. The primary judgments include estimating sales-based revenues in advance of receiving statements from our 38 licensees, estimating variable consideration, identifying the performance obligations in the contract, and determining whether the performance obligations are distinct, and allocating consideration accordingly. Most of our licensing arrangements are structured as sales-based whereby we are paid a unit-based royalty. The unit-based sales data that triggers the royalty obligation is generally reported to us in the quarter after triggering the royalty obligation. We apply the royalty exception to these arrangements, which requires that we recognize sales-based royalties at the later of when the sales occur based on our estimates or the completion of our performance obligations. Our estimates of royalty-based revenue take into consideration the macroeconomic effect of global events, such as COVID-19 or other natural disasters which may impact supply chain activities as well as demand for shipments. These estimates also 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 for 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 previously estimated, we record a favorable or unfavorable adjustment based on the difference, if any, between estimated and actual sales. We also enter into fixed and guaranteed licensing fees arrangements, which require the licensee to pay a fixed, non-refundable fee. In these cases, control is transferred and the transaction price—the amount we expect to be entitled to in exchange for the license right—is recognized upon the later of contract execution or the effective date. Transaction price is determined at contract execution and, to the extent variable consideration applies, is updated each subsequent reporting period until the completion of the contract. In addition, we evaluate whether a significant financing component exists when we recognize revenue in advance of customer payments that occur over time and extend beyond one year. In general, if the payment arrangements extend beyond the first year of the contract, we treat a portion of the payments as a financing component. The discount rate used for each arrangement reflects the rate that would be used in a separate financing transaction between us and the licensee at contract inception and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. As such, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component. The portion related to the financing component is recorded as interest income, and is not material to our consolidated financial statements. For additional information, see Note 3 “Revenue Recognition” to our consolidated financial statements in Part II, Item 8 of this Annual Report. IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED Collaborative Arrangements. In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, ASU 2018-18 precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. This standard will be effective for Dolby beginning September 26, 2020. While we have a number of collaborative arrangements, we do not believe that this standard will have a material impact on our consolidated financial statements. Financial Instruments. In June 2016, the FASB issued ASU 2016-13, Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments, which modifies the measurement of expected credit losses of certain financial instruments, including trade receivables, contract assets, and lease receivables. This standard will be effective for Dolby beginning September 26, 2020. We do not believe that this standard will have a material impact on our consolidated financial statements. Income Taxes. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which modifies and eliminates certain exceptions to the general principles of ASC 740, Income Taxes. This standard will be effective for Dolby beginning September 25, 2021. We are currently evaluating the impact of the standard on our consolidated financial statements. 39 RESULTS OF OPERATIONS For each line item included on our consolidated statements of operations described and analyzed below, the significant factors identified as the leading drivers contributing to the overall fluctuation are presented in descending order of their impact on the overall change (from an absolute value perspective). This discussion and analysis highlights comparisons of material changes in the consolidated financial statements for years ended September 25, 2020, September 27, 2019, and September 28, 2018. Note that adjustments related to previously under-reported sales-based royalties as well as unlicensed settlement activity, are collectively referred to as “recoveries.” Amounts displayed, except percentages, are in thousands. Revenue and Gross Margin Licensing Licensing revenue consists of fees earned from licensing our technologies to customers who incorporate them into their products and services to enable and enhance audio and imaging capabilities. The technologies that we license are either internally developed, acquired, or licensed from third parties. A significant portion of our licensing revenue pertains to customer-shipment royalties that we recognize based on estimates of our licensees’ shipments. To the extent that shipment data reported by licensees differs from estimates we made and recorded, we recognize an adjustment to revenue for such difference. Our cost of licensing consists mainly of amortization of certain purchased intangible assets and intangible assets acquired in business combinations, depreciation, third party royalty obligations, and associated fees. Licensing Fiscal Year Ended 2020 vs. 2019 2019 vs. 2018 September 25, 2020 September 27, 2019 September 28, 2018 $ % $ % Revenue . . . . . . . . . . . . . . . . . . . . . . . $1,078,577 $1,107,280 $940,777 $(28,703) (3)% $166,503 18% Percentage of total revenue . . . . Cost of licensing . . . . . . . . . . . . . . . . . Gross margin . . . . . . . . . . . . . . . . . . . Gross margin percentage . . . . . . 93% 89% 89% 50,822 57,531 42,583 (6,709) (12)% 14,948 35% 1,027,755 1,049,749 898,194 (21,994) (2)% 151,555 17% 95% 95% 95% 2020 vs. 2019 Factor Other Mobile PC Broadcast CE Licensing Revenue Gross Margin Lower revenues from Dolby Cinema resulting from the closure of cinemas and lower attendance due to COVID-19, lower automotive recoveries, and gaming, partially offset by higher patent administration fees from Via Licensing Higher revenues from increased adoption of our patent licensing technologies and increased adoption of Dolby Atmos and Dolby Vision, partially offset by lower recoveries Higher revenues from recoveries, higher adoption of Dolby Vision and Dolby Atmos in more PC models, and higher revenues from patent licensing technologies Lower revenues from patent licensing and decreased market volume of STBs, partially offset by higher adoption of Dolby Atmos and Dolby Vision, primarily in TVs Lower market volumes of AVRs and home theater equipment, partially offset by increased adoption of our patent licensing technologies, and increased adoption of Dolby Atmos and Dolby Vision in DMAs and soundbars 40 No significant fluctuations 2019 vs. 2018 Factor Mobile Broadcast Other CE PC Licensing Revenue Gross Margin Higher revenues from increased adoption of our patent licensing technologies and the adoption of our technologies into more devices, partially offset by lower recoveries Higher revenues from increased adoption of our patent licensing technologies, recoveries, and TVs, partially offset by lower market volume of STBs Higher revenues from Dolby Cinema, gaming, and automotive recoveries, partially offset by lower licensing in Dolby Voice Higher volume of DMAs and increased adoption of our patent licensing technologies, partially offset by lower recoveries Higher revenues from recoveries and increased adoption of our patent licensing technologies, partially offset by lower ASP from decreasing number of PCs with optical disc functionality No significant fluctuations Products and Services Products revenue is generated from the sale of audio, imaging, and voice products for the cinema, television broadcast, communications, and consumer products industries. Also included in products revenue are amounts relating to certain Dolby Cinema arrangements that are considered sales-type leases that involve fixed or minimum fees. Cost of products consists of materials, labor, and manufacturing overhead, amortization of certain intangible assets, as well as third party royalty obligations. Services revenue consists of fees charged to support theatrical and television production for cinema exhibition, broadcast, and home entertainment, including equipment training and maintenance, mixing room alignment, equalization, as well as audio, color, and light image calibration. Services revenue also includes PCS for products sold and equipment installed at Dolby Cinema theaters operated by exhibitor partners and support for the implementation of our technologies into products manufactured by our licensees. Cost of services consists of personnel and personnel-related costs for providing our professional services, software maintenance and support, external consultants, and other direct expenses incurred on behalf of customers. Products and Services Revenue . . . . . . . . . . . . . . . . . . . . . Percentage of total revenue . . Cost of products and services . . . . . Gross margin . . . . . . . . . . . . . . . . . Gross margin percentage . . . . 2020 vs. 2019 Fiscal Year Ended 2020 vs. 2019 2019 vs. 2018 September 25, 2020 September 27, 2019 September 28, 2018 $ % $ % $ 83,215 $134,340 $113,823 $(51,125) (38)% $20,517 18% 7% 11% 11% 95,676 103,323 (12,461) 31,017 84,979 28,844 (15)% 23% 25% (7,647) (7)% 18,344 22% (43,478) (140)% 2,173 8% Factor Products and Services Revenue Gross Margin Products Lower sales of cinema equipment attributable to COVID-19 and lower revenues from Dolby Cinema sales-type leases (hybrid agreements), partially offset by higher units of Dolby Voice products Lower utilization of manufacturing capacity and higher excess & obsolescence charges Services No significant fluctuations Lower utilization of available capacity 41 2019 vs. 2018 Factor Products Products and Services Revenue Gross Margin Higher revenues from Dolby Cinema and Dolby Voice products, and higher units of cinema equipment Higher excess & obsolescence charges Services No significant fluctuations Higher utilization of available capacity Operating Expenses Research and Development R&D expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, consulting and contract labor costs, depreciation and amortization, facilities costs, costs for outside materials, and information technology expenses. Fiscal Year Ended 2020 vs. 2019 2019 vs. 2018 September 25, 2020 September 27, 2019 September 28, 2018 $ % $ % Research and development . . . . . . . . Percentage of total revenue . . . $239,045 $237,871 $236,794 $1,174 — % $1,077 — % 21% 19% 22% 2020 vs. 2019 Category Compensation & Benefits Travel Professional & Consulting 2019 vs. 2018 Category Higher headcount and annual merit increases across the existing employee base Key Drivers Lower costs due to COVID-19 travel restrictions Lower costs for external professional and consulting services for new product development Key Drivers Research & Development No significant fluctuations Sales and Marketing S&M expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, marketing and promotional expenses for events such as trade shows and conferences, marketing campaigns, travel-related expenses, consulting fees, facilities costs, depreciation and amortization, information technology expenses, and legal costs associated with the protection of our IP. Fiscal Year Ended 2020 vs. 2019 2019 vs. 2018 September 25, 2020 September 27, 2019 September 28, 2018 $ % $ % Sales and marketing . . . . . . . . . . . . . . Percentage of total revenue . . . . $335,933 $343,835 $309,762 $(7,902) (2)% $34,073 11% 29% 28% 29% 2020 vs. 2019 Category Travel Marketing Programs Lower costs due to COVID-19 travel restrictions Key Drivers Higher costs related to marketing efforts for company growth initiatives and branding activities Legal, Professional, & Consulting Lower costs for IP recovery activities 42 2019 vs. 2018 Category Key Drivers Legal, Professional, & Consulting Increased IP related activities aimed at revenue generation Marketing Programs Higher costs related to marketing programs, including branding activities, and new product launches General and Administrative G&A expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, depreciation, facilities and information technology costs, as well as professional fees and other costs associated with external consulting and contract labor. Fiscal Year Ended 2020 vs. 2019 2019 vs. 2018 September 25, 2020 September 27, 2019 September 28, 2018 $ % $ % General and administrative . . . . . . . . . . Percentage of total revenue . . . . . $219,753 $205,425 $197,423 $14,328 7% $8,002 4% 19% 17% 19% 2020 vs. 2019 Category Compensation & Benefits Bad Debt 2019 vs. 2018 Category Higher headcount and annual merit increases across the existing employee base Key Drivers Higher charges recorded in the current period Key Drivers Legal, Professional, & Consulting Higher costs associated with various legal activities and patent filings Compensation & Benefits Bad Debt Restructuring Higher headcount and annual merit increases across the existing employee base Higher charges recorded in the current period Restructuring charges/(credits) recorded as operating expenses in our statements of operations represent costs associated with separate individual restructuring plans implemented in various fiscal periods. The extent of our costs arising as a result of these actions, including fluctuations in related balances between fiscal periods, is based on the nature of activities under the various plans. Fiscal Year Ended 2020 vs. 2019 2019 vs. 2018 September 25, 2020 September 27, 2019 September 28, 2018 $ % $ % Restructuring charges/(credits) . . . . . Percentage of total revenue . . . . $1,821 $36,558 $(446) $(34,737) (95)% $37,004 (8,297)% —% 3% —% Subsequent to the fiscal year ended September 25, 2020, we approved a plan to reduce certain activities in order to reallocate those resources towards higher priority investment areas and growth opportunities for the future of our business. Restructuring charges associated with this plan will be reflected in fiscal 2021 financial statements. For additional information on this restructuring program, see Note 20 “Subsequent Events” to our consolidated financial statements. 43 Restructuring charges recorded in fiscal 2019 of $33.5 million represents costs incurred as a result of our early exit of leased facilities. Included in those costs are the write-off of the carrying value of the leasehold improvements associated with the facilities and other expenses associated with the exit of the facilities. Restructuring charges recorded in fiscal 2019 also include $3.1 million associated with a reorganization of our marketing function that resulted in severance and other related benefits for approximately 50 positions that were eliminated. For additional information on our Restructuring programs, see Note 13 “Restructuring” to our consolidated financial statements. Other Income/Expense Other income/(expense) primarily consists of interest income earned on cash and investments and the net gains/(losses) from foreign currency transactions, derivative instruments, and sales of marketable securities from our investment portfolio. Other Income/Expense September 25, 2020 September 27, 2019 September 28, 2018 $ % $ % Fiscal Year Ended 2020 vs. 2019 2019 vs. 2018 Interest income . . . . . . . . Interest expense . . . . . . . . Other income/(expense), $12,725 (186) $24,919 (170) $18,970 (198) $(12,194) (16) (49)% $ 5,949 28 9% 31% (14)% net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,434 $20,973 Total 481 $25,230 (5,903) $12,869 7,953 1,653% $ (4,257) (17)% $12,361 6,384 (108)% 96% 2020 vs. 2019 Category Interest Income Other Income 2019 vs. 2018 Category Key Drivers Lower yields on current year investment balances due to decreased interest rates Increase in realized gains from sales of investments and higher valuation on equity method investments Key Drivers Other Income/(Expense) Decrease in other expense due to impairment charges recorded in the prior year on cost method equity investments that did not re-occur in 2019, higher valuation of current year equity method investment, and lower foreign currency translation losses Interest Income Higher yields on investment balances Income Taxes Our effective tax rate is based on our fiscal year results and is affected by several factors. These reflect the current statutory rates in our domestic and foreign jurisdictions, the relative income earned in our foreign jurisdictions, and nonrecurring items such as changes to our unrecognized tax benefits that may occur in but are not necessarily consistent between periods. Our fiscal 2020 income tax provision reflects a decrease in unrecognized tax benefits due to a lapse in the statute of limitations. Our fiscal 2018 income tax provision reflects amounts accrued in connection with the Tax Act enacted in December 2017. For additional information related to effective tax rates, see Note 12 “Income Taxes” to our consolidated financial statements. Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(8,096) $(26,802) $(154,069) 3% 9% 78% Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 44 2020 vs. 2019 Factor Impact On Effective Tax Rate Unrecognized Tax Benefits Additional benefit in the current year attributable to reversals of unrecognized tax benefits in the third quarter due to a lapse in the statute of limitations. 2019 vs. 2018 Factor Enactment of Tax Act Impact On Effective Tax Rate Lower tax expense due to a large tax charge for US tax reform in the prior year, a large tax benefit in the current year, and the reduction of the federal statutory rate LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION Our principal sources of liquidity are cash, cash equivalents, and investments, as well as cash flows from operations. We believe that these sources will be sufficient to satisfy our currently anticipated cash requirements through at least the next twelve months. As of September 25, 2020, we had cash and cash equivalents of $1,071.9 million, which mainly consisted of cash and highly-liquid money market funds. In addition, we had short and long-term investments of $99.1 million, which consisted primarily of municipal debt securities, certificates of deposit, government bonds, commercial paper, corporate bonds, and U.S. agency securities. The following table presents selected financial information as of the fiscal years ended September 25, 2020 and September 27, 2019 (amounts displayed are in thousands): Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working capital $1,071,876 46,948 52,149 180,340 232,591 1,280,087 $ 797,210 119,146 179,587 189,115 283,356 1,074,687 September 25, 2020 September 27, 2019 Capital Expenditures and Uses of Capital Our capital expenditures consist of purchases of land, building, building fixtures, laboratory equipment, office equipment, computer hardware and software, leasehold improvements, and production and test equipment. Included in capital expenditures are amounts associated with Dolby Cinema locations. We continue to invest in S&M and R&D to promote the overall growth of our business and technological innovation. We retain sufficient cash holdings to support our operations, and we also purchase investment grade securities diversified among security types, industries, and issuers. We have used cash generated from our operations to fund a variety of activities related to our business in addition to our ongoing operations, including business expansion and growth, acquisitions, and repurchases of our Class A common stock. We have historically generated significant cash from operations. However these cash flows and the value of our investment portfolio could be affected by various risks and uncertainties, as described in Part I, Item 1A “Risk Factors.” Shareholder Return We have returned cash to stockholders through both repurchases of Class A common stock under our repurchase program initiated in fiscal 2010 and our quarterly dividend program initiated in fiscal 2015. Refer to 45 Note 9 “Stockholders’ Equity & Stock-Based Compensation” of our consolidated financial statements for a summary of dividend payments made under the program during fiscal 2020 and additional information regarding our stock repurchase program. Stock Repurchase Program. Our stock repurchase program was approved in fiscal 2010, and since then we have completed approximately $1.8 billion of stock repurchases under the program. Quarterly Dividend Program. During the first quarter of fiscal 2015, we initiated a recurring quarterly cash dividend program for our stockholders. For fiscal 2020, quarterly dividends of $0.22 per share were paid on our Class A and Class B common stock to eligible stockholders of record. Cash Flows Analysis For the following comparative analysis performed for each of the sections of the statement of cash flows, the significant factors identified as the leading drivers contributing to the fluctuation are presented in descending order of their impact relative to the overall change (amounts displayed in thousands). Operating Activities Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $343,849 $327,674 Net cash provided by operating activities increased $16.2 million in fiscal 2020 compared to fiscal 2019, primarily due to the following: Fiscal Year Ended September 25, 2020 September 27, 2019 Factor Working Capital Investing Activities Impact On Cash Flows Higher inflows due to decreases in accounts receivable and contract assets, partially offset by higher outflows to settle remaining exit obligations for a terminated lease of an office building Fiscal Year Ended September 25, 2020 September 27, 2019 Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . $134,374 $(56,229) Net cash provided by investing activities was $190.6 million greater in fiscal 2020 compared to fiscal 2019, primarily due to the following: Factor Impact On Cash Flows Proceeds From Investments Higher inflows from the sale & maturity of marketable investment securities Capital Expenditures Lower expenditures for PP&E Purchase of Investments Higher outflows for the purchase of marketable investment securities Financing Activities Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(207,775) $(385,281) 46 Fiscal Year Ended September 25, 2020 September 27, 2019 Net cash used in financing activities was $177.5 million lower in fiscal 2020 compared to fiscal 2019, primarily due to the following: Factor Share Repurchases Lower outflows for common stock repurchases Impact On Cash Flows Common Stock Issuance Higher inflows from employee stock option exercises Off-Balance Sheet Arrangements and Contractual Obligations Our liquidity is not dependent upon the use of off-balance sheet financing arrangements, and we have not entered into any arrangements that are expected to have a material effect on liquidity or the availability of capital resources. The following table presents a summary of our contractual obligations and commitments as of September 25, 2020 (in thousands): Naming rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating leases, including imputed interest . . . . . . . . . . . Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Donation commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments Due By Fiscal Period 2—3 Years 4—5 Years More Than 5 Years $16,131 28,167 3,130 310 $47,738 $16,541 21,616 — 310 $38,467 $61,277 22,484 — 1,002 $84,763 1 Year $ 7,915 18,098 17,305 4,803 $48,121 Total $101,864 90,365 20,435 6,425 $219,089 Naming Rights. We are party to an agreement for naming rights and related benefits with respect to the Dolby Theatre in Hollywood, California, the location of the Academy Awards®. The term of the 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 protracted closure of the Dolby Theatre. Operating Leases. Operating lease payments represent our commitments for future minimum rent made under non-cancelable leases for office space, including those payable to our principal stockholder and portions attributable to the controlling interests in our wholly owned subsidiaries. For additional details regarding our leases, see Note 7 “Leases” to our consolidated financial statements. 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 IT 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. 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. Unrecognized Tax Benefits. As of September 25, 2020, we had an accrued liability for unrecognized tax benefits without interest, penalties, and related deferred tax assets, totaling $60.7 million. We are unable to estimate when any cash settlement with a taxing authority might occur and, therefore, have not reflected these anticipated future outflows in the table above. For additional details regarding our contractual obligations, see Note 14 “Commitments & Contingencies” to our consolidated financial statements. 47 Indemnification Clauses We are party to certain contractual agreements under which we have agreed to provide indemnification of varying scope and duration to the other party relating to our licensed IP. Historically, we have not made any payments for these indemnification obligations and no amounts have been accrued in our consolidated financial statements with respect to these obligations. Since the terms and conditions of the indemnification clauses do not explicitly specify our obligations, we are unable to reasonably estimate the maximum potential exposure for which we could be liable. In addition, we have entered into indemnification agreements with our officers, directors, and certain employees, and our certificate of incorporation and bylaws contain similar indemnification obligations. For additional details regarding indemnification clauses within our contractual agreements, see Note 14 “Commitments & Contingencies” to our consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity As of September 25, 2020, we had cash and cash equivalents of $1,071.9 million, which consisted of cash and highly liquid money market funds. In addition, we had both short and long-term investments of $99.1 million, which consisted primarily of municipal debt securities, corporate bonds, government bonds, and U.S. agency securities. 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. At September 25, 2020, the weighted-average credit quality of our investment portfolio was AA, with a weighted-average maturity of approximately fourteen months. We do not invest in financial instruments for trading or speculative purposes, nor do we use leveraged financial instruments. 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 25, 2020, hypothetical changes in interest rates of 1% and 0.5% would have an impact on the carrying value of our portfolio of approximately $1.1 million and $0.5 million, respectively. Foreign Currency Exchange Risk We maintain business operations in foreign countries, most significantly in Australia, China, Germany, the Netherlands, Poland and the United Kingdom. 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 48 currencies 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 and geopolitical climate, differing tax structures, foreign exchange rate volatility and other regulations and restrictions. In fiscal 2019, we implemented a cash flow hedge program using forward currency contracts to reduce the impact of currency volatility on U.S. dollar operating expenses and margins. The effective portions of cash flow hedges are recorded at fair value with changes in the fair value as a component in AOCI, until the hedged item is recognized in earnings. Amounts in AOCI are expected to be released to the same line item in the consolidated statements of operations concurrently with the hedged costs, within the next twelve months. 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, 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 25, 2020 and September 27, 2019, the outstanding derivative instruments had maturities of equal to or less than 13 months, and the total notional amounts of outstanding contracts were $93.8 million and $29.0 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 25, 2020. 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 are 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 $5.8 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 $5.8 million. 49 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS DOLBY LABORATORIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 54 55 56 57 58 59 50 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 25, 2020 and September 27, 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended September 25, 2020 and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of September 25, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 25, 2020 and September 27, 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended September 25, 2020, 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 25, 2020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of September 28, 2019 due to the adoption of the FASB Accounting Standards Codification No. 842, Leases. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. 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 51 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 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) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate. Revenue estimate related to sales-based licensing arrangements As discussed in Note 3 to the consolidated financial statements, revenue is derived principally from the licensing of technologies and patents to various types of licensees. The Company recognized total licensing revenue of $1.08 billion for the year ended September 25, 2020. 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 estimate related to sales-based licensing arrangements as a critical audit matter. Auditor judgment was required to evaluate the Company’s estimation of sales-based licensing revenue, which included the use of historical data, industry estimates of expected shipments, market penetration, and average sales prices. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s sales-based licensing revenue estimation process. This included controls related to the review of (1) historical data, (2) third-party industry expectations for shipments of units, (3) the estimated percentage of market penetration, and (4) estimated average sales prices. We tested the Company’s process to develop the sales-based licensing revenue estimate. Specifically, we evaluated the sources of the historical data and assumptions that the 52 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 16, 2020 53 DOLBY LABORATORIES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) September 25, 2020 September 27, 2019 ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net of allowance for doubtful accounts of $15,908 and $9,775 . . . . . . . . Contract assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,071,876 8,103 46,948 180,340 161,357 25,550 53,022 1,547,196 52,149 541,963 76,515 152,431 336,945 118,881 91,245 $ 797,210 8,383 119,146 189,115 195,651 32,331 39,704 1,381,540 179,587 537,432 — 180,891 334,829 114,075 93,395 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,917,325 $2,821,749 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contract liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current contract liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity: Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 64,167,725 shares issued and outstanding at September 25, 2020 and 63,911,270 at September 27, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 36,128,720 shares issued and outstanding at September 25, 2020 and 36,229,820 at September 27, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity – Dolby Laboratories, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,617 219,974 3,260 15,436 15,822 267,109 24,342 65,315 122,154 478,920 $ 15,212 268,144 3,506 19,991 — 306,853 24,404 — 177,462 508,719 58 58 41 2,443,138 (10,594) 2,432,643 5,762 41 2,327,877 (20,625) 2,307,351 5,679 2,313,030 Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,438,405 Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,917,325 $2,821,749 See accompanying notes to consolidated financial statements 54 DOLBY LABORATORIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 Revenue: Licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Products and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,078,577 83,215 $1,107,280 134,340 $ 940,777 113,823 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,161,792 1,241,620 1,054,600 Cost of revenue: Cost of licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of products and services . . . . . . . . . . . . . . . . . . . . . . . . 50,822 95,676 Total cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146,498 57,531 103,323 160,854 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,015,294 1,080,766 Operating expenses: Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charges/(credits) . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income/expense: Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income/(expense), net . . . . . . . . . . . . . . . . . . . . . . . . . Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income including controlling interest . . . . . . . . . . . . . . . . . . . . . . Less: net (income) attributable to controlling interest . . . . . . . . . 239,045 335,933 219,753 1,821 796,552 218,742 12,725 (186) 8,434 20,973 239,715 (8,096) 231,619 (256) 237,871 343,835 205,425 36,558 823,689 257,077 24,919 (170) 481 25,230 282,307 (26,802) 255,505 (354) Net income attributable to Dolby Laboratories, Inc. . . . . . . . . . . . $ 231,363 $ 255,151 Net income per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2.30 2.25 Weighted-average shares outstanding: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,564 102,944 Related party rent expense and restructuring charges: Included in operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . Included in net income attributable to controlling interest . . . . . . Cash dividend declared per common share . . . . . . . . . . . . . . . . . . . . . Cash dividend paid per common share . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ 126 455 0.88 0.88 $ $ $ $ $ $ 2.51 2.44 101,629 104,572 16,360 572 0.79 0.76 42,583 84,979 127,562 927,038 236,794 309,762 197,423 (446) 743,533 183,505 18,970 (198) (5,903) 12,869 196,374 (154,069) 42,305 (559) 41,746 0.40 0.39 103,377 106,978 3,483 712 0.67 0.64 $ $ $ $ $ $ $ See accompanying notes to consolidated financial statements 55 DOLBY LABORATORIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Net income including controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income: Currency translation adjustments, net of tax of $22, $(439), and $106 . . Unrealized gains/(losses) on investments, net of tax of $(926), $58, Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 $231,619 $255,505 $42,305 7,552 (10,166) (5,578) and $89 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,380) 5,146 (2,571) Unrealized gains on cash flow hedges, net of tax of $(407), $0, and $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other comprehensive income/(loss), net of tax . . . . . . . . . . . . . . . . . . . . Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: comprehensive (income) attributable to controlling interest . . . . . . 3,969 10,141 241,760 (366) — (5,020) 250,485 (127) — (8,149) 34,156 (489) Comprehensive income attributable to Dolby Laboratories, Inc. . . . . . . . $241,394 $250,358 $33,667 See accompanying notes to consolidated financial statements 56 DOLBY LABORATORIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Dolby Laboratories, Inc. Class A Class B Shares Amount Shares Amount APIC Retained Earnings AOCI Total Stockholders’ Equity Controlling Interest Total Balance at September 29, 2017 . . . . . . . . . . . . . . . . . . . . . . . . 59,282 $ 58 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — Other comprehensive (loss), net of tax . . . . . . . . . . . . . . . — — Distributions to controlling interest . . . . . . . . . . . . . . . . . . — — Stock-based compensation expense . . . . . . . . . . . . . . . . . . — — Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared and paid on common stock . . . . — — Common stock issued under employee stock plans . . . . . . Tax withholdings on vesting of restricted stock . . . . . . . . Common stock transfers—Class B to Class A . . . . . . . . . 3 3,823 (358) — 2 3,613 — — — — — — — — — — — 71,249 (2) — — (150,468) 42,874 $ 43 $ 61,331 $2,337,948 $ (7,753) $2,391,627 41,746 (8,079) — 71,249 (150,470) (66,155) 106,162 (22,144) — — — — (66,155) — — — — — (8,079) — — — — 106,159 (22,144) — — — — — — — — — — (3,613) (2,381) 41,746 (2) — Balance at September 28, 2018 . . . . . . . . . . . . . . . . . . . . . . . . 63,979 61 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — Other comprehensive (loss), net of tax . . . . . . . . . . . . . . . — — Distributions to controlling interest . . . . . . . . . . . . . . . . . . — — Stock-based compensation expense . . . . . . . . . . . . . . . . . . — — Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared and paid on common stock . . . . — — Common stock issued under employee stock plans . . . . . . Tax withholdings on vesting of restricted stock . . . . . . . . Common stock transfers—Class B to Class A . . . . . . . . . (5,268) 39,261 41 — — — — — — — — — — — 76,580 (4) — — (177,264) — 255,151 — (4,793) — — 66,127 2,313,539 (15,832) 2,363,936 255,151 (4,793) — 76,580 (340,585) (77,496) 57,346 (22,788) — — — (163,317) — (77,496) — — — — — 57,345 (22,788) — — — — — — 2,514 1 — — — — (345) — 3,031 — (3,031) — Balance at September 27, 2019 . . . . . . . . . . . . . . . . . . . . . . . . 63,911 58 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — Other comprehensive income, net of tax . . . . . . . . . . . . . . — — Distributions to controlling interest . . . . . . . . . . . . . . . . . . — — Stock-based compensation expense . . . . . . . . . . . . . . . . . . — — Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared and paid on common stock . . . . — — Common stock issued under employee stock plans . . . . . . Tax withholdings on vesting of restricted stock . . . . . . . . Common stock transfers—Class B to Class A . . . . . . . . . 3,063 3 (343) — 101 — — — — — — — — — — 2,327,877 (20,625) 2,307,351 231,363 — 10,031 — — — 86,628 86,628 (173,742) (3) — — (146,218) (88,581) 82,658 (23,065) — — — (27,521) — (88,581) — — — — — — 10,031 — — — — — — — — (101) — — 82,655 (23,065) — — — — 231,363 (2,564) 36,230 41 $ 7,100 $2,398,727 42,305 (8,149) (1,022) 71,249 (150,470) (66,155) 106,162 (22,144) — 559 (70) (1,022) — — — — — — 6,567 354 (227) (1,015) — — — — — — 5,679 256 110 (283) — — — — — — 2,370,503 255,505 (5,020) (1,015) 76,580 (340,585) (77,496) 57,346 (22,788) — 2,313,030 231,619 10,141 (283) 86,628 (173,742) (88,581) 82,658 (23,065) — Balance at September 25, 2020 . . . . . . . . . . . . . . . . . . . . . . . . 64,168 $ 58 36,129 $ 41 $ — $2,443,138 $(10,594) $2,432,643 $ 5,762 $2,438,405 See accompanying notes to consolidated financial statements 57 DOLBY LABORATORIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 Operating activities: Net income including controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating $ 231,619 $ 255,505 $ 42,305 activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of premium on investments . . . . . . . . . . . . . . . . . . . . Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charge for exit of leased facility . . . . . . . . . . . . . . . . . Other non-cash items affecting net income . . . . . . . . . . . . . . . . . . . . Changes in operating assets and liabilities: Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contract assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . Income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contract liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investing activities: Purchases of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of investment securities . . . . . . . . . . . . . . . . . . . . . . Proceeds from maturities of investment securities . . . . . . . . . . . . . . . . . . Purchases of property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . Payments for business acquisitions, net of cash acquired . . . . . . . . . . . . . Purchase of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by/(used in) investing activities . . . . . . . . . . . . . . . . . . . . . Financing activities: Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of cash dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distribution to controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares repurchased for tax withholdings on vesting of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment related to prior purchases of intangible assets . . . . . . . . . . . . . . Payment of deferred consideration for prior business combination . . . . . Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase/(decrease) in cash, cash equivalents, and restricted cash . . . . . . . Cash, cash equivalents, and restricted cash at beginning of period . . . . . . . . . Cash, cash equivalents, and restricted cash at end of period . . . . . . . . . . . . . . Supplemental disclosure: Cash paid for income taxes, net of refunds received . . . . . . . . . . . . . . . . . . . . Non-cash investing and financing activities: Change in property, plant, and equipment purchased, unpaid at period-end . . Purchase consideration payable for acquisition . . . . . . . . . . . . . . . . . . . . . . . . Purchase consideration payable for intangibles . . . . . . . . . . . . . . . . . . . . . . . . 90,878 86,628 800 7,689 (5,274) 1,640 10,920 1,251 34,297 (11,784) (13,516) (5,680) (45,185) (50,586) (4,621) 15,618 (845) 343,849 (287,777) 244,517 246,621 (66,347) — (2,640) 134,374 82,658 (173,742) (88,581) (283) (23,065) (91) (4,671) (207,775) 85,123 76,580 358 4,523 (40,191) 33,251 6,952 (27,492) (29,708) (16,098) — (6,200) 169 (2,186) 1,084 — (13,996) 327,674 (265,361) 200,636 136,951 (96,281) (14,919) (17,255) (56,229) 57,346 (340,585) (77,496) (1,015) (22,788) — (743) (385,281) 81,283 71,249 2,473 2,413 61,059 — 7,570 100,129 (2,502) (6,602) — (52,485) (29,019) 39,738 (59) — 34,650 352,202 (174,195) 123,058 237,432 (72,814) (22,852) (12,543) 78,086 106,162 (150,470) (66,155) (1,022) (22,144) — — (133,629) 3,938 274,386 805,593 $1,079,979 (5,821) (119,657) 925,250 $ 805,593 (5,777) 290,882 634,368 $ 925,250 $ $ $ $ 52,869 $ 59,722 $ 60,875 (3,417) — 260 $ $ $ (324) 1,700 1,881 $ $ $ 7,990 3,750 200 See accompanying notes to consolidated financial statements 58 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, such as the COVID-19 pandemic or other natural disasters which may impact our licensees’ supply chain activities as well as demand for shipments. Additional significant items subject to such estimates and assumptions include estimated selling prices for performance obligations within revenue arrangements; valuation allowances for accounts receivable; carrying values of inventories and certain property, plant, and equipment, goodwill and intangible assets; fair values of investments; accrued liabilities including liabilities for unrecognized tax benefits, deferred income tax assets and liabilities, and stock-based compensation. Actual results could differ from our estimates. Fiscal Year Our fiscal year is a 52 or 53 week period ending on the last Friday in September. The fiscal years presented herein include the 52 week periods ended September 25, 2020 (fiscal 2020), September 27, 2019 (fiscal 2019), and September 28, 2018 (fiscal 2018). Reclassifications We have reclassified certain prior period amounts within our consolidated financial statements and accompanying notes to conform to our current period presentation. These reclassifications did not affect total revenue, operating income, operating cash flows or net income. 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. 59 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 2020, 2019, and 2018, 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, commercial paper, and government bonds. Restricted Cash Restricted cash on our consolidated balance sheets consists of cash contributed by Dolby and third-party licensors to Via Licensing Corporation, 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 Licensing Corporation for the Wideband Code Division Multiple Access (W-CDMA) patent pool. Investments All of our investments are classified as available-for-sale securities, with the exception of our mutual fund investments held in our supplemental retirement plan, which are classified as trading 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 investments 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, other-than-temporary impairments, 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 credit losses and other-than-temporary impairments by comparing the fair value with the cost basis for each of our investment securities. An investment is impaired if the fair value is less than its cost basis. If any portion of the impairment is deemed to be the result of a credit loss, the credit loss portion of the impairment is included as a component of net income. If we deem it probable that we will not recover the full cost basis of the security, the security is other-than-temporarily impaired, and the impairment loss is recognized as a component of net income. Allowance for Doubtful Accounts We maintain a provision for estimated losses on receivables resulting from our customers’ inability to make required payments. In determining the provision, we evaluate the collectability of our accounts receivable based upon a variety of factors. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, we record a specific allowance against amounts due, and thereby reduce the net recognized receivable to the amount reasonably believed to be collectible. For all other customers, we recognize allowances for doubtful accounts based on our actual historical write-off experience in conjunction with the length of time the receivables are past due, geographic risk and the current business environment. 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 60 evaluation includes the analysis of future sales demand by product within specific time horizons. Inventories in excess 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 . . . . . . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . Equipment provided under operating leases . . . . . . . . . . Buildings and building improvements . . . . . . . . . . . . . . 3 to 5 years 3 to 8 years 5 to 8 years Lesser of useful life or related lease term 15 years 20 to 40 years We capitalize certain costs incurred during the construction phase of a project or asset into construction-in-progress until the construction process is complete. 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 cinema equipment installed at third party sites as a fixed asset and depreciate the asset on a straight-line basis. Internal Use Software. We account for the costs of computer software developed for internal use by capitalizing costs of materials and external consultants. These costs are included in PP&E, net of accumulated amortization in our consolidated balance sheets. Our capitalized internal use software costs are typically amortized on a straight-line basis over estimated useful lives of three to five years. Costs incurred during the preliminary project and post-implementation stages are charged to expense. Goodwill, Intangible Assets, and Long-Lived Assets We test goodwill for impairment annually during our third fiscal quarter and whenever events or changes in circumstances indicate that the carrying amount may be impaired. We perform a qualitative assessment as a determinant for whether the two-step annual goodwill impairment test should be performed. For fiscal 2020, we completed our annual goodwill impairment assessment in the fiscal quarter ended June 26, 2020. We determined in our qualitative review that it is more likely than not that the fair value of our reporting unit is substantially in excess of the respective carrying amount. Accordingly, there was no impairment, and the two-step goodwill impairment test was not required. 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. 61 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. For additional financial information and a summary 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 25, 2020 September 27, 2019 September 28, 2018 Advertising and promotional costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . $61,125 $49,118 $49,519 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. Revenues 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. 62 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 25, 2020 September 27, 2019 September 28, 2018 Foreign currency transaction (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,361) $(260) $(823) 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 25, 2020 and September 27, 2019, the outstanding derivative instruments had maturities of equal to or less than 31 days and 31 days, respectively, and the total notional amounts of outstanding contracts were $26.8 million and $22.0 million, respectively. The fair values of these contracts were nominal as of September 25, 2020 and September 27, 2019, and were included within prepaid expenses and other current assets and within accrued liabilities in our consolidated balance sheets. Cash Flow Hedges. We also enter into forward currency contracts exclusively designated as cash flow hedges, which have a maturity of thirteen months or less, to reduce the impact of currency volatility on U.S. dollar operating expenses and margins. Our cash flow hedge program was entered into in fiscal 2019. The gains and losses from the effective portions of cash flow hedges are recorded at fair value as a component of AOCI, until the hedged item is subsequently reclassified into earnings in the same period in which the hedged transaction affects earnings, with the corresponding hedged item. Amounts reclassified are recorded to the same line item in the consolidated statements of operations as the impact of the hedge transaction, concurrently with the hedged costs. The pre-tax gain attributed to the effective portion of cash flow hedges recognized in AOCI was $5.3 million in fiscal 2020, and was immaterial in fiscal 2019. The pre-tax effective portion of gains or losses reclassified to the consolidated statements of income was not material during fiscal 2020 and fiscal 2019. 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. 63 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 Cuts and Jobs Act of 2017 (“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. Therefore, we have provided for U.S. state income taxes and foreign withholding taxes on undistributed earnings of certain foreign subsidiaries to the extent such earnings are no longer considered to be indefinitely reinvested in the operations of those subsidiaries. We consider the earnings of certain 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 Leases. In the first quarter of fiscal 2020, we adopted ASU 2016-02, Leases (ASC 842) along with all subsequent applicable ASU clarifications and improvements, which requires lessees to recognize leases on balance sheet and disclose key information about leasing arrangements. We adopted ASC 842 using the modified retrospective transition method and used the effective date as the date of initial application. Consequently, financial information is not updated and the disclosures required under ASC 842 are not provided for dates and periods prior to implementation. ASC 842 provides a number of optional practical expedients in transition. We elected the “package of practical expedients,” which permits us not to reassess under ASC 842 our prior conclusions about lease identification, lease classification and initial direct costs. In addition, we account for lease and non-lease components as a single lease component. Operating leases are included in operating lease right-of-use assets and in current and non-current operating lease liabilities on our consolidated balance sheets. As a lessee, the adoption of ASC 842 resulted in the recording of Operating lease right-of-use (“ROU”) assets and Operating lease liabilities of $62.1 million and $64.6 million, respectively, as of September 28, 2019. The difference between the operating lease assets and liabilities was recorded as an adjustment to Other non-current liabilities, primarily related to deferred rent and other lease incentives. As a lessor, the adoption of ASC 842 did not have a material impact. The adoption of ASC 842 did not impact Retained Earnings. Income Taxes: Comprehensive Income. In the first quarter of fiscal 2020, we adopted ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. We elected to not reclassify the stranded tax effects to retained earnings as they were not material to Dolby’s consolidated financial statements. 64 Standards Not Yet Adopted Collaborative Arrangements. In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, ASU 2018-18 precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. This standard will be effective for Dolby beginning September 26, 2020. While we have a number of collaborative arrangements, we do not believe that this standard will have a material impact on our consolidated financial statements. Financial Instruments. In June 2016, the FASB issued ASU 2016-13, Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments, which modifies the measurement of expected credit losses of certain financial instruments, including trade receivables, contract assets, and lease receivables. This standard will be effective for Dolby beginning September 26, 2020. We do not believe that this standard will have a material impact on our consolidated financial statements. Income Taxes. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which modifies and eliminates certain exceptions to the general principles of ASC 740, Income Taxes. This standard will be effective for Dolby beginning September 25, 2021. We are currently evaluating the impact of the standard on our consolidated financial statements. 3. Revenue Recognition We enter into revenue arrangements with our customers to license technologies, trademarks and patents for sound, imaging and voice solutions, and to sell products and services. We recognize revenue when we satisfy a performance obligation by transferring control over the use of a license, product, or service to a customer. A. Identification of the Contract or Contracts with Customers We generally determine that a contract with a customer exists upon the execution of an agreement and after consideration of collectability, which could include an evaluation of the customer’s payment history, the existence of a standby letter-of-credit between the customer’s financial institution and our financial institution, public financial information, and other factors. At contract inception, we also evaluate whether two or more non-standard agreements with a customer should be combined and accounted for as a single contract. B. Identification of Performance Obligations in a Contract We generate revenues principally from the following sources, which represent performance obligations in our contracts with customers: • Licensing. We license our technologies, including patents, to a range of customers who incorporate them into their products for enhanced audio, imaging and voice functionality across broadcast, mobile, CE, PC, gaming, and other markets. • Product Sales. We design and provide audio and imaging products for the cinema, television, broadcast, communications, and entertainment industries. • Services. We provide various services to support theatrical and television production for cinema exhibition, broadcast, and home entertainment, including equipment training, mixing room alignment, equalization, as well as audio, color and light image calibration. • PCS. We provide PCS for products sold and for equipment leased, and we support the implementation of our licensing technologies in our licensees’ products. 65 • Equipment Leases. We collaborate with established cinema exhibitors to offer Dolby Cinema, a branded premium cinema offering for movie audiences by leasing equipment and licensing our intellectual property. We also lease hardware that facilitates the Dolby conferencing experience, including the Dolby Conference Phone, and the Dolby Voice Room solution. • Licensing Administration Fees. We generate service fees for managing patent pools on behalf of third party patent owners through our wholly-owned subsidiary, Via Licensing Corporation. Some of our revenue arrangements include multiple performance obligations, such as hardware, software, support and maintenance, and extended warranty services. We evaluate whether promised products and services are distinct performance obligations. The majority of our arrangements with multiple performance obligations pertain to our digital cinema server and processor sales that include the following distinct performance obligations to which we allocate portions of the transaction price based on their stand-alone selling price: • Digital cinema server hardware and embedded software, which is highly dependent on and highly interrelated with the hardware. Accordingly, the hardware and embedded software represent a single performance obligation. • The right to support and maintenance, which is included with the purchase of the digital cinema server hardware, is a distinct performance obligation. • The right to receive commissioning services is a distinct performance obligation within the sale of the Dolby Atmos Cinema Processor. These services consist of the review of venue designs specifying proposed 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 revenues as licensing. For revenue arrangements that include multiple performance obligations, we determine the stand-alone selling price for each distinct performance obligation based on the actual selling prices made to customers. If the performance obligation is not sold separately, we estimate the stand-alone selling price. We do so by considering market conditions such as competitor pricing strategies, customer specific information and industry technology lifecycles, internal conditions such as cost and pricing practices, or applying the residual approach method when the selling price of the good, most commonly a license, is highly variable or uncertain. 66 Once the transaction price—including any variable consideration—has been determined, we allocate the transaction price to the performance obligations identified in the contract and recognize revenue as or when control is transferred for each distinct performance obligation. E. Revenue Recognition as Control is Transferred to a Customer We generate our licensing revenue by licensing our technologies and patents to various types of licensees, such as chip manufacturers (“implementation licensees”), consumer product manufacturers, software vendors, and communications service providers. Our revenue recognition policies for each of these arrangements are summarized below. Initial fees from implementation licensees. Implementation licensees incorporate our technologies into their chipsets that, once approved by Dolby, are available for purchase by OEMs for use in end-user products. Implementation licensees only pay us a nominal initial fee on contract execution as consideration for the ongoing services that we provide to assist in their implementation process. Revenues from these initial fees are recognized ratably over the contractual term as a component of licensing revenue. Sales-based licensing fees. In our royalty bearing licensing agreements with OEMs, control is transferred upon the later of contract execution or the contract’s effective date. We apply the royalty exception, which requires that we recognize sales-based royalties when the sales occur based on our estimates. These estimates involve the use of historical data and judgment for several key attributes including industry estimates of expected shipments, the percentage of markets using our technologies, and average sale prices. Generally, our estimates represent the current period’s shipments to which we expect our licensees to submit royalty statements in the following quarter. Upon receipt of royalty statements from the licensees with the actual reporting of sales-based royalties that we estimated previously, we record a favorable or unfavorable adjustment based on the difference, if any, between estimated and actual sales. In the first quarter of fiscal 2020, we recorded a favorable adjustment of approximately $9 million, which was primarily related to shipments that occurred in our fourth quarter of fiscal 2019 (July through September) and largely based on actual royalty statements received from licensees. In the second, third, and fourth quarters of fiscal 2020 we recorded favorable adjustments of $7 million, $11 million, and $26 million, respectively, each primarily related to shipments that occurred in the preceding fiscal quarter, and largely based on actual royalty statements received from licensees. Fixed and guaranteed licensing fees. In certain cases, our arrangements require the licensee to pay fixed, non-refundable fees. In these cases, control is transferred, and fees are recognized upon the later of contract execution or the effective date. Additionally, and separate from initial fees from implementation licensees, our sales- and usage-based licensing agreements include a nominal fee, which is also recognized at a point in time in which control of the IP has been transferred. Revenues from these arrangements are included as a component of licensing revenue. Recoveries. Through compliance efforts, we identify under-reported licensed activity related to non-current periods. We may record a favorable or unfavorable revenue adjustment in connection with the findings from these compliance efforts generally upon resolution with the licensee through agreement of the findings, or upon receipt of the licensee’s correction statement. Revenues from these arrangements are included as a component of licensing revenue. We undertake activities aimed at identifying potential unauthorized uses of our technologies, which when successful result in the recognition of revenue. Recoveries stem from third parties who agree to remit payments to us based on past use of our technology. In these scenarios, a legally binding contract did not exist at time of use of our technology, and therefore, we recognize revenue recoveries upon execution of the agreement as that is the point in time to which a contract exists and control is transferred. These revenues are classified as licensing revenue. 67 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. 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 involves guaranteed payments, which in some cases result in classifying the arrangement as a sales-type lease. In such arrangements, we consider control to transfer at the point in time to which we have installed and tested the equipment, at which point we record such guaranteed payments as product revenue. Via Administration Fee. We generate service fees for managing patent pools on behalf of third party patent owners through our wholly-owned subsidiary, Via Licensing Corporation. As an agent to licensors in the patent pool, Via receives a share of the sales-based royalty that the patent pool licensors earn from licensees. As such, we apply the sales-based royalty exception as the service provided is directly related to the patent pool licensors’ provision of IP, which results in recognition based on estimates of the licensee’s quarter shipments that use the pool’s patents. In addition to sales-based royalties, Via also has contracts where the fees are fixed. The revenue share Via receives 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 25, 2020, we had $37.9 million of remaining performance obligations, 38% of which we expect to recognize as revenue in fiscal 2021, 22% in fiscal 2022, and the balance of 40% in fiscal years beyond 2022. 68 F. Disaggregation of revenue The following table presents a summary of the composition of our revenue for all periods presented: Fiscal Year-To-Date Ended September 25, 2020 September 27, 2019 Revenue Licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Products and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,078,577 83,215 93% $1,107,280 134,340 7% 89% 11% Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,161,792 100% $1,241,620 100% The following table presents the composition of our licensing revenue for all periods presented: Fiscal Year-To-Date Ended September 25, 2020 September 27, 2019 Revenue By Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Broadcast Mobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 439,415 226,972 152,608 132,302 127,280 41% $ 474,147 193,052 21% 154,399 14% 113,597 12% 172,085 12% 43% 17% 14% 10% 16% Total licensing revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,078,577 100% $1,107,280 100% We license our technologies in approximately 60 countries, and our licensees distribute products that incorporate our technologies throughout the world. As shown in the table below, we generate the majority of our revenue from outside the United States. Geographic data for our licensing revenue is based on the location of our licensees’ headquarters, products revenue is based on the destination to which we ship our products, and services revenue is based on the location where services are performed. Revenue By Geographic Location United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International $ 460,972 700,820 40% $ 449,203 792,417 60% 36% 64% Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,161,792 100% $1,241,620 100% Fiscal Year-To-Date Ended September 25, 2020 September 27, 2019 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 report is received which is typically the quarter following our estimate. Actual amounts reported are typically paid within sixty days following the end of the quarter of shipment. 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 69 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 year 2020, we recognized $17.7 million from prior period deferred revenue. The following table presents a summary of the balances to which contract assets and liabilities related to revenue are recorded for all periods presented: . . . . . . . . . . . . . . . . . . . . Accounts receivable, net Contract assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contract liabilities—current . . . . . . . . . . . . . . . . . . Contract liabilities—non-current . . . . . . . . . . . . . . $180,340 161,357 15,436 24,342 $189,115 195,651 19,991 24,404 $ (8,775) (34,294) (4,555) (62) (5)% (18)% (23)% — % September 25, 2020 September 27, 2019 Change ($) Change (%) 4. Composition of Certain Financial Statement Captions The following tables present detailed information from our consolidated balance sheets as of September 25, 2020 and September 27, 2019 (amounts displayed in thousands). Accounts Receivable Accounts Receivable, Net September 25, 2020 September 27, 2019 Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable from patent administration program licensees . . . . . . . . . . $147,618 48,630 Accounts receivable, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196,248 (15,908) $151,996 46,894 198,890 (9,775) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $180,340 $189,115 Accounts receivable, gross includes unbilled accounts receivable balances of $62.1 million and $82.3 million as of September 25, 2020 and September 27, 2019, respectively, related to amounts that are contractually owed. The unbilled balance represents our unconditional right to consideration related to fixed fee contracts which we are entitled to as a result of satisfying, or partially satisfying, performance obligations, as well as Via’s unconditional right to consideration related to their patent administration programs. Allowance for Doubtful Accounts For fiscal year ended: Beginning Balance Charged to G&A Deductions Ending Balance September 28, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 27, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 25, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,967 5,258 9,775 $2,413 4,523 7,689 $ (122) (6) (1,556) $ 5,258 9,775 15,908 Inventories Inventories September 25, 2020 September 27, 2019 Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,770 9,214 12,566 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,550 $ 8,031 4,872 19,428 $32,331 70 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 $2.6 million and $3.0 million of raw materials inventory within other non-current assets in our consolidated balance sheets as of September 25, 2020 and September 27, 2019, respectively. Based on anticipated inventory consumption rates, and aside from existing write-downs due to excess inventory, we do not believe that material risk of obsolescence exists prior to ultimate sale. Prepaid Expenses And Other Current Assets Prepaid Expenses And Other Current Assets September 25, 2020 September 27, 2019 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,884 35,138 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $53,022 $17,997 21,707 $39,704 As of September 25, 2020, other current assets include the carrying value of $2.2 million of land and building that are currently held for sale. In fiscal year 2019, management committed to a plan to sell the property. There have been no changes to this plan in the current period. Based on current estimated selling prices in the market, we have determined that no indicators of potential impairment exist. Accrued Liabilities Accrued Liabilities September 25, 2020 September 27, 2019 Accrued royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts payable to patent administration program partners . . . . . . . . . . . . . . . Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unpaid PP&E additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued customer refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 901 60,427 89,684 10,344 15,102 10,053 33,463 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $219,974 $ 2,957 58,899 78,716 19,216 15,332 24,299 68,725 $268,144 Other Non-Current Liabilities Other Non-Current Liabilities September 25, 2020 September 27, 2019 Supplemental retirement plan obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current tax liabilities (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,181 85,943 32,030 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $122,154 $ 3,466 136,323 37,673 $177,462 (1) Refer to Note 12 “Income Taxes” for additional information related to tax liabilities. 5. Investments & Fair Value Measurements We use cash holdings to purchase investment grade securities diversified among security types, industries, and issuers. All of our investment 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, all of our investments are classified as AFS securities. 71 Our investment securities primarily consist of government bonds, certificates of deposit, municipal debt securities, corporate bonds, U.S. agency securities, and commercial paper. In addition, our cash and cash equivalents also consist of highly-liquid money market funds. Consistent with our investment policy, none of our municipal debt investments are supported by letters of credit or standby purchase agreements. Our cash and investment portfolio consisted of the following (in thousands): September 25, 2020 Unrealized Estimated Fair Value Cost Gains Losses Total Level 1 Level 2 Level 3 Cash and cash equivalents: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 856,740 $ — $— $ 856,740 $ 856,740 $ — $— Cash equivalents: Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . Money market funds . . . . . . . . . . . . . . . . . . . . . . Government bonds . . . . . . . . . . . . . . . . . . . . . . . 900 — — 214,111 — — 125 — — 900 214,111 125 — 214,111 125 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 1,071,876 — — 1,071,876 1,070,976 900 — — — — — 900 — Short-term investments: Certificate of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. agency securities . . . . . . . . . . . . . . . . . . . . . . . . . Government bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Municipal debt securities . . . . . . . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term investments: U.S. agency securities . . . . . . . . . . . . . . . . . . . . . . . . . Government bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Municipal debt securities . . . . . . . . . . . . . . . . . . . . . . . Other long-term investments (1) . . . . . . . . . . . . . . . . . . 2,277 999 5,118 4,727 18,754 14,828 46,703 1 — 12 — 47 — 4 — 87 97 — (3) 248 (3) 2,214 5,137 24,657 15,220 4,176 — — 56 — 80 — 419 203 (7) (6) Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,404 758 (13) 2,278 1,011 5,165 4,731 18,838 14,925 46,948 2,270 5,217 25,069 15,417 4,176 52,149 1,370 — 2,278 — — 1,011 — 3,795 — — 4,731 — — 18,838 — — 14,925 — 1,370 45,578 — 1,633 — 2,270 — 3,584 — — 25,069 — — 15,417 — — — — 1,633 46,340 — Total cash, cash equivalents, and investments . . . . . . . . $1,169,983 $1,006 $ (16) $1,170,973 $1,073,979 $92,818 $— Investments held in supplemental retirement plan: Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,279 — — 4,279 4,279 — — Included in prepaid expenses and other current assets & other non-current assets Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,279 — — 4,279 4,279 — — Included in accrued liabilities & other non-current liabilities Currency derivatives as hedge instruments: Assets: Included in other current assets . . . . . . . . . . . Assets: included in other non-current assets . . . . . . . . Liabilities: Included in other accrued expenses . . . . . — 4,267 — 369 — — — (79) — 4,267 369 (79) — 4,267 — 369 — — (79) — — (1) Other long-term investments as of September 25, 2020 is comprised of one equity method investment which is not carried at fair value of $4.2 million. 72 Cash and cash equivalents: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 680,287 $ — $ — $ 680,287 $680,287 $ — $— Cash equivalents: September 27, 2019 Unrealized Estimated Fair Value Cost Gains Losses Total Level 1 Level 2 Level 3 Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . Government bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 — — 115,270 — — 653 — — 1,000 — 115,270 115,270 653 653 1,000 — — — — — Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 797,210 — — 797,210 796,210 1,000 — Short-term investments: Certificate of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Government bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Municipal debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,265 10,973 8,381 6,347 76,802 15,210 Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,978 1 — 8 11 9 — (9) (1) 172 18 219 (34) (7) (51) 1,266 10,972 8,391 6,356 76,940 15,221 — 1,266 — — 10,972 — 2,607 — 5,784 — 6,356 — — 76,940 — — 15,221 — 119,146 5,784 113,362 — Long-term investments: Asset backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Government bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Municipal debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term investments (1) . . . . . . . . . . . . . . . . . . . . . . . 2 — 400 146 — 7,102 23,563 187 — 134,360 1,700 — 10,315 1,731 — — 87 (6) 402 7,248 23,750 136,060 10,396 1,731 — — 19,670 402 — 7,248 — 4,080 — — 136,060 — — 10,396 — — — — Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,471 2,122 (6) 179,587 19,670 158,186 — Total cash, cash equivalents, and investments . . . . . . . . . . . . . . $1,093,659 $2,341 $ (57) $1,095,943 $821,664 $272,548 $— Investments held in supplemental retirement plan: Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,564 — — 3,564 3,564 — — Included in prepaid expenses and other current assets & other non-current assets Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Included in accrued liabilities & other non-current liabilities Currency derivatives as hedge instruments: 3,564 — — 3,564 3,564 — — Liabilities: Included in other accrued expenses . . . . . . . . . . . — — (242) (242) — (242) — (1) Other long-term investments as of September 27, 2019 is comprised of one equity method investment which is not carried at fair value of $1.7 million. Fair Value Hierarchy. 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 73 source, reviewing the pricing movement in the context of overall market trends, and reviewing trading information from our investment managers. In addition, we assess the inputs and methods used in determining the fair value in order to determine the classification of securities in the fair value hierarchy. Level 3: Unobservable inputs are used when little or no market data is available and reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The following table describes the valuation techniques and inputs applicable to each class of security held within our investment portfolio as of September 25, 2020: Asset Type Level 1 Money Market Funds . . . . . . . . . . . . . . . . U.S. Government Bonds . . . . . . . . . . . . . . Level 2 Certificates of Deposit . . . . . . . . . . . . . . . . Primary Source Update Frequency Fair Value Methodology Secondary Source ICE (Intercontinental Exchange) ICE (Intercontinental Exchange) Daily Daily $1 per share Not Applicable Bloomberg Institutional Bond Quotes—evaluations based on various market and industry inputs Commercial Paper . . . . . . . . . . . . . . . . . . . U.S. Bank Pricing Corporate Bonds . . . . . . . . . . . . . . . . . . . . ICE (Intercontinental Exchange) Unit ICE (Intercontinental Exchange) Municipal Debt Securities . . . . . . . . . . . . . U.S. Agency Securities . . . . . . . . . . . . . . . Int’l Government Bonds . . . . . . . . . . . . . . ICE (Intercontinental Exchange) ICE (Intercontinental Exchange) ICE (Intercontinental Exchange) Extel Financial Ltd Monthly Market Prices Bloomberg Daily Daily Daily Daily Daily Matrix Pricing Not Applicable Institutional Bond Quotes—evaluations based on various market and industry inputs Evaluations based on various market and industry inputs Institutional Bond Quotes—evaluations based on various market and industry inputs Evaluations based on various market factors Bloomberg Bloomberg Bloomberg Bloomberg Securities In Gross Unrealized Loss Position. We periodically evaluate our investments for other-than-temporary declines in fair value. 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 as of September 25, 2020 and September 27, 2019 (in thousands): September 25, 2020 September 27, 2019 Less Than 12 Months Greater Than 12 Months Less Than 12 Months Greater Than 12 Months Investment Type Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Certificate of deposit . . . . . . . . . . . . . . . . . . . $ — $— $— $— $ U.S. agency securities . . . . . . . . . . . . . . . . . . — Government bonds . . . . . . . . . . . . . . . . . . . . . — Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . Municipal debt securities . . . . . . . . . . . . . . . . 7,076 2,505 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,581 — 1,426 — 7,647 9,552 $— $— $18,925 — — — — (10) — (6) — — — — — 300 — (3) (13) $ (16) Total 4,787 — 27,078 (9) — (32) 900 — $32,765 $ (41) Gross Unrealized Fair Losses Value $— $ — $— Gross Unrealized Losses $ (16) 74 Although we had certain securities that were in an unrealized loss position as of September 25, 2020, we expect to recover the full carrying value of these securities as we do not intend to, nor do we currently anticipate a need to sell these securities prior to recovering the associated unrealized losses. As a result, we do not consider any portion of the unrealized losses at either September 25, 2020 or September 27, 2019 to represent an other- than-temporary impairment, nor do we consider any of the unrealized losses to be credit losses. Investment Maturities. The following table summarizes the amortized cost and estimated fair value of the AFS securities within our investment portfolio based on stated maturities as of September 25, 2020 and September 27, 2019, which are recorded within cash equivalents and both short and long-term investments in our consolidated balance sheets (in thousands): Range of maturity Due within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due in 1 to 2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due in 2 to 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 25, 2020 September 27, 2019 Amortized Cost $261,839 29,328 17,900 Fair Value $262,085 29,814 18,159 Amortized Cost $238,186 93,948 81,793 Fair Value $238,354 94,899 82,957 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $309,067 $310,058 $413,927 $416,210 6. Property, Plant, & Equipment PP&E are recorded at cost, with depreciation expense included in cost of licensing, cost of products, cost of services, R&D, S&M, and G&A expenses in our consolidated statements of operations. Depreciation expense was $61.4 million, $55.5 million, and $54.8 million in fiscal 2020, 2019, and 2018, respectively. As of September 25, 2020 and September 27, 2019, PP&E consisted of the following (in thousands): Property, Plant, & Equipment September 25, 2020 September 27, 2019 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and building improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Computer equipment and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment provided under operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction-in-progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,955 283,617 83,764 126,942 230,800 31,845 199,561 19,545 $ 41,918 282,924 66,730 128,525 219,455 34,191 161,372 19,616 Property, plant, and equipment, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,018,029 (476,066) 954,731 (417,299) Property, plant, & equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 541,963 $ 537,432 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 wholly owned subsidiaries. We determine if a contract contains a lease based on whether we have the right to obtain substantially all of the economic benefits from the use of an identified asset and whether we have the right to direct the use of an identified asset in exchange for consideration, which relates to an asset which we do not own. Right of use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets are recognized as the lease liability, adjusted for lease incentives received. Lease liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to 75 determine the present value of the future lease payments is our Incremental Borrowing Rate, because the interest rate implicit in our leases is not readily determinable. The IBR is a hypothetical rate based on our understanding of what our credit rating would be to borrow and resulting interest we would pay to borrow an amount equal to the lease payments in a similar economic environment over the lease term on a collateralized basis. Lease payments may be fixed or variable, however, only fixed payments are included in our lease liability calculation. Variable lease payments are recognized in operating expenses in the period in which the obligation for those payments are incurred. The lease term of operating leases vary from less than a year to 12 years. We have leases that include one or more options to extend the lease term for up to 9 years as well as options to terminate the lease within one year. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. The components of lease expense were as follows (in thousands): September 25, 2020 Lease cost Operating lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Variable lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,570 1,175 Total lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,745 Total rent expense incurred under operating leases, including the portion of total rent expense which is payable to our principal stockholder, was $20.6 million and $17.2 million in fiscal 2019 and 2018, respectively. Supplemental cash flow information related to leases was as follows (in thousands): September 25, 2020 Other information Cash paid for amounts included in the measurement of operating lease liabilities . . . . . . . . . . . . . . . Right-of-use assets obtained in exchange for operating lease obligations . . . . . . . . . . . . . . . . . . . . . $22,043 34,198 Supplemental balance sheet information related to leases was as follows: Operating Leases Weighted-average remaining lease term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 years 3.1% The following tables presents the maturity analysis of lease liabilities (in thousands): September 25, 2020 September 25, 2020 Operating Leases Fiscal 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total undiscounted lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,098 14,868 13,299 12,718 8,898 22,484 90,365 (9,228) Total lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $81,137 76 Remainder of Fiscal 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total undiscounted lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,231 9,329 7,191 6,218 4,499 12,355 $56,823 September 27, 2019 Operating Leases As Lessor As a lessor, we lease our Dolby Cinema product solution to exhibitors, Dolby Voice equipment to cloud conferencing service providers, and lease or sublease real estate properties. The terms of these leases vary from 4 to 10 years. Lease components consist of fixed payments and/or variable lease payments based on contracted percentages of revenue. Generally, leases do not grant any right to the lessee to purchase the underlying asset at the end of the lease term, with the exception of certain leases of Dolby Voice equipment for which the customer has the option to purchase the equipment at fair value. Dolby Cinema lease arrangements have options to extend the lease term at expiration by increments ranging from 1 to 5 years. Assets provided under an operating lease are carried at cost within property, plant and equipment and depreciated over the useful life of these asset using the straight-line method. Fixed operating lease payments are recognized on a straight-line basis over the lease term to other income for our real estate property and to revenue for all other leases. Variable lease payments received under our Dolby Cinema operating leases are computed as shares of lessees’ box office revenues and recognized to revenue in the period that box office sales occur. Lease incentive payments we make to lessees are amortized as a reduction in revenue over the lease term. For the year ended September 25, 2020, variable operating lease income was $10.4 million and fixed operating lease income was $3.7 million. If a lease is classified as a sales-type lease, the carrying amount of the asset is derecognized from property, plant and equipment and a net investment in the lease is recorded. The net investment in the lease is measured at commencement date as the sum of the lease receivable and the estimated residual value of the equipment. The unguaranteed residual value of the equipment was determined as the estimated carrying value of the asset at the end of the lease term had the asset been depreciated on a straight-line basis. At September 25, 2020, the unguaranteed residual value of sales-type leases was $0.7 million. Selling profit or loss arising from a sales-type lease is recorded at lease commencement and presented on a gross basis. Over the term of the lease, we recognize interest income on the net investment in the lease and any variable lease payments, which is not material and not included in the net investment in the lease. The following table presents the maturity analysis of fixed lease payments due to Dolby (in thousands): September 25, 2020 Operating Leases Sales-Type Leases Fiscal 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total undiscounted cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: present value of lease payments (recognized as lease receivables) . . . . . . . . . . . . . . . Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,361 3,393 3,354 1,821 78 346 12,353 $ 1,605 1,605 1,603 796 395 395 6,399 (4,821) $ 1,578 77 8. Goodwill & Intangible Assets Goodwill The following table outlines changes to the carrying amount of goodwill (in thousands): Balance at September 28, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill $327,982 9,367 (2,520) Balance at September 27, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $334,829 — 2,116 Balance at September 25, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $336,945 Intangible Assets Intangible assets are stated at their original cost less accumulated amortization. Intangible assets subject to amortization consisted of the following (in thousands): Intangible Assets, Net September 25, 2020 September 27, 2019 Cost Accumulated Amortization Net Cost Accumulated Amortization Net Acquired patents and technology . . . . . . $342,637 $(206,123) $136,514 $338,075 $(176,867) $161,208 19,218 Customer relationships . . . . . . . . . . . . . . 465 Other intangibles . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $430,346 $(277,915) $152,431 $425,705 $(244,814) $180,891 (45,510) (22,437) (49,062) (22,730) 64,740 22,969 15,678 239 64,728 22,902 During fiscal 2020 and 2019, we purchased various patents and developed technology for purchase consideration of $2.9 million and $27.3 million, and upon acquisition, these intangible assets had a weighted- average useful life of 14.0 years and 7.9 years, respectively. These acquisitions facilitate our R&D efforts, technologies and potential product offerings. Amortization expense for our intangible assets is included in cost of licensing, cost of products, R&D and S&M expenses in our consolidated statements of operations. Amortization expense was $29.5 million, $29.7 million, and $26.5 million in fiscal 2020, 2019 and 2018, respectively. As of September 25, 2020, expected amortization expense of our intangible assets in future periods was as follows (in thousands): Fiscal Year 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization Expense $ 30,913 28,307 23,929 21,899 6,845 40,538 $152,431 9. Stockholders’ Equity & Stock-Based Compensation We provide stock-based awards as a form of compensation for employees, officers and directors. We have issued stock-based awards in the form of stock options and RSUs under our equity incentive plans, as well as shares under our ESPP. 78 Common Stock—Class A and Class B Our Board of Directors has authorized two classes of common stock, Class A and Class B. At September 25, 2020, we had authorized 500,000,000 Class A shares and 500,000,000 Class B shares. At September 25, 2020, we had 64,167,725 shares of Class A common stock and 36,128,720 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. 2020 Stock Incentive Plan Following shareholder approval in January 2005, our 2005 Stock Plan was adopted by our Board of Directors on February 16, 2005. 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 from June 2008 onward generally vest over four years, with 25% of the shares subject to the option becoming exercisable on the one-year anniversary of the date of grant and the balance of the shares vesting in equal monthly installments over the following 36 months. These options expire on the earlier of 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. In fiscal 2016, we began granting PSOs to our executive officers with shares of our Class A common stock underlying such options. The contractual term for the PSOs is 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. If the minimum conditions are met, the PSOs earned will cliff vest on the third anniversary of the grant date, upon certification of achievement of the performance conditions by our Compensation Committee. Anywhere from 0% to 125% of the shares subject to a PSO may vest based on achievement of the performance conditions at the end of the three-year performance period. In valuing the PSOs, which will be recognized as compensation cost, we used a Monte Carlo valuation model. Aside from the use of an expected term for the PSOs commensurate with their shorter contractual term, the nature of the valuation inputs used in the Monte Carlo valuation model were consistent with those used to value our non-performance based options granted under the 2020 Stock Plan. Compensation cost is being amortized on a straight-line basis over the requisite service period. 79 On December 15, 2018, we granted PSOs to our executive officers exercisable for an aggregate of 241,100 shares at the target award amount, which would be exercisable up to an aggregate of 301,375 shares at 125% of the target award amount. On December 15, 2017, we granted PSOs to our executive officers exercisable for an aggregate of 264,000 shares at the target award amount, which would be exercisable up to an aggregate of 330,000 shares at 125% of the target award amount. On December 15, 2016, we granted PSOs to our executive officers exercisable for an aggregate of 276,199 shares at the target award amount, which would be exercisable for an aggregate of up to 345,248 shares at 125% of the target award amount. On December 15, 2015, we granted PSOs to our executive officers, which vested in December 2018 at 125% of the target award amount, for an aggregate of 334,623 shares. As of September 25, 2020, PSOs which would be exercisable for an aggregate of 726,639 shares at the target award amount (994,455 shares at 125% of the target award amount) were outstanding. The following table summarizes information about stock options issued under our 2020 Stock Plan: Options outstanding at September 27, 2019 . . . . . . . . . Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeitures and cancellations . . . . . . . . . . . . . . . . Options outstanding at September 25, 2020 . . . . . . . . . Options vested and expected to vest at September 25, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options exercisable at September 25, 2020 . . . . . . . . . Shares (in thousands) 7,201 1,150 (1,671) (81) 6,599 6,345 4,026 Weighted- Average Exercise Price Weighted- Average Remaining Contractual Life Aggregate Intrinsic Value (1) (in years) (in thousands) $48.03 67.77 40.16 62.20 53.30 52.80 $45.98 6.2 6.1 5.2 $80,636 80,486 76,557 (1) Aggregate intrinsic value is based on the closing price of our Class A common stock on September 25, 2020 of $64.99 and excludes the impact of options that were not in-the-money. Restricted Stock Units. Beginning in fiscal 2008, we began granting RSUs to certain directors, officers and employees under our 2020 Stock Plan. Awards granted to employees and officers generally vest over four years, with equal annual cliff-vesting. Awards granted to directors prior to November 2010 generally vest over three years, with equal annual cliff-vesting. Awards granted after November 2010 and prior to fiscal 2014 to new directors vest over approximately two years, with 50% vesting per year, while awards granted from November 2010 onward to ongoing directors generally vest over approximately one year. Awards granted to new directors from fiscal 2014 onward vest on the earlier of the first anniversary of the award’s date of grant, or the day immediately preceding the date of the next annual meeting of stockholders that occurs after the award’s date of grant. Our 2020 Stock Plan also allows us to grant RSUs that vest based on the satisfaction of specific performance criteria. At each vesting date, the holder of the award is issued shares of our Class A common stock. Compensation expense from these awards is equal to the adjusted fair market value of our Class A common stock on the date of grant, discounted to account for dividend payments forgone during the vesting period, and recognized on a straight-line basis over the requisite service period. Performance-Based Restricted Stock Units (PSUs). In the first quarter of fiscal 2020, we began granting PSUs to our executive officers with shares of our Class A common stock underlying such awards, which would vest for an aggregate of 62,000 shares at the target amount (124,000 shares at 200% of the target award amount). The terms of the PSU Agreement adopted in the first quarter fiscal 2020 provide for the grant of performance- based restricted stock units to our executive officers contingent on Dolby’s achievement of annualized TSR targets measured against a comparator index over a three-year performance period following the date of grant. Anywhere from 0% to 200% of eligible restricted stock units may vest based on achievement of the performance conditions at the end of the three-year performance period. In valuing the PSUs which will be recognized as compensation cost, we used a Monte Carlo valuation model. Compensation cost is being amortized on a straight- line basis over the requisite service period. 80 The following table summarizes information about RSUs issued under our 2020 Stock Plan: Non-vested at September 27, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-vested at September 25, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares (in thousands) 2,805 1,395 (1,078) (143) 2,979 Weighted-Average Grant Date Fair Value $58.84 65.76 52.71 61.16 $62.70 The fair value as of the respective vesting dates of RSUs were as follows (in thousands): Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 Restricted stock units—vest date fair value . . . . . . . . . . . . . . . . . . . . . $72,426 $69,956 $64,755 Employee Stock Purchase Plan. Our plan allows eligible employees to have up to 10 percent of their eligible compensation withheld and used to purchase Class A common stock, subject to a maximum of $25,000 worth of stock purchased in a calendar year or no more than 1,000 shares in an offering period, whichever is less. An offering period consists of successive six-month purchase periods, with a look back feature to our stock price at the commencement of a one-year offering period. The plan provides for a discount equal to 15 percent of the lower of the closing price of our Class A common stock on the New York Stock Exchange on the first and last day of the offering periods. The plan also includes an automatic reset feature that provides for an offering period to be reset and recommenced to a new lower-priced offering if the offering price of a new offering period is less than that of the immediately preceding offering period. Stock Option Valuation Assumptions We use the Black-Scholes option pricing model to determine the estimated fair value of employee stock options at the date of the grant. The Black-Scholes model includes inputs that require us to make certain estimates and assumptions regarding the expected term of the award, as well as the future risk-free interest rate, and the volatility of our stock price over the expected term of the award. Expected Term. The expected term of an award represents the estimated period of time that options granted will remain outstanding, and is measured from the grant date to the date at which the option is either exercised or canceled. Our determination of the expected term involves an evaluation of historical terms and other factors such as the exercise and termination patterns of our employees who hold options to acquire our Class A common stock, and is based on certain assumptions made regarding the future exercise and termination behavior. Risk-Free Interest Rate. The risk-free interest rate is based on the yield curve of United States Treasury instruments in effect on the date of grant. In determining an estimate for the risk-free interest rate, we use average interest rates based on these instruments’ constant maturities with a term that approximates and corresponds with the expected term of our awards. Expected Stock Price Volatility. The expected volatility represents the estimated volatility in the price of our Class A common stock over a time period that approximates the expected term of the awards, and is determined using a blended combination of historical and implied volatility. Historical volatility is representative of the historical trends in our stock price for periods preceding the measurement date for a period that is commensurate with the expected term. Implied volatility is based upon externally traded option contracts of our Class A common stock. 81 Dividend Yield. The dividend yield is based on our anticipated dividend payout over the expected term of our option awards. Dividend declarations and the establishment of future record and payment dates are subject to the Board of Directors’ continuing determination that the dividend policy is in the best interests of our stockholders. The dividend policy may be changed or canceled at the discretion of the Board of Directors at any time. The weighted-average assumptions used in the determination of the fair value of our stock options were as follows: Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.91 1.6% 24.2% 1.3% 4.90 2.7% 22.9% 1.1% 5.06 2.2% 22.6% 1.1% 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 25, 2020 September 27, 2019 September 28, 2018 Stock options granted—weighted-average grant date fair value . . . . . Stock options exercised—intrinsic value . . . . . . . . . . . . . . . . . . . . . . . $ 13.76 47,267 $ 14.16 33,226 $ 13.19 63,973 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 9.74%, 9.78% and 9.91% in fiscal 2020, 2019, and 2018, 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 Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated benefit from income taxes . . . . . . . . . . . . . . . . . . . . . . Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 $ 16,718 65,235 4,675 86,628 (14,090) $ 17,742 54,650 4,188 76,580 (12,884) $ 21,083 46,162 4,004 71,249 (12,595) Total stock-based compensation, net of tax $ 72,538 $ 63,696 $ 58,654 82 Expense—By Income Statement Classification Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 Cost of products and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,072 25,634 31,915 27,007 Total stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated benefit from income taxes . . . . . . . . . . . . . . . . . . . . . . 86,628 (14,090) $ 1,710 23,191 28,137 23,542 76,580 (12,884) $ 1,574 19,515 24,997 25,163 71,249 (12,595) Total stock-based compensation, net of tax $ 72,538 $ 63,696 $ 58,654 The tax benefit that we recognize from shares issued under our ESPP is excluded from the tables above. This benefit was as follows (in thousands): Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 Tax benefit—shares issued under ESPP . . . . . . . . . . . . . . . . . . . . . . . . $409 $353 $577 Unrecognized Compensation Expense. At September 25, 2020, total unrecognized compensation expense associated with employee stock options expected to vest was approximately $23.8 million, which is expected to be recognized over a weighted-average period of 2.2 years. At September 25, 2020, total unrecognized compensation expense associated with RSUs expected to vest was approximately $121.8 million, which is expected to be recognized over a weighted-average period of 2.3 years. Common Stock Repurchase Program In November 2009, we announced a stock repurchase program (“program”), providing for the repurchase of our Class A common stock. The following table summarizes the initial amount of authorized repurchases as well as additional repurchases approved by our Board of Directors as of September 25, 2020 (in thousands): Authorization Period Authorization Amount Fiscal 2010: November 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2010: July 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2011: July 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2012: February 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2015: October 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2017: January 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2018: July 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2019: July 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total $ 250,000 300,000 250,000 100,000 200,000 200,000 350,000 350,000 $2,000,000 Stock repurchases under the program may be made through open market transactions, negotiated purchases, or otherwise, at times and in amounts that we consider appropriate. 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 25, 2020, the remaining authorization to purchase additional shares is approximately $187 million. 83 The following table provides information regarding share repurchase activity under the program in fiscal 2020: Quarterly Repurchase Activity Shares Repurchased Cost (1) Average Price Paid Per Share (2) Q1 - Quarter ended December 27, 2019 . . . . . . . . . . . . . . . . . . . . Q2 - Quarter ended March 27, 2020 . . . . . . . . . . . . . . . . . . . . . . . Q3 - Quarter ended June 26, 2020 . . . . . . . . . . . . . . . . . . . . . . . . Q4 - Quarter ended September 25, 2020 . . . . . . . . . . . . . . . . . . . . 432,042 1,015,481 474,340 642,696 (in thousands) $ 30,003 71,669 27,081 44,989 $69.44 70.57 57.09 70.00 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,564,559 $173,742 (1) Cost of share repurchases includes the price paid per share and applicable commissions. (2) Average price paid per share excludes commission costs. Dividend Program The following table summarizes dividends declared under the program during fiscal 2020: Fiscal Period Fiscal 2020 Announcement Date Record Date Payment Date Q1 - Quarter ended December 27, 2019 . . . . . February 10, 2020 February 20, 2020 Q2 - Quarter ended March 27, 2020 . . . . . . . . May 27, 2020 August 26, 2020 Q3 - Quarter ended June 26, 2020 . . . . . . . . . . Q4 - Quarter ended September 25, 2020 . . . . . November 12, 2020 November 24, 2020 December 4, 2020 January 29, 2020 May 4, 2020 August 3, 2020 May 18, 2020 August 17, 2020 Cash Dividend Per Common Share Dividend Payment $0.22 $0.22 $0.22 $0.22 $22.2 million $22.1 million $22.1 million $22.1 million(1) (1) The dividend payment amount is estimated based on the number of shares of our Class A and Class B common stock that we estimate will be outstanding as of the Record Date. 10. Accumulated Other Comprehensive Income Other comprehensive income 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 income, 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. 84 The following table summarizes the changes in the accumulated balances during the period, and includes information regarding the manner in which the reclassifications out of AOCI into earnings affect our consolidated statements of operations (in thousands): Fiscal Year Ended September 25, 2020 Fiscal Year Ended September 27, 2019 Investment Securities Cash Flow Hedges Currency Translation Adjustments Total Investment Securities Cash Flow Hedges Currency Translation Adjustments Total Beginning Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,198 Other comprehensive income before reclassifications: $ — $(22,823) $(20,625) $(2,948) $ — $(12,884) $(15,832) Unrealized gains/(losses) . . . . . . . . . . . . . . . . . . . Foreign currency translation gains/(losses) (1) . . . Income tax effect—benefit/(expense) . . . . . . . . . (5,393) — (87) 5,270 — (581) Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,480) 4,689 Amounts reclassified from AOCI into earnings: Realized gains/(losses) (1) . . . . . . . . . . . . . . . . . . . Income tax effect—benefit/(expense) (2) . . . . . . . Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,939 (839) 4,100 (894) 174 (720) — 7,420 22 7,442 — — — (123) 7,420 (646) 6,651 4,045 (665) 3,380 5,131 — 37 5,168 (43) 21 (22) (176) — — (176) 176 — 176 — (9,500) (439) (9,939) 4,955 (9,500) (402) (4,947) — — — 133 21 154 Net current-period other comprehensive income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,380) 3,969 7,442 10,031 5,146 — (9,939) (4,793) Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 818 $3,969 $(15,381) $(10,594) $ 2,198 $ — $(22,823) $(20,625) (1) Realized gains or losses, if any, from the sale of our AFS investment securities or from foreign currency translation adjustments are included within other income/expense, net in our consolidated statements of operations. Realized gains or losses on foreign currency contracts designated as cash flow hedges are included in operating expenses on the consolidated statements of operations. (2) The income tax benefit or expense is included within provision for income taxes in our consolidated statements of operations. 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. 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. 85 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 25, 2020 September 27, 2019 September 28, 2018 Numerator: Net income attributable to Dolby Laboratories, Inc. . . . . . . . . . . $231,363 $255,151 $ 41,746 Denominator: Weighted-average shares outstanding—basic . . . . . . . . . . . . . . . 100,564 101,629 103,377 Potential common shares from options to purchase common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Potential common shares from restricted stock units . . . . . . Potential common shares from ESPP . . . . . . . . . . . . . . . . . . 1,400 941 39 1,922 1,021 — 2,370 1,231 — Weighted-average shares outstanding—diluted . . . . . . . . . . . . . . 102,944 104,572 106,978 Net income per share attributable to Dolby Laboratories, Inc.: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2.30 2.25 $ $ 2.51 2.44 $ $ 0.40 0.39 Antidilutive awards excluded from calculation: Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,209 2 1 2,340 1 — 1,043 6 — 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 United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense. 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): United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,426 207,289 $ 60,500 221,807 $ 27,819 168,555 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $239,715 $282,307 $196,374 Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 86 Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 Current: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(48,517) 735 61,153 13,371 (4,674) (111) (490) (5,275) $ 8,096 $ 14,144 394 64,335 78,873 (55,793) 1,007 2,715 (52,071) $ 26,802 $ 40,624 333 59,383 100,340 43,377 17,484 (7,132) 53,729 $154,069 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 moves towards a modified territorial tax system through the provision of a 100% dividend received deduction for the foreign-source portions of dividends received from controlled foreign subsidiaries. As a result, we have reevaluated our historical assertion and determined that we no longer consider a vast majority of these earnings to be indefinitely reinvested. During the fiscal year, we repatriated $300 million of foreign subsidiary earnings which were exempt from foreign withholding tax. As of September 25, 2020, the total undistributed earnings of our foreign subsidiaries were approximately $244 million. The unrecognized deferred tax liability on the portion of the undistributed earnings considered indefinitely reinvested is not material. 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 temporary differences were as follows (in thousands): Deferred income tax assets: Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue recognition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deemed repatriated earnings tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total gross deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax liabilities: Right of use asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Fiscal Year Ended September 25, 2020 September 27, 2019 $ 1,899 6,863 3,450 13,839 17,397 4,374 45,572 17,655 31,795 12,161 9,788 4,765 169,558 (30,416) 139,142 $ 2,099 4,041 2,050 13,917 17,189 4,410 19,988 — 28,777 10,777 33,357 4,705 141,310 (24,884) 116,426 (17,360) (2,901) $118,881 — (2,351) $114,075 Net Operating Losses (“NOL”) and Tax Credit Carryforwards At September 25, 2020, the NOL carryforwards for U.S. federal and California were $4.5 million and $9.0 million, respectively, and will start to expire in fiscal 2034 and 2029, respectively. Additionally, we had foreign NOL carryforwards of $9.8 million as of September 25, 2020, an amount which is not subject to expiration. At September 25, 2020, we had foreign tax credit and federal R&D tax credit carryforwards of $8.5 million and $6.9 million, respectively, which will start to expire in fiscal 2029 and fiscal 2039. We had California R&D tax credits of $34.7 million, which will carry forward indefinitely, and foreign R&D tax credits of $2.6 million, which will start to expire in fiscal 2021 and fiscal 2029. Valuation Allowance As of September 25, 2020, a $25.8 million valuation allowance was recorded against California deferred tax assets and a $4.6 million valuation allowance was recorded against foreign deferred tax assets for which ultimate realization of its future benefits is uncertain. Effective Tax Rate 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 25, 2020 September 27, 2019 September 28, 2018 Federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State income taxes, net of federal effect . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development tax credits . . . . . . . . . . . . . . . . . . . . . Foreign-derived intangible income deduction . . . . . . . . . . . . . . . U.S. tax on foreign entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign rate differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) unrecognized tax benefit . . . . . . . . . . . . . . . . Tax Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in Valuation Allowance . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.0% 0.2 (2.7) (3.0) (2.2) 3.1 (1.8) (12.9) — — 1.7 21.0% 0.2 (1.9) (4.7) (0.7) 0.6 (4.4) 3.4 (7.6) 1.5 2.1 24.6% 0.7 (5.2) (4.0) — — (9.4) 3.7 53.3 8.3 6.5 Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4% 9.5% 78.5% Our effective tax rate was 3.4% in fiscal 2020, compared with our federal statutory rate of 21.0%, and with our effective tax rate in fiscal 2019 of 9.5%. The decrease in our effective tax rate is primarily related to a benefit in fiscal 2020 from reversals of unrecognized tax benefits. Our effective tax rate was 78.5% in fiscal 2018 and was 9.5% in fiscal 2019. The effective tax rate in fiscal 2018 reflects the impact from the Tax Act, most notably the remeasurement of net deferred tax assets and the Transition Tax on the accumulated earnings of our foreign subsidiaries, and the establishment of a valuation allowance against California tax credits in fiscal 2018. In addition, our federal statutory tax rate decreased from a blended rate of 24.6% in fiscal 2018 to 21% in fiscal 2019. 88 Uncertain Tax Positions As of September 25, 2020, the total amount of gross unrecognized tax benefits was $60.7 million, of which $42.0 million, if recognized, would reduce our effective tax rate. Our liability decreased from fiscal 2019 primarily due to lapse in the statute of limitations in fiscal 2020. Our liability for unrecognized tax benefits is classified within other non-current liabilities in our consolidated balance sheets. Over the next twelve months, we estimate that this amount could be reduced by $24.0 million as a result of the expiration of certain statute of limitations. Aggregate changes in the balance of gross unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands): Beginning Balance Gross increases—tax positions taken during prior years . . . . . . . . . . . Gross decreases—tax positions taken during prior years . . . . . . . . . . Gross increases—tax positions taken during current year . . . . . . . . . . Gross decreases—settlements with tax authorities during current year . . . Lapse of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 $108,539 5,504 — 7,509 (37) (60,824) $102,009 115 — 6,822 — (407) $ 98,665 — (2,209) 9,580 (130) (3,897) Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,691 $108,539 $102,009 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 2020, our current tax provision was decreased by interest expense of $6.3 million, while in fiscal year 2019, our current tax provision was increased by interest expense of $3.5 million. Accrued interest and penalties are included within the related tax liability line item in our consolidated balance sheets. Our accrued interest and penalties on unrecognized tax benefits as of September 25, 2020 and September 27, 2019 were as follows (in thousands): Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal Year Ended September 25, 2020 September 27, 2019 $4,017 45 $4,062 $10,315 44 $10,359 We continue to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected tolling of the statute of limitations in various taxing jurisdictions. We file income tax returns in the U.S. federal, states, and foreign jurisdictions. The material income tax jurisdictions are the U.S. federal, California, New York, and the Netherlands. We are currently under audit by the State of Oregon for fiscal years 2016 through 2018 and Spain for fiscal years 2014 and 2015. The statute remains open for fiscal years subsequent to 2014 for U.S. federal, and 2014 and onward for state and foreign purposes. Therefore, these periods may be subject to examination by the tax authorities. Management does not believe that the outcome of any ongoing examination will have a material impact on our consolidated financial statements. 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. 89 13. Restructuring Restructuring charges/(credits) recorded in our 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 2019 Restructuring Events. In fiscal 2019, we recorded charges as a result of our early exit of a leased facility. In addition, we recorded charges associated with a strategic reorganization of our marketing function that resulted in severance and other related benefits provided to the affected employees. As a result of these events, we recorded a total of $36.6 million in restructuring costs in fiscal 2019 and they are reflected as such in the accompanying consolidated statement of operations. The table presented below summarizes changes in restructuring accruals under these plans (in thousands): Severance Leased facility exit costs Fixed assets write-off Other associated costs Balance at September 27, 2019 . . . . . . . . . . . $128 $ 15,723 Restructuring charges . . . . . . . . . . . . . . . . Cash payments . . . . . . . . . . . . . . . . . . . . . Non-cash and other adjustments . . . . . . . — (75) (53) 1,821 (22,119) 4,575 Balance at September 25, 2020 . . . . . . . . . . . $— $ — $— — — — $— $— — — — $— Total $ 15,851 1,821 (22,194) 4,522 $ — Accruals for restructuring charges incurred for the restructuring plans described above are included within accrued liabilities in our consolidated balance sheets while restructuring charges are included within restructuring charges in our consolidated statements of operations. 14. Commitments & 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 25, 2020 (in thousands): Payments Due By Fiscal Period Fiscal 2021 Fiscal 2022 Fiscal 2023 Fiscal 2024 Fiscal 2025 Thereafter Total Naming rights . . . . . . . . . . . . . . . . . . . . . Purchase obligations . . . . . . . . . . . . . . . . Donation commitments . . . . . . . . . . . . . $ 7,915 17,305 4,803 $ 8,015 2,991 155 $8,116 139 155 $8,219 — 155 $8,322 — 155 $61,277 — 1,002 $101,864 20,435 6,425 Total . . . . . . . . . . . . . . . . . . . . . . . . $30,023 $11,161 $8,410 $8,374 $8,477 $62,279 $128,724 Naming Rights. We are party to an agreement for naming rights and related benefits with respect to the Dolby Theatre in Hollywood, California, the location of the Academy Awards®. The term of the agreement is 20 years, over which we will make payments on a semi-annual basis until fiscal 2032. Our 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 protracted closure of the Dolby Theatre. 90 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 IT 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. 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 will 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. Furthermore, we have not historically made any payments in connection with any such obligation and believe there to be a remote likelihood that any potential exposure in future periods would be of a material amount. As a result, no amounts have been accrued in our consolidated financial statements with respect to the contingent aspect of these indemnities. 15. Operating Segments & 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 chief operating decision maker, 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 reporting 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 91 The following tables present selected information regarding total revenue by geographic location (amounts presented in thousands). Revenue Composition—United States & International Location Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International $ 460,972 700,820 $ 449,203 792,417 $ 353,235 701,365 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,161,792 $1,241,620 $1,054,600 Revenue Concentration—Significant Individual Geographic Regions Location Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40% 12% 20% 9% 10% 2% 7% 36% 12% 20% 11% 12% 4% 5% 33% 17% 15% 13% 12% 3% 7% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% Long-lived tangible assets, net of accumulated depreciation, by geographic region were as follows (in thousands): Location September 25, 2020 September 27, 2019 United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $453,889 88,074 Total long-lived tangible assets, net of accumulated depreciation . . . . . . . . $541,963 $460,370 77,062 $537,432 16. 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. 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, any such amounts are either immaterial, or it is not possible to provide an estimate of any such potential losses. 92 17. 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 property leased to Dolby Laboratories as of September 25, 2020 were as follows: Entity Name Minority Ownership Interest Location Of Properties Dolby Properties Brisbane, LLC . . . . . . . . Dolby Properties Burbank, LLC . . . . . . . . Dolby Properties, LP . . . . . . . . . . . . . . . . . 49.0% 49.0% 10.0% Brisbane, California Burbank, California Wootton Bassett, England We lease from our principal stockholder a commercial office building located at 100 Potrero Avenue in San Francisco, California under a term that expires on October 31, 2024. In fiscal 2019, we ceased occupancy of the facility, and do not intend to re-occupy the locations. As a result of our ceased occupancy, we incurred $33.5 million in restructuring charges recorded as operating expenses in our consolidated statement of operations. Related party rent expense included in operating expenses in our consolidated statements of operations were as follows (in thousands): Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 Related party rent expense and restructuring charges included in operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $126 $16,360 $3,483 Distributions. Distributions made by the jointly-owned real estate entities to our principal stockholder were as follows (in thousands): Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 Distributions to principal stockholder . . . . . . . . . . . . . . . . . . . . . . . . . $(283) $(1,015) $(1,022) 18. Retirement Plans We maintain a tax-qualified Section 401(k) retirement plan for employees in the United States 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. 93 Retirement plan expenses, which are included in cost of products, cost of services, R&D, S&M, and G&A expense in our consolidated statements of operations, were as follows (in thousands): Fiscal Year Ended September 25, 2020 September 27, 2019 September 28, 2018 Retirement plan expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,257 $23,375 $23,439 19. Selected Quarterly Financial Data The following table presents selected unaudited quarterly financial information from fiscal 2020 and 2019 (in thousands, except per share amounts): Fiscal Year 2020 Fiscal Year 2019 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Revenue: Licensing . . . . . . . . . . . . . . . . . . . . . . . . . . Products and services . . . . . . . . . . . . . . . . $257,683 34,194 $328,865 22,950 $235,125 11,784 $256,904 14,287 $260,279 42,097 $310,308 27,950 $271,897 30,262 $264,796 34,031 Total revenue . . . . . . . . . . . . . . . . . . Cost of revenue . . . . . . . . . . . . . . . . . . . . . 291,877 37,315 351,815 36,830 246,909 29,888 271,191 42,465 302,376 38,629 338,258 36,575 302,159 39,690 298,827 45,960 Gross margin . . . . . . . . . . . . . . . . . . . . . . . 254,562 314,985 217,021 228,726 263,747 301,683 262,469 252,867 Income/(loss) before taxes and controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . Net income/(loss) attributable to Dolby 54,454 110,779 39,990 34,492 74,254 110,002 41,800 56,251 Laboratories . . . . . . . . . . . . . . . . . . . . . $ 48,753 $ 88,496 $ 67,285 $ 26,829 $ 98,219 $ 73,440 $ 39,574 $ 43,918 Earnings per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . $ $ 0.49 0.47 $ $ 0.88 0.86 $ $ 0.67 0.66 $ $ 0.27 0.26 $ $ 0.96 0.93 $ $ 0.72 0.70 $ $ 0.39 0.38 $ $ 0.44 0.43 Weighted-average shares outstanding: Basic . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . 100,336 103,078 100,854 102,773 100,593 102,075 100,473 102,722 102,677 106,130 102,141 104,587 101,218 103,717 100,481 102,945 20. Subsequent Events Fiscal 2021 Restructuring Program. Subsequent to the fiscal year ended September 25, 2020, we approved a plan to reduce certain activities, such as winding down our conferencing hardware business, in order to reallocate those resources towards higher priority investment areas and growth opportunities for the future of our business. As a result, we expect to record approximately $10 million in restructuring costs that will be reflected in the fiscal 2021 financial statements, representing severance and other related benefits offered to approximately 100 employees that were impacted by this action. 94 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. Evaluation of Disclosure Controls and Procedures ITEM 9A. CONTROLS AND PROCEDURES We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Subject to the limitations noted above, our management, with the participation of our CEO and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based on that evaluation, the CEO and CFO have concluded that, as of such date, our disclosure controls and procedures were effective to meet the objective for which they were designed and operate at the reasonable assurance level. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rule 13a-15(f) or 15d-15(f) of the Exchange Act. 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, and includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our 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. Our management assessed the effectiveness of the Company’s internal control over financial reporting as of September 25, 2020 using the criteria established in Internal Control—Integrated Framework (2013) issued by the COSO. Based on this assessment and those criteria, management concluded that our internal control over 95 financial reporting was effective as of September 25, 2020. Our internal control over financial reporting has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which appears in Part II, Item 8 of this Form 10-K. Changes in Internal Control Over Financial Reporting The Company adopted ASC 824, “Leases” beginning September 28, 2019. As a result of this adoption, we implemented new processes and internal controls over financial reporting during the fiscal year ended September 25, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Company’s internal business operations, including financial reporting systems and internal control over financial reporting, have not been materially impacted by COVID-19. There were no other changes in our internal control over financial reporting during the fiscal quarter ended September 25, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. None. ITEM 9B. OTHER INFORMATION 96 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this item concerning our directors, compliance with Section 16 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), our code of business conduct and ethics, our Compensation Committee, Nominating and Governance Committee and Audit Committee is incorporated by reference from the information set forth in the sections under the headings “Election of Directors,” “Delinquent Section 16(a) Reports” and “Corporate Governance Matters” in our Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held in 2021 (“2021 Proxy Statement”). Executive Officers of the Registrant Our executive officers serve at the discretion of the Board of Directors. The names of our executive officers and their ages, titles, and biographies as of October 23, 2020 are set forth below: Executive Officers Age Position(s) Kevin Yeaman . . . . . . . . . . . . . . . Lewis Chew . . . . . . . . . . . . . . . . . Andy Sherman . . . . . . . . . . . . . . . Giles Baker . . . . . . . . . . . . . . . . . . Steven Forshay . . . . . . . . . . . . . . . Todd Pendleton . . . . . . . . . . . . . . . President and Chief Executive Officer 54 57 Executive Vice President and Chief Financial Officer 53 Executive Vice President, General Counsel and Corporate Secretary 44 66 48 Senior Vice President, Consumer Entertainment Senior Vice President, Advanced Technology Group Senior Vice President, and Chief Marketing Officer Kevin Yeaman joined us as Chief Financial Officer and Vice President in October 2005, was appointed Senior Vice President in November 2006 and Executive Vice President in July 2007. He became our President and CEO in March 2009 and has been a member of our Board since he assumed the role of CEO. Prior to joining us, he worked for seven years at E.piphany, Inc., a publicly traded enterprise software company, most recently as Chief Financial Officer from August 1999 to October 2005. Previously, Mr. Yeaman also served as Worldwide Vice President of Field Finance Operations for Informix Software, Inc., a provider of relational database software, from February 1998 to August 1998. From September 1988 to February 1998, Mr. Yeaman served in Silicon Valley and London in various positions at KPMG LLP, an accounting firm, serving most recently as a senior manager. Mr. Yeaman is a member of the Academy of Motion Picture Arts and Sciences. He also sits on the Board of Trustees of the Academy Museum Foundation. He holds a B.S. degree in commerce from Santa Clara University. Lewis Chew joined us as Executive Vice President and Chief Financial Officer in June 2012. Mr. Chew leads the worldwide finance organization and is responsible for the financial and infrastructure support for our business, which includes all finance functions, information technology, real estate and facilities, manufacturing, supply chain, and investor relations. Mr. Chew comes to us with decades of financial and strategic business management experience. Mr. Chew is the former Senior Vice President of Finance and Chief Financial Officer of National Semiconductor Corporation, a manufacturer of electronic components, where he was responsible for all finance functions as well as information systems and investor relations. Prior to joining National Semiconductor, Mr. Chew was a partner at KPMG LLP, an accounting firm, serving numerous technology and financial institution clients. Mr. Chew serves as a member of the Board of Directors of Cadence Design Systems, a provider of software, hardware, and system design tools to enable the design and development of electronic products. Mr. Chew holds a B.S. degree in accounting from Santa Clara University. Andy Sherman joined us as Executive Vice President, General Counsel and Corporate Secretary in January 2011. Mr. Sherman oversees Dolby’s patent licensing businesses and government relations, and Dolby’s 97 worldwide legal affairs, including all corporate, regulatory, IP, litigation, and licensing activities. Prior to joining us, from June 2008 to January 2011, Mr. Sherman served as Senior Vice President and General Counsel at CBS Interactive, an online content network, where he led the legal group advising CBS’s online entertainment, mobile, technology, sports, news, games, lifestyle, and international business units. Mr. Sherman joined CBS Interactive following CBS’s acquisition of CNET Networks, an online content network, where from June 2007 to June 2008 he was Senior Vice President, General Counsel and Secretary. Before CNET, Mr. Sherman served as Vice President, Legal at Sybase, an enterprise software and services company, from November 2006 to May 2007, following Sybase’s acquisition of Mobile 365, where he was Vice President, General Counsel and Secretary. Prior to joining Mobile 365, he held senior legal positions with global responsibility at a variety of public technology companies including PeopleSoft and E.piphany. Earlier in his career, Mr. Sherman worked in private practice with Gray Cary Ware & Freidenrich (now DLA Piper), focusing on the representation of emerging technology companies. Mr. Sherman holds a J.D. from the University of the Pacific, as well as a B.S. degree in business administration from the University of Southern California. Giles Baker joined us in March 2010 and has served since in a variety of positions, including Vice President, Broadcast Business Group; Senior Vice President, Broadcast Business Group; and since October 2016, Senior Vice President, Consumer Entertainment. Mr. Baker focuses on Dolby’s business in the consumer entertainment industry, leading a global team that builds complete industry solutions—from content production to distribution and playback—to bring immersive entertainment experiences to consumer devices, including TVs, game consoles, PCs, digital media adapters, mobile phones, and tablets. Before joining Dolby, Mr. Baker spent nearly 10 years in business leadership roles at Adobe Systems, where he was responsible for professional video software. Previously, he was responsible for the professional DVD authoring business at Sonic Solutions. Mr, Baker holds an undergraduate degree in music and sound recording from the University of Surrey in the United Kingdom and an MBA degree from the Wharton School. Steven Forshay joined us in July 1982 and has served since in a variety of positions advancing our technologies, including Senior Vice President, Research; Senior Vice President of Research for Image and Sound; Senior Vice President, Sound Technology R&D; and since January 2015, Senior Vice President, Advanced Technology Group. Mr. Forshay is a member of the Audio Engineering Society, the Institute of Electrical and Electronics Engineers, and the Society of Motion Picture and Television Engineers. Mr. Forshay holds a B.S.E.E. degree in electrical engineering from the New Jersey Institute of Technology and a M.B.A. from Saint Mary’s College of California. Todd Pendleton joined us in July 2018 as Senior Vice President and Chief Marketing Officer. He leads Dolby’s marketing efforts and is responsible for promoting the brand globally to consumers and through its partners. Prior to Dolby, from June 2011 to June 2018, Mr. Pendleton served as Chief Marketing Officer of Samsung Telecommunications America, where he among other things led the relaunch of the Samsung Galaxy. Prior to Samsung Telecommunications America, Mr. Pendleton was with Nike for over 15 years, where he held country, regional, and global leadership roles working across North America, Europe, and Asia. Mr. Pendleton earned his B.A. degree in Political Science and International Business from Northeastern University in Boston, Massachusetts. ITEM 11. EXECUTIVE COMPENSATION The information required by this item concerning executive compensation is incorporated by reference from the information in the 2021 Proxy Statement under the headings “Compensation Discussion and Analysis,” “Report of the Compensation Committee of the Board of Directors,” “Executive Compensation Tables and Related Matters,” “Compensation of Directors”, and “Corporate Governance Matters-Compensation Committee Interlocks and Insider Participation.” 98 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item concerning securities authorized for issuance under equity compensation plans and security ownership of certain beneficial owners and management is incorporated by reference from the information in the 2021 Proxy Statement under the headings “Executive Compensation Tables and Related Matters—Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management.” ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item concerning transactions with related persons and director independence is incorporated by reference from the information in the 2021 Proxy Statement under the headings “Certain Relationships and Related Transactions” and “Corporate Governance Matters.” ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this item is incorporated by reference from the information in the 2021 Proxy Statement under the heading “Ratification of Independent Registered Public Accounting Firm.” 99 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 1. 2. 3. Financial Statements: See “Index to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K. Financial Statement Schedules: Financial statement schedules have been omitted as the information required is inapplicable or the information is presented in the consolidated financial statements and related notes Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K. 100 Exhibit Number 2.1* 3.1 3.2 4.1 4.2 4.3 10.1* 10.2* 10.3* 10.4* 10.5* 10.6* 10.7* 10.8* INDEX TO EXHIBITS Description Asset Contribution Agreement dated November 19, 2004, by and between the Registrant, Dolby Laboratories Licensing Corporation, Ray Dolby individually, Ray Dolby as Trustee for the Ray Dolby Trust under the Dolby Family Trust instrument dated May 7, 1999, and Ray and Dagmar Dolby Investments L.P. Amended and Restated Certificate of Incorporation Form of Amended and Restated Bylaws Form of Registrant’s Class A Common Stock Certificate Form of Registrant’s Class B Common Stock Certificate Incorporated by Reference Herein Form Date Registration Statement on Form S-1 (No. 333-120614), Amendment No. 1 December 30, 2004 Registration Statement on Form S-1 (No. 333-120614), Amendment No. 2 January 19, 2005 Quarterly Report on Form 10-Q April 30, 2009 Registration Statement on Form S-1 (No. 333-120614), Amendment No. 1 December 30, 2004 Registration Statement on Form 8-A January 25, 2006 Description of Capital Stock Annual Report on Form 10-K November 25, 2019 Form of Indemnification Agreement entered into between the Registrant and its Directors & Officers 2000 Stock Incentive Plan, as amended and restated 2020 Stock Plan, as amended and restated on February 4, 2020 (“2020 Stock Plan”) Employee Stock Purchase Plan (“ESPP”), as amended and restated on September 19, 2017 Registration Statement on Form S-1 (No. 333-120614) November 19, 2004 Quarterly Report on Form 10-Q February 6, 2013 Current Report on Form 8-K February 7, 2020 Annual Report on Form 10-K November 16, 2017 Forms of Stock Option Agreements under the 2000 Stock Incentive Plan Registration Statement on Form S-1 (No. 333-120614) November 19, 2004 Form of Global Stock Option Agreement under the 2020 Stock Plan Form of Executive Global Stock Option Agreement under the 2020 Stock Plan Form of Global Restricted Stock Unit Agreement under the 2020 Stock Plan Quarterly Report on Form 10-Q February 2, 2017 Quarterly Report on Form 10-Q February 2, 2017 Quarterly Report on Form 10-Q February 2, 2017 101 Exhibit Number 10.9* 10.10* 10.11* 10.12* 10.13* 10.14* 10.15* 10.16* 10.17* 10.18* 10.19* 10.20* 10.21* Description Form of Executive Global Restricted Stock Unit Agreement under the 2020 Stock Plan Form of Subscription Agreement under the ESPP—U.S. Employees Form of Subscription Agreement under the ESPP—Non-U.S. Employees Form of Executive Performance- Based Stock Option Agreement Form of Executive Performance- Based Restricted Stock Units Incorporated by Reference Herein Form Date Quarterly Report on Form 10-Q February 2, 2017 Annual Report on Form 10-K November 19, 2009 Quarterly Report on Form 10-Q August 8, 2012 Current Report on Form 8-K December 11, 2015 Quarterly Report on Form 10-Q January 29, 2020 2020 Dolby Executive Bonus Plan Current Report on Form 8-K November 18, 2019 Quarterly Report on Form 10-Q April 30, 2009 Quarterly Report on Form 10-Q February 6, 2013 Quarterly Report on Form 10-Q May 10, 2011 Quarterly Report on Form 10-Q May 8, 2012 Quarterly Report on Form 10-Q February 8, 2006 Quarterly Report on Form 10-Q May 4, 2006 Quarterly Report on Form 10-Q July 30, 2014 Employment Agreement dated February 24, 2009, by and between Dolby Laboratories, Inc. & Kevin Yeaman Amendment, dated as of December 19, 2012, to Employment Agreement dated as of February 24, 2009, by and between Dolby Laboratories, Inc. and Kevin Yeaman Offer Letter by and between Andy Sherman & Dolby Laboratories, Inc. Offer Letter dated March 22, 2012 by and between Lewis Chew and Dolby Laboratories, Inc. Lease for 100 Potrero Avenue, San Francisco, California First Amendment to Lease for 100 Potrero Avenue, San Francisco, California Second Amendment to 100 Potrero Avenue, San Francisco, California Lease Agreement dated May 6, 2014 by and among Dolby Laboratories, Inc. and the Dolby Family Trust & affiliated Trusts 10.22* Lease for 130 Potrero Avenue, San Francisco, California Quarterly Report on Form 10-Q February 8, 2006 102 Exhibit Number 10.23* 10.24* 10.25* 10.26* 10.27* 10.28* 21.1+ 23.1+ 24.1 31.1+ 31.2+ 32.1‡ Description First Amendment to 130 Potrero Avenue, San Francisco, California Lease Agreement dated May 6, 2014 by and among Dolby Laboratories, Inc. and the Dolby Family Trust & affiliated Trusts Lease for 140 Potrero Avenue, San Francisco, California First Amendment to 140 Potrero Avenue, San Francisco, California Lease Agreement dated May 6, 2014 by and among Dolby Laboratories, Inc. and the Dolby Family Trust & affiliated Trusts Waiver and Extension Relating to Potrero Avenue Leases dated as of September 29, 2013, by and among Dolby Laboratories, Inc. and the Dolby Family Trust & affiliated Trusts Agreement of Sale and Purchase by and between DWF III 1275 Market, LLC and Dolby Laboratories, Inc. dated June 8, 2012 Offer Letter dated June 26, 2018 by and between Todd Pendleton and Dolby Laboratories, Inc. List of significant subsidiaries of the Registrant Consent of KPMG LLP, Independent Registered Public Accounting Firm Power of Attorney (incorporated by reference from the signature page of this Annual Report on Form 10-K) Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act Incorporated by Reference Herein Form Date Quarterly Report on Form 10-Q July 30, 2014 Quarterly Report on Form 10-Q February 8, 2006 Quarterly Report on Form 10-Q July 30, 2014 Annual Report on Form 10-K November 15, 2013 Quarterly Report on Form 10-Q August 8, 2012 Quarterly Report on Form 10-Q August 1, 2018 103 Exhibit Number Description Form Date Incorporated by Reference Herein 101.INS‡ XBRL Instance Document 101.SCH‡ 101.CAL‡ XBRL Taxonomy Extension Schema Document XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF‡ XBRL Extension Definition 101.LAB‡ 101.PRE‡ XBRL Taxonomy Extension Label Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document + Filed herewith. * Denotes a management contract or compensatory plan or arrangement. ‡ Furnished herewith. 104 ITEM 16. FORM 10-K SUMMARY None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 16, 2020 DOLBY LABORATORIES, INC. By: /S/ LEWIS CHEW Lewis Chew Executive Vice President and Chief Financial Officer (Principal Financial Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kevin J. Yeaman and Lewis Chew, and each of them, his or her attorney-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitutes, may do or cause to be done by virtue of hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 105 SIGNATURE TITLE DATE /S/ PETER GOTCHER Peter Gotcher /S/ KEVIN J. YEAMAN Kevin J. Yeaman /S/ LEWIS CHEW Lewis Chew /S/ RYAN NICHOLSON Ryan Nicholson /S/ MICHELINE CHAU Micheline Chau /S/ DAVID DOLBY David Dolby /S/ N. W. JASPER, JR. N. W. Jasper, Jr. /S/ SIMON SEGARS Simon Segars /S/ ROGER SIBONI Roger Siboni /S/ ANJALI SUD Anjali Sud Chairman of the Board of Directors November 16, 2020 President, Chief Executive Officer and Director (Principal Executive Officer) Executive Vice President and Chief Financial Officer (Principal Financial Officer) Vice President, Corporate Controller (Principal Accounting Officer) Director Director Director Director Director Director November 16, 2020 November 16, 2020 November 16, 2020 November 16, 2020 November 16, 2020 November 16, 2020 November 16, 2020 November 16, 2020 November 16, 2020 /S/ AVADIS TEVANIAN, JR. Director November 16, 2020 Avadis Tevanian, Jr. 106 Dolby Laboratories (NYSE:DLB) is based in San Francisco with offices in over 20 countries around the globe. Dolby transforms the science of sight and sound into spectacular experiences. Through innovative research and engineering, we create breakthrough experiences for billions of people worldwide through a collaborative ecosystem spanning artists, businesses, and consumers. The experiences people have - in Dolby Vision®, Dolby Atmos®, Dolby Cinema®, Dolby Voice®, and Dolby Audio™ - revolutionize entertainment and communications at the cinema, on the go, in the home, and at work. For more information, please visit: www.dolby.com. Executive Officers and Directors Investor Relations Kevin Yeaman President, Chief Executive Officer, and Director Lewis Chew Executive Vice President and Chief Financial Officer Andy Sherman Executive Vice President, General Counsel, and Corporate Secretary Giles Baker Senior Vice President, Consumer Entertainment Steven Forshay Senior Vice President, Advanced Technology Group Todd Pendleton Senior Vice President and Chief Marketing Officer Dolby Laboratories, Inc. 1275 Market Street San Francisco, CA 94103-1410 http://investor.dolby.com investor@dolby.com Transfer Agent and Registrar Computershare Trust Company, N.A. P.O. Box 505000 Louisville, KY 40233-5000 800-587-3984 www.computershare.com/investor Legal Counsel Wilson Sonsini Goodrich & Rosati, Professional Corporation Palo Alto, CA Public Accounting KPMG LLP San Francisco, CA Outside Directors Class A Common Stock Peter Gotcher Chairman of the Board of Directors Micheline Chau David Dolby N.W. (Bill) Jasper, Jr. Simon Segars Roger Siboni Anjali S ud Avadis Tevanian, Jr. Listed on the New York Stock Exchange under stock symbol DLB A copy of Dolby’s Annual Report on Form 10-K may be ordered, viewed, or downloaded at http://investor.dolby.com. Dolby and the double-D symbol are registered trademarks of Dolby Laboratories. © 2019 Dolby Laboratories, Inc. All rights reserved. Investor Relations Dolby Laboratories, Inc. dolby.com 1275 Market Street San Francisco, CA 94103-1410 USA T 415-558-0200 F 415-645-4000 

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