Stockholders' Equity And Stock-Based Compensation | . Stockholders' Equity & Stock-Based Compensation We provide stock-based awards as a form of compensation for employees, officers and directors. We have issued stock-based awards in the form of stock options and RSUs under our equity incentive plans, as well as shares under our ESPP. Common Stock - Class A and Class B Our Board of Directors has authorized two classes of common stock, Class A and Class B. At September 29, 2017 , we had authorized 500,000,000 Class A shares and 500,000,000 Class B shares. At September 29, 2017 , we had 59,281,837 shares of Class A common stock and 42,873,597 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. 2005 Stock Incentive Plan Following shareholder approval in January 2005, our 2005 Stock Plan was adopted by our Board of Directors on February 16, 2005, the day prior to the completion of our IPO. Our 2005 Stock Plan, as amended and restated, provides for the ability to grant incentive stock options, non-qualified stock options, restricted stock, RSUs, stock appreciation rights, deferred stock units, performance units, performance bonus awards, and performance shares. A total of 46.0 million shares of our Class A common stock is authorized for issuance under the 2005 Stock Plan. For awards granted prior to February 2011, any shares subject to an award with a per share price less than the fair market value of our Class A common stock on the date of grant and any shares subject to an outstanding RSU award will be counted against the authorized share reserve as two shares for every one share subject to the award, and if returned to the 2005 Stock Plan, such shares will be counted as two shares for every one share returned. For those awards granted from February 2011 onward, any shares subject to an award with a per share price less than the fair market value of our Class A common stock on the date of grant and any shares subject to an outstanding RSU award will be counted against the authorized share reserve as 1.6 shares for every one share subject to the award, and if returned to the 2005 Stock Plan, such shares will be counted as 1.6 for every one share returned. Stock Options. Stock options are generally granted at fair market value on the date of grant. Options granted to employees and officers prior to June 2008 generally vest over 4 years , with equal annual cliff-vesting and expire on the earlier of 10 years after the date of grant or three months after termination of service. Options granted to employees and officers from June 2008 onward generally vest over four years , with 25% of the shares subject to the option becoming exercisable on the one-year anniversary of the date of grant and the balance of the shares vesting in equal monthly installments over the following 36 months . These options expire on the earlier of 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 2005 Stock Plan. Our 2005 Stock Plan also allows us to grant stock awards which vest based on the satisfaction of specific performance criteria. Performance-Based Stock Options. 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 2005 Plan. Compensation cost is being amortized on a straight-line basis over the requisite service period. 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 exercisable for an aggregate of 335,699 shares at the target award amount, which would be exercisable for an aggregate of up to 419,623 shares at 125% of the target award amount. As of September 29, 2017 , PSOs exercisable for an aggregate of 571,398 shares at the target award amount, which would be exercisable for an aggregate of up to 714,246 shares at 125% of the target award amount, were outstanding. The following table summarizes information about stock options issued under our 2005 Stock Plan: Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life Aggregate Intrinsic Value (1) (in thousands) (in years) (in thousands) Options outstanding at September 30, 2016 8,690 $ 35.98 Grants 1,934 46.88 Exercises (1,679 ) 34.41 Forfeitures and cancellations (204 ) 37.64 Options outstanding at September 29, 2017 8,741 38.65 7.0 $ 164,950 Options vested and expected to vest at September 29, 2017 8,342 38.44 6.7 159,235 Options exercisable at September 29, 2017 4,783 $ 36.07 5.8 102,627 (1) Aggregate intrinsic value is based on the closing price of our Class A common stock on September 29, 2017 of $57.52 and excludes the impact of options that were not in-the-money. The following table summarizes information about stock options outstanding and exercisable at September 29, 2017 : Outstanding Options Options Exercisable Range of Exercise Price Shares Weighted-Average Remaining Contractual Life Weighted-Average Exercise Price Shares Weighted-Average Exercise Price (in thousands) (in years) (in thousands) $24.60 - $28.90 785 3.6 $ 28.21 813 $ 27.64 $28.91 - $33.40 2,374 7.3 32.36 1,189 31.59 $33.41 - $37.33 110 5.4 35.37 85 35.03 $37.34 - $42.95 1,705 6.1 38.43 1,521 38.38 $42.96 - $47.45 3,374 8.0 44.30 1,125 43.12 $47.46 - $62.29 393 8.5 50.89 50 52.59 8,741 4,783 Restricted Stock Units. Beginning in fiscal 2008, we began granting RSUs to certain directors, officers and employees under our 2005 Stock Plan. Awards granted to employees and officers generally vest over four years , with equal annual cliff-vesting. Awards granted to directors prior to November 2010 generally vest over three years , with equal annual cliff-vesting. Awards granted after November 2010 and prior to fiscal 2014 to new directors vest over approximately two years , with 50% vesting per year, while awards granted from November 2010 onward to ongoing directors generally vest over approximately one year . Awards granted to new directors from fiscal 2014 onward vest on the earlier of the first anniversary of the award’s date of grant, or the day immediately preceding the date of the next annual meeting of stockholders that occurs after the award’s date of grant. Our 2005 Stock Plan also allows us to grant RSUs that vest based on the satisfaction of specific performance criteria, although no such awards had been granted as of September 29, 2017 . At each vesting date, the holder of the award is issued shares of our Class A common stock. Compensation expense from these awards is equal to the fair market value of our Class A common stock on the date of grant and is recognized on a straight-line basis over the requisite service period. The following table summarizes information about RSUs issued under our 2005 Stock Plan: Shares Weighted-Average Grant Date Fair Value (in thousands) Non-vested at September 30, 2016 2,872 $ 40.16 Granted 1,218 46.80 Vested (1,108 ) 36.69 Forfeitures (143 ) 39.75 Non-vested at September 29 , 2017 2,839 $ 44.38 The fair value as of the respective vesting dates of RSUs were as follows (in thousands): Fiscal Year Ended September 29, September 30, September 25, Restricted stock units - vest date fair value $ 51,985 $ 40,283 $ 45,175 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. 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 29, September 30, September 25, Expected term (in years) 5.13 5.24 4.64 Risk-free interest rate 2.1 % 1.7 % 1.5 % Expected stock price volatility 27.4 % 29.8 % 29.6 % Dividend yield 1.1 % 1.4 % 0.9 % 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 29, September 30, September 25, Stock options granted - weighted-average grant date fair value $ 11.39 $ 8.49 $ 10.54 Stock options exercised - intrinsic value 28,544 27,485 8,546 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. Our methodology under which estimated forfeiture rates are derived 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 estimates, we will revise such estimates accordingly. Beginning in fiscal 2015, we revised the method under which we estimate forfeitures. The impact of this change in estimate was not material. The estimated annual forfeiture rates used for awards granted were 10.16% , 10.49% and 9.98% in fiscal 2017 , 2016 , and 2015 , respectively. The following tables separately present stock-based compensation expense both by award type and classification within our consolidated statements of operations (in thousands): Expense - By Award Type Fiscal Year Ended September 29, September 30, September 25, Stock options $ 18,630 $ 21,311 $ 22,972 Restricted stock units 43,171 42,201 40,332 Employee stock purchase plan 3,542 3,473 3,765 Total stock-based compensation 65,343 66,985 67,069 Benefit from income taxes (18,959 ) (19,627 ) (19,606 ) Total stock-based compensation, net of tax $ 46,384 $ 47,358 $ 47,463 Expense - By Income Statement Classification Fiscal Year Ended Compensation Expense - By Classification September 29, September 30, September 25, Cost of products $ 946 $ 859 $ 949 Cost of services 512 547 457 Research and development 18,497 17,771 18,682 Sales and marketing 26,175 27,579 24,283 General and administrative 19,213 20,229 22,698 Total stock-based compensation 65,343 66,985 67,069 Benefit from income taxes (18,959 ) (19,627 ) (19,606 ) Total stock-based compensation, net of tax $ 46,384 $ 47,358 $ 47,463 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 29, September 30, September 25, Tax benefit - shares issued under ESPP $ 802 $ 550 $ 328 Unrecognized Compensation Expense. At September 29, 2017 , total unrecorded compensation expense associated with employee stock options expected to vest was approximately $30.9 million , which is expected to be recognized over a weighted-average period of 2.4 years. At September 29, 2017 , total unrecorded compensation expense associated with RSUs expected to vest was approximately $77.0 million , which is expected to be recognized over a weighted-average period of 2.6 years. Common Stock Repurchase Program In November 2009, we announced a stock repurchase program ("program"), providing up to $250.0 million to be used 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 29, 2017 (in thousands): Authorization Period Authorization Amount Fiscal 2010: November 2009 $ 250,000 Fiscal 2010: July 2010 300,000 Fiscal 2011: July 2011 250,000 Fiscal 2012: February 2012 100,000 Fiscal 2015: October 2014 200,000 Fiscal 2017: January 2017 200,000 Total $ 1,300,000 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 29, 2017 , the remaining authorization to purchase additional shares is approximately $152.0 million . The following table provides information regarding share repurchase activity under the program in fiscal 2017 : Quarterly Repurchase Activity Shares Repurchased Cost (1) Average Price Paid Per Share (2) (in thousands) Q1 - Quarter ended December 30, 2016 531,465 $ 25,001 $ 47.02 Q2 - Quarter ended March 31, 2017 519,917 24,999 48.07 Q3 - Quarter ended June 30, 2017 485,179 24,994 51.50 Q4 - Quarter ended September 29, 2017 488,909 25,006 51.13 Total 2,025,470 $ 100,000 (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 In October 2014, our Board of Directors initiated a quarterly cash dividend program for our stockholders. The following table summarizes dividends declared under the program during fiscal 2017 : Fiscal Period Declaration Date Record Date Payment Date Cash Dividend Per Common Share Dividend Payment Fiscal 2017 Q1 - Quarter ended December 30, 2016 January 25, 2017 February 6, 2017 February 15, 2017 $ 0.14 $14.3 million Q2 - Quarter ended March 31, 2017 April 26, 2017 May 8, 2017 May 16, 2017 $ 0.14 $14.3 million Q3 - Quarter ended June 30, 2017 July 24, 2017 August 7, 2017 August 15, 2017 $ 0.14 $14.3 million Q4 - Quarter ended September 29, 2017 October 25, 2017 November 6, 2017 November 15, 2017 $ 0.16 $16.3 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. |