report financial and management information on a timely and accurate basis. Further, these systems are subject to power and telecommunication outages or other general system failure. Failure of our IT systems or difficulties in managing them could result in business disruption.
On January 7, 2008, we announced the appointment of Moshe N. Gavrielov as our new President and CEO concurrent with the retirement of Willem P. Roelandts from these positions. Our new CEO has made organizational changes, including changes to our management team and may make future changes to our Company’s structure. It is important for us to successfully manage these transitions as our failure to do so could adversely affect our ability to compete effectively.
We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (the Act). Our controls necessary for continued compliance with the Act may not operate effectively at all times and may result in a material weakness disclosure. The identification of material weaknesses in internal control, if any, could indicate a lack of proper controls to generate accurate financial statements and could cause investors to lose confidence and our stock price to drop. Further, our internal control effectiveness may be impacted if we are unable to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies.
From time to time we are subject to various legal proceedings and claims that arise out of the ordinary conduct of our business. Certain claims are not yet resolved, including those that are discussed in Item 3, "Legal Proceedings," and additional claims may arise in the future. Results of legal proceedings cannot be predicted with certainty. Regardless of its merit, litigation may be both time-consuming and disruptive to our operations and cause significant expense and diversion of management attention and we may enter into material settlements to avoid these risks. Should the Company fail to prevail in certain matters, or should several of these matters be resolved against us in the same reporting period, we may be faced with significant monetary damages or injunctive relief against us that would materially and adversely affect a portion of our business and might materially and adversely affect our financial condition and operating results.
Our cash, short-term and long-term investments represent significant assets that may be subject to fluctuating and even negative returns depending upon interest rate movements and financial market conditions. Since September 2007, the global credit markets have experienced adverse conditions due to the increased concerns related to the U.S. sub-prime mortgage market that have negatively impacted the values of various types of investment and non-investment grade securities. As of March 29, 2008, approximately 4% of our investment portfolio consisted of AAA-rated auction rate securities which are secured primarily by pools of student loans originated under the Federal Family Education Loan Program (FFELP) that are guaranteed by the U. S. Department of Education. These securities experienced failed auctions in the fourth quarter of fiscal 2008 due to liquidity issues in the global credit markets. In a failed auction, the interest rates are reset to a maximum rate defined by the contractual terms for each security. We have collected and expect to collect all interest payable on these securities when due. As of March 29, 2008, the securities were reclassified from short-term to long-term investments on the consolidated balance sheet to reflect the securities’ final maturity dates since there can be no assurance of a successful auction in the future. The auction rate securities described above are a type of asset-backed securities. All other asset-backed securities comprised less than 5% of our investment portfolio as of March 29, 2008 and were all AAA rated with the exception of approximately $37.0 million of asset-backed securities that were downgraded in April 2008 to AA or A rating. These asset-backed securities are secured primarily by bank, finance and insurance company obligations, collateralized loan and bank obligations, mortgage-backed securities with no direct sub-prime exposure and credit card debt. Substantially all of the other mortgage-backed securities in the investment portfolio are AAA rated, were issued by U.S. government-sponsored enterprises and agencies and represented less than 9% of the portfolio as of March 29, 2008. As a result of these recent adverse conditions in the global credit markets, there is a risk that we may incur other-than-temporary impairment charges for certain types of investments such as asset-backed securities should the credit markets experience further deterioration. Our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair values of our debt and equity securities is judged to be other-than-temporary. Furthermore, we may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates or financial market conditions. Please see Note 5 to our consolidated financial statements, included in Item 8. “Financial Statements and Supplementary Data,” for additional information about our investments.
Our products could have quality problems which could result in reduced revenues and claims against us.
We develop complex and evolving products that include both hardware and software. Despite our testing efforts and those of our subcontractors, defects may be found in existing or new products. These defects may cause us to incur significant warranty, support and repair or replacement costs, divert the attention of our engineering personnel from our product development efforts and harm our relationships with customers. Product defects or other performance problems could result in the delay or loss of market acceptance of our products and would likely harm our business. Our customers could also seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time-consuming and costly to defend. Product liability risks are particularly significant with respect to aerospace, automotive and medical applications because of the risk of serious harm to users of these products. Any product liability claim, whether or not determined in our favor, could result in significant expense, divert the efforts of our technical and management personnel, and harm our business.
In preparing our financial statements, we make good faith estimates and judgments that may change or turn out to be erroneous.
In preparing our financial statements in conformity with accounting principles generally accepted in the United States, we must make estimates and judgments in applying our most critical accounting policies. Those estimates and judgments have a significant impact on the results we report in our consolidated financial statements. The most difficult estimates and subjective judgments that we make concern valuation of marketable and non-marketable securities, revenue recognition, inventories, long-lived assets, taxes, legal matters and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We also have other key accounting policies that are not as subjective, and therefore, their application would not require us to make estimates or judgments that are as difficult, but which nevertheless could significantly affect our financial reporting. Actual results may differ materially from these estimates. If these estimates or their related assumptions change, our operating results for the periods in which we revise our estimates or assumptions could be adversely and perhaps materially affected.
We depend on distributors, primarily Avnet, to generate a majority of our sales and complete order fulfillment.
We rely on distributors throughout the world to assist us in demand creation, technical support, order processing and order fulfillment. Resale of product through Avnet accounted for 61% of the Company’s worldwide net revenues in fiscal 2008 and as of March 29, 2008, Avnet accounted for 83% of our accounts receivable. If a key distributor such as Avnet materially defaults on a contract or fails to perform, our business and financial results would suffer.
Reductions in the average selling prices of our products could have a negative impact on our gross margins.
The average selling prices of our products generally decline as the products mature. We seek to offset the decrease in selling prices through yield improvement, manufacturing cost reductions and increased unit sales. However, there is no guarantee that our ongoing efforts will be successful or that they will keep pace with the decline in selling prices of our products, which could ultimately lead to a decline in revenues and have a negative effect on our gross margins.
A number of factors can impact our gross margins.
A number of factors, including our product mix, market acceptance of our new products, competitive pricing dynamics, geographic and/or market segment pricing strategies and various manufacturing cost variables cause our gross margins to fluctuate. In addition, forecasting our gross margins is difficult because the majority of our business is based on turns within the same quarter.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our corporate offices, which include the administrative, sales, customer support, marketing, R&D and manufacturing and testing groups, are located in San Jose, California. This main site consists of adjacent buildings providing 588,000 square feet of space, which we own. We also own two parcels of land totaling approximately 121 acres in South San Jose near our corporate facility. At present, we do not have any plans to develop the land. We also have a 106,000 square foot leased facility in San Jose, which we do not occupy and is presently listed for subleasing.
16
In addition, we own a 228,000 square foot facility in the metropolitan area of Dublin, Ireland, which serves as our regional headquarters in Europe. The Irish facility is primarily used for manufacturing and testing of our products, service and support for our customers in Europe, R&D and IT support.
In June 2007, we completed construction of a building in Singapore, which serves as our Asia Pacific regional headquarters. We own the building but the land is subject to a 30-year lease expiring in November 2035. This building provides 222,000 square feet of usable space. The Singapore facility is primarily used for manufacturing and testing of our products, service and support for our customers in Asia Pacific/Japan, coordination and management of certain third parties in our supply chain and R&D. Excess space in the facility is leased to tenants under long-term lease agreements.
We also own a 130,000 square foot facility in Longmont, Colorado. The Longmont facility serves as the primary location for our software efforts in the areas of R&D, manufacturing and quality control. In addition, we also own a 200,000 square foot facility and 40 acres of land adjacent to the Longmont facility for future expansion. The facility is partially leased to tenants under long-term lease agreements and partially used by the Company.
We own a 45,000 square foot facility in Albuquerque, New Mexico, which is used for the development of our CoolRunner CPLD product families as well as IP cores.
We lease office facilities for our engineering design centers in Austin, Texas, Grenoble, France and Edinburgh, Scotland. We also lease sales offices in various locations throughout North America, which include the metropolitan areas of Chicago, Dallas, Denver, Los Angeles, Nashua, Ottawa, Raleigh, San Diego, San Jose and Toronto as well as international sales offices located in the metropolitan areas of Beijing, Brussels, Helsinki, Hong Kong, London, Milan, Munich, Osaka, Paris, Seoul, Shanghai, Shenzhen, Stockholm, Taipei, Tel Aviv and Tokyo.
ITEM 3. LEGAL PROCEEDINGS
Internal Revenue Service
The Internal Revenue Service (IRS) audited and issued proposed adjustments to the Company’s tax returns for fiscal 1996 through 2001. The Company filed petitions with the Tax Court in response to assertions by the IRS relating to fiscal 1996 through 2000. To date, all issues have been settled with the IRS in this matter except as described in the following paragraph.
On August 30, 2005, the Tax Court issued its opinion concerning whether the value of stock options must be included in the cost sharing agreement with Xilinx Ireland. The Tax Court agreed with the Company that no amount for stock options was to be included in the cost sharing agreement, and thus, the Company had no tax, interest, or penalties due for this issue. The Tax Court entered its decision on May 31, 2006. On August 25, 2006, the IRS appealed the decision to the U.S. Court of Appeal for the Ninth Circuit. The Company and the IRS presented oral arguments to a three-judge panel of the Appeals Court on March 12, 2008. If the Company were to lose on appeal, the amount due to the IRS would be approximately $39.3 million. Of that amount, $6.2 million would be an expense to the consolidated statement of income and the remaining $33.1 million would be an adjustment to additional paid-in capital. The Company would also be required to reverse $7.6 million of interest income accrued to date on prepayments to the IRS.
Patent Litigation
On December 28, 2007, a patent infringement lawsuit was filed by PACT XPP Technologies, AG (PACT) against the Company in the U.S. District Court for the Eastern District of Texas, Marshall Division (PACT XPP Technologies, AG. v. Xilinx, Inc. and Avnet, Inc. Case No. 2:07-CV-563). The lawsuit pertains to eight different patents and PACT seeks injunctive relief, unspecified damages and interest and attorneys’ fees. Neither the likelihood, nor the amount of any potential exposure to the Company is estimable at this time.
On August 21, 2007, a patent infringement lawsuit was filed by Lonestar Inventions, L.P. (Lonestar) against Xilinx in the U.S. District Court for the Eastern District of Texas, Tyler Division (Lonestar Inventions, L.P. v. Xilinx, Inc. Case No. 6:07-CV-393). The lawsuit pertains to a single patent and Lonestar seeks injunctive relief, unspecified damages and interest and attorneys’ fees. Neither the likelihood, nor the amount of any potential exposure to the Company is estimable at this time.
Other Matters
From time to time, we are involved in various disputes and litigation matters that arise in the ordinary course of our business. These include disputes and lawsuits related to intellectual property, mergers and acquisitions, licensing, contract
17
law, tax, distribution arrangements, employee relations and other matters. Periodically, we review the status of each matter and assess its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and a range of possible losses can be estimated, we accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based only on the best information available at the time. As additional information becomes available, we continue to reassess the potential liability related to pending claims and litigation and may revise estimates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
18
PART II
| ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock trades on the NASDAQ Global Select Market under the symbol XLNX. As of May 7, 2008, there were approximately 885 stockholders of record. Since many holders’ shares are listed under their brokerage firms’ names, the actual number of stockholders is estimated by the Company to be over 120,000.
The following table sets forth the high and low closing sale prices, for the periods indicated, for our common stock as reported by the NASDAQ Global Select Market:
| | Fiscal 2008 | | Fiscal 2007 |
| | High | | Low | | High | | Low |
| First Quarter | $ | 30.18 | | $ | 25.65 | | $ | 29.31 | | $ | 22.31 |
| Second Quarter | | 28.70 | | | 24.34 | | | 23.31 | | | 19.60 |
| Third Quarter | | 26.97 | | | 21.16 | | | 28.25 | | | 22.14 |
| Fourth Quarter | | 24.94 | | | 19.06 | | | 26.60 | | | 22.97 |
Dividends Declared Per Common Share
The following table presents the quarterly dividends declared on our common stock for the periods indicated.
| | Fiscal | | Fiscal |
| | 2008 | | 2007 |
| First Quarter | $0.12 | | $0.09 |
| Second Quarter | 0.12 | | 0.09 |
| Third Quarter | 0.12 | | 0.09 |
| Fourth Quarter | 0.12 | | 0.09 |
On February 25, 2008, our Board of Directors approved an increase to our quarterly common stock dividend for the first quarter of fiscal 2009 from $0.12 per common share to $0.14 per common share. The dividend is payable on May 28, 2008 to stockholders of record at the close of business on May 7, 2008.
Issuer Purchases of Equity Securities
The following table summarizes the Company’s repurchase of its common stock during the fourth quarter of fiscal 2008. See Note 13 to our consolidated financial statements, included in Item 8. “Financial Statements and Supplementary Data” for information regarding our stock repurchase plans.
| | | | | | | | Approximate |
| | | | | | Total Number of | | Dollar Value of |
| (In thousands, except per share amounts) | Total Number | | Average | | Shares Purchased | | Shares that May |
| | of Shares | | Price Paid | | as Part of Publicly | | Yet Be Purchased |
| Period | | | Purchased | | per Share | | Announced Program | | Under the Program |
| December 30, 2007 to February 2, 2008 | | 3,841 | | | $21.41 | | | 3,841 | | | $311,629 |
| February 3 to March 1, 2008 | | 4,458 | | | $21.41 | | | 4,458 | | | $216,167 |
| March 2 to March 29, 2008 | | 1,040 | | | $21.41 | | | 1,040 | | | $193,888 |
| Total for the Quarter | | 9,339 | | | $21.41 | | | 9,339 | | | |
On February 26, 2007, we announced a repurchase program of up to $1.50 billion of common stock and during the fourth quarter of fiscal 2008, the Company repurchased a total of 9.3 million shares of its common stock for $200.0 million under this repurchase program. On February 25, 2008, we announced a further repurchase program of up to an additional $800.0 million of common stock. Through March 29, 2008, the Company had repurchased $1.31 billion of the $1.50 billion of common stock approved for repurchase under the February 2007 authorization. These share repurchase programs have no stated expiration date.
19
Company Stock Price Performance
The following chart shows a comparison of cumulative total return for the Company's common stock, the Standard & Poor’s 500 Stock Index (S&P 500 Index), and the Standard & Poor’s 500 Semiconductors Index (S&P 500 Semiconductors). The total stockholder return assumes $100 invested on March 31, 2003 in Xilinx, Inc. common stock, the S&P 500 Index and the S&P 500 Semiconductors and assumes all dividends are reinvested.
| | | | | Indexed Returns |
| | | Base | | Years Ended |
| | | Period | | | | | | | | | | |
| Company / Index | | Mar 03 | | Mar 04 | | Mar 05 | | Mar 06 | | Mar 07 | | Mar 08 |
| Xilinx, Inc. | | 100 | | 161.30 | | 125.67 | | 110.58 | | 113.36 | | 106.72 |
| S&P 500 Index | | 100 | | 135.12 | | 144.16 | | 161.07 | | 180.12 | | 170.98 |
| S&P 500 Semiconductors | | 100 | | 171.55 | | 145.41 | | 157.49 | | 145.40 | | 138.10 |
Note: Stock price performance and indexed returns for our Common Stock are historical and are not an indicator of future price performance or future investment returns.
20
ITEM 6. SELECTED FINANCIAL DATA
Consolidated Statement of Income Data
Five years ended March 29, 2008
(In thousands, except per share amounts)
| | 2008(1) | | 2007(2) | | 2006(3) | | 2005(4) | | 2004(5) |
| Net revenues | $ | 1,841,372 | | $ | 1,842,739 | | $ | 1,726,250 | | $ | 1,573,233 | | $ | 1,397,846 |
| Operating income (6) | | 424,194 | | | 347,767 | | | 412,062 | | | 372,040 | | | 327,135 |
| Income before income taxes (6) | | 474,094 | | | 431,146 | | | 456,602 | | | 400,544 | | | 350,544 |
| Provision for income taxes | | 100,047 | | | 80,474 | | | 102,453 | | | 87,821 | | | 47,555 |
| Net income | | 374,047 | | | 350,672 | | | 354,149 | | | 312,723 | | | 302,989 |
| Net income per common share : | | | | | | | | | | | | | | |
| Basic | $ | 1.27 | | $ | 1.04 | | $ | 1.01 | | $ | 0.90 | | $ | 0.89 |
| Diluted | $ | 1.25 | | $ | 1.02 | | $ | 1.00 | | $ | 0.87 | | $ | 0.85 |
| Shares used in per share calculations: | | | | | | | | | | | | | | |
| Basic | | 295,050 | | | 337,920 | | | 349,026 | | | 347,810 | | | 341,427 |
| Diluted | | 298,636 | | | 343,636 | | | 355,065 | | | 358,230 | | | 354,551 |
| Cash dividends declared per common share | $ | 0.48 | | $ | 0.36 | | $ | 0.28 | | $ | 0.20 | | $ | - |
| (1) | | Income before income taxes includes a loss on the sale of the Company’s remaining UMC investment of $4,732 and an impairment loss on investments of $2,850. |
| |
| (2) | | Income before income taxes includes a charge of $5,934 related to an impairment of a leased facility that the Company no longer intends to occupy, a loss related to litigation settlements and contingencies of $2,500, stock-based compensation related to prior years of $2,209, an impairment loss on investments of $1,950 and a gain of $7,016 from the sale of a portion of the Company’s UMC investment. |
| |
| (3) | | Income before income taxes includes a loss related to litigation settlements and contingencies of $3,165, a write-off of acquired in-process R&D of $4,500 related to the acquisition of AccelChip and an impairment loss on investments of $1,418. |
| |
| (4) | | Income before income taxes includes a write-off of acquired in-process R&D of $7,198 related to the acquisition of Hier Design Inc. and impairment loss on investments of $3,099. |
| |
| (5) | | Income before income taxes includes an impairment loss on excess facilities of $3,376, a loss related to litigation settlements and contingencies of $6,400 and a write-off of acquired in-process R&D of $6,969 related to the acquisition of Triscend Corporation. Net income includes a $34,418 reduction in taxes associated with an IRS tax settlement. |
| |
| (6) | | The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment” (SFAS 123(R)) in fiscal 2007. Results for prior fiscal years do not include the effects of stock-based compensation (see Notes 2 and 3 to our consolidated financial statements in Item 8: “Financial Statements and Supplementary Data”). |
Consolidated Balance Sheet Data
Five years ended March 29, 2008
(In thousands)
| | 2008 | | 2007 | | 2006 | | 2005 | | 2004 |
| Working capital | $ | 1,479,530 | | $ | 1,396,733 | | $ | 1,303,224 | | $ | 1,154,163 | | $ | 955,878 |
| Total assets | | 3,137,107 | | | 3,179,355 | | | 3,173,547 | | | 3,039,196 | | | 2,937,473 |
| Convertible debentures | | 999,851 | | | 999,597 | | | — | | | — | | | — |
| Other long-term liabilities | | 40,281(1) | | | 1,320 | | | 7,485 | | | — | | | — |
| Stockholders’ equity | | 1,671,823 | | | 1,772,740 | | | 2,728,885 | | | 2,673,508 | | | 2,483,062 |
| (1) | | Includes $39,122 of long-term income taxes payable reclassified from current to non-current liabilities in connection with the adoption of FIN 48 (see Note 14 to our consolidated financial statements in Item 8: “Financial Statements and Supplementary Data”). |
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of financial condition and results of operations should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included in Item 8. “Financial Statements and Supplementary Data.”
Cautionary Statement
The statements in this Management’s Discussion and Analysis that are forward looking, within the meaning of the Private Securities Litigation Reform Act of 1995, involve numerous risks and uncertainties and are based on current expectations. The reader should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including those risks discussed under “Risk Factors” and elsewhere in this document. Often, forward-looking statements can be identified by the use of forward-looking words, such as “may,” “will,” “could,” “should,” “expect,” “believe,” “anticipate,” “estimate,” “continue,” “plan,” “intend,” “project” and other similar terminology, or the negative of such terms. We disclaim any responsibility to update or revise any forward-looking statement provided in this Management’s Discussion and Analysis for any reason.
Nature of Operations
We design, develop and market complete programmable logic solutions, including advanced ICs, software design tools, predefined system functions delivered as IP cores, design services, customer training, field engineering and technical support. Our PLDs include FPGAs and CPLDs. These devices are standard products that our customers program to perform desired logic functions. Our products are designed to provide high integration and quick time-to-market for electronic equipment manufacturers in end markets such as wired and wireless communications, industrial, scientific and medical, test and measurement, aerospace and defense, audio, video and broadcast, consumer, automotive and data processing. We sell our products globally through independent domestic and foreign distributors and through direct sales to OEMs by a network of independent sales representative firms and by a direct sales management organization.
Critical Accounting Policies and Estimates
The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. The SEC has defined critical accounting policies as those that are most important to the portrayal of our financial condition and results of operations and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our critical accounting policies include: valuation of marketable and non-marketable securities, which impacts losses on debt and equity securities when we record impairments; revenue recognition, which impacts the recording of revenues; and valuation of inventories, which impacts cost of revenues and gross margin. Our critical accounting policies also include: the assessment of impairment of long-lived assets including acquisition-related intangibles, which impacts their valuation; the assessment of the recoverability of goodwill, which impacts goodwill impairment; accounting for income taxes, which impacts the provision or benefit recognized for income taxes, as well as the valuation of deferred tax assets recorded on our consolidated balance sheet, and valuation and recognition of stock-based compensation, which impacts gross margin, R&D expenses, and selling, general and administrative (SG&A) expenses. Below, we discuss these policies further, as well as the estimates and judgments involved. We also have other key accounting policies that are not as subjective, and therefore, their application would not require us to make estimates or judgments that are as difficult, but which nevertheless could significantly affect our financial reporting.
Valuation of Marketable and Non-marketable Securities
The Company’s short-term and long-term investments include marketable debt and equity securities and non-marketable equity securities. At March 29, 2008, the Company had marketable debt securities with a fair value of $1.50 billion, non-marketable equity securities in private companies of $22.6 million (adjusted cost) and a marketable equity security with a fair value of $822 thousand.
The fair values for marketable debt and equity securities are determined by independent pricing sources that value the securities based on quoted market prices and pricing models except for failed auction rate securities for which the Company determined their fair value at March 29, 2008 based on internal analyses. In determining if and when a decline in market value below adjusted cost of marketable debt and equity securities is other-than-temporary, the Company evaluates on an ongoing basis the market conditions, trends of earnings, financial condition and other key measures for our investments. We assess other-than-temporary impairment of debt and equity securities in accordance with Financial Accounting Standards Board (FASB) Staff Position (FSP) No. FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and
22
Its Application to Certain Investments.” We have not recorded any other-than-temporary impairment for marketable debt and equity securities for fiscal 2008 or 2007.
In determining whether a decline in value of non-marketable equity investments in private companies is other-than-temporary, the assessment is made by considering available evidence including the general market conditions in the investee’s industry, the investee’s product development status, the investee’s ability to meet business milestones and the financial condition and near-term prospects of the individual investee, including the rate at which the investee is using its cash and the investee’s need for possible additional funding at a lower valuation. When a decline in value is deemed to be other-than-temporary, the Company recognizes an impairment loss in the current period’s operating results to the extent of the decline.
Revenue Recognition
Sales to distributors are made under agreements providing distributor price adjustments and rights of return under certain circumstances. Revenue and costs relating to distributor sales are deferred until products are sold by the distributors to the distributors’ end customers. For fiscal 2008, approximately 83% of our net revenues were from products sold to distributors for subsequent resale to OEMs or their subcontract manufacturers. Revenue recognition depends on notification from the distributor that product has been sold to the distributor’s end customer. Also reported by the distributor are product resale price, quantity and end customer shipment information, as well as inventory on hand. Reported distributor inventory on hand is reconciled to deferred revenue balances monthly. We maintain system controls to validate distributor data and to verify that the reported information is accurate. Deferred income on shipments to distributors reflects the effects of distributor price adjustments and the amount of gross margin expected to be realized when distributors sell through product purchased from the Company. Accounts receivable from distributors are recognized and inventory is relieved when title to inventories transfers, typically upon shipment from Xilinx at which point we have a legally enforceable right to collection under normal payment terms.
Revenue from sales to our direct customers is recognized upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed, title has transferred, collection of resulting receivables is reasonably assured, and there are no customer acceptance requirements and no remaining significant obligations. For each of the periods presented, there were no formal acceptance provisions with our direct customers.
Revenue from software licenses is deferred and recognized as revenue over the term of the licenses of one year. Revenue from support services is recognized when the service is performed. Revenue from Support Products, which includes software and services sales, was less than 7% of net revenues for all of the periods presented.
Allowances for end customer sales returns are recorded based on historical experience and for known pending customer returns or allowances.
Valuation of Inventories
Inventories are stated at the lower of actual cost (determined using the first-in, first-out method) or market (estimated net realizable value). The valuation of inventory requires us to estimate excess or obsolete inventory as well as inventory that is not of saleable quality. We review and set standard costs quarterly to approximate current actual manufacturing costs. Our manufacturing overhead standards for product costs are calculated assuming full absorption of actual spending over actual volumes, adjusted for excess capacity. Given the cyclicality of the market, the obsolescence of technology and product lifecycles, we write down inventory based on forecasted demand and technological obsolescence. These factors are impacted by market and economic conditions, technology changes, new product introductions and changes in strategic direction and require estimates that may include uncertain elements. The estimates of future demand that we use in the valuation of inventory are the basis for our published revenue forecasts, which are also consistent with our short-term manufacturing plans. If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to write down additional inventory, which would have a negative impact on our gross margin.
Impairment of Long-Lived Assets Including Acquisition-Related Intangibles
Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment if indicators of potential impairment exist. Impairment indicators are reviewed on a quarterly basis. When indicators of impairment exist and assets are held for use, we estimate future undiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets or based on appraisals. Factors affecting impairment of assets held for use include the ability of the specific assets to generate positive cash flows.
23
When assets are removed from operations and held for sale, we estimate impairment losses as the excess of the carrying value of the assets over their fair value. Factors affecting impairment of assets held for sale include market conditions. Changes in any of these factors could necessitate impairment recognition in future periods for assets held for use or assets held for sale.
Goodwill
As required by SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), goodwill is not amortized but is subject to impairment tests on an annual basis, or more frequently if indicators of potential impairment exist, and goodwill is written down when it is determined to be impaired. We perform an annual impairment review in the fourth quarter of each fiscal year and compare the fair value of the reporting unit in which the goodwill resides to its carrying value. If the carrying value exceeds the fair value, the goodwill of the reporting unit is potentially impaired. For purposes of impairment testing under SFAS 142, Xilinx operates as a single reporting unit. We use the quoted market price method to determine the fair value of the reporting unit. Based on the impairment review performed during the fourth quarter of fiscal 2008, there was no impairment of goodwill in fiscal 2008. Unless there are indicators of impairment, our next impairment review for goodwill will be performed and completed in the fourth quarter of fiscal 2009. To date, no impairment indicators have been identified.
Accounting for Income Taxes
Xilinx is a multinational corporation operating in multiple tax jurisdictions. We must determine the allocation of income to each of these jurisdictions based on estimates and assumptions and apply the appropriate tax rates for these jurisdictions. We undergo routine audits by taxing authorities regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. Tax audits often require an extended period of time to resolve and may result in income tax adjustments if changes to the allocation are required between jurisdictions with different tax rates.
In determining income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. Additionally, we must estimate the amount and likelihood of potential losses arising from audits or deficiency notices issued by taxing authorities. The taxing authorities’ positions and our assessment can change over time resulting in a material effect on the provision for income taxes in periods when these changes occur.
We must also assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a reserve in the form of a valuation allowance for the deferred tax assets that we estimate will not ultimately be recoverable.
The Company has elected to adopt the alternative transition method provided in FSP No. FAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” for calculating the tax effects of stock-based compensation pursuant to SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the APIC pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48).” The provisions were effective for the Company beginning in the first quarter of fiscal 2008. See Notes 2 and 14 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.
Stock-Based Compensation
In the first quarter of fiscal 2007, we adopted SFAS 123(R), which requires the measurement at fair value and recognition of compensation expense for all stock-based payment awards. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the date of grant requires judgment. We use the Black-Scholes option-pricing model to estimate the fair value of employee stock options and rights to purchase shares under the Company’s Employee Stock Purchase Plan, consistent with the provisions of SFAS 123(R). Option pricing models, including the Black-Scholes model, also require the use of input assumptions, including expected stock price volatility, expected life, expected dividend rate, expected forfeiture rate and expected risk-free rate of return. We use implied volatility based on traded options in the open market as we believe implied volatility is more reflective of market conditions and a better indicator of expected volatility than historical volatility. In determining the appropriateness of implied volatility, we considered: the volume of market activity of traded options, and determined there was sufficient market activity; the ability to reasonably match the input variables of traded options to those of options granted by the Company, such as date of grant
24
and the exercise price, and determined the input assumptions were comparable; and the length of term of traded options used to derive implied volatility, which is generally one to two years and which was extrapolated to match the expected term of the employee options granted by the Company, and determined the length of the option term was reasonable. The expected life of options granted is based on the historical exercise activity as well as the expected disposition of all options outstanding. We will continue to review our input assumptions and make changes as deemed appropriate depending on new information that becomes available. Higher volatility and expected lives result in a proportional increase to stock-based compensation determined at the date of grant. The expected dividend rate and expected risk-free rate of return do not have as significant an effect on the calculation of fair value.
In addition, SFAS 123(R) requires us to develop an estimate of the number of stock-based awards which will be forfeited due to employee turnover. Quarterly changes in the estimated forfeiture rate have an effect on reported stock-based compensation, as the effect of adjusting the rate for all expense amortization after April 1, 2006 is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the financial statements. The effect of forfeiture adjustments in fiscal 2008 and 2007 was insignificant. The expense we recognize in future periods could also differ significantly from the current period and/or our forecasts due to adjustments in the assumed forfeiture rates.
Results of Operations
The following table sets forth statement of income data as a percentage of net revenues for the fiscal years indicated:
| | 2008 | | 2007 | | 2006 |
| Net Revenues | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of revenues | 37.3 | | | 39.0 | | | 38.1 | |
| Gross Margin | 62.7 | | | 61.0 | | | 61.9 | |
| |
| Operating Expenses: | | | | | | | | |
| Research and development | 19.4 | | | 21.1 | | | 18.9 | |
| Selling, general and administrative | 19.9 | | | 20.4 | | | 18.3 | |
| Amortization of acquisition-related intangibles | 0.4 | | | 0.4 | | | 0.4 | |
| Litigation settlements and contingencies | 0.0 | | | 0.1 | | | 0.2 | |
| Stock-based compensation related to prior years | 0.0 | | | 0.1 | | | 0.0 | |
| Write-off of acquired in-process research and development | 0.0 | | | 0.0 | | | 0.2 | |
| Total operating expenses | 39.7 | | | 42.1 | | | 38.0 | |
| |
| Operating Income | 23.0 | | | 18.9 | | | 23.9 | |
| Impairment loss on investments | (0.2 | ) | | (0.1 | ) | | (0.1 | ) |
| Interest and other, net | 2.9 | | | 4.6 | | | 2.6 | |
| |
| Income Before Income Taxes | 25.7 | | | 23.4 | | | 26.4 | |
| |
| Provision for income taxes | 5.4 | | | 4.4 | | | 5.9 | |
| |
| Net Income | 20.3 | % | | 19.0 | % | | 20.5 | % |
Net Revenues
| (In millions) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| Net revenues | | $1,841.4 | | 0% | | $1,842.7 | | 7% | | $1,726.2 |
The relatively flat net revenues in fiscal 2008 compared to fiscal 2007 was driven by strong customer demand for our New Products which was offset by decreased demand for our Mainstream and Base Products, particularly in the Communications and Data Processing end markets. Increased total unit sales during fiscal 2008 compared to the comparable prior year period were offset by declines in average unit selling prices, which also contributed to the flat net revenues in fiscal 2008. The increase in net revenues from $1.73 billion in fiscal 2006 to $1.84 billion in fiscal 2007 was due to strong demand for our New Products and growth in the Consumer and Automotive and Industrial and Other end markets. The increase in net revenues in fiscal 2007 resulted from increased unit sales, partially offset by normal declines
25
in average unit selling prices. See “Net Revenues by Product” and “Net Revenues by End Markets” for more information on our product and end-market categories.
No end customer accounted for more than 10% of net revenues for any of the periods presented
Net Revenues by Product
We classify our product offerings into four categories: New, Mainstream, Base and Support Products. These product categories, excluding Support Products, are modified on a periodic basis to better reflect advances in technology. The most recent adjustment was made on July 2, 2006, which was the beginning of our second quarter of fiscal 2007. Amounts for the prior periods presented have been reclassified to conform to the new categorization. New Products, as currently defined, include our most recent product offerings and include the Virtex-5, Virtex-4, Spartan-3, and CoolRunner-II product families. Mainstream Products include the Virtex-II, Spartan-II, CoolRunner and Virtex-E product families. BaseProducts consist of our mature product families and include the Virtex, Spartan, XC4000 and XC9500 products. Support Products make up the remainder of our product offerings and include configuration solutions (serial PROMs), software, IP cores, customer training, design services and support.
Net revenues by product categories for the fiscal years indicated were as follows:
| | | | | % of | | % | | | | | % of | | % | | | | | % of |
| (In millions) | 2008 | | Total | | Change | | 2007 | | Total | | Change | | 2006 | | Total |
| New Products | $ | 604.2 | | 33 | | 45 | | | $ | 416.8 | | 23 | | 102 | | | $ | 206.4 | | 12 |
| Mainstream Products | | 849.8 | | 46 | | (15 | ) | | | 1,004.2 | | 54 | | (4 | ) | | | 1,049.6 | | 61 |
| Base Products | | 277.7 | | 15 | | (12 | ) | | | 317.2 | | 17 | | (14 | ) | | | 367.3 | | 21 |
| Support Products | | 109.7 | | 6 | | 5 | | | | 104.5 | | 6 | | 2 | | | | 102.9 | | 6 |
| Total net revenues | $ | 1,841.4 | | 100 | | 0 | | | $ | 1,842.7 | | 100 | | 7 | | | $ | 1,726.2 | | 100 |
Net revenues from New Products increased significantly in fiscal 2008 and now represent one-third of our total net revenues. New Products consist primarily of our 65-nm, high-performance and high-density Virtex-5 family and our 90-nm products, which include the Virtex-4 family, and our high-volume, low-cost Spartan-3 families. These products, along with our CoolRunner-II family of CPLDs, contributed to the majority of the revenue growth in New Products in fiscal 2008 and 2007. We expect sales of New Products to continue to increase over time as more customers’ programs go into volume production with our 65-nm and 90-nm products.
Net revenues from Mainstream Products declined in fiscal 2008 and 2007 primarily due to reduced sales from older products manufactured on 150-nm and 180-nm process technologies including Spartan-II, Virtex-E and Virtex-II. The decrease in net revenues for this product category resulted from both a decline in units sold as well as in average selling prices.
The decline in net revenues from Base Products in fiscal 2008 and 2007 was expected because the average selling price continued to decline as these products matured and approached end of life.
Net revenues from Support Products increased in fiscal 2008 and 2007 due to modest increases in sales from our software products.
Net Revenues by End Markets
Our end market revenue data is derived from our understanding of our end customers’ primary markets. We classify our net revenues by end markets into four categories: Communications, Industrial and Other, Consumer and Automotive, and Data Processing. The percentage change calculation in the table below represents the year-to-year dollar change in each end market.
Net revenues by end markets for the fiscal years indicated were as follows:
| | | | | % Change | | | | % Change | | |
| (% of total net revenues) | | 2008 | | in Dollars | | 2007 | | in Dollars | | 2006 |
| Communications | | 43 | % | | (5 | ) | | 45 | % | | (1 | ) | | 49 | % |
| Industrial and Other | | 32 | | | 11 | | | 29 | | | 22 | | | 25 | |
| Consumer and Automotive | | 17 | | | 4 | | | 16 | | | 18 | | | 14 | |
| Data Processing | | 8 | | | (14 | ) | | 10 | | | (10 | ) | | 12 | |
| Total net revenues | | 100 | % | | 0 | | | 100 | % | | 7 | | | 100 | % |
26
Net revenues from Communications, our largest end market, decreased in fiscal 2008 compared with the prior year period due to a decline in sales in wireless communications applications, much of which was driven by merger and consolidation activity in that market. In fiscal 2007, the Communications end market decreased slightly compared to fiscal 2006 due primarily to a decline in wired telecommunications applications.
Net revenues from the Industrial and Other end market increased in fiscal 2008 and 2007 compared with the prior year periods. The increases were driven by broad-based strength across all applications including defense, industrial, scientific and medical and test and measurement.
Net revenues from the Consumer and Automotive end market increased in fiscal 2008 compared with the prior year period primarily due to strength in automotive applications. In fiscal 2007, the increase in net revenues from the Consumer and Automotive end market was driven by broad-based strength across all applications, including consumer, automotive and audio, video and broadcast.
The decline in net revenues from the Data Processing end market in fiscal 2008 was driven by decreases in sales from storage, computing and data processing applications. In fiscal 2007, net revenues from the Data Processing end market declined due primarily to weakness in the storage business.
Net Revenues by Geography
Geographic revenue information reflects the geographic location of the distributors or OEMs who purchased our products. This may differ from the geographic location of the end customers. Net revenues by geography for the fiscal years indicated were as follows:
| | | | | | % of | | % | | | | | % of | | % | | | | | % of |
| (In millions) | | 2008 | | Total | | Change | | 2007 | | Total | | Change | | 2006 | | Total |
| North America | | $ | 717.8 | | 39 | | (2 | ) | | $ | 731.3 | | 40 | | 2 | | | $ | 714.9 | | 41 |
| Asia Pacific | | | 526.3 | | 29 | | 13 | | | | 466.6 | | 25 | | 15 | | | | 406.7 | | 24 |
| Europe | | | 407.2 | | 22 | | (5 | ) | | | 426.9 | | 23 | | 21 | | | | 352.8 | | 20 |
| Japan | | | 190.1 | | 10 | | (13 | ) | | | 217.9 | | 12 | | (13 | ) | | | 251.8 | | 15 |
| Total net revenues | | $ | 1,841.4 | | 100 | | 0 | | | $ | 1,842.7 | | 100 | | 7 | | | $ | 1,726.2 | | 100 |
Net revenues in North America decreased in fiscal 2008 primarily due to a decline in sales from wireless communications as well as data processing applications. The fiscal 2007 increase was driven primarily by strength in the Industrial and Other end market, particularly defense applications.
Net revenues in Asia Pacific grew double-digits in fiscal 2008 due to broad-based end market strength, with particular strength coming from customers in the Communications and Industrial and Other end markets. Additionally, Asia Pacific sales continued to benefit from outsourcing of manufacturing operations by large U.S. and European-based customers to the Asia Pacific region. The fiscal 2007 increase was due to increased sales from communications and consumer applications as well as continued outsourcing of manufacturing operations to the Asia Pacific region by some of our larger OEM customers.
Net revenues in Europe decreased in fiscal 2008 due primarily to lower sales from wireless communications applications. Net revenues in fiscal 2007 increased primarily due to strength from communications and industrial applications, particularly wireless infrastructure and industrial, scientific and medical applications.
Net revenues in Japan declined in fiscal 2008 due to broad-based weakness across all end market categories. The fiscal 2007 decline was primarily due to a weakened telecommunications infrastructure market during the year.
Gross Margin
| (In millions) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| Gross margin | | $1,154.4 | | 3% | | $1,124.1 | | 5% | | $1,069.1 |
| Percentage of net revenues | | 62.7% | | | | 61.0% | | | | 61.9% |
The increase in the gross margin percentage in fiscal 2008 from the comparable prior year period was driven primarily by product cost reductions and improved operational efficiency. This favorable impact was partially offset by the product mix effect of New Product growth year-over-year. New Products generally have lower gross margins than Mainstream and
27
Base Products in the early product life cycle due to higher unit costs resulting from lower yields. As a percentage of total net revenues, New Product sales increased by approximately 10% from fiscal 2007 to fiscal 2008.
The decline in the gross margin percentage in fiscal 2007 from the comparable prior year period was partially due to the effect of stock-based compensation expense of $10.3 million resulting from our adoption of SFAS 123(R) effective April 2, 2006. Stock-based compensation expense was zero for fiscal 2006. In addition, the impact of the production ramp of our 90-nm process and the significant growth in the New Products category also contributed to the decline of gross margin. New Products represented 23% of net revenues in fiscal 2007 compared to 12% of net revenues in the comparable prior year period.
Gross margin may be adversely affected in the future due to mix shifts, competitive-pricing pressure, manufacturing-yield issues and wafer pricing. We expect to mitigate these risks by continuing to improve yields on our New Products and by improving manufacturing efficiency with our suppliers.
Sales of inventory previously written off were not material during fiscal 2008, 2007 or 2006.
In order to compete effectively, we pass manufacturing cost reductions on to our customers in the form of reduced prices to the extent that we can maintain acceptable margins. Price erosion is common in the semiconductor industry, as advances in both product architecture and manufacturing process technology permit continual reductions in unit cost. We have historically been able to offset much of this revenue decline in our mature products with increased revenues from newer products.
Research and Development
| (In millions) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| Research and development | | $358.1 | | (8%) | | $388.1 | | 19% | | $326.1 |
| Percentage of net revenues | | 19% | | | | 21% | | | | 19% |
R&D spending decreased $30.0 million or 8% during fiscal 2008 compared to the same period last year. The decrease was primarily due to reduced stock-based compensation expense and lower mask and wafer spending, coupled with lower cost related to our R&D center in India. R&D spending increased $62.0 million or 19% during fiscal 2007 compared to fiscal 2006. The increase was primarily related to stock-based compensation expense of $41.6 million resulting from our adoption of SFAS 123(R) effective April 2, 2006 and expenses related to investments in resources to support new product development, particularly in the area of DSP. Stock-based compensation expense was zero for fiscal 2006.
We plan to continue to selectively invest in R&D efforts in areas such as new products and more advanced process development, IP cores and the development of new design and layout software. We will also consider acquisitions to complement our strategy for technology leadership and engineering resources in critical areas.
Selling, General and Administrative
| (In millions) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| Selling, general and administrative | | $365.3 | | (3%) | | $375.5 | | 19% | | $316.3 |
| Percentage of net revenues | | 20% | | | | 20% | | | | 18% |
SG&A expenses decreased 3% during fiscal 2008 compared to the same period last year. The decrease was attributable to lower stock-based compensation expense, reduced discretionary spending and lower sales commissions. The reductions in discretionary spending included consulting, travel and marketing expenses. SG&A expenses increased 19% during fiscal 2007 compared to fiscal 2006. This increase was attributable to stock-based compensation expense of $38.3 million resulting from our adoption of SFAS 123(R) effective April 2, 2006, expenses related to increased headcount, particularly in our sales organization, and legal related costs. Stock-based compensation expense was zero for fiscal 2006.
Amortization of Acquisition-Related Intangibles
| (In millions) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| Amortization of acquisition-related intangibles | | $6.8 | | (15%) | | $8.0 | | 15% | | $7.0 |
28
Amortization expense was related to the intangible assets acquired from prior acquisitions. Amortization expense for these intangible assets decreased for fiscal 2008 from the same period last year, due to the complete amortization of certain intangible assets in fiscal 2007. Amortization expense for these intangible assets increased for fiscal 2007 from fiscal 2006 due to the acquisition of AccelChip in January 2006.
We expect amortization of acquisition-related intangibles to be approximately $5.3 million for fiscal 2009 compared with $6.8 million for fiscal 2008.
Litigation Settlements and Contingencies
On November 27, 2006, the Company settled a patent infringement lawsuit under which the Company agreed to pay $6.5 million. The plaintiff agreed to dismiss the patent infringement lawsuit with prejudice, granted a patent license to the Company and executed an agreement not to sue the Company under any patent owned or controlled by the plaintiff for ten years. As a result of the settlement agreement, we recorded a current period charge of $2.5 million during the third quarter of fiscal 2007. The remaining balance of $4.0 million represented the value of the prepaid patent license granted as part of the settlement. This balance is being amortized over the patent’s remaining useful life.
In the second quarter of fiscal 2006, the Company accrued an additional $3.2 million that represented the settlement payment for litigation related to an agreement with a sales representative. The Company accrued amounts that represented anticipated payments for liability for legal contingencies under the provisions of SFAS No. 5, “Accounting for Contingencies.”
Stock-Based Compensation
| (In millions) | 2008 | | Change | | 2007 | | Change | | 2006 |
| Stock-based compensation included in: | | | | | | | | | | | | | |
| Cost of revenues | $ | 7.6 | | (26% | ) | | $ | 10.4 | | - | | $ | - |
| Research and development | | 31.4 | | (24% | ) | | | 41.6 | | - | | | - |
| Selling, general and administrative | | 27.4 | | (29% | ) | | | 38.3 | | - | | | - |
| Stock-based compensation related to prior years | | — | | - | | | | 2.2 | | - | | | — |
| | $ | 66.4 | | (28% | ) | | $ | 92.5 | | - | | $ | - |
We adopted SFAS 123(R) under the modified prospective transition method, effective beginning in fiscal 2007. Prior to the adoption of SFAS 123(R), we accounted for stock-based compensation under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25) and related interpretations, using the intrinsic value method and, as such, generally recognized no compensation cost for employee stock options. The 28% decrease in stock-based compensation expense for fiscal 2008 was due to a decrease in the number of shares granted, declining weighted-average fair values of stock awards vesting and lower expense related to a methodology change from accelerated to straight-line amortization in connection with the adoption of SFAS 123(R). Total stock-based compensation expense during fiscal 2007 related to the adoption of SFAS 123(R) was $90.3 million, excluding one-time expense of $2.2 million relating to prior years under the provisions of APB 25.
In June 2006, stockholder derivative complaints were filed against the Company concerning the Company’s historical option-granting practices and the SEC initiated an informal inquiry on the matter. An investigation of the Company’s historical stock option-granting practices was conducted by outside counsel and no evidence of fraud, management misconduct or manipulation in the timing or exercise price of stock option grants was found. The investigation determined that in nearly all cases, stock options were issued as of pre-set dates; however, there were some minor differences between the recorded grant dates and measurement dates for certain grants made between 1997 and 2006. As a result, a $2.2 million charge was taken to the Company’s earnings for the first quarter of fiscal 2007. Subsequently the SEC informal inquiry was terminated and no enforcement action was recommended and the stockholder derivative complaints were dismissed.
The income tax effect of the charge resulted in a benefit of $650 thousand, which was recorded to income tax expense. The Company assessed the implications of applicable income tax rules that may affect the Company. The tax benefit recorded is net of such potential costs.
Write-Off of Acquired In-Process Research and Development
In connection with the acquisition of AccelChip in January 2006, $4.5 million of in-process R&D costs were written off. The projects identified as in-process would have required additional effort in order to establish technological feasibility. These projects had identifiable technological risk factors indicating that successful completion, although expected, was not assured. If an identified project is not successfully completed, there is no alternative future use for the project, therefore,
29
the expected future income will not be realized. The acquired in-process R&D represented the fair value of technologies in the development stage that had not yet reached technological feasibility and did not have alternative future uses.
The acquired in-process R&D components consist of algorithmic synthesis software and IP libraries for high-performance DSP design in FPGAs. We plan to sell these products to new and existing Xilinx customers and over time integrate them with our existing DSP software products. These projects were approximately 45% complete at the time of acquisition and we expected to complete all of the development projects by the end of fiscal 2009 with an estimated cost to complete of $3.5 million. As of March 29, 2008, these projects were approximately 85% complete and we still expect to complete all of the development projects by the end of fiscal 2009 with a remaining estimated cost to complete of $1.0 million.
To determine the value of AccelChip’s in-process R&D, the expected future cash flow attributable to the in-process technology was discounted, taking into account the percentage of completion, utilization of pre-existing “core” technology, risks related to the characteristics and applications of the technology, existing and future markets, and technological risk associated with completing the development of the technology. We expensed these non-recurring charges in the period of acquisition. See Note 17 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Impairment Loss on Investments
| (In millions) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| Impairment loss on investments | | $2.9 | | 46% | | $2.0 | | 38% | | $1.4 |
The impairment losses on investments were related to non-marketable equity securities in private companies. These impairment losses resulted primarily from weak financial conditions of certain investees, certain investees diluting Xilinx’s investment through the receipt of additional rounds of investment at a lower per share price or from the liquidation of certain investees.
Interest and Other, Net
| (In millions) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| Interest and other, net | | $52.7 | | (38%) | | $85.3 | | 86% | | $46.0 |
| Percentage of net revenues | | 3% | | | | 5% | | | | 3% |
The decrease in interest and other, net in fiscal 2008 over the prior year was due to the interest expense ($32.0 million) related to the debentures issued in the fourth quarter of fiscal 2007 as well as a loss of approximately $4.7 million from the sale of the Company’s remaining UMC investment in the fourth quarter of fiscal 2008. These decreases were partially offset by an increase in interest income of $13.6 million in fiscal 2008 over the prior year due to higher yields resulting from investing in taxable securities and a larger investment portfolio. The increase in interest and other, net in fiscal 2007 over the prior year was due to higher yields from our investments, resulting from an increase in interest rates, and contributing to an increase of $23.6 million in interest income. The increase was also attributable to an increase of approximately $4.2 million in dividend income from the UMC investment compared to the prior year and a gain of approximately $7.0 million from the sale of a portion of the Company’s UMC investment which was partially offset by portfolio capital losses. The increase in fiscal 2007 was also offset by interest expense related to the debentures of $2.2 million for fiscal 2007. During fiscal 2007, we began liquidating our investments with low interest rate yields (e.g., tax-exempt municipal bonds) and investing in taxable securities such as floating rate notes, which had a higher rate of return than the tax-exempt municipal bonds. See Note 10 to our consolidated financial statements, included in Item 8. “Financial Statements and Supplementary Data.”
Provision for Income Taxes
| (In millions) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| Provision for income taxes | | $100.0 | | 24% | | $80.5 | | (21)% | | $102.5 |
| Percentage of net revenues | | 5% | | | | 4% | | | | 6% |
| Effective tax rate | | 21% | | | | 19% | | | | 22% |
The effective tax rates in all years reflected the favorable impact of foreign income at statutory rates less than the United States rate and tax credits earned.
30
The increase in the effective tax rate in fiscal 2008, when compared with fiscal 2007, was primarily due to items unique to fiscal 2007 reducing the rates for the prior year period. The decrease in the effective tax rate in fiscal 2007 from fiscal 2006 was related to an increase in the amount of R&D tax credits recognized and an increase in the proportion of net income earned in lower tax jurisdictions. The Company also benefited from a decrease in tax reserves in fiscal 2007 due to expiration of the federal statute of limitations for fiscal 2003. These benefits were partially offset by non-deductible stock-based compensation resulting from the adoption of SFAS 123(R).
The IRS examined the Company’s tax returns for fiscal 1996 through 2001. All issues have been settled with the exception of issues related to Xilinx U.S.’s cost sharing arrangement with Xilinx Ireland. On August 30, 2005, the Tax Court issued its opinion concerning whether the value of stock options must be included in the cost sharing agreement with Xilinx Ireland. The Tax Court agreed with the Company that no amount for stock options was to be included in the cost sharing agreement. Accordingly, there are no additional taxes, penalties or interest due for this issue. The Tax Court entered its decision on May 31, 2006. On August 25, 2006, the IRS appealed the decision to the Ninth Circuit Court of Appeals. The Company is opposing this appeal as it believes that the Tax Court decided the case correctly. The Company and the IRS presented oral arguments to a three-judge panel of the Appeals Court on March 12, 2008. See Item 3. “Legal Proceedings” and Note 14 to our consolidated financial statements, included in Item 8. “Financial Statements and Supplementary Data.”
Financial Condition, Liquidity and Capital Resources
We have historically used a combination of cash flows from operations and equity and debt financing to support ongoing business activities, acquire or invest in critical or complementary technologies, purchase facilities and capital equipment, repurchase our common stock under our stock repurchase program, pay dividends and finance working capital. Additionally, our investments in debt securities are available for future sale.
Fiscal 2008 Compared to Fiscal 2007
Cash, Cash Equivalents and Short-term and Long-term Investments
The combination of cash, cash equivalents and short-term and long-term investments at March 29, 2008 and March 31, 2007 totaled $1.86 billion and $1.81 billion, respectively. As of March 29, 2008, we had cash, cash equivalents and short-term investments of $1.30 billion and working capital of $1.48 billion. Cash provided by operations of $581.0 million for fiscal 2008 was $29.4 million higher than the $551.6 million generated during fiscal 2007. Cash provided by operations during fiscal 2008 resulted primarily from net income as adjusted for non-cash related items, decreases in inventories and prepaid expenses and increases in income taxes payable and deferred income on shipments to distributors which were partially offset by an increase in accounts receivable.
The decrease in prepaid expenses in fiscal 2008 was primarily related to the utilization of the advance wafer purchase payment paid to Toshiba. In October 2004, we entered into an advanced purchase agreement with Toshiba under which the Company paid Toshiba a total of $100.0 million for advance payment of silicon wafers produced under the agreement, which expired in December 2006 and has since been extended until December 2008. The entire advance payment of $100.0 million is being reduced by future wafer purchases from Toshiba. At March 29, 2008, the unused balance of the advance payment remaining was $4.5 million.
Net cash provided by investing activities was $192.0 million during fiscal 2008, as compared to net cash used in investing activities of $283.8 million in fiscal 2007. Net cash provided by investing activities during fiscal 2008 consisted of $232.2 million of net proceeds from the sale and maturity of available-for-sale securities, including $47.1 million of net proceeds from the sale of the remaining UMC investment, and a distribution from UMC of $10.7 million. These items were partially offset by $45.6 million for purchases of property, plant and equipment (see further discussion below) and $5.3 million of other investing activities.
Net cash used in financing activities was $541.9 million in fiscal 2008, as compared to $415.3 million in fiscal 2007. Net cash used in financing activities during fiscal 2008 consisted of $550.0 million for the repurchase of common stock and $140.0 million for dividend payments to stockholders. These items were partially offset by $125.6 million of proceeds from the issuance of common stock under employee stock plans and $22.5 million for excess tax benefits from stock-based compensation.
AccountsReceivable
Accounts receivable, net of allowances for doubtful accounts, customer returns and distributor pricing adjustments increased 37% from $182.3 million at the end of fiscal 2007 to $249.1 million at the end of fiscal 2008. Days sales outstanding increased to 49 days at March 29, 2008 from 36 days at March 31, 2007. The increases were primarily
31
attributable to the timing of payments from customers, credit issuance and the timing of shipments during the fourth quarter of fiscal 2008.
Inventories
Inventories decreased from $174.6 million at March 31, 2007 to $130.3 million at March 29, 2008. The combined inventory days at Xilinx and distribution channel decreased to 94 days at March 29, 2008, compared to 112 days at March 31, 2007. The decreases were primarily due to improved forecasting accuracy and fewer inventory mix issues.
We attempt to maintain sufficient levels of inventory in various product, package and speed configurations in order to keep lead times short and to meet forecasted customer demand. Conversely, we also attempt to minimize the handling costs associated with maintaining higher inventory levels and to fully realize the opportunities for cost reductions associated with architecture and manufacturing process advancements. We continually strive to balance these two objectives to provide excellent customer response at a competitive cost.
Property, Plant and Equipment
During fiscal 2008, we invested $45.6 million in property, plant and equipment compared to $110.8 million in fiscal 2007. Primary investments in fiscal 2008 were for computer equipment, software, test equipment, and building and leasehold improvements. The decrease in fiscal 2008 was primarily attributable to the accumulated construction costs incurred in fiscal 2007 in connection with our Asia Pacific regional headquarters building in Singapore, which was completed in June 2007, and the purchase in February 2007 of a parcel of land for $28.6 million near our headquarters in San Jose for future potential growth purposes, neither of which was repeated in fiscal 2008. We do not intend to build on the land at this time. We expect that property, plant and equipment expenditures will decrease in the future due to expense controls.
Current Liabilities
Current liabilities increased from $303.4 million at the end of fiscal 2007 to $340.7 million at the end of fiscal 2008. The increase was primarily due to the increases in deferred income on shipments to distributors and accrued payroll and related liabilities, which were partially offset by the decrease in accounts payable. The increase in deferred income on shipments to distributors was due to an increase in distributor inventories at March 29, 2008 compared to the prior year.
Stockholders’ Equity
Stockholders’ equity decreased $100.9 million during fiscal 2008, from $1.77 billion in fiscal 2007 to $1.67 billion in fiscal 2008. The decrease in stockholder’s equity was attributable to the repurchase of common stock of $550.0 million, the payment of dividends to stockholders of $140.0 million and unrealized losses on available-for-sale securities, net of deferred tax benefits, of $1.8 million. The decreases were partially offset by net income of $374.0 million for fiscal 2008, the issuance of common stock under employee stock plans of $124.7 million, stock-based compensation related amounts totaling $65.8 million, the related tax benefits associated with stock option exercises and the Employee Stock Purchase Plan of $15.8 million, the effect of the adoption of FIN 48 totaling $6.5 million, cumulative translation adjustment of $3.1 million and hedging transaction gains totaling $1.0 million.
Fiscal 2007 Compared to Fiscal 2006
Cash, Cash Equivalents and Short-term and Long-term Investments
The combination of cash, cash equivalents and short-term and long-term investments at March 31, 2007 and April 1, 2006 was $1.81 billion and $1.60 billion, respectively. As of March 31, 2007, we had cash, cash equivalents and short-term investments of $1.14 billion and working capital of $1.40 billion. Cash provided by operations of $551.6 million for fiscal 2007 was $62.2 million higher than the $489.4 million generated during fiscal 2006. Cash provided by operations for fiscal 2007 resulted primarily from net income as adjusted for non-cash related items, decreases in accounts receivable, inventories and prepaid expenses and an increase in income taxes payable (net of reclassifications), which were partially offset by increases in deferred income taxes and other assets, and decreases in accrued liabilities and deferred income on shipments to distributors.
The decrease in prepaid expenses in fiscal 2007 was primarily related to the utilization of the advance wafer purchase payment paid to Toshiba. In October 2004, we entered into an advanced purchase agreement with Toshiba under which the Company paid Toshiba a total of $100.0 million for advance payment of silicon wafers produced under the agreement, which expired in December 2006 and has since been extended until December 2008. The entire advance payment of $100.0 million is being reduced by future wafer purchases from Toshiba.
32
At March 31, 2007, the unused balance of the advance payment remaining was $40.0 million.
Net cash used in investing activities was $283.8 million during fiscal 2007, as compared to net cash provided by investing activities of $242.4 million in fiscal 2006. Net cash used in investing activities during fiscal 2007 consisted of $171.4 million of net purchases of available-for-sale securities, $110.8 million for purchases of property, plant and equipment (see further discussion below) and $1.6 million of other investing activities. The net purchases of available-for-sale securities during fiscal 2007 were primarily due to the portfolio mix of our short- and long-term security investments.
Net cash used in financing activities was $415.3 million in fiscal 2007, as compared to $397.8 million in fiscal 2006. Net cash used in financing activities during fiscal 2007 consisted of $1.43 billion for the repurchase of common stock and $120.8 million for dividend payments to stockholders. These items were primarily offset by $980.0 million of net proceeds from the issuance of the debentures and $128.1 million of proceeds from the issuance of common stock under employee stock plans.
AccountsReceivable
Accounts receivable, net of allowances for doubtful accounts, customer returns and distributor pricing adjustments decreased 6% from $194.2 million at the end of fiscal 2006 to $182.3 million at the end of fiscal 2007. Days sales outstanding decreased to 36 days at March 31, 2007 from 41 days at April 1, 2006. The decreases were primarily attributable to strong collections during fiscal 2007 that were partially offset by increased shipments.
Inventories
Inventories decreased from $201.0 million at April 1, 2006 to $174.6 million at March 31, 2007. The combined inventory days at Xilinx and distribution channel decreased to 112 days at March 31, 2007, compared to 145 days at April 1, 2006. The decreases were primarily due to improved production yields (which lower our per-unit inventory costs), inventory mix and greater visibility to our customers’ forecast and production requirements.
Property, Plant and Equipment
During fiscal 2007, we invested $110.8 million in property, plant and equipment compared to $67.0 million in fiscal 2006. Primary investments in fiscal 2007 were for computer equipment, IT equipment, test equipment, building and leasehold improvements, and land. The increase in fiscal 2007 was also attributable to the accumulated construction costs of the building in Singapore, which was completed in June 2007, and our purchase in February 2007 of a parcel of land for $28.6 million near our headquarters in San Jose for future potential growth purposes.
Current Liabilities
Current liabilities decreased from $345.0 million at the end of fiscal 2006 to $303.4 million at the end of fiscal 2007. The decrease was primarily due to the decreases in deferred income on shipments to distributors and other accrued liabilities, which were partially offset by the increases in accounts payable and accrued payroll and related liabilities. The decrease in deferred income on shipments to distributors was due to lower inventory in the distributor channel as distributors attempted to adjust their inventory level to align with end-customer demand and to reduce inventory carrying costs.
Stockholders’ Equity
Stockholders’ equity decreased $956.1 million during fiscal 2007, from $2.73 billion in fiscal 2006 to $1.77 billion in fiscal 2007. The decrease in stockholder’s equity was a result of the $1.43 billion repurchase of our common stock, $120.8 million of dividend payments to stockholders and $12.2 million decrease in other comprehensive income primarily due to a decrease in the fair market value of the UMC investment. The decrease was partially offset by net income of $350.7 million for fiscal 2007, the proceeds from issuance of common stock under employee stock plans of $125.8 million and the effect of stock-based compensation expense and associated tax benefits of $130.4 million.
Liquidity and Capital Resources
Cash generated from operations is used as our primary source of liquidity and capital resources. Our investment portfolio is also available for future cash requirements as is our $250.0 million revolving credit facility entered into in April 2007. There have been no borrowings to date under our existing revolving credit facility. We also have a shelf registration on file with the SEC pursuant to which we may offer an indeterminate amount of debt, equity and other securities.
33
We used $550.0 million of cash to repurchase 23.5 million shares of our common stock in fiscal 2008 compared with $1.43 billion used to repurchase 55.2 million shares in fiscal 2007. In the fourth quarter of fiscal 2007, we received net proceeds of $980.0 million from the issuance of convertible debentures. As part of the $1.43 billion of stock repurchases in fiscal 2007, $930.0 million of the net proceeds from the debentures was used to repurchase 34.6 million shares of our common stock. During fiscal 2008, we paid $140.0 million in cash dividends to stockholders, representing an aggregate amount of $0.48 per common share. During fiscal 2007, we paid $120.8 million in cash dividends to stockholders, representing an aggregate amount of $0.36 per common share. On February 25, 2008, our Board of Directors declared an increase in the dividend rate on our common stock from $0.12 to $0.14 per common share for the first quarter of fiscal 2009. The dividend is payable on May 28, 2008. Our stock repurchase program and dividend policy could be impacted by, among other items, our views on potential future capital requirements relating to R&D, investments and acquisitions, legal risks, principal and interest payments on our debentures and other strategic investments.
We anticipate that existing sources of liquidity and cash flows from operations will be sufficient to satisfy our cash needs for the foreseeable future. However, the risk factors discussed in Item 1A included in Part I and below could affect our cash positions adversely. In addition, as a result of recent adverse conditions in the global credit markets, certain types of investments such as asset-backed securities may present risks arising from liquidity and/or credit concerns. In the event these investments become illiquid, the Company does not expect this will materially affect its liquidity and capital resources or results of operations. We will continue to evaluate opportunities for investments to obtain additional wafer capacity, procurement of additional capital equipment and facilities, development of new products, and potential acquisitions of technologies or businesses that could complement our business.
Contractual Obligations
The following table summarizes our significant contractual obligations at March 29, 2008 and the effect such obligations are expected to have on our liquidity and cash flows in future periods. This table excludes amounts already recorded on our consolidated balance sheet as current liabilities at March 29, 2008.
| | Payments Due by Period |
| | | | | Less than | | | | | | | | More than |
| | Total | | 1 year | | 1-3 years | | 3-5 years | | 5 years |
| | (In millions) |
| Operating lease obligations (1) | $ | 31.3 | | $ | 10.3 | | $ | 14.2 | | $ | 3.4 | | $ | 3.4 |
| Inventory and other purchase obligations (2) | | 74.3 | | | 74.3 | | | - | | | - | | | - |
| Electronic design automation software | | | | | | | | | | | | | | |
| licenses (3) | | 21.5 | | | 12.9 | | | 8.6 | | | - | | | - |
| Intellectual property license rights | | | | | | | | | | | | | | |
| obligations (4) | | 20.0 | | | - | | | - | | | - | | | 20.0 |
| 3.125% convertible debentures – | | | | | | | | | | | | | | |
| principal and interest (5) | | 1,905.0 | | | 31.3 | | | 62.5 | | | 62.5 | | | 1,748.7 |
| Total | $ | 2,052.1 | | $ | 128.8 | | $ | 85.3 | | $ | 65.9 | | $ | 1,772.1 |
| (1) | | We lease some of our facilities, office buildings and land under non-cancelable operating leases that expire at various dates through November 2035. Rent expense, net of rental income, under all operating leases was approximately $8.2 million for fiscal 2008. See Note 8 to our consolidated financial statements, included in Item 8. “Financial Statements and Supplementary Data,” for additional information about operating leases. |
| |
| (2) | | Due to the nature of our business, we depend entirely upon subcontractors to manufacture our silicon wafers and provide assembly and some test services. The lengthy subcontractor lead times require us to order the materials and services in advance, and we are obligated to pay for the materials and services when completed. We expect to receive and pay for these materials and services in the next three to six months, as the products meet delivery and quality specifications. |
| |
| (3) | | As of March 29, 2008, the Company had $21.5 million of non-cancelable license obligations to providers of electronic design automation software and hardware/software maintenance expiring at various dates through September 2011. |
| |
| (4) | | In the fourth quarter of fiscal 2005, the Company committed up to $20.0 million to acquire, in the future, rights to intellectual property until July 2023. License payments will be amortized over the useful life of the intellectual property acquired. |
| |
| (5) | | In March 2007, the Company issued $1.00 billion principal amount of 3.125% debentures due March 15, 2037. The debentures require payment of interest at an annual rate of 3.125% payable semiannually on March 15 and September |
34
| | 15 of each year, beginning September 15, 2007. See Note 12 to our consolidated financial statements, included in Item 8. “Financial Statements and Supplementary Data,” for additional information about our debentures. |
Due to the inherent uncertainty with respect to the timing of future cash outflows associated with our unrecognized tax benefits at March 29, 2008, we are unable to reliably estimate the timing of cash settlement with the respective taxing authority. Therefore, $39.1 million of unrecognized tax benefits classified as long-term income taxes payable in the accompanying consolidated balance sheet as of March 29, 2008, have been excluded from the contractual obligations table above.
Off-Balance-Sheet Arrangements
As of March 29, 2008, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value in accordance with generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS 157 applies to other pronouncements that require or permit fair value measurements; it does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 (fiscal 2009 for Xilinx), and interim periods within those fiscal years. The Company does not expect the adoption of SFAS 157 for financial assets and financial liabilities to have a material effect on its financial condition and results of operations. Additionally, in February 2008, the FASB issued FSP No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (FSP 157-1) and FSP No. 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP 157-1 removes leasing from the scope of SFAS 157 and FSP 157-2 delays the effective date of SFAS 157 from fiscal 2009 to fiscal 2010 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is currently evaluating the impact that SFAS 157 will have on its financial condition and results of operations when it is applied to non-financial assets and non-financial liabilities beginning in the first quarter of fiscal 2010.
See Note 2 to our consolidated financial statements, included in Item 8. “Financial Statements and Supplementary Data,” for additional information about other recent accounting pronouncements.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK
Interest Rate Risk
Our exposure to interest rate risk relates primarily to our investment portfolio, which consists of fixed income securities with a fair value of approximately $1.50 billion at March 29, 2008. Our primary aim with our investment portfolio is to invest available cash while preserving principal and meeting liquidity needs. The portfolio includes municipal bonds, floating rate notes, mortgage-backed securities, asset-backed securities, bank certificates of deposit, commercial paper, corporate bonds, auction rate securities and U.S. and foreign government and agency securities. In accordance with our investment policy, we place investments with high credit quality issuers and limit the amount of credit exposure to any one issuer based upon the issuer’s credit rating. These securities are subject to interest rate risk and will decrease in value if market interest rates increase. A hypothetical 100 basis-point (one percentage point) increase or decrease in interest rates compared to rates at March 29, 2008 and March 31, 2007 would have affected the fair value of our investment portfolio by less than $9.0 million and $8.0 million, respectively.
Credit Market Risk
Since September 2007, the global credit markets have experienced adverse conditions due to the increased concerns related to the U.S. sub-prime mortgage market that have spread to other sectors of the U.S. economy. This has negatively impacted the values of various types of investment and non-investment grade securities. As a result of these recent adverse conditions in the global credit markets, there is a risk that the Company may incur other-than-temporary impairment charges for certain types of investments such as asset-backed securities should the credit markets experience further deterioration. Please see Note 5 to our consolidated financial statements, included in Item 8. “Financial Statements and Supplementary Data,” for additional information about our investments.
35
Foreign Currency Exchange Risk
Sales to all direct OEMs and distributors are denominated in U.S. dollars.
Gains and losses on foreign currency forward contracts that are designated as hedges of anticipated transactions, for which a firm commitment has been attained and the hedged relationship has been effective, are deferred and included in the basis of the transaction in the same period that the underlying transaction is settled. Gains and losses on any instruments not meeting the above criteria are recognized in income or expenses in the consolidated statements of income as they are incurred.
We enter into forward currency exchange contracts to hedge our overseas operating expenses and other liabilities when deemed appropriate. As of March 29, 2008 and March 31, 2007, we had the following outstanding forward currency exchange contracts:
| (In thousands and U.S. dollars) | March 29, | | March 31, |
| | 2008 | | 2007 |
| Euro | $ | 18,616 | | $ | - |
| Singapore dollar | | 11,938 | | | 16,902 |
| Japanese Yen | | 5,364 | | | 4,309 |
| British Pound | | 3,022 | | | - |
| | $ | 38,940 | | $ | 21,211 |
The net unrealized gain or loss, which approximates the fair market value of the above contracts, was immaterial at March 29, 2008 and March 31, 2007. The contracts expire at various dates between April and June 2008.
Our investments in several of our wholly-owned subsidiaries are recorded in currencies other than the U.S. dollar. As the financial statements of these subsidiaries are translated at each quarter end during consolidation, fluctuations of exchange rates between the foreign currency and the U.S. dollar increase or decrease the value of those investments. These fluctuations are recorded within stockholders' equity as a component of accumulated other comprehensive income. Other foreign-denominated assets and liabilities are revalued on a monthly basis with gains and losses on revaluation reflected in net income. A hypothetical 10% favorable or unfavorable change in foreign currency exchange rates at March 29, 2008 and March 31, 2007 would have affected the annualized foreign-currency denominated operating expenses of our foreign subsidiaries by less than $15.0 million and $14.0 million, respectively. In addition, a hypothetical 10% favorable or unfavorable change in foreign currency exchange rates compared to rates at March 29, 2008 and March 31, 2007 would have affected the value of foreign-currency denominated cash and investments by less than $6.0 million and $4.0 million, respectively.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
XILINX,INC.
CONSOLIDATEDSTATEMENTSOFINCOME
| | Years Ended |
| | March 29, | | March 31, | | April 1, |
| (In thousands, except per share amounts) | 2008(1) | | 2007(1) | | 2006 |
| Net revenues | $ | 1,841,372 | | | $ | 1,842,739 | | | $ | 1,726,250 | |
| Cost of revenues | | 686,988 | | | | 718,643 | | | | 657,119 | |
| Gross margin | | 1,154,384 | | | | 1,124,096 | | | | 1,069,131 | |
| |
| Operating expenses: | | | | | | | | | | | |
| Research and development | | 358,063 | | | | 388,101 | | | | 326,126 | |
| Selling, general and administrative | | 365,325 | | | | 375,510 | | | | 316,302 | |
| Amortization of acquisition-related intangibles | | 6,802 | | | | 8,009 | | | | 6,976 | |
| Litigation settlements and contingencies | | — | | | | 2,500 | | | | 3,165 | |
| Stock-based compensation related to prior years | | — | | | | 2,209 | | | | — | |
| Write-off of acquired in-process research and development | | — | | | | — | | | | 4,500 | |
| Total operating expenses | | 730,190 | | | | 776,329 | | | | 657,069 | |
| |
| Operating income | | 424,194 | | | | 347,767 | | | | 412,062 | |
| Impairment loss on investments | | (2,850 | ) | | | (1,950 | ) | | | (1,418 | ) |
| Interest and other, net | | 52,750 | | | | 85,329 | | | | 45,958 | |
| |
| Income before income taxes | | 474,094 | | | | 431,146 | | | | 456,602 | |
| |
| Provision for income taxes | | 100,047 | | | | 80,474 | | | | 102,453 | |
| |
| Net income | $ | 374,047 | | | $ | 350,672 | | | $ | 354,149 | |
| |
| Net income per common share: | | | | | | | | | | | |
| Basic | $ | 1.27 | | | $ | 1.04 | | | $ | 1.01 | |
| Diluted | $ | 1.25 | | | $ | 1.02 | | | $ | 1.00 | |
| |
| Shares used in per share calculations: | | | | | | | | | | | |
| Basic | | 295,050 | | | | 337,920 | | | | 349,026 | |
| Diluted | | 298,636 | | | | 343,636 | | | | 355,065 | |
| (1) | | Cost of revenues and operating expenses for fiscal 2008 and 2007 include stock-based compensation expenses. See Notes 2 and 3 for additional information. |
See notes to consolidated financial statements.
37
XILINX, INC.
CONSOLIDATEDBALANCESHEETS
| | March 29, | | March 31, |
| (In thousands, except par value amounts) | 2008 | | 2007 |
| ASSETS | | | | | | | |
| Current assets: | | | | | | | |
| Cash and cash equivalents | $ | 866,995 | | | $ | 635,879 | |
| Short-term investments | | 429,440 | | | | 502,036 | |
| Accounts receivable, net of allowances for doubtful accounts and customer | | | | | | | |
| returns of $3,634 and $3,737 in 2008 and 2007, respectively | | 249,147 | | | | 182,295 | |
| Inventories | | 130,250 | | | | 174,572 | |
| Deferred tax assets | | 106,842 | | | | 100,344 | |
| Prepaid expenses and other current assets | | 37,522 | | | | 104,976 | |
| Total current assets | | 1,820,196 | | | | 1,700,102 | |
| |
| Property, plant and equipment, at cost: | | | | | | | |
| Land | | 94,184 | | | | 94,187 | |
| Buildings | | 288,338 | | | | 281,334 | |
| Machinery and equipment | | 357,103 | | | | 337,037 | |
| Furniture and fixtures | | 49,821 | | | | 47,639 | |
| | | 789,446 | | | | 760,197 | |
| Accumulated depreciation and amortization | | (385,016 | ) | | | (347,161 | ) |
| Net property, plant and equipment | | 404,430 | | | | 413,036 | |
| Long-term investments | | 564,269 | | | | 675,713 | |
| Investment in United Microelectronics Corporation | | — | | | | 67,050 | |
| Goodwill | | 117,955 | | | | 117,955 | |
| Acquisition-related intangibles, net | | 7,825 | | | | 14,626 | |
| Other assets | | 222,432 | | | | 190,873 | |
| Total Assets | $ | 3,137,107 | | | $ | 3,179,355 | |
| |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable | $ | 59,402 | | | $ | 78,912 | |
| Accrued payroll and related liabilities | | 100,730 | | | | 83,949 | |
| Income taxes payable | | 39,258 | | | | 24,210 | |
| Deferred income on shipments to distributors | | 111,678 | | | | 89,052 | |
| Other accrued liabilities | | 29,598 | | | | 27,246 | |
| Total current liabilities | | 340,666 | | | | 303,369 | |
| |
| Convertible debentures | | 999,851 | | | | 999,597 | |
| |
| Deferred tax liabilities | | 84,486 | | | | 102,329 | |
| |
| Long-term income taxes payable | | 39,122 | | | | — | |
| |
| Other long-term liabilities | | 1,159 | | | | 1,320 | |
| |
| Commitments and contingencies | | | | | | | |
| |
| Stockholders’ equity: | | | | | | | |
| Preferred stock, $.01 par value; 2,000 shares authorized; none issued and outstanding | | — | | | | — | |
| Common stock, $.01 par value; 2,000,000 shares authorized; 280,519 and 295,902 | | | | | | | |
| shares issued and outstanding in 2008 and 2007, respectively | | 2,805 | | | | 2,959 | |
| Additional paid-in capital | | 858,172 | | | | 849,888 | |
| Retained earnings | | 805,042 | | | | 916,292 | |
| Accumulated other comprehensive income | | 5,804 | | | | 3,601 | |
| Total stockholders’ equity | | 1,671,823 | | | | 1,772,740 | |
| Total Liabilities and Stockholders’ Equity | $ | 3,137,107 | | | $ | 3,179,355 | |
| | | | | | | | |
| See notes to consolidated financial statements. |
38
XILINX,INC.
CONSOLIDATEDSTATEMENTS OFCASHFLOWS
| | | Years Ended |
| | | March 29, | | March 31, | | April 1, |
| (In thousands) | | 2008 | | 2007 | | 2006 |
| Cash flows from operating activities: | | | | | | | | | | | | |
| Net income | | $ | 374,047 | | | $ | 350,672 | | | $ | 354,149 | |
| Adjustments to reconcile net income to net cash provided | | | | | | | | | | | |
| by operating activities: | | | | | | | | | | | | |
| Depreciation | | | 54,199 | | | | 55,998 | | | | 53,326 | |
| Amortization | | | 17,756 | | | | 17,926 | | | | 16,223 | |
| Stock-based compensation | | | 66,427 | | | | 90,292 | | | | — | |
| Stock-based compensation related to prior years | | — | | | | 2,209 | | | | — | |
| Net (gain) loss on sale of available-for-sale securities | | 5,139 | | | | (814 | ) | | | 4,981 | |
| Impairment loss on investments | | | 2,850 | | | | 1,950 | | | | 1,418 | |
| Convertible debt derivatives – revaluation and amortization | | 254 | | | | (403 | ) | | | — | |
| Write-off of acquired in-process research and development | | — | | | | — | | | | 4,500 | |
| Noncash compensation expense | | | — | | | | — | | | | 735 | |
| Provision for deferred income taxes | | | 669 | | | | 7,091 | | | | 26,032 | |
| Tax benefit from exercise of stock options | | 15,794 | | | | 35,765 | | | | 40,596 | |
| Excess tax benefit from stock-based compensation | | (22,459 | ) | | | (27,413 | ) | | | — | |
| Changes in assets and liabilities, net of effects from acquisition of business: | | | | | | | | | | | |
| Accounts receivable, net | | | (66,853 | ) | | | 11,911 | | | | 19,380 | |
| Inventories | | | 43,647 | | | | 28,617 | | | | (15,307 | ) |
| Deferred income taxes | | | (891 | ) | | | 3,532 | | | | (1,891 | ) |
| Prepaid expenses and other current assets | | 35,160 | | | | 35,652 | | | | (34,897 | ) |
| Other assets | | | 4,404 | | | | (15,636 | ) | | | (29,910 | ) |
| Accounts payable | | | (19,509 | ) | | | 7,908 | | | | 7,811 | |
| Accrued liabilities | | | 19,276 | | | | (10,939 | ) | | | 18,917 | |
| Income taxes payable | | | 28,464 | | | | (5,244 | ) | | | (687 | ) |
| Deferred income on shipments to distributors | | 22,626 | | | | (37,506 | ) | | | 24,047 | |
| Net cash provided by operating activities | | 581,000 | | | | 551,568 | | | | 489,423 | |
| |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Purchases of available-for-sale securities | | (2,147,828 | ) | | | (1,864,582 | ) | | | (1,459,248 | ) |
| Proceeds from sale and maturity of available-for-sale securities | | 2,380,055 | | | | 1,693,152 | | | | 1,812,580 | |
| Distribution from United Microelectronics Corporation | | 10,693 | | | | — | | | | — | |
| Purchases of property, plant and equipment | | (45,593 | ) | | | (110,777 | ) | | | (67,040 | ) |
| Acquisition of business, net of cash acquired | | — | | | | — | | | | (19,476 | ) |
| Other investing activities | | | (5,308 | ) | | | (1,564 | ) | | | (24,436 | ) |
| Net cash provided by (used in) investing activities | | 192,019 | | | | (283,771 | ) | | | 242,380 | |
| |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Repurchases of common stock | | | (550,000 | ) | | | (1,430,000 | ) | | | (401,584 | ) |
| Proceeds from issuance of common stock through various stock plans | | 125,612 | | | | 128,136 | | | | 100,949 | |
| Proceeds from issuance of convertible debentures, net of issuance costs | | — | | | | 980,000 | | | | — | |
| Payment of dividends to stockholders | | | (139,974 | ) | | | (120,833 | ) | | | (97,190 | ) |
| Excess tax benefit from stock-based compensation | | 22,459 | | | | 27,413 | | | | — | |
| Net cash used in financing activities | | (541,903 | ) | | | (415,284 | ) | | | (397,825 | ) |
| |
| Net increase (decrease) in cash and cash equivalents | | 231,116 | | | | (147,487 | ) | | | 333,978 | |
| |
| Cash and cash equivalents at beginning of year | | 635,879 | | | | 783,366 | | | | 449,388 | |
| |
| Cash and cash equivalents at end of year | | $ | 866,995 | | | $ | 635,879 | | | $ | 783,366 | |
| |
| Supplemental schedule of non-cash activities: | | | | | | | | | | | |
| Accrual of affordable housing credit investments | $ | — | | | $ | — | | | $ | 19,357 | |
| Supplemental disclosure of cash flow information: | | | | | | | | | | | |
| Interest paid | | $ | 32,118 | | | $ | — | | | $ | — | |
| Income taxes paid, net of refunds | | $ | 56,012 | | | $ | 39,330 | | | $ | 37,159 | |
| | | | | | | | | | | | |
| See notes to consolidated financial statements. |
39
XILINX, INC.
CONSOLIDATEDSTATEMENTS OFSTOCKHOLDERS’EQUITY
| | | | | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | Common Stock | | Additional | | | | | | | | | | Other | | Total |
| (In thousands) | Outstanding | | Paid-in | | Retained | | Treasury | | Comprehensive | | Stockholders’ |
| | Shares | | Amount | | Capital | | Earnings | | Stock | | Income (Loss) | | Equity |
| Balance at April 2, 2005 | 350,161 | | | $ | 3,502 | | | $ | 906,929 | | | $ | 1,762,873 | | | $ | — | | | $ | 204 | | | $ | 2,673,508 | |
| Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | — | | | | — | | | | — | | | | 354,149 | | | | — | | | | — | | | | 354,149 | |
| Change in net unrealized gain on available-for- | | | | | | | | | | | | | | | | | | | | | | | | | | |
| sale securities, net of taxes of $10,540 | — | | | | — | | | | — | | | | — | | | | — | | | | 17,179 | | | | 17,179 | |
| Change in net unrealized gain on hedging | | | | | | | | | | | | | | | | | | | | | | | | | | |
| transactions, net of taxes | — | | | | — | | | | — | | | | — | | | | — | | | | 118 | | | | 118 | |
| Cumulative translation adjustment | — | | | | — | | | | — | | | | — | | | | — | | | | (1,692 | ) | | | (1,692 | ) |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | 369,754 | |
| Issuance of common shares and treasury stock under | | | | | | | | | | | | | | | | | | | | | | | | | | |
| employee stock plans | 7,437 | | | | 74 | | | | 46,321 | | | | (13,009 | ) | | | 70,690 | | | | — | | | | 104,076 | |
| Reclassification of losses from reissuance of | | | | | | | | | | | | | | | | | | | | | | | | | | |
| treasury stock | — | | | | — | | | | 502,552 | | | | (502,552 | ) | | | — | | | | — | | | | — | |
| Repurchase and retirement of common stock | (15,011 | ) | | | (150 | ) | | | (159,429 | ) | | | (169,741 | ) | | | (70,690 | ) | | | — | | | | (400,010 | ) |
| Noncash compensation expense | 31 | | | | — | | | | 735 | | | | — | | | | — | | | | — | | | | 735 | |
| Cash dividends declared ($0.28 per common share) | — | | | | — | | | | — | | | | (97,190 | ) | | | — | | | | — | | | | (97,190 | ) |
| Reversal of reserve for cost sharing as a result of | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tax Court decision | — | | | | — | | | | 44,713 | | | | — | | | | — | | | | — | | | | 44,713 | |
| Tax reconciliation and reclassification adjustments | — | | | | — | | | | (7,297 | ) | | | — | | | | — | | | | — | | | | (7,297 | ) |
| Tax benefit from exercise of stock options | — | | | | — | | | | 40,596 | | | | — | | | | — | | | | — | | | | 40,596 | |
| Balance at April 1, 2006 | 342,618 | | | | 3,426 | | | | 1,375,120 | | | | 1,334,530 | | | | — | | | | 15,809 | | | | 2,728,885 | |
| Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | — | | | | — | | | | — | | | | 350,672 | | | | — | | | | — | | | | 350,672 | |
| Change in net unrealized loss on available-for- | | | | | | | | | | | | | | | | | | | | | | | | | | |
| sale securities, net of tax benefit of $8,267 | — | | | | — | | | | — | | | | — | | | | — | | | | (13,520 | ) | | | (13,520 | ) |
| Change in net unrealized loss on hedging | | | | | | | | | | | | | | | | | | | | | | | | | | |
| transactions, net of taxes | — | | | | — | | | | — | | | | — | | | | — | | | | (105 | ) | | | (105 | ) |
| Cumulative translation adjustment | — | | | | — | | | | — | | | | — | | | | — | | | | 1,417 | | | | 1,417 | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | 338,464 | |
| Issuance of common shares under employee stock | | | | | | | | | | | | | | | | | | | | | | | | | | |
| plans | 8,505 | | | | 85 | | | | 125,712 | | | | — | | | | — | | | | — | | | | 125,797 | |
| Repurchase and retirement of common stock | (55,221 | ) | | | (552 | ) | | | (781,371 | ) | | | (648,077 | ) | | | — | | | | — | | | | (1,430,000 | ) |
| Stock-based compensation expense | — | | | | — | | | | 90,292 | | | | — | | | | — | | | | — | | | | 90,292 | |
| Stock-based compensation capitalized in | | | | | | | | | | | | | | | | | | | | | | | | | | |
| inventory | — | | | | — | | | | 2,161 | | | | — | | | | — | | | | — | | | | 2,161 | |
| Stock-based compensation related to prior years | — | | | | — | | | | 2,209 | | | | — | | | | — | | | | — | | | | 2,209 | |
| Cash dividends declared ($0.36 per common share) | — | | | | — | | | | — | | | | (120,833 | ) | | | — | | | | — | | | | (120,833 | ) |
| Tax benefit from exercise of stock options | — | | | | — | | | | 35,765 | | | | — | | | | — | | | | — | | | | 35,765 | |
| Balance at March 31, 2007 | 295,902 | | | | 2,959 | | | | 849,888 | | | | 916,292 | | | | — | | | | 3,601 | | | | 1,772,740 | |
| Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | — | | | | — | | | | — | | | | 374,047 | | | | — | | | | — | | | | 374,047 | |
| Change in net unrealized loss on available-for- | | | | | | | | | | | | | | | | | | | | | | | | | | |
| sale securities, net of tax benefit of $1,168 | — | | | | — | | | | — | | | | — | | | | — | | | | (1,863 | ) | | | (1,863 | ) |
| Change in net unrealized gain on hedging | | | | | | | | | | | | | | | | | | | | | | | | | | |
| transactions, net of taxes | — | | | | — | | | | — | | | | — | | | | — | | | | 1,014 | | | | 1,014 | |
| Cumulative translation adjustment | — | | | | — | | | | — | | | | — | | | | — | | | | 3,052 | | | | 3,052 | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | 376,250 | |
| Issuance of common shares under employee stock | | | | | | | | | | | | | | | | | | | | | | | | | | |
| plans | 8,125 | | | | 80 | | | | 124,660 | | | | — | | | | — | | | | — | | | | 124,740 | |
| Repurchase and retirement of common stock | (23,508 | ) | | | (234 | ) | | | (198,946 | ) | | | (350,820 | ) | | | — | | | | — | | | | (550,000 | ) |
| Stock-based compensation expense | — | | | | — | | | | 66,427 | | | | — | | | | — | | | | — | | | | 66,427 | |
| Stock-based compensation capitalized in | | | | | | | | | | | | | | | | | | | | | | | | | | |
| inventory | — | | | | — | | | | (675 | ) | | | — | | | | — | | | | — | | | | (675 | ) |
| Effect of adoption of FIN 48 | — | | | | — | | | | 1,024 | | | | 5,497 | | | | — | | | | — | | | | 6,521 | |
| Cash dividends declared ($0.48 per common share) | — | | | | — | | | | — | | | | (139,974 | ) | | | — | | | | — | | | | (139,974 | ) |
| Tax benefit from exercise of stock options | — | | | | — | | | | 15,794 | | | | — | | | | — | | | | — | | | | 15,794 | |
| Balance at March 29, 2008 | 280,519 | | | $ | 2,805 | | | $ | 858,172 | | | $ | 805,042 | | | $ | — | | | $ | 5,804 | | | $ | 1,671,823 | |
See notes to consolidated financial statements.
40
XILINX,INC.
NOTES TOCONSOLIDATEDFINANCIALSTATEMENTS
Note 1. Nature of Operations
Xilinx designs, develops and markets complete programmable logic solutions, including advanced integrated circuits, software design tools, predefined system functions delivered as intellectual property cores, design services, customer training, field engineering and technical support. The wafers used to manufacture its products are obtained primarily from independent wafer manufacturers located in Taiwan and Japan. The Company is dependent on these foundries to produce and deliver silicon wafers on a timely basis. The Company is also dependent on subcontractors, primarily located in the Asia Pacific region, to provide semiconductor assembly, test and shipment services. Xilinx is a global company with manufacturing and test facilities in the United States, Ireland and Singapore and sales offices throughout the world. The Company derives over one-half of its revenues from international sales, primarily in Europe, Japan and the Asia Pacific region.
Note 2. Summary of Significant Accounting Policies and Concentrations of Risk
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Xilinx and its wholly-owned subsidiaries after elimination of all intercompany transactions. The Company uses a 52- to 53-week fiscal year ending on the Saturday nearest March 31. Fiscal 2008 was a 52-week year ended on March 29, 2008. Fiscal 2007 was a 52-week year ended on March 31, 2007. Fiscal 2006 was a 52-week year ended on April 1, 2006. Fiscal 2009 will be a 52-week year ending on March 28, 2009.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of net revenues and expenses during the reporting period. Such estimates relate to, among others, the useful lives of assets, assessment of recoverability of property, plant and equipment, intangible assets and goodwill, inventory write-downs, allowances for doubtful accounts and customer returns, potential reserves relating to litigation and tax matters, valuation of certain investments and derivative financial instruments as well as other accruals or reserves. Actual results may differ from those estimates and such differences may be material to the financial statements.
Cash Equivalents and Investments
Cash equivalents consist of highly liquid investments with original maturities from the date of purchase of three months or less. These investments consist of commercial paper, bank certificates of deposit, money market funds and time deposits. Short-term investments consist of municipal bonds, corporate bonds, commercial paper, U.S. and foreign government and agency securities, floating rate notes, mortgage-backed securities, asset-backed securities and bank certificates of deposit with original maturities greater than three months and remaining maturities less than one year from the balance sheet date. Prior to March 29, 2008, short-term investments also included taxable and tax-advantaged auction rate securities. Long-term investments consist of U.S. and foreign government and agency securities, corporate bonds, mortgage-backed securities, asset-backed securities, floating rate notes and municipal bonds with remaining maturities greater than one year, unless the investments are specifically identified to fund current operations, in which case they are classified as short-term investments. As of March 29, 2008, long-term investments also included approximately $71.9 million of AAA-rated auction rate securities that experienced failed auctions in the fourth quarter of fiscal 2008. These auction rate securities are secured primarily by pools of student loans originated under FFELP that are guaranteed by the U. S. Department of Education. Equity investments are also classified as long-term investments since they are not intended to fund current operations.
The Company maintains its cash balances with various banks with high quality ratings, and investment banking and asset management institutions. The Company manages its liquidity risk by investing in a variety of money market funds, high-grade commercial paper, corporate bonds, municipal bonds and U.S. and foreign government and agency securities. This diversification of investments is consistent with its policy to maintain liquidity and ensure the ability to collect principal. The Company maintains an offshore investment portfolio denominated in U.S. dollars with investments in non-U.S. based issuers. All investments are made pursuant to corporate investment policy guidelines. Investments include Euro commercial paper, Euro dollar bonds, Euro dollar floating rate notes and offshore time deposits.
41
Management classifies investments as available-for-sale or held-to-maturity at the time of purchase and re-evaluates such designation at each balance sheet date, although classification is not generally changed. Securities are classified as held-to-maturity when the Company has the positive intent and the ability to hold the securities until maturity. Held-to-maturity securities are carried at cost adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, as well as any interest on the securities, is included in interest income. No investments were classified as held-to-maturity at March 29, 2008 or March 31, 2007. Available-for-sale securities are carried at fair value with the unrealized gains or losses, net of tax, included as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest and other, net. The fair values for marketable debt and equity securities are determined by independent pricing sources that value the securities based on quoted market prices and pricing models except for failed auction rate securities for which the Company determined their fair value at March 29, 2008 based on internal analyses. The cost of securities matured or sold is based on the specific identification method.
Xilinx adopted the provisions of FSP 115-1 on January 1, 2006. Beginning in the fourth quarter of fiscal 2006, the Company assessed other-than-temporary impairment of debt and equity securities in accordance with FSP 115-1. In determining whether a decline in value of non-marketable equity investments in private companies is other-than-temporary, the assessment is made by considering available evidence including the general market conditions in the investee’s industry, the investee’s product development status, the investee’s ability to meet business milestones and the financial condition and near-term prospects of the individual investee, including the rate at which the investee is using its cash and the investee’s need for possible additional funding at a lower valuation. When a decline in value is deemed to be other-than-temporary, the Company recognizes an impairment loss in the current period’s operating results to the extent of the decline.
Accounts Receivable
The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on the aging of Xilinx’s accounts receivable, historical experience, known troubled accounts, management judgment and other currently available evidence. Xilinx writes off accounts receivable against the allowance when Xilinx determines a balance is uncollectible and no longer actively pursues collection of the receivable.
Inventories
Inventories are stated at the lower of actual cost (determined using the first-in, first-out method), or market (estimated net realizable value) and are comprised of the following:
| (In thousands) | March 29, | | March 31, |
| | 2008 | | 2007 |
| Raw materials | $ | 13,771 | | $ | 28,138 |
| Work-in-process | | 76,870 | | | 109,653 |
| Finished goods | | 39,609 | | | 36,781 |
| | $ | 130,250 | | $ | 174,572 |
The Company reviews and sets standard costs quarterly to approximate current actual manufacturing costs. The Company's manufacturing overhead standards for product costs are calculated assuming full absorption of actual spending over actual volumes, adjusted for excess capacity. Given the cyclicality of the market, the obsolescence of technology and product lifecycles, the Company writes down inventory based on forecasted demand and technological obsolescence. These factors are impacted by market and economic conditions, technology changes, new product introductions and changes in strategic direction and require estimates that may include uncertain elements. Actual demand may differ from forecasted demand and such differences may have a material effect on recorded inventory values.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, net of accumulated depreciation. Depreciation for financial reporting purposes is computed using the straight-line method over the estimated useful lives of the assets of three to five years for machinery, equipment, furniture and fixtures and 15 to 30 years for buildings. Depreciation expense totaled $54.2 million, $56.0 million and $53.3 million for fiscal 2008, 2007 and 2006, respectively.
Impairment of Long-Lived Assets Including Acquisition-Related Intangibles
The Company evaluates the carrying value of long-lived assets and certain identifiable intangible assets to be held and used for impairment if indicators of potential impairment exist. Impairment indicators are reviewed on a quarterly basis. When
42
indicators of impairment exist and assets are held for use, the Company estimates future undiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets or based on appraisals. When assets are removed from operations and held for sale, Xilinx estimates impairment losses as the excess of the carrying value of the assets over their fair value.
Goodwill
As required by SFAS 142, goodwill is not amortized but is subject to impairment tests on an annual basis, or more frequently if indicators of potential impairment exist, using a fair-value-based approach. All other intangible assets are amortized over their estimated useful lives and assessed for impairment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Based on the impairment review performed during the fourth quarter of fiscal 2008, there was no impairment of goodwill in fiscal 2008. Unless there are indicators of impairment, the Company’s next impairment review for goodwill will be performed and completed in the fourth quarter of fiscal 2009. To date, no impairment indicators have been identified.
Revenue Recognition
Sales to distributors are made under agreements providing distributor price adjustments and rights of return under certain circumstances. Revenue and costs relating to distributor sales are deferred until products are sold by the distributors to the distributors’ end customers. For fiscal 2008, approximately 83% of Xilinx’s net revenues were from products sold to distributors for subsequent resale to OEMs or their subcontract manufacturers. Revenue recognition depends on notification from the distributor that product has been sold to the distributor’s end customer. Also reported by the distributor are product resale price, quantity and end customer shipment information, as well as inventory on hand. Reported distributor inventory on hand is reconciled to deferred revenue balances monthly. The Company maintains system controls to validate distributor data and to verify that the reported information is accurate. Deferred income on shipments to distributors reflects the effects of distributor price adjustments and the amount of gross margin expected to be realized when distributors sell through product purchased from the Company. Accounts receivable from distributors are recognized and inventory is relieved when title to inventories transfers, typically upon shipment from Xilinx at which point Xilinx has a legally enforceable right to collection under normal payment terms.
Revenue from sales to Xilinx’s direct customers is recognized upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed, title has transferred, collection of resulting receivables is reasonably assured, and there are no customer acceptance requirements and no remaining significant obligations. For each of the periods presented, there were no formal acceptance provisions with Xilinx’s direct customers.
Revenue from software licenses is deferred and recognized as revenue over the term of the licenses of one year. Revenue from support services is recognized when the service is performed. Revenue from support products, which includes software and services sales, was less than 7% of net revenues for all of the periods presented.
Allowances for end customer sales returns are recorded based on historical experience and for known pending customer returns or allowances.
Foreign Currency Translation
The U.S. dollar is the functional currency for the Company’s Ireland and Singapore subsidiaries. Assets and liabilities that are not denominated in the functional currency are remeasured into U.S. dollars, and the resulting gains or losses are included in the consolidated statements of income under interest and other, net. The remeasurement gains or losses were immaterial for fiscal 2008, 2007 and 2006.
The local currency is the functional currency for each of the Company’s other wholly-owned foreign subsidiaries. Assets and liabilities are translated from foreign currencies into U.S. dollars at month-end exchange rates and statements of income are translated at the average monthly exchange rates. Exchange gains or losses arising from translation of foreign currency denominated assets and liabilities (i.e., cumulative translation adjustment) are included as a component of accumulated other comprehensive income (loss) in stockholders’ equity.
Derivative Financial Instruments
To reduce financial risk, the Company periodically enters into financial arrangements as part of the Company’s ongoing asset and liability management activities. Xilinx uses derivative financial instruments to hedge fair values of underlying assets and liabilities or future cash flows which are exposed to foreign currency, equity and interest rate fluctuations. The
43
Company does not enter into derivative financial instruments for trading or speculative purposes. As of March 29, 2008 and March 31, 2007, the Company had the following outstanding forward currency exchange contracts:
| (In thousands and U.S. dollars) | March 29, | | March 31, |
| | 2008 | | 2007 |
| Euro | $ | 18,616 | | $ | - |
| Singapore dollar | | 11,938 | | | 16,902 |
| Japanese Yen | | 5,364 | | | 4,309 |
| British Pound | | 3,022 | | | - |
| | $ | 38,940 | | $ | 21,211 |
The net unrealized gain or loss, which approximates the fair market value of the above contracts, was immaterial at March 29, 2008 and March 31, 2007. The contracts expire at various dates between April and June 2008.
The $1.00 billion debentures include provisions which qualify as embedded derivatives. Please see Note 12 below for detailed discussion about the embedded derivatives. The embedded derivatives were separated from the debentures and their fair value was established at the inception of the debentures. Any subsequent change in fair value of the embedded derivatives would be recorded in the Company’s consolidated statement of income. The fair value of the embedded derivatives at inception of the debentures was $2.5 million and it changed to $2.3 million and $2.1 million at March 29, 2008 and March 31, 2007, respectively. The change in the fair value of the embedded derivatives of approximately $200 thousand and $400 thousand during fiscal 2008 and 2007, respectively, was recorded as a charge or a credit to interest expense, as applicable, on the Company’s consolidated statements of income.
Research and Development Expenses
Research and development costs are charged to expense as incurred.
Stock-Based Compensation
The Company has equity incentive plans that are more fully discussed in Note 3. Effective April 2, 2006, the Company adopted SFAS 123(R). SFAS 123(R) requires the Company to measure the cost of all employee equity awards that are expected to be exercised based on the grant-date fair value of those awards and to record that cost as compensation expense over the period during which the employee is required to perform service in exchange for the award (generally over the vesting period of the award). SFAS 123(R) addresses all forms of stock-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. In addition, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based compensation under APB 25 and related interpretations, using the intrinsic value method and, as such, generally recognized no compensation cost for employee stock options. Prior to adopting SFAS 123(R), the Company presented all tax benefits resulting from the exercise of stock options as operating cash flows in its statements of cash flows. SFAS 123(R) requires cash flows resulting from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised options in excess of the deferred tax asset attributable to stock compensation costs for such options. In addition, the Company provided the required pro forma disclosures related to its stock plans in accordance with SFAS No. 123 “Accounting for Stock-Based Compensation” (SFAS 123) as amended by SFAS No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure” (SFAS 148). The exercise price of employee stock options is equal to the market price of Xilinx common stock (defined as the closing trading price reported by The NASDAQ Global Select Market) on the date of grant. Additionally, Xilinx’s employee stock purchase plan is deemed a compensatory plan under SFAS 123(R). Accordingly, the employee stock purchase plan is included in the computation of stock-based compensation expense.
The Company applies SFAS 123(R) using the modified-prospective method and consequently has not retroactively adjusted results for prior periods. Under the modified-prospective method, the compensation cost recognized by the Company beginning in fiscal 2007 includes (a) compensation cost for all stock-based awards granted prior to, but not yet vested as of April 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all stock-based awards granted subsequent to April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). The Company uses the straight-line attribution method to recognize stock-based compensation costs over the requisite service period of the award for stock-based awards granted after April 1, 2006. For stock-based awards granted prior to April 2, 2006, the Company continues to use the accelerated amortization method consistent with the amounts disclosed in the pro forma disclosure as prescribed by SFAS 123. Upon exercise, cancellation or expiration of stock options, deferred tax assets for options with multiple vesting dates are eliminated for each vesting period on a first-in, first-out basis as if each award had a separate vesting period. To calculate
44
the excess tax benefits available for use in offsetting future tax shortfalls as of the date of implementation, the Company followed the alternative transition method discussed in FSP 123(R)-3.
Income Taxes
All income tax amounts reflect the use of the liability methodunder SFAS No. 109, “Accounting for Income Taxes” (SFAS 109).Under this method, deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes
Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48). The interpretation contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being ultimately realized. FIN 48 requires that the cumulative effect of adopting FIN 48 shall be recorded as an adjustment to the opening balance of retained earnings or other appropriate components of equity or net assets on the balance sheet. The Company adopted FIN 48 effective April 1, 2007, the first day of fiscal 2008. See Note 14 for additional information relating to the adoption of FIN 48.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. SFAS 157 applies to other pronouncements that require or permit fair value measurements; it does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 (fiscal 2009 for Xilinx), and interim periods within those fiscal years. The Company does not expect the adoption of SFAS 157 for financial assets and financial liabilities to have a material effect on its financial condition and results of operations. Additionally, in February 2008, the FASB issued FSP No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (FSP 157-1) and FSP No. 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP 157-1 removes leasing from the scope of SFAS 157 and FSP 157-2 delays the effective date of SFAS 157 from fiscal 2009 to fiscal 2010 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is currently evaluating the impact that SFAS 157 will have on its financial condition and results of operations when it is applied to non-financial assets and non-financial liabilities beginning in the first quarter of fiscal 2010.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each subsequent reporting date. SFAS 159 was effective for Xilinx on March 30, 2008 and the Company has made no elections to measure any financial instruments or certain other assets at fair value.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" (SFAS 141(R)) which replaces SFAS No. 141. SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective as of the beginning of an entity's fiscal year that begins after December 15, 2008 (fiscal 2010 for Xilinx). The adoption of SFAS 141(R) will change the Company’s accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal 2010.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51" (SFAS 160). The objective of this statement is to improve the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires reclassifying noncontrolling interests, also referred to as minority interests, as a component of equity upon adoption. SFAS 160 is effective as of the beginning of an entity's fiscal year that begins after December 15, 2008 (fiscal 2010 for Xilinx). As of March 29, 2008, Xilinx did not have any minority interests. The adoption of SFAS 160 will not have any effect on the Company’s financial condition or results of operations.
45
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), to provide an enhanced understanding of an entity’s use of derivative instruments, how they are accounted for under SFAS 133 and a tabular disclosure of the effects of such instruments and related hedged items on the entity’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (fiscal 2010 for Xilinx). The Company is currently evaluating the potential impact of the adoption of SFAS 161 on its financial condition and results of operations.
In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (FSP APB 14-1). The Company’s 3.125% convertible debentures due March 15, 2037 will be affected by this FSP. FSP APB 14-1 will require the issuer to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Further, the FSP will require bifurcation of a component of the debt, classification of that component in equity, and then accretion of the resulting discount on the debt as part of interest expense being reflected in the statement of income. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 and will be required to be applied retrospectively to all periods presented. The Company will be required to implement the standard during the first quarter of fiscal 2010, which begins on March 29, 2009. The Company is currently evaluating the effect that the adoption of FSP APB 14-1 will have on its consolidated results of operations and financial condition.
Product Warranty and Indemnification
The Company generally sells products with a limited warranty for product quality. The Company provides an accrual for known product issues if a loss is probable and can be reasonably estimated. The warranty accrual and related provision for fiscal 2007 is predominately due to two quality issues, one related to a single vendor and another due to a settlement payment with one of the Company’s customers. The following table presents a reconciliation of the Company's product warranty liability, which is included in other accrued liabilities on the Company’s consolidated balance sheets:
| (In thousands) | | 2008 | | 2007 |
| Balance at beginning of fiscal year | | $ | 2,500 | | | $ | 893 | |
| Provision | | | 1,413 | | | | 4,920 | |
| Utilized | | | (3,913 | ) | | | (3,313 | ) |
| Balance at end of fiscal year | | $ | - | | | $ | 2,500 | |
The Company offers, subject to certain terms and conditions, to indemnify certain customers and distributors for costs and damages awarded against these parties in the event the Company’s hardware products are found to infringe third-party intellectual property rights, including patents, copyrights or trademarks. To a lesser extent, the Company may from time-to-time offer limited indemnification with respect to its software products. The terms and conditions of these indemnity obligations are limited by contract, which obligations are typically perpetual from the effective date of the agreement. The Company has historically received only a limited number of requests for indemnification under these provisions and has not made any significant payments pursuant to these provisions. The Company cannot estimate the maximum amount of potential future payments, if any, that the Company may be required to make as a result of these obligations due to the limited history of indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim and indemnification provision. However, there can be no assurances that the Company will not incur any financial liabilities in the future as a result of these obligations.
Concentrations of Credit Risk
Avnet distributes the substantial majority of the Company’s products worldwide. As of March 29, 2008 and March 31, 2007, Avnet accounted for 83% and 86% of the Company’s total accounts receivable, respectively. Resale of product through Avnet accounted for 61%, 67% and 70% of the Company’s worldwide net revenues in fiscal 2008, 2007 and 2006, respectively. The Company monitors the creditworthiness of its distributors and believes their sales to diverse end customers and to diverse geographies further serve to mitigate the Company’s exposure to credit risk.
Xilinx is subject to concentrations of credit risk primarily in its trade accounts receivable and investments in debt securities to the extent of the amounts recorded on the consolidated balance sheet. The Company attempts to mitigate the concentration of credit risk in its trade receivables through its credit evaluation process, collection terms, distributor sales to diverse end customers and through geographical dispersion of sales. The Company obtained credit insurance for a portion of its accounts receivable balance to further mitigate the concentration of its credit risk. Xilinx generally does not require collateral for receivables from its end customers or from distributors.
46
No end customer accounted for more than 10% of net revenues in fiscal 2008, 2007 or 2006.
The Company mitigates concentrations of credit risk in its investments in debt securities by currently investing more than 90% of its portfolio in AA or higher grade securities as rated by Standard & Poor’s or Moody’s Investors Service. The Company’s methods to arrive at investment decisions are not solely based on the rating agency’s credit ratings. Xilinx also performs additional credit due diligence and conducts regular portfolio credit reviews. Additionally, Xilinx limits its investments in the debt securities of a single issuer based upon the issuer’s credit rating and attempts to further mitigate credit risk by diversifying risk across geographies and type of issuer. At March 29, 2008, 55% and 45% of its investments in debt securities were domestic and foreign issuers, respectively. See Note 5 for detailed information about the Company’s investment portfolio.
As of March 29, 2008, approximately 4% of the investment portfolio consisted of AAA-rated auction rate securities which are secured primarily by pools of student loans originated under FFELP that are guaranteed by the U. S. Department of Education. These securities experienced failed auctions in the fourth quarter of fiscal 2008 due to liquidity issues in the global credit markets. In a failed auction, the interest rates are reset to a maximum rate defined by the contractual terms for each security. The Company has collected and expects to collect all interest payable on these securities when due. As of March 29, 2008, the securities were reclassified from short-term to long-term investments on the consolidated balance sheet to reflect the securities’ final maturity dates since there can be no assurance of a successful auction in the future. The auction rate securities described above are a type of asset-backed securities. All other asset-backed securities comprised less than 5% of the investment portfolio as of March 29, 2008 and were all AAA rated with the exception of approximately $37.0 million of asset-backed securities that were downgraded in April 2008 to AA or A rating. These asset-backed securities are secured primarily by bank, finance and insurance company obligations, collateralized loan and bank obligations, mortgage-backed securities with no direct sub-prime exposure and credit card debt. Substantially all of the other mortgage-backed securities in the portfolio are AAA rated, were issued by U.S. government-sponsored enterprises and agencies and represented less than 9% of the portfolio as of March 29, 2008.
Dependence on Independent Manufacturers and Subcontractors
The Company does not directly manufacture the finished silicon wafers used to manufacture its products. Xilinx receives a substantial majority of its finished wafers from one independent wafer manufacturer located in Taiwan. The Company is also dependent on a limited number of subcontractors, primarily located in the Asia Pacific region, to provide semiconductor assembly, test and shipment services.
Note 3. Stock-Based Compensation Plans
The Company’s equity incentive plans are broad-based, long-term retention programs that are intended to attract and retain talented employees as well as align stockholder and employee interests.
Stock-Based Compensation
Effective April 2, 2006, the Company adopted SFAS 123(R), as discussed in Note 2.
Stock-based compensation recognized beginning in fiscal 2007 as a result of the adoption of SFAS 123(R) as well as pro forma disclosures according to the original provisions of SFAS 123 for periods prior to the adoption of SFAS 123(R) use the Black-Scholes option pricing model for estimating fair value of options granted under the Company’s stock option plans and rights to acquire stock granted under the Employee Stock Purchase Plan.
The following table summarizes stock-based compensation expense related to stock awards granted under the Company’s equity incentive plans and rights to acquire stock granted under the Company’s Employee Stock Purchase Plan:
| (In thousands) | | 2008 | | 2007 | | 2006 |
| Stock-based compensation included in: | | | | | | | | | | | | |
| Cost of revenues | | $ | 7,605 | | | $ | 10,345 | | | $ | - | |
| Research and development | | | 31,433 | | | | 41,610 | | | | - | |
| Selling, general and administrative | | | 27,389 | | | | 38,337 | | | | - | |
| Stock-based compensation related to prior years | | | - | | | | 2,209 | | | | - | |
| Stock-based compensation effect on income before taxes | | | 66,427 | | | | 92,501 | | | | - | |
| Income tax effect | | | (17,036 | ) | | | (26,876 | ) | | | - | |
| Net stock-based compensation effect on net income | | $ | 49,391 | | | $ | 65,625 | | | $ | - | |
47
In June 2006, stockholder derivative complaints were filed against the Company concerning the Company’s historical option-granting practices and the SEC initiated an informal inquiry on the matter. An investigation of the Company’s historical stock option-granting practices was conducted by outside counsel and no evidence of fraud, management misconduct or manipulation in the timing or exercise price of stock option grants was found. The investigation determined that in nearly all cases, stock options were issued as of pre-set dates; however, there were some minor differences between the recorded grant dates and measurement dates for certain grants made between 1997 and 2006. As a result, a $2.2 million charge was taken to the Company’s earnings for the first quarter of fiscal 2007. Subsequently the SEC informal inquiry was terminated and no enforcement action was recommended and the stockholder derivative complaints were dismissed.
In accordance with SFAS 123(R), the Company adjusts stock-based compensation on a quarterly basis for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate for all expense amortization after April 1, 2006 is recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments in fiscal 2008 and 2007 was insignificant.
The amount that the Company would have capitalized to inventory as of April 1, 2006, if it had applied the provisions of SFAS 123(R) retrospectively, was $4.5 million. Under the provisions of SFAS 123(R), this $4.5 million was recorded as a credit to additional paid-in-capital. The total stock-based compensation released from the inventory capitalization during fiscal 2008 and 2007 was $675 thousand and $2.3 million, respectively, which resulted in an ending inventory balance of $1.5 million and $2.2 million related to stock-based compensation at March 29, 2008 and March 31, 2007, respectively. During fiscal 2008, 2007 and 2006, the tax benefit realized for the tax deduction from option exercises and other awards, including amounts credited to additional paid-in capital, totaled $25.3 million, $35.8 million and $40.6 million, respectively.
Prior to the adoption of SFAS 123(R), the Company adopted the disclosure-only alternative allowed under SFAS 123, as amended by SFAS 148. Stock-based compensation expense recognized under SFAS 123(R) was not reflected in the Company’s results of operations for fiscal 2006 for stock option awards as all options were granted with an exercise price equal to the market value of the underlying common stock on the date of grant. In addition, the Employee Stock Purchase Plan was deemed non-compensatory under the provisions of APB 25. Forfeitures of awards were recognized as they occurred for the period prior to the adoption.
Pro forma information required under SFAS 123 for fiscal 2006 as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation, was as follows:
| (In thousands, except per share amounts) | | 2006 |
| Net income as reported | | $ | 354,149 | |
| Deduct: Stock-based employee compensation expense determined | | | | |
| under fair value method for all awards, net of tax | | | (82,956 | ) |
| Pro forma net income | | $ | 271,193 | |
| |
| Net income per common share: | | | | |
| Basic-as reported | | $ | 1.01 | |
| Basic-pro forma | | $ | 0.78 | |
| |
| Diluted-as reported | | $ | 1.00 | |
| Diluted-pro forma | | $ | 0.76 | |
The fair values of stock options and stock purchase plan rights under the Company’s equity incentive plans and Employee Stock Purchase Plan were estimated as of the grant date using the Black-Scholes option pricing model. The Company’s expected stock price volatility assumption for stock options is estimated using implied volatility of the Company’s traded options. The expected life of options granted is based on the historical exercise activity as well as the expected disposition of all options outstanding. The expected life of options granted also considers the contractual term which decreased to seven years beginning in the first quarter of fiscal 2008 thereby decreasing the expected life by nearly one year. Calculated under SFAS 123(R) (SFAS 123 for fiscal 2006), the per share weighted-average fair values of stock options granted during fiscal 2008, 2007 and 2006 were $7.23, $9.02 and $7.99, respectively. The per share weighted-average fair values of stock purchase rights granted under the Employee Stock Purchase Plan during fiscal 2008, 2007 and 2006 were $7.20, $6.51 and $7.89, respectively. The fair value of stock options and stock purchase plan rights granted in fiscal 2008, 2007 and 2006 were estimated at the date of grant using the following weighted average assumptions:
48
| | | | | | | | | | | | | | |
| | | | | Stock Options | | | | | Employee Stock Purchase Plan |
| | | 2008 | | 2007 | | 2006 | | | 2008 | | 2007 | | 2006 |
| Expected life of options | | 5.3 to | | 6.3 to | | 4.8 to | | | 0.5 to | | 0.5 to | | 0.5 to |
| (years) | | 5.4 | | 6.4 | | 5.0 | | | 2.0 | | 2.0 | | 2.0 |
| Expected stock price volatility | | 0.30 to | | 0.31 to | | 0.29 to | | | 0.32 to | | 0.27 to | | 0.27 to |
| | | 0.38 | | 0.39 | | 0.36 | | | 0.36 | | 0.38 | | 0.46 |
| Risk-free interest rate | | 2.4% to | | 4.4% to | | 3.7% to | | | 2.1% to | | 3.6% to | | 1.9% to |
| | | 5.1% | | 5.2% | | 4.8% | | | 5.0% | | 5.2% | | 4.6% |
| Dividend yield | | 1.6% to | | 1.4% to | | 1.0% to | | | 2.1% to | | 1.4% to | | 1.2% to |
| | | 2.8% | | 1.6% | | 1.1% | | | 2.4% | | 1.8% | | 1.4% |
The Company began granting restricted stock units (RSUs) in the first quarter of fiscal 2008. The estimated fair value of RSU awards was calculated based on the market price of Xilinx common stock on the date of grant, reduced by the present value of dividends expected to be paid on Xilinx common stock prior to vesting. Calculated under SFAS 123(R), the per share weighted-average fair value of RSUs granted during fiscal 2008 was $24.46. The weighted-average fair value of RSUs granted in fiscal 2008 was calculated based on estimates at the date of grant as follows:
| | | 2008 |
| Risk-free interest rate | | 1.7% to 5.0% |
| Dividend yield | | 1.6% to 2.8% |
Options outstanding that have vested and are expected to vest in future periods as of March 29, 2008 are as follows:
| | | | | | | | | Weighted-Average | | | | | |
| | | | | | | Weighted-Average | | Remaining | | | | | |
| | Number | | Exercise Price | | Contractual Term | | Aggregate |
| (Shares and intrinsic value in thousands) | | of Shares | | Per Share | | (Years) | | Intrinsic Value (1) |
| Vested (i.e., exercisable) | | | 39,238 | | | $34.33 | | 4.44 | | | $ | 19,004 | |
| Expected to vest | | | 9,458 | | | $24.64 | | 7.54 | | | | 3,846 | |
| Total vested and expected to vest | | | 48,696 | | | $32.45 | | 5.04 | | | $ | 22,850 | |
| | |
| Total outstanding | | | 49,289 | | | $32.34 | | 5.07 | | | $ | 23,179 | |
| (1) | | These amounts represent the difference between the exercise price and $23.09, the closing price per share of Xilinx’s stock on March 28, 2008, for all in-the-money options outstanding. |
Options outstanding that are expected to vest are net of estimated future option forfeitures in accordance with the provisions of SFAS 123(R), which are estimated when compensation costs are recognized. Options with a fair value of $80.8 million completed vesting during fiscal 2008. As of March 29, 2008, total unrecognized stock-based compensation costs related to stock options and Employee Stock Purchase Plan was $75.3 million and $6.3 million, respectively. The total unrecognized stock-based compensation cost for stock options and Employee Stock Purchase Plan is expected to be recognized over a weighted-average period of 2.5 years and 0.6 years, respectively.
Employee Stock Option Plans
Under the Company’s stock option plans (Option Plans), options reserved for future issuance of common shares to employees and directors of the Company total 58.9 million shares as of March 29, 2008, including 9.6 million shares available for future grants under the 2007 Equity Incentive Plan (2007 Plan). Options to purchase shares of the Company’s common stock under the Option Plans are granted at 100% of the fair market value of the stock on the date of grant. The contractual term for stock awards granted under the 2007 Plan is seven years from the grant date. Prior to April 1, 2007, stock options granted by the Company generally expired ten years from the grant date. Stock awards granted to existing and newly hired employees generally vest over a four-year period from the date of grant.
49
A summary of shares available for grant under the 2007 Plan is as follows:
| | | | |
| | | Shares |
| | Available for |
| (Shares in thousands) | | Grant |
| March 31, 2007 | | | 10,000 | |
| Additional shares reserved | | | 5,000 | |
| Stock options granted | | | (3,367 | ) |
| Stock options cancelled | | | 166 | |
| RSUs granted | | | (2,301 | ) |
| RSUs cancelled | | | 132 | |
| March 29, 2008 | | | 9,630 | |
A summary of the Company’s Option Plans activity and related information is as follows:
| | | Options Outstanding |
| | | | | | | Weighted |
| | | | | | | Average |
| | Number of | | Exercise Price |
| (Shares in thousands) | | Shares | | Per Share |
| April 2, 2005 | | | 60,643 | | | $ | 30.18 | |
| Granted | | | 8,489 | | | $ | 25.91 | |
| Exercised | | | (6,090 | ) | | $ | 11.71 | |
| Forfeited/cancelled/expired | | | (3,212 | ) | | $ | 38.64 | |
| April 1, 2006 | | | 59,830 | | | $ | 30.99 | |
| Granted | | | 8,751 | | | $ | 23.50 | |
| Exercised | | | (6,598 | ) | | $ | 13.88 | |
| Forfeited/cancelled/expired | | | (6,041 | ) | | $ | 37.51 | |
| March 31, 2007 | | | 55,942 | | | $ | 31.13 | |
| Granted | | | 3,367 | | | $ | 24.54 | |
| Exercised | | | (5,990 | ) | | $ | 14.72 | |
| Forfeited/cancelled/expired | | | (4,030 | ) | | $ | 35.17 | |
| March 29, 2008 | | | 49,289 | | | $ | 32.34 | |
In July 2006, the stockholders approved the adoption of the 2007 Plan and authorized 10.0 million shares to be reserved for issuance thereunder. On August 9, 2007, the stockholders approved an amendment to increase the authorized number of shares reserved for issuance under the 2007 Plan by 5.0 million shares. The types of awards allowed under the 2007 Plan include incentive stock options, non-qualified stock options, RSUs, restricted stock and stock appreciation rights. To date, the Company has issued a mix of non-qualified stock options and RSUs under the 2007 Plan. The mix of stock options and RSU awards will change depending upon the grade level of the employees. Employees at the lower grade levels will receive mostly RSUs and may also receive stock options, whereas employees at the higher grade levels, including the Company’s executive officers, will receive mostly stock options and may also receive RSUs. The 2007 Plan, which became effective on January 1, 2007, replaced both the Company’s 1997 Stock Plan (which expired on May 8, 2007) and the Supplemental Stock Option Plan and all available but unissued shares under these prior plans were cancelled as of April1, 2007. The 2007 Plan is now Xilinx’s only plan for providing stock-based awards to eligible employees and non-employee directors. At its 2008 annual stockholder meeting, the Company will seek stockholder approval of an increase in the number of shares reserved for issuance under the 2007 Plan by 4.0 million shares.
The total pre-tax intrinsic value of options exercised during fiscal 2008 and 2007 was $65.8 million and $75.5 million, respectively. This intrinsic value represents the difference between the exercise price and the fair market value of the Company’s common stock on the date of exercise.
Since the Company adopted the policy of retiring all repurchased shares of its common stock, new shares are issued upon employees’ exercise of their stock options.
50
The following information relates to options outstanding and exercisable under the Option Plans at March 29, 2008:
| | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
| | | | | | Weighted | | Weighted | | | | | Weighted |
| (Shares in thousands) | | | | | Average | | Average | | | | | Average |
| | | | | | Remaining | | Exercise | | | | | Exercise |
| Range of | | Options | | Contractual | | Price Per | | Options | | Price Per |
| Exercise Prices | | | Outstanding | | Life (Years) | | Share | | Exercisable | | Share |
| $ 8.42 - $21.81 | | 6,342 | | | 2.57 | | $19.78 | | 5,177 | | | $19.61 |
| $21.85 - $23.49 | | 9,657 | | | 6.74 | | $23.02 | | 6,249 | | | $23.18 |
| $23.53 - $26.97 | | 9,812 | | | 7.04 | | $25.76 | | 5,242 | | | $25.63 |
| $27.02 - $36.48 | | 8,549 | | | 4.52 | | $31.83 | | 7,760 | | | $32.14 |
| $37.57 - $41.55 | | 8,550 | | | 4.96 | | $39.39 | | 8,433 | | | $39.38 |
| $41.56 - $96.63 | | 6,379 | | | 2.86 | | $60.33 | | 6,377 | | | $60.34 |
| $ 8.42 - $96.63 | | 49,289 | | | 5.07 | | $32.34 | | 39,238 | | | $34.33 |
At March 31, 2007, 41.8 million options were exercisable at an average price of $32.68. At April 1, 2006, 45.2 million options were exercisable at an average price of $31.39.
Restricted Stock Unit Awards
A summary of the Company’s RSU activity and related information is as follows:
| | | | | | Weighted- |
| | | | | | Average |
| | | | | | Grant-Date |
| | | Number of | | Fair Value |
| (Shares in thousands) | | Shares | | Per Share |
| March 31, 2007 | | — | | | $ | - |
| Granted | | 2,301 | | | $ | 24.46 |
| Vested | | — | | | $ | - |
| Cancelled | | (132 | ) | | $ | 25.62 |
| March 29, 2008 | | 2,169 | | | $ | 24.39 |
As of March 29, 2008, total unrecognized stock-based compensation costs related to RSUs was $41.3 million. The total unrecognized stock-based compensation cost for RSUs is expected to be recognized over a weighted-average period of 3.4 years.
Employee Qualified Stock Purchase Plan
Under the Employee Stock Purchase Plan, qualified employees can obtain a 24-month purchase right to purchase the Company’s common stock at the end of six-month exercise periods. Participation is limited to 15% of the employee’s annual earnings up to a maximum of $21 thousand in a calendar year. More than 80% of all eligible employees participate in the Employee Stock Purchase Plan. The purchase price of the stock is 85% of the lower of the fair market value at the beginning of the 24-month offering period or at the end of each six-month exercise period. Employees purchased 2.1 million shares for $36.6 million in fiscal 2008, 2.0 million shares for $34.2 million in fiscal 2007 and 1.4 million shares for $33.0 million in fiscal 2006. On August 9, 2007, the stockholders approved an amendment to increase the authorized number of shares reserved for issuance under the Employee Stock Purchase Plan by 2.0 million shares. As of March 29, 2008, 7.8 million shares were available for future issuance out of 38.5 million shares authorized. At its 2008 annual stockholder meeting, the Company will seek stockholder approval of an increase in the number of shares reserved for issuance under the Employee Stock Purchase Plan by 2.0 million shares.
Note 4. Investment in United Microelectronics Corporation
During the fourth quarter of fiscal 2008, the Company sold its remaining equity investment in UMC stock. Prior to the sale, the Company accounted for its investment in UMC as available-for-sale marketable securities in accordance with SFAS 115.
51
The following table summarizes the cost basis and fair values of the investment in UMC:
| | March 29, 2008 | | March 31, 2007 |
| | | Adjusted | | Fair | | Adjusted | | Fair |
| (In thousands) | | Cost | | Value | | Cost | | Value |
| Total investment | | $ - | | $ - | | $ 62,537 | | $67,050 |
In August 2007, UMC announced a capital reduction program to reduce its outstanding shares of 18.95 billion by 5.74 billion shares or 30.3%, down to 13.21 billion shares. As part of the capital reduction program, the UMC stockholders would receive a cash distribution of NT$3.03 per share for each share of the UMC stock cancelled. In October 2007, the Company received a cash distribution of $10.7 million from UMC in connection with this capital reduction program. For accounting purposes, the cash distribution of $10.7 million was treated as a reduction of the adjusted cost in UMC investment. After the capital reduction, the number of UMC shares held by the Company was reduced from 115.5 million shares to 80.5 million shares, as of December 29, 2007.
During fiscal 2007, the Company sold 325.9 million shares of its UMC investment for approximately $183.5 million in cash, resulting in a gain of approximately $7.0 million. The gain is included in interest and other, net in the consolidated statements of income. As of March 31, 2007, the Company held 115.5 million shares of UMC stock.
During the fourth quarter of fiscal 2008, the Company sold the remaining 80.5 million shares of its UMC investment for approximately $47.1 million in cash, resulting in a loss of approximately $4.7 million. The loss is included in interest and other, net in the consolidated statements of income.
During fiscal 2007, the fair value of the UMC investment decreased by $209.4 million, including the sale of shares noted above. At March 31, 2007, the Company recorded a total of $1.7 million of deferred tax liabilities and a $2.8 million balance (net of tax) in accumulated other comprehensive income associated with the UMC investment.
Note 5. Financial Instruments
The following is a summary of available-for-sale securities:
| | | March 29, 2008 | | March 31, 2007 |
| | | | | | | Gross | | Gross | | Estimated | | | | | | | Gross | | Gross | | Estimated |
| | Amortized | | Unrealized | | Unrealized | | Fair | | | | Amortized | | Unrealized | | Unrealized | | Fair |
| (In thousands) | | Cost | | Gains | | Losses | | Value | | | | Cost | | Gains | | Losses | | Value |
| Money market funds | | | $ | 246,973 | | $ | — | | $ | — | | | $ | 246,973 | | | | $ | 57,477 | | $ | — | | $ | — | | | $ | 57,477 | |
| Bank certificates of deposit | | | | 55,998 | | | 4 | | | — | | | | 56,002 | | | | | 41,465 | | | — | | | — | | | | 41,465 | |
| Commercial paper | | | | 375,554 | | | — | | | — | | | | 375,554 | | | | | 414,982 | | | — | | | — | | | | 414,982 | |
| Corporate bonds | | | | 61,306 | | | 549 | | | (24 | ) | | | 61,831 | | | | | 85,902 | | | 83 | | | (1,109 | ) | | | 84,876 | |
| Auction rate securities | | | | 71,850 | | | — | | | — | | | | 71,850 | | | | | 148,835 | | | 4 | | | — | | | | 148,839 | |
| Municipal bonds | | | | 20,787 | | | 59 | | | (65 | ) | | | 20,781 | | | | | 95,948 | | | 317 | | | (576 | ) | | | 95,689 | |
| U.S. government and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| agency securities | | | | 66,390 | | | 3,504 | | | (8 | ) | | | 69,886 | | | | | 50,945 | | | — | | | (46 | ) | | | 50,899 | |
| Foreign government and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| agency securities | | | | 252,074 | | | 466 | | | (1 | ) | | | 252,539 | | | | | 29,644 | | | — | | | (399 | ) | | | 29,245 | |
| Floating rate notes | | | | 367,437 | | | 20 | | | (4,726 | ) | | | 362,731 | | | | | 378,445 | | | 32 | | | (86 | ) | | | 378,391 | |
| Asset-backed securities | | | | 82,594 | | | 1 | | | (2,372 | ) | | | 80,223 | | | | | 391,738 | | | 2 | | | (42 | ) | | | 391,698 | |
| Mortgage-backed securities | | | | 139,825 | | | 4,110 | | | (261 | ) | | | 143,674 | | | | | 50,288 | | | 114 | | | (298 | ) | | | 50,104 | |
| Investment in UMC | | | | — | | | — | | | — | | | | — | | | | | 62,537 | | | 4,513 | | | — | | | | 67,050 | |
| Investment-other | | | | 3,030 | | | — | | | (2,208 | ) | | | 822 | | | | | 2,724 | | | — | | | (430 | ) | | | 2,294 | |
| | | | $ | 1,743,818 | | $ | 8,713 | | $ | (9,665 | ) | | $ | 1,742,866 | | | | $ | 1,810,930 | | $ | 5,065 | | $ | (2,986 | ) | | $ | 1,813,009 | |
| Included in: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | | | | | | | | | | | | $ | 749,157 | | | | | | | | | | | | | | $ | 568,210 | |
| Short-term investments | | | | | | | | | | | | | | 429,440 | | | | | | | | | | | | | | | 502,036 | |
| Long-term investments | | | | | | | | | | | | | | 564,269 | | | | | | | | | | | | | | | 675,713 | |
| Investment in UMC | | | | | | | | | | | | | | — | | | | | | | | | | | | | | | 67,050 | |
| | | | | | | | | | | | | | $ | 1,742,866 | | | | | | | | | | | | | | $ | 1,813,009 | |
The following table shows the fair values and gross unrealized losses of the Company’s investments, aggregated by investment category, for individual securities that have been in a continuous unrealized loss position for the length of time specified, at March 29, 2008 and March 31, 2007:
52
| | | March 29, 2008 |
| | | Less Than 12 Months | | 12 Months or Greater | | Total |
| | | | | | Gross | | | | | Gross | | | | | Gross |
| | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
| (In thousands) | | Value | | Losses | | Value | | Losses | | Value | | Losses |
| Corporate bonds | | $ | 5,988 | | $ | (23 | ) | | $ | 2,001 | | $ | (1 | ) | | $ | 7,989 | | $ | (24 | ) |
| Municipal bonds | | | 4,656 | | | (42 | ) | | | 2,464 | | | (23 | ) | | | 7,120 | | | (65 | ) |
| U.S. government and agency | | | | | | | | | | | | | | | | | | | | | |
| securities | | | 2,091 | | | (8 | ) | | | — | | | — | | | | 2,091 | | | (8 | ) |
| Foreign government and agency | | | | | | | | | | | | | | | | | | | | | |
| securities | | | 119,494 | | | (1 | ) | | | — | | | — | | | | 119,494 | | | (1 | ) |
| Floating rate notes | | | 291,542 | | | (4,050 | ) | | | 38,245 | | | (676 | ) | | | 329,787 | | | (4,726 | ) |
| Asset-backed securities | | | 38,857 | | | (731 | ) | �� | | 38,362 | | | (1,641 | ) | | | 77,219 | | | (2,372 | ) |
| Mortgage-backed securities | | | 9,953 | | | (261 | ) | | | — | | | — | | | | 9,953 | | | (261 | ) |
| Investment-other | | | 822 | | | (2,208 | ) | | | — | | | — | | | | 822 | | | (2,208 | ) |
| | | $ | 473,403 | | $ | (7,324 | ) | | $ | 81,072 | | $ | (2,341 | ) | | $ | 554,475 | | $ | (9,665 | ) |
| |
| | |
| | | March 31, 2007 |
| | | Less Than 12 Months | | 12 Months or Greater | | Total |
| | | | | | Gross | | | | | Gross | | | | | Gross |
| | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
| (In thousands) | | Value | | Losses | | Value | | Losses | | Value | | Losses |
| Corporate bonds | | $ | 5,647 | | $ | (55 | ) | | $ | 71,966 | | $ | (1,054 | ) | | $ | 77,613 | | $ | (1,109 | ) |
| Municipal bonds | | | 6,573 | | | (6 | ) | | | 53,491 | | | (570 | ) | | | 60,064 | | | (576 | ) |
| U.S. government and agency | | | | | | | | | | | | | | | | | | | | | |
| securities | | | 14,942 | | | (4 | ) | | | 5,402 | | | (42 | ) | | | 20,344 | | | (46 | ) |
| Foreign government and agency | | | | | | | | | | | | | | | | | | | | | |
| securities | | | — | | | — | | | | 28,700 | | | (399 | ) | | | 28,700 | | | (399 | ) |
| Floating rate notes | | | 209,663 | | | (86 | ) | | | — | | | — | | | | 209,663 | | | (86 | ) |
| Asset-backed securities | | | 39,963 | | | (42 | ) | | | — | | | — | | | | 39,963 | | | (42 | ) |
| Mortgage-backed securities | | | 30,810 | | | (298 | ) | | | — | | | — | | | | 30,810 | | | (298 | ) |
| Investment-other | | | 2,294 | | | (430 | ) | | | — | | | — | | | | 2,294 | | | (430 | ) |
| | | $ | 309,892 | | $ | (921 | ) | | $ | 159,559 | | $ | (2,065 | ) | | $ | 469,451 | | $ | (2,986 | ) |
The gross unrealized losses on these investments were primarily due to a rising interest rate environment in fiscal 2007 and recent adverse conditions in the global credit markets in fiscal 2008. The Company reviewed the investment portfolio and determined that the gross unrealized losses on these investments at March 29, 2008 and March 31, 2007 were temporary in nature. The aggregate of individual unrealized losses that had been outstanding for 12 months or more were not significant as of March 29, 2008 and March 31, 2007. The Company has the ability and intent to hold these investments until recovery of their carrying values. The Company also believes that it will be able to collect both principal and interest amounts due to the Company at maturity, given the high credit quality of these investments and any related underlying collateral.
The amortized cost and estimated fair value of marketable debt securities (bank certificates of deposit, commercial paper, corporate bonds, auction rate securities, municipal bonds, U.S. and foreign government and agency securities, floating rate notes, asset-backed securities and mortgage-backed securities) at March 29, 2008, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.
| | | | | | Estimated |
| | | Amortized | | Fair |
| (In thousands) | | Cost | | Value |
| Due in one year or less | | $ | 933,269 | | $ | 931,624 |
| Due after one year through five years | | | 314,992 | | | 313,905 |
| Due after five years through ten years | | | 56,660 | | | 58,202 |
| Due after ten years | | | 188,894 | | | 191,340 |
| | | $ | 1,493,815 | | $ | 1,495,071 |
53
Certain information related to available-for-sale securities is as follows:
| (In thousands) | | 2008 | | 2007 | | 2006 |
| Gross realized gains on sale of available-for-sale securities | | $ | 1,437 | | | $ | 7,041 | | | $ | 169 | |
| Gross realized losses on sale of available-for-sale securities | | | (6,576 | ) | | | (6,227 | ) | | | (5,150 | ) |
| Net realized gains (losses) on sale of available-for-sale securities | | $ | (5,139 | ) | | $ | 814 | | | $ | (4,981 | ) |
| Amortization of premiums on available-for-sale securities | | $ | (8,229 | ) | | $ | (8,229 | ) | | $ | (7,798 | ) |
Note 6. Balance Sheet Information
The following tables disclose those current assets, long-term other assets and current liabilities that individually exceed 5% of the respective consolidated balance sheet amounts at each fiscal year. Individual balances that are less than 5% of the respective consolidated balance sheet amounts are aggregated and disclosed as “other.”
| | March 29, | | March 31, |
| (In thousands) | | 2008 | | 2007 |
| Prepaid expenses and other current assets: | | | | | | | | | | |
| Advances for wafer purchases | | | $ | 4,503 | | | | $ | 39,999 | |
| Income tax refunds receivable | | | | 430 | | | | | 30,641 | |
| Prepaid expenses | | | | 12,241 | | | | | 14,677 | |
| Interest receivable | | | | 7,359 | | | | | 6,818 | |
| Prepaid royalties | | | | 3,838 | | | | | 4,500 | |
| Other | | | | 9,151 | | | | | 8,341 | |
| | | | $ | 37,522 | | | | $ | 104,976 | |
| | | | | | | | | | | |
| Other assets: | | | | | | | | | | |
| Deferred tax assets | | | $ | 66,072 | | | | $ | 57,802 | |
| Affordable housing credit investments | | | | 29,442 | | | | | 37,671 | |
| Deferred compensation plan | | | | 27,038 | | | | | 25,174 | |
| Debt issuance costs | | | | 19,278 | | | | | 19,944 | |
| Investments in intellectual property and licenses | | | | 16,703 | | | | | 18,057 | |
| Investments in non-marketable equity securities | | | | 22,622 | | | | | 17,964 | |
| Prepaid royalties and patent license | | | | 3,000 | | | | | 7,027 | |
| Income tax refunds receivable | | | | 31,884 | | | | | - | |
| Other | | | | 6,393 | | | | | 7,234 | |
| | | | $ | 222,432 | | | | $ | 190,873 | |
| | | | | | | | | | | |
| Accrued payroll and related liabilities: | | | | | | | | | | |
| Accrued compensation | | | $ | 61,838 | | | | $ | 48,042 | |
| Deferred compensation plan liability | | | | 31,802 | | | | | 29,079 | |
| Other | | | | 7,090 | | | | | 6,828 | |
| | | | $ | 100,730 | | | | $ | 83,949 | |
No individual amounts within other accrued liabilities exceed 5% of total current liabilities at March 29, 2008 or March 31, 2007.
Note 7. Impairment Loss on Investments
The Company recognized impairment losses on investments of $2.9 million, $2.0 million and $1.4 million during fiscal 2008, 2007 and 2006, respectively, related to non-marketable equity securities in private companies. These impairment losses resulted primarily from weak financial conditions of certain investees, certain investees diluting Xilinx’s investment through the receipt of additional rounds of investment at a lower valuation or from the liquidation of certain investees.
Note 8. Commitments
Xilinx leases some of its facilities and office buildings under non-cancelable operating leases that expire at various dates through October 2017. During the third quarter of fiscal 2006, Xilinx entered into a land lease in conjunction with the Company’s new building investment in Singapore. The lease cost was settled in an up-front payment in June 2006. Some of the operating leases for facilities and office buildings require payment of operating costs, including property taxes,
54
repairs, maintenance and insurance. Most of the Company’s leases contain renewal options for varying terms. Approximate future minimum lease payments under non-cancelable operating leases are as follows:
| Fiscal Year | (In thousands) |
| 2009 | | $ | 10,250 | |
| 2010 | | | 8,142 | |
| 2011 | | | 6,077 | |
| 2012 | | | 1,804 | |
| 2013 | | | 1,559 | |
| Thereafter | | | 3,431 | |
| | | $ | 31,263 | |
Aggregate future rental income to be received, which includes rents from both owned and leased property, totaled $7.4 million at March 29, 2008. Rent expense, net of rental income, under all operating leases was $8.2 million for fiscal 2008, $8.7 million for fiscal 2007 and $6.5 million for fiscal 2006. Rental income, which includes rents received from both owned and leased property, was not material for fiscal 2008, 2007 or 2006.
Other commitments at March 29, 2008 totaled $74.3 million and consisted of purchases of inventory and other non-cancelable purchase obligations related to subcontractors that manufacture silicon wafers and provide assembly and some test services. The Company expects to receive and pay for these materials and services in the next three to six months, as the products meet delivery and quality specifications. As of March 29, 2008, the Company also had $21.5 million of non-cancelable license obligations to providers of electronic design automation software and hardware/software maintenance expiring at various dates through September 2011.
In the fourth quarter of fiscal 2005, the Company committed up to $20.0 million to acquire, in the future, rights to intellectual property until July 2023. License payments will be amortized over the useful life of the intellectual property acquired.
Note 9. Net Income Per Common Share
The computation of basic net income per common share for all periods presented is derived from the information on the consolidated statements of income, and there are no reconciling items in the numerator used to compute diluted net income per common share. The total shares used in the denominator of the diluted net income per common share calculation includes 3.6 million, 5.7 million and 6.0 million common equivalent shares attributable to outstanding stock awards for fiscal 2008, 2007 and 2006, respectively, that are not included in basic net income per common share.
Outstanding out-of-the-money stock options to purchase approximately 39.9 million, 40.7 million and 31.1 million shares, for fiscal 2008, 2007 and 2006, respectively, under the Company's stock option plans were excluded from diluted net income per common share, applying the treasury stock method, as their inclusion would have been antidilutive. These options could be dilutive in the future if the Company’s average share price increases and is greater than the combined exercise prices and the unamortized fair values of these options.
Diluted net income per common share does not include any incremental shares issuable upon the exchange of the debentures (see Note 12). The debentures will have no impact on diluted net income per common share until the price of the Company’s common stock exceeds the conversion price of $31.18 per share, because the principal amount of the debentures will be settled in cash upon conversion. Prior to conversion, the Company will include, in the diluted net income per common share calculation, the effect of the additional shares that may be issued when the Company’s common stock price exceeds $31.18 per share, using the treasury stock method. The conversion price of $31.18 per common share excludes any potential adjustments to the conversion ratio provided under the terms of the debentures.
Note 10. Interest and Other, Net
The components of interest and other, net are as follows:
| (In thousands) | | 2008 | | 2007 | | 2006 |
| Interest income | | | $ | 94,022 | | | | $ | 80,436 | | | | $ | 56,859 | |
| Interest expense | | | | (32,001 | ) | | | | (2,155 | ) | | | | - | |
| Gain (loss) on sale of the UMC investment | | | | (4,731 | ) | | | | 7,016 | | | | | - | |
| Other, net | | | | (4,540 | ) | | | | 32 | | | | | (10,901 | ) |
| | | | $ | 52,750 | | | | $ | 85,329 | | | | $ | 45,958 | |
55
Note 11. Comprehensive Income
Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances from nonowner sources. The difference between net income and comprehensive income for the Company results from unrealized gains (losses) on its available-for-sale securities, net of taxes, foreign currency translation adjustments and hedging transactions.
The components of comprehensive income are as follows:
| (In thousands) | | 2008 | | 2007 | | 2006 |
| Net income | | | $ | 374,047 | | | | $ | 350,672 | | | | $ | 354,149 | |
| Net change in unrealized gain (loss) on available-for- | | | | | | | | | | | | | | | |
| sale securities, net of tax | | | | (2,512 | ) | | | | (16,943 | ) | | | | 15,287 | |
| Reclassification adjustment for losses on available-for- | | | | | | | | | | | | | | | |
| sale securities, net of tax, included in net income | | | | 649 | | | | | 3,423 | | | | | 1,892 | |
| Net change in unrealized gain (loss) on hedging | | | | | | | | | | | | | | | |
| transactions, net of tax | | | | 1,014 | | | | | (105 | ) | | | | 118 | |
| Net change in cumulative translation adjustment | | | | 3,052 | | | | | 1,417 | | | | | (1,692 | ) |
| Comprehensive income | | | $ | 376,250 | | | | $ | 338,464 | | | | $ | 369,754 | |
The components of accumulated other comprehensive income at fiscal year-ends are as follows:
| (In thousands) | | March 29, | | March 31, |
| | | 2008 | | 2007 |
| Accumulated unrealized gain (loss) on available-for-sale securities, | | | | | | | | | | |
| net of tax | | | $ | (586 | ) | | | $ | 1,277 | |
| Accumulated unrealized gain on hedging transactions, net of tax | | | | 1,027 | | | | | 13 | |
| Accumulated cumulative translation adjustment | | | | 5,363 | | | | | 2,311 | |
| Accumulated other comprehensive income | | | $ | 5,804 | | | | $ | 3,601 | |
The change in the accumulated unrealized gain (loss) on available-for-sale securities, net of tax, at March 29, 2008, primarily reflects the decrease in value of the UMC investment since March 31, 2007 and the sale of the remaining UMC investment in fiscal 2008 (see Note 4). In addition, the unrealized loss on the Company’s short-term and long-term investments decreased by $1.5 million during fiscal 2008 due to liquidation of certain investments with loss positions and changes in interest rates.
Note 12. Convertible Debentures and Revolving Credit Facility
3.125% Junior Subordinated Convertible Debentures
In March 2007, the Company issued $1.00 billion principal amount of 3.125% convertible debentures due March 15, 2037, to an initial purchaser in a private offering. The debentures are subordinated in right of payment to the Company’s existing and future senior debt and to the other liabilities of the Company’s subsidiaries. The debentures are initially convertible, subject to certain conditions, into shares of Xilinx common stock at a conversion rate of 32.0760 shares of common stock per $1 thousand principal amount of debentures, representing an initial effective conversion price of approximately $31.18 per share of common stock. The conversion rate will be subject to adjustment for certain events as outlined in the indenture governing the debentures but will not be adjusted for accrued interest. The Company received net proceeds of $980.0 million after deduction of issuance costs of $20.0 million. The debt issuance costs are recorded in long-term other assets and are being amortized to interest expense over 30 years. Interest is payable semiannually in arrears on March 15 and September 15, beginning on September 15, 2007. Interest expense related to the debentures for fiscal 2008 and 2007 totaled $32.0 million and $2.2 million, respectively, and was included in interest and other, net on the consolidated statements of income. The debentures also have a contingent interest component that will require the Company to pay interest based on certain thresholds beginning with the semi-annual interest period commencing on March 15, 2014 (the maximum amount of contingent interest that will accrue is 0.50% per year) and upon the occurrence of certain events, as outlined in the indenture governing the debentures.
On or after March 15, 2014, the Company may redeem all or part of the debentures for the principal amount plus any accrued and unpaid interest if the closing price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading-day period prior to the date on which the Company provides notice of redemption. Upon conversion, the Company would pay the holder the cash value of the applicable number of shares of Xilinx common stock, up to the principal amount of the debentures. If the conversion value
56
exceeds $1 thousand, the Company may also deliver, at its option, cash or common stock or a combination of cash and common stock for the conversion value in excess of $1 thousand (conversion spread). There would be no adjustment to the numerator in the net income per common share computation for the cash settled portion of the debentures as that portion of the debt instrument will always be settled in cash. The conversion spread will be included in the denominator for the computation of diluted net income per common share.
Holders of the debentures may convert their debentures only upon the occurrence of certain events in the future, as outlined in the indenture. In addition, holders of the debentures who convert their debentures in connection with a fundamental change, as defined in the indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, in the event of a fundamental change, the holders of the debentures may require Xilinx to purchase all or a portion of their debentures at a purchase price equal to 100% of the principal amount of debentures, plus accrued and unpaid interest, if any. As of March 29, 2008, none of the conditions allowing holders of the debentures to convert had been met.
The Company concluded that the embedded features related to the contingent interest payments and the Company making specific types of distributions (e.g., extraordinary dividends) qualify as derivatives and should be bundled as a compound embedded derivative under SFAS 133. The fair value of the derivative at the date of issuance of the debentures was $2.5 million and is accounted for as a discount on the debentures. The initial fair value of the debentures of $997.5 million will be accreted to par value over the term of the debt resulting in $2.5 million being amortized to interest expense over 30 years. Any change in fair value of this embedded derivative will be included in interest and other, net on the Company’s consolidated statements of income. The fair value of the derivative as of March 29, 2008 and March 31, 2007 was $2.3 million and $2.1 million, respectively. The balance of the debentures on the Company’s consolidated balance sheets at March 29, 2008 and March 31, 2007 was $999.9 million and $999.6 million, respectively, including the fair value of the embedded derivative. The Company also concluded that the debentures are not conventional convertible debt instruments and that the embedded stock conversion option qualifies as a derivative under SFAS 133. In addition, in accordance withEmerging Issues Task Force (EITF) Issue No. 00-19 of the FASB, “Accounting for Derivative Financial Instruments indexed to and Potentially Settled in a Company’s own Stock,” the Company has concluded that the embedded conversion option would be classified in stockholders’ equity if it were a freestanding instrument. Accordingly, the embedded conversion option is not required to be accounted for separately as a derivative.
Under the terms of the debentures, the Company was required to file a shelf registration statement covering resales of the debentures and any common stock issuable upon conversion of the debentures with the SEC and cause the shelf registration statement to be declared effective within 180 days of the closing of the offering of the debentures. In addition, the Company must maintain the effectiveness of the shelf registration statement for a period of two years after the closing of the offering of the debentures. If the Company fails to meet these terms, it will be required to pay additional interest on the debentures at a rate per annum equal to 0.25% for the first 90 days after the occurrence of the event and 0.50% after the first 90 days. The Company filed the shelf registration statement with the SEC in June 2007.
Revolving Credit Facility
In April 2007, Xilinx entered into a five-year $250.0 million senior unsecured revolving credit facility with a syndicate of banks. Borrowings under the credit facility will bear interest at a benchmark rate plus an applicable margin based upon the Company’s credit rating. In connection with the credit facility, the Company is required to maintain certain financial and non-financial covenants. As of March 29, 2008, the Company has made no borrowings under this credit facility.
Note 13. Stockholders’ Equity
Preferred Stock
The Company’s Certificate of Incorporation authorized 2.0 million shares of undesignated preferred stock. The preferred stock may be issued in one or more series. The Board of Directors is authorized to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of preferred stock. As of March 29, 2008 and March 31, 2007, no preferred shares were issued or outstanding.
Common Stock Repurchase Programs
The Board of Directors has approved stock repurchase programs enabling the Company to repurchase its common stock in the open market or through negotiated transactions with independent financial institutions. On February 26, 2007, the Board authorized the repurchase of up to $1.50 billion of common stock. On February 25, 2008, the Board authorized the repurchase of up to an additional $800.0 million of common stock. These share repurchase programs have no stated expiration date. Through March 29, 2008, the Company had repurchased $1.31 billion of the $1.50 billion of common
57
stock approved for repurchase under the February 2007 authorization. The Company’s current policy is to retire all repurchased shares, and consequently, no treasury shares were held at March 29, 2008 or March 31, 2007.
During the second, third and fourth quarters of fiscal 2008 and all four quarters of fiscal 2007, the Company entered into stock repurchase agreements with independent financial institutions. Under these agreements, Xilinx provided these financial institutions with up-front payments totaling $550.0 million for fiscal 2008 and $1.05 billion for fiscal 2007. These financial institutions agreed to deliver to Xilinx a certain number of shares based upon the volume weighted-average price, during an averaging period, less a specified discount. Under the terms of the accelerated share repurchase program (ASR) entered into during the fourth quarter of fiscal 2007, the Company paid $700.0 million upfront in exchange for a minimum number of shares (25.7 million) of its common stock, which were delivered to the Company in fiscal 2007. The $700.0 million was recorded in stockholders’ equity in fiscal 2007. Upon completion of the ASR on June 19, 2007, the Company did not receive any additional shares since the volume weighted-average price, during an averaging period, less a specified discount, exceeded the upside threshold price specified in the ASR of $27.21. In addition, under the guidelines of Rule 10b5-1 under the Exchange Act, Xilinx entered into other agreements with the same independent financial institutions within the first, second and fourth quarters of fiscal 2007 to repurchase additional shares on its behalf after the conclusion of the purchase period of the aforementioned agreements. As of March 29, 2008, no amounts remained outstanding under any stock repurchase agreements and all related shares had been delivered to the Company.
During fiscal 2008, 2007 and 2006, the Company repurchased a total of 23.5 million, 55.2 million and 15.0 million shares of common stock for $550.0 million, $1.43 billion and $400.0 million, respectively.
Dividend
On February 25, 2008, the Board of Directors approved an increase to the Company’s quarterly common stock dividend from $0.12 per common share to $0.14 per common share, which is payable on May 28, 2008 to stockholders of record at the close of business on May 7, 2008.
Note 14. Income Taxes
The provision for income taxes consists of the following:
| (In thousands) | | 2008 | | 2007 | | 2006 |
| Federal: | | Current | | $ | 81,147 | | | $ | 36,088 | | | $ | 42,382 | |
| | | Deferred | | | 4,414 | | | | 31,739 | | | | 29,804 | |
| | | | | | 85,561 | | | | 67,827 | | | | 72,186 | |
| |
| State: | | Current | | | (3,359 | ) | | | 14,383 | | | | 4,130 | |
| | | Deferred | | | (3,415 | ) | | | (24,531 | ) | | | (2,148 | ) |
| | | | | | (6,774 | ) | | | (10,148 | ) | | | 1,982 | |
| |
| Foreign: | | Current | | | 21,590 | | | | 22,912 | | | | 29,909 | |
| | | Deferred | | | (330 | ) | | | (117 | ) | | | (1,624 | ) |
| | | | | | 21,260 | | | | 22,795 | | | | 28,285 | |
| Total | | | | $ | 100,047 | | | $ | 80,474 | | | $ | 102,453 | |
The domestic and foreign components of income before income taxes were as follows:
| | 2008 | | 2007 | | 2006 |
| Domestic | $ | 49,955 | | $ | 17,215 | | $ | 59,966 |
| Foreign | | 424,139 | | | 413,931 | | | 396,636 |
| Income before income taxes | $ | 474,094 | | $ | 431,146 | | $ | 456,602 |
The tax benefits associated with stock option exercises and the employee stock purchase plan credited to additional paid-in capital were $15.8 million, $35.8 million and $40.6 million, for fiscal 2008, 2007 and 2006, respectively.
At March 29, 2008, the Company had federal and state net operating loss carryforwards of approximately $20.8 million. If unused, these carryforwards will expire in 2014 through 2026. The Company had federal and state R&D tax credit carryforwards of approximately $99.6 million, federal affordable housing tax credit carryforwards of approximately $17.9
58
million and no other state credit carryforwards. If unused, $39.6 million of the tax credit carryforwards will expire in 2025 through 2028.
Unremitted foreign earnings that are considered to be permanently invested outside the United States and on which no U.S. taxes have been provided, are approximately $659.0 million as of March 29, 2008. The residual U.S. tax liability, if such amounts were remitted, would be approximately $199.9 million.
The provision for income taxes reconciles to the amount obtained by applying the Federal statutory income tax rate to income before provision for taxes as follows:
| (In thousands) | 2008 | | 2007 | | 2006 |
| Income before provision for taxes | $ | 474,094 | | | $ | 431,146 | | | $ | 456,602 | |
| Federal statutory tax rate | | 35% | | | | 35% | | | | 35% | |
| Computed expected tax | | 165,933 | | | | 150,901 | | | | 159,811 | |
| State taxes, net of federal benefit | | (6,709 | ) | | | (2,938 | ) | | | (1,233 | ) |
| Non-deductible stock-based compensation | | 2,676 | | | | 4,976 | | | | - | |
| Tax exempt interest | | (721 | ) | | | (3,542 | ) | | | (4,196 | ) |
| Foreign earnings at lower tax rates | | (55,949 | ) | | | (51,775 | ) | | | (51,430 | ) |
| Effect of IRS settlements | | - | | | | - | | | | (9,434 | ) |
| Tax credits | | (5,054 | ) | | | (12,323 | ) | | | (7,674 | ) |
| Dividend (American Jobs Creation Act) | | - | | | | - | | | | 24,886 | |
| Correction of deferred accounting for investment in UMC | | - | | | | - | | | | (9,816 | ) |
| Release of valuation allowance | | - | | | | (90 | ) | | | (8,936 | ) |
| Deferred compensation | | 606 | | | | (703 | ) | | | 3,752 | |
| Write-off of in-process R&D | | - | | | | - | | | | 1,575 | |
| Other | | (735 | ) | | | (4,032 | ) | | | 5,148 | |
| Provision for income taxes | $ | 100,047 | | | $ | 80,474 | | | $ | 102,453 | |
The Company has manufacturing operations in Ireland and Singapore. In Ireland, the Company operates under a special tax regime granted for manufacturing status. Under this regime, the majority of the income earned in Ireland is subject to tax at 10%. The regime granting manufacturing status is effective through fiscal 2010. The tax benefit from this special status for fiscal 2008 is approximately $1.5 million on income considered permanently reinvested outside the U.S. The Company has been granted “Pioneer Status” in Singapore that is effective through fiscal 2021. The Pioneer Status reduces the Company’s tax on the majority of Singapore income from 20% to zero. The benefit of Pioneer Status in Singapore for fiscal 2008 is approximately $17.3 million ($0.06 per common share) on income considered permanently reinvested outside the U.S. The tax effect of these low tax jurisdictions on the Company’s overall tax rate is reflected in the table above.
The major components of deferred tax assets and liabilities consisted of the following at March 29, 2008 and March 31, 2007:
| (In thousands) | 2008 | | 2007 |
| Deferred tax assets: | | | | | | |
| Inventory valuation differences | $ | 9,569 | | $ | 11,962 | |
| Stock-based compensation | | 42,760 | | | 25,996 | |
| Deferred income on shipments to distributors | | 30,733 | | | 34,234 | |
| Accrued expenses | | 57,563 | | | 36,417 | |
| Tax loss carryforwards | | 10,403 | | | 9,586 | |
| Tax credit carryforwards | | 88,123 | | | 132,380 | |
| Intangible and fixed assets | | 20,612 | | | 11,370 | |
| Strategic and equity investments | | 9,337 | | | 8,083 | |
| Deferred compensation plan | | 12,975 | | | 11,688 | |
| Unrealized losses on available-for-sale securities | | 366 | | | - | |
| Other | | 2,393 | | | 6,995 | |
| Total deferred tax assets | | 284,834 | | | 288,711 | |
| Deferred tax liabilities: | | | | | | |
| Unremitted foreign earnings | | (146,916 | ) | | (192,018 | ) |
| Capital gain from merger of USIC with UMC | | - | | | (13,276 | ) |
| Unrealized gains on available-for-sale securities | | - | | | (802 | ) |
| State income taxes | | (25,352 | ) | | (23,312 | ) |
| Convertible debt | | (18,099 | ) | | (286 | ) |
| Other | | (6,039 | ) | | (3,200 | ) |
| Total deferred tax liabilities | | (196,406 | ) | | (232,894 | ) |
| Valuation allowance | | 0 | | | 0 | |
| Total net deferred tax assets | $ | 88,428 | | $ | 55,817 | |
59
Long-term deferred tax assets of $66.1 million and $57.8 million at March 29, 2008 and March 31, 2007, respectively, are included in other assets on the consolidated balance sheet (see Note 6).
The Company adopted FIN 48 on April 1, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.
The cumulative effect of adopting FIN 48 was a decrease in tax reserves and increases in the April 1, 2007 balances of additional paid-in capital and retained earnings of $1.0 million and of $5.5 million, respectively. The Company’s total gross unrecognized tax benefits upon adoption were $103.1 million. In addition, consistent with the provisions of FIN 48, the Company reclassified $30.0 million of income tax liabilities from current to non-current liabilities because payment of cash was not anticipated within one year of the balance sheet date. These non-current income tax liabilities are recorded in long-term income taxes payable in the consolidated balance sheet.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits for fiscal 2008 is as follows (in thousands):
| Gross unrecognized tax benefits at April 1, 2007 | $ | 103,103 | |
| Increases in tax positions for prior years | | 7,035 | |
| Decreases in tax positions for prior years | | (7,646 | ) |
| Increases in tax positions for current year | | 13,211 | |
| Settlements | | - | |
| Lapse in statute of limitations | | (10,624 | ) |
| Gross unrecognized tax benefits at March 29, 2008 | $ | 105,079 | |
If the remaining balance of $105.1 million of unrecognized tax benefits at March 29, 2008 were realized in a future period, it would result in a tax benefit of $44.7 million and a reduction of the effective tax rate.
The Company’s policy to include interest and penalties related to income tax liabilities within the provision for income taxes on the consolidated statements of income did not change as a result of implementing the provisions of FIN 48. The balance of accrued interest and penalties recorded in the consolidated balance sheet at April 1, 2007 was $1.5 million. This amount was also reclassified from current to non-current liabilities upon adoption of FIN 48. Interest and penalties included in the Company’s provision for income taxes totaled $1.4 million for fiscal 2008.
With limited exception, the Company is no longer subject to U.S. federal and state audits by taxing authorities for years through fiscal 2004. The Company is no longer subject to tax audits in Ireland for years through fiscal 2002. The Company is currently under examination by the IRS and California Franchise Tax Board for fiscal 2005. The Company believes that due to various factors, including the current development of ongoing audits, it is impractical to determine the amount of uncertain tax benefits that will significantly increase or decrease within the next 12 months.
The IRS examined the Company’s tax returns for fiscal 1996 through 2001. All issues were settled with the exception of issues related to the cost sharing of stock options. On August 30, 2005, the Tax Court issued its opinion concerning whether the value of stock options must be included in the cost sharing agreement with Xilinx Ireland. The Tax Court agreed with the Company that no amount for stock options was to be included in the cost sharing agreement, and thus, the Company had no tax, interest or penalties due for this issue. The Tax Court entered its decision on May 31, 2006. On August 25, 2006, the IRS appealed the decision to the U.S. Court of Appeal for the Ninth Circuit. The Company is opposing this appeal, as it believes that the Tax Court decided the case correctly. The Company and the IRS presented oral arguments to a three-judge panel of the Appeals Court on March 12, 2008. Management has assessed the risk of loss, and determined that no accrual is required. If the Company were to lose on appeal, the amount due to the IRS would be approximately $39.3 million. Of that amount, $6.2 million would be an expense to the consolidated statement of income and the remaining $33.1 million would be an adjustment to additional paid-in capital. The Company would also be required to reverse $7.6 million of interest income accrued to date on prepayments to the IRS.
60
Note 15. Segment Information
Xilinx designs, develops, and markets programmable logic semiconductor devices and the related software design tools. The Company operates and tracks its results in one operating segment. Xilinx sells its products to OEMs and to electronic components distributors who resell these products to OEMs or subcontract manufacturers.
Enterprise wide information is provided in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Geographic revenue information for fiscal 2008, 2007 and 2006 reflects the geographic location of the distributors or OEMs who purchased the Company’s products. This may differ from the geographic location of the end customers. Long-lived assets include property, plant and equipment and goodwill. Property, plant and equipment information is based on the physical location of the asset at the end of each fiscal year while goodwill is based on the location of the owning entity.
Net revenues by geographic region were as follows:
| (In thousands) | 2008 | | 2007 | | 2006 |
| North America: | | | | | | | | |
| United States | $ | 696,367 | | $ | 727,443 | | $ | 676,778 |
| Other | | 21,430 | | | 3,894 | | | 38,074 |
| Total North America | | 717,797 | | | 731,337 | | | 714,852 |
| Asia Pacific: | | �� | | | | | | |
| China | | 205,184 | | | 159,389 | | | 162,400 |
| Other | | 321,106 | | | 307,223 | | | 244,321 |
| Total Asia Pacific | | 526,290 | | | 466,612 | | | 406,721 |
| Europe | | 407,186 | | | 426,922 | | | 352,841 |
| Japan | | 190,099 | | | 217,868 | | | 251,836 |
| Worldwide total | $ | 1,841,372 | | $ | 1,842,739 | | $ | 1,726,250 |
| |
| Net long-lived assets by country at fiscal year-ends were as follows: |
| |
| (In thousands) | March 29, | | March 31, | | April 1, |
| | 2008 | | 2007 | | 2006 |
| United States | $ | 385,669 | | $ | 399,472 | | $ | 384,751 |
| Foreign: | | | | | | | | |
| Ireland | | 72,947 | | | 73,254 | | | 74,919 |
| Singapore | | 51,756 | | | 44,300 | | | 12,881 |
| Other | | 12,013 | | | 13,965 | | | 10,790 |
| Total foreign | | 136,716 | | | 131,519 | | | 98,590 |
| Worldwide total | $ | 522,385 | | $ | 530,991 | | $ | 483,341 |
Note 16. Litigation Settlements and Contingencies
Internal Revenue Service
On August 25, 2006, the IRS filed a Notice of Appeal that it appeals to the U.S. Court of Appeal for the Ninth Circuit, the August 30, 2005 decision of the Tax Court. In its 2005 decision, the Tax Court decided in favor of the Company and rejected the IRS’s position that the value of compensatory stock options must be included in the Company’s cost sharing agreement with its Irish affiliate. The Company is opposing this appeal as it believes that the Tax Court decided the case correctly. The Company and the IRS presented oral arguments to a three-judge panel of the Appeals Court on March 12, 2008. Management has assessed the risk of loss, and determined that no accrual is required (see Note 14).
The IRS and California Franchise Tax Board are auditing the Company’s fiscal 2005 income tax returns. The Company believes that adequate accruals have been provided for fiscal 2005 and all other open tax years.
Patent Litigation
On December 28, 2007, a patent infringement lawsuit was filed by PACT XPP Technologies, AG (PACT) against the Company in the U.S. District Court for the Eastern District of Texas, Marshall Division (PACT XPP Technologies, AG. v. Xilinx, Inc. and Avnet, Inc. Case No. 2:07-CV-563). PACT seeks injunctive relief, unspecified damages and interest and attorneys’ fees. Neither the likelihood, nor the amount of any potential exposure to the Company is estimable at this time.
61
On August 21, 2007, a patent infringement lawsuit was filed by Lonestar Inventions, L.P. (Lonestar) against Xilinx in the U.S. District Court for the Eastern District of Texas, Tyler Division (Lonestar Inventions, L.P. v. Xilinx, Inc. Case No. 6:07-CV-393). Lonestar seeks injunctive relief, unspecified damages and interest and attorneys’ fees. Neither the likelihood, nor the amount of any potential exposure to the Company is estimable at this time.
On November 27, 2006, the Company settled a patent infringement lawsuit under which the Company agreed to pay $6.5 million. The plaintiff agreed to dismiss the patent infringement lawsuit with prejudice, granted a patent license to the Company and executed an agreement not to sue the Company under any patent owned or controlled by the plaintiff for ten years. As a result of the settlement agreement, the Company recorded a current period charge of $2.5 million during the third quarter of fiscal 2007. The remaining balance of $4.0 million represented the value of the prepaid patent license granted as part of the settlement. This balance is being amortized over the patent’s remaining useful life.
Sales Representative Agreements Litigation
In the second quarter of fiscal 2006, the Company accrued an additional $3.2 million that represented the settlement payment for litigation related to an agreement with a sales representative.
Other Matters
Except as stated above, there are no pending legal proceedings of a material nature to which the Company is a party or of which any of its property is the subject.
Note 17. Business Combination
AccelChip, Inc.
In January 2006, Xilinx completed the acquisition of AccelChip, a privately-held company that provides MATLAB® synthesis software tools for designing digital signal processing systems. The AccelChip acquisition aligns with Xilinx’s strategy for its existing DSP products and product development roadmaps, since both AccelChip and Xilinx have significant customer overlap and synergy across the digital communications, multimedia, video and imaging, and defense systems market segments. The acquisition was accounted for under the purchase method of accounting. The total purchase price for AccelChip was $19.6 million in cash, including $436 thousand of acquisition related costs. In connection with the transaction, Xilinx recorded a charge to operations for acquired in-process R&D of $4.5 million. In addition, Xilinx recorded approximately $8.9 million of goodwill and $9.7 million of other intangible assets, which resulted in amortization expense of approximately $500 thousand in fiscal 2006. The financial results for AccelChip are included in the Company’s consolidated results from the date of acquisition. Pro forma information is not presented due to the immateriality of the operating results of AccelChip prior to the acquisition. Xilinx had an equity investment in AccelChip of $2.6 million prior to the acquisition. The investment, which was included in the total purchase price of $19.6 million, was previously accounted for under the cost method of accounting.
Following is the purchase price allocation based on the estimated fair value of the assets acquired and liabilities assumed. Management considered a number of factors, including an independent appraisal and expected uses of assets and dispositions of liabilities, in determining the final purchase price allocation.
| (In thousands) | | | |
| | Amount | | Amortization Life |
| Current assets | $ | 126 | | | |
| Long-term tangible assets | | 46 | | | |
| Goodwill | | 8,874 | | | |
| Other intangible assets: | | | | | |
| Developed technology | | 6,100 | | | 5 years |
| Customer base | | 1,800 | | | 3 years |
| Tradename | | 1,800 | | | 3 years |
| Acquired in-process research and development | | 4,500 | | | |
| Liabilities assumed | | 261 | | | |
| Deferred tax liabilities | | ( 3,880 | ) | | |
| Total purchase price | $ | 19,627 | | | |
62
Note 18. Goodwill and Acquisition-Related Intangibles
As of March 29, 2008 and March 31, 2007, the gross and net amounts of goodwill and of acquisition-related intangibles for all acquisitions were as follows:
| (In thousands) | | | | | |
| | 2008 | | 2007 | | Amortization Life |
| Goodwill-gross | $ | 169,479 | | $ | 169,479 | | |
| Less accumulated amortization through fiscal 2002 | | 51,524 | | | 51,524 | | |
| Goodwill-net | $ | 117,955 | | $ | 117,955 | | |
| |
| Patents-gross | $ | 22,752 | | $ | 22,752 | | 5 to 7 years |
| Less accumulated amortization | | 21,335 | | | 18,714 | | |
| Patents-net | | 1,417 | | | 4,038 | | |
| |
| Miscellaneous intangibles-gross | | 58,958 | | | 58,958 | | 2 to 5 years |
| Less accumulated amortization | | 52,550 | | | 48,370 | | |
| Miscellaneous intangibles-net | | 6,408 | | | 10,588 | | |
| |
| Total acquisition-related intangibles-gross | | 81,710 | | | 81,710 | | |
| Less accumulated amortization | | 73,885 | | | 67,084 | | |
| Total acquisition-related intangibles-net | $ | 7,825 | | $ | 14,626 | | |
Amortization expense for all intangible assets for fiscal 2008, 2007 and 2006 was $6.8 million, $8.0 million and $7.0 million, respectively. Intangible assets are amortized on a straight-line basis. Based on the carrying value of acquisition-related intangibles recorded at March 29, 2008, and assuming no subsequent impairment of the underlying assets, the annual amortization expense for acquisition-related intangibles is expected to be as follows: 2009 - $5.3 million; 2010 - $1.5 million; 2011 - $1.0 million.
Note 19. Employee Benefit Plans
Xilinx offers various retirement benefit plans for U.S. and non-U.S. employees. Total contributions to these plans were $8.1 million, $5.9 million and $5.4 million in fiscal 2008, 2007 and 2006, respectively. For employees in the U.S., the Company provides discretionary 401(k) contributions when performance targets are met. As permitted under Section 401(k) of the Internal Revenue Code, Xilinx’s 401(k) Plan (the 401(k) Plan) allows tax deferred salary deductions for eligible employees. The Compensation Committee of the Board of Directors administers the 401(k) Plan. Participants in the 401(k) Plan may make salary deferrals of up to 25% of the eligible annual salary, limited by the maximum dollar amount allowed by the Internal Revenue Code. Effective January 1, 2003, participants who have reached the age of 50 before the close of the plan year may be eligible to make catch-up salary deferral contributions, up to 25% of eligible annual salary, limited by the maximum dollar amount allowed by the Internal Revenue Code.
The Company allows its U.S.-based officers, director-level employees, and its board members to defer a portion of their compensation under the Deferred Compensation Plan (the Plan). The Compensation Committee administers the Plan. At March 29, 2008, there were approximately 118 participants in the Plan who self-direct their contributions into investment options offered by the Plan. The Plan does not allow Plan participants to invest directly in Xilinx’s stock. In the event Xilinx becomes insolvent, Plan assets are subject to the claims of the Company’s general creditors. There are no Plan provisions that provide for any guarantees or minimum return on investments. At March 29, 2008, Plan assets were $27.0 million and obligations were $31.8 million. At March 31, 2007, Plan assets were $25.2 million and obligations were $29.1 million.
63
REPORTOFERNST&YOUNGLLP,
INDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRM
The Board of Directors and Stockholders
Xilinx, Inc.
We have audited the accompanying consolidated balance sheets of Xilinx, Inc. as of March 29, 2008 and March 31, 2007, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended March 29, 2008. Our audits also included the financial statement schedule listed in the Index at Part IV, Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Xilinx, Inc. at March 29, 2008 and March 31, 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 29, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Notes 2 and 14 to the consolidated financial statements, on April 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” Also, as discussed in Note 2 to the consolidated financial statements, on April 2, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment."
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Xilinx, Inc.’s internal control over financial reporting as of March 29, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 27, 2008 expressed an unqualified opinion thereon.
San Jose, California
May 27, 2008
64
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Xilinx, Inc.
We have audited Xilinx, Inc.’s internal control over financial reporting as of March 29, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Xilinx, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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.
In our opinion, Xilinx, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 29, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Xilinx, Inc. as of March 29, 2008 and March 31, 2007, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended March 29, 2008 of Xilinx, Inc. and our report dated May 27, 2008 expressed an unqualified opinion thereon.
San Jose, California
May 27, 2008
65
XILINX,INC.
SCHEDULEII
VALUATIONANDQUALIFYINGACCOUNTS
| (In thousands) |
| |
| Description | Beginning | | Charged | | Deductions | | Balance at |
| | of Year | | (Credited) to | | (a) | | End of Year |
| | | | | Income | | | | | | |
| For the year ended April 1, 2006: | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 3,803 | | $ | 582 | (b) | | $ | 783 | | $ | 3,602 |
| Allowance for customer returns | $ | 66 | | $ | 90 | | | $ | 61 | | $ | 95 |
| |
| For the year ended March 31, 2007: | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 3,602 | | $ | 519 | (c) | | $ | 466 | | $ | 3,655 |
| Allowance for customer returns | $ | 95 | | $ | (4 | ) | | $ | 9 | | $ | 82 |
| |
| For the year ended March 29, 2008: | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 3,655 | | $ | - | | | $ | 21 | | $ | 3,634 |
| Allowance for customer returns | $ | 82 | | $ | (3 | ) | | $ | 79 | | $ | - |
| (a) | | Represents amounts written off against the allowances or customer returns. |
| |
| (b) | | In fiscal 2006, the amount includes $382 of allowance recorded in the acquisition of AccelChip which was not charged to operations. |
| |
| (c) | | In fiscal 2007, the amount represents recovery of bad debts that were previously charged against the allowance for doubtful accounts which had no impact on operations. |
SUPPLEMENTARYFINANCIALDATA
Quarterly Data (Unaudited)
| (In thousands, except per share amounts) | First | | Second | | Third | | Fourth | | |
| Year ended March 29, 2008 (1) | Quarter | | Quarter | | Quarter | | Quarter | | |
| Net revenues | $ | 445,912 | | $ | 444,894 | | $ | 474,806 | | $ | 475,760 | | |
| Gross margin | | 277,434 | | | 274,772 | | | 300,392 | | | 301,786 | | |
| Income before income taxes | | 111,001 | | | 113,881 | | | 129,731 | | | 119,481 | | (2) |
| Net income | | 84,278 | | | 89,698 | | | 103,592 | | | 96,479 | | |
| Net income per common share: (3) | | | | | | | | | | | | | |
| Basic | $ | 0.28 | | $ | 0.30 | | $ | 0.36 | | $ | 0.34 | | |
| Diluted | $ | 0.28 | | $ | 0.30 | | $ | 0.35 | | $ | 0.34 | | |
| Shares used in per share calculations: | | | | | | | | | | | | | |
| Basic | | 297,720 | | | 298,008 | | | 289,703 | | | 284,523 | | |
| Diluted | | 303,198 | | | 302,226 | | | 293,036 | | | 286,321 | | |
| Cash dividends declared per common share | $ | 0.12 | | $ | 0.12 | | $ | 0.12 | | $ | 0.12 | | |
| (1) | | Xilinx uses a 52- to 53-week fiscal year ending on the Saturday nearest March 31. Fiscal 2008 was a 52-week year and each quarter was a 13-week quarter. |
| |
| (2) | | Income before income taxes includes a loss on the sale of the Company’s remaining UMC investment of $4,732 and an impairment loss on investments of $2,850. |
| |
| (3) | | Net income per common share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly per common share information may not equal the annual net income per common share. |
66
| (In thousands, except per share amounts) | First | | | | Second | | | | Third | | | | Fourth | | |
| Year ended March 31, 2007 (1) | Quarter | | | | Quarter | | | | Quarter | | | | Quarter | | |
| Net revenues | $ | 481,362 | | | | $ | 467,180 | | | | $ | 450,725 | | | | $ | 443,472 | | |
| Gross margin | | 289,303 | | | | | 286,600 | | | | | 272,762 | | | | | 275,431 | | |
| Income before income taxes | | 107,467 | | (2) | | | 119,288 | | (3) | | | 103,117 | | (4) | | | 101,274 | | (5) |
| Net income | | 82,491 | | | | | 93,046 | | | | | 87,509 | | | | | 87,626 | | |
| Net income per common share: (6) | | | | | | | | | | | | | | | | | | | |
| Basic | $ | 0.24 | | | | $ | 0.27 | | | | $ | 0.26 | | | | $ | 0.27 | | |
| Diluted | $ | 0.24 | | | | $ | 0.27 | | | | $ | 0.26 | | | | $ | 0.27 | | |
| Shares used in per share calculations: | | | | | | | | | | | | | | | | | | | |
| Basic | | 341,853 | | | | | 339,431 | | | | | 334,062 | | | | | 325,115 | | |
| Diluted | | 348,988 | | | | | 343,192 | | | | | 339,669 | | | | | 330,243 | | |
| Cash dividends declared per common share | $ | 0.09 | | | | $ | 0.09 | | | | $ | 0.09 | | | | $ | 0.09 | | |
| (1) | | Xilinx uses a 52- to 53-week fiscal year ending on the Saturday nearest March 31. Fiscal 2007 was a 52-week year and each quarter was a 13-week quarter. |
| |
| (2) | | Income before income taxes includes stock-based compensation related to prior years of $2,209 and an impairment loss on investments of $437. |
| |
| (3) | | Income before income taxes includes a gain of $5,993 from the sale of a portion of the Company’s UMC investment. |
| | |
| (4) | | Income before income taxes includes a loss related to litigation settlements and contingencies of $2,500, an impairment loss on investments of $1,513 and a gain of $1,023 from the sale of a portion of the Company’s UMC investment. |
| | |
| (5) | | Income before income taxes includes a charge of $5,934 related to an impairment of a leased facility that the Company no longer intends to occupy. |
| | |
| (6) | | Net income per common share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly per common share information may not equal the annual net income per common share. |
67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out, under the supervision of and with the participation of Xilinx, Inc.’s management, including our CEO and CFO of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon the controls evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this Form 10-K, the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 29, 2008 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. This system of internal control is designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with management’s authorization. The design, monitoring and revision of the system of internal control over financial reporting involves, among other things, management’s judgments with respect to the relative cost and expected benefits of specific control measures. The effectiveness of the system of internal control over financial reporting is supported by the selection, retention and training of qualified personnel and an organizational structure that provides an appropriate division of responsibility and formalized procedures. The system of internal control is periodically reviewed and modified in response to changing conditions.
Because of its inherent limitations, no matter how well designed, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect all misstatements or all fraud. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.
Management has used the criteria established in the Report ‘Internal Control — Integrated Framework’issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to evaluate the effectiveness of our internal control over financial reporting. Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of March 29, 2008.
The effectiveness of the Company’s internal control over financial reporting as of March 29, 2008 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included in Part II, Item 8. of this Form 10-K.
ITEM 9B. OTHER INFORMATION
None.
68
PART III
Certain information required by Part III is omitted from this Report in that the Registrant will file a definitive proxy statement pursuant to Regulation 14A under the Exchange Act (the Proxy Statement) not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement that specifically address the items set forth herein are incorporated by reference. Such incorporation does not include the Compensation Committee Report included in the Proxy Statement.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item concerning the Company's executive officers is incorporated herein by reference to Item 1. “Business – Executive Officers of the Registrant" within this Form 10-K.
The information required by this item concerning the Company's directors and corporate governance matters is incorporated herein by reference to the sections entitled “Proposal One-Election of Directors,” “Board of Directors – Principles of Corporate Governance,” and “Director Independence, Board Meetings and Committees” in our Proxy Statement.
The information required by this item regarding delinquent filers pursuant to Item 405 of Regulation S-K is incorporated herein by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement.
Our codes of conduct and ethics and significant corporate governance principles are available on the investor relations page of our website atwww.investor.xilinx.com. Printed copies of these documents are also available to stockholders without charge upon written request directed to Corporate Secretary, Xilinx, Inc., 2100 Logic Drive, San Jose CA 95124.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item concerning executive compensation is incorporated herein by reference to the sections entitled “Compensation of Directors” and “Executive Compensation” in our Proxy Statement.
The information required by this item pursuant to Item 407(e)(4) of Regulation S-K is incorporated herein by reference to the section entitled “Compensation Committee Interlocks and Insider Participation” in our Proxy Statement.
The information required by this item pursuant to Item 407(e)(5) of Regulation S-K is incorporated herein by reference to the section entitled “Report of the Compensation Committee of the Board of Directors” in our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item pursuant to Item 403 of Regulation S-K is incorporated herein by reference to the section entitled “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement. The information required by Item 201(d) of Regulation S-K is set forth below.
The table below sets forth certain information as of March 29, 2008 about the Company’s Common Stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans (shares in thousands):
69
Equity Compensation Plan Information
| | A | | B | | C | |
| | | | | | Number of Securities | |
| | | | | | Remaining Available for | |
| | Number of Securities | | | | Future Issuance under | |
| | to be Issued upon | | Weighted-average | | Equity Compensation | |
| | Exercise of | | Exercise Price of | | Plans (excluding | |
| | Outstanding Options, | | Outstanding Options, | | securities reflected in | |
| Plan Category | Warrants and Rights | | Warrants and Rights | | Column A) | |
| Equity Compensation Plans Approved by Security Holders |
| 1997 Stock Plan | 46,030 | | $32.91 | | 0 | (1) |
| 2007 Plan | 5,370 | (2) | $24.41 | (3) | 9,630 | (4) |
| | | | | | | |
| Employee Stock Purchase Plan | N/A | | N/A | | 7,847 | |
| Total-Approved Plans | 51,400 | | $32.36 | | 17,477 | |
| Equity Compensation PlansNOTApproved by Security Holders (5) |
| Supplemental Stock Option | | | | | | |
| Plan (6) | 14 | | $33.81 | | 0 | |
| Total-All Plans | 51,414 | | $32.36 | | 17,477 | |
| (1) | | The Company ceased issuing options under the 1997 Stock Plan as of April 1, 2007. The 1997 Stock Plan expired on May 8, 2007 and all available but unissued shares under this plan were cancelled. |
| |
| (2) | | Includes 2.2 million shares issuable upon vesting of RSUs that the Company granted under the 2007 Plan. |
| |
| (3) | | The weighted-average exercise price does not take into account shares issuable upon vesting of outstanding RSUs, which have no exercise price. |
| |
| (4) | | On July 26, 2006, the stockholders approved the adoption of the 2007 Plan and authorized 10.0 million shares to be reserved for issuance thereunder. The 2007 Plan, which became effective on January 1, 2007, replaced both the Company’s 1997 Stock Plan (which expired on May 8, 2007) and the Supplemental Stock Option Plan. On August 9, 2007 our stockholders authorized the reserve of an additional 5.0 million shares. All of the shares reserved for issuance under the 2007 Plan may be granted as stock options, stock appreciation rights, restricted stock or RSUs. |
| |
| (5) | | In November 2000, the Company acquired RocketChips. Under the terms of the merger, the Company assumed all of the stock options previously issued to RocketChips’ employees pursuant to four different stock option plans. A total of approximately 807 thousand option shares were assumed by the Company. Of this amount, a total of 44 thousand option shares, with an average weighted exercise price of $18.71, remained outstanding as of March 29, 2008. These option shares are excluded from the above table. All of the options assumed by the Company remain subject to the terms of the RocketChips' stock option plan under which they were issued. Subsequent to acquiring RocketChips, the Company has not made any grants or awards under any of the RocketChips’ stock option plans and the Company has no intention to do so in the future. |
| |
| (6) | | Under the Supplemental Stock Option Plan, options were granted to employees and consultants of the Company, however neither officers nor members of our Board of Directors were eligible for grants under the Supplemental Stock Option Plan. Only non-qualified stock options were granted under the Supplemental Stock Option Plan (that is, options that do not entitle the optionee to special U.S. income tax treatment) and such options generally expire not later than 12 months after the optionee ceases to be an employee or consultant. Upon a merger of the Company with or into another company, or the sale of substantially all of the Company’s assets, each option granted under the Supplemental Stock Option Plan may be assumed or substituted with a similar option by the acquiring company, or the outstanding options will become exercisable in connection with the merger or sale. |
70
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item concerning related party transactions is incorporated herein by reference to the section entitled “Related Transactions” in our Proxy Statement.
The information required by this item concerning director independence pursuant to Item 407(a) of Regulation S-K is incorporated herein by reference to the section entitled “Director Independence, Board Meetings and Committees” in our Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the sections entitled “Ratification of Appointment of External Auditors” and “Fees Paid to Ernst & Young LLP” in our Proxy Statement.
71
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | | (1) | | The financial statements required by Item 15(a) are included in Item 8 of this Annual Report on Form 10-K. |
| |
| | | (2) | | The financial statement schedule required by Item 15(a) (Schedule II, Valuation and Qualifying Accounts) is included in Item 8 of this Annual Report on Form 10-K. |
| |
| | | Schedules not filed have been omitted because they are not applicable, are not required or the information required to be set forth therein is included in the financial statements or notes thereto. |
| |
| | | (3) | | The exhibits listed below in (b) are filed or incorporated by reference as part of this Annual Report on Form 10-K. |
(b) Exhibits
EXHIBIT LIST
| | | | | | Incorporated by Reference | | | | |
| | | | | | | | | | |
| Exhibit | | Exhibit Title | | Form | | File No. | | Exhibit | | Filing Date | | Filed |
| No | | | | | | | | | | | | Herewith |
| 3.1 | | Restated Certificate of Incorporation, as amended to date | | 10-K | | 000-18548 | | 3.1 | | 05/30/07 | | |
| | | | | | | | | | | | |
| 3.2 | | Bylaws of the Company, as amended and restated as of May 3, 2006 | | 10-K | | 000-18548 | | 3.2 | | 05/31/06 | | |
| | | | | | | | | | | | |
| 4.1 | | Indenture dated March 5, 2007 between the Company as Issuer and the Bank of New York Trust Company, N.A. as Trustee | | 10-K | | 000-18548 | | 4.1 | | 05/30/07 | | |
| | | | | | | | | | | | |
| 4.2 | | Registration Rights Agreement dated March 5, 2007 between the Company and J.P. Morgan Securities Inc. | | 10-K | | 000-18548 | | 4.2 | | 05/30/07 | | |
| | | | | | | | | | | | |
| 10.1* | | 1988 Stock Option Plan, as amended | | S-1 | | 333-34568 | | 10.15 | | 06/11/90 | | |
| | | | | | | | | | | | |
| 10.2* | | 1990 Employee Qualified Stock Purchase Plan | | S-8 | | 333-127318 | | 4.1 | | 08/09/05 | | |
| | | | | | | | | | | | |
| 10.3* | | 1997 Stock Plan and Form of Stock Option Agreement | | S-8 | | 333-127318 | | 4.2 | | 08/09/05 | | |
| | | | | | | | | | | | |
| 10.4* | | Form of Indemnification Agreement between the Company and its officers and directors | | S-1 | | 333-34568 | | 10.17 | | 06/11/90 | | |
| | | | | | | | | | | | |
| 10.5† | | Advance Payment Agreement entered into on May 17, 1996 between Seiko Epson Corporation and the Company | | 10-K | | 000-18548 | | 10.16 | | 06/27/96 | | |
| | | | | | | | | | | | |
| 10.6† | | Amended and Restated Advance Payment Agreement with Seiko dated December 12, 1997 | | 10-Q | | 000-18548 | | 10.5 | | 02/05/98 | | |
| | | | | | | | | | | | |
| 10.7* | | Supplemental Stock Option Plan | | 10-K | | 000-18548 | | 10.16 | | 06/17/02 | | |
| | | | | | | | | | | | |
| 10.8 | | Xilinx, Inc. Master Distribution Agreement with Avnet | | 10-Q | | 000-18548 | | 10.1 | | 11/04/05 | | |
| | | | | | | | | | | | |
| 10.9* | | Letter Agreement dated June 2, 2005 between the Company and Jon A. Olson | | 10-Q/A | | 000-18548 | | 10.1 | | 08/12/05 | | |
| | | | | | | | | | | | |
| 10.10* | | Letter Agreement dated October 20,2006 between the Company and Iain Morris | | 8-K | | 000-18548 | | 99.2 | | 11/02/06 | | |
| | | | | | | | | | | | |
| 10.11* | | 2007 Equity Incentive Plan | | 10-K | | 000-18548 | | 10.23 | | 05/30/07 | | |
| | | | | | | | | | | | |
| 10.12* | | Form of Stock Option Agreement under 2007 Equity Incentive Plan | | 10-K | | 000-18548 | | 10.24 | | 05/30/07 | | |
72
| 10.13* | | Form of Restricted Stock Unit Agreement under 2007 Equity Incentive Plan | | 10-K | | 000-18548 | | 10.25 | | 05/30/07 | | |
| |
| 10.14* | | Form of Performance Based Restricted Stock Unit Agreement under 2007 Equity Incentive Plan | | 8-K | | 000-18548 | | 99.1 | | 07/05/07 | | |
| |
| 10.15* | | Summary of Fiscal 2008 Executive Incentive Plan | | 8-K | | 000-18548 | | N/A | | 07/30/07 | | |
| |
| 10.16* | | Amended and Restated Executive Succession Agreement dated November 7, 2007 between the Company and Willem P. Roelandts | | 10-Q | | 000-18548 | | 10.27 | | 11/08/07 | | |
| |
| 10.17* | | Letter Agreement dated January 4, 2008 between the Company and Moshe N. Gavrielov | | 8-K | | 000-18548 | | 99.2 | | 01/07/08 | | |
| |
| 10.18* | | Amendment of Employment Agreement dated February 14, 2008 between the Company and Jon A. Olson | | 8-K | | 000-18548 | | 99.1 | | 02/20/08 | | |
| |
| 12.1 | | Ratio of Earnings to Fixed Charges | | | | | | | | | | X |
| |
| 21.1 | | Subsidiaries of the Company | | | | | | | | | | X |
| |
| 23.1 | | Consent of Independent Registered Public Accounting Firm | | | | | | | | | | X |
| |
| 24.1 | | Power of Attorney (included in the signature page) | | | | | | | | | | X |
| |
| 31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X |
| |
| 31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X |
| |
| 32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X |
| |
| 32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X |
| * | | Management contract or compensatory plan or arrangement required to be filed as an exhibit to the Company’s Annual Report on Form 10-K pursuant to Item 15(b) herein. |
| | | |
| † | | Confidential treatment requested as to certain portions of this document |
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on the 28th day of May 2008.
XILINX, INC. | |
| | |
| | |
| By: /s/ Moshe N. Gavrielov | |
| | |
| | |
| Moshe N. Gavrielov, | |
| President and Chief Executive Officer | |
POWEROFATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Moshe N. Gavrielov and Jon A. Olson, jointly and severally, his/her attorneys-in-fact, each with the power of substitution, for him/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/her substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934 this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
| Signature | | Title | | Date |
| /S/ MOSHE N. GAVRIELOV | | President and Chief Executive Officer (Principal | | |
| (Moshe N. Gavrielov) | | Executive Officer) and Director | | May 28, 2008 |
| |
| /S/ JONA. OLSON | | Senior Vice President, Finance and Chief | | May 28, 2008 |
| (Jon A. Olson) | | Financial Officer (Principal Accounting and | | |
| | | Financial Officer) | | |
| |
| /S/ WILLEMP. ROELANDTS | | Chairman of the Board of Directors | | May 28, 2008 |
| (Willem P. Roelandts) | | | | |
| |
| /S/ JOHNL. DOYLE | | Director | | May 28, 2008 |
| (John L. Doyle) | | | | |
| |
| /S/ JERALDG. FISHMAN | | Director | | May 28, 2008 |
| (Jerald G. Fishman) | | | | |
| |
| /S/ PHILIPT. GIANOS | | Director | | May 28, 2008 |
| (Philip T. Gianos) | | | | |
| |
| /S/ WILLIAMG. HOWARD, JR. | | Director | | May 28, 2008 |
| (William G. Howard, Jr.) | | | | |
| |
| /S/ J. MICHAELPATTERSON | | Director | | May 28, 2008 |
| (J. Michael Patterson) | | | | |
| |
| /S/ MARSHALL C.TURNER | | Director | | May 28, 2008 |
| (Marshall C. Turner) | | | | |
| |
| /S/ ELIZABETHW. VANDERSLICE | | Director | | May 28, 2008 |
| (Elizabeth W. Vanderslice) | | | | |
74
