UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
Commission File Number 0-18548
Xilinx, Inc.(Exact name of registrant as specified in its charter)
(408) 559-7778(Registrant's telephone number, including area code)
N/A(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YesX No __
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes __ No X
Shares outstanding of the Registrant’s common stock:
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
XILINX, INC.CONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited)
See notes to condensed consolidated financial statements.
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XILINX, INC.CONDENSED CONSOLIDATED BALANCE SHEETS
Derived from audited financial statements
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XILINX, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
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XILINX, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
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The tax benefit realized from option exercises and other awards during the first nine months of fiscal 2008 and 2007 was $14.1 million and $20.0 million, respectively.
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.
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The fair values of stock options and stock purchase plan rights under the Company’s equity incentive plans and 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), the per-share weighted-average fair values of stock options granted during the third quarter of fiscal 2008 was $7.30 ($9.19 for the third quarter of fiscal 2007) and for the first nine months of fiscal 2008 was $8.10 ($9.03 for the first nine months of fiscal 2007). The fair value of stock options granted in fiscal 2008 and 2007 were estimated at the date of grant using the following assumptions:
Under the Company’s Stock Purchase Plan, shares are only issued during the second and fourth quarters of each year. The per-share weighted-average fair values of stock purchase rights granted under the Stock Purchase Plan during the first nine months of fiscal 2008 and 2007 were $7.28 and $5.95, respectively.
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Employee Stock Option Plans
A summary of the Company’s option plans activity and related information is as follows:
The total pre-tax intrinsic value of options exercised during the three months and nine months ended December 29, 2007 was $4.8 million and $36.6 million, respectively. This intrinsic value represents the difference between the fair market value of the Company’s common stock on the date of exercise and the exercise price of each option.
Restricted Stock Unit Awards
A summary of the Company’s RSU activity and related information is as follows:
Employee Qualified Stock Purchase Plan
Under the Stock Purchase Plan, employees purchased 944 thousand shares for $16.2 million in the second quarter of fiscal 2008 and 885 thousand shares for $15.3 million in the second quarter of fiscal 2007. No shares were issued during the first or third quarters of fiscal 2008 or 2007. The next scheduled purchase under the Stock Purchase Plan is in the fourth quarter of fiscal 2008. On August 9, 2007, the stockholders approved an amendment to increase the authorized number of shares reserved for issuance under the Stock Purchase Plan by 2.0 million shares. As of December 29, 2007, 9.0 million shares were available for future issuance out of 38.5 million shares authorized.
The computation of basic net income per common share for all periods presented is derived from the information on the condensed 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 3.3 million and 4.3 million common equivalent shares attributable to outstanding stock awards for the third quarter and the first nine months of fiscal 2008, respectively, that are not included in basic net income per common share. For the third quarter and the first nine months of fiscal 2007, the total shares used in the denominator of the diluted net income per common share calculation includes 5.6 million and 5.8 million common equivalent shares attributable to outstanding stock awards, respectively.
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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 both the three months and the nine months ended December 29, 2007, the fair value of the Company’s total UMC investment decreased by $6.2 million. At December 29, 2007, the Company recorded a total of $644 thousand of deferred tax benefits and a $1.0 million unrealized loss (net of tax) in accumulated other comprehensive income associated with the UMC investment. As of December 29, 2007, the Company classified the UMC investment as short-term because the Company intends to sell the entire investment within the next 12 months.
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The change in the accumulated unrealized gain (loss) on available-for-sale securities, net of tax, at December 29, 2007, primarily reflects the decrease in value of the UMC investment since March 31, 2007 (see Note 6). In addition, the unrealized loss on the Company’s short-term and long-term investments increased by $2.5 million during the nine months ended December 29, 2007.
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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. Forward-looking statements can often be identified by the use of forward-looking words, such as “may,” “will,” “could,” “should,” “expect,” “believe,” “anticipate,” “estimate,” “continue,” “plan,” “intend,” “project” or other similar words. We disclaim any responsibility to update any forward-looking statement provided in this document.
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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, research and development (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 December 29, 2007, the Company had debt securities with a fair value of $1.68 billion, an equity investment in UMC, a publicly-held Taiwanese semiconductor wafer manufacturing company, of $50.2 million, and strategic investments in non-marketable equity securities of $23.9 million (adjusted cost).
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. 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 FASB Staff Position (FSP) No. FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and 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 distributor’s end customers. For the first nine months of fiscal 2008, approximately 84% of our net revenues were from products sold to distributors for subsequent resale to original equipment manufacturers (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.
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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.
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 2007, there was no impairment of goodwill in fiscal 2007. Unless there are indicators of impairment, our next impairment review for goodwill will be performed and completed in the fourth quarter of fiscal 2008. To date, no impairment indicators have been identified.
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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 FIN 48. The provisions were effective for the Company beginning in the first quarter of fiscal 2008. See Note 13 to our condensed consolidated financial statements included in Part I. “Financial Information.”
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 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 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 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
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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 the first nine months of 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: Third quarter and first nine months of fiscal 2008 compared to the third quarter and first nine months of fiscal 2007
The following table sets forth statement of income data as a percentage of net revenues for the periods indicated:
Net Revenues
Net revenues of $474.8 million in the third quarter of fiscal 2008 represented a 5% increase from the comparable prior year period of $450.7 million. The increase was primarily driven by strong customer demand for our New Products. Net revenues for the first nine months of fiscal 2008 were $1.37 billion, a 2% decrease from the comparable prior year period of $1.40 billion. The decrease in net revenues was primarily a result of decreased demand for our older products, particularly in the areas of communications and data processing. Increased total unit sales during the first nine months of fiscal 2008 compared to the comparable prior year period were more than offset by declines in average unit selling prices, which also contributed to the decrease in net revenues in the first nine months of fiscal 2008.
No end customer accounted for more than 10% of the Company’s 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 products. Mainstream Products include the Virtex-II, Spartan-II, CoolRunner and Virtex-E products. 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 - programmable read only memory), software, intellectual property (IP) cores, customer training, design services and support.
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Net revenues by product categories for the third quarter and the first nine months of fiscal 2008 and 2007 were as follows:
New Products continue to lead our revenue growth and now represent 35% of Xilinx total revenues. The increases in net revenues from New Products in the third quarter and the first nine months of fiscal 2008 were a result of continued strong market acceptance of our products manufactured on 90-nanometer (nm) and 65-nm process technologies. 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 the third quarter and the first nine months of fiscal 2008 from the comparable prior year periods. The decreases were primarily due to weakness experienced from customers in the communications and data processing end markets.
Net revenues from Base Products decreased in the third quarter and the first nine months of fiscal 2008 from the comparable prior year periods. Base Product revenues typically decrease over time as products within this category mature and approach end of life.
Net revenues from Support Products increased in the third quarter and the first nine months of fiscal 2008 from the comparable prior year periods. The increases were primarily due to an increase in sales from our serial PROM and 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 third quarter and the first nine months of fiscal 2008 and 2007 were as follows:
Net revenues from Communications, our largest end market, decreased in the third quarter and the first nine months of fiscal 2008 compared with the comparable prior year periods. The decreases were due to broad-based weakness in sales from both wired and wireless communications applications, much of which was driven by merger consolidation.
Net revenues from the Industrial and Other end market increased in the third quarter and the first nine months of fiscal 2008 compared with the comparable prior year periods. The increases were due to strong sales in defense, industrial, scientific and medical applications. In the recent past, revenues from defense applications are typically stronger in the third fiscal quarter.
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Net revenues from the Consumer and Automotive end market increased in the third quarter and the first nine months of fiscal 2008 compared with the comparable prior year periods. The increases were due to strength in audio, video and broadcast and automotive applications.
Net revenues from the Data Processing end market were flat in the third quarter of fiscal 2008 compared with the comparable prior year period as a slight rebound in storage applications was offset by a decline in computing and data processing applications. Net revenues from the Data Processing end market decreased in the first nine months of fiscal 2008 compared with the comparable prior year period. The decrease was driven primarily by decreases in sales from storage, computing and data processing applications.
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 third quarter and the first nine months of fiscal 2008 and 2007 were as follows:
During the third quarter of fiscal 2008, net revenues in North America increased from the comparable prior year period. The increase was primarily driven by strength in the Consumer and Automotive and Industrial and Other end markets. During the first nine months of fiscal 2008, net revenues in North America decreased from the comparable prior year period. The decrease was primarily due to a decline in sales from wired and wireless communications and data processing applications.
During the third quarter and the first nine months of fiscal 2008, net revenues in Asia Pacific increased from the comparable prior year periods. The increases were due to increased sales to customers in China as well as continued outsourcing of manufacturing operations by large U.S. and European-based customers to the Asia Pacific region. The revenue growth in Asia Pacific was broad-based across most end markets.
Net revenues in Europe were flat during the third quarter of fiscal 2008 compared with the comparable prior year period as strength in automotive, consumer, industrial, scientific and medical applications were offset by weakness in wireless communications applications. Net revenues in Europe decreased in the first nine months of fiscal 2008 compared with the comparable prior year period driven by lower sales from wireless communications applications.
The decrease in net revenues in Japan during the third quarter of fiscal 2008 compared with the comparable prior year period was primarily a result of weakness in the Data Processing and Consumer and Automotive end markets. The decrease in net revenues in Japan during the first nine months of fiscal 2008 compared with the comparable prior year period was a result of broad-based weakness across several end markets including Communications and Consumer and Automotive.
Gross Margin
The increase in the gross margin percentage in the third quarter and the first nine months of fiscal 2008 from the comparable prior year periods was due to several factors. Favorable yields and lower wafer pricing from products manufactured using 90-nm and 65-nm technology resulted in lower unit product costs. Additionally, our expense for excess and obsolete inventory in the third quarter and the first nine months of fiscal 2008 was down significantly from the comparable prior year periods.
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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.
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
R&D spending decreased $5.1 million during the third quarter of fiscal 2008 and $22.4 million during the first nine months of fiscal 2008 compared to the same periods last year. These decreases were primarily due to reduced stock-based compensation expense and discretionary spending coupled with lower cost of our investment in our R&D center in India.
We plan to continue to selectively invest in R&D efforts in areas such as new products and more advanced process development, IP cores, digital signal processing (DSP), embedded processing 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
SG&A expenses increased $2.5 million during the third quarter of fiscal 2008 and decreased $7.0 million during the first nine months of fiscal 2008 compared to the same periods last year. The increase in SG&A expenses in the third quarter of fiscal 2008 was primarily due to expenses related to increased headcount, particularly in our sales and support organization. The decrease in SG&A expenses for the first nine months of fiscal 2008 compared to the same period last year was attributable to lower stock-based compensation, reduced discretionary spending and lower commissions due to decreased net revenues. The reductions in discretionary spending included consulting, travel and marketing expense.
Amortization of Acquisition-Related Intangibles
Amortization expense was related to the intangible assets acquired from prior acquisitions. Amortization expense for these intangible assets decreased for the third quarter and the first nine months of fiscal 2008 from the same periods last year, due to the complete amortization of certain intangible assets in fiscal 2007. We expect amortization of acquisition-related intangibles to be approximately $6.8 million for fiscal 2008 compared with $8.0 million for fiscal 2007.
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Total stock-based compensation expense during the third quarter and the first nine months of fiscal 2008 was $16.5 million and $48.7 million, respectively. The decreases in stock-based compensation expense for the third quarter and the first nine months of fiscal 2008 were 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 the third quarter of fiscal 2007 related to the adoption of SFAS 123(R) was $21.4 million. Total stock-based compensation expense during the first nine months of fiscal 2007 related to the adoption of SFAS 123(R) was $70.2 million, excluding one-time expense of $2.2 million relating to prior years under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
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.
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.
Impairment Loss on Investments
We recognized impairment losses on investments of $1.5 million and $2.0 million during the third quarter and the first nine months of fiscal 2007, respectively, related to non-marketable equity securities in private companies. These impairment losses resulted from certain investees diluting Xilinx’s investment through the receipt of additional rounds of investment at a lower valuation.
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Interest and Other, Net
The decreases in interest and other, net for the third quarter and the first nine months of fiscal 2008 over the prior year’s comparable periods were due to the interest expense ($8.0 million and $24.0 million, respectively) related to the debentures issued in the fourth quarter of fiscal 2007. This interest expense was partially offset by an increase in interest income for the third quarter and the first nine months of fiscal 2008 due to higher yields resulting from an increase in interest rates and a larger investment portfolio. Interest and other, net in the third quarter and the first nine months of fiscal 2007 also included gains of approximately $1.0 million and $7.0 million, respectively, from the sale of a portion of the Company’s UMC investment which were partially offset by portfolio capital losses.
Provision for Income Taxes
Our effective tax rate increased five percentage points in the third quarter and two percentage points in the first nine months of fiscal 2008 as compared to the prior year periods. The net increases in the third quarter and the first nine months of fiscal 2008, when compared with fiscal 2007, were primarily due to items unique to the third quarter of fiscal 2007 decreasing the rates for the prior year periods.
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. See Note 13 to our condensed consolidated financial statements included in Part 1. “Financial Information” and Item 1. “Legal Proceedings” included in Part II. “Other Information.”
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 and in UMC stock are available for future sale. The combination of cash, cash equivalents and short-term and long-term investments at December 29, 2007 and March 31, 2007 totaled $1.89 billion and $1.81 billion, respectively. As of December 29, 2007, we had cash, cash equivalents and short-term investments of $1.32 billion and working capital of $1.56 billion. As of March 31, 2007, cash, cash equivalents and short-term investments were $1.14 billion and working capital was $1.40 billion.
Operating Activities - During the first nine months of fiscal 2008, our operations generated net positive cash flow of $479.1 million, which was $33.2 million higher than the $445.9 million generated during the first nine months of fiscal 2007. The positive cash flow from operations generated during the first nine months of fiscal 2008 was primarily from net income as adjusted for noncash related items, decreases in inventories and deferred income taxes and an increase in accrued liabilities. These items were partially offset by an increase in accounts receivable. Our inventory levels were $42.5 million lower at December 29, 2007 compared to March 31, 2007. Combined inventory days at Xilinx and distribution decreased to 93 days at December 29, 2007 from 112 days at March 31, 2007, which was due to improved forecasting accuracy, fewer inventory mix issues and lower inventory in the distributor channel. Accounts receivable increased by $47.0 million from the levels at March 31, 2007, due to the timing of payments from customers, credit issuance and the timing of shipments during the third quarter of fiscal 2008. Days sales outstanding increased to 46 days at December 29, 2007 from 36 days at March 31, 2007.
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For the first nine months of fiscal 2007, the net positive cash flow from operations was primarily from net income as adjusted for noncash related items, a decrease in accounts receivable and an increase in income taxes payable. These items were partially offset by a decrease in deferred income on shipments to distributors.
Investing Activities - Net cash used in investing activities of $349.1 million during the first nine months of fiscal 2008 included net purchases of available-for-sale securities of $315.9 million, $39.3 million for purchases of property, plant and equipment and $4.6 million for other investing activities. These uses of cash were partially offset by a distribution from UMC of $10.7 million. For the comparable fiscal 2007 period, net cash used in investing activities of $302.2 million included net purchases of available-for-sale securities of $253.0 million, including $183.5 million of net proceeds from the sale of a portion of the UMC investment, $47.6 million for purchases of property, plant and equipment and $1.6 million for other investing activities.
Financing Activities - Net cash used in financing activities was $365.5 million in the first nine months of fiscal 2008 and consisted of $350.0 million for the repurchase of common stock and $105.9 million for dividend payments to stockholders. These items were partially offset by $78.3 million of proceeds from the issuance of common stock under employee stock plans and $12.1 million for excess tax benefits from stock-based compensation. For the comparable fiscal 2007 period, net cash used in financing activities was $387.0 million and consisted of $400.0 million for the repurchase of common stock and $91.2 million for dividend payments to stockholders. These items were partially offset by $85.1 million of proceeds from the issuance of common stock under employee stock plans and $19.1 million for excess tax benefits from stock-based compensation.
Stockholders’ equity decreased $38.0 million during the first nine months of fiscal 2008. The decrease was attributable to the repurchase of common stock of $350.0 million, the payment of dividends to stockholders of $105.9 million and the combination of unrealized losses on available-for-sale securities, net of deferred tax benefits, and hedging transaction losses totaling $5.6 million. The decreases were partially offset by the $277.6 million in net income for the first nine months of fiscal 2008, the issuance of common stock under employee stock plans of $77.2 million, stock-based compensation related amounts totaling $48.3 million, the related tax benefits associated with stock option exercises and the Stock Purchase Plan of $11.7 million, the effect of the adoption of FIN 48 totaling $6.5 million and cumulative translation adjustment of $2.2 million.
Contractual Obligations
We lease some of our facilities, office buildings and land under non-cancelable operating leases that expire at various dates through November 2035. See Note 14 to our condensed consolidated financial statements included in Part 1. “Financial Information” for a schedule of our operating lease commitments as of December 29, 2007.
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. As of December 29, 2007, we had $70.5 million of outstanding inventory and other non-cancelable purchase obligations to subcontractors. 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. As of December 29, 2007, the Company also had $26.5 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.
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 15 of each year, beginning September 15, 2007. See Note 7 to our condensed consolidated financial statements included in Part 1. “Financial Information” for additional information about our debentures.
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Off-Balance-Sheet Arrangements
As of December 29, 2007, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
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.
We used $350.0 million of cash to repurchase 14.2 million shares of our common stock during the first nine months of fiscal 2008 compared with $400.0 million used to repurchase 16.5 million shares during the first nine months of fiscal 2007. During the first nine months of fiscal 2008, we paid $105.9 million in cash dividends to stockholders, representing an aggregate amount of $0.36 per common share. During the first nine months of fiscal 2007, we paid $91.2 million in cash dividends to stockholders, representing an aggregate amount of $0.27 per common share. In addition, on January 16, 2008, our Board of Directors declared a cash dividend of $0.12 per common share for the fourth quarter of fiscal 2008. The dividend is payable on February 27, 2008 to stockholders of record on February 6, 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 II. “Other Information” and below could affect our cash positions adversely. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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 $1.68 billion at December 29, 2007. 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 December 29, 2007 would have affected the fair value of our investment portfolio by less than $10.0 million.
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 and effective as hedges of anticipated transactions, for which a firm commitment has been attained, 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.
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We will enter into forward currency exchange contracts to hedge our overseas operating expenses and other liabilities when deemed appropriate. As of December 29, 2007, we had the following outstanding forward currency exchange contracts:
The net unrealized gain or loss, which approximates the fair market value of the above contracts, was immaterial at December 29, 2007. The contracts expire at various dates between January and March 2008.
Our investments in several of our wholly-owned subsidiaries are recorded in currencies other than the U.S. dollar. As 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 December 29, 2007 would have affected the annualized foreign-currency denominated operating expenses of our foreign subsidiaries by less than $15.0 million. In addition, a hypothetical 10% favorable or unfavorable change in foreign currency exchange rates compared to rates at December 29, 2007 would have affected the value of foreign-currency denominated cash and investments by less than $5.0 million.
Equity Security Price Risk
Our investment in marketable equity securities at December 29, 2007 consists almost entirely of our investment in UMC, which consists of shares of common stock, the value of which is determined by the closing price on the Taiwan Stock Exchange as of the balance sheet date. This value is converted from New Taiwan dollars into U.S. dollars and included in our determination of the change in the fair value of our investment in UMC, which is accounted for under the provisions of SFAS 115. The market value of our investment in UMC was approximately $50.2 million at December 29, 2007 as compared to our adjusted cost basis of approximately $51.8 million. The value of our investment in UMC would be materially impacted if there were a significant change in the market price of the UMC shares and/or New Taiwan dollars. Excluding the effect of any changes in the New Taiwan dollar, a hypothetical 30% favorable or unfavorable change in UMC’s stock price compared to the stock price at December 29, 2007 would have affected the value of our investment in UMC by less than $15.1 million. See Note 6 to our condensed consolidated financial statements included in Part 1. “Financial Information” for additional information about our UMC investment.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. These controls and procedures are also designed to ensure that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate to allow timely decisions regarding required disclosure. Internal controls are procedures designed to provide reasonable assurance that: transactions are properly authorized; assets are safeguarded against unauthorized or improper use; and transactions are properly recorded and reported, to permit the preparation of our financial statements in conformity with generally accepted accounting principles.
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with its policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We continuously evaluate our internal controls and make changes to improve them as necessary. Our intent is to maintain our disclosure controls as dynamic systems that change as conditions warrant.
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An evaluation was carried out, under the supervision of and with the participation of our 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-Q, 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.
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 29, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Internal Revenue Service
The 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 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 IRS and the Company have each filed briefs. The U.S. Court of Appeal for the Ninth Circuit has calendared March 2008 for oral arguments.
Other than as stated above, we know of no legal proceedings contemplated by any governmental authority or agency against the Company.
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.
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.
Other Matters
From time to time, we are involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, mergers and acquisitions, licensing, contract law, distribution arrangements and employee relations matters. Periodically, we review the status of each significant 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.
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ITEM 1A. RISK FACTORS
The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company or that the Company’s management currently deems immaterial also may impair its business operations. If any of the risks described below were to occur, our business, financial condition, operating results and cash flows could be materially adversely affected.
Except for the addition of a new risk factor titled “New Chief Executive Officer” and the inclusion of additional information related to the risk factor titled “Potential Effect of New Accounting Pronouncements,” there have been no material changes to our risk factors from those previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2007.
The semiconductor industry is characterized by rapid technological change, intense competition and cyclical market patterns which contribute to create factors that may affect our future operating results including:
Market Demand
Competitive Environment
Technology
Other
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We attempt to identify changes in market conditions as soon as possible; however, the dynamics of the market make prediction of and timely reaction to such events difficult. Due to these and other factors, our past results, including those described in this report, are much less reliable predictors of the future than with companies in many older, more stable and mature industries. Based on the factors noted herein, we may experience substantial fluctuations in future operating results.
Our results of operations are impacted by global economic and political conditions, dependence on new products, dependence on independent manufacturers and subcontractors, competition, intellectual property, considerable number of common shares subject to future issuance, potential effect of new accounting pronouncements, the transition of our CEO, financial reporting and internal controls environment and litigation, each of which is discussed in greater detail below.
Potential Effect of Global Economic and Political Conditions
Sales and operations outside of the U.S. subject us to the risks associated with conducting business in foreign economic and regulatory environments. Our financial condition and results of operations could be adversely affected by unfavorable economic conditions in countries in which we do significant business and by changes in foreign currency exchange rates affecting those countries. For example, we have sales and operations in the Asia Pacific region, Japan and Europe. Past economic weakness in these markets adversely affected revenues, and such conditions may occur in the future. Sales to all direct OEMs and distributors are denominated in U.S. dollars. While the recent movement of the Euro and Yen against the U.S. dollar had no material impact to our business, increased volatility could impact our European and Japanese customers. Currency instability may increase credit risks for some of our customers and may impair our customers' ability to repay existing obligations. Increased currency volatility could also positively or negatively impact our foreign currency denominated costs, assets and liabilities. Any or all of these factors could adversely affect our financial condition and results of operations in the future.
Our financial condition and results of operations are increasingly dependent on the global economy. Any instability in worldwide economic environments occasioned, for example, by political instability or terrorist activity could impact economic activity and could lead to a contraction of capital spending by our customers. Additional risks to us include U.S. military actions, changes in U.S. government spending on military and defense activities impacting defense-associated sales, economic sanctions imposed by the U.S. government, government regulation of exports, imposition of tariffs and other potential trade barriers, reduced protection for intellectual property rights in some countries, rising oil prices and generally longer receivable collection periods. Moreover, our financial condition and results of operations could be affected in the event of political conflicts or economic crises in countries where our main wafer providers, end customers and contract manufacturers who provide assembly and test services worldwide, are located.
Dependence on New Products
Our success depends in large part on our ability to develop and introduce new products that address customer requirements and compete effectively on the basis of price, density, functionality, power consumption and performance. The success of new product introductions is dependent upon several factors, including:
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Our product development efforts may not be successful, our new products may not achieve industry acceptance and we may not achieve the necessary volume of production that would lead to further per unit cost reductions. Revenues relating to our mature products are expected to decline in the future, which is normal for our product life cycles. As a result, we may be increasingly dependent on revenues derived from design wins for our newer products as well as anticipated cost reductions in the manufacture of our current products. We rely primarily on obtaining yield improvements and corresponding cost reductions in the manufacture of existing products and on introducing new products that incorporate advanced features and other price/performance factors that enable us to increase revenues while maintaining consistent margins. To the extent that such cost reductions and new product introductions do not occur in a timely manner, or to the extent that our products do not achieve market acceptance at prices with higher margins, our financial condition and results of operations could be materially adversely affected.
Dependence on Independent Manufacturers and Subcontractors
During the first nine months of fiscal 2008, nearly all of our wafers were manufactured either in Taiwan, by UMC or in Japan, by Toshiba or Seiko. Terms with respect to the volume and timing of wafer production and the pricing of wafers produced by the semiconductor foundries are determined by periodic negotiations between Xilinx and these wafer foundries, which usually result in short-term agreements. We are dependent on these foundries, especially UMC, which supplies the substantial majority of our wafers. We rely on UMC to produce wafers with competitive performance and cost attributes. These attributes include an ability to transition to advanced manufacturing process technologies and increased wafer sizes, produce wafers at acceptable yields, and deliver them in a timely manner. We cannot guarantee that the foundries that supply our wafers will not experience manufacturing problems, including delays in the realization of advanced manufacturing process technologies. In addition, greater demand for wafers produced by the foundries, without an offsetting increase in foundry capacity, raises the likelihood of potential wafer price increases and wafer shortages.
UMC’s foundries in Taiwan and Toshiba’s and Seiko’s foundries in Japan as well as many of our operations in California are centered in areas that have been seismically active in the recent past. Should there be a major earthquake in our suppliers’ or our operating locations in the future, our operations, including our manufacturing activities, may be disrupted. This type of disruption could result in our inability to ship products in a timely manner, thereby materially adversely affecting our financial condition and results of operations. Additionally, disruption of operations at these foundries for any reason, including other natural disasters such as fires or floods, as well as disruptions in access to adequate supplies of electricity, natural gas or water could cause delays in shipments of our products, and could have a material adverse effect on our results of operations.
We are also dependent on subcontractors to provide semiconductor assembly, test and shipment services. Any prolonged inability to obtain wafers with competitive performance and cost attributes, adequate yields or timely delivery, unavailability of or disruption in assembly, test or shipment services, or any other circumstance that would require us to seek alternative sources of supply, could delay shipments and have a material adverse effect on our ability to meet customer demand reducing net sales and negatively impacting our financial condition and results of operations.
Competition
Our PLDs compete in the logic integrated circuit (IC) industry, an industry that is intensely competitive and characterized by rapid technological change, increasing levels of integration, product obsolescence and continuous price erosion. We expect increased competition from our primary PLD competitors, Altera Corporation (Altera), Lattice Semiconductor Corporation and Actel Corporation, from the ASIC market, which has been ongoing since the inception of field programmable gate arrays (FPGAs), from the ASSP market, and from new companies that may enter the traditional programmable logic market segment. We believe that important competitive factors in the logic industry include:
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Our strategy for expansion in the logic market includes continued introduction of new product architectures that address high-volume, low-cost and low-power applications as well as high-performance, high-density applications. In addition, we anticipate continued price reductions proportionate with our ability to lower the cost for established products. However, we may not be successful in achieving these strategies.
Other competitors include manufacturers of:
Several companies have introduced products that compete with ours or have announced their intention to enter the PLD market segment. To the extent that our efforts to compete are not successful, our financial condition and results of operations could be materially adversely affected.
The benefits of programmable logic have attracted a number of competitors to the market segment. We recognize that different applications require different programmable technologies, and we are developing architectures, processes and products to meet these varying customer needs. Recognizing the increasing importance of standard software solutions, we have developed common software design tools that support the full range of our IC products. We believe that automation and ease of design are significant competitive factors in the PLD market segment.
We could also face competition from our licensees. In the past we have granted limited rights to other companies with respect to certain of our older technology, and we may do so in the future. Granting such rights may enable these companies to manufacture and market products which may be competitive with some of our older products.
Intellectual Property
We rely upon patent, copyright, trade secret, mask work and trademark laws to protect our intellectual property. We cannot provide assurance that such intellectual property rights can be successfully asserted in the future or will not be invalidated, circumvented or challenged. From time to time, third parties, including our competitors, have asserted patent, copyright and other intellectual property rights to technologies that are important to us. Third parties may assert infringement claims against our indemnitees or us in the future; assertions by third parties may result in costly litigation or indemnity claims and we may not prevail in such matters or be able to license any valid and infringed patents from third parties on commercially reasonable terms. Litigation, regardless of its outcome, could result in substantial costs and diversion of our resources. Any infringement claim, indemnification claim or other litigation against us or by us could materially adversely affect our financial condition and results of operations.
Considerable Number of Common Shares Subject to Future Issuance
As of December 29, 2007, we had 2.00 billion authorized common shares, of which 286.2 million shares were outstanding. In addition, 73.7 million common shares were reserved for issuance pursuant to our equity incentive plans and Stock Purchase Plan, and 32.1 million shares were reserved for issuance upon conversion or repurchase of the debentures. The availability of substantial amounts of our common shares resulting from the exercise or settlement of equity awards outstanding under our equity incentive plans or the conversion or repurchase of debentures using common shares, which would be dilutive to existing security holders, could adversely affect the prevailing market price of our common shares and could impair our ability to raise additional capital through the sale of equity securities.
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Potential Effect of New Accounting Pronouncements
There may be potential new accounting pronouncements or regulatory rulings, which may have an impact on our future financial condition and results of operations. For example, on August 31, 2007, the FASB issued proposed FSP No. APB 14-a, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” Our 3.125% convertible debentures due March 15, 2037 would be affected by this proposed FSP. The proposed FSP would 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 proposed FSP would 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. The proposed FSP is expected to make any final guidance effective for fiscal years beginning after December 15, 2007 and would be applied retrospectively to all periods presented. The Company would be required to implement the proposed standard during the first quarter of fiscal 2009, which begins on March 30, 2008. We are currently evaluating the effect that the adoption of this FSP would have on our consolidated results of operations and financial condition. We cannot predict the outcome of this process or any other changes in GAAP that may affect accounting for convertible debt securities. Any change in the accounting method for convertible debt securities could have an adverse impact on our financial results. These impacts could adversely affect the trading price of our common stock and in turn negatively impact the trading price of the debentures.
See Note 7 to our condensed consolidated financial statements included in Part 1. “Financial Information” for additional information about the debentures. Please also see Note 2 to our condensed consolidated financial statements included in Part 1. “Financial Information” for additional information about recent accounting pronouncements.
New Chief Executive Officer
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. Mr. Roelandts shall continue to serve as our Chairman of the Board and will assist in transitioning his CEO-level responsibilities to Mr. Gavrielov. While we do not believe that our business has been or will be adversely affected by the change in our leadership, it is important for us to successfully manage this transition. Our failure to do so could adversely affect our ability to compete effectively.
Financial Reporting and Internal Controls Environment
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. 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.
Litigation
See Part II, Item 1. “Legal Proceedings.”
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Issuer Purchases of Equity Securities
The following table summarizes the Company’s repurchase of its common stock during the third fiscal quarter of 2008. See Note 8 to our condensed consolidated financial statements included in Part 1. “Financial Information” for information regarding our stock repurchase plans.
During the third quarter of fiscal 2008, the Company repurchased a total of 8.2 million shares of its common stock for $200.0 million. On February 26, 2007, we announced a repurchase program of up to an additional $1.50 billion of common stock. Through December 29, 2007, the Company had repurchased $1.11 billion of the $1.50 billion of common stock approved for repurchase under the February 2007 authorization. This share repurchase program has no stated expiration date.
ITEM 6. EXHIBITS
10.27 Amended and Restated Executive Succession Agreement dated November 7, 2007 between the Company and Willem P. Roelandts (1)31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to Exhibit 10.27 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2007
Items 3, 4 and 5 are not applicable and have been omitted.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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