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Xilinx 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
xilinx_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
[X]
      
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 2, 2010
 
or
 
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________ .
 
Commission File Number     000-18548
 
Xilinx, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware 77-0188631
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2100 Logic Drive, San Jose, California  95124
(Address of principal executive offices) (Zip Code)

(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.
Yes No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x    Accelerated filer o    Non-accelerated filer o    Smaller reporting company o

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:
 
Class          Shares Outstanding as of January 27, 2010
Common Stock, $.01 par value 276,646,832



PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
XILINX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended Nine months Ended
Jan 2, Dec 27, Jan 2, Dec 27,
(In thousands, except per share amounts)         2010         2008*         2010         2008*
Net revenues $ 513,349 $ 458,387 $ 1,304,534   $ 1,430,170
Cost of revenues 184,320 165,331 486,319 519,244
Gross margin 329,029 293,056 818,215 910,926
 
Operating expenses:
       Research and development 101,867 86,967 275,245 267,202
       Selling, general and administrative 85,037 85,032 237,214 266,116
       Amortization of acquisition-related intangibles 1,475 2,493 4,326
       Restructuring charges 5,531 27,217 22,023
              Total operating expenses 192,435 173,474 542,169 559,667
 
Operating income 136,594 119,582 276,046 351,259
Gain on early extinguishment of convertible debentures 58,290 58,290
Impairment loss on investments (3,041 ) (19,540 ) (3,041 ) (53,162 )
Interest and other income (expense), net (542 ) (1,743 ) (13,234 ) 9,975
 
Income before income taxes 133,011 156,589 259,771 366,362
 
Provision for income taxes 26,103 37,145 50,819 82,680
 
Net income $ 106,908 $ 119,444 $ 208,952 $ 283,682
 
Net income per common share:
       Basic $ 0.39 $ 0.44 $ 0.76 $ 1.03
       Diluted $ 0.38 $ 0.44 $ 0.75 $ 1.02
 
Cash dividends declared per common share $ 0.16 $ 0.14 $ 0.44 $ 0.42
 
Shares used in per share calculations:
       Basic 276,832 273,997 275,989 276,584
       Diluted 278,566 274,223 277,030 277,603

* As adjusted for the retrospective adoption of the accounting standard for convertible debentures in the first quarter of fiscal 2010 (see Note 1)
 
See notes to condensed consolidated financial statements.
 
2
 


XILINX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
Jan 2, Mar 28,
(In thousands, except par value amounts)         2010         2009*
(Unaudited)
ASSETS
Current assets:
       Cash and cash equivalents $ 1,037,564 $ 1,065,987
       Short-term investments 452,429 258,946
       Accounts receivable, net 231,078 216,390
       Inventories 128,935 119,832
       Deferred tax assets 83,482 63,709
       Prepaid expenses and other current assets 25,238 27,604
Total current assets 1,958,726 1,752,468
 
Property, plant and equipment, at cost 720,990 776,808
Accumulated depreciation and amortization (353,476 ) (388,901 )
Net property, plant and equipment 367,514 387,907
Long-term investments 503,106 347,787
Goodwill 117,955 117,955
Acquisition-related intangibles, net 2,493
Other assets 174,650 203,291
Total Assets $ 3,121,951 $ 2,811,901
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
       Accounts payable $ 108,452 $ 48,201
       Accrued payroll and related liabilities 115,269 89,918
       Income taxes payable 4,028 10,171
       Deferred income on shipments to distributors 77,395 62,364
       Other accrued liabilities 56,824 22,412
Total current liabilities 361,968 233,066
 
Convertible debentures 354,460 352,110
 
Deferred tax liabilities 247,822 196,189
 
Long-term income taxes payable 122,287 80,699
 
Other long-term liabilities 1,506 1,077
 
Commitments and contingencies (Note 17, Note 19)
 
Stockholders’ equity:
       Preferred stock, $.01 par value (none issued)
       Common stock, $.01 par value 2,765 2,755
       Additional paid-in capital 1,067,748 1,085,745
       Retained earnings 959,909 879,118
       Accumulated other comprehensive income (loss) 3,486 (18,858 )
Total stockholders’ equity 2,033,908 1,948,760
Total Liabilities and Stockholders’ Equity $ 3,121,951 $ 2,811,901
 
* Derived from audited financial statements and adjusted for the retrospective adoption of the accounting standard for convertible debentures in the first quarter of fiscal 2010 (see Note 1)

See notes to condensed consolidated financial statements.
 
3
 


XILINX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine months Ended
Jan 2, Dec 27,
(In thousands)         2010         2008*
Cash flows from operating activities:
       Net income $ 208,952 $ 283,682
       Adjustments to reconcile net income to net cash provided by operating
              activities:
                     Depreciation 37,932 42,167
                     Amortization 11,777 12,420
                     Stock-based compensation 41,010 41,188
                     Gain on early extinguishment of convertible debentures (58,290 )
                     Net (gain) loss on sale of available-for-sale securities 12 (2,740 )
                     Amortization of debt discount on convertible debentures 2,893 3,797
                     Convertible debt derivatives – revaluation and amortization (542 ) 798
                     Impairment loss on investments 3,041 53,162
                     Tax benefit (expense) from exercise of stock options (7,662 ) 668
                     (Excess) reduction of tax benefit from stock-based compensation 15,868 (4,759 )
       Changes in assets and liabilities:
                     Accounts receivable, net (14,688 ) 35,557
                     Inventories (8,883 ) (19,297 )
                     Deferred income taxes 35,307 63,453
                     Prepaid expenses and other current assets (5,272 ) 6,180
                     Other assets 25,042 (15,220 )
                     Accounts payable 60,250 (5,996 )
                     Accrued liabilities (including restructuring activities) 57,893 18,772
                     Income taxes payable (27,540 ) (33,699 )
                     Deferred income on shipments to distributors 15,031 (40,167 )
                            Net cash provided by operating activities 450,421 381,676
 
Cash flows from investing activities:
       Purchases of available-for-sale securities (1,325,973 ) (832,919 )
       Proceeds from sale and maturity of available-for-sale securities 1,001,091 1,078,161
       Purchases of property, plant and equipment (17,540 ) (32,711 )
       Other investing activities (2,972 ) (493 )
                            Net cash provided by (used in) investing activities (345,394 ) 212,038
 
Cash flows from financing activities:
       Repurchases of convertible debentures (146,324 )
       Repurchases of common stock (25,000 ) (275,000 )
       Proceeds from issuance of common stock through various stock plans 29,035 79,620
       Payment of dividends to stockholders (121,617 ) (115,982 )
       Excess (reduction of) tax benefit from stock-based compensation (15,868 ) 4,759
                            Net cash used in financing activities (133,450 ) (452,927 )
 
Net increase (decrease) in cash and cash equivalents (28,423 ) 140,787
   
Cash and cash equivalents at beginning of period 1,065,987 866,995
 
Cash and cash equivalents at end of period $ 1,037,564 $ 1,007,782
 
Supplemental disclosure of cash flow information:
       Interest paid $ 10,776 $ 17,055
       Income taxes paid, net of refunds $ 25,238 $ 59,400

* As adjusted for the retrospective adoption of the accounting standard for convertible debentures in the first quarter of fiscal 2010 (see Note 1)
 
See notes to condensed consolidated financial statements.
 
4
 


XILINX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1. Basis of Presentation
 
The accompanying interim condensed consolidated financial statements have been prepared in conformity with United States (U.S.) generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X, and should be read in conjunction with the Xilinx, Inc. (Xilinx or the Company) consolidated financial statements filed with the U.S. Securities and Exchange Commission (SEC) on Form 10-K/A for the fiscal year ended March 28, 2009. The interim financial statements are unaudited, but reflect all adjustments which are, in the opinion of management, of a normal, recurring nature necessary to provide a fair statement of results for the interim periods presented. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for the fiscal year ending April 3, 2010 or any future period.
 
The Company uses a 52- to 53-week fiscal year ending on the Saturday nearest March 31. Fiscal 2010 is a 53-week year ending on April 3, 2010, while fiscal 2009, which ended on March 28, 2009, was a 52-week fiscal year. The third quarter of fiscal 2010 was a 14-week quarter ended on January 2, 2010, while the third quarter of fiscal 2009 was a 13-week quarter ended on December 27, 2008. The first and second quarters of fiscal 2010 and 2009 were all 13-week quarters.
 
     Adoption of New Accounting Standard for Convertible Debentures
 
Effective March 29, 2009, the Company retrospectively adopted the authoritative guidance for convertible debentures issued by the Financial Accounting Standards Board (FASB), which affected the Company’s 3.125% convertible debentures (debentures). The guidance specifies that issuers of convertible debt instruments should separately account for the liability (debt) and equity (conversion option) components of such instruments in a manner that reflects the borrowing rate for a similar non-convertible debt. The liability component is recognized as the fair value of a similar instrument that does not have a conversion feature at issuance. The equity component is based on the excess of the principal amount of the debentures over the fair value of the liability component, after adjusting for an allocation of debt issuance costs and the deferred tax impact. Such excess represents the estimated fair value of the conversion feature and is recorded as additional paid-in capital. The Company’s debentures were issued at a coupon rate of 3.125%, which was below that of a similar instrument that does not have a conversion feature (7.20%). Therefore, the valuation of the debt component resulted in a discounted carrying value of the debentures compared to the principal. This debt discount is amortized as additional non-cash interest expense over the expected life of the debt, which is also the stated life of the debt. The condensed consolidated financial statements have been retrospectively adjusted for all periods presented in accordance with the authoritative guidance for convertible debentures. See “Note 10. Convertible Debentures and Revolving Credit Facility” for further information.
 
The effect of the retrospective adoption on individual line items on the Company’s condensed consolidated balance sheet was as follows:
 
Mar 28, 2009
(In thousands) As
Previously As
        Reported         Adjustments (1)         Adjusted
Other assets $ 216,905 $ (13,614 ) (2) $ 203,291
Convertible debentures 690,125 (338,015 ) 352,110
Deferred tax liabilities 82,648 113,541 196,189
Additional paid-in capital 856,232 229,513 1,085,745
Retained earnings 897,771 (18,653 ) 879,118

(1) The amounts represent the net effect of the adoption of the accounting standard for convertible debentures in the first quarter of fiscal 2010 and the repurchase of a portion of the debentures.
 
(2) Other assets as of March 28, 2009 decreased by $13.6 million due to a decrease to long-term deferred tax assets of $7.0 million and a retroactive adjustment of debt issuance costs from other assets to additional paid-in capital of $6.6 million upon the adoption of the accounting standard for convertible debentures. The reclassification resulted in a cumulative decrease in amortization of debt issuance costs of $488 thousand as of March 28, 2009.
 
5
 


The effect of the retrospective adoption on individual line items on the Company’s condensed consolidated statements of income for the periods indicated was as follows:
 
Year Ended Year Ended
Mar 28, 2009   Mar 29, 2008
(In thousands, except per share amounts) As As
Previously As Previously As
     Reported         Adjustments         Adjusted         Reported         Adjustments         Adjusted
Gain on early extinguishment of
       convertible debentures $ 110,606 $ (35,572 ) (1) $ 75,034 $ $ $
Interest and other income (expense), net 12,189 (4,587 ) (2) 7,602 52,750 (4,604 ) (2) 48,146
Provision for income taxes 122,544 (26,237 ) 96,307 100,047 127 100,174
Net income 375,640 (13,922 ) 361,718 374,047 (4,731 ) 369,316
Net income per common share - basic $ 1.36 $ (0.05 ) $ 1.31 $ 1.27 $ (0.02 ) $ 1.25
Net income per common share - diluted $ 1.36 $ (0.05 ) $ 1.31 $ 1.25 $ (0.01 ) $ 1.24

Three Months Ended Nine months Ended
Dec 27, 2008   Dec 27, 2008
(In thousands, except per share amounts) As As
Previously As Previously As
     Reported         Adjustments         Adjusted         Reported         Adjustments         Adjusted
Gain on early extinguishment of
       convertible debentures $ 89,672 $ (31,382 ) (1) $ 58,290 $ 89,672 $ (31,382 ) $ 58,290
Interest and other income (expense), net (575 ) (1,168 ) (2) (1,743 ) 13,620 (3,645 ) (2) 9,975
Provision for income taxes 49,765 (12,620 ) 37,145 96,261 (13,581 ) 82,680
Net income 139,374 (19,930 ) 119,444 305,128 (21,446 ) 283,682
Net income per common share - basic $ 0.51 $ (0.07 ) $ 0.44 $ 1.10 $ (0.07 ) $ 1.03
Net income per common share - diluted $ 0.51 $ (0.07 ) $ 0.44 $ 1.10 $ (0.08 ) $ 1.02

(1) Gain on early extinguishment of convertible debentures decreased due to the allocation of the original gain to additional paid-in capital.
 
(2) Interest and other income (expense), net decreased due to additional interest expense recorded retroactively, partially offset by a reduction of amortization of debt issuance costs.
 
The retrospective adoption does not change the Company’s net cash provided by (used in) operating, investing or financing activities for any periods.
 
     Subsequent Events
 
Events that have occurred subsequent to January 2, 2010 have been evaluated through February 9, 2010, the date the Company issued these financial statements. See “Note 21. Subsequent Events” for additional information.
 
Note 2. Recent Accounting Pronouncements
 
In June 2009, the FASB issued the authoritative guidance to eliminate the historical GAAP hierarchy and establish only two levels of U.S. GAAP, authoritative and nonauthoritative. When launched on July 1, 2009, the FASB Accounting Standards Codification (ASC) became the single source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in the ASC became nonauthoritative. The subsequent issuances of new standards will be in the form of Accounting Standards Updates that will be included in the ASC. This authoritative guidance was effective for financial statements for interim or annual reporting periods ended after September 15, 2009. The Company adopted the new codification in the second quarter of fiscal 2010. As the codification was not intended to change or alter existing GAAP, it did not have any impact on the Company’s consolidated financial statements.
 
In August 2009, the FASB issued the authoritative guidance to provide additional guidance (including illustrative examples) clarifying the measurement of liabilities at fair value. Among other things, the guidance clarifies how the price of a traded debt security (i.e., an asset value) should be considered in estimating the fair value of the issuer’s liability. This authoritative guidance was effective for the first reporting period (including interim periods) beginning after its issuance, which for the Company was its third quarter of fiscal 2010, and it did not have a significant impact on the Company’s consolidated financial statements.
 
In October 2009, the FASB issued the authoritative guidance to update the accounting and reporting requirements for revenue arrangements with multiple deliverables. This guidance established a selling price hierarchy, which allows the use of an estimated selling price to determine the selling price of a deliverable in cases where neither vendor-specific objective evidence nor third-party evidence is available. This guidance is to be applied prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, which for the Company is its fiscal 2012. Early adoption is permitted, and if this update is adopted early in other than the first quarter of an entity’s fiscal year, then it must be applied retrospectively to the beginning of that fiscal year. The Company is currently assessing the impact of the adoption on its consolidated financial statements.
 
6
 


In October 2009, the FASB issued the authoritative guidance that clarifies which revenue allocation and measurement guidance should be used for arrangements that contain both tangible products and software, in cases where the software is more than incidental to the tangible product as a whole. More specifically, if the software sold with or embedded within the tangible product is essential to the functionality of the tangible product, then this software as well as undelivered software elements that relate to this software are excluded from the scope of existing software revenue guidance. This guidance is to be applied prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, which for the Company is its fiscal 2012. Early adoption is permitted, and if this update is adopted early in other than the first quarter of an entity’s fiscal year, then it must be applied retrospectively to the beginning of that fiscal year. The Company is currently assessing the impact of the adoption on its consolidated financial statements.
 
In January 2010, the FASB issued amended standards that require additional disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers, beginning in the Company’s fourth quarter of fiscal 2010. Additionally, these amended standards require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3), beginning in the Company’s first quarter of fiscal 2012. The Company does not expect these new standards to have significant impacts on the Company’s consolidated financial statements.
 
Note 3. Significant Customers and Concentrations of Credit Risk
 
Avnet, Inc. (Avnet), one of the Company’s distributors, distributes the substantial majority of the Company’s products worldwide. As of January 2, 2010 and March 28, 2009, Avnet accounted for 82% and 81% of the Company’s total accounts receivable, respectively. Resale of product through Avnet accounted for 49% of the Company’s worldwide net revenues in both the third quarter and the first nine months of fiscal 2010. For the third quarter and the first nine months of fiscal 2009, resale of product through Avnet accounted for 55% and 56% of the Company’s worldwide net revenues, respectively. The percentage of accounts receivable due from Avnet and the percentage of worldwide net revenues from Avnet are consistent with historical patterns.
 
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 condensed 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. Xilinx generally does not require collateral for receivables from its end customers or from distributors.
 
No end customer accounted for more than 10% of net revenues for any of the periods presented.
 
The Company mitigates concentrations of credit risk in its investments in debt securities by currently investing at least 95% 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 agencies’ credit ratings. Xilinx also performs additional credit due diligence and conducts regular portfolio credit reviews, including a review of counterparty credit risk related to the Company’s forward currency exchange contracts. 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.
 
As of January 2, 2010, less than 4% of the Company’s $1.89 billion investment portfolio consisted of student loan auction rate securities and all of these securities are rated AAA with the exception of $8.7 million that were downgraded to an A rating during the fourth quarter of fiscal 2009. More than 98% of the underlying assets that secure these securities are pools of student loans originated under the Federal Family Education Loan Program (FFELP) that are substantially 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. During the first nine months of fiscal 2010 and 2009, $1.3 million and $1.4 million, respectively, of these student loan auction rate securities were redeemed for cash by the issuers at par value. Because there can be no assurance of a successful auction in the future, beginning with the quarter ended March 29, 2008, the student loan auction rate securities were reclassified from short-term to long-term investments on the consolidated balance sheets. The maturity dates range from March 2023 to November 2047.
 
As of January 2, 2010, approximately 18% of the portfolio consisted of mortgage-backed securities. All of the mortgage-backed securities in the investment portfolio are AAA rated and were issued by U.S. government-sponsored enterprises and agencies.
 
7
 


Since September 2007, the global credit markets have experienced adverse conditions that have negatively impacted the values of various types of investment and non-investment grade securities. During this time the global credit and capital markets experienced volatility and disruption due to instability in the global financial system and uncertainty related to global economic conditions. While general conditions in the global credit markets have improved, there is a risk that the Company may incur additional other-than-temporary impairment charges for certain types of investments should credit market conditions deteriorate or the underlying assets fail to perform as anticipated due to the continued or worsening global economic conditions. See “Note 5. Financial Instruments” for a table of the Company’s available-for-sale securities.
 
Note 4. Fair Value Measurements
 
The guidance for fair value measurements established by the FASB defines fair value as the exchange price that would be received from selling an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which Xilinx would transact and also considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.
 
The Company determines the fair value for marketable debt securities using industry standard pricing services, data providers and other third-party sources and by internally performing valuation analyses. The Company primarily uses a consensus price or weighted average price for its fair value assessment. The Company determines the consensus price using market prices from a variety of industry standard pricing services, data providers, security master files from large financial institutions and other third party sources and uses those multiple prices as inputs into a distribution-curve-based algorithm to determine the daily market value. The pricing services use multiple inputs to determine market prices, including reportable trades, benchmark yield curves, credit spreads and broker/dealer quotes as well as other industry and economic events. For certain securities with short maturities, such as discount commercial paper and certificates of deposit, the security is accreted from purchase price to face value at maturity. If a subsequent transaction on the same security is observed in the marketplace, the price on the subsequent transaction is used as the current daily market price and the security will be accreted to face value based on the revised price. For certain other securities, such as student loan auction rate securities, the Company performs its own valuation analysis using a discounted cash flow pricing model.
 
The Company validates the consensus prices by taking random samples from each asset type and corroborating those prices using reported trade activity, benchmark yield curves, binding broker/dealer quotes or other relevant price information. There have not been any changes to the Company’s fair value methodology during the first nine months of fiscal 2010 and the Company did not adjust or override any fair value measurements as of January 2, 2010.
 
     Fair Value Hierarchy
 
The measurements of fair value were established based on a fair value hierarchy that prioritizes the utilized inputs. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. The guidance for fair value measurements requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:
 
Level 1 – Quoted (unadjusted) prices in active markets for identical assets or liabilities.
 
The Company’s Level 1 assets consist of U.S. Treasury securities and money market funds.
 
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
 
The Company’s Level 2 assets consist of bank certificates of deposit, commercial paper, corporate bonds, municipal bonds, U.S. agency securities, foreign government and agency securities, floating-rate notes and mortgage-backed securities. The Company’s Level 2 assets and liabilities include foreign currency forward contracts.
 
Level 3 - Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
 
The Company’s Level 3 assets and liabilities include student loan auction rate securities and the embedded derivative related to the Company’s debentures.
 
8
 


     Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of January 2, 2010 and March 28, 2009:
 
Jan 2, 2010
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Instruments Inputs Inputs Total Fair
(In thousands)         (Level 1)         (Level 2)         (Level 3)         Value
Assets:
Money market funds $ 481,646 $ $ $ 481,646
Bank certificates of deposit 59,991 59,991
Commercial paper 306,798 306,798
Corporate bonds 4,809 4,809
Auction rate securities 63,798 63,798
Municipal bonds 12,716 12,716
U.S. government and agency securities 4,967 46,326 51,293
Foreign government and agency securities 392,887 392,887
Floating rate notes 179,819 179,819
Mortgage-backed securities 337,200 337,200
Foreign currency forward contracts (net) 780 780
Total assets measured at fair value $ 486,613 $ 1,341,326 $ 63,798 $ 1,891,737
  
Liabilities:
Convertible debentures – embedded derivative $ $ $ 1,524 $ 1,524
Total liabilities measured at fair value $ $ $ 1,524 $ 1,524
  
Net assets measured at fair value $ 486,613 $ 1,341,326 $ 62,274 $ 1,890,213

9
 


Mar 28, 2009
(In thousands)         Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
        Significant
Other
Observable
Inputs
(Level 2)
        Significant
Unobservable
Inputs
(Level 3)
        Total Fair
Value
Assets:
Money market funds $ 343,750 $ $ $ 343,750
Bank certificates of deposit 20,001 20,001
Commercial paper 229,869 229,869
Corporate bonds 11,485 11,485
Auction rate securities 58,354 58,354
Municipal bonds 14,520 14,520
U.S. government and agency securities 2,972 6,952 9,924
Foreign government and agency securities 453,664 453,664
Floating rate notes 230,575 230,575
Asset-backed securities 5,894 36,492 42,386
Mortgage-backed securities 169,201 169,201
Total assets measured at fair value $ 346,722 $ 1,142,161 $ 94,846 $ 1,583,729
 
Liabilities:
Foreign currency forward contracts (net) $ $ 1,082 $ $ 1,082
Convertible debentures – embedded derivative 2,110 2,110
Total liabilities measured at fair value $ $ 1,082 $ 2,110 $ 3,192
 
Net assets measured at fair value $ 346,722 $ 1,141,079 $ 92,736 $ 1,580,537
 
     Changes in Level 3 Instruments Measured at Fair Value on a Recurring Basis
 
The following table is a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
Three Months Nine Months
Ended Ended
(In thousands)         Jan 2, 2010         Jan 2, 2010
Balance as of beginning of period $ 79,256 $ 92,736
Total realized and unrealized gains (losses):
       Included in interest and other income (expense), net 7 (414 )
       Included in other comprehensive income (loss) 3,311 10,202
       Included in impairment loss on investments
Sales and settlements, net (1) (20,300 ) (40,250 )
Balance as of end of period $ 62,274 $ 62,274
                 
(1) During the third quarter of fiscal 2010, $20.0 million notional value of senior class asset-backed securities matured at par value and $300 thousand of student loan auction rate securities were redeemed for cash at par value. In addition, during the first and second quarter of fiscal 2010, the Company sold $20.0 million notional value of senior class asset-backed securities and realized a $1.0 million loss that is included in interest and other income (expense), net, and $950 thousand of student loan auction rate securities were redeemed for cash at par value.
 
The amount of total gains or (losses) included in net income attributable to the change in unrealized gains or losses relating to assets and liabilities still held as of the end of the period:
 
Three Months Ended Nine Months Ended
Jan 2, Dec 27, Jan 2, Dec 27,
(In thousands)         2010         2008         2010         2008
Interest and other income (expense), net $ 7 $ (1,070 ) $ 586 $ (740 )
Impairment loss on investments (3,041 ) (18,240 ) (3,041 ) (38,006 )

10
 


As of January 2, 2010, marketable securities measured at fair value using Level 3 inputs were comprised of $63.8 million of student loan auction rate securities. Auction failures during the fourth quarter of fiscal 2008 and the lack of market activity and liquidity required that the Company’s student loan auction rate securities be measured using observable market data and Level 3 inputs. The fair values of the Company’s student loan auction rate securities were based on the Company’s assessment of the underlying collateral and the creditworthiness of the issuers of the securities. More than 98% of the underlying assets that secure the student loan auction rate securities are pools of student loans originated under FFELP that are substantially guaranteed by the U.S. Department of Education. The fair values of the Company’s student loan auction rate securities were determined using a discounted cash flow pricing model that incorporated financial inputs such as projected cash flows, discount rates, expected interest rates to be paid to investors and an estimated liquidity discount. The weighted-average life over which cash flows were projected was determined to be approximately nine years, given the collateral composition of the securities. The discount rates that were applied to the pricing model were based on market data and information for comparable- or similar-term student loan asset-backed securities. During the first nine months of fiscal 2010, the discount rate decreased by approximately 170 to 200 basis points (1.70 and 2.00 percentage points). The expected interest rate to be paid to investors in a failed auction was determined by the contractual terms for each security. The liquidity discount represents an estimate of the additional return an investor would require to compensate for the lack of liquidity of the student loan auction rate securities. The Company does not intend to sell, nor does it believe it is more likely than not that it would be required to sell, the student loan auction rate securities before anticipated recovery, which could be at final maturity that ranges from March 2023 to November 2047. Because there can be no assurance of a successful auction in the future, all of the Company’s student loan auction rate securities are recorded in long-term investments on its condensed consolidated balance sheets. All of the Company’s student loan auction rate securities are rated AAA with the exception of $8.7 million that were downgraded to an A rating during the fourth quarter of fiscal 2009.
 
During the second quarter of fiscal 2010, the Company sold $20.0 million notional value of senior class asset-backed securities and realized a $1.0 million loss. During the third quarter of fiscal 2010, $20.0 million notional value of senior class asset-backed securities matured at par value. As of the end of the third quarter of fiscal 2010, the Company had no investments in the asset-backed security category.
 
In March 2007, the Company issued $1.00 billion principal amount of 3.125% junior subordinated convertible debentures to an initial purchaser in a private offering. As a result of the repurchases in fiscal 2009, the remaining principal amount of the debentures as of January 2, 2010 was $689.6 million. The fair value of the debentures as of January 2, 2010 was approximately $640.4 million, based on the last trading price of the debentures. The debentures included embedded features that qualify as an embedded derivative under authoritative guidance issued by the FASB. The embedded derivative was separately accounted for as a discount on the debentures and its fair value was established at the inception of the debentures. Each quarter, the change in the fair value of the embedded derivative, if any, is recorded in the consolidated statements of income. The Company uses a derivative valuation model to derive the value of the embedded derivative. Key inputs into this valuation model are the Company’s current stock price, risk-free interest rates, the stock dividend yield, the stock volatility and the debenture’s credit spread over LIBOR. The first three inputs are based on observable market data while the last two inputs require management judgment and are Level 3 inputs.
 
     Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
 
As of January 2, 2010, the Company had non-marketable equity securities in private companies of $19.1 million (adjusted cost). The Company’s investments in non-marketable securities of private companies are accounted for by using the cost method. The fair value of the Company’s cost method investments is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of these investments. These investments are measured at fair value on a non-recurring basis when they are deemed to be other-than-temporarily impaired. In determining whether a decline in value of non-marketable equity investments in private companies has occurred and is other than temporary, an assessment is made by considering available evidence, including the general market conditions in the investee’s industry, the investee’s product development status and subsequent rounds of financing and the related valuation and/or Xilinx’s participation in such financings. The Company also assesses 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. The valuation methodology for determining the fair value of non-marketable equity securities is based on the factors noted above which require management judgment and are Level 3 inputs. The Company recognized an impairment loss on non-marketable equity investments of $3.0 million during the third quarter of fiscal 2010 and $2.3 million during the first quarter of fiscal 2009 due to the weak financial condition of certain investees. The entire amount of each of the impaired non-marketable equity investments was written off. No impairment loss on non-marketable equity investments was recognized during the second and third quarter of fiscal 2009 or the first and second quarter of fiscal 2010.
 
11
 


Note 5. Financial Instruments
 
The following is a summary of available-for-sale securities:
 
Jan 2, 2010 Mar 28, 2009
(In thousands)    Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair
Value
      Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair
Value
Money market funds $ 481,646 $ $ $ 481,646 $ 343,750 $ $ $ 343,750
Bank certificates of deposit 59,991 59,991 20,001 20,001
Commercial paper 306,798 306,798 229,869 229,869
Corporate bonds 4,677 136 (4 ) 4,809 11,579 207 (301 ) 11,485
Auction rate securities 69,200 (5,402 ) 63,798 70,450 (12,096 ) 58,354
Municipal bonds 12,680 106 (70 ) 12,716 14,868 74 (422 ) 14,520
U.S. government and
       agency securities 51,420 4 (131 ) 51,293 9,789 137 (2 ) 9,924
Foreign government and
       agency securities 392,871 16 392,887 453,505 159 453,664
Floating rate notes 180,836 199 (1,216 ) 179,819 244,222 303 (13,950 ) 230,575
Asset-backed securities 46,275 13 (3,902 ) 42,386
Mortgage-backed securities 332,017 7,379 (2,196 ) 337,200 164,533 5,004 (336 ) 169,201
$ 1,892,136 $ 7,840 $ (9,019 ) $ 1,890,957 $ 1,608,841 $ 5,897 $ (31,009 ) $ 1,583,729
 
Included in:
       Cash and cash equivalents $ 935,422 $ 976,996
       Short-term investments 452,429 258,946
       Long-term investments 503,106 347,787
$ 1,890,957 $ 1,583,729
 
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, as of January 2, 2010 and March 28, 2009:
 
Jan 2, 2010
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 $ 521 $ (4 ) $ $ $ 521 $ (4 )
Auction rate securities 63,797 (5,403 ) 63,797 (5,403 )
Municipal bonds 583 (1 ) 1,879 (69 ) 2,462 (70 )
U.S. government and agency
       securities 39,787 (131 ) 39,787 (131 )
Floating rate notes 11,868 (210 ) 55,578 (1,005 ) 67,446 (1,215 )
Mortgage-backed securities 156,925 (2,196 ) 156,925 (2,196 )
$ 209,684 $ (2,542 ) $ 121,254 $ (6,477 ) $ 330,938 $ (9,019 )
 
Mar 28, 2009
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 $ 1,729 $ (49 ) $ 471 $ (252 ) $ 2,200 $ (301 )
Auction rate securities 58,354 (12,096 ) 58,354 (12,096 )
Municipal bonds 4,103 (274 ) 2,302 (148 ) 6,405 (422 )
U.S. government and agency
       securities 717 (2 ) 717 (2 )
Floating rate notes 95,746 (5,762 ) 116,586 (8,188 ) 212,332 (13,950 )
Asset-backed securities 5,267 (393 ) 36,492 (3,509 ) 41,759 (3,902 )
Mortgage-backed securities 23,421 (294 ) 306 (42 ) 23,727 (336 )
$ 189,337 $ (18,870 ) $ 156,157 $ (12,139 ) $ 345,494 $ (31,009 )
 
12
 


The gross unrealized losses on these investments were primarily due to adverse conditions in the global credit markets in fiscal 2010 and 2009. For available-for-sale debt securities with unrealized losses, the Company performs additional analysis in order to evaluate whether or not the losses are associated with the underlying creditworthiness of the security. When assessing whether the decline in fair value is other than temporary, the Company considers the fair market value of the security, the duration of the security’s decline, the financial condition of the issuer as well as any other relevant information. Management also assesses whether it intends to sell the security or whether it would more likely than not be required to sell the security before expected recovery. The Company reviewed the investment portfolio and determined that the gross unrealized losses on these investments as of January 2, 2010 and March 28, 2009 were temporary in nature. The aggregate of individual unrealized losses that had been outstanding for 12 months or more were not significant in relation to the Company’s total available-for-sale portfolio as of January 2, 2010 and March 28, 2009. 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 and mortgage-backed securities) as of January 2, 2010, 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.
 
Amortized Estimated
(In thousands)         Cost         Fair Value
Due in one year or less $ 906,164 $ 906,205
Due after one year through five years 104,166 103,304
Due after five years through ten years 109,163 110,734
Due after ten years 290,997 289,068
$ 1,410,490 $ 1,409,311
 
Certain information related to available-for-sale securities is as follows:
 
Three Months Ended Nine months Ended
(In thousands) Jan 2, Dec 27, Jan 2, Dec 27,
        2010         2008         2010         2008
Proceeds from sale of available-for-sale securities $ 36,163 $ 29,648 $ 98,238 $ 193,008
 
Gross realized gains on sale of available-for-sale securities $ 622 $ 282 $ 2,360 $ 4,150
Gross realized losses on sale of available-for-sale securities (537 ) (832 ) (2,371 ) (1,413 )
Net realized gains (losses) on sale of available-for-sale securities $ 85 $ (550 ) $ (11 ) $ 2,737
 
Amortization of premiums (discounts) on available-for-sale securities, net $ 58 $ (3,924 ) $ (215 ) $ (10,500 )
 
The cost of securities matured or sold is based on the specific identification method.
 
Note 6. Derivative Financial Instruments
 
As of January 2, 2010 and March 28, 2009, the Company had the following outstanding forward currency exchange contracts which are derivative financial instruments:
 
(In thousands and U.S. dollars) Jan 2, Mar 28,
        2010         2009
Euro $ 35,814 $ 51,072
Singapore dollar 46,980 30,123
Japanese Yen 11,569 12,563
British Pound 7,884 6,408
$ 102,247 $ 100,166
 

As part of the Company’s strategy to reduce volatility of operating expenses due to foreign exchange rate fluctuations, the Company employs a hedging program with a five-quarter forward outlook for major foreign-currency-denominated operating expenses. The outstanding forward currency exchange contracts expire at various dates between January 2010 and January 2011. The net unrealized gain or loss was an unrealized gain of $780 thousand as of January 2, 2010 and an unrealized loss of $1.1 million as of March 28, 2009.
 
As of January 2, 2010 and March 28, 2009, all the forward foreign currency exchange contracts are designated and qualify as cash flow hedges and the effective portion of the gain or loss on the forward contract is reported as a component of other comprehensive income and reclassified into net income in the same period during which the hedged transaction affects earnings.
 
The Company may enter into forward foreign currency exchange contracts to hedge firm commitments such as the acquisition of capital expenditures. For such forward foreign currency exchange contracts that are designated and qualify as a fair value hedge, the gain or loss on the forward contract as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in the same line item associated with the hedged item in current earnings.
 
13
 


The debentures include provisions that qualify as an embedded derivative. See “Note 10. Convertible Debentures and Revolving Credit Facility” for detailed discussion about the embedded derivative. The embedded derivative was separated from the debentures and its fair value was established at the inception of the debentures. Any subsequent change in fair value of the embedded derivative would be recorded in the Company’s consolidated statement of income. The fair value of the embedded derivative at inception of the debentures was $2.5 million and it changed to $2.1 million and $1.5 million as of March 28, 2009 and January 2, 2010, respectively. The change (decrease) in the fair value of the embedded derivative of $586 thousand during the first nine months of fiscal 2010 was recorded as an increase to interest and other income (expense), net on the Company’s condensed consolidated statements of income. The change (increase) in the fair value of the embedded derivative of $740 thousand during the first nine months of fiscal 2009 was recorded as a decrease to interest and other income (expense), net on the Company’s condensed consolidated statements of income.
 
The following table summarizes the fair value and presentation in the consolidated balance sheets for derivative instruments designated as hedging instruments as of January 2, 2010 and March 28, 2009, utilized for risk management purposes detailed above:
 
(In thousands) Foreign Exchange Contracts
Asset Derivatives            Liability Derivatives
      Balance Sheet Balance Sheet      
      Location       Fair Value Location Fair Value
January 2, 2010 Prepaid expenses and other current assets $ 1,995 Other accrued liabilities $   1,215
 
March 28, 2009 Prepaid expenses and other current assets $ 2,307 Other accrued liabilities $ 3,389
 
The following table summarizes the effect of derivative instruments on the consolidated statements of income for the three and nine months ended January 2, 2010:
 
(In thousands) Amount of Gain Amount of Gain
(Loss) Recognized (Loss) Reclassified
Derivatives in Cash in OCI on Statement of from Accumulated Amount of Gain
Flow Hedging Derivative Income OCI into Income Statement of (Loss) Recorded
Relationships       (Effective portion)       Location       (Effective portion)       Income Location       (Ineffective portion)
Three Months Ended January 2, 2010
   
Interest and Interest and
Foreign exchange other income other income
contracts $ (4,104 ) (expense), net $ 2,810 (expense), net $ (5 )
 
Nine months Ended January 2, 2010
 
Interest and Interest and
Foreign exchange other income other income
contracts $ 1,906 (expense), net $ 3,700 (expense), net $ 2
 
Note 7. 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
 
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 1990 Employee Qualified Stock Purchase Plan (Employee Stock Purchase Plan):
 
  Three Months Ended Nine months Ended
  Jan 2,   Dec 27, Jan 2, Dec 27,
(In thousands)       2010       2008       2010       2008
Stock-based compensation included in:                  
Cost of revenues $ 1,291 $ 1,337 $ 3,678 $ 4,416
Research and development 7,289 6,055     18,140 18,702
Selling, general and administrative     6,939   5,649 18,247     17,506
Restructuring charges   945 564
$ 15,519 $ 13,041 $ 41,010 $ 41,188
 
 
14
 


During the first nine months of fiscal 2010 and 2009, the tax benefit realized for the tax deduction from option exercises and other awards, including amounts credited to additional paid-in capital, totaled $5.9 million and $10.3 million, respectively.
 
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 is seven years for all option awards granted on or after April 1, 2007. The per-share weighted-average fair values of stock options granted during the third quarter of fiscal 2010 was $5.88 ($6.74 for the third quarter of fiscal 2009) and for the first nine months of fiscal 2010 was $5.66 ($7.38 for the first nine months of fiscal 2009). The fair values of stock options granted in fiscal 2010 and 2009 were estimated at the date of grant using the following assumptions:
 
Three Months Ended Nine months Ended
Jan 2, Dec 27, Jan 2, Dec 27,
2010       2008       2010       2008
Expected life of options (years) 5.3   5.4 5.2 to 5.3 5.4
Expected stock price volatility 0.32 to 0.34 0.51 to 0.53 0.32 to 0.43 0.33 to 0.53
Risk-free interest rate 2.3% 1.6% to 2.8% 1.8% to 2.9% 1.6% to 3.5%
Dividend yield 2.7% to 2.8% 2.9% to 3.4% 2.4% to 3.0% 2.1% to 3.4%

Under the Company’s Employee Stock Purchase Plan, shares are only issued during the second and fourth quarters of each fiscal year. The per-share weighted-average fair values of stock purchase rights granted under the Employee Stock Purchase Plan during the first nine months of fiscal 2010 and 2009 were $6.13 and $7.35, respectively, which were estimated at the date of grant using the following assumptions:
 
2010       2009
Expected life of options (years) 0.5 to 2.0 0.5 to 2.0
Expected stock price volatility 0.33 to 0.34 0.36
Risk-free interest rate 0.3% to 1.2% 1.9% to 2.5%
Dividend yield 2.5%   2.3%

The Company began granting restricted stock units (RSUs) in the first quarter of fiscal 2008. The estimated fair values of RSU awards were 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. The per share weighted-average fair value of RSUs granted during the third quarter of fiscal 2010 was $21.89 ($16.30 for the third quarter of fiscal 2009) and for the first nine months of fiscal 2010 was $19.38 ($22.73 for the first nine months of fiscal 2009). The weighted-average fair values of RSUs granted in fiscal 2010 and 2009 were calculated based on estimates at the date of grant as follows:
 
Three Months Ended Nine months Ended
Jan 2, Dec 27, Jan 2,   Dec 27,
2010       2008       2010       2008
Risk-free interest rate 1.3% to 1.4% 1.2% to 1.9% 1.3% to 2.0% 1.2% to 3.2%
Dividend yield 2.7% to 2.8% 2.9% to 3.4% 2.4% to 3.0% 2.1% to 3.4%

15
 


     Employee Stock Option Plans
 
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
March 29, 2008 49,289 $ 32.34
Granted 1,895 $ 24.32
Exercised (3,234 ) $ 20.08
Forfeited/cancelled/expired (6,929 ) $ 34.93
March 28, 2009 41,021   $ 32.51
Granted 2,111   $ 20.60
Exercised (837 ) $ 22.54
Forfeited/cancelled/expired (9,066 ) $ 32.31
January 2, 2010     33,229   $ 32.05
 
Options exercisable at:  
       March 28, 2009 35,059 $ 33.95
       January 2, 2010 28,257 $ 33.72

The 2007 Equity Incentive Plan (2007 Equity 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 April 1, 2007. The 2007 Equity Plan is now Xilinx’s only plan for providing stock-based awards to eligible employees and non-employee directors. The contractual term for stock awards granted under the 2007 Equity 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. The types of awards allowed under the 2007 Equity 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 Equity 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. On August 12, 2009, the stockholders approved an amendment to increase the authorized number of shares reserved for issuance under the 2007 Equity Plan by 5.0 million shares. As of January 2, 2010, 13.0 million shares remained available for grant under the 2007 Equity Plan.
 
The total pre-tax intrinsic value of options exercised during the three months and nine months ended January 2, 2010 was $694 thousand and $925 thousand, respectively. The total pre-tax intrinsic value of options exercised during the three months and nine months ended December 27, 2008 was $473 thousand and $18.0 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.
 
16
 


     Restricted Stock Unit Awards
 
A summary of the Company’s RSU activity and related information is as follows:
 
RSUs Outstanding
      Weighted-
Average
Grant-Date
Number of Fair Value
(Shares in thousands) Shares Per Share
March 29, 2008 2,169 $ 24.39
Granted 1,634 $ 21.89
Vested (509 ) $ 24.46
Cancelled (324 ) $ 24.25
March 28, 2009 2,970 $ 22.99
Granted 1,403 $ 19.38
Vested (773 ) $ 22.75
Cancelled (185 ) $ 22.70
January 2, 2010       3,415 $ 21.37
 

     Employee Stock Purchase Plan
 
Under the Employee Stock Purchase Plan, employees purchased 719 thousand shares for $10.2 million in the second quarter of fiscal 2010 and 947 thousand shares for $16.4 million in the second quarter of fiscal 2009. The next scheduled purchase under the Employee Stock Purchase Plan is in the fourth quarter of fiscal 2010. On August 12, 2009, 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 January 2, 2010, 8.9 million shares were available for future issuance out of 42.5 million shares authorized.
 
Note 8. 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 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 1.7 million and 1.0 million potentially dilutive common equivalent shares outstanding for the third quarter and the first nine months of fiscal 2010, respectively, that are not included in basic net income per common share. For the third quarter and the first nine months of fiscal 2009, the total shares used in the denominator of the diluted net income per common share calculation includes 226 thousand and 1.0 million potentially dilutive common equivalent shares, respectively. Potentially dilutive common equivalent shares are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, the assumed vesting of outstanding RSUs and the assumed issuance of common stock under the Employee Stock Purchase Plan.
 
Outstanding stock options and RSUs to purchase approximately 31.0 million and 44.4 million shares, for the third quarter and the first nine months of fiscal 2010, respectively, under the Company's stock award plans were excluded from diluted net income per common share, applying the treasury stock method, as their inclusion would have been antidilutive. These options and RSUs 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 and RSUs. For the third quarter and the first nine months of fiscal 2009, respectively, 43.2 million and 41.7 million of the Company’s stock options and RSUs outstanding were excluded from the calculation.
 
Diluted net income per common share does not include any incremental shares issuable upon the exchange of the debentures (see “Note 10. Convertible Debentures and Revolving Credit Facility”). 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 $30.48 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 $30.48 per share, using the treasury stock method. The conversion price of $30.48 per share represents the adjusted conversion price due to the accumulation of cash dividends distributed to the common stockholders through the third quarter of fiscal 2010.
 
17
 


Note 9. Inventories
 
Inventories are stated at the lower of cost (determined using the first-in, first-out method), or market (estimated net realizable value) and are comprised of the following:
 
Jan 2, Mar 28,
(In thousands) 2010       2009
Raw materials $ 8,413 $ 10,024
Work-in-process 85,589 79,426
Finished goods 34,933 30,382
$ 128,935 $ 119,832
 
 
Note 10. 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% junior 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 were 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 is subject to adjustment for certain events as outlined in the indenture governing the debentures but will not be adjusted for accrued interest. Due to the accumulation of cash dividend distributions to common stockholders, the conversion rate for the debentures was adjusted to 32.8092 shares of common stock per $1 thousand principal amount of debentures, representing an adjusted conversion price of $30.48 per share through the third quarter of fiscal 2010.
 
The Company received net proceeds from issuance of the debentures of $980.0 million after deduction of issuance costs of $20.0 million. In the third and fourth quarters of fiscal 2009, the Company paid $193.2 million in cash to repurchase $310.4 million (principal amount) of its debentures, resulting in approximately $689.6 million of debt outstanding as of March 28, 2009. The debt issuance costs, as adjusted for the retrospective adoption of the authoritative guidance for convertible debentures issued by the FASB, 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. The debentures pay cash interest of 3.125%. However, the Company recognizes an effective interest rate of 7.20% on the carrying value of the debentures. The effective rate is based on the interest rate for a similar instrument that does not have a conversion feature. The debentures also have a contingent interest component that may 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.
 
Effective March 29, 2009, the Company retrospectively adopted the authoritative guidance for convertible debentures issued by the FASB. The authoritative guidance specifies that issuers of convertible debt instruments should separately account for the liability (debt) and equity (conversion option) components of such instruments in a manner that reflects the borrowing rate for a similar non-convertible debt. See “Adoption of New Accounting Standard for Convertible Debentures” included in “Note 1. Basis of Presentation” for further information relating to the adoption.
 
The carrying values of the liability and equity components of the debentures, after the retrospective adoption, are reflected in the Company’s condensed consolidated balance sheets as follows:
 
(In thousands) Jan 2,       Mar 28,
2010 2009
Liability component:    
       Principal amount of convertible debentures $ 689,635 $ 689,635
       Unamortized discount of liability component (335,122 ) (338,015 )
       Unamortized discount of embedded derivative from date of issuance (1,577 ) (1,620 )
       Carrying value of liability component 352,936   350,000  
       Carrying value of embedded derivative component 1,524 2,110
       Convertible debentures – net carrying value $ 354,460   $ 352,110  
 
Equity component – net carrying value $ 229,513   $ 229,513  
 

The remaining debt discount is being amortized as additional non-cash interest expense over the expected remaining life of the debentures using the effective interest rate of 7.20%. As of January 2, 2010, the remaining term of the debentures is 27.2 years.
 
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Interest expense related to the debentures was included in interest and other income (expense), net on the condensed consolidated statements of income and was recognized as follows:
 
Three Months Ended Nine months Ended
(In thousands) Jan 2,       Dec 27,       Jan 2,       Dec 27,
2010 2008 2010 2008
       Contractual coupon interest $ 5,388 $ 7,185 $ 16,428 $ 22,810
       Amortization of debt issuance costs 56 73 168 305
       Amortization of embedded derivative 14 16 43 57
       Amortization of debt discount 982 1,218 2,893 3,797
Total interest expense related to the debentures $ 6,440 $ 8,492 $ 19,532 $ 26,969
 

On or after March 15, 2014, the Company may redeem all or part of the remaining debentures outstanding 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 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, using the treasury stock method.
 
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 January 2, 2010, 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. 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. Due to the repurchase of a portion of the debentures in fiscal 2009, the carrying value of the derivative was reduced to $1.6 million and will continue to be amortized to interest expense over the remaining term of the debentures. Any change in fair value of this embedded derivative will be included in interest and other income (expense), net on the Company’s condensed consolidated statements of income. The Company also concluded that the debentures are not conventional convertible debt instruments and that the embedded stock conversion option qualifies as a derivative. In addition, 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.
 
     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 nonfinancial covenants. As of January 2, 2010, the Company had made no borrowings under this credit facility and was not in violation of any of the covenants.
 
Note 11. Common Stock and Debentures Repurchase Program
 
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 25, 2008, the Board authorized the repurchase of up to $800.0 million of common stock (2008 Repurchase Program). On November 6, 2008, the Board of Directors approved an amendment to the Company’s 2008 Repurchase Program to provide that the funds may also be used to repurchase outstanding debentures. The 2008 Repurchase Program has no stated expiration date. Through January 2, 2010, the Company had used $299.3 million of the $800.0 million authorized under the 2008 Repurchase Program, of which $106.1 million was used to repurchase 4.3 million shares of its outstanding common stock and $193.2 million was used to repurchase $310.4 million (principal amount) of its debentures. The Company’s current policy is to retire all repurchased shares and debentures, and consequently, no treasury shares or debentures were held as of January 2, 2010 or March 28, 2009.
 
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In February 2007, the Board had previously authorized a $1.50 billion repurchase program (2007 Repurchase Program). During the first nine months of fiscal 2009, the Company entered into stock repurchase agreements with independent financial institutions to repurchase shares under both the 2007 Repurchase Program and the 2008 Repurchase Program. Under these agreements, Xilinx provided these financial institutions with up-front payments totaling $275.0 million for the first nine months of fiscal 2009. 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 these arrangements, the Company repurchased 10.8 million shares of common stock for $275.0 million during the first nine months of fiscal 2009, of which $81.1 million was purchased under the 2008 Repurchase Program while the remaining balance of $193.9 million was purchased under the 2007 Repurchase Program. There were no such arrangements and no repurchases of common stock in the first and second quarter of fiscal 2010. During the third quarter of fiscal 2010, the Company repurchased 1.1 million shares of common stock in the open market for a total of $25.0 million. As of January 2, 2010, no amounts remained outstanding under any stock repurchase agreements and all related shares had been delivered to the Company.
 
Note 12. Restructuring Charges
 
On April 15, 2009, Xilinx announced restructuring measures designed to drive structural operating efficiencies across the Company. Upon completion of the restructuring plan, Xilinx expects to reduce its global workforce by up to 200 positions, or approximately 6% of the Company’s global workforce. These employee terminations impact various geographies and functions worldwide. Certain positions were eliminated during the first nine months of fiscal 2010 and other positions will be eliminated during the fourth quarter of fiscal 2010. The reorganization plan is expected to be completed by the end of the fourth quarter of fiscal 2010.
 
The Company recorded total restructuring charges of $5.5 million and $27.2 million in the third quarter and the first nine months of fiscal 2010, respectively, primarily related to severance pay expenses. As stated above, the Company expects to continue implementing the restructuring measures under the April 2009 restructuring, resulting in additional restructuring charges of approximately $3.0 million over the remaining period of fiscal 2010.
 
The following table summarizes the restructuring accrual activity for the first nine months of fiscal 2010:
 
Employee Facility-  
severance   related and  
(In thousands) and benefits       other costs       Total
Balance as of March 28, 2009 $   $ 682   $ 682  
Restructuring charges 25,684   1,533       27,217  
Cash payments      (20,141 )        (1,865 )   (22,006 )
Non-cash settlements   (945 )     (945 )
Balance as of January 2, 2010 $ 4,598 $ 350   $ 4,948
 
 
The charges above, as well as those included in the table below, have been shown separately as restructuring charges on the condensed consolidated statements of income. The remaining accrual as of January 2, 2010 primarily relates to severance pay and benefits that are expected to be paid during the fourth quarter of fiscal 2010.
 
In June 2008, Xilinx announced a functional reorganization pursuant to which Xilinx eliminated 249 positions, or approximately 7% of the Company’s global workforce at that time. These employee terminations occurred across various geographies and functions worldwide. The reorganization plan was completed by the end of the second quarter of fiscal 2009. The Company recorded total restructuring charges of $22.0 million in connection with the reorganization. These charges consisted of $19.5 million of severance pay and benefits expenses which were recorded in the first quarter of fiscal 2009 and $2.5 million of facility-related costs and severance pay and benefits expenses which were recorded in the second quarter of fiscal 2009.
 
The following table summarizes the restructuring accrual activity for the first nine months of fiscal 2009:
 
Employee Facility-  
severance   related  
(In thousands) and benefits       costs       Total
Balance as of March 29, 2008 $   $   $  
Restructuring charges 20,539      1,484       22,023  
Cash payments      (19,975 )   (613 )   (20,588 )
Non-cash settlements   (564 ) (131 )   (695 )
Balance as of December 27, 2008 $ $ 740   $ 740
 
 
Note 13. Impairment Loss on Investments
 
The Company recorded impairment loss on investments of $3.0 million for the third quarter and the first nine months of fiscal 2010. This impairment loss was related to the write-down of the Company’s investments in non-marketable equity securities of private companies, resulted from the weak financial condition of certain investees.
 
The Company recognized impairment losses on investments of $19.5 million and $53.2 million during the third quarter and the first nine months of fiscal 2009, respectively. The $19.5 million of impairment losses for the third quarter of fiscal 2009 included $18.8 million of losses related to marketable debt securities in the Company’s investment portfolio and $700 thousand related to the Company’s investment in a non-marketable equity security.
 
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During the second quarter of fiscal 2009, the issuer of one of the marketable debt securities in the Company’s investment portfolio filed for bankruptcy resulting in a significant decline in the fair value of this security. The original purchase price of this security, excluding accrued interest, was $10.0 million. Based upon the available market and financial data for the issuer, the decline in market value was deemed to be other than temporary and the Company recorded an impairment loss of $9.0 million during the first nine months of fiscal 2009, $600 thousand of which was recorded during the third quarter of fiscal 2009.
 
The Company also recognized an additional impairment loss of $18.2 million during the third quarter of fiscal 2009, which represented the remaining investment balance of the senior class asset-backed securities that were partially written off in the second quarter of fiscal 2009. At the time of the initial write-off in the second quarter of fiscal 2009, the Company understood, based on the issuer’s prospectus disclosures that investors would be repaid on a pari passu basis. In October 2008, the issuer went into receivership. The receiver subsequently sought judicial interpretation of a provision of a legal document governing the issuer’s securities. As a result of the outcome of the judicial determination, the receiver immediately liquidated the substantial majority of the issuer’s assets, and in accordance with the court order, the proceeds were used to repay short-term liabilities in the order in which they fell due. In December 2008, the receiver reported to the issuer’s creditors the outcome of the judicial determination and that the issuer’s liabilities substantially exceeded its assets. As a result, the receiver estimated that the issuer would not be able to pay any liabilities falling due after October 2008 regardless of the seniority or status of the securities. Based on these developments, the Company concluded that it was not likely to recover the remaining balance of its investment. This decline in fair value was deemed to be other than temporary and, therefore, the Company recognized an impairment loss of $18.2 million on these securities during the third quarter of fiscal 2009 in addition to the $19.8 million of impairment loss recorded during the second quarter of fiscal 2009. In October 2009, a higher court reversed the initial judicial interpretation and determined that the proceeds should be used to repay short-term liabilities on a pari passu basis. Given the significant liabilities of the issuer, it is uncertain whether the Company will recover any of its original investment. The Company has not recognized any amount it may be due. The original purchase price of these securities, excluding accrued interest, was $38.0 million.
 
In addition to the aforementioned amounts, the $53.2 million of impairment losses for the first nine months of fiscal 2009 included $2.3 million of write down of the Company’s investment in non-marketable equity securities in private companies, which was recorded due primarily to the weak financial condition of certain investees. Furthermore, during the same period the Company recorded $3.1 million of impairment losses in marketable equity securities investment as a result the continued decline in its market value, which led the Company to believe that the decline in the market value was other than temporary.
 
Note 14. Interest and Other Income (Expense), Net
 
The components of interest and other income (expense), net are as follows:
 
Three Months Ended Nine months Ended
Jan 2,       Dec 27,       Jan 2,       Dec 27,
(In thousands) 2010 2008* 2010 2008*
Interest income $ 4,453 $ 12,378   $ 14,043 $ 40,453
Reversal of interest income (8,656 )
Interest expense (6,440 ) (8,492 ) (19,532 ) (26,969 )
Other income (expense), net 1,445 (5,629 ) 911 (3,509 )
$ (542 ) $ (1,743 ) $ (13,234 ) $ 9,975  
 

     * As adjusted for the retrospective adoption of the accounting standard for convertible debentures in the first quarter of fiscal 2010 (see Note 1)
 
During the first quarter of fiscal 2010, the Company recorded a charge of $8.7 million in order to reverse the interest income it accrued through March 28, 2009 related to an earlier prepayment it made to the Internal Revenue Service (IRS). See “Note 16. Income Taxes” for additional information.
 
Note 15. Comprehensive Income
 
The components of comprehensive income are as follows:
 
Three Months Ended Nine months Ended
Jan 2,       Dec 27,       Jan 2,       Dec 27,
(In thousands) 2010 2008* 2010 2008*
Net income $ 106,908   $ 119,444 $ 208,952   $ 283,682
Net change in unrealized loss on available-for-sale
       securities, net of tax 1,437 (6,967 ) 14,840 (16,863 )
Reclassification adjustment for (gains) losses on
       available-for-sale securities, net of tax, included
       in net income (104 ) 361 (97 ) (1,608 )
Net change in unrealized gain (loss) on hedging
       transactions, net of tax (4,104 ) 3,457 1,906 (568 )
Net change in cumulative translation adjustment 1,542 (4,453 ) 5,695 (6,874 )
Comprehensive income $ 105,679 $ 111,842 $ 231,296 $ 257,769
 

     * As adjusted for the retrospective adoption of the accounting standard for convertible debentures in the first quarter of fiscal 2010 (see Note 1)

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The components of accumulated other comprehensive income (loss) as of January 2, 2010 and March 28, 2009 are as follows:
 
Jan 2,       Mar 28,
(In thousands) 2010 2009
Accumulated unrealized loss on available-for-sale securities, net of tax $ (731 ) $ (15,474 )
Accumulated unrealized gain (loss) on hedging transactions, net of tax 894 (1,012 )
Accumulated cumulative translation adjustment 3,323 (2,372 )
Accumulated other comprehensive income (loss) $ 3,486 $ (18,858 )
 

Note 16. Income Taxes
 
The Company recorded tax provisions of $26.1 million and $50.8 million for the third quarter and the first nine months of fiscal 2010, respectively, representing effective tax rates of 20% for both periods. The Company recorded tax provisions of $37.1 million and $82.7 million for the third quarter and the first nine months of fiscal 2009, respectively, representing effective tax rates of 24% and 23%, respectively.
 
The difference between the U.S. federal statutory tax rate of 35% and the Company’s effective tax rate is primarily due to income earned in lower tax rate jurisdictions, for which no U.S. income tax has been provided, as the Company intends to permanently reinvest these earnings outside of the U.S.
 
The Company’s total gross unrecognized tax benefits as of January 2, 2010 decreased by $21.6 million to $180.2 million in the third quarter of fiscal 2010 due to the expiration of the statute of limitations on fiscal 2006. The total amount of unrecognized tax benefits that, if realized in a future period, would favorably affect the effective tax rate was $66.3 million as of January 2, 2010.
 
The Company’s policy is to include interest and penalties related to income tax liabilities within the provision for income taxes on the consolidated statements of income. The balance of accrued interest and penalties recorded in the consolidated balance sheet as of January 2, 2010 was $21.5 million, an increase of $17.5 million compared to the balance as of March 28, 2009. The increase is primarily the result of amounts accrued in the first quarter of fiscal 2010 on account of the Appeal Court decision described below.
 
The Company is no longer subject to U.S. federal and state audits by taxing authorities for years through fiscal 2004. The U.S. federal statute of limitation on fiscal 2006 has also expired. The Company is no longer subject to tax audits in Ireland for years through fiscal 2004.
 
On December 8, 2008, the IRS issued a statutory notice of deficiency reflecting proposed audit adjustments for fiscal 2005. The Company began negotiations with the IRS Appeals Division on this matter in the third quarter of fiscal 2010. The Company has no estimates of when the audit adjustments proposed in the notice of deficiency will be resolved.
 
On August 25, 2006, the IRS filed a Notice of Appeal that it appealed to the U.S. Court of Appeals 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. On May 27, 2009, the Company received a 2-1 adverse judicial ruling from the Appeals Court reversing the Tax Court decision and holding that the Company should include stock option amounts in its cost sharing agreement with Xilinx Ireland. The Company did not agree with the Appeals Court decision and filed a motion for rehearing on August 12, 2009. On January 13, 2010, the Appeals Court issued an order withdrawing both the majority and dissent opinions that were issued on May 27, 2009. The Company has no estimate of when the Ninth Circuit Court of Appeals will further rule on this matter.
 
As a result of the original May 27, 2009 Appeals Court decision, the Company had recorded adjustments for taxes, penalties and interest to be accrued in the first quarter of fiscal 2010. No adjustment was recorded in connection with the withdrawal of the Appeals Court decision.
 
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The Company believes it has provided adequate reserves for any tax deficiencies that could result from the matters described above. Due to the latest developments in the Appeals Court and various other factors, the Company believes it is impractical to determine the amount of uncertain tax benefits that will significantly increase or decrease from IRS reviews within the next 12 months.
 
Note 17. Commitments
 
Xilinx leases some of its facilities and office buildings under non-cancelable operating leases that expire at various dates through October 2018. 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 land lease will expire in November 2035 and 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, 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:
 
Years ending March 31, (In thousands)
2010 (remaining three months) $ 2,295
2011 7,694
2012   2,826
2013 2,168
2014   1,434
Thereafter   2,986
  $ 19,403
 

Aggregate future rental income to be received, which includes rents from both owned and leased property, totaled $8.4 million as of January 2, 2010. Rent expense, net of rental income, under all operating leases was $1.1 million and $4.2 million for the third quarter and the first nine months of fiscal 2010, respectively. Rent expense, net of rental income, under all operating leases was $1.4 million and $8.0 million for the third quarter and the first nine months of fiscal 2009, respectively. Rent expense for the first quarter of fiscal 2009 includes a $2.8 million charge related to a leased facility that the Company no longer intends to occupy. Rental income, which includes rents received from both owned and leased property, was not material for the third quarter and the first nine months of fiscal 2010 or 2009.
 
Other commitments as of January 2, 2010 totaled $85.3 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 January 2, 2010, the Company also had $11.5 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. This commitment was reduced to $5.0 million in May 2009. License payments will be amortized over the useful life of the intellectual property acquired.
 
Note 18. 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. Activity related to the Company's product warranty liability for the first nine months of fiscal 2010 and 2009 was not significant.
 
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. Subject to certain terms and conditions, the Company has also agreed to compensate certain customers for limited, specified costs they actually incur in the event the Company’s hardware products experience an epidemic failure. 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 certain of 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.
 
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Note 19. Contingencies
 
     Internal Revenue Service
 
On August 25, 2006, the IRS filed a Notice of Appeal that it appealed to the U.S. Court of Appeals 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. On May 27, 2009, the Company received a 2-1 adverse judicial ruling from the Appeals Court reversing the Tax Court decision and holding that the Company should include stock option amounts in its cost sharing agreement with Xilinx Ireland. The Company did not agree with the Appeals Court decision and filed a motion for rehearing on August 12, 2009. On January 13, 2010, the Appeals Court issued an order withdrawing both the majority and dissent opinions that were issued on May 27, 2009. The Company has no estimate of when the Ninth Circuit Court of Appeals will further rule on this matter.
 
In a separate matter, on December 8, 2008, the IRS issued a statutory notice of deficiency reflecting proposed audit adjustments for fiscal 2005. The Company began negotiations with the IRS Appeals Division on this matter in the third quarter of fiscal 2010. The Company believes that adequate accruals have been provided for fiscal 2005 and all other open tax years.
 
     Patent Litigation
 
On November 5, 2009, Agere Systems, Inc. (Agere), a wholly-owned subsidiary of LSI Corporation (LSI), filed a notice and summons for an action for patent infringement and breach of contract of a patent license agreement between the Company and American Telephone and Telegraph Company (AT&T), to which LSI/Agere purports to be the successor from AT&T, against the Company in the Supreme Court of the State of New York (Agere Systems Inc. v. Xilinx, Inc., Index No. 603382/09, the New York State Action). On November 23, 2009, Agere and LSI filed a separate action for patent infringement against the Company in the U.S. District Court for the Southern District of New York (Agere Systems Inc. and LSI Corporation v. Xilinx, Inc., Case No, 09 CV 9719, the New York Federal Action). The New York State Action was removed to federal court and subsequently consolidated with the New York Federal Action. The amended consolidated complaint alleges infringement of seven patents and breach of the patent license agreement between the Company and AT&T which covers three additional patents. The complaint seeks injunctive relief, monetary damages and interest and attorneys’ fees. On January 15, 2010, the Company filed its answer to the consolidated action, denying the allegations made by LSI and Agere, and asserting counterclaims of infringement of ten patents by LSI and Agere. The trial is currently scheduled to begin on July 27, 2010. Neither the likelihood, nor the amount of any potential exposure to the Company is estimable at this time.
 
On November 20, 2009, the Company filed an action seeking 1) declaratory judgment of patent non-infringement, invalidity and unenforceability of patents asserted by LSI and Agere and 2) declaratory judgment of unenforceability of the patent license agreement between the Company and AT&T. The complaint was filed in the U.S. District Court for the District of Delaware (Xilinx, Inc., v. LSI Corp. and Agere Systems Inc. Civil Action No. 09-886-MMB), and was subsequently amended to include claims for patent infringement against LSI and Agere. The amended complaint seeks declaratory judgment with respect to the patent license agreement and seventeen patents, and asserts ten patents against LSI and Agere. The Company seeks declaratory relief, injunctive relief, monetary 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 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 eleven 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.
 
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.
 
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Note 20. Goodwill and Acquisition-Related Intangibles
 
As of January 2, 2010 and March 28, 2009, goodwill and the gross and net amounts of acquisition-related intangibles for all acquisitions were as follows:
 
  Jan 2, Mar 28,
(In thousands) 2010       2009       Amortization Life
Goodwill $ 117,955 $ 117,955
 
Patents-gross $ 22,752 $ 22,752 5 to 7 years
Less accumulated amortization 22,752 22,738
Patents-net 14  
               
Miscellaneous intangibles-gross 58,958 58,958 2 to 5 years
Less accumulated amortization 58,958 56,479
Miscellaneous intangibles-net 2,479
 
Total acquisition-related intangibles-gross 81,710 81,710
Less accumulated amortization 81,710 79,217
Total acquisition-related intangibles-net $ $ 2,493  
 

Amortization expense for acquisition-related intangible assets for the first nine months of fiscal 2010 was $2.5 million. During the second and third quarter of fiscal 2010, the Company did not record any amortization expense from acquisition-related intangibles since all acquisition-related intangibles were fully amortized as of June 27, 2009. For the third quarter and the first nine months of fiscal 2009, amortization expense for acquisition-related intangible assets was $1.5 million and $4.3 million, respectively. Acquisition-related intangible assets were amortized on a straight-line basis. During the first quarter of fiscal 2010, the Company decided to discontinue investing additional funds or resources in certain software technology that was previously acquired. Based on the fact that the future separately identifiable cash flows were not sufficient to recover the carrying value of the asset, the Company wrote off $1.9 million of remaining carrying value of this acquisition-related intangible asset.
 
Note 21. Subsequent Events
 
On January 19, 2010, the Company’s Board of Directors declared a cash dividend of $0.16 per common share for the third quarter of fiscal 2010. The dividend is payable on March 3, 2010 to stockholders of record on February 10, 2010.
 
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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 document for any reason.
 
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, 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
 
Our short-term and long-term investments include marketable debt securities and non-marketable equity securities. As of January 2, 2010, we had marketable debt securities with a fair value of $1.41 billion and non-marketable equity securities in private companies of $19.1 million (adjusted cost).
 
We determine the fair values for marketable debt and equity securities using industry standard pricing services, data providers and other third-party sources and by internally performing valuation analyses. See “Note 4. Fair Value Measurements” to our condensed consolidated financial statements, included in Part 1. “Financial Information,” for details of the valuation methodologies. In determining if and when a decline in value below adjusted cost of marketable debt and equity securities is other than temporary, we evaluate on an ongoing basis the market conditions, trends of earnings, financial condition, credit ratings, any underlying collateral and other key measures for our investments. We assess other-than-temporary impairment of debt and equity securities in accordance with the latest guidance issued by the FASB. We recorded an other-than-temporary impairment for marketable debt securities and a marketable equity security in the first nine months of fiscal 2009. We did not record any other-than-temporary impairment for marketable debt or equity securities in the first nine months of fiscal 2010.
 
Our investments in non-marketable securities of private companies are accounted for by using the cost method. These investments are measured at fair value on a non-recurring basis when they are deemed to be other-than-temporarily impaired. In determining whether a decline in value of non-marketable equity investments in private companies has occurred and is other than temporary, an assessment is made by considering available evidence, including the general market conditions in the investee’s industry, the investee’s product development status and subsequent rounds of financing and the related valuation and/or our participation in such financings. We also assess 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. The valuation methodology for determining the fair value of non-marketable equity securities is based on the factors noted above which require management judgment and are Level 3 inputs. See “Note 4. Fair Value Measurements” to our condensed consolidated financial statements, included in Part 1. “Financial Information,” for additional information. When a decline in value is deemed to be other than temporary, we recognize an impairment loss in the current period’s operating results to the extent of the decline. We recorded other-than-temporary impairments for non-marketable equity securities in the first nine months of fiscal 2010 and 2009 of $3.0 million and $ 2.3 million, respectively.
 
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     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 the first nine months of fiscal 2010, approximately 70% 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 us. 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.

As of January 2, 2010, we had $108.3 million of deferred revenue and $30.9 million of deferred cost of goods sold recognized as a net $77.4 million of deferred income on shipments to distributors. As of March 28, 2009, we had $90.4 million of deferred revenue and $28.0 million of deferred cost of goods sold recognized as a net $62.4 million of deferred income on shipments to distributors. The deferred income on shipments to distributors that will ultimately be recognized in our consolidated statement of income will be different than the amount shown on the consolidated balance sheet due to actual price adjustments issued to the distributors when the product is sold to their end customers.
 
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 significant 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 6% 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
 
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 separately identifiable 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.
 
Long-lived assets such as goodwill, other intangible assets and property, plant, and equipment, are considered nonfinancial assets, and are only measured at fair value when indicators of impairment exist. The accounting and disclosure guidance for fair value measurements established by the FASB became effective for these assets beginning in the first quarter of fiscal 2010.
 
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     Goodwill
 
As required by the guidance for goodwill established by the FASB, 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, 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 2009, there was no impairment of goodwill in fiscal 2009. Unless there are indicators of impairment, our next impairment review for goodwill will be performed and completed in the fourth quarter of fiscal 2010. 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.
 
We have elected to adopt the alternative transition method provided by the FASB for calculating the tax effects of stock-based compensation pursuant to the authoritative guidance for stock-based compensation. The alternative transition method includes simplified methods to establish the initial pool of excess tax benefits related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the pool of excess tax benefits and consolidated statements of cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of the accounting guidance for stock-based compensation.
 
In June 2006, the FASB issued authoritative guidance which contains a two-step approach to recognizing and measuring uncertain tax positions relating to accounting for income taxes. 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. See “Note 16. Income Taxes” to our condensed consolidated financial statements included in Part 1. “Financial Information.”
 
     Stock-Based Compensation
 
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 our Employee Stock Purchase Plan. 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 us, 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 us, 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.
 
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In addition, we developed 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 impact of forfeiture rate estimates in the first nine months of fiscal 2010 and 2009 reduced stock-based compensation expense by $12.2 million and $12.5 million, respectively. 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 2010 compared to the third quarter and first nine months of fiscal 2009
 
The third quarter and the first nine months of fiscal 2010 were a 14-week and 40-week period, respectively, ended on January 2, 2010, while the third quarter and the first nine months of fiscal 2009 were a 13-week quarter and 39-week period, respectively, ended on December 27, 2008.
 
The following table sets forth statement of income data as a percentage of net revenues for the periods indicated:
 
Three Months Ended       Nine months Ended
Jan 2, Dec 27, Jan 2, Dec 27,
2010       2008* 2010       2008*
Net Revenues    100.0 %    100.0 %      100.0 %    100.0 %
Cost of revenues 35.9     36.1   37.3   36.3
Gross Margin 64.1 63.9 62.7 63.7
 
Operating Expenses:
Research and development 19.8 19.0 21.1 18.7
Selling, general and administrative 16.6 18.5 18.2 18.6
Amortization of acquisition-related intangibles 0.0 0.3 0.2 0.3
Restructuring charges 1.1 2.1 1.5
       Total operating expenses 37.5 37.8 41.6 39.1
 
Operating Income 26.6 26.1 21.1 24.6
Gain on early extinguishment if convertible debentures 12.7 4.0
Impairment loss on investments (0.6 ) (4.3 ) (0.2 ) (3.7 )
Interest and other income (expense), net (0.1 ) (0.3 ) (1.0 ) 0.7
 
Income Before Income Taxes 25.9 34.2 19.9 25.6
 
Provision for income taxes 5.1 8.1 3.9 5.8
 
Net Income 20.8 % 26.1 % 16.0 % 19.8 %
 
* As adjusted for the retrospective adoption of the accounting standard for convertible debentures in the first quarter of fiscal 2010 (see Note 1)
 
Net Revenues
 
We sell our products to global manufacturers of electronic products in end markets such as wired and wireless communications, aerospace and defense, industrial, scientific and medical and audio, video and broadcast. The vast majority of our net revenues are generated by sales of our semiconductor products, but we also generate sales from support products. We classify our product offerings into four categories: New, Mainstream, Base and Support Products. The composition of each product category is as follows:
  • New Products include our most recent product offerings and include the Virtex®-6, Virtex-5, Spartan®-6, Spartan-3A and Spartan-3E product families.
  • Mainstream Products include the Virtex-4, Spartan-3, Spartan-II and CoolRunner™-II product families.
  • Base Products consist of our older product families including the Virtex, Virtex-E, Virtex-II, Spartan, XC4000, CoolRunner and XC9500 products.
  • Support Products include configuration products (PROMs - programmable read only memory), software, intellectual property (IP) cores, customer training, design services and support.
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These product categories, excluding Support Products, are modified on a periodic basis to better reflect the age of the products and advances in technology. The most recent adjustment was made on March 29, 2009, which was the beginning of our first quarter of fiscal 2010. Amounts for the prior periods presented have been reclassified to conform to the new categorization. New Products include our most recent product offerings and are typically designed into our customers’ latest generation of electronic systems. Mainstream Products are generally several years old and designed into customer programs that are currently shipping in full production. Base Products are older than Mainstream Products with demand generated generally by the oldest customer systems still in production. Support Products are generally products or services sold in conjunction with our semiconductor devices to aid customers in the design process.
 
Net revenues of $513.3 million in the third quarter of fiscal 2010 represented a 12% increase from the comparable prior year period of $458.4 million. Net revenues for the first nine months of fiscal 2010 were $1.30 billion, down 9% from the comparable prior year period of $1.43 billion. While we have seen a recovery in our business, the worldwide economic downturn adversely impacted our revenues in the first two quarters of fiscal 2010 compared with the same period in the prior year.
 
Total unit sales increased in the third quarter of fiscal 2010 but decreased for the first nine months of fiscal 2010 compared with the comparable prior year periods. Total average selling prices increased in the third quarter and first nine months of fiscal 2010 compared with the comparable prior year periods. No end customer accounted for more than 10% of our net revenues for any of the periods presented.
 
     Net Revenues by Product
 
Net revenues by product categories for the third quarter and the first nine months of fiscal 2010 and 2009 were as follows:
 
Three Months Ended Nine months Ended
Jan 2, Dec 27, Jan 2, Dec 27,
(In millions) 2010       2008       Change       2010       2008       Change
New Products $ 168.4 $ 97.6 72 % $ 390.3 $ 234.6 66 %
Mainstream Products   169.0   155.6 9 %   441.6 523.8   (16 )%
Base Products 151.4   181.9   (17 )%   408.2     594.8   (31 )%
Support Products 24.5 23.3 5 % 64.4 77.0 (16 )%
Total net revenues $ 513.3 $ 458.4 12 % $ 1,304.5 $ 1,430.2 (9 )%
 
Net revenues from New Products for the third quarter and the first nine months of fiscal 2010 increased significantly from the comparable prior year periods as a result of strong market acceptance of these products, particularly for our 65 nm Virtex-5 product family. We expect sales of New Products to continue to increase over time as more customers’ programs go into volume production. In addition, design win activity is strong for our next generation product families which include our high-end, 40-nm Virtex-6 field programmable gate arrays (FPGAs) and our high-volume, 45-nm Spartan-6 FPGAs. We expect these New Product families to contribute significantly to the growth in New Product revenues over time.
 
Net revenues from Mainstream Products increased during the third quarter of fiscal 2010 from the comparable prior year period due primarily to resumption in customer ordering patterns associated with the improved economic condition as well as probable inventory replenishment. Net revenues from Mainstream Products decreased during the first nine months of fiscal 2010 from the comparable prior year period due to lower demand associated with the weakened economic conditions during the earlier part of the fiscal year.
 
While recent demand showed relative sequential improvement, net revenues from Base Products declined during the third quarter and first nine months of fiscal 2010 from the comparable prior year periods, primarily due to lower demand associated with the weakened economic conditions occurring in the earlier part of the fiscal year.
 
Net revenues from Support Products increased during the third quarter of fiscal 2010 from the comparable prior year period due to increased demand, while during the first nine months of fiscal 2010, net revenues from Support Products decreased from the comparable prior year period due to lower demand associated with the weakened economic conditions during the earlier part of the fiscal year.
 
     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.
 
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Net revenues by end markets for the third quarter and the first nine months of fiscal 2010 and 2009 were as follows:
 
Three Months Ended
Nine months Ended
Jan 2, Dec 27, % Change Jan 2, Dec 27, % Change
(% of total net revenues) 2010       2008       in Dollars       2010       2008       in Dollars
Communications 46 % 44 % 16 % 47 %  43 % (1 )%
Industrial and Other 32   33   8 % 31 33   (13 )%
Consumer and Automotive 15 16   2 %   15     16   (19 )%
Data Processing 7   7 27 % 7 8 (16 )%
Total net revenues 100 % 100 % 12 % 100 %    100 % (9 )%
 
Net revenues from Communications increased during the third quarter of fiscal 2010 compared to the same prior year period due to higher sales from both wired and wireless applications. Net revenues from Communications decreased during the first nine months of fiscal 2010 compared to the same prior year period due to a decline in sales from wired applications, which more than offset the increase in sales from wireless applications.
 
Net revenues from Industrial and Other increased during the third quarter but decreased during the first nine months of fiscal 2010 as compared to the comparable prior year periods. The increase in net revenues during the third quarter of fiscal 2010 was driven primarily by higher sales from defense and aerospace applications and to a lesser extent from industrial, scientific and medical applications as well as test and measurement applications. The decrease in net revenues during the first nine months of fiscal 2010 was primarily driven by weakness in industrial, scientific and medical applications as well as test and measurement applications during the earlier part of the fiscal year.
 
Net revenues from Consumer and Automotive increased during the third quarter of fiscal 2010 compared to the same prior year period primarily due to increased sales in audio, video and broadcast applications as well as automotive applications. Net revenues from Consumer and Automotive decreased during the first nine months of fiscal 2010 compared to the same prior year period due to decreased sales in audio, video and broadcast and consumer applications, primarily during the earlier part of the fiscal year.
 
During the third quarter of fiscal 2010, net revenues from Data Processing increased compared to the same prior year period primarily due to higher sales from computing and data processing applications, while during the first nine months of fiscal 2010, net revenues decreased from the comparable prior year period due to lower demand associated with the weakened economic conditions during the earlier part of the fiscal year.
 
     Net Revenues by Geography
 
Geographic revenue information reflects the geographic location of the distributors, OEMs or contract manufacturers 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 2010 and 2009 were as follows:
 
Three Months Ended Nine months Ended
Jan 2, Dec 27, Jan 2, Dec 27,
(In millions) 2010       2008       Change       2010       2008       Change
North America $ 181.7 $ 155.1 17 % $ 456.5 $ 489.4 (7 )%
Asia Pacific   182.3   154.3 18 %   465.4 466.4   0 %
Europe 103.3   99.5 4 %   265.9   324.3 (18 )%
Japan 46.0 49.5   (7 )% 116.7   150.1 (22 )%
Total net revenues $ 513.3 $ 458.4 12 % $ 1,304.5 $ 1,430.2 (9 )%
 
Except for Japan, net revenues in all geographies increased during the third quarter of fiscal 2010 from the comparable prior year period due to broad-based economic recovery across most end market segments. However, weakened economic conditions during the earlier part of fiscal year negatively impacted net revenues for the first nine months of fiscal 2010 as compared to the same prior year period.
 
Net revenues in North America increased during the third quarter of fiscal 2010 from the comparable prior year period primarily due to an increase in sales from wired communications, defense and aerospace, and test and measurement applications. Net revenues in North America decreased during the first nine months of fiscal 2010 from the comparable prior year period due to broad-based weakness across all end markets during the earlier part of the fiscal year.
 
During the third quarter of fiscal 2010, net revenues in Asia Pacific increased from the comparable prior year period as a result of strength in wired and wireless communications applications. During the first nine months of fiscal 2010, net revenues in Asia Pacific were flat from the comparable prior year period as strength in third generation wireless applications in China offset weak sales to most other end market segments.
 
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Net revenues in Europe increased during the third quarter of fiscal 2010 as compared to the comparable prior year period primarily due to strength from automotive as well as audio, video and broadcast applications. Net revenues in Europe decreased during the first nine months of fiscal 2010 as compared to the comparable prior year period due to broad-based weakness across all end market segments with the exception of wireless communications.
 
Net revenues in Japan decreased during the third quarter and the first nine months of fiscal 2010 from the comparable prior year periods. The decrease in the third quarter of fiscal 2010 was primarily due to weaker sales from applications in the communications end market while the decline in the first nine months of fiscal 2010 was due to weaker sales in all end market segments with the exception of consumer applications.
 
Gross Margin
 
Three Months Ended Nine months Ended
Jan 2, Dec 27, Jan 2, Dec 27,
(In millions) 2010       2008       Change       2010       2008       Change
Gross margin $ 329.0   $ 293.1   12%   $ 818.2   $ 910.9   (10)%
       Percentage of net revenues 64.1 %   63.9 %     62.7 %   63.7 %  

The gross margin increased slightly by 0.2 percentage point in the third quarter of fiscal 2010 but decreased 1.0 percentage point in the first nine months of fiscal 2010 compared to the same prior year periods. Gross margin in the third quarter of fiscal 2010 benefited primarily from yield improvement and higher revenues. The decrease in the first nine months of fiscal 2010 was driven by the product mix effect of New Product growth year-over-year and a decline in sales of Mainstream and Base Products, primarily in the earlier part of fiscal 2010. New Products generally have lower gross margins than Mainstream and Base Products as they are in the early stage of their product life cycle and have higher unit costs associated with relatively lower volumes and early manufacturing maturity.
 
Gross margin may be affected in the future due to product and customer mix shifts, competitive-pricing pressure, manufacturing-yield issues and wafer pricing. We expect to mitigate any adverse impacts from these factors by continuing to improve yields on our New Products and by improving manufacturing efficiencies.
 
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
 
Three Months Ended Nine months Ended
Jan 2, Dec 27, Jan 2, Dec 27,
(In millions) 2010       2008       Change       2010       2008       Change
Research and development $ 101.9   $ 87.0   17%   $ 275.2   $ 267.2   3%
       Percentage of net revenues 20 %   19 %     21 %   19 %  
 
R&D spending increased $14.9 million during the third quarter of fiscal 2010 and $8.0 million during the first nine months of fiscal 2010 compared to the same periods last year. The increase in R&D expenses for the third quarter of fiscal 2010 was mainly due to increased mask and wafer spending, as well as the impact of the additional one week within the 2010 fiscal period. For the first nine months of fiscal 2010, higher R&D spending was primarily attributable to the increased mask and wafer spending, partially offset by lower expenses attributable to headcount reduction as a result of a functional reorganization and reduced discretionary spending as part of our restructuring measures.
 
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 may also consider acquisitions to complement our strategy for technology leadership and engineering resources in critical areas.
 
Selling, General and Administrative
 
Three Months Ended Nine months Ended
Jan 2, Dec 27, Jan 2, Dec 27,
(In millions) 2010       2008       Change       2010       2008       Change
Selling, general and administrative $ 85.0   $ 85.0   0%   $ 237.2   $ 266.1   (11)%
       Percentage of net revenues 17 %   19 %     18 %   19 %  
 
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SG&A expenses were flat during the third quarter of fiscal 2010 as compared to the same period last year. The savings from the headcount reduction related to our restructuring measures were offset by the impact of the additional one week and increased variable expenses due to higher revenue within the 2010 fiscal period. For the first nine months of fiscal 2010, SG&A expenses decreased by $28.9 million compared to the same period last year, which was primarily attributable to savings from headcount reduction as part of our restructuring measures.
 
Amortization of Acquisition-Related Intangibles
 
 
Three Months Ended Nine months Ended
Jan 2, Dec 27, Jan 2, Dec 27,
(In millions) 2010       2008       Change       2010       2008       Change
Amortization $ $ 1.5 (100)% $ 2.5 $ 4.3 (42)%
 
During the first quarter of fiscal 2010, we decided to discontinue investing additional funds or resources in certain software technology that was previously acquired. Based on the fact that the future separately identifiable cash flows were not sufficient to recover the carrying value of the asset, we wrote off $1.9 million of remaining carrying value of this acquisition-related intangible asset in the first quarter of fiscal 2010. The remaining intangible assets related to prior acquisitions and have been fully depreciated by then end of the first quarter of fiscal 2010.
 
Restructuring Charges
 
On April 15, 2009, we announced restructuring measures designed to drive structural operating efficiencies across the company. Upon completion of the restructuring plan, we expect to reduce our global workforce by up to 200 positions, or approximately 6% of our global workforce. These employee terminations impact various geographies and functions worldwide. Certain positions were eliminated throughout the first nine months of fiscal 2010 and other positions will be eliminated during the fourth quarter of fiscal 2010. The reorganization plan is expected to be completed by the end of the fourth quarter of fiscal 2010.
 
We recorded total restructuring charges of $5.5 million and $27.2 million in the third quarter and the first nine months of fiscal 2010, respectively, primarily related to severance pay and benefits expenses. As stated above, we expect to continue implementing the restructuring measures resulting in additional restructuring charges relating to the April 2009 restructuring totaling approximately $3.0 million over the remaining period of fiscal 2010.
 
The following table summarizes the restructuring accrual activity for the first nine months of fiscal 2010:
 
Employee Facility-
severance related and
(In millions) and benefits       other costs       Total
Balance as of March 28, 2009 $ $ 0.7 $ 0.7  
Restructuring charges   25.7     1.5     27.2
Cash payments   (20.1 )   (1.9 )   (22.0 )
Non-cash settlements (1.0 ) (1.0 )
Balance as of January 2, 2010 $ 4.6 $ 0.3 $ 4.9
 
The charges above, as well as those included in the table below, have been shown separately as restructuring charges on the condensed consolidated statements of income. The remaining accrual as of January 2, 2010 primarily relates to severance pay and benefits that are expected to be paid during the fourth quarter of fiscal 2010.
 
In June 2008, we announced a functional reorganization pursuant to which we eliminated 249 positions, or approximately 7% of our global workforce at that time. These employee terminations occurred across various geographies and functions worldwide. The reorganization plan was completed by the end of the second quarter of fiscal 2009. We recorded total restructuring charges of $22.0 million in connection with the reorganization. These charges consisted of $19.5 million of severance pay and benefits expenses which were recorded in the first quarter of fiscal 2009 and $2.5 million of facility-related costs and severance benefits expenses which were recorded in the second quarter of fiscal 2009.
 
The following table summarizes the restructuring accrual activity for the first nine months of fiscal 2009:
 
Employee Facility-
severance related
(In millions) and benefits       costs       Total
Balance as of March 29, 2008 $ $   $
Restructuring charges   20.5   1.5 22.0  
Cash payments (20.0 )     (0.6 )     (20.6 )
Non-cash settlements (0.5 ) (0.2 ) (0.7 )
Balance as of December 27, 2008 $ $ 0.7 $ 0.7
 
33
 


We estimate that severance and benefits expenses incurred in the April 2009 restructuring will result in gross annual cash savings relating to employee compensation of approximately $23.0 million before taxes. We began realizing savings associated with the restructuring, primarily within the SG&A and R&D expense categories, beginning in the first quarter of fiscal 2010, but we do not expect to fully realize the savings benefit until the fourth quarter of fiscal 2010. In addition, we estimate cumulative stock-based compensation expense savings of approximately $3.8 million through fiscal 2013 as a result of the April 2009 restructuring. The vast majority of the stock-based compensation expense savings are estimated to occur in fiscal 2010 and 2011. There can be no assurance that these expected future savings will be completely realized as they may be partially offset by increases in other expenses.
 
Stock-Based Compensation
 
Three Months Ended Nine months Ended
Jan 2, Dec 27, Jan 2, Dec 27,
(In millions) 2010       2008       Change       2010       2008       Change