Xilinx 10-Q 2018
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended December 30, 2017
For the transition period from ________ to _______ .
Commission File Number 000-18548
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Shares outstanding of the registrant’s common stock:
TABLE OF CONTENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
 Derived from audited financial statements
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 for the fiscal year ended April 1, 2017. 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 March 31, 2018 or any future period.
The Company uses a 52- to 53-week fiscal year ending on the Saturday nearest March 31. Fiscal year 2018 and fiscal year 2017 are both 52-week years ending on March 31, 2018 and April 1, 2017, respectively. The quarters ended on December 30, 2017 and December 31, 2016 each consisted of 13 weeks.
In April 2014, the Financial Accounting Standards Board (FASB) issued the authoritative guidance, as amended, that outlines a new global revenue recognition standard that replaces virtually all existing U.S. GAAP guidance on contracts with customers and the related other assets and deferred costs. The authoritative guidance provides a five-step process for recognizing revenue that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The authoritative guidance also requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The new authoritative guidance is required to be applied retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The Company is currently evaluating the full impact of this new authoritative guidance on its consolidated financial statements, including selection of the transition method. However, assuming all other revenue recognition criteria have been met, it is expected that the new authoritative guidance would require the Company to recognize revenue and cost relating to distributor sales upon product delivery (Sell-In), subject to estimated allowance for distributor price adjustments and rights of return, rather than deferring the distributor sales upon product delivery and subsequently recognizing revenue when the product is sold by the distributor to the end customer (Sell-Through). Upon adoption, the Company currently expects that it will record the balance of the deferred revenue (subject to true-ups) under Sell-Through to retained earnings, and the impact would be offset by the recognition of revenue on shipments post adoption under Sell-In. The Company continues to evaluate the impact to revenues and related disclosures related to the pending adoption of the new guidance and the preliminary assessments are subject to change. Depending on timing of customer orders, timing of shipment to distributors and to end customers, distributor inventory strategies and other factors that may be beyond the Company's control, the difference in revenue recognized under Sell-Through and Sell-In could be material in the future. The authoritative guidance will be effective for the Company beginning in fiscal year 2019 as the Company decided not to early adopt it in fiscal year 2018.
In January 2016, the FASB issued the final authoritative guidance regarding how companies measure equity investments that do not result in consolidation and are not accounted for under the equity method and how they present changes in the fair value of financial liabilities measured under the fair value option. The new authoritative guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP. It does not change the guidance for classifying and measuring investments in debt securities and loans. The authoritative guidance is effective for public business entities for annual periods beginning after December 15, 2017, and interim periods within those annual periods, which for Xilinx would be the first quarter of fiscal year 2019. Upon adoption, the Company will record all of the unrealized gains or losses from its investment in mutual funds and equity securities to retained earnings, and subsequent changes in fair value from such investments will be recorded under its consolidated statements of income.
In February 2016, the FASB issued the authoritative guidance on leases. The new authoritative guidance requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and will also require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. Accordingly, a lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. The new authoritative guidance is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, which for Xilinx would be the first quarter of fiscal year 2020. Early adoption is permitted. The new authoritative guidance must be adopted using a modified retrospective transition, and provides for certain practical expedients. In addition, the transition will
require application of the new authoritative guidance at the beginning of the earliest comparative period presented. The Company is currently evaluating the impact of this new authoritative guidance on its consolidated financial statements.
In August 2016, the FASB issued authoritative guidance for cash flow classification. The new authoritative guidance is intended to reduce diversity in practice in how cash receipts and cash payments are classified in the statement of cash flows. The new authoritative guidance will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those years, which for Xilinx would be the first quarter of fiscal year 2019. Early adoption is permitted. The Company is currently evaluating the impact of this new authoritative guidance on its consolidated financial statements.
In May 2017, the FASB issued authoritative guidance that clarifies the scope of modification accounting for share-based compensation. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. The new authoritative guidance will be effective for public business entities in fiscal years beginning after December 15, 2017, which for Xilinx would be the first quarter of fiscal year 2019. Early adoption is permitted as of the beginning of the annual period. The authoritative guidance will be effective for the Company beginning in fiscal year 2019 as the Company decided not to early adopt it in fiscal year 2018. The Company is currently evaluating the impact of this new authoritative guidance on its consolidated financial statements.
In August 2017, the FASB issued authoritative guidance that amended the accounting for hedging activities. The guidance permits more hedging strategies to be eligible for hedge accounting and simplifies the application of hedge accounting guidance in areas where practice issues exist. The new authoritative guidance will be effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, which for Xilinx would be the first quarter of fiscal year 2020. Early adoption is permitted, including adoption in any interim periods after issuance of the authoritative guidance. The Company is currently evaluating the impact of this new authoritative guidance on its consolidated financial statements.
Avnet, Inc. (Avnet), one of the Company’s distributors, distributes the Company’s products worldwide. As of December 30, 2017 and April 1, 2017, Avnet accounted for 64% and 59% of the Company’s total net accounts receivable, respectively. For the third quarter and first nine months of fiscal year 2018, resale of product through Avnet accounted for 42% and 45% of the Company’s worldwide net revenues, respectively. For the third quarter and the first nine months of fiscal year 2017, resale of product through Avnet accounted for 42% and 43% of the Company’s worldwide net revenues, respectively.
Xilinx is subject to concentrations of credit risk primarily in its trade accounts receivable and investments in debt securities to the extent of the amounts recorded on the consolidated balance sheet. The Company attempts to mitigate the concentration of credit risk in its trade receivables through its credit evaluation process, collection terms, distributor sales to diverse end customers and through geographical dispersion of sales. Xilinx generally does not require collateral for receivables from its end customers or from distributors.
No end customer accounted for more than 10% of the Company’s worldwide net revenues for the third quarter as well as the first nine months of fiscal years 2018 and 2017.
The Company mitigates concentrations of credit risk in its investments in debt securities by currently investing approximately 85% of its portfolio in AA (or its equivalent) 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 and interest rate swap 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 December 30, 2017, approximately 33% of the portfolio consisted of mortgage-backed securities. All of the mortgage-backed securities in the investment portfolio were issued by U.S. government-sponsored enterprises and agencies and are rated AA+ by Standard & Poor’s and Aaa by Moody’s Investors Service.
The authoritative 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 testing and analysis. 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.
The Company validates the consensus prices by taking random samples from each asset type and corroborating those prices using reported trade activities, 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 year 2018 and the Company did not adjust or override any fair value measurements as of December 30, 2017.
Fair Value Hierarchy
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. government securities, money market funds and equity securities.
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 financial institution securities, non-financial institution securities, U.S. agency securities, foreign government and agency securities, mortgage-backed securities, debt mutual funds, bank loans, asset-backed securities and commercial mortgage-backed securities. The Company’s Level 2 assets and liabilities also include foreign currency forward contracts and interest rate swap 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 has no Level 3 assets and liabilities.
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 December 30, 2017 and April 1, 2017:
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):
As of December 30, 2017, the Company held no marketable securities measured at fair value using Level 3 inputs.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
The Company's $500.0 million principal amount of 2.125% notes due March 15, 2019 (2019 Notes), $500.0 million principal amount of 3.000% notes due March 15, 2021 (2021 Notes) and $750.0 million principal amount of 2.950% senior notes due June 1,
2024 (2024 Notes) are measured at fair value on a quarterly basis for disclosure purposes. The fair values of the 2019 Notes, 2021 Notes and 2024 Notes as of December 30, 2017 were approximately $499.2 million, $504.7 million and $746.4 million, respectively, based on the last trading price for the period (classified as Level 2 in the fair value hierarchy due to relatively low trading volume).
The following is a summary of cash equivalents and available-for-sale securities as of the end of the periods presented:
The following tables show 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 December 30, 2017 and April 1, 2017:
As of December 30, 2017, the gross unrealized losses that had been outstanding for less than twelve months were primarily related to mortgage-backed securities due to the general rising of the interest-rate environment. However, the percentage of such losses to the total estimated fair value of the mortgage-backed securities was relatively insignificant. The gross unrealized losses that had been outstanding for more than twelve months were primarily related to debt mutual funds and mortgage-backed securities, which were primarily due to the general rising of the interest-rate environment and foreign currency movement.
The Company reviewed the investment portfolio and determined that the gross unrealized losses on these investments as of December 30, 2017 and April 1, 2017 were temporary in nature as evidenced by the fluctuations in the gross unrealized losses within the investment categories. These investments are highly rated by the credit rating agencies, there have been no defaults on any of these securities and we have received interest payments as they become due. Therefore, the Company believes that it will be able to collect both principal and interest amount due to the Company. Additionally, in the past several years a portion of the Company's investment in the mortgage-backed securities were redeemed or prepaid by the debtors at par. Furthermore, the aggregate of individual unrealized losses that had been outstanding for twelve months or more were not significant as of December 30, 2017 and April 1, 2017, the majority of which were related to debt mutual funds due to foreign currency and interest rate fluctuations. The Company neither intends to sell these investments nor concludes that it is more-likely-than-not that it will have to sell them until recovery of their carrying values.
The amortized cost and estimated fair value of marketable debt securities (financial institution securities, non-financial institution securities, U.S. and foreign government and agency securities, asset-backed securities, bank loans, mortgage-backed securities and commercial mortgage-backed securities), by contractual maturity, are shown in the table below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.
As of December 30, 2017, $1.98 billion of marketable debt securities with contractual maturities of greater than one year were classified as short-term investments. Additionally, the above table did not include investments in money market funds, mutual funds and equity securities because these securities do not have specific contractual maturities.
Certain information related to available-for-sale securities is as follows:
The cost of securities matured or sold is based on the specific identification method.
The Company entered into interest rate swap contracts with certain independent financial institutions to manage interest rate risks related to fixed interest rate expenses from its 2024 Notes and floating interest rate income from its investments in marketable debt securities. See “Note 10. Debt and Credit Facility” for more discussion related to interest rate swap contracts. The interest rate swap contracts were designated and qualified as fair value hedges of the 2024 Notes, and were separately accounted for as a derivative. The interest rate swap contracts and the 2024 Notes were initially measured at fair value. Any subsequent changes in fair values of the interest rate swap contracts and the 2024 Notes will be recorded in the Company’s consolidated balance sheets. During the nine months ended December 30, 2017, the net change in fair values of the interest rate swap contracts and the underlying 2024 Notes was $11.8 million, which was recorded as a derivative liability for the interest rate swap contacts (as a component of other long-term liabilities on the condensed consolidated balance sheets) and also a reduction from the carrying amount of 2024 Notes. There was no ineffectiveness during all periods presented. Other than this arrangement, there have been no material changes to the Company's derivative financial instruments since April 1, 2017.
The Company’s equity incentive plans are broad-based, long-term retention programs that cover employees, consultants and non-employee directors of the Company. These plans are intended to attract and retain talented employees, consultants and non-employee directors and to provide such persons with a proprietary interest in the Company.
The following table summarizes stock-based compensation expense related to stock awards granted under the Company’s equity incentive plans and rights to acquire stock granted under the Company’s Employee Stock Purchase Plan (ESPP):
Employee Stock Option Plans
The types of awards allowed under the 2007 Equity Incentive Plan (2007 Equity Plan) include incentive stock options, non-qualified stock options, restricted stock units (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; however, there was no issuance of stock options during the first nine months of fiscal year 2018 and the entire fiscal year 2017. The Company's stock-based compensation expenses related to options during the first nine months of fiscal year 2018 and the number of options outstanding as of December 30, 2017
were not material. On August 9, 2017, the stockholders approved an amendment to increase the authorized number of shares reserved for issuance under the 2007 Equity Plan by 1.9 million shares. As of December 30, 2017, 11.3 million shares remained available for grant under the 2007 Equity Plan.
The total pre-tax intrinsic value of options exercised during the three and nine months ended December 30, 2017 was $303 thousand and $3.5 million, respectively. The total pre-tax intrinsic value of options exercised during the three and nine months ended December 31, 2016 was $2.8 million and $24.2 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.
A summary of the Company’s RSU activity and related information is as follows:
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 year 2018 was $67.40 ($49.50 for the third quarter of fiscal year 2017), and for the first nine months of fiscal year 2018 was $60.36 ($43.40 for the first nine months of fiscal year 2017), which were calculated based on estimates at the date of grant using the following weighted-average assumptions:
For the majority of RSUs granted, the number of shares of common stock issued on the date the RSU awards vest is net of the minimum statutory withholding requirements that the Company pays in cash to the appropriate taxing authorities on behalf of its employees.
During the third quarter of fiscal year 2018, the Company realized an immaterial amount of excess tax benefits after adjusting for the impact of the decrease in the tax rate from 35% to 31.5% due to the enactment of the Tax Cuts and Jobs Act as detailed in “Note 14. Income Taxes” to our condensed consolidated financial statements, included in “Part I. Financial Information.” During the first nine months of fiscal year 2018, the Company realized excess tax benefits of $17.5 million. During the third quarter and the first nine months of fiscal year 2017, the Company realized excess tax benefits of $1.2 million and $10.9 million, respectively. These benefits were recorded in the condensed consolidated statements of income as a component of the provision for income taxes.
Employee Stock Purchase Plan
Under the ESPP, shares are only issued during the second and fourth quarters of each fiscal year. Employees purchased 355 thousand shares for $16.9 million during the second quarter of fiscal year 2018 and 446 thousand shares for $15.0 million during
the second quarter of fiscal year 2017. The per-share weighted-average fair value of stock purchase rights granted under the ESPP during the second quarter of fiscal years 2018 and 2017 was $16.46 and $11.64, respectively. The fair values of stock purchase plan rights granted in the second quarter of fiscal years 2018 and 2017 were estimated using the Black-Scholes option pricing model at the date of grant using the following assumptions:
The next scheduled purchase under the ESPP is in the fourth quarter of fiscal year 2018. On August 9, 2017, the stockholders approved an amendment to increase the authorized number of shares reserved for issuance under the ESPP by 2.0 million shares. As of December 30, 2017, 9.9 million shares were available for future issuance under the ESPP.
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 following table summarizes the computation of basic and diluted net income per common share:
The total shares used in the denominator of the diluted net income per common share calculation include potentially dilutive common equivalent shares outstanding that are not included in basic net income per common share calculation. The diluted shares were calculated by applying the treasury stock method to the impact of the equity incentive plans, the incremental shares issuable assuming conversion of the Company's $600.0 million principal amount of 2.625% convertible notes issued in June 2010 (2017 Convertible Notes), before its maturity on June 15, 2017, and exercise of warrants on a weighted-average outstanding basis. The 2017 Convertible Notes matured during the first quarter of fiscal year 2018, and the Company exercised its call options to neutralize the dilutive effect of the incremental shares from the 2017 Convertible Notes. The warrants were fully settled during the third quarter of fiscal year 2018. Because the number of diluted shares in the above table for the nine months ended December 30, 2017 was calculated based on a weighted-average outstanding basis, it included approximately 2.0 million shares of dilutive impact from the 2017 Convertible Notes through the maturity date and 5.5 million shares of dilutive impact from warrants before the settlement. See "Note 10. Debt and Credit Facility" for more discussion of the Company's debt, call options and warrants.
Outstanding stock options and RSUs under the Company's stock award plans to purchase approximately 248 thousand and 3.4 million shares, for the third quarter and the first nine months of fiscal year 2018, respectively, were excluded from diluted net income per common share by applying the treasury stock method, as their inclusion would have been anti-dilutive. 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.
Inventories are stated at the lower of actual cost (determined using the first-in, first-out method) or market (estimated net realizable value) and are comprised of the following:
2017 Convertible Notes
During the first quarter of fiscal year 2018, the Company received conversion requests from the remaining holders of the 2017 Convertible Notes. Upon settlement, the holders received a cash payment equal to the par value of the 2017 Convertible Notes of $457.9 million, as well as 9.0 million shares of the Company's common stock. In conjunction with the settlement, the Company exercised its call options on its shares of common stock that it purchased to hedge against the dilution from the conversion of the 2017 Convertible Notes, and received 9.0 million shares from the hedge counterparties. As of the end of the first quarter of fiscal year 2018, the 2017 Convertible Notes were no longer outstanding.
The carrying values of the liability and equity components of the 2017 Convertible Notes are reflected in the Company’s condensed consolidated balance sheets as follows:
Prior to the conversion, interest expense related to the 2017 Convertible Notes was included in interest and other income (expense), net on the condensed consolidated statements of income, and was recognized as follows: