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EX-10.1 - EXHIBIT 10.1 - XILINX INCex101q1fy19.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 June 30, 2018
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
incorporation or organization)
 
 
 
(I.R.S. Employer
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  x    No  ¨
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
Emerging growth company o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 July 13, 2018
Common Stock, $0.01 par value
 
252,913,557




TABLE OF CONTENTS
 

2


PART I.
FINANCIAL INFORMATION

Item 1.
Financial Statements
XILINX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended
(In thousands, except per share amounts)
June 30, 2018
 
July 1, 2017 [1]
Net revenues
$
684,370

 
$
602,810

Cost of revenues
206,888

 
190,824

Gross margin
477,482

 
411,986

Operating expenses:

 

Research and development
170,826

 
153,051

Selling, general and administrative
90,532

 
89,175

Amortization of acquisition-related intangibles
360

 
705

Total operating expenses
261,718

 
242,931

Operating income
215,764

 
169,055

Interest and other income (expense), net
(2,847
)
 
1,839

Income before income taxes
212,917

 
170,894

Provision for income taxes
22,879

 
13,650

Net income
$
190,038

 
$
157,244

Net income per common share:

 

Basic
$
0.75

 
$
0.63

Diluted
$
0.74

 
$
0.59

Cash dividends per common share
$
0.36

 
$
0.35

Shares used in per share calculations:

 

Basic
252,682

 
247,911

Diluted
255,935

 
265,797


[1] Prior year balances have been restated to reflect the retrospective application of the new revenue recognition accounting standard. Please refer to "Note 2. Recent Accounting Changes and Accounting Pronouncements."

See notes to condensed consolidated financial statements.



3


XILINX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended
(In thousands)
June 30, 2018
 
July 1, 2017 [1]
Net income
$
190,038

 
$
157,244

Other comprehensive income (loss), net of tax:


 


Change in net unrealized gains (losses) on available-for-sale securities
(1,660
)
 
5,250

Reclassification adjustment for gains on available-for-sale securities
(51
)
 
(48
)
Net change in unrealized gains (losses) on hedging transactions
(5,619
)
 
1,425

Reclassification adjustment for gains on hedging transactions
(441
)
 
(338
)
Cumulative translation adjustment, net
(2,050
)
 
1,760

Other comprehensive (loss) income
(9,821
)
 
8,049

Total comprehensive income
$
180,217

 
$
165,293


[1] Prior year balances have been restated to reflect the retrospective application of the new revenue recognition accounting standard. Please refer to "Note 2. Recent Accounting Changes and Accounting Pronouncements."

See notes to condensed consolidated financial statements.


4


XILINX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In thousands, except par value amounts)
June 30, 2018
 
March 31, 2018 [1]
 
(unaudited)
 
 
ASSETS

 

Current assets:

 

Cash and cash equivalents
$
1,677,389

 
$
2,179,328

Short-term investments
1,686,809

 
1,268,242

Accounts receivable, net
456,898

 
382,246

Inventories
247,001

 
236,077

Prepaid expenses and other current assets
57,448

 
88,695

Total current assets
4,125,545

 
4,154,588

Property, plant and equipment, at cost
871,411

 
855,023

Accumulated depreciation and amortization
(559,327
)
 
(550,906
)
Net property, plant and equipment
312,084

 
304,117

Long-term investments
91,700

 
97,896

Goodwill
162,421

 
162,421

Acquisition-related intangibles, net
3,763

 
4,123

Other assets
359,679

 
337,402

Total Assets
$
5,055,192

 
$
5,060,547

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

Accounts payable
$
105,484

 
$
98,999

Accrued payroll and related liabilities
198,602

 
206,367

Income taxes payable
82,410

 
47,713

Other accrued liabilities
56,696

 
59,680

Current portion of long-term debt
499,407

 
499,186

Total current liabilities
942,599

 
911,945

Long-term debt
1,207,387

 
1,214,440

Long-term income taxes payable
530,167

 
523,864

Other long-term liabilities
56,401

 
49,945

Commitments and contingencies (Note 17)

 

Stockholders' equity:

 

Preferred stock, $.01 par value (none issued and outstanding)

 

Common stock, $.01 par value
2,515

 
2,534

Additional paid-in capital
894,588

 
878,672

Retained earnings
1,457,467

 
1,513,656

Accumulated other comprehensive loss
(35,932
)
 
(34,509
)
Total stockholders’ equity
2,318,638

 
2,360,353

Total Liabilities and Stockholders’ Equity
$
5,055,192

 
$
5,060,547


[1] Prior year balances have been restated to reflect the retrospective application of the new revenue recognition accounting standard. Please refer to "Note 2. Recent Accounting Changes and Accounting Pronouncements."

See notes to condensed consolidated financial statements.

5


XILINX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
(In thousands)
June 30, 2018
 
July 1, 2017 [1]
Cash flows from operating activities:
 
 
 
Net income
$
190,038

 
$
157,244

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
15,075

 
11,232

Amortization
7,333

 
3,729

Stock-based compensation
35,608

 
32,036

Amortization of debt discounts
295

 
1,676

Provision (benefit) for deferred income taxes
(13,532
)
 
24,694

Others
6,147


(446
)
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(74,652
)
 
(23,654
)
Inventories
(10,924
)
 
11,691

Prepaid expenses and other current assets
2,140

 
(5,023
)
Other assets
(7,770
)
 
(8,690
)
Accounts payable
9,320

 
(3,049
)
Accrued liabilities
(32,437
)
 
2,378

Income taxes payable
49,527

 
(12,910
)
Net cash provided by operating activities
176,168

 
190,908

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities
(559,159
)
 
(832,705
)
Proceeds from sale and maturity of available-for-sale securities
155,230

 
613,396

Purchases of property, plant and equipment and other intangibles
(26,359
)
 
(9,926
)
Other investing activities
(13,900
)
 
(3,008
)
Net cash used in investing activities
(444,188
)
 
(232,243
)
Cash flows from financing activities:
 
 
 
Repurchases of common stock
(137,300
)
 
(67,062
)
Taxes paid related to net share settlements of restricted stock units
(5,495
)
 
(933
)
Proceeds from issuance of common stock through various stock plans
214

 
2,003

Payment of dividends to stockholders
(90,675
)
 
(87,303
)
Repayment of convertible debt

 
(457,918
)
Proceeds from issuance of long-term debt, net

 
745,871

Other financing activities
(663
)
 
(663
)
Net cash (used in) provided by financing activities
(233,919
)
 
133,995

Net (decrease) increase in cash and cash equivalents
(501,939
)
 
92,660

Cash and cash equivalents at beginning of period
2,179,328

 
966,695

Cash and cash equivalents at end of period
$
1,677,389

 
$
1,059,355

Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
21,174

 
$
5,795

Income taxes (refunded) paid, net
$
(13,328
)
 
$
1,873


[1] Prior year balances have been restated to reflect the retrospective application of the new revenue recognition accounting standard. Please refer to "Note 2. Recent Accounting Changes and Accounting Pronouncements."

See notes to condensed consolidated financial statements.

6


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 for the fiscal year ended March 31, 2018. 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 30, 2019 or any future period.

The Company uses a 52- to 53-week fiscal year ending on the Saturday nearest March 31. Fiscal 2019 and fiscal 2018 are both 52-week years ending on March 30, 2019 and March 31, 2018, respectively. The quarters ended June 30, 2018 and July 1, 2017 each consisted of 13 weeks.

Note 2.
Recent Accounting Changes and Accounting Pronouncements
 
Recent Accounting Pronouncements Adopted

Revenue Recognition

In April 2014, the Financial Accounting Standards Board (FASB) issued the authoritative guidance, as amended, that outlines a new 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 new 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 guidance is required to be applied retrospectively to each prior reporting period presented (Full Retrospective), or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The Company adopted the new guidance on April 1, 2018, using the Full Retrospective method and restated the comparative prior periods. The Company implemented internal controls and certain system functionality to enable the preparation of financial information on adoption.
As a result of the adoption of the authoritative guidance, the Company changed its accounting policy for revenue recognition and the details of the significant changes and quantitative impact of the changes are disclosed below:
Revenue from sales to the Company's distributors is recognized upon shipment of the product to the distributors (sell-in) and is reduced by estimated allowances for distributor price adjustments and rights of return. Previously, revenue was recognized upon reported resale of the product by the distributors to their customers (sell-through) as reduced by actual allowances for distributor price adjustments. Revenue from software license agreements, software license renewals, and other contracts are recognized at point of sales, whereas previously these were deferred and recognized over the contractual term before the implementation of the authoritative guidance. Revenue recognition related to the Company's other revenue streams, such as direct customers, remains unchanged.
The adoption of this authoritative guidance has an impact on the Company’s condensed consolidated statements of income and balance sheets, but has no impact on net cash provided by or used in operating, financing, or investing activities on the condensed consolidated statements of cash flows.
The impact on the Company's previously reported condensed consolidated statement of income resulting from the adoption of the authoritative guidance is as follows:

7


 
Three months ended July 1, 2017
(In thousands, except per share amounts)
As Reported
Adjustment
As Adjusted
Net revenues
$
615,446

$
(12,636
)
$
602,810

Cost of revenues
192,095

(1,271
)
190,824

Gross margin
423,351

(11,365
)
411,986

Operating expenses:
 
 
 
Research and development
153,051


153,051

Selling, general and administrative
89,175


89,175

Amortization of acquisition-related intangibles
705


705

Total operating expenses
242,931


242,931

Operating income
180,420

(11,365
)
169,055

Interest and other income, net
1,839


1,839

Income before income taxes
182,259

(11,365
)
170,894

Provision for income taxes
15,014

(1,364
)
13,650

Net income
$
167,245

$
(10,001
)
$
157,244

Net income per common share:
 
 
 
Basic
$
0.67

$
(0.04
)
$
0.63

Diluted
$
0.63

$
(0.04
)
$
0.59

Shares used in per share calculations:
 
 
 
Basic
247,911

 
247,911

Diluted
265,797

 
265,797


The impact on the Company's previously reported condensed consolidated balance sheet line items affected by the adoption of the authoritative guidance is as follows:
 
March 31, 2018
(In thousands)
As Reported
Adjustment
As Adjusted
Accounts receivable
$
372,144

$
10,102

$
382,246

Other assets
342,644

(5,242
)
337,402

Deferred income on shipments to distributors
25,166

(25,166
)

Other accrued liabilities
59,772

(92
)
59,680

Retained earnings
1,483,538

30,118

1,513,656


Financial Instruments

In January 2016, the FASB issued 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 that are attributable to their own credit. The authoritative guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP on this matter. The authoritative guidance 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. The Company adopted this authoritative guidance on April 1, 2018 and recorded the balance of the unrealized losses of $11.0 million as of the end of fiscal 2018 from its investment in debt mutual funds and equity securities to retained earnings, less the related deferred taxes of $2.6 million. Subsequent changes in fair value from such investments are recorded in the condensed consolidated statements of income.


8


Income Taxes

In October 2016, the FASB issued authoritative guidance on income taxes which eliminates the deferred tax effects of intra-entity asset transfers other than inventory. As a result, a reporting entity would recognize the tax expense from the sale of an asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. The authoritative guidance is effective for public business entities in fiscal years beginning after December 15, 2017 and requires the adoption be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings. The Company adopted this authoritative guidance on April 1, 2018. Accordingly, $13.8 million of prepaid taxes associated with prior period intra-entity asset transfers was reclassified to retained earnings.

Recent Accounting Pronouncements Not Yet Adopted

Leases

In February 2016, the FASB issued 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 2020. Early adoption is permitted. The new authoritative guidance must be adopted using a modified retrospective transition with application of the new authoritative guidance for leases that existed at or are entered into after the beginning of the earliest comparative period presented. To help with the transition to the new guidance, certain practical expedients are provided. The Company is currently evaluating the impact of this new authoritative guidance on its condensed consolidated financial statements.

Note 3.
Significant Customers and Concentrations of Credit Risk

Avnet, Inc. (Avnet), one of the Company’s distributors, distributes the Company’s products worldwide. As of June 30, 2018 and March 31, 2018, Avnet accounted for 70% and 61% of the Company’s total net accounts receivable, respectively. Net revenues from Avnet accounted for 51% and 41% of the Company’s worldwide net revenues in the first quarter of fiscal 2019 and 2018, respectively. The Company expects its accounts receivable to be relatively higher than normal on a temporary basis as the Company partners with its distributors to manage their inventory requirements.

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 distributors.

No end customer accounted for more than 10% of the Company’s worldwide net revenues for the first quarter of fiscal 2019 and 2018.

The Company mitigates concentrations of credit risk in its investments in debt securities by currently investing approximately 91% 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 June 30, 2018, approximately 24% 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.


9


Note 4.
Fair Value Measurements

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 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 quarter of fiscal 2019 and the Company did not adjust or override any fair value measurements as of June 30, 2018.

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 marketable 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, 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 measured at fair value on a recurring basis.

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 June 30, 2018 and March 31, 2018:


10


 
 
June 30, 2018
(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
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
458,706

 
$

 
$

 
$
458,706

Financial institution securities
 

 
349,850

 

 
349,850

Non-financial institution securities
 

 
350,624

 

 
350,624

U.S. government and agency securities
 
114,664

 
206,945

 

 
321,609

Foreign government and agency securities
 

 
130,622

 

 
130,622

Short-term investments:
 
 
 
 
 
 
 
 
Financial institution securities
 

 
249,982

 

 
249,982

Non-financial institution securities
 

 
263,922

 

 
263,922

U.S. government and agency securities
 
3,647

 
96,105

 

 
99,752

Foreign government and agency securities
 

 
43,783

 

 
43,783

Mortgage-backed securities
 

 
796,953

 

 
796,953

Asset-backed securities
 

 
89,028

 

 
89,028

Commercial mortgage-backed securities
 

 
143,389

 

 
143,389

Long-term investments:
 
 
 
 
 
 
 
 
Debt mutual funds
 

 
85,633

 

 
85,633

Marketable equity securities
 
6,067

 

 

 
6,067

Total assets measured at fair value
 
$
583,084

 
$
2,806,836

 
$

 
$
3,389,920

Liabilities
 


 


 


 


Derivative financial instruments, net
 
$

 
$
41,289

 
$

 
$
41,289

Total liabilities measured at fair value
 
$

 
$
41,289

 
$

 
$
41,289

Net assets measured at fair value
 
$
583,084

 
$
2,765,547

 
$

 
$
3,348,631




11


 
March 31, 2018
(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
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
1,291,891

 
$

 
$

 
$
1,291,891

Financial institution securities

 
359,901

 

 
359,901

Non-financial institution securities

 
242,904

 

 
242,904

U.S. government and agency securities
996

 
34,999

 

 
35,995

Foreign government and agency securities

 
179,957

 

 
179,957

Short-term investments:

 

 

 


Financial institution securities

 
75,000

 

 
75,000

Non-financial institution securities

 
81,939

 

 
81,939

U.S. government and agency securities
3,639

 
19,008

 

 
22,647

Mortgage-backed securities

 
844,397

 

 
844,397

Asset-backed securities

 
91,389

 

 
91,389

Commercial mortgage-backed securities

 
152,870

 

 
152,870

Long-term investments:

 
 
 

 


Debt mutual funds

 
89,670

 

 
89,670

Marketable equity securities
8,226

 


 

 
8,226

Total assets measured at fair value
$
1,304,752

 
$
2,172,034

 
$

 
$
3,476,786

Liabilities
 
 
 
 
 
 
 
Derivative financial instruments, net
$

 
$
26,091

 
$

 
$
26,091

Total liabilities measured at fair value
$

 
$
26,091

 
$

 
$
26,091

Net assets measured at fair value
$
1,304,752

 
$
2,145,943

 
$

 
$
3,450,695


For certain of the Company’s financial instruments, including cash held in banks, accounts receivable and accounts payable, the carrying amounts approximate fair value due to their short maturities, and are therefore excluded from the fair value tables above.
 

As of June 30, 2018 and July 1, 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 June 30, 2018 were approximately $498.0 million, $495.9 million and $713.4 million, respectively, based on the last trading price for the period (classified as Level 2 in fair value hierarchy due to relatively low trading volume).

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

As of June 30, 2018, the Company had non-marketable equity securities in private companies of $49.6 million, which were classified as Level 3 assets. The Company’s investments in non-marketable securities of private companies, together with its non-financial assets such as property, plant and equipment, goodwill and acquisition-related intangibles, are recorded at fair value only if the Company recognizes an impairment or an observable price adjustment. Such impairment losses or observable price adjustments were not material during all periods presented.


12


Note 5.
Financial Instruments

The following is a summary of cash equivalents and available-for-sale securities as of the end of the periods presented:

 
June 30, 2018
 
 
March 31, 2018
(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
$
458,706

 
$

 
$

 
$
458,706

 
 
$
1,291,891

 
$

 
$

 
$
1,291,891

Financial institution


 


 


 


 
 


 


 


 


securities
599,832

 

 

 
599,832

 
 
434,901

 

 

 
434,901

Non-financial institution


 


 


 


 
 


 


 


 


securities
615,958

 
1

 
(1,413
)
 
614,546

 
 
326,219

 

 
(1,376
)
 
324,843

U.S. government and

 

 

 

 
 

 

 

 

agency securities
421,679

 
9

 
(327
)
 
421,361

 
 
58,913

 
1

 
(272
)
 
58,642

Foreign government and

 

 

 

 
 

 

 

 

agency securities
174,405

 

 

 
174,405

 
 
179,957

 

 

 
179,957

Mortgage-backed securities
820,305

 
580

 
(23,932
)
 
796,953

 
 
866,048

 
660

 
(22,311
)
 
844,397

Asset-backed securities
90,426

 
12

 
(1,410
)
 
89,028

 
 
92,751

 
16

 
(1,378
)
 
91,389

Debt mutual funds
101,350

 

 
(15,717
)
 
85,633

 
 
101,350

 

 
(11,680
)
 
89,670

Commercial mortgage-


 


 


 


 
 


 


 


 


backed securities
146,984

 

 
(3,595
)
 
143,389

 
 
156,296

 
1

 
(3,427
)
 
152,870

Marketable equity securities
7,500

 

 
(1,433
)
 
6,067

 
 
7,500

 
726

 

 
8,226

 
$
3,437,145

 
$
602

 
$
(47,827
)
 
$
3,389,920

 
 
$
3,515,826

 
$
1,404

 
$
(40,444
)
 
$
3,476,786


Financial institution securities include securities issued or managed by financial institutions in various forms, such as commercial paper and time deposits. Substantially all time deposits were issued by institutions outside the U.S. as of June 30, 2018 and March 31, 2018.


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 June 30, 2018 and March 31, 2018:

 
June 30, 2018
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(In thousands)
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Non-financial institution securities
$
57,501

 
$
(1,193
)
 
$
7,910

 
$
(220
)
 
$
65,411

 
$
(1,413
)
U.S. government and

 

 

 

 


 


    agency securities
52,351

 
(224
)
 
4,586

 
(103
)
 
56,937

 
(327
)
Mortgage-backed securities
424,784

 
(10,639
)
 
340,733

 
(13,293
)
 
765,517

 
(23,932
)
Asset-backed securities
53,832

 
(944
)
 
33,333

 
(466
)
 
87,165

 
(1,410
)
Debt mutual funds

 

 
85,633

 
(15,717
)
 
85,633

 
(15,717
)
Commercial mortgage-

 

 

 

 
 
 
 
backed securities
84,596

 
(1,830
)
 
57,875

 
(1,765
)
 
142,471

 
(3,595
)
Marketable equity securities
6,067

 
(1,433
)
 

 

 
6,067

 
(1,433
)
 
$
679,131

 
$
(16,263
)
 
$
530,070

 
$
(31,564
)
 
$
1,209,201

 
$
(47,827
)


13


 
March 31, 2018
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(In thousands)
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Non-financial institution securities
$
69,780

 
$
(1,146
)
 
$
8,344

 
$
(230
)
 
$
78,124

 
$
(1,376
)
U.S. government and

 

 

 

 

 

    agency securities
13,471

 
(176
)
 
9,176

 
(96
)
 
22,647

 
(272
)
Mortgage-backed securities
510,988

 
(11,048
)
 
299,663

 
(11,263
)
 
810,651

 
(22,311
)
Asset-backed securities
57,128

 
(876
)
 
32,696

 
(502
)
 
89,824


(1,378
)
Debt mutual funds

 

 
89,670

 
(11,680
)
 
89,670

 
(11,680
)
Commercial mortgage-
 
 
 
 
 
 
 
 
 
 
 
    backed securities
95,435

 
(1,760
)
 
56,051

 
(1,667
)
 
151,486

 
(3,427
)
 
$
746,802

 
$
(15,006
)
 
$
495,600

 
$
(25,438
)
 
$
1,242,402

 
$
(40,444
)

As of June 30, 2018, 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, although 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.

Starting April 1, 2018, the Company records the change in the fair value of its investment in debt mutual funds and marketable equity securities as part of its interest and other income (expense), net. This change in fair value was a net decrease of $6.2 million for the three months ended June 30, 2018 and resulted in an expense within interest and other income (expense) net for the period.
 
The Company reviewed the investment portfolio and determined that the gross unrealized losses on these investments as of June 30, 2018 and March 31, 2018 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 the company has 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 was redeemed or prepaid by the debtors at par. Furthermore, the aggregate of individual unrealized losses that had been outstanding for twelve months or more was not significant as of June 30, 2018 and March 31, 2018. 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, 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.

 
June 30, 2018
(In thousands)
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
1,758,865

 
$
1,758,593

Due after one year through five years
176,391

 
172,941

Due after five years through ten years
148,349

 
143,894

Due after ten years
785,984

 
764,086


$
2,869,589

 
$
2,839,514


As of June 30, 2018, $1.08 billion of marketable debt securities with contractual maturities of greater than one year were classified as short-term investments. Additionally, the above table does not include investments in money market, debt mutual funds and marketable equity securities because these investments do not have specific contractual maturities.


14


Certain information related to available-for-sale securities is as follows:

 
Three Months Ended
(In thousands)
June 30, 2018
 
July 1, 2017
Proceeds from sale of available-for-sale securities
$
895

 
$
119,922

Gross realized gains on sale of available-for-sale securities
$
96

 
$
832

Gross realized losses on sale of available-for-sale securities
(47
)
 
(386
)
Net realized gains on sale of available-for-sale securities
$
49

 
$
446

Amortization of premiums on available-for-sale securities
$
2,491

 
$
6,823


The cost of securities matured or sold is based on the specific identification method.

Note 6.
Derivative Financial Instruments

The Company’s primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk. As a result of the use of derivative financial instruments, the Company is exposed to the risk that counterparties to derivative contracts may fail to meet their contractual obligations. The Company manages counterparty credit risk in derivative contracts by reviewing counterparty creditworthiness on a regular basis, establishing collateral requirement and limiting exposure to any single counterparty. The right of set-off that exists with certain transactions enables the Company to net amounts due to and from the counterparty, reducing the maximum loss from credit risk in the event of counterparty default.

As of June 30, 2018 and March 31, 2018, the Company had the following outstanding forward currency exchange contracts (in notional amount), which were derivative financial instruments:
 
(In thousands and U.S. dollars)
June 30, 2018
 
March 31, 2018
Singapore Dollar
$
26,392

 
$
24,914

Euro
38,591

 
38,987

Indian Rupee
64,959

 
62,472

British Pound
8,125

 
8,155

Japanese Yen
3,882

 
3,859

Chinese Yuan
13,247

 
8,260

 
$
155,196

 
$
146,647


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 forward outlook of up to two years for major foreign-currency-denominated operating expenses. The outstanding forward currency exchange contracts expire at various dates through May 2020. The net unrealized losses, which approximate the fair market value of the outstanding forward currency exchange contracts, are expected to be realized into net income within the next two years.

As of June 30, 2018, all of the forward foreign currency exchange contracts were designated and qualified as cash flow hedges and the effective portion of the gain or loss on the forward contracts was reported as a component of other comprehensive income (loss) and reclassified into net income in the same period during which the hedged transaction affects earnings. The estimated amount of such gains or losses as of June 30, 2018 that is expected to be reclassified into earnings was not material. The ineffective portion of the gains or losses on the forward contracts was immaterial and included in the net income for all periods presented.

The Company may enter into forward foreign currency exchange contracts to hedge firm commitments such as acquisitions and capital expenditures. Gains and losses on foreign currency forward contracts that are designated as hedges of anticipated transactions, for which a firm commitment has been attained and the hedged relationship has been effective, are deferred and included in income or expenses in the same period that the underlying transaction is settled. Gains and losses on any instruments not meeting the above criteria are recognized in income or expenses in the consolidated statements of income as they are incurred.


15


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 three months ended June 30, 2018, the net change in fair values of the interest rate swap contracts and the underlying 2024 Notes was $7.4 million, which was recorded as a derivative liability for the interest rate swap contacts and also a reduction from the carrying amount of 2024 Notes. There was no ineffectiveness during all periods presented.

The Company had the following derivative instruments as of June 30, 2018 and March 31, 2018, located on the condensed consolidated balance sheets, utilized for risk management purposes detailed above:

 
Foreign Exchange Contracts
 
Asset Derivatives
 
Liability Derivatives
(In thousands)
Balance Sheet Location
Fair Value
 
Balance Sheet Location
Fair Value
June 30, 2018
Prepaid expenses and other current assets
$
167

 
Other accrued liabilities
$
5,040

March 31, 2018
Prepaid expenses and other current assets
$
2,922

 
Other accrued liabilities
$
12


The Company does not offset or net the fair value amounts of derivative financial instruments in its condensed consolidated balance sheets. The potential effect of rights of set-off associated with the derivative financial instruments was not material to the Company's condensed consolidated balance sheets for all periods presented.

The following table summarizes the effect of derivative instruments on the condensed consolidated statements of income for the first quarter of fiscal 2019 and 2018:

 
Three Months Ended
(In thousands)
June 30, 2018
 
July 1, 2017
Amount of gains (losses) recognized in other comprehensive income on derivative (effective portion of cash flow hedging)
$
(5,909
)
 
$
1,086

Amount of gains (losses) reclassified from accumulated other comprehensive income into income (effective portion) *
$
(430
)
 
$
357

Amount of gains (losses) recorded (ineffective portion) *
$
(11
)
 
$
(19
)

*
Recorded in interest and other income (expense), net within the condensed consolidated statements of income.

Note 7.
Stock-Based Compensation Plans

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.

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 Employee Stock Purchase Plan (ESPP):


16


 
Three Months Ended
(In thousands)
June 30, 2018
 
July 1, 2017
Stock-based compensation included in:

 

Cost of revenues
$
2,035

 
$
2,150

Research and development
20,930

 
17,466

Selling, general and administrative
12,643

 
12,420

 
$
35,608

 
$
32,036


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 quarter of fiscal 2019 and the entire fiscal 2018. The Company's stock-based compensation expenses related to options during the first quarter of fiscal 2019 and the number of options outstanding as of June 30, 2018 were not material. As of June 30, 2018, 11.2 million shares remained available for grant under the 2007 Equity Plan.

The total pre-tax intrinsic value of options exercised during the three months ended June 30, 2018 and July 1, 2017 was $220 thousand and $2.8 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.

RSU Awards

A summary of the Company’s RSU activity and related information is as follows:
 
 
RSUs Outstanding
(Shares in thousands)
Number of Shares
 
Weighted-Average Grant-Date Fair Value Per Share
April 1, 2017
6,988

 
$
42.93

Granted
3,718

 
$
60.18

Vested
(3,016
)
 
$
43.30

Cancelled
(701
)
 
$
48.16

March 31, 2018
6,989

 
$
51.39

Granted
261

 
$
65.69

Vested
(212
)
 
$
53.68

Cancelled
(128
)
 
$
50.50

June 30, 2018
6,910

 
$
51.84



17


The estimated fair values of RSUs 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 first quarter of fiscal 2019 was $65.69 ($57.99 for the first quarter of fiscal 2018), which were calculated based on estimates at the date of grant using the following weighted-average assumptions: 

 
Three Months Ended

June 30, 2018

July 1, 2017
Risk-free interest rate
2.7
%
 
1.7
%
Dividend yield
2.1
%
 
2.3
%

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 the Company's employees. During the first three months of fiscal 2019 and 2018, the Company withheld $5.5 million and $25.6 million worth of RSU awards, respectively, to satisfy the employees’ tax obligations.

During the first three months of fiscal 2019, the Company realized an immaterial amount of excess tax benefits in the condensed consolidated statements of income as a component of the provision for income taxes. During the first three months of fiscal 2018, the Company realized tax benefits of $11.6 million.

Employee Stock Purchase Plan

The fair values of stock purchase plan rights under the Company’s ESPP were estimated using the Black-Scholes option pricing model. Under the Company’s ESPP, shares are only issued during the second and fourth quarters of each fiscal year. Therefore, no shares were issued during the first quarter of fiscal 2019 or 2018. The next scheduled purchase under the ESPP is in the second quarter of fiscal 2019. As of June 30, 2018, 9.3 million shares were available for future issuance under the Company's ESPP.

Note 8.
Net Income Per Common Share

The computation of basic net income per common share for all periods presented is derived from information on the condensed consolidated statements of income, and there are no reconciling items in the numerator used to compute the diluted net income per common share. The following table summarizes the computation of basic and diluted net income per common share:

(In thousands, except per share amounts)
June 30, 2018
 
July 1, 2017
Net income available to common stockholders
$
190,038

 
$
157,244

Weighted average common shares outstanding-basic
252,682

 
247,911

Dilutive effect of employee equity incentive plans
3,253

 
3,817

Dilutive effect of 2017 Convertible Notes and warrants

 
14,069

Weighted average common shares outstanding-diluted
255,935

 
265,797

Basic net income per common share
$
0.75

 
$
0.63

Diluted net income per common share
$
0.74

 
$
0.59


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, before the final settlements during the third quarter of fiscal 2018. The 2017 Convertible Notes matured during the first quarter of fiscal 2018, and the Company exercised its call options to neutralize the dilutive effect of the incremental shares from the 2017 Convertible Notes. Because the number of diluted shares in the above table for the three months ended July 1, 2017 was calculated based on a weighted-average outstanding basis, it included approximately 6.0 million shares of dilutive impact from the 2017 Convertible Notes through the maturity date. Such impact will no longer be applicable in future periods.


18


Outstanding stock options and RSUs under the Company's stock award plans to purchase approximately 366 thousand and 152 thousand shares for the first quarter of fiscal 2019 and 2018, respectively, were excluded from the diluted net income per common share calculation by 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.

Note 9.
Inventories

Inventories are stated at the lower of actual cost (determined using the first-in, first-out method), or market (estimated net realizable value) and are comprised of the following:

(In thousands)
June 30, 2018
 
March 31, 2018
Raw materials
$
17,405

 
$
14,674

Work-in-process
169,926

 
167,039

Finished goods
59,670

 
54,364

 
$
247,001

 
$
236,077


Note 10.
Debt and Credit Facility
 
2019 Notes and 2021 Notes

On March 12, 2014, the Company issued the 2019 Notes and 2021 Notes at a discounted price of 99.477% and 99.281% of par, respectively. Interest on the 2019 Notes and 2021 Notes is payable semi-annually on March 15 and September 15.

The Company received net proceeds of $990.1 million from issuance of the 2019 Notes and 2021 Notes, after the debt discount and deduction of debt issuance costs. The debt discounts and issuance costs are amortized to interest expense over the terms of the 2019 Notes and 2021 Notes. As of June 30, 2018, the remaining term of the 2019 Notes and 2021 Notes are 0.7 years and 2.7 years respectively.

The following table summarizes the carrying value of the 2019 Notes and 2021 Notes as of June 30, 2018 and March 31, 2018:
 
 
 
 
(In thousands)
June 30, 2018
 
March 31, 2018
Principal amount of the 2019 Notes
$
500,000


$
500,000

Unamortized discount of the 2019 Notes
(365
)

(501
)
Unamortized debt issuance costs associated with 2019 Notes
(228
)

(313
)
Carrying value of the 2019 Notes
499,407

 
499,186

Principal amount of the 2021 Notes
500,000


500,000

Unamortized discount of the 2021 Notes
(1,461
)

(1,593
)
Unamortized debt issuance costs associated with 2021 Notes
(651
)

(711
)
Carrying value of the 2021 Notes
$
497,888

 
$
497,696

Total carrying value
$
997,295

 
$
996,882


Interest expense related to the 2019 Notes and 2021 Notes was included in interest and other income (expense), net on the condensed consolidated statements of income as follows:
 
Three Months Ended
(In thousands)
June 30, 2018
 
July 1, 2017
Contractual coupon interest
$
6,406

 
$
6,406

Amortization of debt issuance costs
146

 
146

Amortization of debt discount, net
268

 
260

Total interest expense related to the 2019 Notes and 2021 Notes
$
6,820

 
$
6,812



19


2024 Notes

On May 30, 2017, the Company issued the 2024 Notes at a discounted price of 99.887% of par. Interest on the 2024 Notes is payable semi-annually on June 1 and December 1.

The Company received $745.2 million from the issuance of the 2024 Notes, after the debt discount and deduction of debt issuance costs. The debt discounts and issuance costs are amortized to interest expense over the term of the 2024 Notes. As of June 30, 2018, the remaining term of the 2024 Notes is approximately 6.0 years.

In relation to the issuance of the 2024 Notes, the Company entered into interest rate swap contracts with certain independent financial institutions, whereby the Company pays on a semi-annual basis, a variable interest rate equal to the three-month London Interbank Offered Rate (LIBOR) plus 91.43 bps, and receives on a semi-annual basis, interest income at a fixed interest rate of 2.950%. The Company incurred a net interest expense of $851 thousand for the three months ended June 30, 2018 and earned a net interest income of $643 thousand for the three months ended July 1, 2017, from the interest rate swap contracts, which was included in interest and other income (expense), net on the condensed consolidated statements of income. As of June 30, 2018, the fair value of the interest rate swap contracts was $36.4 million, which was recorded in other long-term liabilities.

The following table summarizes the carrying value of the 2024 Notes as of June 30, 2018 and March 31, 2018:

(In thousands)
 
June 30, 2018

March 31, 2018
Principal amount of the 2024 Notes
 
$
750,000


$
750,000

Unamortized discount of the 2024 Notes
 
(727
)

(755
)
Unamortized debt issuance costs associated with 2024 Notes
 
(3,358
)

(3,500
)
Carrying Value of the 2024 Notes
 
$
745,915


$
745,745

Fair value hedge adjustment — interest rate swap contracts
 
(36,416
)

(29,001
)
Net carrying value of the 2024 Notes
 
$
709,499


$
716,744


Interest expense related to the 2024 Notes was included in interest and other income (expense), net on the condensed consolidated statements of income as follows:
 
Three Months Ended
(In thousands)
June 30, 2018

July 1, 2017
Contractual coupon interest (including interest rate swap, net)
$
6,382


$
1,322

Amortization of debt issuance costs
142


47

Amortization of debt discount, net
28


10

Total interest expense related to the 2024 Notes
$
6,552


$
1,379



Revolving Credit Facility

On December 7, 2016, the Company entered into a $400.0 million senior unsecured revolving credit facility that, upon certain conditions, may be extended by an additional $150.0 million, with a syndicate of banks (expiring in December 2021). 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 June 30, 2018, the Company had made no borrowings under this credit facility and was not in violation of any of the covenants.

Note 11. Common Stock Repurchase Program

The Board of Directors (Board) 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 May 16, 2016, the Board authorized the repurchase of up to $1.00 billion of the Company's common stock and debentures (2016 Repurchase Program). The 2016 Repurchase Program has no stated expiration date. On May 16, 2018, the Board authorized the 2018 Repurchase Program to repurchase the Company's common stock and debentures up to $500.0 million.


20


Through June 30, 2018, the Company had used $929.4 million of the $1.00 billion authorized under the 2016 Repurchase Program, leaving $70.6 million available for future repurchases. The Company’s current policy is to retire all repurchased shares, and consequently, no treasury shares were held as of June 30, 2018 and March 31, 2018.

During the first quarter of fiscal 2019, the Company repurchased 2.1 million shares of common stock for a total of $136.8 million and during the first quarter of fiscal 2018, the Company repurchased 1.0 million shares of common stock for a total of $67.1 million.

Note 12.
Interest and Other Income (Expense), Net

The components of interest and other income (expense), net are as follows: 
 
Three Months Ended
(In thousands)
June 30, 2018
 
July 1, 2017
Interest income
$
17,397

 
$
13,414

Interest expense
(13,372
)
 
(12,081
)
Other income (expense), net
(6,872
)
 
506

   Total interest and other income (expense), net
$
(2,847
)
 
$
1,839


Note 13.
Accumulated Other Comprehensive Loss

Comprehensive income (loss) is defined as the change in equity of a company during a period from transactions and other events and circumstances from non-owner sources. The components of the Company's accumulated other comprehensive loss are as follows:
 
(In thousands)
June 30, 2018
 
March 31, 2018
Accumulated unrealized losses on available-for-sale securities, net of tax
$
(23,156
)
 
$
(29,844
)
Accumulated unrealized gains (losses) on hedging transactions, net of tax
(4,386
)
 
1,674

Accumulated cumulative translation adjustment, net of tax
(8,390
)
 
(6,339
)
Total accumulated other comprehensive loss
$
(35,932
)
 
$
(34,509
)

The related tax effects of other comprehensive income (loss) were not material for all periods presented.

Note 14.
Income Taxes

The Company recorded a tax provision of $22.9 million for the first quarter of fiscal 2019 as compared to $13.7 million in the same prior year period, representing effective tax rates of 11% and 8%, respectively. The prior year balance has been restated to reflect the retrospective application of the current authoritative guidance for revenue recognition. Please refer to "Note 2. Recent Accounting Changes and Accounting Pronouncements" for additional detail.

On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was enacted into law. The TCJA provides numerous significant tax law changes including the reduction of the U.S. federal corporate income tax rate from 35% to 21%, the requirement for companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and the creation of new taxes on certain foreign-sourced earnings. Some provisions of the TCJA began to impact the Company in fiscal 2018, while other provisions impact the Company beginning in fiscal 2019.

In accordance with Staff Accounting Bulletin (SAB) 118, the Company has recorded provisional amounts recognizing the effect of the tax law changes in prior periods, but may adjust those provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. As of June 30, 2018, the Company has not adjusted the provisional estimate recorded in prior periods for effects from the one-time transition tax. The amount recorded for the one-time transition tax remains provisional as the Company has not yet finalized its calculation of the total post-1986 earnings and profits (E&P) for its foreign subsidiaries. Additionally, the Company will continue to evaluate the impact of the tax law change as it relates to providing U.S. taxes on its investments in foreign subsidiaries. Since U.S. federal taxes have been recognized through the one-time transition tax on all accumulated and previously untaxed foreign earnings through December 31, 2017, the Company does not intend to permanently reinvest those earnings.


21


The difference between the U.S. federal statutory tax rate of 21% and the Company's effective tax rate in the first quarter of fiscal 2019 was primarily due to the beneficial impact of income earned in lower tax rate jurisdictions, which was partially offset by the new tax on low-taxed income from foreign subsidiaries. The difference between the U.S. federal statutory tax rate of 35% and the Company’s effective tax rate in the first quarter of fiscal 2018 was primarily due to income earned in lower tax rate jurisdictions, for which no U.S. income tax had been provided, as the Company had intended to permanently reinvest the earnings outside of the U.S.

The Company’s total gross unrecognized tax benefits as of June 30, 2018, determined in accordance with FASB authoritative guidance for measuring uncertain tax positions, increased by $825 thousand in the first quarter of fiscal 2019 to $126.0 million. The total amount of unrecognized tax benefits that, if realized in a future period, would favorably affect the effective tax rate was $16.0 million as of June 30, 2018. Another $85.5 million would increase additional paid-in capital. The $85.5 million relates to an additional deduction claimed on federal and state amended tax returns for fiscal 2014 for repurchase premium paid in that year in connection with the early redemption of the Company’s 3.125% Junior Convertible debenture due March 15, 2037. It is reasonably possible that changes to the Company's unrecognized tax benefits could be significant in the next twelve months due to tax audit settlements and lapses of statutes of limitation. As a result of uncertainties regarding tax audit settlements and their possible outcomes, an estimate of the range of increase or decrease that could occur in the next twelve months cannot be made.

The Company’s policy is to include interest and penalties related to income tax liabilities within the provision for income taxes on the condensed consolidated statements of income. The balance of accrued interest and penalties recorded in the condensed consolidated balance sheets and the amounts of interest and penalties included in the Company's provision for income taxes were not material for all periods presented.

The statutes of limitations have closed for U.S. federal income tax purposes for years through fiscal 2014, for U.S. state income tax purposes for years through fiscal 2010, and for Ireland income tax purposes for years through fiscal 2013.

Note 15.
Commitments

Xilinx leases some of its facilities and office buildings under non-cancelable operating leases that expire at various dates through April 2029. Additionally, Xilinx entered into a land lease in conjunction with the Company’s building in Singapore, which 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. Xilinx also leases cars under non-cancelable operating leases that expire at various dates through May 2022. Approximate future minimum lease payments under non-cancelable operating leases are as follows:

Fiscal
(In thousands)
2019 (remaining nine months)
$
6,115

2020
9,216

2021
7,198

2022
5,923

2023
4,798

Thereafter
30,708

Total
$
63,958


Aggregate future rental income to be received, which includes rents from both owned and leased property, totaled $12.0 million as of June 30, 2018. Rent expense, net of rental income, under all operating leases was $1.0 million and $1.2 million for the three months ended June 30, 2018 and July 1, 2017, respectively. Rental income was not material for the first quarter of fiscal 2019 or 2018.

Other commitments as of June 30, 2018 totaled $136.5 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. Additionally, as of June 30, 2018, the Company also had $18.9 million of non-cancelable license obligations to providers of electronic design automation software and hardware/software maintenance and $33.7 million commitments primarily related to open purchase orders from ordinary operations. These commitments expire at various dates through December 2022.


22


Note 16.
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. As of the end of the first quarter of fiscal 2019 and the end of fiscal 2018, the accrual balances of the product warranty liability were immaterial.

The Company offers, subject to certain terms and conditions, to indemnify 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, and to compensate certain customers for limited specified costs they actually incur in the event the Company's hardware products experience 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 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.

Note 17.
Contingencies

Patent Litigation

On February 1, 2017, a patent infringement lawsuit was filed by Godo Kaisha IP Bridge 1 (IP Bridge) against the Company in the U.S. District Court for the Eastern District of Texas (Godo Kaisha IP Bridge 1 v. Xilinx, Inc., Case. No. 2:17-cv-00100).  The lawsuit pertains to two patents and IP Bridge seeks unspecified damages, interest, attorneys’ fees, costs, and a permanent injunction or an on-going royalty.  On September 14, 2017, the court granted the Company’s motion to transfer venue and the matter is now pending before the U.S. District Court for the Northern District of California. The Company is unable to estimate its range of possible loss, if any, in this matter at this time.

On March 17, 2017, a patent infringement lawsuit was filed by Anza Technology, Inc. (Anza) against the Company in the U.S. District Court for the District of Colorado (Anza Technology, Inc. v. Xilinx, Inc., Case No. 1:17-cv-00687). The lawsuit pertains to three patents and Anza seeks unspecified damages, attorney fees, interest, costs, and expenses. On October 27, 2017, the court granted the Company’s motion to transfer venue and the matter is now pending before the U.S. District Court for the Northern District of California. The Company is unable to estimate its range of possible loss, if any, in this matter at this time.

The Company intends to continue to protect and defend its IP vigorously.

Other Matters

On June 11, 2015, John P. Neblett, as Chapter 7 Trustee of Valley Forge Composite Technologies, Inc., filed a complaint against Xilinx and others in the U.S. Bankruptcy Court for the Middle District of Pennsylvania (Bankruptcy No. 1:13-bk-05253-JJT). The complaint alleges causes of actions against Xilinx for negligence and civil conspiracy relating to alleged violations of U.S. export laws. It seeks at least $50.0 million in damages, together with punitive damages, from the defendants. On September 21, 2015, the action was withdrawn from the U.S. Bankruptcy Court for the Middle District of Pennsylvania and transferred to the U.S. District Court for the Eastern District of Kentucky. On November 2, 2015, Xilinx, along with other defendants, filed a motion to dismiss the complaint. On November 3, 2015, Xilinx filed a motion for sanctions pursuant to Federal Rule of Civil Procedure 11. On June 27, 2016, the Court denied both motions. On September 11, 2017, Xilinx, along with other defendants, filed motions for summary judgment seeking to dispose of all claims against them.  On July 3, 2018, the Court granted both of Xilinx’s Motions for Summary Judgment, disposing of all claims asserted against Xilinx.  

From time to time, the Company is involved in various disputes and litigation matters that arise in the ordinary course of its business. These include disputes and lawsuits related to intellectual property, mergers and acquisitions, licensing, contract law, tax, regulatory, distribution arrangements, employee relations and other matters. Periodically, the Company reviews the status of each matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and a range of possible losses can be estimated, the Company accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based only on the best information available at the time. As additional information becomes available, the Company continues to reassess the potential liability related to pending claims and litigation and may revise estimates.

23



Note 18.
Goodwill and Acquisition-Related Intangibles

As of June 30, 2018 and March 31, 2018, the gross and net amounts of goodwill and of acquisition-related intangibles for all acquisitions were as follows:
 



 


 
Weighted-Average
(In thousands)
June 30, 2018
 
March 31, 2018
 
Amortization Life
Goodwill
$
162,421

 
$
162,421

 

Core technology, gross
82,480

 
82,480

 

Less accumulated amortization
(78,885
)
 
(78,562
)
 

Core technology, net
3,595

 
3,918

 
4.8 years
Other intangibles, gross
46,966

 
46,966

 

Less accumulated amortization
(46,798
)
 
(46,761
)
 

Other intangibles, net
168

 
205

 
2.6 years
Total acquisition-related intangibles, gross
129,446

 
129,446

 

Less accumulated amortization
(125,683
)
 
(125,323
)
 

Total acquisition-related intangibles, net
$
3,763

 
$
4,123

 


Amortization expense for acquisition-related intangibles for the three months ended June 30, 2018 and July 1, 2017 was $360 thousand and $705 thousand, respectively. Based on the carrying value of acquisition-related intangibles recorded as of June 30, 2018, and assuming no subsequent acquisition or impairment of the underlying assets, the annual amortization expense for acquisition-related intangibles is expected to be as follows:
 
Fiscal
(In thousands)
2019 (remaining nine months)
$
893

2020
1,160

2021
1,137

2022
573

Total
$
3,763


Note 19.
Subsequent Events

On July 17, 2018, the Company announced the acquisition of DeePhi Technology Co., Ltd, a leading artificial intelligence and machine learning company.

On July 24, 2018, the U.S. Court of Appeals for the Ninth Circuit reversed a 2015 decision of the U.S. Tax Court that had found U.S. Treasury Regulations requiring the inclusion of stock-based compensation in intercompany cost-sharing arrangements to be invalid. The case at issue was Altera Corp. v. Commissioner. The Company is currently evaluating the impact of this decision on its financial statements and is unable to estimate the impact at this time.

On July 24, 2018, the Company’s Board of Directors declared a cash dividend of $0.36 per common share for the second quarter of fiscal 2019. The dividend is payable on August 28, 2018 to stockholders of record on August 8, 2018.




24



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 Management's Discussion and Analysis 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 condensed 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 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 condensed 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. For more discussion please refer to "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Form 10-K for the year ended March 31, 2018 filed with the SEC, and to "Note 2. Recent Accounting Changes and Accounting Pronouncements" to our condensed consolidated financial statements, included in Part I. "Financial Information." 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.

Results of Operations: first quarter of fiscal 2019 compared to the first quarter of fiscal 2018

The following table sets forth statement of income data as a percentage of net revenues for the periods indicated:

 
Three Months Ended

June 30, 2018

 
July 1, 2017

Net revenues
100.0
%
 
100.0
%
Cost of revenues
30.2

 
31.7

Gross margin
69.8

 
68.3

Operating expenses:


 

Research and development
25.0

 
25.4

Selling, general and administrative
13.2

 
14.8

Amortization of acquisition-related intangibles
0.1

 
0.1

Total operating expenses
38.3

 
40.3

Operating income
31.5

 
28.0

Interest and other income (expense), net
(0.4
)
 
0.3

Income before income taxes
31.1

 
28.3

Provision for income taxes
3.3

 
2.2

Net income
27.8
%
 
26.1
%
 

25


Net Revenues

We sell our products to global manufacturers of electronic products in various end markets. The vast majority of our net revenues is generated by sales of our semiconductor products, but we also generate sales from support products. We classify our product offerings into two categories: Advanced Products and Core Products:

Advanced Products include our most recent product offerings and consist of the UltraScale+, UltraScale and 7-series product families.

Core Products consist of all other product families.

These product categories are modified on a periodic basis to better reflect the maturity of the products and advances in technology. The most recent modification was made on April 3, 2016, which was the beginning of our fiscal 2017, whereby we reclassified our product categories to be consistent with how these categories are analyzed and reviewed internally.  Specifically, we are grouping the products manufactured at the 28 nanometer (nm), 20nm and 16nm nodes into a category named Advanced Products while all other products are grouped in a category named Core Products.

No end customer accounted for more than 10% of our net revenues for the first quarter of fiscal 2019.

Net Revenues by Product

Net revenues by product categories for the first quarter of fiscal 2019 and 2018 were as follows:
 
 
Three Months Ended
(In millions)
June 30, 2018
 
% of Total
 
% Change
 
July 1, 2017
 
% of Total
Advanced Products
$
383.9

 
56

 
21

 
$
317.8

 
53

Core Products
300.5

 
44

 
5

 
285.0

 
47

Total net revenues
$
684.4

 
100

 
14

 
$
602.8

 
100


Net revenues from Advanced Products increased in the first three months of fiscal 2019 compared to the comparable prior year period. The increase was a result of sales growth from our 16nm and 20nm product families. We expect sales of Advanced Products to continue to grow as more customer programs enter into volume production with our 16nm and 20nm products.

Net revenues from Core Products increased in the first three months of fiscal 2019 from the comparable prior year period. The increase was largely due to higher sales from Virtex-2 and Virtex-5 product families, partially offset by decline in sales from Virtex-6 and Spartan-3 product families. Core Products are relatively mature products and, as a result, their sales are expected to decline over time.

Net Revenues by End Markets

Our end market revenue data is derived from our understanding of our end customers’ primary markets, which is based on reports provided by distributors and our internal records. To provide additional visibility, starting April 1, 2018 we classify our end markets into businesses with similar market drivers: Data Center and Test, Measurement and Emulation (TME); Automotive, Broadcast and Consumer; Communications; and Industrial, Aerospace & Defense. Additionally, we classify revenue recognized from shipments to distributors but not yet subsequently sold to the end markets as Channel revenue. The Channel revenue represents the difference between the shipments to distributors and what the distributors subsequently sold to the end customers within the given period. The percentage change calculation in the table below represents the year-to-year dollar change in each end market.


26


Net revenues by end markets for the first quarter of fiscal 2019 and 2018 were as follows:
 

Three Months Ended
(% of total net revenues)
June 30, 2018


% Change in Dollars

July 1, 2017

Data Center and TME
19
%

11


19
%
Automotive, Broadcast and Consumer
16


13


17

Communications
31


(7
)

38

Industrial, Aerospace & Defense
33


30


28

Channel
1


(167
)

(2
)
Total net revenues
100
%

14


100
%

Net revenues from Data Center and TME increased, in terms of absolute dollar, in the first quarter of fiscal 2019 from the comparable prior year period. The increase was primarily due to higher sales from Data Center, but was partially offset by a decrease in sales from TME.

Net revenues from Automotive, Broadcast and Consumer increased, in terms of absolute dollar, in the first three months of fiscal 2019 from the comparable prior year period. The increase was due to higher sales from all sub-segments, in particular from automotive and Audio, Video and Broadcast.

Net revenues from Communications decreased in the first three months of fiscal 2019 from the comparable prior year period. The decrease was primarily due to lower sales from Wireless, and to a lesser extent from Wireline business.

Net revenues from Industrial, Aerospace & Defense increased in the first quarter of fiscal 2019 from the comparable prior year period. The increase was driven by higher sales from all sub-segments, with Aerospace and Defense leading the increase.

Channel revenue was positive in the first three months of fiscal 2019. This is because shipments to distributors exceeded what the distributors subsequently shipped to their customers in the period. In the comparable prior year period, our shipments to distributors were less than what the distributors subsequently shipped to their customers. In the second half of fiscal 2018, we partnered with our distributors to reduce overall distributor inventory and improve the stability of inventory balances. We expect Channel revenue to be a positive amount as the distributors restock inventory to support growth and customer service objectives.

Net Revenues by Geography

Geographic revenue information reflects the geographic location of the distributors, original equipment manufacturers (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 first quarter of fiscal 2019 and 2018 were as follows:
 
 
Three Months Ended
(In millions)
June 30, 2018
 
% of Total
 
% Change
 
July 1, 2017
 
% of Total
North America
$
193.5

 
28

 
12

 
$
173.2

 
29

Asia Pacific
303.9

 
45

 
15

 
264.9

 
44

Europe
131.9

 
19

 
14

 
115.7

 
19

Japan
55.1

 
8

 
12

 
49.0

 
8

Total net revenues
$
684.4

 
100

 
14

 
$
602.8

 
100


Net revenues in North America increased in the first quarter of fiscal 2019 from the comparable prior year period. The increase was primarily due to higher sales from Industrial, Aerospace & Defense but was partially offset by decline in sales from TME.

Net revenues in Asia Pacific increased in the first quarter of fiscal 2019 from the comparable prior year period. The increase was primarily due to higher sales from Data Center in China and Aerospace & Defense in India.


27


Net revenues in Europe increased in the first quarter of fiscal 2019 from the comparable prior year period. The increase was primarily due to higher sales from Industrial, Scientific and Medical and Data Center, but was partially offset by decline in sales from Wireless and TME.

Net revenues in Japan increased in the first quarter of fiscal 2019 from the comparable prior year period. The increase was due to higher sales from Automotive.

Gross Margin
 
Three Months Ended
(In millions)
June 30, 2018
 
Change
 
July 1, 2017
Gross margin
$
477.5

 
16
%
 
$
412.0

Percentage of net revenues
69.8
%
 

 
68.3
%

Gross margin was higher by 1.5 percentage points in the first quarter of fiscal 2019 from the comparable prior year period. The increase was driven primarily by manufacturing cost reduction in our Advanced Products and favorable changes in the end market mix.

Gross margin may be affected in the future due to multiple factors, including but not limited to those set forth in Item 1A. "Risk Factors," included in Part II of this Form 10-Q, shifts in the mix of customers and products, 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 Advanced Products, improve manufacturing efficiencies, and improve average selling price management. The average selling prices of our products generally decline as the products mature. We seek to offset the decrease in selling prices through yield improvement, manufacturing cost reductions and increased unit sales. We also continue to develop higher value products or product features that increase, or slow the decline of, the average selling price of our products. However, there is no guarantee that our ongoing efforts will be successful or that they will keep pace with the decline in selling prices of our products, which could ultimately lead to a decline in revenues and have a negative effect on our gross margins.

Research and Development

 
Three Months Ended
(In millions)
June 30, 2018
 
Change
 
July 1, 2017
Research and development
$
170.8

 
12
%
 
$
153.1

Percentage of net revenues
25
%
 

 
25
%