Fair Value Measurements

3 Months Ended

Jul. 02, 2011

Fair Value Measurements

Fair Value Measurements

Note 4. Fair Value Measurements

The guidance for fair value measurements established by the FASB defines fair value as the exchange price that would be received from selling an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which Xilinx would transact and also considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.

The Company determines the fair value for marketable debt securities using industry standard pricing services, data providers and other third-party sources and by internally performing valuation analyses. The Company primarily uses a consensus price or weighted average price for its fair value assessment. The Company determines the consensus price using market prices from a variety of industry standard pricing services, data providers, security master files from large financial institutions and other third party sources and uses those multiple prices as inputs into a distribution-curve-based algorithm to determine the daily market value. The pricing services use multiple inputs to determine market prices, including reportable trades, benchmark yield curves, credit spreads and broker/dealer quotes as well as other industry and economic events. For certain securities with short maturities, such as discount commercial paper and certificates of deposit, the security is accreted from purchase price to face value at maturity. If a subsequent transaction on the same security is observed in the marketplace, the price on the subsequent transaction is used as the current daily market price and the security will be accreted to face value based on the revised price. For certain other securities, such as student loan auction rate securities, the Company performs its own valuation analysis using a discounted cash flow pricing model.

The Company validates the consensus prices by taking random samples from each asset type and corroborating those prices using reported trade activity, benchmark yield curves, binding broker/dealer quotes or other relevant price information. There have not been any changes to the Company's fair value methodology during the first quarter of fiscal 2012 and the Company did not adjust or override any fair value measurements as of July 2, 2011.

Fair Value Hierarchy

The measurements of fair value were established based on a fair value hierarchy that prioritizes the utilized inputs. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. The guidance for fair value measurements requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:

Level 1 – Quoted (unadjusted) prices in active markets for identical assets or liabilities.

The Company's Level 1 assets consist of U.S. Treasury securities and money market funds.

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

The Company's Level 2 assets consist of bank certificates of deposit, commercial paper, corporate bonds, municipal bonds, U.S. agency securities, foreign government and agency securities, floating-rate notes and mortgage-backed securities. The Company's Level 2 assets and liabilities include foreign currency forward contracts.

Level 3 - Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.

The Company's Level 3 assets and liabilities include student loan auction rate securities and the embedded derivative related to the Company's debentures.

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 July 2, 2011 and April 2, 2011:

	July 2, 2011
(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 and cash equivalents:
Money market funds	$	326,640	$	0	$	0	$	326,640
Bank certificates of deposit		0		35,000		0		35,000
Commercial paper		0		264,066		0		264,066
U.S. government and agency securities		0		60,593		0		60,593
Foreign government and agency securities		0		154,981		0		154,981
Short-term investments:
Bank certificates of deposit		0		69,971		0		69,971
Commercial paper		0		419,634		0		419,634
Corporate bonds		0		71,411		0		71,411
U.S. government and agency securities		3,799		17,997		0		21,796
Foreign government and agency securities		0		429,221		0		429,221
Mortgage-backed securities		0		116		0		116
Long-term investments:
Corporate bonds		0		112,246		0		112,246
Auction rate securities		0		0		31,208		31,208
Municipal bonds		0		22,613		0		22,613
U.S. government and agency securities		7,538		43,214		0		50,752
Mortgage-backed securities		0		682,751		0		682,751
Foreign currency forward contracts, net		0		4,628		0		4,628
Total assets measured at fair value	$	337,977	$	2,388,442	$	31,208	$	2,757,627
Liabilities
Convertible debentures – embedded derivative		0		0		572		572
Total liabilities measured at fair value	$	0	$	0	$	572	$	572
Net assets measured at fair value	$	337,977	$	2,388,442	$	30,636	$	2,757,055

	April 2, 2011
(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 and cash equivalents:
Money market funds	$	275,596	$	0	$	0	$	275,596
Bank certificates of deposit		0		79,984		0		79,984
Commercial paper		0		485,315		0		485,315
U.S. government and agency securities		29,998		99,974		0		129,972
Foreign government and agency securities		0		161,970		0		161,970
Short-term investments:
Bank certificates of deposit		0		10,000		0		10,000
Commercial paper		0		224,896		0		224,896
Municipal bonds		0		45		0		45
U.S. government and agency securities		14,404		7,996		0		22,400
Foreign government and agency securities		0		384,428		0		384,428
Floating rate notes		0		62,261		0		62,261
Mortgage-backed securities		0		24		0		24
Long-term investments:
Corporate bonds		0		25,566		0		25,566
Auction rate securities		0		0		34,950		34,950
Municipal bonds		0		16,913		0		16,913
U.S. government and agency securities		7,941		45,570		0		53,511
Floating rate notes		0		29,869		0		29,869
Mortgage-backed securities		0		605,643		0		605,643
Foreign currency forward contracts, net		0		5,134		0		5,134
Total assets measured at fair value	$	327,939	$	2,245,588	$	34,950	$	2,608,477
Liabilities
Convertible debentures – embedded derivative		0		0		945		945
Total liabilities measured at fair value	$	0	$	0	$	945	$	945
Net assets measured at fair value	$	327,939	$	2,245,588	$	34,005	$	2,607,532

Changes in Level 3 Instruments Measured at Fair Value on a Recurring Basis

The following table is a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

	Three Months Ended
	July 2,			July 3,
(In thousands)	2011			2010
Balance as of beginning of period	$	34,005		$	60,796
Total realized and unrealized gains (losses):
Included in interest and other income (expense), net		373			(469	)
Included in other comprehensive income		658			1,848
Sales and settlements, net (1)		(4,400	)		(450	)
Balance as of end of period	$	30,636		$	61,725

(1) During the three months ended July 2, 2011 and July 3, 2010, $4.4 million and $450 thousand of student loan auction rate securities, respectively, were redeemed for cash at par value.

The amount of total gains (losses) included in net income attributable to the change in unrealized gains or losses relating to assets and liabilities still held as of the end of the period was as follows:

	Three Months Ended
	July 2,		July 3,
(In thousands)	2011		2010
Interest and other expense, net	$	373	$	(425	)

As of July 2, 2011, marketable securities measured at fair value using Level 3 inputs were comprised of $31.2 million of student loan auction rate securities. Auction failures during the fourth quarter of fiscal 2008 and the lack of market activity and liquidity required that the Company's student loan auction rate securities be measured using observable market data and Level 3 inputs. The fair values of the Company's student loan auction rate securities were based on the Company's assessment of the underlying collateral and the creditworthiness of the issuers of the securities. Substantially all of the underlying assets that secure the student loan auction rate securities are pools of student loans originated under FFELP, which are substantially guaranteed by the U.S. Department of Education. The fair values of the Company's student loan auction rate securities were determined using a discounted cash flow pricing model that incorporated financial inputs such as projected cash flows, discount rates, expected interest rates to be paid to investors and an estimated liquidity discount. The weighted-average life over which cash flows were projected was determined to be approximately nine years, given the collateral composition of the securities. The discount rates that were applied to the pricing model were based on market data and information for comparable- or similar-term student loan asset-backed securities. The expected interest rate to be paid to investors in a failed auction was determined by the contractual terms for each security. The liquidity discount represents an estimate of the additional return an investor would require to compensate for the lack of liquidity of the student loan auction rate securities. The Company does not intend to sell, nor does it believe it is more likely than not that it would be required to sell, the student loan auction rate securities before anticipated recovery, which could be at final maturity that ranges from December 2027 to May 2046.

 

In March 2007, the Company issued $1.00 billion principal amount of 3.125% junior convertible debentures due March 15, 2037 (3.125% Debentures) to an initial purchaser in a private offering. As a result of repurchases in fiscal 2009, the remaining principal amount of the 3.125% Debentures as of July 2, 2011 was $689.6 million. The fair value of the 3.125% Debentures as of July 2, 2011 was approximately $886.2 million, based on the last trading price of the 3.125% Debentures of the period. The 3.125% Debentures included embedded features that qualify as an embedded derivative under authoritative guidance for derivatives instruments and hedging activities issued by the FASB. The embedded derivative was separately accounted for as a discount on the 3.125% Debentures and its fair value was established at the inception of the 3.125% Debentures. Each quarter, the change in the fair value of the embedded derivative, if any, is recorded in the consolidated statements of income. The Company uses a derivative valuation model to derive the value of the embedded derivative. Key inputs into this valuation model are the Company's current stock price, risk-free interest rates, the stock dividend yield, the stock volatility and the 3.125% Debenture's credit spread over London Interbank Offered Rate (LIBOR). The first three inputs are based on observable market data and are considered Level 2 inputs while the last two inputs require management judgment and are Level 3 inputs.

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

As of July 2, 2011, the Company had non-marketable equity securities in private companies of $11.7 million (adjusted cost, which approximates fair value). The Company's investments in non-marketable securities of private companies are accounted for by using the cost method. These investments are measured at fair value on a non-recurring basis when they are deemed to be other-than-temporarily impaired. In determining whether a decline in value of non-marketable equity investments in private companies has occurred and is other than temporary, an assessment is made by considering available evidence, including the general market conditions in the investee's industry, the investee's product development status and subsequent rounds of financing and the related valuation and/or Xilinx's participation in such financings. The Company also assesses the investee's ability to meet business milestones and the financial condition and near-term prospects of the individual investee, including the rate at which the investee is using its cash, the investee's need for possible additional funding at a lower valuation and bona fide offers to purchase the investee from a prospective acquirer. The valuation methodology for determining the fair value of non-marketable equity securities is based on the factors noted above which require management judgment and are Level 3 inputs. No impairment loss on non-marketable equity investments was recognized during the first quarter of fiscal 2012 or 2011.