XLNX - Mark Moore

Valuation Analysis for
December 4, 2008
chad.lochrie@ttu.edu
eric.hopper@ttu.edu
jeff.marsicano@ttu.edu
kody.roach@ttu.edu
michael.barrera@ttu.edu
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Table of Contents
Executive Summary 7
Company Overview 13
Industry Overview 15
Five Forces Model 18
Rivalry Among Existing Firms 20
Threat of New Entrants 26
Threat of Substitute Products 29
Bargaining Power of Customers 31
Bargaining Power of Suppliers 34
Industry Analysis 35
Value Creation Analysis 41
Formal Accounting Analysis 46
Key Accounting Policies 47
Assess Accounting Flexibility 53
Evaluate Accounting Strategy 56
Quantitative Accounting Measures and Disclosure 64
Sales Manipulation Diagnostic 68
Expense Manipulation Diagnostic 76
Potential Red Flags 85
Undo Accounting Distortions 87
Financial Analysis 90
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Liquidity Ratio Analysis 91
Profitability Ratio Analysis 102
Capital Structure Ratio Analysis 116
Cost of Capital Estimation 123
Alternative Cost of Equity 127
Cost of Debt 128
Weighted Average Cost of Capital 130
Forecasting Financial Statements 131
Income Statement Forecast 132
Restated Income Statement Forecast 137
Balance Sheet 140
Restated Balance Sheet 144
Statement of Cash Flows 147
Restated Cash flows 150
Valuation Ratios 153
Price to Earnings Ratio 153
P/E Trailing Twelve Months 154
P/E Forward 155
Price to EBITDA 156
Price to Book 157
Dividends to Price 158
Price Earnings Growth 159
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Price to Free Cash Flows per share 159
Enterprise Value to EBITDA 160
Intrinsic Valuation Models 161
Discounted Dividends Model 162
Residual Income Model 163
Discounted Free Cash Flows Model 167
Abnormal Earnings Growth Model 169
Long run residual income model 172
Analyst Recommendation 175
Appendices 178
References 210
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Executive Summary
Analyst Recommendation: Overvalued, Sell
As of November 3 rd , 2008
XLNX ‐ NASDAQ (11/3/2008) $17.62
52 Week Range:
Revenue:
Market Capitalization:
Shares Outstanding:
14.28-28.21
1.84 Billion
4.942 Billion
280.52 Million
Altman Z‐scores
2004 2005 2006 2007 2008
Initial Scores: 4.31 5.22 6.58 5.74 2.63
Revised Scores: 5.13 6.40 5.61 2.57 2.59
Current Market Share Price (11/3/08) $17.62
As Stated Restated
Book Value Per Share: $5.95 N/A
Financial Based Valuations
Return on Equity: 21.10% 36.76% As Stated Restated
Return on Assets: 11.76% 20.69% Trailing P/E: 13.21 7.52
Forward P/E: 15.51 10.50
Dividends to Price: 0.78 0.78
Cost of Capital
Price to Book 1.64 1.64
Estimated R‐Squared Beta Ke P.E.G. Ratio 6.61 6.07
3-Month 55.21 1.087 16.29% Price to EBITDA: 0.0330 0.0202
2 ‐Year 55.23 1.084 19.23% EV/ EBITDA: 8.52 5.20
5 ‐ Year 55.12 1.078 16.27% Price to FCF: 12.71 12.71
7‐Year 55.04 1.075 16.26%
10 ‐ Year 54.96 1.072 16.24%
Intrinsic Valuations
Upper Lower
Published Beta: 1.21
Valuation Price
Estimated Beta: 1.747 Discounted Dividends:
$4.94
Size Adj. Cost of Cap: 13.73% 17.03% 10.09% Free Cash Flows:
$3.06
Size Adj. Cost of Equity: 17.20% 21.16% 13.24% Residual Income:
$5.81
Cost of Debt: 2.94% Long Run Residual Income:
$0.50
WACC (BT): 13.96% Abnormal Earnings Growth:
$5.34
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Source: Yahoo Finance
Source: Yahoo Finance
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Executive Summary
Industry Analysis
Xilinx is a specialized semiconductor company with global operations in California, Asia,
and Western Europe. Xilinx primarily designs and markets programmable logic devices
(PLD) or chips which can go into a variety of products and industries. They currently
employed 3,400 people and have over 21,000 customers worldwide.
Competitive Force
Rivalry Among Existing Firms
Threat of New Entrants
Threat of Substitute Products
Bargaining Power of Customers
Bargaining Power of Suppliers
Degree of Competition
High
Low
High
Low
Moderate
Xilinx main competitors are Altera, Actel, and Lattice in the specialized semiconductor
fabless industry. The specialized semiconductor industry main competitive focus being
on differentiation of products due to the high demand for superior intrinsic value
brought on by the volume of Research and Development. Each one of these companies
is striving to make the fastest, best quality, and smallest chip out on the market. This
is why the rivalry amongst existing firms is so high in this industry. One of the least
concerns for this industry is the threat of new entrants because of the huge cost of
physical capital as well as the human capital involved in dealing with these highly
sophisticated technological devices. As mentioned above, companies in this industry
need to keep up with their competitors so that the product doesn’t become obsolete
because of another companies product which is faster or cheaper. With this intense
competition the threat of substitute products because of faster or cheaper products
from other firms is high. Another area of competition in this industry is the bargaining
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power of customers. In this industry due the fact that each company tries to find their
own niche in the market creates products that are highly customized to meet the
customers’ demands. With this degree of customization of products to the customer,
creates in a way a degree of customer dependency. It will be harder for these
companies now even to switch products because they are buying from companies that
specially make products for them and to go to another company will be costly. Due to
this, the bargaining power of customers in this industry is low. Companies also have to
think of the suppliers as well to gain a competitive advantage. The suppliers in the
semiconductor industry are moderate, due to the fact that there are numerous suppliers
to choose from and for the most part offer undifferentiated semiconductor wafers.
However, for Research and Development activities, companies need the newest wafer
for these activities and the number of suppliers supplying these wafers is small.
Accounting Analysis
Accounting analysis plays a large part in valuing a firm in the sense that it must
determined whether or not the key accounting policies accurately depict the company.
After all, these numbers are man-made estimates, which are subject to manipulation
and error, sometimes distorting the financial situation of a firm. Often, companies only
report financial statements according to minimal SEC standards this gives a company an
advantage because of the financial freedom the standards allow. This misleads
investors to a false view of the company, making it seem like the company is
performing better than it actually is.
Compared to other companies in the semiconductor industry, Xilinx was effective in
accurately depicting the true value of their company based on accounting policy. The
key success factors for the specialized semiconductor industry were as follows: product
warranties, foreign currency, research and development, and goodwill. Product
warranties are important factor because if warranty liability increases in relation to sales
over time it indicates poor product quality. This would adversely affect a firm’s
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evenues. Furthermore, understating warranty expense would overstate net income,
leading to a less accurate financial picture of the firm. The amount of flexibility that
managers have in manipulating this is high because management is only required to
estimate the amount of product warranties that are probable and reasonably estimable.
In Xilinx, case however we found no substantial understatement of product warranties
and the materiality of this account is small relative to the other items on the balance
sheet. Another key success factor in this industry was foreign currency. With some
companies having over 60% of their sales internationally, being able to combat this
foreign currency risk is a top priority for firms. Companies in this industry hedge, to
decrease the currency risk and most, accurately display their hedging in the footnotes.
Xilinx fully displayed their hedging in the footnotes and like product warranties, this
account is immaterial compared to other accounts because of the low amount of
expense in currency loss.
Another key accounting policy that affects this industry is research and development.
According to GAAP, research and development can only be accounted for as being an
expense, therefore, cannot be capitalized by the firm. The problem issue with research
and development is that is should be capitalized because the innovative products
resulting from R&D expenditures generate revenue, which more accurate depicts the
value of the firm. Since this rule is strictly enforced by GAAP, managers have no
flexibility in capitalizing this expense. It is a general rule though, a more accurate
picture of the what the financial statements would look like if firm were to capitalize
R&D would be use a capitalization rate of approximately 25% of R&D and add this
amount to assets on the balance sheet. After converting Xilinx’s R&D expense to an
asset through capitalization we only found a 10% decrease in the percentage of R&D
expense to total net income. The last accounting policy that was evaluated was
goodwill. Goodwill is an intangible asset that generally evolves from the acquisition
process. Firms are required to re-value goodwill annually. Impairment occurs when
the carrying value of goodwill exceeds its fair value. When impairment is evident the
firm must write down the asset to market value (mark-to-market). Companies in this
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industry resist the impairment of goodwill due to the fact that it decreases the value of
the firm. If firms are not careful, they might be obligated to write off as much as 223
million dollars in goodwill in one year, which was exactly what happened to Lattice in
2007. Xilinx, compared to other companies in the industry, did a good job on
impairment, but not enough to give a complete accurate view of the firm. As a general
rule, when goodwill is greater than 10% of long term assets then impairment is needed.
After performing impairment on Xilinx’s goodwill we concluded that there was no large
change in the balance sheet because of this impairment. With the overall effect of the
changes to the accounting policies there was no considerate amount of change to the
financial statements, concluding that Xilinx has accurately displayed the true value of
the firm in the financial statements.
Financial Analysis, Forecasting Financials, and Cost Estimations
Financial analysis involves looking at viability, profitability, and stability of firm using
financial ratios. Firms use ratios in order to better measure their own financial status
compared to their competitors. The three main types of ratio categories firms’ use are
liquidity, profitability, and capital structure. Liquidity ratios are used to determine if the
firm has enough cash to meet its current obligations. Banks will use the ratios of the
firms compared to others to determine the credit risk of the company. Liquidity ratios
for Xilinx were above the industry average compared to its competitors. The next
category of ratios is profitability ratios. These ratios measure how efficiently the firm
operates. Just as in the liquidity ratios, Xilinx consistently outperformed its competitors.
The last ratio category is capital structure ratios. Capital structure ratios are different
from the other two categories in that they don’t measure actual performance, but more
towards how the firm finances its investments and operating activities. Firms can
finance these activities in two ways, debt or equity financing. These ratios are important
because they provide insight into the firms default risk. The ratios show how the firm is
dealing with paying for interest payments, liabilities, and the financial leverage of the
company. Xilinx has been outperforming its competitors in this category as well, but
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the trend line is showing a decrease in the future, and should been looked at further in
order for this not to become a problem later on. After computing these three categories
of ratios you can determine potential growth rates using the sustainable and internal
growth rates. Xilinx has also out performed its competitors in this area as well. It is
worth noting that even though Xilinx is out performing its competitors, they in many
cases have not been performing better than their main competitor Altera. The other
two companies, Actel and Lattice are was is making Xilinx be better than the industry
average due to their own poor performances.
The next step in this analysis is the cost of capital explanation. Before finding the
weighted average cost of capital, cost of equity and cost of debt need to be calculated.
From our regression analysis we found our beta to be 1.746. Our beta was stable
across the time period which means that the systematic risk is not changing over time.
Once you have the beta you can get the cost of equity by using the CAPM equation by
filling in also the MRP, which was 7% and the risk free rate of 4%, giving us a cost of
equity of 17.2% (including the size adjustment). Next you need to find the cost of debt
by taking the weighted average of the liabilities times the interest rates given to the
liability. With the cost of debt of 2.94% and with the cost of equity you can find the
weighted average cost of capital (Wacc). The calculated size adjusted Wacc for Xilinx
was 13.96% before tax and 13.73% after tax. There would have been no material
change in a restated Wacc.
The last and probably the most important part of the prospective analysis was the
forecasting of the financial statements. This all starts with expected sales growth. From
our analysis we conclude that Xilinx will have a -1% growth rate for the 2009 year, but
will steadily move up to a 6% growth rate in the year 2018. After the sales have been
forecasted out the rest of the income statement using either prior year’s percentages of
total sales or increase the account by the growth rate. The way of connecting the
income statement to the balance sheet is through the asset turnover ratio. Using this
ratio you can obtain total assets and forecast the majority of the balance sheet. For the
cash flow statement, using the CFFO/Sales ratio will give you the CFFO on the cash flow
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statement. To find CFFI, Xilinx was different in how they used their cash to invest in
different accounts, so we used a combination of change in plant property and
equipment as well as research and development cost to calculate this account. We feel
confident in our income statement forecast, but remain hesitant on the balance sheet
due to the retained earnings and the cash flow statement because of the payment of
dividends to shareholders is difficult to forecast.
Valuation Executive Summary
To estimate true equity value of a firm it is necessary to use both relative financial ratio
valuation and intrinsic valuation models; the latter is much more complex and requires
sophistication, while the former is a simpler alternative. Our valuation analysis attempts
to estimate the correct market price as of November 3, 2008.
Financial ratios are used relatively, via the method of comparables, in order to indicate
over- or undervaluation. For firms to be comparable they must exhibit similar cash
flows and business risk; we defined Xilinx competitors as the other specializedsemiconductor
firms designing similar products, they are Altera, Actel, and Lattice
Semiconductor. By comparing and subsequently ranking firms an industry average can
be calculated; this benchmark is the basis for under- or overvaluation detection. Of the
eight comparable ratios used, four indicated that Xilinx was undervalued, two indicated
they were overvalued, one indicated fair value and one was thrown out. The mixed
results do not provide an adequate amount of guidance and therefore did not greatly
influence our valuation recommendation.
The intrinsic valuation methods were used to estimate the true equity value of Xilinx
through more complex quantitative modeling. These models do not depend on Xilinx’s
comparability with its industry or competitors, but rather its individual circumstance and
financial position. These models are considered more substantive, and therefore render
a more accurate depiction of equity value than the relative valuation of financial ratios.
All of our models agree and each estimated share price value fell below $17.62 (the
observed price) by more than 15%, suggesting that Xilinx is overvalued. Sensitivity
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analysis was performed to gauge how different rate assumptions would manipulate the
price. We illustrated our findings in tables which prove that the overvaluation is
substantial and that many different rate assumptions yield the same overall result.
Company Overview
History
Xilinx is a participant in the specialized-semiconductor industry. They are a global
operation with headquarters in San Jose, California, Singapore, and Saggart, Ireland.
Xilinx is a company that designs and markets programmable logic devices (PLD) which
have many functions. Xilinx employs about 3,400 people and has over 21,000
customers worldwide. The company was founded in 1984, by Ross Freedman, Bernie
Vonderschmitt, and Jim Barnett. Xilinx "invented the field programmable gate array
(FPGA) and [was] the first semiconductor company to establish the fabless
manufacturing model. This model calls for outsourcing everything [except] design,
marketing and support of products. Xilinx was the first to employ 180nm, 150nm,
130nm, 90nm, and 65nm process technology and currently delivers approximately 90
percent of all high-end 65nm FPGAs in the world” (www.xilinx.com). In order to
appropriately hedge their portfolio risk Xilinx competes in a broad scope of end
markets, including: communications, consumer and automotive, industrial, and data
processing.
Fundamentals
The company is constantly involved in research and development "primarily directed
towards the design of new IC’s, the development of new software design automation
tools for hardware and embedded software, the design of IP cores of logic and the
adoption of advanced semiconductor manufacturing processes for ongoing cost
reductions, performance and signal integrity improvements and lowering power
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consumption. As a result of [Xilinx's] R&D efforts, [they] have introduced a number of
new products during the past years including the Virtex-5 and Virtex-4 series of FPGAs,
and the Spartan-3 FPGA series" (Company 10-k).
Source: TD Ameritrade
Xilinx has had significant market share of the PLD segment for the last five years.
According to the Xilinx investor relations fact sheet, the company held a 49 percent
market share in 2003 and currently holds 51 percent market share in 2008. Xilinx has
outpaced the specialized semiconductor industry with a five year revenue growth rate
of 9.76 percent (www.Xilinx.com). The figure above shows the 24.64 percent decline in
Xilinx's stock price over a five year period; it is contrasted with a 33.09 percent decline
in the Dow Jones Semiconductor Industry Index. Xilinx main competitors are, Altera,
Lattice Semiconductor, and Actel. These three companies compete directly with the
operations of Xilinx. All are in a continual race to design smaller IC’s that use less power
and operate faster using a fabless manufacture of PLD’s and FPGA’s.
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Industry overview
The specialized-semiconductor industry can be described as a group of firms who
design, market-develop, and market semiconductor devices. A semiconductor is a solid
substance (i.e. silicon) that has electrical conductivity. This industry began in the
1960’s as making transistors for simple electronic devices and has grown into a 228
billion dollar industry. One wall street journal article even stated "the semiconductor
industry is still widely perceived to be a proxy for the state of the U.S. economy; the
reality is that it's much more closely tied to the chip inventory cycle” (WSJ.com). Prior
to the 1980’s the industry was vertically integrated and participated in the
manufacturing process. The average pre-1980 firm was highly leveraged in the
manufacturing wafers, which are a silicon based semiconductor used in the fabrication
of integrated circuits. An integrated circuit (IC) is a miniaturized or microscopic electric
circuit used in semiconductors. Post 1980 the industry discovered the important
implications derived from Moore's law. The law states that "the number of transistors
that can be inexpensively placed on an integrated circuit has increased exponentially,
doubling approximately every two years" (Harvard Business Review). In order to meet
the expectation of customers (derived from Moore's law) the industry spends a
significant percentage of total sales on research and development (R&D). As a result of
these large expenditures the business model for successful firms began to transform.
Relevant competitors began to outsource their input costs from manufacturing
semiconductors to focusing on market development, design, and marketing. The
specialized-semiconductor industry became known for its fabless business model.
Fabless companies lower fixed costs by outsourcing all manufacturing to fabricationspecific
companies (Barrons).
Wafer fabrication is merely a process of using the silicon wafers to build the integrated
circuits. The industry has grown drastically through R&D and has continued to create
innovative silicon products that are smaller and stronger than ever before. After a new
product has completed the scientific manufacturing process, the chips (and thus
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semiconductors) will be ready for programming. At this junction manufacturers send
the chips to fabless companies that specialize in programming these mechanisms with
logic memory.
To be absolutely explicit, fabless semiconductor companies are primarily focused on
increasing the speed and efficiency of technologies associated with integrated
circuits. Four main product types have developed into the industry's focal
point. First, the memory chip. Memory chips serve as temporary storehouses of data
and pass information to and from computer devices. The consolidation of the memory
market continues, driving memory prices lower. The second type of product is called a
microprocessor. Microprocessors are "central processing units that contain the basic
logic to perform tasks. Intel's domination of the microprocessor segment has forced
nearly all competitors, with the exception of Advanced Micro Devices (AMD), out of the
mainstream market and into smaller niches or different segments altogether”
(Investopedia). The third type of product companies focus on are commodity integrated
circuits. These “chips” are produced in massive batches (implying a low profit margin,
high volume strategy) for basic routine processing purposes. The market for
commodity IC's is dominated by Asian companies who control the market share. The
fourth and final type of product that the majority of the firms in the fabless business
focus on is called system on chips (SOC’s). A SOC is an IC with an entire
programmable system already on the IC. “The market revolves around growing
demand for consumer products that combine new features and lower prices. With the
doors to the memory, microprocessor and commodity integrated circuit markets tightly
shut, the SOC segment is arguably the only one left with enough opportunity to attract
a wide range of companies” (Investopedia). Firms within this industry rely on these
four types of products when producing and generating revenue for their company.
Overlooking the industry, it has shown over time that the growth is strictly cyclical and
fluctuates on a tri-annual basis. The graph below examines historical data pertaining to
a more broadly defined semiconductor market. It is relevant because the specializedsemiconductor
industry tends to mirror growth in the overall market.
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The drivers for this cyclicality are consumer electronics/computer demand,
overcapacity, and inventory burn. The demand for consumer products can play a big
part in this phenomenon as evidenced through basic supply-and-demand economics.
However, the most influential driver is overcapacity. The constant demand for updated
cost efficient technology generates obsolete inventory quickly, creating a surplus of
soon to be out-of-date products.
The semiconductor industry has grown tremendously since the 1960’s due to a strong
consumer demand for new and improved electronic devices. In order to satisfy Moore's
law a significant percentage of revenue is devoted to R&D expenditures. Relevant
competitors (those with business continuity) constantly develop and manage costs, new
manufacturing processes, and R&D expenditures. The Wall Street Journal stated that
for a company to remain relevant “each new generation of manufacturing technology
produced must contain smaller circuits and chips that can run faster, use less power
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and shrink into smaller spaces” (MercuryNews.com). Innovative chips are achieved as
a result of significant R&D expenditures.
Additionally, it is critical for industry demand and growth to be driven by
customers/industries not susceptible to being phased out of the global economy. This
should not be confused with the natural evolution that takes place when cutting-edge
technology improves operation efficiency, thus creating job loss. Historical industry
growth is a product of the evolution of technology. Post-tech bubble data manifests a
slowing growth model dependent upon R&D for sustainability. However, regardless of
technical analysis the industry has a natural cycle of oscillation that we believe is
sustainable into foreseeable future. This variance explains our forecast for industry
growth (resulting from R&D) which is forecasted later in our analysis.
Five Forces Model
The five forces analysis was created by Harvard graduate Michael E. Porter. Analysis of
this model allows firms to better understand the industry in which they operate and
how to capitalize on varying degrees of competition that exist. The model
demonstrates how industries are influenced by the following five forces: bargaining
power of customers, bargaining power of suppliers, threat of new entrants, threat of
substitute products, and the rivalry amongst existing competitors. When used
diagnostically these forces can help prescribe how lucrative an industry could potentially
be. The model is illustrated below.
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Source: Yahoo! Images
Industries can compete on one of two general platforms, either price or product
differentiation. Competitors in the specialized-semiconductor industry, fabless
companies, can only compete on product differentiation. The industry's average R&D
expenditures are so large that it would impede growth to compete on price.
The five forces analysis quantifies the ability and perceived likelihood of a new company
to enter into an industry. Industries that have abnormal profits are susceptible to
attracting new entrants. Typically profits begin to level out as new entrants start to
acquire market share. Barriers that limit access to new entrants are governmental,
patents or proprietary knowledge, scale/learning economies and excess capacity.
The threat of substitute products analysis estimates the economic incentive buyers have
to switch products. Factors going into product substitution are the buyers switching
cost and the relative price and performance between the two products.
The bargaining power of customers helps define who has pricing leverage. Whoever
has the bargaining power also has pricing leverage. Some of the factors that can
influence this force are buyer volume, number of buyers, switching cost, and product
differentiation.
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The bargaining power of suppliers mirrors the bargaining power of customers, except it
focuses on the supply side. A supplier can influence price when suppliers are
concentrated, have high switching cost among suppliers, and/or have low amount of
substitute inputs.
The chart below is a collection of our analytical findings.
Competitive Force
Rivalry Among Existing Firms
Threat of New Entrants
Threat of Substitute Products
Bargaining Power of Customers
Bargaining Power of Suppliers
Degree of Competition
High
Low
High
Low
Moderate
Rivalry Among Existing Firms
In the specialized-semiconductor industry average profitability is primarily influenced by
the competition exhibited by rivals. The intensity of competition is affected by several
factors, which we explore below. The following analysis supports our belief that the
rivalry among existing firms is high.
Industry Growth Rate
The following chart forecasts a slowing growth rate for the specialized-semiconductor
industry (www.hoovers.com). Keep in mind that these forward looking estimates are
difficult to accurately predict, even if the industry leaders are in agreement with the
analysis.
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Sales of semiconductor products are highly dependent upon demand from the
computer industry and makers of telecommunications products. Threat of an
encroaching recession will deteriorate prospective growth for such a dependent
industry. However, due to the fact that this industry is cyclical it is important that we
examine long-term (historical) data trends.
“The Semiconductor International Association (SIA) provides information on worldwide
chip sales from 1982 through 2005 on its website. Taking a look at the data shows that
there has definitely been a slowdown in the growth rate. During the years 1982 through
1994, chip revenues grew at a compounded rate of 17.9% per year. Since 1994,
however, the growth rate has been much slower -- only 7.6% per year. These numbers
are confirmed by market research firm IC Insights, which states that revenue growth
over the 20-year period from 1973 to 1993 was 17%. From 1993 to 2003 the growth
rate slowed down to just 8%” (www.hoovers.com). Conscious consumers know that
the average selling price of chips is continually declining and chip capabilities are
continually increasing (Moore’s Law).
At this point it is important to determine whether the declining revenue growth rate is a
result of plummeting prices or slowing growth in the number of chips sold. We believe
that the answer is a combination of both issues. Profitability is exceptionally vulnerable
to declines (in the short-term) because the current economic outlook is
slightly softening the demand for semiconductor products. This is a direct result of
consumers requiring low-cost products and declining output potential (sales demand).
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However, industry growth is not dependent upon one national economy.
Semiconductor products have successfully been integrated into the global economy,
and in fact are one of the technological products that made globalization possible.
Strong future growth prospects for an industry decreases rivalry among incumbent
firms because competitors need not gain market share in order to grow. Reciprocally,
weak growth forecasts increase rivalry among incumbents. For this reason, we
conclude that current forecasts for the specialized-semiconductor industry lends
towards a significant rivalry.
Concentration and Balance of Competitors
To gain a better understand of the competitive landscape Xilinx participates in we need
to develop a thorough understanding of who their direct competitors are, the size of the
over-all industry, the market capitalization of each major competitor, and an accurate
description of how market share is distributed amongst all competitors.
The size of the industry does not distract large semiconductor firms from specializing.
Xilinx specializes in the design, development, and marketing of complete programmable
logic solutions. Although the semiconductor industry includes hundreds of firms,
fragmentation is created through specialization. The major competitors faced by Xilinx
include: Actel Corporation, Altera Corporation, and Lattice Semiconductor Corporation.
Each company compete to design and market the next fastest most efficient and
smallest advanced integrated circuit. These companies achieve this through the
manipulation of the geometry of the circuits whereby increasing the performance of the
next generation of product. Actel and Lattice Semiconductor have mid-market caps of
$211.46M and $180.09M, respectively. These companies better represent the industry
average-market cap of $362.2M. Xilinx and Altera have large-market caps of $4.942B
and $4.519, respectively. These two companies are to be considered the most
significant and relevant competitors.
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The most important component of concentration analysis is the distribution of market
share. This information, in combination with industry growth expectations, is crucial in
determining long-term sustainability and profitability. The following chart is available
on Xilinx website and provides valuable market share information.
Industry concentration influences whether direct rivals compete on price or product
differentiation. The preceding chart suggests that the industry is dominated by Xilinx,
thus giving them a significant cost/price advantage. However, thorough analysis of the
industry dictates that competition is inherently derived from differentiation. Xilinx
states clearly in their 10-K that “success depends in large part on [their] ability to
develop and introduce new products that address customer requirements and compete
effectively on the basis of price, density, functionality, power consumption, and
performance.” High concentration creates a pricing power similar in nature to a
monopoly. We believe that this industry has a high concentration, which decreases the
amount of rivalry present.
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Degree of Differentiation
Effective differentiation is a result of large investments in research and development.
Industry standards demand fast time-to-market and volume production, and high
flexibility for every product introduced. In attaining differentiation companies must
contemporaneously meet industry standards while introducing innovative products that
are consistently reliable. Support staffing (sales and customer service) must
demonstrate the expertise and enthusiasm of the firm/products they represent.
Recently, rapidly increasing processing needs have become more important to end
users. The long-term future is bright for companies who can satisfy their processstarved
customers.
Switching Costs
Switching costs are exaggerated by large R&D investments. However, differentiation is
impossible without significant R&D costs. Thus, to achieve differentiation a company
must accept the high switching costs that result from R&D expenditures. This
contributes to the high degree of rivalry in the specialized-semiconductor industry.
Learning Economies
There is a steep learning curve in the specialized-semiconductor industry. This creates
a significant barrier to entry as well as added incentive to aggressively seek market
share.
Scale Economies
Small cap companies are disadvantaged when they lack the capacity to participate in
scale economies. However, fabless companies (which outsource the fabrication of their
devices) can more readily exploit scale economies with less capital by utilizing
semiconductor foundries (semiconductor manufacturers). However, access to scale
economies is limited by the capital intensiveness, due to R&D, of the industry. These
factors result in an emphasis on size, creating an incentive to engage in an aggressive
24

pursuit for market share. Thus, we conclude that the degree of rivalry is increased via
scale/learning economies.
Ratio of Fixed to Variable Costs
A high fixed-to-variable cost ratio means there is incentive to reduce price and utilize
installed capacity. We have reason to believe that this industry has a high ratio as a
result of massive amounts of R&D expenditures. We therefore believe that the above
factors increase the degree of rivalry in the industry.
Excess Capacity
Excess capacity creates an incentive for competitors to reduce prices and utilize
installed capacity. However, in the specialized-semiconductor industry, where demand
for innovation is so great, excess capacity has yet to be the source of reduced prices.
The demand for new and improved products has remained consistently high, even
when sales growth is slowing. Large investments in research and development are a
direct result of the lack of excess capacity in this fast-paced industry.
Exit Barriers
Exit barriers tend to be high due to the large amount of specialized assets. These
characteristics increase rivalry. These characteristics deter companies from wanting to
leave the market because the sale of highly specialized assets is difficult, this increases
the competitors incentive an industry to remain competitive so the firm does not risk
massive losses at liquidation.
Conclusion
When considering the above rivalry analysis overall, we conclude that the rivalry among
incumbent firms is high. Taking in the fact that this specialized industry is constantly
competing for market share and trying to balance the research and development cost
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with creating new, smaller, and faster chips to generate profit to meet these cost has a
turned this niche in this industry to be highly competitive.
Threat of New Entrants
The threat of new entrants entering a market can greatly affect an existing company’s
market share and profit. The prospect of making abnormal profits attracts new
entrants into an industry. The fewer barriers to entry that exist, the more likely it is
that a firm can enter the market, therefore increasing the level of competition. The key
factors that determine the degree to which new entrants will try to enter the industry
are as follows: economies of scale, first mover advantage, channels of distribution and
relationships, and legal barriers. Taking all of the factors into consideration, the threat
of a new entrant into the semiconductor industry is relatively low.
Economies of Scale
Large economies of scale make it very difficult for new entrants to compete in an
industry. The more assets a firm has, the greater the firm’s ability to take advantage of
economies of scale. The following chart shows each competitor's total assets from
2004 to 2008.
Total Assets (in millions)
2004
2005 2006 2007 2008
Xilinx $2,937 $3,039 $3,173 $3,139 $3,137
Altera $1,488 $1,763 $1,823 $2,234 $1,770
Actel $320 $318 $343 $369 $364
Lattice $852 $811 $715 $726 $376
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A company that has economies of scale drives down the average cost per unit through
increased production, which also decreases fixed cost per unit. When fabricationspecific
semiconductor companies achieve economies of scale fabless companies benefit
from a lower cost per unit. The lower cost per unit can lend too many advantages (i.e.
high profit margins). However, the economic barrier (billions of dollars in start-up
capital) to fabrication decreases the threat of new entrants to manufacturing, which
limits fabless outsourcing potential and places an artificial floor on unit cost. Increased
rivalry amongst fabrication-specific firms could dramatically decrease cost for fabless
companies and increase distribution channels. The two largest fabless companies in the
industry, Xilinx and Altera, currently have a combined market segment share of 85
percent of PLD sales. The two largest fabless companies in the industry, Xilinx and
Altera, currently have a combined market segment share of 85 percent of PLD sales.
Fabless companies do not inherently have great barriers to gaining economies of scale
through production because outsourcing is available via fabrication-specific
semiconductor firms. Thus, we conclude that the barriers to economies of scale are
moderate.
First Mover Advantage
First mover advantage is the advantage gained by the initial occupant of a market
segment. Successors are initially playing catch up because established companies have
a larger resource/customer base and have been designing innovative products longer.
The risk faced by first movers is compensated by the opportunity to develop brand
loyalty and recognition.
In a learning economy the initial firms to enter the industry will have a cost advantage
after they have established relationships with suppliers and distributors. A new
entrant’s ability to accumulate viable resources and a competitive edge is not easily
attainable. When an industry (i.e. specialized-semiconductors) has a significant first
mover advantage, the threat of new entrants is reduced. The specialized-
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semiconductor industry is a mirror image of this theory in practice. The threat of new
entrants has been greatly reduced because of the first mover advantage gained by all
firms in the industry.
Access to Channels of Distribution and Relationships
Another potential problem for new entrants is gaining access to channels of
distribution. “Limited capacity in the existing distribution channels and high costs of
developing new channels can act as powerful barriers to entry” (Text 2-4). The fabless
business model allows for new entrants to remain competitive through outsourcing.
However, as mentioned earlier, the high barriers to entering the fabrication community
minimizes the overall manufacturing capacity. Thus, contracts with suppliers become
extremely important for fabless companies. One example of this would be Xilinx
contract with United Microelectronics Corporation (UMC). Their strategy with the
company is to negotiate new contracts every two years in order to set new prices and
quantity amounts for their company. This is important because minimized capacity of
fabrication and contractual barriers create extremely difficult hurdles, thus decreasing
the threat of new entrants.
Legal Barriers
In the semiconductor industry it is very important to protect intellectual property rights
that prevent new entrants from obtaining proprietary information. Industry leaders
hold as many as 1,800 patents relating to their products. In the specializedsemiconductor
industry failure to protect intellectual property rights and trade secrets
will result in a diminished bottom line. Patents and copyrights help establish companies
and impede competitive growth stemming from new entrants. This industry spends an
average of 20 percent of total sales on research and development, further justifying
why copyrights and patents are so important to the industry. However, exceptions do
exist. For example, from 2001-2006 Xilinx and Lattice sold the privilege of using certain
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intellectual property to Altera (Altera 10-k). When the top three competitors share
intellectual property the competitive disadvantage aggregated to new entrants is
significant, once again contributing to the decreasing threat presented by new entrants.
Conclusion
The semiconductor industry is very difficult for new entrants to successfully enter. The
industry tends to be capital intensive, and in times of difficult fundraising this fact alone
makes entering the industry near impossible. First movers to the industry have the
ability to set industry standards and to develop relations with distributors; both of which
has been achieved by Xilinx. Although the cost associated with developing new
channels of distribution is relatively low, the risk of attaining these channels is high due
to lack of capacity and contractual agreements. Thus, we conclude that the threat of
new entrants into the specialized-semiconductor industry is low.
Threat of Substitute Products
When looking at the threat of substitute products in the specialized-semiconductor
industry, one has to consider what would make a customer switch between products
that essentially perform the same function. Price and performance are two of the most
relevant factors when considering the threat of substitute products in this industry.
Arguably the industry's most important products, PLDs, are inputs for a final product in
the electronics industry. Therefore, vast amounts of products are developed by other
companies that perform programmable logic, these include: field programmable gate
arrays (FPGA), complex programmable logic devices (CLPD), and application specific
integrated circuits (ASCI). This industry also has significant threat of product
obsolescence, whereby a company could produce an alternative product that performs
the same function faster and at a cheaper price, creating an attractive substitute. So
for a developer of programmable logic the threat of substitute products is high.
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Relative Price and Performance
In the broadly defined electronics industry there are primarily two strategies that exist.
The first is cost leadership (providing the lowest cost to the consumer); and the second
is product differentiation (providing a product of superior quality or variety). The
PLD market incorporates to both perspectives of competitive strategy. However,
recently there has been a decline in companies that provide low-cost-low-performance
machines, because the price of technology has decrease substantially, allowing for a
greater number of consumers to gain access to better performing products. The
demand for companies to produce increasingly high-tech products increases the
demand for faster, smaller, and cheaper inputs to produce these end products.
Therefore, designers of PLD's have to achieve a balance between price and
performance. If a buyer of these inputs perceives the price to be too high, relative to
the performance, they are more willing to seek out a lower cost provider if the next
best alterative will suffice. For companies who compete purely on differentiation, a
superior input is the only choice when creating a product that emphasizes quality. In
these situations the perceive price paid for a superior product is not as critical to end
users. We conclude that relative price and performance contributes to the large threat
presented by substitute products.
Customers willingness to Switch
In an “industry that is intensely competitive and characterized by rapid technological
change, increasing levels of integration, product obsolescence and continuous price
erosion,” the threat of substitute products is a reality (Xilinx company 10-k). The
industry faces reverse engineering and new product development constantly, but wards
off negative effects through extensive patents and licensing. Many customers seek out
both the lowest price and best performance, and will switch between suppliers
frequently in search of cutting-edge technology. Buyers in this industry are not inhibited
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y high switching costs. The low switching cost for end users lends to a significant
threat of substitute products.
Conclusion
To remain competitive firms need to develop a strategy that will prevent customers’
willingness to switch between suppliers. Industry competitors must strike a balance
between price and performance when switching costs are low. Sustainability is attained
by investing in R&D and protection of intellectual property. However, it seems
impossible to mitigate the significant threat faced by substitute products.
Bargaining Power of Customers
When assessing the bargaining power of customers it is essential to first define the
customer base. The relevant competitors in the specialized-semiconductor industry,
according to their annual reports, agree that their customer base includes the following
industries:
· Communications
· Consumer
· Industrial, Scientific and Medical
· Audio, Video and Broadcast
· Automotive
· Defense and Aerospace
· Data Processing
These end markets deal with primarily distributors, wholesalers, and some independent
sales representatives. Each end market can be divided into separate subsections who
eventually will be a beneficiary of our product and but not necessarily our customers.
The customers are those four main end markets that each of the main competitors in
this industry categorize in their 10-K’s. As a specialized semiconductor industry, it is
crucial to develop relationships between firms and their customers.
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In this industry, the customers of these high end products realize that this field takes
some expertise causing a small substitution differential. The specialized semiconductor
industry is a highly competitive market with low concentration of corporations
competing for similar quantities of the market share. This industry is a highly
competitive market when you leave the United States and go into the global market.
Globally, the industry deals with international companies that have big research
development industries pertaining to integrated circuit markets such as: China, Japan,
and Britain. The bargaining power of the customers/buyers can go into more detail by
three elements of analyzing the company and industry: price sensitivity, relative
bargaining power and customer switching costs.
Price Sensitivity
Typically, buyers’ are more price sensitive when the product is undifferentiated and not
many switching costs. Buyers sensitivity can also depend on the products’ own cost
structure. Furthermore, “the importance of the product to the buyers’ own product
quality also determines whether or not price becomes the most important determinant
of the buying decision.” (Palepu and Healy)
Buyers of this industry are very sensitive to quality because the value added to these
products are cost demanding and customizable. There is a high degree of
product/service differentiation in this industry. The creation of customer value also
creates (to a degree) customer dependency. Having a patent in this industry should be
a requirement because it identifies the product – firm relationships for the buyers to
appreciate and use as a name brand type of market. Overall, the industry contains low
price sensitivity.
Relative Bargaining Power
Relative bargaining power is determined by whether the product is a commodity or a
high end product. This is a big factor for the customers when they take into
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consideration the leverage they have on competitive advantage. This means that if
there are alternative products then the customer has bargaining power with the firm
and the industry. In this case, the specialized-semiconductor industry has the control
of the bargaining power which gives the customers a low bargaining power against this
industry. The products provided in this industry are critical for customers’ business
continuity, and therefore diminishes the relative bargaining power of buyers. When
comparing the relativity of the four end markets that these industries compete; each of
the markets contain an importance level which puts the customers under strict
negotiation room for price. Those end markets can’t bargain price very much because
they need this industry to provide its products; the end markets will pay the product
price. This industry can dictate the prices of their products just because they control
over half of the market share.
The number of suppliers in this industry is relatively high when you compare the major
buyers (distributors/original equipment manufacturers) who contain most of the market
share. Some of the major industry competitors are: Xilinx, Altera, Actel and Lattice.
While some of the buyers are: Avnet Inc., Arrow Electronics and privately owned
companies. Due to vast amount of companies that this industry deals with they have a
minimum requirement of shipments for each load. They also make strong long term
relationships that will hold in the future.
Customer Switching Costs
The ability for a customer to switch products is a common threat in most competitive
markets. As for the specialized-semiconductor industry, that theme is definitely not the
case; this industry is a high end market with highly specialized products used to create
programmable logic devices. The switching costs are extremely large. Each product
costs are high and are not a commodity but a high end necessity giving the firm all the
power for customer/buyer bargaining power and limits their switching capabilities.
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Conclusion
We conclude that low price sensitivity and large customer switching costs contribute to
low customer bargaining power. The market sets price. As for the main incentive of
this market, it would be the high research based technology programmable logic
devices with the best quality out on the market. The industry does not leave much
wiggle room for price adjustments since the demand for industry products is high.
Bargaining Power of Suppliers
The factors discussed when defining the bargaining power of customers mirror the
issues analyzed on the supply side. Industries with few suppliers will have to become
price takers, which can give rise to major operation costs. Suppliers achieve high
bargaining power by having a differentiated product, high switching cost, and/or an
indispensible service. A supplier with high bargaining power can decide cost, quantity,
and even delivery terms for the industry. However, a supplier with relatively low
bargaining power has little influence over price and quantity. Suppliers in this situation
have many competitors. We conclude that the bargaining power of suppliers in the
specialized-semiconductor industry is low.
Price Sensitivity
Price sensitivity of fabless firms to the fees charged by fabrication-specific firms plays a
major role in defining which party has negotiating power. Price sensitivity, as discussed
in the preceding section, is increased when switching costs are low. Additionally, we
believe that these low switching costs are sustainable through bi-annual contract
renewal. We have concluded that, due to the large number of firms participating in the
fabrication process, switching costs for fabless companies is low. The ability to seek the
low-cost provider increases their sensitivity to price, thus strengthening the fabless
companies bargaining power and decreasing the bargaining power of suppliers.
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Relative Bargaining Power
Suppliers in this industry have relatively low bargaining power. With undifferentiated
products and many competitors in the fabrication-specific semiconductor industry these
supply firms have little negotiation power. As a result, many fabless firms do not enter
into long term contracts with suppliers. The lack of long term contractual obligation
creates intrinsic value for fabless firms by keeping low-cost options open and avoiding
high switching cost. Switching cost is relatively low for this industry because of the
many suppliers and undifferentiated products supplied to these firms. However, some
of these suppliers do offer high tech wafers for R&D activities. In the case of
specialized products the suppliers bargaining power increases.
Conclusion
Bargaining power over suppliers is crucial in lowing input cost for fabless products. The
suppliers are numerous and a majority of the products offered are undifferentiated.
They do offer some highly specialized products for R&D activities which increase
supplier bargaining power. For these reasons the suppliers for the semiconductor
industry have moderately low bargaining power.
Industry Analysis
The goal of any firm in an industry is to maintain some type of sustainable competitive
advantage. Firms achieve this through a hybrid mixture of two strategies. First is cost
leadership, which is experienced by a company that provides similar products to their
competitors but at a lower cost. To produce at a lower cost results in lower prices
without necessarily decreasing profit margins. This strategy, when used effectively, can
mangle a competitor’s bottom line. Companies achieve cost leadership through
economies of scale, simpler product designs, lowering distribution cost, and/or efficient
production. The other strategy to sustaining a competitive advantage is through
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product/service differentiation. A differentiation strategy occurs when companies supply
a product to an industry that is unique. Firms can do this by having superior product
quality or variety, more flexible delivery, or investing in research and development. By
using these two strategies companies can achieve value in their industry and in turn try
to maximize shareholder wealth. This industry’s primary focus is on differentiation but
they cannot dismiss the importance of cost management.
Economies of Scale
Economies of scale occur when the cost per unit decrease as a result of increased
output. Fabrication-specific companies achieve large scale economies by purchasing
raw material in large batch quantities (Actel 10-K). Fabrication-specific firms narrow
their list of suppliers, rather than purchasing raw materials from numerous suppliers, in
order to receive purchasing discounts, and ultimately increasing their scale economies.
The fabless companies on the other hand can achieve economies of scale in two ways.
Manufacturing companies can achieve economies of scale by making chips smaller or by
making the wafers bigger, thereby reducing per unit cost. United Microelectronics
Corporation (UMC) stated that their “future capacity expansion plans will focus on 12-
inch wafer facilities in order to maintain [their] technology leadership. 12-inch wafers
offer manufacturing advantages over 8-inch wafers because of the greater number of
chips on each wafer. In addition, 12-inch wafer facilities present a more cost-effective
solution in achieving an economic scale of production. They intend to carefully monitor
current market conditions in order to optimize the timing of their capital spending”
(UMC 20-F). By switching from 8-inch wafers to 12-inch, a company can make twice as
many chips, and the cost of doing this only 20% more (www.ndu.edu). Economies of
scale play a substantial role in this industry, and developing new ways to low lower
input cost can be a driving force to which company can sustain a competitive
advantage.
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Superior Product Quality
The quality of products can play a major role in how long companies can last in the
specialized-semiconductor industry. Providing sub-par products to customers will
eventually lead to the loss of a contract and declining credibility. Many companies now
are trying to achieve International Organization for Standardization (ISO) certifications
(quality standards) for their industry to show their customers that they can meet their
quality needs. Under their risk analysis section of their 10-K, Xilinx emphasizes the
need to maintain product integrity.
“Product defects or other performance problems could result in the delay
or loss of market acceptance of our products and would likely harm our
business. Our customers could also seek damages from us for their
losses.” -Xilinx 10-K
Recently, Nvidia Corp had to pay up to $196 million dollars out of their cash reserves to
cover dysfunctional products purchased by their customers (WSJ). Another example
(emphasizing the importance of product quality) is from Xilinx’s 2007 annual report. In
the report they state that “a product liability claim brought against [them], even if
unsuccessful, would likely be time-consuming and costly to defend… Any product
liability claim, whether or not determined in [their] favor, could result in significant
expense, divert the efforts of [their] technical and management personnel, and harm
[their] business” (Xilinx 10-k). Companies take these risks seriously and are constantly
trying to meet customer specifications in hope of mitigating these threats.
Superior product variety
The ramifications of product diversification on long-term business continuity are
significant. Transferring risk across different markets lends to profit sustainability. The
graphs below show the end-use markets for the semiconductor industry from 1996-
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2008. The computer sector is by far the most dominate and companies should still
strive to have a variety of their products in this sector.
Source: www.wikinvest.com/industry/Semiconductor_Foundry#Fabless_Semiconductor_Companies
After dissecting economic trends of the specialized-semiconductor industry, we conclude
that the demand for quality and innovative products is high; however, the recently
lagging economic growth has decreased the level of output of the industry. This
basically means that consumers have continued to have high standards, even when
they are buying lower volumes of products. Future growth of these business-tobusiness
transactions is dependent on the American, European and Asian economies.
Investment in Research and Development
The top priority of R&D is market development. R&D teams focus on finding different
applications in new markets of the same product. Xilinx, for example, has recently
begun researching how they could get involved in the "green" market by studying solar
panel energy transformation.
Additionally, Research and Development teams in the semiconductor industry have the
difficult task of keeping pace with Moore’s Law. The prevailing opinion of the
specialized-semiconductor industry is explained by Lattice Semiconductor’s in their 2007
annual report; they state that “the [specialized] semiconductor industry is intensely
38

competitive and characterized by rapid rates of technological change, product
obsolescence and price erosion."
In order to keep up with the rapid technological progress in this industry firms must
expend considerable amounts of capital on R&D especially to acquire the human capital
necessary to keep pace with Moore’s law. Companies that fail to recognize this
phenomenon will have products that become obsolete. Nevertheless companies still
spend a great deal of money on R&D as evident by IBM investing 1 billion to expand a
chip plant. The Wall Street Journal recently published an article that discussed how
IBM is investing in nanotechnology to make smaller and faster chips. The exploration
of the technology field seems boundless. The following graph compares key accounting
information presented on the income statements of the relevant rivals.
Net Sales Research and Development Research and
Development as a
percentage of net sales
Xilinx $1,841,372 $358,063 19.4%
Altera $1,263,548 $265,581 21%
Lattice $228,709 $82,977 36.3%
Actel $197,043 $63,726 32.3%
* In thousands,
*A further analysis of sales and research & development will be explained in detail during the forecast
income statement/balance sheet.
The ratio of research and development to sales shows that the smaller the sales are for
a company the greater the ratio of research and development to sales required to
compete. According to Investopedia, the higher the percentage of sales spent on
research and development, the more opportunities available to develop new chip
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products. However, the advantage in this industry is not derived from the percentage
spent on R&D but on the total amount spent.
More Flexible Delivery
A company in the semiconductor industry that has a flexible delivery schedule will have
a competitive advantage over companies that fail to deliver to the consumer timely.
Through the use of a network of distributors, a direct sales force, independent sales
representatives, and electronic distributors, companies in this industry sell products
worldwide. “For the fiscal year ended December 28, 2007, worldwide sales through
distributors for subsequent resale to OEMs or their subcontract manufacturers
accounted for 94% of total sales” (Altera 10k). Companies in this industry have main
distributors that account for a large portion of their sales. For example, Arrow
Electronics, the largest distributor for Altera, is responsible for 45 percent of total sales
in 2007 and Avnet Inc. has accounted for at least 60 percent of total sales for Xilinx
over the past three years. According to Lattice the majority of sales are made through
distributors, which can provide a cost-effective way to reach a broad range of
customers while providing efficient logistics service as well. Firms in the semiconductor
industry have regional distributors close to customers throughout the world allowing for
quicker delivery. The more flexible delivery provided by firms in the semiconductor
industry, the greater the potential to gain a competitive advantage because they are
able to reach more customers. Delayed delivery of products can lead to lost sales,
decreased profits and weaker competitive position.
Conclusion
Differentiation is the main strategy that the specialized-semiconductor industry focuses
on when creating a competitive advantage. Companies need to focus on superior
product quality or variety, more flexible delivery, or investing in research and
development in order to achieve this competitive advantage. Cost leadership can also
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e important when focusing on attaining the lowest input cost possible. Successful
companies compete with a hybrid strategy, incorporating both into its competitive
advantage.
Value Creation Analysis
Xilinx competes in a highly competitive industry with multiple end-markets. They
employ a combination of competitive strategies in order to create value. Dominate firms
balance their strategy by investing in certain aspects of their business
effectively. Diligently improving economies of scale, product quality and variety, access
to distribution and research and development all contribute to a firm’s value.
Economies of Scale
A scale economy is simply the measure of how large a company has to be in order to
succeed in an industry. A large economy of scale translates in to lower per-unit cost and
higher output. Xilinx produces "PLD’s which are standard components. This means that
the same device type can be sold to many different users for many different
applications. As a result, the development cost of PLDs can be spread over a large
number of users” (Xilinx 10-k). This provides an advantage over application specific
standard products (ASSP) because with a greater degree of customization there is
generally “less flexibility, requiring longer fabrication lead times and higher up-front
costs than PLDs” (Xilinx 10-k). The Xilinx business model allows for large economies of
scale by mass producing a variety of undifferentiated products in order to reduce cost
and increase capacity.
Superior Product Quality
The two functions that end markets regard as contributing the most to overall device
quality are processing speed and power usage. This complies with Moore’s Law. As
integrated circuits get smaller there processing speed goes up and their power
consumption goes down. Therefore, in order for Xilinx to differentiate themselves from
their competitors they must have a higher level of product quality. Greater product
quality can create demand, gain market share and sustain value for their product. Xilinx
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has consistently pioneered and championed innovative products. For example, Xilinx
was the first to introduce 90nm and 65nm technology, providing a low cost per logic
cell (Xilinx 10-K).
However, innovative rivals have their share of successes. For example, Altera recently
outpaced Xilinx in the race to design the next smallest field programmable gate array
(FPGA). This device according to Altera, is 40nm creating a 35% faster processing
speed and uses 50% less power. This could greatly affect Xilinx's net revenue and
market share.
Superior Product Variety
Programmable logic devices are inherently designed to be flexible in application. The
programmability of these devices lends to greater utility by customers. PLD’s can be
developed for numerous end-markets. Xilinx addresses the specific needs of their
customers by developing a variety of products that cater to a large spectrum of endmarkets.
This produces almost a limitless number of potential customers, which creates
value for the firm. Xilinx also competes on a variety of cost structures, allowing their
customers to choose the level of performance based on cost. Xilinx can therefore
compete in a larger number of end market segments, including: high-end
differentiation, mid-range high-growth and low-cost cost leadership.
Product Overview
In a technologically driven industry large research and development expenditures is
expected. Participating companies seek to gain market share through process
and market development. Xilinx develops software and hardware appropriately for each
unit of integrated circuit that they build to help with the functioning of each product.
By Xilinx creating specific software for its products it’s a way to try and control the
entire market by using horizontal expansion, a mere extension of a company’s current
activities to grow and gain more profit. Xilinx’ creates field programmable gate array
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products (FPGA) and complex programmable logic devices called (CPLD). CPLD'S
include the Virtex, Spartan, and the CoolRunner series. Each series contributes value
by providing a wide variety of applications for end markets to select from.
The Virtex series is the latest generation of the FPGA and uses the most advanced logic
fabric. They are considered to be top of the line products because of their
performance, speed processing and memory capability. This series has been produced
for specific end markets and is not advertised to all customers. This series contains the
Virtex 5, Virtex 4, Virtex II Pro, and Virtex II which is definitely the best collection of
Xilinx’ products that they provide for their customers.
The Spartan series is another FPGA product, but is marketed towards industries
currently experiencing high growth. Spartan series products cost approximately half
the price of Virtex series products. This is achieved by using the lowest cost per logic
cell available. One of the major networking consumers for the Spartan series is the
automotive industry. The high performance is mandatory with these chips because
they are specifically marketed towards industries that deal directly with safety and
regulation policies. Innovative engineering has enabled Spartan products to have fewer
parts without compromising quality. The Spartan product line consists of the following:
Spartan 3A, Spartan 3E, Spartan IIE, Spartan II, and Spartan XL.
The CoolRunner series are CPLD products that require the least memory capabilities
while maintaining high performance. The products that are created under this series
are the CoolRunner II and the CoolRunner XPLA3. These small products are usually
marketed to electronics. This series could be the most vital product in regards to daily
usage. The series is intertwined with the communication network of cell phones,
competing in a very high end market.
Xilinx clearly manifests its future intentions regarding research and development in its
recent annual report.
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“Our Research and Development challenge is to develop new products
that create cost-effective solutions for customers. In fiscal 2008,
2007, and 2006, our R&D expenses were $358.1 million, $388.1 million,
and $326.1 million, respectively. We believe leadership and innovation
are essential to our future success and we are committed to continuing a
significant level of R&D effort” (Xilinx, 10 – K Report).
More Flexible Delivery
Due to the global market that Xilinx is incorporated with, Xilinx sells their products to
distributors to help with the wide variety of end markets that benefit from these
products. The products must be spread over America, Europe, Asian Pacific, and Japan
for distributors and Original Equipment Manufacturers (OEM). After Xilinx sells its
product in the primary market then there is a combination of secondary transactions
that come into play but at this point in the process Xilinx no longer contains any
liability.
Xilinx uses distributors because the company feels that this is the best way to deliver
their product in such an efficient way across the global market. Over 60% of all sales
come from international territory which places delivery and distribution as a top priority
to the business. Distributors attract customers due to the ability to manage high volume
inventories and fast deliveries. “As of March 29, 2008, our backlog from OEM
customers and backlog from end customers reported by our distributors scheduled for
delivery within the next three months was $202 million, compared to $190 million as of
2007” (Xilinx 10-K).
Avnet Inc, Xilinx’s major global distributor, currently accounts for over 85% of Xilinx’s
accounts receivable in 2008, making Avnet a huge asset to Xilinx (Xilinx, 10–K). Avnet
has a division called electronics marketing that is solely responsible for the ongoing
supply chain services. For example, “EM Supply Chain Services provides end-to-end
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solutions focused on OEMs, EMS providers and electronic component manufacturers,
enabling them to optimize supply chains on a local, regional or global basis” (Avnet, 10-
K). This can be relative because Xilinx specifically focuses on the relationship with
Avnet by providing services for their company. “Avnet's factory-trained field
applications engineers (FAEs) have developed materials for the full day SpeedWay
Workshops with support from Xilinx’s applications engineers” (Avnet.com). SpeedWay
workshops are the seminars that Xilinx provides for Avnet solely to understand the
software and functions of their products. No other company can replicate the
relationship that has developed between Xilinx and Avnet. Xilinx’s turnover ratio for
distributors is high because of the ferocity displayed by Avnet in the market.
Currently, “in June 2007, [Xilinx] completed construction of a building in Singapore,
which serves as [their] Asia Pacific regional headquarters… The Singapore facility is
primarily used for manufacturing and testing of products, services and support for our
customers in Asia Pacific/Japan, coordination and management of certain third parties
in [their] supply chain and research and development” (Xilinx, 10-K). This quote
supports that Xilinx is moving toward a delivery structure that will sustain globally and
contribute directly to their international relations. With 61% of total revenue coming
from foreign markets it is crucial for Xilinx to focus on improving distribution channels.
Xilinx and Altera control the market for the integrated circuits. Xilinx controls about
51% of the entire market share, while Altera manages 34%, and the rest of the
industry competitors control the remaining portion.
Conclusion
In conclusion, Xilinx has utilized a combination of both cost leadership and
differentiation in creating a competitive advantage. It is important for Xilinx to maintain
large economies of scale by continuing to increase production while lowering cost.
However, in order to create real value in their products they concentrate on
differentiation through designing a superior product with a variety of applications. Xilinx
maintains this competitive advantage by investing large sums in research and
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development, spending nearly 100 million dollars more on R&D than their nearest
competitor, Altera. Distribution is another key success factor in Xilinx business model;
without a solid distribution to end markets Xilinx would be severely limited in growth
potential.
Formal Accounting Analysis
Introduction
There is a fundamental problem with accounting among firms; the numbers are manmade
estimates, which are subject to manipulation and error, sometimes distorting the
financial situation of a firm. Therefore, companies must adhere to Generally Accepted
Accounting Principles (GAAP), which are established by the Financial Accounting
Standards Board (FASB) to standardize and regulate the way managers calculate these
estimates. These rules are enforced by the Securities and Exchange Commission (SEC)
and supplemented by the Sarbanes-Oxley Act of 2002 which requires, among other
things, that a public company’s financial statements are audited by a third party
auditor. Independent auditors are only able to validate that a company has followed
GAAP principles and ensure the accounting numbers; they are not able to always catch
fraud.
GAAP is flawed. The principles only mandate that firms follow “best practice”
accounting, which give managers flexibility in the way certain line items can be
reported. Management has several incentives to distort financial information. Examples
include deflating net income to diminish tax expense or inflating net income by
understating expense to give a more favorable picture to investors, creditors and
potential investors. Both of these examples can be achieved legally by following GAAP
and therefore mandate accounting analysis to identify key accounting principles where
flexibility exist and identify any potential manipulation.
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Accounting analysis involves the implementation of six steps, ultimately leading to
restating any manipulation done by managers, thus giving a more accurate view of the
firm’s financial performance. The basic accounting analysis is outlined below:
1. Identification of key accounting policies.
2. Assessing the degree of accounting flexibility by evaluating the methods of
recording expenses, calculating of estimates, choice of inventory methods, etc…
3. These key accounting policies are then compared to “industry norms” and
other factors to evaluate a firms accounting strategy (Palepu & Healy).
4. Evaluate the quality of disclosure via qualitative and quantitative analysis.
5. “Red flags” are then identified by examining unexplained or unusual
changes in accounting policies or reported information.
6. Finally, any distortions are undone by “[restating] reported numbers to
reduce distortion” (Palepu & Healy).
By employing these six steps an analyst will be able to look beyond the “accounting
numbers” and accurately estimate the financial position of a firm.
Key Accounting Policies
Introduction
Key accounting policies can directly affect the business factors that drive value. This
theory can be separated out into two different types: 1 & 2. Type 1, key accounting
policies, dictates the relation to business activities. As stated before, the key success
factors of the specialized semiconductor industry are cost control, research and
development, superior product quality and variety, and flexible delivery. Using the
sales and expense manipulation ratios we will be able to determine how Xilinx has
formatted their business model. As for type 2 key accounting policies, it relates to
distinct items that will affect a company during the restatement of the financials. The
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accounting policies that reflect these success factors are research and development
expense, product warranty, foreign currency, and goodwill. Xilinx does not have a
pension plan or any operating/capital leases that pertain to its current financials. By
assessing the validity of these accounting policies we will get a better perspective of
Xilinx’s financial performance.
Research and Development
In the specialized-semiconductor industry “investment” in research and development
(R&D) is an essential element for growth and crucial in gaining a sustainable
competitive advantage. GAAP regulations require that R&D is expensed as incurred
rather than capitalizing it as an asset. “Economic benefits from R&D are generally
considered highly uncertain [because] research projects may never deliver promised
new products, the products they generate may not be economically viable, or their
competitors will cause their research to become obsolete” (Palepu & Healy). It is this
uncertainty that supports GAAP rules to treat R&D as an expense. However there is a
strong case that R&D expenditures should be capitalized because the innovative
products resulting from R&D expenditures generate revenue.
Newer products contribute significantly to total revenue as older products experience
price erosion and declining sales. Xilinx’s sales revenue from its newest products has
increased from $206.4 million in 2006 to $604.2 million in 2008 for Xilinx. Altera has
also experienced an increase in sales of new products, “The increase in net sales in
2006 was driven by sales of our New Products which increased 150% year-over-year
predominantly due to higher sales of our Stratix II and Cyclone II families” (Altera 10
k). New products are the result of R&D, further explaining how R&D creates value for a
firm and why firms should capitalize at least a portion of R&D expense. The following
table denotes the end markets that R&D expenditures contribute to:
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% of total net
revenues
2008
(%)
% change
in dollars
2007
(%)
% change
in dollars2
2006
(%)
Communications 43 -5 45 -1 49
Industrial and Other 32 11 29 22 25
Consumer and
Automotive 17 4 16 18 14
Data Processing 8 -14 10 -10 12
Total net revenues 100 0 100 7 100
The expensing of R&D has a great affect on the financial statements of all companies
participating in R&D heavy industries. In general terms, expensing R&D tends to
overstate expenses, thus understating net income, stockholders equity and assets. This
is disadvantageous to the entire semiconductor industry. Considering Xilinx has the
highest R&D expense in the industry, it could perhaps benefit more than competitors
from R&D capitalization. Capitalizing R&D may in fact provide a better understanding of
the company’s overall value because so much value is created via innovation and
differentiation. The table below provides a representation of the affects of recording
R&D as an expense rather than an asset.
Assets Liabilities Equity Revenues Expenses Net Income
U N U N O U
*U=Understate; N=No effect; O=Overstate
Product Warranty
Warranty liabilities arise when a seller agrees to fix a product (or service) that fails to
perform as expected within a specified period. To ensure conformity with the matching
principle, the seller reports expected warranty expense in the period when revenue
from the sale is reported (drtaccounting.com). The Statement of Financial Accounting
Standards (SFAS) No. 5 says that companies must report “accrual of losses when they
are reasonably estimable and relate to the current or a prior period” (www.fasb.org).
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The matching principle, when applied to product warranty, can help indicate poor
product quality by studying a firm’s history of warranty liabilities. If the warranty
liability increases in relation to sales over time it indicates poor product quality. This
would adversely affect a firm’s revenues. Furthermore, understating warranty expense
would overstate net income, leading to a less accurate financial picture of the firm. For
companies that compete on differentiation and superior product quality, the reporting of
warranty expense and liability is directly related to what drives value and is therefore a
key accounting principle.
It is important to consider industry standards to see if the liabilities and expenses
associated with product warranties for Xilinx are generally in line. Quality analysis yields
a hierarchy designating who provides the greatest quality. It is not always easy to
estimate liabilities; this is why firms often use a percentage of sales number to
determine the allowance for warranty liability. In the specialized-semiconductor industry
the allowance is based on past utilization of warranties. Additional provisions either
increase or decrease the liability based on the current periods warranty expense. The
following graph shows the product warranty and indemnification over the past five
years for both Xilinx and Altera.
Xilinx
(In Thousands)
2003 2004 2005 2006 2007 2008
Beg. Balance N/A N/A 5,905 9 893 2,500
Provision N/A 7,361 3,426 2,199 4,920 1,413
Payments N/A (1,456) (9,340) (1,306) (3,313) (3,913)
End Balance N/A 5,905 9 893 2,500 0
Source: Xilinx 10-k
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Altera
(In Thousands)
2002 2003 2004 2005 2006 2007
Beg. Balance N/A N/A 2905 N/A 1453 1115
Provision N/A 2350 0 N/A 1320 (874
Payments N/A (255) (273) N/A (1658) (223)
End Balance N/A 2095 1822 N/A 1115 18
Source: Altera 10-k
These graphs indicate that while the warranty liability is a small fraction of sales, the
payments have no clear growth rate. This indicates that the overall quality of either
company’s product has not declined. The difference between the company’s expenses
can be attributed to the fact that Xilinx has had on average out sold Altera by 37.97
percent. Variance in the tables also distinguishes differences in the manufacturing
process and manufacturing partners. Due to the fact that these warranties are a small
portion of the company’s total current liabilities (1.15%), there is little effect on revenue
or the balance sheet.
Foreign Currency
The global economy is a conduit for foreign currency risk exposure. Industry standards
manifest that a substantial portion of total revenue (averaging 69%) is derived from
international sales, implicitly implying gravitas foreign currency risk exposure. Beyond
sales, international fixed assets require annual adjustments in order to comply with the
Securities and Exchange Commission’s GAAP requirements.
Moderate movements in currency markets can translate into multi-million dollar
spreads, impeding stability in a company’s bottom line. Chicago Mercantile Exchange,
Inc. discusses using currency futures to hedge currency risks as a solution to overall
exposure. The following excerpt is taken from their foreign currency risk research
paper:
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“A key difference between investing in domestic and foreign assets is
that the latter exposes the investor to a currency risk. Over the years,
most investors have not been careful in characterizing this risk to
returns from un-hedged portfolios. One simplistic view was to measure
the return in domestic currency terms and compare it with returns in
local currency terms, and characterize the difference as the ‘currency
effect.’ The reasoning was that if the exchange rate remains constant
from the time of purchase of the foreign asset to its sale, then the
currency risk has had zero impact. On the other hand, if the domestic
currency has weakened (strengthened) against the foreign currency,
the exposure would result in a gain (loss).”
Disclosure of foreign currency exchange risk in the footnotes of the financial
statements is a key accounting policy for all specialized-semiconductor
participants. The general consensus is that foreign currency exposure is
immaterial; however, the industry provides full disclosure and allows analysts
to evaluate management’s financial hedging performance. This lends to insight
that can add significant value to the overall accounting analysis.
Goodwill
“Goodwill is an accounting term used to reflect the portion of the book value of a
business entity not directly attributable to its assets and liabilities” (Wikipedia).
Goodwill is an intangible asset that generally evolves from the acquisition process. The
difference between the acquisition price and the fair value of the total assets is
goodwill. Many reputable executives view goodwill as an arbitrary premium paid in
order to complete the acquisition process.
Firms are required to re-value goodwill annually. Impairment occurs when the carrying
value of goodwill exceeds its fair value. When impairment is evident the firm must
write down the asset to market value (mark-to-market). According to the Statements
of Financial Accounting Standards (SFAS) No. 142, “Goodwill is not amortized [annually]
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ut is subject to impairment tests on an annual basis, or more frequently if indicators of
potential impairment exist” (Xilinx 10-k). This is a general accounting policy recognized
throughout the specialized-semiconductor industry. However, ambiguous guidelines
beget flexibility in the determination of impairment. A general rule is that when
goodwill is greater than 10% of long-term assets impairment is necessary.
Management incentives preclude appropriate amortization of goodwill for many
companies; this ultimately leads to overstating assets.
From 2002 through 2006 approximately 25% of Lattice Semiconductor Company’s total
assets were goodwill. This gross overstatement was in reaction to a recent acquisition.
In 2007, Lattice wrote off over $223 million of goodwill. Clearly investors would prefer
for management to appropriately and rationally amortize goodwill over a specified
period of time. Large write offs are detrimental to a company’s financial statements.
Xilinx currently values goodwill at 8.96% of its total assets, significantly lower than the
10% rule. This implies that impairment is not necessary.
Conclusion
The key success factors for Xilinx are research and development expenditures, product
warranty liability and expense, foreign currency exchange exposure, and goodwill
impairment. The succeeding analysis evaluates these four success factors in relation to
the disclosure flexibility granted by FASB.
Assess Accounting Flexibility
Introduction
The rules imposed on public companies by the SEC through the FASB regulate the way
a firm reports certain accounting numbers. These limitations contravene their purpose
and can preclude management from accurately describing the firm’s current economic
position. Although this seems self-defeating it helps establish a standard across broad
industries. However, the FASB does provide a substantial amount of flexibility in
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accounting. Identifying the areas of flexibility is the next step in understanding the
firm’s key accounting principles.
Research and Development
There is no flexibility in accounting policies regarding research and development. GAAP
mandates that research and development is expensed as incurred regardless of its
relevance to future economic benefits. Forced to expense these investments,
companies overstate expenses and understate net income, stockholders equity and
total assets. An important point to make is that R&D heavy firms (i.e. Xilinx) are
required to expense R&D at a time when they are not recognizing the benefits of R&D
(revenue). This seems to contradict the matching principle. Accounting data is far less
informative in economic terms for readers of financial statements when the company is
forced to expense such an important investment.
Product warranty
FASB grants firms significant flexibility in estimating accounting numbers representing
product warranty liabilities. The FASB states that the estimation of accrued liabilities
must be “probable and reasonably estimable” (fasb.com). While the probability that any
one product warranty will be utilized is not always certain, the allowance account
representing this liability will be. Companies have the choice to estimate this liability
based on a several factors such as a percent of sales or a forecast based on prior
warranty expense.
The flexibility of this principle can affect the bottom line and balance sheet accounts by
several million dollars based on the quality of a firm’s estimation. Understating warranty
expense would result in overstating net income for the period, thereby improving the
perception of business profitability.
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While the warranty liability for Xilinx is only a small portion of their current liabilities,
they would be able to reduce their liabilities they kept the balance in the warranty
indemnification account low by only adjusting for the amount of the expense for the
period. If the company where to change its estimates to keep this balance high the
company could recognize less expense, thus inflating the company’s net income. The
amount of flexibility allowed by FASB gives firms discretion over which benefit is taken.
Foreign Currency
The Securities and Exchange Commission requires that all derivative instruments are
recorded at fair value. The SEC also encourages companies to provide adequate
footnotes to supplement accounting numbers and help explain their economic
situation. The industry is limited in their ability to calculate the accounting numbers
required through full disclosure; however they enjoy a large amount of flexibility in the
footnotes. Industry participants tend to follow these guidelines in similar formats,
providing easy comparison across the competitive landscape.
Goodwill
GAAP provides a moderate amount of flexibility regarding impairment of goodwill.
Considering the rigors of estimating the fair value of acquired assets, it is reasonable to
conclude that the aegis of goodwill is somewhat unsubstantiated. Additionally, there is
existing incentive for management to keep the appearance of the balance sheet strong,
whether or not it is an accurate representation. Writing down goodwill increases total
expenses which decreases total earnings and diminishes executive bonuses at yearend.
This paradigm is commonly denoted as the agency problem between the
shareholders and the managers of the firm.
Xilinx’s management recently increased goodwill by $19.6 million due to an acquisition;
however, this amount has already been entirely amortized. When companies allow for
goodwill to maintain presence on their balance sheet it gives the impression that they
are trying to inflate assets. Firms are granted investor approbation when they
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appropriately abate goodwill. Xilinx’s annual report briefly discusses their impairment
strategy as follows:
“Based on the impairment review performed during the fourth quarter of
fiscal 2008, there was no impairment of goodwill in fiscal 2008. Unless
there are indicators of impairment, the Company’s next impairment
review for goodwill will be performed and completed in the fourth
quarter of fiscal 2009. To date, no impairment indicators have been
identified.”
This statement explains the lack of impairment for years 2008, 2007 and 2006.
Conclusion
Accounting flexibility varies from industry to industry. Understanding the amount of
flexibility the managers have in disclosing financial information is a big part in analyzing
financial statements. The specialized-semiconductor industry is diverse when it comes
to the amount of flexibility managers have on disclosing success factors. Research and
development expensing is strictly enforced by GAAP and precludes companies from
capitalizing the expenditures. For product warranties on the other hand, management
has great flexibility in disclosure; requiring only that the estimation of accrued liabilities
be probable and reasonably estimable. Foreign currency and goodwill have moderate
accounting flexibility. With the diversity of flexibility for different items on the financial
statements it is important for analyst to recognize the industry standards in order to
properly evaluate companies with in that particular industry.
Evaluate Accounting Strategy
Introduction
Accounting flexibility helps manifest accounting strategy. The accounting strategy can
be thought of as the way “managers exercise their accounting flexibility… and can use it
to either communicate their firm’s economic situation or to hide true performance”
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(Palepu & Healy). There are two basic parameters that can assess a firm’s actual
accounting strategy.
The first step is determining the level of disclosure in a company’s financial statements.
In a high disclosure company there are extensive explanations of accounting segments
and breakdowns of asset and liability accounts. In a low disclosure company the
explanation of accounting activity is minimal, reporting only enough information to
satisfy GAAP.
The second method to assessing a company’s accounting strategy is to evaluate
whether a company uses conservative or aggressive accounting policies. Aggressive
accounting leads to inflated net incomes, a policy that might be followed if manager
incentives are earnings based. Conservative accounting understates earnings and would
be an attractive strategy for firms who are trying to minimize tax expense. The actual
accounting strategy utilized by firms will dictate whether a firm is aggressive or
conservative.
Research and Development
Xilinx reports R&D only to the extent that minimal disclosure required by GAAP is
satisfied. Xilinx cannot deviate from the accounting mandates proclaimed by GAAP
regulations and they will continue to expense R&D costs as they are incurred. The
expensing of R&D results in a conservative accounting.
Xilinx adequately discloses the effect on R&D caused by the adoption of SFAS 123(R)
which is a stock-based compensation expense classified as R&D expense. The adoption
of SFAS 123(R) increased the amount of R&D expense by $62 million in 2007.
Product Warranty
As previously stated, the amount of warranty liability and expense recognized by a firm
could be an indicator of poor quality. Firms who compete on superior product quality
need to distinguish how the balance for warranty liabilities is estimated and then show
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the amount of expensed. Xilinx’s accounting disclosure of warranty liabilities is mixed.
There is a high-level of disclosure regarding the warranty liability account. There is a
full breakdown of the beginning, ending and utilization of the warranties instead of
including the warranty liability into “other accrued liabilities” paired with a footnote.
The level of disclosure in terms of how the estimates are calculated is lacking.
Because there is a fair amount of flexibility in the estimation of warranty liability, Xilinx
uses a conservative method when recognizing warranty expense. This is probably due
to the fact that the expense due to warranty utilization is such a small portion of the
company’s total expenses. Therefore, Xilinx seems to change its accounting policy
frequently, using an expense as incurred method to keep current liabilities at a
minimum some years; and in other years, the firm keeps a higher balance in the liability
account to reduce expenses.
Foreign Currency
The following spreadsheet excerpt quantifies total currency risk for Xilinx, a hegemonic
industry participant, as a result of international sales. The data provides the net
revenues by geography denominated the U.S. dollar.
(In thousands)
Region 2004 % of
Sales
2005 % of
Sales
%
Change
2006 % of
Sales
%
Change
Asia-Pacific 331.4 24 367.9 23 11 406.7 24 11
Europe 270.3 19 326.1 21 21 352.8 20 8
Japan 203.6 15 224.1 14 10 251.8 15 12
Total Foreign Sales 805.3 918.1 1011.3
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(In thousands)
Region 2007 % of % 2008 Sales % of Sales % Change
Sales Change
Asia-Pacific 466.6 25 15 526.3 29 13
Europe 426.9 23 21 407.2 22 -5
Japan 217.9 12 -13 190.1 10 -13
Total Foreign
Sales
1111.4 1123.6
Source: Xilinx 10-K
When composing a hedging strategy it is important to understand the reasons for
annum volatility and how to minimize the pressures arising from these fluctuations. "To
reduce financial risk, [Xilinx]... uses derivative financial instruments to hedge fair values
of underlying assets and liabilities or future cash flows which are exposed to foreign
currency, equity and interest rate fluctuations" (Xilinx 10-K). Xilinx had the following
outstanding forward currency exchange contracts:
(In thousands)
Foreign Currency 2005 2006 2007 2008
Euro 4,600 Unknown - 18,616
Singapore Dollar - Unknown 16,902 11,938
Japanese Yen - Unknown 4,309 5,364
British Pound - - - 3,022
Total 4,600 32,800 21,211 38,940
Source: Xilinx 10-k
These derivative positions help secure international sales revenues and supports longterm
liquidity. The industry "does not enter into derivative financial instruments for
trading or speculative purposes" (Xilinx 10-K). This data indicates that exposure to
markets denominated in the euro and Singapore dollar are most critical. This seems
logical because Xilinx has set up regional headquarters in Dublin, Ireland and Singapore
to support European and Asia-Pacific business, respectively. Markets denominated in
the British pound and Japanese yen are also important, but their relevance is
proportional to their influence in major geographic markets.
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Foreign Currency Exchange Rates
Exchange rate movements tend to be episodic and thus tenuously related. Successfully
implementing a comprehensive hedging strategy can protect companies from shortterm
currency exchange risks that stem from volatile currency markets. Firms
exercising this financial prowess are able to lock-up profits from international sales.
However, currency risk is more complicated than simple exchange rate exposure across
various economic environs. Currency instability can potentially “increase credit risks for
international customers and impair their ability to repay existing obligations” (Xilinx 10-
K). For example, if the dollar was to move strictly and terminally strong against the
euro, European demand would dramatically decline and existing un-hedged obligations
would increase in value. The following charts denote currency exchange rates for
denominations important to the specialized-semiconductor industry:
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Source: forextrading.com
Xilinx Foreign Currency Management
The industry reports that foreign currency translation has historically been immaterial
and future forecasts continue to make this assumption. Altera stated in the 10-K that
foreign currency exchange fluctuations as large as 10% would be immaterial. Xilinx's
consolidated statement of stockholders' equity lists the line item "changes in net
unrealized gain (loss) on hedging transactions, net of taxes,” which helps evaluate
managements hedging strategy. The information is provided in the figure 2-5:
Balance
at
(In thousands)
Cumulative Translation
Adjustment
Net unrealized gain on hedging transactions,
net of taxes
Interest and Other,
net
29-Mar-03 1,560 0 24,628
3-Apr-04 897 0 23,409
2-Apr-05 -1,692 118 31,603
1-Apr-06 1,417 -105 45,958
31-Mar-07 3,052 1,014 85,329
29-Mar-08 N/A N/A 52,750
Source: Xilinx 10-k
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The quality of foreign currency exchange management is excellent. The gains (2005
and 2007) and loss (2006) are independently immaterial on each of their respective
statements; additionally, 2005 and 2006 simulated an annual hedge strategy against
previous gains/losses. In 2007 Xilinx experienced a material change in relation to
preceding gains and losses; the $1.014M gain from unrealized hedging was 10 times
greater than previous years denote. This is not due to a change in management
strategy, quality, or competency. The change is a direct result of substantial
macroeconomic changes in the global economy. The following list briefly analyzes why
such a significant change occurred over this time period (April 2006- March 2007):
· The U.S. dollar weakened against the euro while European sales increased
by 21%.
· The U.S. dollar strengthened against the Japanese yen while Japanese
sales declined by 13%
· The U.S. dollar weakened against the Singapore dollar while Asian-Pacific
sales increased by 15%
International Fixed Assets
The functional currency for Xilinx's subsidiaries in Ireland and Singapore is the U.S.
dollar. However, local operating initiatives mandate that a portion of assets and
liabilities are measured in local currency (i.e. overhead expenses), thus requiring
translation into the U.S. dollar periodically. The gain/loss resulting from remeasurement
is included in the line item "Interest and Other, net" on the consolidated
income statement. Refer to figure 2-5 for annual data.
Wholly-owned foreign subsidiaries use their respective local currency as the functional
currency, requiring a similar re-measurement as described earlier. The inevitable
exchange gains/losses "arising from translation of foreign currency denominated assets
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and liabilities are included as a component of accumulated other comprehensive income
in stockholders equity" (Xilinx 10-K). Refer to figure 2-5 for annual data.
These figures are relevant only because they has a significant impact on total foreign
currency gains/losses and assist in calculating total foreign currency exchange risk.
International assets and liabilities not denominated in the company's functional
currency should not be considered when analyzing managements hedging strategy
because it is impossible to hedge. Additionally, this exposure to risk is the nature of
doing global business and must be put in the correct perspective.
Goodwill
If goodwill is not managed correctly it will play an influential role in firm valuation
performed by industry analysts. Compared to its competitors, Xilinx has been good in
keeping goodwill stable. Below shows three tables comparing Xilinx to its competitors.
(In thousands)
Goodwill
Company 2002 2003 2004 2005 2006 2007 2008
Xilinx 100,700 100,724 111,627 119,415 125,084 117,955 117,955
Actel 32,100 32,100 32,100 32,100 30,209 30,209 30,197
Lattice 223,489 223,605 223,605 223,556 223,566 0 0
Goodwill as percent of Total Assets
Company 2002 2003 2004 2005 2006 2007 2008
Xilinx 4% 4% 4% 4% 4% 4% 4%
Actel 11% 10% 10% 9% 8% 8% 8%
Lattice 24% 26% 28% 31% 31% 0 0
Goodwill as percent of Long Term Assets
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Company 2002 2003 2004 2005 2006 2007 2008
Xilinx 8% 8% 7% 8% 8% 8% 9%
Actel 43% 42% 43% 30% 27% 29% 31%
Lattice 41% 50% 55% 60% 65% 0 0
Source: Xilinx 10-k
From the tables above Xilinx has consistently kept its goodwill below 10% of long-term
total assets. While they lead among their competitors with the lowest ratio in both
long-term and total assets, they still have not taken steps to write down goodwill. The
consistent 8% to 9% of goodwill infers that management is trying to keep goodwill
below the radar, which is considered an aggressive accounting technique. Xilinx does
not show any indication of impairing goodwill in the near future.
Qualitative Disclosure
Introduction
An important part of the accounting analysis is analyzing the quality of disclosure. In
general the accounting rules only require the company to disclose a minimal amount,
burdening management with the decision of what amount of disclosure is needed to
adequately reflect their economic performance.
Research and Development
As previously mentioned, Xilinx has a relatively low level of disclosure in reporting for
R&D expense. In the notes to the consolidated financial statements Xilinx did not go
into great detail when explaining R&D. It is also not in the best interest for Xilinx to
fully disclose the proprietary information that is closely related to R&D. Xilinx
adequately discloses the effect on R&D caused by the adoption of SFAS 123(R) which is
a stock-based compensation expense classified as R&D expense, which greatly
increased the amount of R&D expense reported in fiscal 2007. The 10-K did not go into
great detail in explaining the root cause of an increase in R&D,” [primarily the increase]
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in expenses is related to investment in resources to support new product development”
(Xilinx 10k). The level of transparency for R&D is low, but appropriate given the nature
of the expenditure.
Product Warranty
As discussed earlier, product warranties are reported when the liability is reasonably
estimable and probable. The firm is required to use the matching principle by reporting
the expected warranty expense and adjusting the liability and revenue accounts. By
adjusting the matching of the liability and expense accounts the firm can either
overstate or understate net income.
Xilinx makes adjustments to the liability account based on the expense incurred in that
period. The quality of reporting is highlighted by the breakdown of the liability account.
It is clear that Xilinx varies the way warranty indemnification is reported because there
are variations from year to year on the ending balances. The historical expense is
inconsequential compared to total revenues of the firm.
It is difficult to say that the firm has a high quality of disclosure in the warranty
indemnification account. Although there is a thorough break down of total cost, the
terms, calculation and estimation of warranties are vague. Xilinx’s disclosure can be
summarized by the following excerpt:
“The Company offers, subject to certain terms and conditions, to
indemnify certain customers and distributors for costs and damages
awarded against these parties in the event the Company’s hardware
products are found to infringe third-party intellectual property rights,
including patents, copyrights or trademarks. To a lesser extent, the
Company may from time-to-time offer limited indemnification with
respect to its software products” (Xilinx 10-K).
There is a moderate level of quality disclosure in Xilinx’s presentation of product
warranty liabilities.
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Foreign Currency
Xilinx provides transparent financial statements that clearly state their foreign currency
exchange risks. Xilinx embraces full disclosure enthusiastically and allows for readers to
understand their basic hedging strategy. The accounting policy is adequately explained
in the supplemental footnotes with an appropriate amount of disaggregation. There is
thorough discussion on foreign currency forward contracts and their utility (analyzed
earlier). The quality of disclosure as high.
Goodwill
Overall, the specialized-semiconductor industry has overvalued their total assets by
failing to take steps to writing down goodwill on the financial statements. Xilinx has the
lowest in percentage of goodwill in relation to its long-term assets than any of its
competitors; but they have not significantly reduced goodwill. The only write off Xilinx
made was in 2006 when it purchased AccelChip for $19.6 million dollars and impaired
goodwill by $8.7 million, due to the acquisition of AccelChips intangible goodwill. Not
recognizing the impairment of goodwill is becoming the industry norm; which results in
overvaluing assets and increasing the earnings of the company, which ultimately leads
to high bonuses for managers. Unless laws change that affect goodwill or change in
industry standard, Xilinx's quality of disclosure will still remain fairly aggressive when it
comes to keeping the goodwill under 10% of total long term assets.
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Conclusion
Source: Xilinx 10-k
The quality of a firm’s financial statements is determined by whether they provide
adequate footnotes and disclosure regarding the consequences of their business
activities. Xilinx addresses these factors by going beyond GAAP requirements and
providing supplementary data and breakdowns of key accounting principles. Therefore,
after examining the financial statements and management’s discussion and analysis of
Xilinx, we can conclude that the quality of reporting is high.
Quantitative Accounting Measures and Disclosure
Introduction
The quantitative disclosure is a measure of accuracy in comparison to the flexibility of
accounting numbers that can be reported in the balance sheet and income statement.
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The allotted room for error has shrunk over the years due to the creation of GAAP,
Generally Accepted Accounting Principles, and the Sarbanes-Oxley Act. Before this
time, the margin for inaccurate financial statements was a real problem due to flexibility
when disclosing the reports. Companies and CEO’s used to manipulate the accounting
numbers in order to appear more profitable and gain managerial incentives.
Financial ratios are tools that companies use to analyze their numbers to prove to
financial intermediaries, informational intermediaries, shareholders and stakeholders the
liquidity of the company. These ratios should appear transparent within the 10-K to not
cause any red flags or misleading assumptions about the company.
The sales and expense manipulation are two calculations that will determine if the
business activities have undergone proper procedures. The sales manipulation
diagnostic involves the net sales by cash from sales, accounts receivable and inventory.
This will determine whether or not the profitability of the company has been adjusted
improperly. As for the expense manipulation diagnostic, the asset turnover (sales/total
assets), cash flows from operations over operating income and net operating assets will
aid us in configuring if these numbers were over or under expensed. By doing these
ratios, this will provide a benchmark of our company against the semiconductor
industry, but will also aid us in determining potential red flags for our specific company,
Xilinx.
Sales Manipulation Diagnostic
This diagnostic shows adjustments in the net sales or appropriate cash from sales,
accounts receivable and inventory to maneuver the profits to dictate what the
management would like to have on the financial statements. Through this process,
going back five years will provide an understanding of Xilinx and the semiconductor
industry in creating patterns of manipulation or honesty within the financials. With the
ratio analysis, the process is meant to find “red flags” in finding data that proves that
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Xilinx, or the industry has done manipulation with the financial statements to create an
agency problem.
Net Sales/Cash from Sales
This ratio is a determinant that refers directly to the amount of cash received in
comparison to the listed sales amount. This ratio should result in being approximate or
equal to 1 to be considered efficient. If the company ratio is to far above 1, the
company does not have enough accounts receivable to match sales. Either a ratio
calculated to be too high or below of 1, than this would draw a “red flag” for insufficient
cash flows being recognized.
From the chart you can see that over time from 2003 to 2004, Xilinx was the performed
worst out of its competitors when comparing net sales over cash from sales ratios. The
ratio was 0.85 which is drastically less than 1; causing a “red flag” in our financials. On
the other hand, Xilinx showed a increasing trend during that time and reached the
industry average in year 2005. As for year 2008, Xilinx is showing a decrease in this
ratio and in the future will have to determine if this decrease is detrimental to their
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financial situation. In accordance to the rest of the semiconductor industry, the trend
does not raise any red flags for this section of the sales manipulation diagnostic.
Net Sales/Accounts Receivable
This ratio determines if net sales and accounts receivables are directly correlated.
Theoretically, they should positively correlate in relation. For example, if sales are
moving up then account receivable should also move up. On the other hand, if the
ratio is low then this portrays that the company relies on more accounts receivables on
credit rather than cash from the sales. This can be explained by a type one key
accounting policy includes the reasoning behind the business activity that relates this
business model to this particular ideology.
This chart shows that Xilinx, in comparison to the industry, is fairly average for the
amount of diversity it uses for cash from sales or credit accounts. The industry
generally is carrying the same pattern except with the exception of Altera. This shows
that Altera was highly dependent on cash from sales during 2003 to 2006 and after
which they started to rely more on accounts receivable as the ratio went down. The
raw form of net sales over accounts receivable, Xilinx was in line with the industry trend
during the years 2004 to 2008, but before that in 2003, the ratio was a slightly low.
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The semiconductor industry in relation to this ratio should be high due to the fact that
the customers will generally be buying the product from company to company during
the supply chain process. The products will be usually bought in bulk and should have
a high ratio putting a high focus on accounts receivable. This ratio again correlates to
the understanding of the business model and key accounting policies (Type 1).
The change form of net sales over accounts receivable can be simplified by
understanding the differentiation of the yearly basis financials. Each year will have a
change of the numerator divided by the change in the denominator. Finding the
solution to this ratio equals the slope of a derivative.
From understanding this chart, any type of negative drop proves that the change might
have a few systematic errors. For example, the net sales could decrease which would
create a negative amount and then be divided by an increasing accounts receivable
which would indirectly correlate.
As a general rule of thumb, Lattice will be cleared as an outlier and the rest of the
industry can primarily show volatility in this ratio when taking the derivative. These
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atios ideally should be trending in a positive manner; unless both net sales and
accounts receivable are both declining.
Net Sales/Inventory
This ratio determines the amount in comparison of the net sales to the inventory levels
that are kept. Businesses’ strive to achieve a high number in this ratio because it
coincides with proper management of the inventory with the current sales during the
periods, which in turn creates an inverse relationship. An increase of sales or a
decrease of inventory will result in a high ratio. On the other hand, a backlog of
product could be because they have a small inventory while managing the costs
allocated. Either way, the production of a large inventory and ability to maintain it will
develop into revenue. This ratio could be useful in comparing the size of a firm and
future manufacturing forecasting for what percentage of inventory should be in stock.
The semiconductor industry has shown a wide range of ratios but none of which was a
deliberate outlier within the industry.
This chart shows that Xilinx and its competitors are very spread out in response to this
ratio. Net sales over inventory does not necessarily follow an industry guideline but this
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does relate to the size of the company and its specific inclination on what each
company believes a proper inventory level should be. Altera has the highest ratio which
means that they are the most efficient in generating sales with the least amount of
inventory. Xilinx is just below Altera but as the graph shows in the upcoming years
Xilinx could eventually catch up to Altera. This trend might follow the reasoning that
Xilinx has had increasing sales within recent years; not technically a decline in
inventory.
The net sales over change in inventory model display a common ratio between 0 and
10 throughout 2003 to 2007. Altera on the other hand, seems to have a relatively high
ratio, which would cause a “red flag” when compared to the industry. Xilinx in
comparison to the industry curve is relatively on par but does have a substantial drop
during 2004.
The derivative in relation to this ratio is an understanding that there was an industry
failure during 2004, especially for Xilinx. The differentiation should show that the trend
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will positively return back to the industry average due to the type one key accounting
principles that we have explained previously.
Sales Manipulation Diagnostics
Xilinx 2003 2004 2005 2006 2007 2008
Net Sales $1,155,977 $1,397,846 $1,573,233 $1,726,250 $1,842,739 $1,841,372
Net Sales (Revenue) / Cash 0.85 0.96 1.02 1.01 1.01 0.96
from Sales
Net Sales/Account
5.85 5.61 7.37 8.89 10.11 7.39
Receivables (RAW)
Net Sales/Account
5.85 4.72 -4.94 -7.95 -9.78 -0.02
Receivables (CHANGE)
Net Sales/Inventory (RAW) 10.37 13.64 8.47 8.59 10.56 14.14
Net Sales/Inventory
(CHANGE) 10.37 (26.73) 2.11 10.00 (4.40) 0.03
Net Sales/ Warranty
N/A N/A N/A N/A N/A N/A
Expenses (Liabilities)
Net Sales/ Pension
N/A N/A N/A N/A N/A N/A
Expenses (Liabilities)
• Net Account Receivables: $197,690 ‐ 2003, $248,956 – 2004, $213,459 – 2005, $194,205 –
2006, $182,295 – 2007, $249,147 – 2008
• Inventory: $111,504 – 2003, $102,454 ‐ 2004, $185,722 ‐ 2005, $201,029 ‐ 2006, $174,572 ‐
2007, $130,250 – 2008
Sales Manipulation Diagnostics
Altera 2003 2004 2005 2006 2007 2008
Net Sales $827,207 $1,016,364 $1,123,739 $1,285,535 $1,263,548 -
Net Sales (Revenue) / Cash
-
from Sales 0.90 1.02 0.99 0.99 0.92
Net Sales/Account
-
Receivables (RAW) 9.49 15.05 13.96 13.78 6.35
Net Sales/Account
-
Receivables (CHANGE) 9.49 -9.61 8.27 12.69 -0.21
Net Sales/Inventory
-
(RAW) 18.55 15.07 15.89 16.38 17.05
Net Sales/Inventory
-
(CHANGE) 18.55 8.27 32.97 20.83 5.03
Net Sales/ Warranty
N/A N/A N/A N/A N/A N/A
Expenses (Liabilities)
Net Sales/ Pension
Expenses (Liabilities)
N/A N/A N/A N/A N/A N/A
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• Net Account Receivables: $87,204 – 2003, $67,522 – 2004, $80,509 – 2005, $93,263 – 2006,
$198,889 – 2007, – 2008
• Inventory: $44,583 – 2003, $67,454 ‐ 2004, $70,711 ‐ 2005, $78,477 ‐ 2006, $74,110 ‐ 2007, –
2008
Sales Manipulation Diagnostics
Actel 2003 2004 2005 2006 2007 2008
Net Sales $149,910 $165,402 $178,947 $191,499 $197,043 -
Net Sales (Revenue) / Cash
-
from Sales 0.88 1.02 0.96 1.02 1.02
Net Sales/Account
-
Receivables (RAW) 7.30 9.35 7.08 8.70 10.88
Net Sales/Account
-
Receivables (CHANGE) 7.30 -5.43 1.78 -3.84 -1.42
Net Sales/Inventory
-
(RAW) 3.88 4.01 4.79 4.88 5.54
Net Sales/Inventory
-
(CHANGE) 3.88 6.07 -3.52 6.86 -1.53
Net Sales/ Warranty Expenses
(Liabilities)
N/A N/A N/A N/A N/A N/A
Net Sales/ Pension Expenses
(Liabilities)
N/A N/A N/A N/A N/A N/A
• Net Account Receivables: $20,537 – 2003, $17,686 – 2004, $25,287– 2005, $22,017 – 2006,
$18,116 – 2007, – 2008
• Inventory: $38,664 – 2003, $41,218 ‐ 2004, $37,372 ‐ 2005, $39,203 ‐ 2006, $35,587 ‐ 2007, –
2008
Sales Manipulation Diagnostics
Lattice 2003 2004 2005 2006 2007 2008
Net Sales $209,662 $225,832 $211,060 $245,459 $228,709 -
Net Sales (Revenue) / Cash
-
from Sales 0.89 1.03 0.98 1.00 0.97
Net Sales/Account
-
Receivables (RAW) 7.82 11.53 8.95 10.89 7.81
Net Sales/Account
-
Receivables (CHANGE) 7.82 -2.24 -3.70 -33.33 -2.48
Net Sales/Inventory
-
(RAW) 4.50 5.89 7.38 6.32 5.72
Net Sales/Inventory
-
(CHANGE) 4.50 -1.96 1.51 3.36 -14.09
Net Sales/ Warranty Expenses N/A N/A N/A N/A N/A N/A
(Liabilities)
Net Sales/ Pension Expenses
(Liabilities)
N/A N/A N/A N/A N/A N/A
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• Net Account Receivables: $26,796 – 2003, $19,587 – 2004, $23,577 – 2005, $22,545 – 2006,
$29,293– 2007, – 2008
• Inventory: $46,630 – 2003, $38,364 ‐ 2004, $28,581 ‐ 2005, $38,816 ‐ 2006, $40,005‐ 2007, –
2008
Conclusion
Using the Sales Manipulation diagnostic tests, Xilinx, in comparison to its competitors
did fairly well. The net sales over cash from sales were in direct correspondence with
industry patterns was around the ratio of 1. As for the net sales over the account
receivables, Xilinx followed the current industry pattern. However, Altera was the
company that caused some alert for potential red flags. Lastly, net sales over
inventory, Xilinx was the company that performed the best in that ratio. All the
companies were spread out across the industry but Xilinx was not under or outperform
the industry.
Overall, Xilinx had no potential red flags using the sales manipulation diagnostic ratios.
With no potential red flags, that has proven that Xilinx has been able to create a
business model that works. Xilinx’ model proves it can take its daily activities and
convert them to a profitable return which is shown through the key success factors and
key accounting principles.
Expense Manipulation Diagnostic
The expense manipulation diagnostic ratios can be used to perceive the value of a firm
accordingly to analyze trends throughout an industry. These ratios are asset turnover,
cash flows from operations/operation income, CFFO/OI (change), CFFO/net operating
assets, CFFO/NOA (change) and total accruals over sales. These ratios allow firms’
cash flows from operations to take a benchmark and ability to analyze future expenses
based off the income statement. The ability to take the statement of cash flows in
manipulation of a firms potential abilities, this is also evident during the forecasting.
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These analyses are critical ratios for a company to depend on for potential red flags and
trends within the industry.
Asset Turnover
This ratio is computed by dividing the net sales by the total assets. The total assets
should correlate directly to the amount of sales that are being generated on a periodic
basis. If a company has any type of “red flags” then that must mean the assets have
discrepancies and items should be written off, expensed, or capitalized. For example,
some good items are goodwill and research and development and can relate to the type
two key accounting policies that could affect a firms’ financials drastically.
As sales rise the total assets should also increase and the ratio should remain at some
constant rate. If there is a growing/shrinking industry then that is when there will be a
big increase/decrease in this ratio and would then show evidence of a “red flag.”
Xilinx has a constant increasing variable, which is a great example of what a company
should look like over a five year period using the asset turnover ratio (using the proper
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lagged form of the previous year’s total assets). When comparing Xilinx to the industry,
Actel and Xilinx are generally on track with an industry pattern and are fairly similar
over this time period. Altera’s ratio slightly increases in comparison to Actel and Xilinx
which could result in a big increase in sales or a drop of total assets and not being
constant with the previous years. On the other hand, Lattice is the “outlier” and is the
industry competitor “blacksheep.” Lattice shows a large disparity from the rest of the
industry and then drastically increases its ratio in one year which is evidence and
considered a red flag.
Overall, Xilinx was on average with the industry patterns and contains no “red flags”.
The healthiness of the yearly increase with this ratio, has given analysts the ability to
forecast the futures sales and other main components to provide a clear understanding
of what might happen in relation to this downturn in the economy.
Cash Flow from Operations/Operating Income
This ratio shows the cash flow of operations over the operating income during a year to
year basis period. This ratio is a tool that utilizes both the income statement and the
statement of cash flows to combine both financial statements to depict important
information regarding the company’s earning. Any industry would like for its ratio to
equal or to be around a 1:1 ratio showing that cash flows are correlated to operating
income. The relationship is explained by understanding a cash inflow is the concept
behind an operating income due to the possibility of that income is concept behind all
the expenses after net revenues.
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According to the graph above, from 2003 to 2004, Xilinx moved from a (2:1) ratio and
dropped to a (1:1) trend for the rest of the years to create a pattern. Xilinx and Altera
follow the same paths during these years with a drop from the (2:1) ratio. Actel does
not follow the industry pattern with the rest of the companies which causes a “red flag”
for that company due to its volatility. Xilinx, in general, does not have any “red flags”
and follows the industry pattern. This “red flag” for Actel could mean potential financial
instability issues when relating to forecasting.
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The result from analyzing the CFFO over operating income in change form results in a
different range in the volatility of this ratio compared to the raw form. Xilinx dropped
to a -3.5percent, the lowest point in the industry by cash flows from operations
decreasing from 2004 to 2005 by about 36%. In 2006, Xilinx bounced back and had a
76% increase from 2005 to 2006 back to 5.35, which halted the assumption of a
“potential red flag”. Altera was the “red flag” company showing a spike in 2005 with a
ratio of 13.98. Overall, Xilinx does not have any “red flags” and perceives to follow the
industry pattern of ratios between -2 and 6 percent.
CFFO/NOA
The cash flows from operations over net operating assets can be used for business
activity decisions and can relate to forecasting, key success factors, and key accounting
policies. A net operating asset is plant, property, and equipment (PPE) minus
accumulated depreciation. This ratio compares how the cash generated by the
operations, which uses this equipment, to how much the equipment should cost. The
higher this ratio is the better it is for the firm. In the semiconductor industry, PPE
contains a big part of total assets and utilizing these assets to generate the most cash
from sales is a key concern for management. A ratio that takes into consideration the
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plant property & equipment (PPE) will prove to be very valuable in the future. After
reviewing the financials, Xilinx has been purchasing new plants on foreign soil to
expand their market share in the Europe, Asia, and Japan. Since, PPE is stable
throughout the years we will use that item to help our forecasting decisions for the next
ten years.
The raw change of the CFFO over Net Operating Assets graph has shown two out of the
four companies being “red flag” companies; Altera & Lattice. This ratio is supposed to
be a high ratio to depict your equipment is properly generating a profit. Altera is
extremely high and above the rest of the companies, which more than likely conflicts
with their business models’ key accounting policies. This could be a positive if their
equipment is generating a high profit, but the company could possibly writing off too
much over the years to improve their financial picture. Lattice on the other hand, is in
a continuing trend of declining over the years and has been considered an outlier as a
competitor within the industry. As for the industry pattern, Xilinx and Actel follow the
trend of staying within a ratio of between 0.80 and 1.56.
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The changed form of this ratio shows the companies begin with ratios ranging from
0.65 and 2.4. From there, the ratio fluctuates anywhere from -16.70 to 26.77percent,
but these altering peaks do not follow a trend which does not create “red flags” for the
industry or companies. As the graph shows, Xilinx follows the industry pattern as well
as all the other companies and no “red flags” are evident.
Total Accruals/Sales
The accrual ratio determines the efficiency of receivables versus the total sales. The
calculation is cash flows from operations minus the net earnings and then divided by
the total sales for that period. The ratio is usually close to 1 which proves it to be
generally stable and fluid with the operating activities. If the ratio is too high, the
finances are relying too much on accounts receivable. But, if the ratio is too low, then
sales are received by cash or other types of transactions that are not credit accounts.
Using this ratio, the industry can portray trends and outliers will be marked as red flags.
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After reviewing this chart, Xilinx is on par with the rest of the industry pattern that is
from 0 to 0.2. This ratio places all three companies: Xilinx, Altera and Actel in an
industry norm. In this case, Lattice is again singled out and draws attention to “red
flags” and should be inspected thoroughly in the financial statements for misconception
and an outlier in the industry. Although, Xilinx had a drop in 2005 because of the
decline in cash flows from operations by 36% and a small increase in total sales by
12.5%. Xilinx is meeting the industry norm, draws no attention to its financial
statements and therefore, no “red flags” have been concluded.
Expense Manipulation Diagnostics
Xilinx 2003 2004 2005 2006 2007 2008
Asset Turnover 0.48 0.48 0.52 0.54 0.58 0.59
CFFO/OI (Raw) 2.22 1.32 0.74 1.19 1.59 1.37
CFFO/OI (Change) 2.22 0.51 -3.50 5.35 -0.97 0.39
CFFO/NOA (Raw) 0.90 1.29 0.80 1.37 1.34 1.44
CFFO/NOA (Change) 0.90 -1.83 -16.70 15.57 1.13 -3.42
Total Accruals/ Sales 0.19 0.09 -0.02 0.08 0.11 0.11
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Expense Manipulation Diagnostics
Altera 2003 2004 2005 2006 2007 2008
Asset Turnover
-
0.56 0.58 0.62 0.58 0.71
CFFO/OI (Raw)
1.65 1.00 1.29 1.41 0.99
-
CFFO/OI (Change)
1.65 -0.12 13.98 -0.47 5.82
-
CFFO/NOA (Raw)
2.04 4.65 5.16 4.56 1.37
-
CFFO/NOA (Change) 2.04 -1.64 26.77 27.01 1.70 -
Total Accruals/ Sales
0.21 0.04 0.12 0.08 -0.01
-
Expense Manipulation Diagnostics
Actel 2003 2004 2005 2006 2007 2008
Asset Turnover
-
0.47 0.52 0.49 0.56 0.54
CFFO/OI (Raw) 6.12 -8.28 3.85 -2.72 -0.89 -
CFFO/OI (Change) 6.12 2.25 1.80 -0.13 4.47 -
CFFO/NOA (Raw) 1.00 0.43 0.95 1.08 0.42 -
CFFO/NOA (Change) 1.00 -3.49 12.03 -1.79 -5.20 -
Total Accruals/ Sales 0.09 0.05 0.09 0.14 0.07 -
Expense Manipulation Diagnostics
Lattice 2003 2004 2005 2006 2007 2008
Asset Turnover
-
0.25 0.28 0.29 0.34 0.61
CFFO/OI (Raw) -0.37 -0.09 -0.30 1.13 0.11 -
CFFO/OI (Change)
-0.37 -0.90 -0.20 -0.07 0.06
-
CFFO/NOA (Raw)
0.65 0.13 -0.44 -0.31 -0.65
-
CFFO/NOA (Change)
0.65 4.64 12.14 4.40 4.55
-
Total Accruals/ Sales
0.60 0.26 -0.33 -0.07 0.92
-
Conclusion
Xilinx, in comparison to its competitors did not have any “red flags” after the analysis,
which concludes that there has been no manipulation in their key accounting policies.
Xilinx has key success factors that follow a combination of cost leadership,
differentiation, economies of scale and distribution to establish their competitive
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advantage. Using the ratios of Asset Turnover, CFFO/OI, CFFO/OI (change),
CFFO/NOA, CFFO/NOA (change) and Total Accruals/Sales, they have proven Xilinx to
follow the industry patterns and that their key accounting policies were consistent.
After restating the financials, the asset turnover and cash flows from operations over
net operating assets for forecasting but must use the type two key accounting policies.
Those items that are affected are research and development expenses and the
capitalization of goodwill. In general, the diagnostics have proven to be more valuable
in relating an analysis to future business entities.
Potential Red flags
Introduction
Red flags identify questionable accounting methods that demand further analytical
research. Our previous discussion was centered on a couple key accounting issues
(goodwill and R&D) that we have flagged as material; however, due to our extensive
analysis on these subjects we believe it would be more beneficial to discuss other issues
that materially affect the financial statements of Xilinx. Therefore, we will discuss two
new financial topics: available-for-sale securities and operating leases.
Available-for-Sale Securities
Given the recent market turmoil, the slowing economic progress and the relative size of
Xilinx’s available-for-sale portfolio, we believe it is appropriate to take a closer look at
the quality of their investment management. The estimate fair value of their portfolio is
$1.8 billion.
The decreasing fair value is not surprising given the current environment. The red flag
is that they do not show investments in mortgage-backed securities or asset-backed
securities until March 31, 2007; this means that these investments were made at the
beginning of the market melt-down resulting from mortgage defaults. Xilinx has
marked down their asset-backed securities for both 2007 and 2008; however, Xilinx
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shows a net gain of $3,849,000 on mortgage-back securities for 2008. Although this
amount is immaterial in the current period, Xilinx has a increased its total investment in
mortgage-backed securities since 2007 and has a total amortized cost of $139,825,000
relating to these securities. The complexity and lack of disclosure makes it impossible
to estimate the accuracy of Xilinx’s statements, however we remain suspicious of gains
in these securities. Furthermore, Xilinx has made insignificant write downs on their
auction rate securities and in the year ending March 29, 2008 they showed no write
down. Again, given the current market situation we find these actions suspicious.
Operating Leases
Significant contractual obligations exist and will have an adverse effect on liquidity. A
portion of the “facilities, office buildings, and land are under non-cancelable operating
leases that expire at various dates through November 2035” (Xilinx 10-K). The
following table denotes the minimum lease payments obligated under non-cancelable
operating leases:
Year
Noncancelable
obligation
% of Long
Term
Liabilities
2009 10,250 1.11%
2010 8,142 1.01%
2011 6,077 0.88%
2012 1,804 0.31%
2013 1,559 0.29%
Thereafter 3,431 N/A
31,263 N/A
Source: Xilinx 10-K
Additional “commitments at March 29, 2008 totaled $74.3 million and consisted of
purchases of inventory and non-cancelable purchase obligations related to
subcontractors that manufacture silicon wafers and provide assembly and some test
services” (Xilinx 10-K). Xilinx also had $21.5 million of non-cancelable lease obligations
through 2011 due to electronic design automation software providers (Xilinx 10-K).
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We believe that the total obligations from operating leases are material and could
adversely affect Xilinx liquidity in the event of slowing sales.
Undo Accounting Distortions
Introduction
Accounting distortions are created two ways. The first is when managers choose
numbers that are either too aggressive or too conservative than the industry norm. The
second is when an accounting rule changes the way the manager would report certain
information that gives a less favorable view of the firm. Out of the above key
accounting principles, restating foreign currency exchange and product warranty
liabilities would have little effect on the firm’s balance sheet. However the restatement
of both goodwill and research and development expense would have a substantial
effect on the economic picture of the firm. Below, both goodwill and R&D expense are
restated using capitalization rates which were calculated using an industry established
norms.
Research and Development
In order to keep up with the rapid technological progress in this industry firms must
expend considerable amounts of capital on R&D to keep pace with Moore’s law.
Companies that fail to recognize this phenomenon will have products that become
obsolete. Xilinx had the lowest investment in R&D (as a percentage of net sales) in the
specialized-semiconductor industry; but they also spent the greatest amount in total
dollars (over $358 million in 2008). Comparing R&D to net income is very insightful. If
R&D expense is greater than 50% of net income then a portion of it needs to be
capitalized. In 2008 Xilinx reported R&D as 95.7% of its net income. This is not
unusual for technologically driven firms. Below is a table showing the calculations using
millions to derive the capitalized amount.
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R&D expense Cap. Rate Cap. Amount
2003 222.14 20% 44.43
2004 247.61 20% 93.95
2005 307.45 20% 155.44
2006 326.13 20% 220.67
2007 388.10 20% 298.29
2008 358.06 20% 369.90
To find the capitalized amount we multiplied the R&D expense by the capitalization rate
of 20% and added it to the succeeding year, with 2003 being the first year. By
capitalizing R&D we have increased the total assets for the years indicated.
Disregarding taxes, the table below shows the expected effects on the balance sheet
from 2003 to 2008.
Capitalized R&D 44.43 93.95 155.44 220.67 298.29 369.90
Total Assets (after adjustment) 2,466.10 3,031.42 3,194.64 3,394.23 3,477.65 3,507.01
Retained Earnings (after adjustment) 1,263.01 1,615.51 1,918.31 1,555.20 1,214.58 1,174.94
Total Stockholders’ Equity 1,955.17 2,577.00 2,828.95 2,949.56 2,071.03 2,031.72
Total Liabilities and Stockholders’ Equity 2,466.11 3,031.42 3,194.64 3,394.22 3,477.65 3,507.01
The table above shows the increase in total assets, retained earnings and stockholders’
equity on the balance sheet if you capitalized R&D at a rate of 20%. The table below
shows the effect on the income statement in millions by capitalizing R&D.
Operating Expense 526.76 540.74 624.91 657.07 776.33 730.19
Capitalized R&D 44.43 93.95 155.44 220.67 298.29 369.90
Net Income (after adjustment) 170.135 396.94 468.16 574.82 648.96 743.95
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As the table above indicate, by capitalizing R&D the total operating expenses decrease
thus increasing the operating income and leading to a higher net income in certain
years. After capitalizing R&D expense the percentage of net income comprised of R&D
expense decreased from 95.7% to 85% in 2008. This results in a much more accurate
and realistic number for the financial statements.
Goodwill
If Xilinx from 2002-2008 wrote off 25% of goodwill a year the intangible assets would
look very different, as indicated in the table below.
(in thousands)
Goodwill
Company 2002 2003 2004 2005 2006 2007 2008
Xilinx 100,700 100,724 111,627 119,415 125,084 117,955 117,955
Xilinx 25% a
yr
75,525 75,543 83,720 89,591 93,813 88,466 88,466
Source: Xilinx 10-k
This decrease in assets will have a major impact on how this firm values themselves
amongst competitors. This is a clearer view of what the value of these assets should
be. Xilinx needs to keep writing off goodwill in order for the investors to have a better
understanding of the true value of this company.
Conclusion
By restating these accounts there is a minor difference in the balance sheet of Xilinx.
After these adjustments there was an increase in total assets of 1% to 2%. The
accounting policies that limit manager’s ability to report research and development cost
has been undone. The overall affect was a 1% average increase from the years 2003
thru 2008. With this relatively small amount of increase in net income would not
obligate this company to make accounting changes in order to benefit the company.
These changes have little to no affect on the financial statements.
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Financial Analysis, Forecasting Financials and Cost of
Capital Estimation
Forecasting expected future earnings remains one of financial analysts’ most important
tasks, and it is a task that begins with current earnings. In order to accurately forecast
earnings it is critical that we distinguish between contributions from ongoing operations
of a firm and how much is attributable to extraordinary items (gains or losses that are
unlikely to be recurring).
To have a financial analysis of a company, you must be able to have a ratio analysis,
forecasts, and the Weighted Average Cost of Capital. The ratio analysis will be
determined by the three ratio categories: liquidity, profitability, and capital structure.
The financial forecasts will be done by using the income statement, balance sheet, and
statement of cash flows. The Weighted Average Cost of Capital will be concluded by
using the WACC equation and previously configuring the Cost of Equity and Cost of
Debt.
Financial Analysis
Financial statements are the source for calculating financial ratios; which are often used
to compare how a firm is valued with how similar firms are priced by the market. This
particular approach is called the valuation of comparables, or relative valuation, and the
justifications for using this method are well founded. First, this analysis can be
performed more quickly than other methods and with fewer explicit assumptions. This
is an important point. The implicit assumptions are that the firms compared share
similar business models, financing methodology, and customer base that relative value
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can be derived through simple comparison; these firms also share the same challenges.
Second, this valuation technique is much less complex than other popular methods, like
the dividend discount model, which makes it easier to explain. And finally, since the
method attempts to measure firm value relatively rather than intrinsically, the resulting
value is more inclined to reflect the mood of the market.
Relative valuation is performed by comparing ratios that yield insight into crucial
aspects of business and business management; these ratios are categorically organized
under three headings: liquidity ratios, profitability ratios, and capital structure ratios. In
order to perform this analysis we have collected five years of historical data for each
company in the specialized-semiconductor industry.
Liquidity Ratio Analysis
The term “liquidity” refers to a firm’s ability to quickly convert assets to cash without
having to dramatically discount those assets in the process. Liquidity ratios are used to
measure a firm’s ability to pay short-term debt obligations, which arise primarily from
the need to finance current operations. In addition to these short-term liquidity risks,
these ratios measure default risk (the risk of a firm going bankrupt) of a company. The
liquidity ratios commonly used in valuation are as follows:
• Current ratio
• Quick ratio
• Inventory turnover ratio
• Days’ supply of inventory ratio
• Account receivable turnover ratio
• Days’ sales outstanding ratio
• Working capital turnover ratio
These ratios are especially important to current and potential creditors to a firm.
Creditor requirements vary widely, but all agree that larger ratios mean greater
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liquidity, thus yielding a larger margin of safety for the creditor in extending credit to a
firm.
Current Ratio
The current ratio is calculated by dividing total current liabilities into total current
assets. A ratio below one indicates that there are more obligations coming due within
the next period than assets a firm can expect to turn into cash; this situation indicates
liquidity risk. The opposite would be true for a firm with a ratio above one, however,
industry standards and a thorough understanding of the business model is required
before determining an appropriate benchmark number.
Additionally it is worth noting that there is a trade-off between minimizing liquidity risk
and tying up cash in net working capital (net working capital= current assets- current
liabilities). Generally speaking, firms should focus on reducing their current ratio to
appropriate levels and managing their net working capital.
The current ratio is the foundation of two additional liquidity measurements: the quick
asset ratio and the cash ratio.
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The chart above suggests that Xilinx has improved its liquidity over recent years. The
improvement in firm liquidity is a result of substantial increases in cash and cash
equivalents and building up their inventory related accounts (i.e. raw materials, work in
progress, and finished goods). Also contributing to this improvement was the fact that
all current liability accounts, with the exception of accrued payroll, decreased over this
five year period.
The current ratio of the industry has been on a continuous decline, albeit still above the
text book benchmark of one. The industry may be struggling with inventory obsolesce,
which results from the intensive pursuit of innovation amongst competitors. Xilinx has
been outperforming the industry since 2005.
Quick Asset Ratio
The quick asset ratio is a variant of the current ratio; it is calculated by dividing total
current liabilities into the most liquid current assets. The most liquid current assets
include line items such as cash and cash equivalents, short term investments,
marketable securities, and accounts receivable. This ratio yields a beneficial
perspective into firm liquidity because it does not include inventory line item accounts,
which have a variety of risks (i.e. obsolesce) and can easily manipulate the appearance
of a firm’s financial position. Similar to the current ratio, higher ratios indicate greater
liquidity; however, a ratio below one is not necessarily indicative of liquidity risk since
inventory investments are not included.
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Xilinx has experienced significant improvement in its quick asset ratio over the last five
years, a result from its large increase in cash and cash equivalent. The large drop in
2005 is a result from a declining accounts receivable account and a substantial decrease
in short-term investments. The industry seems to be suffering from a sustained loss of
liquidity, probably due to the same reason for the declining current ratio, which is
inventory losses from obsolesce created by competitors.
Inventory Turnover
The inventory turnover ratio measures the efficiency of working capital management by
looking at the relationship of cost of goods sold to inventory; it is calculated by dividing
cost of goods sold by inventory. Inventory is carried at cost, which means that efficient
management of working capital would yield a consistent ratio. All else being equal, the
higher the ratio is the more effective a firm is at managing its inventory.
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Xilinx seems to be unable to effectively manage inventory levels as seen by the volatility
experienced by the ratio. From 2003 to 2004 the inventory account substantially
increased, subsequent to 2004 Xilinx has experienced declining levels of inventory until
2005 where inventory seemed to steadily climb back to peak 2004 levels. Although
inventory can hinder short-term liquidity if obsolesce occurs, it is important that firm’s
prepare adequately for future sales growth. However, Xilinx has not proved competent
in predicting sales volume relative to inventory investments; thus instability in the
inventory turnover ratio has resulted.
The industry has experienced a fairly consistent level of inventory turnover ranging
from 3 to 4, implying that Xilinx is slightly outperforming the industry benchmark.
Mismanaging inventory investments (and ultimately working capital) can cause undue
long-term financial stress. Investors must monitor this particular problem area for
Xilinx.
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Days’ Supply of Inventory
Days’ supply of inventory (DSI) is merely an extension of the inventory turnover ratio.
It measures the speed with which inventory is turned into sales revenue. A low DSI is
better because it implies that inventory is being sold quickly. A large DSI will hurt the
firm in the “money merry-go-round” because inventory is not being sold quickly and
there is a slowing of cash inflows.
Xilinx’s mismanagement of inventory is justified by the DSI, which continues from 2003-
2006 to increase, implying weakening demand for their products, obsolesce, or some
other cause that hinders sales. The ratio begins to decline subsequent to 2006; this is
a result of decreasing inventory levels not an increase in sales. Although liquidity
seems to be returning it is far from its 2003 levels. Xilinx must manage inventory and
sales more efficiently. The industry is becoming more efficient in managing inventory
levels and sales growth. Xilinx is once again underperforming the industry in the sense
that they are getting worse while the industry is improving. Regardless that Xilinx’s DSI
only recently exceeded the industry average, the momentum for the industry is
downward while the momentum for Xilinx is upward. Investors must monitor this issue
carefully since recent economic outlook is diming.
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Accounts Receivables Turnover
The accounts receivable turnover ratio, similar to the inventory turnover ratio, measures
the efficiency of working capital management by looking at the relationship of sales to
accounts receivable; it is calculated by dividing accounts receivable into sales. The ratio
will increase (decrease) as a firm becomes more efficient (inefficient) at asset
management. If a company experiences sustaining decreases it may need to modify
credit policies and search for ways to increase its collection of receivables.
Xilinx experienced continuous improvement in collection efficiencies from 2004 to 2007;
this is due to a steadily declining accounts receivable balance and an equally steady
increase in total sales during that period. Credit policies prove to be effective because
the general extension period to pay short-term debt is 30 days. The dramatic downturn
from 2007 to 2008 is due to a significant increase in accounts receivable. This should
only be of concern if it continues beyond the fiscal year 2008 because the firms overall
credit policies have not changed.
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The industry as a whole has followed a similar pattern as Xilinx and increased collection
efficiencies from 2004 to 2007. The only company to continue to increase collection
efficiencies from 2007 to 2008 is Altera; this is a signal that the industry’s overall credit
policies are changing and larger amounts of credit are being extended by all
competitors. This is probably due to pressure from distributors, which are the
industry’s largest customer.
Days’ Sales Outstanding
Days’ sales outstanding ratio describes the duration of time (measured in days) that it
takes for a firm to collect credit sales and it is an extension of the accounts receivable
turnover ratio. The lower the ratio is the faster the firm is at collecting credit sales, and
the opposite is true for higher ratios; this has a significant impact on cash inflows to a
firm and therefore is very relevant when analyzing short-term liquidity.
Xilinx has mirrored the image of the industry average, but overall has underperformed
over the last five years. Similar to the discussion of the preceding turnover ratio, Xilinx
improved collection efficiency from 2004 to 2007 and regressed somewhat backward
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from 2007 to 2008. By the end of 2008 Xilinx is practically in line with industry
standards.
Cash to Cash Cycle
Cash to cash cycle is calculated by adding days’ sales in inventory and days’ sales
outstanding. This ratio illustrates how long it takes a company to convert a cash outflow
to a cash inflow. This is important for liquidity because variances in this ratio can show
that a company is taking longer to receive cash inflows; the components of this ratio
(DSI and DSO) allows analysts to see if a firms actual collections are appropriate in
correlation with inventory and receivables policies. A lower number denotes greater
efficiencies, liquidity, and consistent credit policies.
Xilinx is effective in their cash to cash cycle and slightly outperforms the industry. The
50 day increase in 2004 is due to the increase in days’ supply of inventory and slightly
decreased collection efficiency; however overall Xilinx’s cash to cash cycle is trending
downward. The industry is also experiencing a downward trending cash to cash cycle,
signaling efficiencies amongst competitors.
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Working Capital
The working capital turnover ratio is calculated by dividing net working capital (the
difference between current assets and current liabilities) into sales. This ratio yields
insight into how efficiently working capital is managed (operating efficiency) in relation
to total sales volume. The higher the ratio is the better the firm is at utilizing its
operating capital.
While Xilinx has on average outperformed the industry, their net working capital
turnover ratio has been steadily declining since 2004; this implies that Xilinx is not
effectively using its net working capital to generate sales. Net working capital (the
denominator) over the last five years has grown on average by 13% while sales (the
numerator) have grown by approximately 9.67%, thus mathematically justifying the
declining ratio.
The industry is experiencing an upward trend, which is a sign that operation efficiencies
are enhancing the utility of working capital in generating sales. However, one caveat is
that the dramatic increase experienced by Lattice skews the industry average upward.
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Conclusion
Xilinx demonstrates a strong ability to pay its short-term debt obligations by
outperforming the industry in both the current ratio, quick ratio, and the cash to cash
cycle. However, real concern arises when evaluating Xilinx’s ability to effectively
manage inventory. They are underperforming the industry in both turnover ratios; and
although they outperform the industry benchmark working capital turnover ratio it is a
problem area for the company. The industry benchmark surpassed Xilinx at the end of
2007, further justifying the need for management to take extensive measures to
change inventory policy.
The following table outlines the liquidity analysis.
Ratio Performance Trend
Current Ratio outperforming increasing
Quick Ratio outperforming stable
Inventory Turnover slightly outperforming unchanged
Days Sales in Inventory underperforming stable
Receivables Turnover slightly underperforming increasing
Days Sales Outstanding slightly underperforming decreasing
Working Capital T/O outperforming decreasing
Cash to Cash Cycle outperforming decreasing
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Profitability Ratio Analysis
Profitability ratios focus on utilizing information from both the balance sheet and income
statement to assess a firm’s ability to generate earnings relative to the costs incurred
during the same time period. While financial statements allow for readers to estimate
profitability in absolute terms, profitability ratios allow for investors to estimate
profitability in comparable percentages. A thorough understanding of expenses
(operating, financing, and capital) is necessary to truly gain perspective into the
profitability of a firm. Operating expenses are subtracted from revenues, yielding
operating earnings; financing expenses are then subtracted from operating earnings to
arrive at net income; and capital expenses are depreciated or amortized over the useful
life of the related asset. Profitability ratios focus on recurring expenses and disregard
extraordinary items. The most commonly used profitability ratios are as follows:
• Gross profit margin
• Operating profit margin
• Net profit margin
• Asset turnover
• Return on assets
• Return on equity
These ratios are especially important to potential investors because sustainable
profitability can lead to greater market value and high dividends. For all of the ratios
discussed, higher numbers mean greater profitability.
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Gross Profit Margin
Gross profit margin is calculated by subtracting cost of goods sold from sales and then
dividing the sum by the sales in the current period. It measures profitability by
revealing the residual cash available to cover additional expenses and contribute to net
income. High gross profit margins are associated with efficient companies.
Xilinx has slightly increased its gross profit margin over the last five years (from 59% to
approximately 63%) because they have managed to dramatically reduce their per unit
cost of goods sold by increasing volume. There are significant risks inherent in this
strategy, but if sales forecasts are accurate this profitability will be transferred to
shareholders. Demand for Xilinx’s highly technical products is stimulated by the
markets need for technological innovation and efficiency; this allows for Xilinx and other
industry participants to charge price premiums, which also increase gross profit.
The industry’s gross profit margin has remained stable over the last five years and is
believed to be sustainable due to the size and maturity of the major competitors in this
market. It is key to note that Altera significantly outperforms every industry
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participant; at one point Altera outperforms Xilinx by 10 percent. Xilinx is in line with
the industry benchmark.
Operating Profit Margin
Operating profit margin is calculated by dividing operating income by revenue. This is a
measure of recurring or sustainable profitability; said another way, operating profit
margin is a measure of operating efficiency. Operating income is presented on the
income statement before interest and tax expenses; it subtracts an additional layer of
expenses from gross profit. Higher ratios mean that additional expenses beyond cost of
goods sold are relatively minor and that operations are efficient.
Xilinx demonstrates operating efficiency as it strongly outperforms the industry
benchmark. Unlike gross profit margin, Xilinx’s operating profit margin seems to be
more stable. The slight dip experienced from 2006 to 2008 is due substantial increases
in research and development (R&D) and selling, general, and administrative costs
(SGA); R&D expenditures returned to normal levels in 2008. The 40% difference
between gross profit and operating profit suggests that R&D and SGA expenses are
substantial portions of Xilinx’s cost structure. Xilinx has demonstrated an ability to
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manage these costs and maintain stability over time, which are a profitable talents and
definitely advantageous for the firm.
The restated operating profit margin increases more smoothly after capitalizing 20% of
R&D expenditures; this is much different from the original operating profit margin
presented in the financial statements. This means Xilinx has actually increased its
operating profits over the last five years.
The industry improved operating efficiency until 2007 when all gains were lost and
operating profit margin went negative. However, Lattice skews the industry average.
It is important to note that Altera is doing particularly well in managing their cost
structure as well and outperformed Xilinx before adjustments.
Net Profit Margin
This ratio communicates how much net income or profit is earned from each sales
dollar. Net profit margin is computed by dividing net income by total sales. A firm that
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is able to grow net profit margins over time will also experience growth in its market
value (denoted by share price). Similarly, firms that demonstrate declining net profit
margins will experience decreased share price and could potentially struggle to raise
money in capital markets. Net profit margin is expressed as a percentage; the higher
the percentage is the more profitable the firm.
Xilinx has demonstrated sustainable stability of the last four years and is well above the
industry benchmark. However, the table above illustrates that Altera is the most
profitable firm in the specialized-semiconductor industry. This is a significant threat to
Xilinx and could greatly affect its long-term ability to raise money in capital markets
because investors are only interested in the most profitable firms. So although Xilinx is
outperforming the industry benchmark, they must strive to reduce their total costs in
order to increase firm profitability.
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The restated net profit margin for Xilinx becomes much more profitable when 20% of
R&D expenditures are capitalized. This is significant because it implies that
management is actually increasing operating efficiency and making the business more
profitable.
The industry benchmark is once again skewed because of Lattice’s weak performance;
if thrown out the industry would have an average profitability of approximately 10%
and would demonstrate stability over time.
Asset Turnover
Asset turnover is calculated by dividing total assets from the previous period into sales
of the current period. This ratio demonstrates what is known as the lag effect because
the sales in the current period are derived from the assets of the preceding period.
Asset turnover is a measure of asset productivity; said another way, asset turnover is a
measure of firm’s ability to generate revenue from its assets. It is important because it
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connects the income statement to the balance sheet. The higher a ratio becomes the
more effective a firm is at managing its assets.
Xilinx has experienced a significant improvement (10%) in asset productivity. Over the
last five years its total sales revenue has increased by approximately 9.67% while total
assets have increased by only 2%; implying that management can generate
significantly higher sales with only a minor increase in its asset base. Additional
revenue is derived from long-term contracts with outside manufacturers and
distributors, which allows for Xilinx to essentially use more assets than presented on
their books; this strategy helps drive asset productivity upward.
Increased asset productivity has been experienced by the entire industry and once
again Altera has outperformed Xilinx, even as Xilinx outperforms the industry
benchmark.
Return on Assets
A firm’s return on assets (ROA) measures how efficiently profits are generated from its
assets; said differently, ROA is indicative of firm profitability relative to assets available
to generate earnings. This ratio varies widely by industry and one must be cautious
when comparing firms. It is standard to compare a firm’s ROA over time to gauge
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efficient use of assets for profit generation. ROA is calculated by dividing net income
from the current period by the total assets in the previous period, demonstrating the
lag principle. The lag is justified because the net income earned in the current period is
generated by the previous period’s assets. The high the ROA is the more profitable the
firm.
Xilinx experienced a significant increase in its ROA in 2003 as a result of a substantial
increase in net income of 97%; subsequent to 2003 net income grew by an average of
3% while total assets grew by 2%. The proportionate growth in both net income and
total assets is the rational for the stability demonstrated from 2004 to 2008. Stability is
important because over time it appears to be sustainable, which instills investors with
confidence.
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The restated ROA greatly improves after 20% of R&D expenditures are transferred from
the income statement to the balance sheet. This presents Xilinx in a different light;
they seem to generate more return from their asset base than their competitors. Xilinx
demonstrates greater asset management than the industry benchmark, and is the only
firm to continuously increase their ROA.
The industry, if Lattice is thrown out as an outlier, would experience the same stability
as the other three competitors. Altera outperforms the entire industry before
adjustments. Xilinx outperforms the industry benchmark; however, their main rival has
a 5% greater return on assets before Xilinx’s restatements.
Return on Equity
Return on equity (ROE) represents the profitability of the equity investors in the firm.
The ratio is calculated by dividing the net income from the current period by owners’
equity of the previous year. Since preferred shares are considered a hybrid debt/equity
type of ownership, resulting in a unique type of claim to the firm’s assets, the net
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income should be calculated after preferred dividends. The lag effect is again
necessary and is justified by the same theory discussed earlier. ROE can be affected by
several decisions because it is based on earnings after interest payments; this means
that it is affected by the financing mix. Debt financing can increase ROE if the cost of
borrowing is less than total return on capital, increasing profitability to equity investors.
Xilinx experiences a substantial increase in ROE from 2003 to 2008. This is due to the
substantial increase in 2003 net income previously discussed in the ROA section.
However, the increase from 2007 to 2008 is due to a declining book value of
stockholders’ equity. In 2007 Xilinx began to repurchase $800 million dollars worth of
common shares outstanding, signaling that the firm believed the market had incorrectly
discounted the share price. The current economic crisis limits Xilinx’s ability to take
advantage of cheap debt financing; this could strain is ability to compete with Altera in
terms of profitability in the short-term.
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Once again, after adjustments accounted for Xilinx overall performance greatly
improves. This is important because by the end of 2008 Xilinx has the highest return to
equity holders.
The industry, if Lattice is considered an outlier, is slightly increasing, but remains below
both Xilinx and Altera. Altera’s ROE (before adjustments) is more profitable than Xilinx
by 10% and has maintained a wide spread throughout the last five years. This is
significant because investors are not likely to benefit from our restatements due to
GAAP regulations; this implies that Altera will be the more attractive firm to equity
investors and capital markets.
Internal Growth Rate
The internal growth rate (IGR) measures the highest rate of growth a company can
achieve without outside financing. The significance of this rate is that it quantifies
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maximum growth prospects for a firm not willing to explore financing alternatives. It is
calculated using the following formula:
IGR= ROA (1- Dividend Payout)
The following graph illustrates the IGR for the specialized-semiconductor industry.
Xilinx’s internal growth rate has remained stable over the last five years and has
maintained a 5% spread over the industry benchmark.
If Lattice is excluded from the statistical data the industry would have a smooth internal
growth rate of approximately 8%. All else being equal, this implies the industry has a
strong level of self-sustaining growth.
Sustainable Growth Rate
The sustainable growth rate (SGR) measures the maximum growth rate a company can
experience without increasing financial leverage. Financial leverage is increased by
taking on debt obligations. It can be calculated using the following formula:
SGR= IGR [1+ (Debt t-1 /Equity t-1 )]
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The following graph illustrates the SGR for the specialized-semiconductor industry.
Xilinx has maintained a significant SGR, averaging approximately about 10% over the
last 5 years. The industry, with exception of Lattice, is also experiencing a stable SGR
level. This is important because it means that the specialized-semiconductor industry is
able to grow by about 8% annually while maintaining consistent leverage ratios. This
financial stability implies that the industry is approaching maturity, meaning the
competitive landscape is not likely to experience significant volatile due to leverage
financing; this outlook could be altered by further consolidation.
Conclusion
Xilinx has experienced an increasing gross profit margin, asset turnover and return on
equity over the last five years. These measures should instill investors with confidence
when comparing Xilinx to the industry benchmark; however, the more appropriate
standard may be to compare Xilinx directly to Altera because Lattice is often an outlier
and Actel seems to consistently underperform the industry benchmark. From that
perspective Xilinx is struggling even with positive results. Their operating profit margin,
net profit margin, ROA, IGR, and SGR all remained stable or unchanged. Stability in
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these areas instills confidence that management is able to appropriately manage
profitability.
Xilinx presents a much more positive outlook when restatements are taken into
consideration; instead of being dominated by Altera, Xilinx actually takes the lead in the
areas affected by the adjustments. However, this is not likely to because GAAP does
not allow for firms to capitalize any R&D expenditures, even if capitalization lends a
more accurate depiction of a firms economic activities.
Xilinx has outperformed the industry average in all seven of the preceding profitability
ratios. However, Altera outperforms Xilinx in every area in profitability. Xilinx has
displayed an inept ability to compete with Altera in regards to profitability. Future
market share could be lost to this competitive threat if they do not continue to manage
their assts effectively. The following table organizes our discussion of profitability
Ratio Performance Trend
Gross Profit Margin average slightly increasing
Operating Profit Margin outperforming stable
Net Profit Margin outperforming stable
Asset Turnover outperforming increasing
ROA outperforming stable
ROE outperforming increasing
Internal Growth Rate outperforming stable
Sustainable Growth Rate slightly outperforming unchanged
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Capital Structure Ratio Analysis
The capital structure of a firm describes the way in which it finances the acquisition of
assets through a combination of debt, equity, and hybrid securities. It is critical that
analysts understand the way in which a firm uses leverage because it is a key tool for
growth and the source of default risk.
Debt to Equity Ratio
Debt ratios attempt to examine whether a firm can pay back the principle and interest
on outstanding debt.
The debt to equity ratio is a measure of a company's financial leverage and is calculated
by dividing total liabilities by stockholders' equity. A high debt to equity ratio could
potentially generate larger earnings, but the cost of debt must not be greater than the
return generated through leverage; bankruptcy can occur when the cost of debt is
greater than the total return, which typically leaves equity holders with nothing.
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Xilinx experienced slight deleveraging from 2003 to 2006; however, they experienced a
substantial increase in leverage (216%) in 2006 when it issued $1.0 billion in 30 year
convertible debentures. The risk of default has naturally increased; however, Xilinx has
the right to call outstanding debt and debt holders have the right to convert their
debentures upon the occurrence of contingencies outlined in the indenture. The ability
to convert debentures is a dilutive feature that equity holders must be made aware.
The industry has experienced a steady increase in leverage; possibly a sign that higher
earnings should be expected by investors. The default risks associated with Xilinx’s
increasing debt is manageable as their annual obligations are 3.125% and their total
return on assets is approximately 12%.
Times Interest Earned
The times interest earned ratio measures how many times interest payments can be
covered by income from operations; this is done by dividing interest expense into
operating income. Interpretation of this ratio requires a firm understanding of the
firm’s capital structure and financing goals. A high ratio could signal that a firm is not
incorporating enough debt into its capital structure or is paying off its debt to quickly.
Having a high ratio indicates good performance, but a firm could most likely earn
greater returns by investing its earnings into other projects and borrowing at a lower
cost of capital.
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In 2008 Xilinx has a times interest earned ratio of 8.04, which means that Xilinx could
pay their interest expense 8.04 times with their income from operations. This
demonstrates financial strength and contributes to the going concern assumption. The
industry has experienced some volatility and has been trending downward in recent
years. This indicates that either interest expense is rising or income from operations is
decreasing.
Debt Service Margin
The Debt Service Margin measures the adequacy of cash provided by operations in
cover required annual installment payments on the principal amount of long-term
liabilities. Debt service margin is found by dividing installments due on long-term debt
from the previous year into cash provided by operations. A higher debt service
indicates better performance and ability to pay off debt with cash flows from
operations.
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Xilinx had a debt service margin of 1.92 in 2008 which is much higher than the industry
average of .57. This is important because it indicates that Xilinx has a financing
advantage over the industry, which can aid in outperforming its competitors. Investors
find cash flows from operations critical in determining a company’s long-term success
and business viability. The volatility over the last five years can be seen as a minor
threat; however, Xilinx has experienced greater cash inflows from operations since
2005.
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After adjustments Xilinx’s debt service margin decreases substantially; this results
because when R&D is capitalized the operating cash flow decreases, ultimately making
the ratio substantially smaller.
The industry benchmark before adjustments remains fairly stable. This is an important
sign that the industry has appropriately managed its capital structure and financing
vehicles. The dramatic change experienced by Xilinx after adjustments completely
destabilizes the industry benchmark.
Z-Score
The Z-score is a model designed to predict the likelihood of a public firm filing
bankruptcy within two years. It accomplishes this by incorporating five different
financial ratios in its model. The lower the score, the greater the chances are for
bankruptcy. A score of fewer than 1.8 means that the company is in danger of
bankruptcy according to the model, while a score of over 3 means that the company is
healthy and more financially secure. A company with a score between, or equal to, 1.8
and 3 are labeled in the grey area. The formula for calculating the Z-score is as
follows:
Z = 1.2A + 1.4B + 3.3C + .6D + .999E
Each variable represents a financial ratio; these ratios are defined below.
A represents working capital divided by total assets; it is a measure of liquid assets in
relation to the size of the company. B represents retained earnings divided by total
assets; it is a measure of profitability that reflects a firm’s earning power. C represents
earnings before interest and taxes divided by total assets; it is a measure of operating
efficiency apart from tax and leveraging factors. D represents market value of equity
divided by total liabilities; it is designed to detect possible share price fluctuations. E
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epresents asset turnover; its characteristics have already been discussed. The
following graph illustrates the Z-score of the specialized-semiconductor industry.
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The semiconductor industry as a whole has a relatively high z-score and only lattice is
of concern. Xilinx had a z-score as high as 6.58 in 2006 but is currently is in a grey
area with a score of 2.63, which is explained by the $957,831 decrease in retained
earnings. Xilinx’s Z-score is trending downward rapidly, a result of both the decrease in
retained earnings as well as the shrinking credit market in the United States. Further
deterioration of credit worthiness is a substantial threat because of Xilinx resent issue of
a billion dollars in convertible debentures; this issue most be monitored actively by
investors and potential investors. As for the restated Z-score is immaterially different
from the stated Z-score, and therefore the analysis remains the same.
Conclusion
The capital structure ratios provide a unique insight into how a firm finances its
operations. Xilinx’s debt to equity is trending upward over the last five years and is
outperforming the industry benchmark. This resulted from a significant issuance of
convertible debentures in 2006. This new debt contributes to the decreasing times
interest is earned (TIE ratio), even though Xilinx is still outperforming industry
standards. The debt service margin experiences a great deal of volatility and offers a
completely different outlook after adjustments. To this end, we should consider that
the debt service margin before adjustments demonstrates Xilinx’s ability to use financial
leverage to increase its total return to equity holders. And finally, the consistency in
Xilinx’s Z-score suggests that they are a credit worthy company; which is further
verified by the fact that they are able to issue substantial debt. However, the Z-score is
trending downward, a result of the concession of the overall credit markets in the
United States.
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Ratio Performance Trend
Debt to Equity out performing increasing
Times Interest Earned slightly out performing decreasing
Debt Service Margin slightly out performing varies
Z-score out performing varies
Cost of Capital Estimation
Cost of Equity
The cost of equity (K e ) is the rate of return demanded by investors in exchange for
owning and bearing the risks of an asset. Greater risk is rewarded with larger return
and therefore has a higher cost of equity. The capital asset pricing model (CAPM) is
commonly used to derive K e ; the formula and variable definitions for the CAPM are as
follows:
K e = R f + β (R M - R f )
R f is the risk free rate; R M is the market return; and β (known as the beta coefficient)
measures the correlation between an assets expected return and the markets return.
The risk free rate is the 10-year U.S. Treasury yield. Treasury bonds are used to
measure the riskless rate because they are backed by government fiat. The risk of
default by the government is non-existent because the government can always print
money to meet their debt obligations. The beta coefficient is a measure of systematic
(non-diversifiable) risk; it denotes how dramatic market movements affect an individual
security. In the CAPM beta is multiplied by the market risk premium (MRP). The MRP is
calculated by subtracting the riskless rate from the market return; it quantifies the
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compensation received for taking on additional risk. Multiplying the MRP by the beta
quantifies how significant market movements are in correlation to an individual security.
In order to find Xilinx’s cost of equity we had to first estimate the beta coefficient. This
was accomplished through a regression analysis. The yield curve in our regression
analysis was completed using returns from the 3 month T-bill, and 2-yr, 5-yr, 7-yr, and
10-yr nonfinancial treasury bonds. Each collection period was analyzed using returns
over 24 month, 36 month, 48 month, 60 month, and 72 month periods.
3 Month T‐Bill
Months 72 60 48 36 24
β 1.746216 1.404632 1.277579 1.263773 1.086833
R f 4.07 4.07 4.07 4.07 4.07
MRP 7 7 7 7 7
K e 16.29351 13.90243 13.01305 12.91641 11.67783
R 2 0.341978 0.249025 0.236898 0.230476 0.273319
2 Year Nonfinancial Treasury Bond
Months 72 60 48 36 24
β 1.746985 1.407857 1.277547 1.261572 1.084086
R f 4.07 4.07 4.07 4.07 4.07
MRP 7 7 7 7 7
K e 19.2289 16.855 15.94283 15.831 14.5886
R 2 0.342453 0.250314 0.237565 0.230933 0.273503
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5 Year Nonfinancial Treasury Bond
Months 72 60 48 36 24
β 1.743105 1.404129 1.269849 1.25218 1.077908
R f 4.07 4.07 4.07 4.07 4.07
MRP 7 7 7 7 7
K e 16.27174 13.8989 12.95894 12.83526 11.61536
R 2 0.340276 0.249142 0.23582 0.228987 0.272048
7 Year Nonfinancial Treasury Bond
Months 72 60 48 36 24
β 1.741396 1.402166 1.266453 1.248022 1.075228
R f 4.07 4.07 4.07 4.07 4.07
MRP 7 7 7 7 7
K e 16.25977 13.88516 12.93517 12.80616 11.5966
R 2 0.339293 0.248547 0.234959 0.228035 0.271311
10 Year Nonfinancial Treasury Bond
Months 72 60 48 36 24
β 1.739003 1.399074 1.262211 1.242937 1.071989
R f 4.07 4.07 4.07 4.07 4.07
MRP 7 7 7 7 7
K e 16.24302 13.86352 12.90548 12.77056 11.57392
R 2 0.338374 0.24773 0.233915 0.226846 0.270381
Using the data compilation we chose the highest explanatory power (adjusted R 2 ) to
find the results of our Beta. The adjusted R 2 quantifies the amount (as a percentage) of
the dependent variable (Xilinx’s return) which is described by the independent variable
beta. The regression analysis concluded that the most accurate beta from the data
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collected was 1.747 (a result from the 72 month regression using the 2-yr nonfinancial
Treasury bond yield).
The chart below represents the beta stability of each 3 month, 2 year, 5 year, 7 year,
and 10 year Nonfinancial Treasury Bond. Overtime, the stability for Xilinx’s beta has
proven to be fairly stable in comparison to the amount of months that have been
related.
The representation of beta stability can be shown that Xilinx has a common trend,
which is the same trend for r 2 . The fact that our beta stability is stable provides an
understanding that our explanatory power is related as well. For example, if the beta
decreased then we would not have much explanatory power.
“The market risk premium investors demand as additional return for bearing beta risk.
It is the excess of the expected return on the market index over the riskless rate. Over
the 1926-2005 period based off the table from the book, the returns to the s&p 500
index have exceeded the rate on intermediate-term treasury bonds by 7%.” We used
these estimates to calculate the cost of equity by plugging them into the CAPM formula
defined earlier. We calculated the cost of equity to be 16.29% by doing the following:
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.163 = .0407 + 1.746(.07)
After the size adjustment of .9% our CAPM is 17.2%. The decision to include .9% to
the original cost of equity for size adjustment was based off our market cap in relation
to using the size premium plus the CAPM.
*Cost of Equity = Riskless rate of return + (Beta risk * Market risk premium) + Size
premium
Xilinx’ market cap placed us in the size range of category 8 out of 10. This places Xilinx
in the third largest bracket that a company could be in according to this model. This is
important because the model states the size adjustments have a direct correlation to
the volatility of risk.
Below we provide the results from our regression analysis for the calculation of the
upper and lower bound for cost of equity. The original ranges of 95% certainty
depicted the upper bound equity of 20.26% and the lower bound equity of 12.34%.
While taking into consideration the size adjustments of the cost of equity, we followed
the same method for the upper and lower bounds of equity and added in the same
.9%.
Upper Bound of K e 21.16%
Lower Bound of K e 13.24%
Alternative Cost of Equity Estimation
A common alternative to estimating the cost of equity is referred to as the back door
method. This approach is defined by the following formula:
Market
Book
= 1 + ROE - K e
K e - g
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The market to book ratio is on the left side of the formula. The “g” variable in our
calculation is the assumed historical sales growth rate. The other variables have
already been thoroughly discussed.
Rudimentary algebraic manipulation used to solve for the cost of equity yields a formula
that appears as follows:
K e =
ROE + (P/B)g - g
(P/B)
According to Yahoo! Finance Xilinx’s market to book ratio is equal to 3.37. We
calculated Xilinx’s return on equity to be 15.53% and their assumed sales growth rate is
9.67%. Using these variables to solve for the unknown variable will yield a cost of
equity of 11.41%. The spread between the two different calculations of cost of equity
is due to the fact that some variables were taken from internet resources. The lack of
disclosure from these resources lends to a great amount of uncertainty in calculation
methodology, however, the fact that the spread is small aids in the verification of our
initial cost of equity calculation.
Cost of Debt
The Cost of Debt (K d ) is calculated by taking the weighted average of short and long
term liabilities over the total liabilities multiplied by the interest rates for each specific
liability. The four liabilities that Xilinx listed were as follows: current liabilities,
convertible debentures, deferred tax liabilities, and other long term liabilities all coming
to a total amount of $1,465,284. Each interest rate was taken from one of the four
resources, St. Louis AA Non-Financial Commercial Paper, Xilinx 10-K, 10-year Treasury
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Constant Maturity Rate, and the 2-year Treasury Constant Maturity Rate, to find the
proper interest rates.
For the short term liabilities, current liabilities was the first listed on Xilinx’ 10-K and
stated as $340,666. These accounts consisted of accounts payable, accrued payroll and
related liabilities, income taxes payable, deferred income on shipments to distributors
and other accrued liabilities. The rates used for the majority of these liabilities were
1.95%, which was the St. Louis AA Non-Financial Commercial paper rate. The only
current liability that was different was income taxes payable in which we used the 10-
year Treasury rate.
For long term liabilities, these accounts had a higher interest rate due to the fact that
there is more risk involved with these accounts and the nature of time associated with
them. The largest account, convertible debentures, had the amount $999,851 and had
an interest rate of 3.125% from the Xilinx 10-K. This account as by far the largest with
68% of total liabilities and is the main driver for the cost of debt equation. Another
long term liability that was listed was deferred tax liabilities for $84,486. The interest
rate on this weighted average was taken from the 10-year Treasury Constant Maturity
Rate of 3.69% and equaled 0.21. The last documented liability from Xilinx was $1,159
for the other long term liabilities. We used the interest rate then received from Xilinx
10-k rate for convertible debentures and resulted in a ratio of 0. With all the
information at hand, the weighted average of short and long term liabilities are now
added together to calculate the total Cost of Debt for a percent of 2.94%.
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Short and Long Term
Liabilities
Amount for each
liability
Percent of
Total
Liabilities
Interest Rates
Resources
Accounts payable $59,402 4% 1.95 St. Louis AA Non‐
Financial
Commercial Paper
Accrued payroll and
related liabilities
$100,730 7% 1.95 St. Louis AA Non‐
Financial
Commercial Paper
Income taxes payable $39,258 3% 3.69 10‐year Treasury
Constant Maturity
Rate
Deferred income on
shipments to
distributors
Other accrued
liabilities
Convertible
Debentures
Deferred Tax
Liabilities
Long‐term income
taxes payable
$111,678 8% 1.95 St. Louis AA Non‐
Financial
Commercial Paper
$29,598 2% 1.95 St. Louis AA Non‐
Financial
Commercial Paper
$999,851 68% 3.125 Xilinx 10‐K
$84,486 6% 3.69 10‐year Treasury
Constant Maturity
Rate
$39,122 2% 3.69 10‐year Treasury
Constant Maturity
Rate
$1,159 0% 3.125 Xilinx 10‐K
Other Long Term
Liabilities
Total Liabilities $1,465,284 100% N/A Xilinx 10‐k
Weighted Average Cost of Capital (WACC)
The Weighted Average Cost of Capital can be configured before and after taxes to
assume the percent available for financing assets. The WACC (before tax) is the
calculation of the weighted sum of cost of equity added together with the weighted sum
of cost of debt before taxes. Then if you would like to find the WACC after tax add the
difference of 1 minus the tax rate and multiply that by the cost of debt at the end of
the equation. The Wacc is important because it shows the amount the company must
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eturn on its assets in order to pay off its creditors, owners, or other providers of capital
to the company.
Xilinx takes the market value of equity of $4.942 billion over the market value of assets
of 6.45 billion to get the ratio of 0.7731 multiplied by the cost of equity of 17.2%. The
next step is to take the market value of debt of 1.47 billion over the market value of
assets of 6.45 billion to get the ratio of 0.2269 multiplied by the cost of debt of 2.94%.
The Weighted Average Cost of Capital (before tax) is then added together by these two
methods and then calculated out to be 13.96%. The Weighted Average Cost of Capital
(after tax) is then calculated by multiplying the difference of 1 minus the tax rate of
35% to equal 65%. After including taxes, the Weighted Average Cost of Capital (after
tax) is then 13.73%. Also included in the table is the upper and lower bound Wacc,
using the cost of equity’s upper and lower 95% confidence interval. This is done in
order to show the highest and lowest amount with a 95% confidence interval that a
company needs to return on its assets.
Weighted Average Cost of Capital
WACC(before
tax)
WACC(after
tax)
WACC
Upper(bt)
WACC
Lower(bt)
MVe/MVa Cost of MVd/MVa Cost of Tax Rate WACC
Equity
Debt
0.7731 0.172 0.2269 0.0294 0 13.96%
0.7731 0.172 0.2269 0.0294 35% 13.73%
0.7731 .2116 0.2269 0.0294 0 17.03%
0.7731 .1324 0.2269 0.0294 0 10.9%
Forecasting Financial Statements
Business valuation is fruitless without forecasting future financial statements. Future
business value is derived from future cash flows, earnings, and prospective growth.
Contemporaneously using business/industry valuation and relative (ratio) analysis lends
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to more substantive forecasting analysis. The first step in forecasting financial
statements is to create greater comparability by reformatting the financial data into
common size statements. Trends are then identified and used to foster forecasts for
forecast-able line items. The forecasted common size statements are then used to
quantify future financial statements. We have forecasted out 10 years in this analysis,
but it is important to note some of the errors inherent in forecasting. The future sales
growth forecast is the foundation of the forecasted statements; errors made in the sales
forecast will trickle down the financials. The further out forecasts are made the greater
the uncertainty, regardless of due diligence. And finally, forecasting the statement of
cash flows is highly susceptible to error. The forecasts are meant to be a tool in
valuation; it is incorrect to view forecasts as perfect predictions of value.
Income Statement Forecast
The income statement is the most important financial statement in forecasting. The
income statement is the foundation for both the balance sheet and statement of cash
flows that will be discussed later. The basis for the income statement forecast is sales
information. To forecast sales, one must estimate future sales growth. There are many
factors when considering this future growth. There are many unknowns in forecasting a
company’s sales figures because of unforeseeable future growth, acquisitions, or new
product technology. There are also macroeconomic factors that greatly affect sales
growth, such as a recession, expansion, or inflation. After sales figures, other line items
we chose as being reasonably estimable are as follows: cost of sales, gross margin,
operating income, and net income.
As mentioned above forecasting sales data can be difficult. To understand the direction
of Xilinx sales growth we must understand the source of Xilinx’s sales. Xilinx’s sales
growth is based on customer demand for consumer electronics a sector that makes up
more than 60% of Xilinx sales. The second significant portion of sales comes from
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industrial applications which are driven by corporate investment. Therefore, after
considering the recent economic recessionary environment, which has caused a
significant decrease in consumer and corporate spending, the only viable conclusion is
that future sales growth for Xilinx will be negative.
2007 2008 2009
Date Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09
%
change
Quarter
number
Total
year
‐3% ‐4% ‐2% 1% 0% 7% 0% 3% ‐1% ‐10% ‐5%
481,362 467,180 450,725 443,472 445,912 444,894 474,806 475,760 488,246 483,537 435,183 413,424
1,842,739 1,841,372 1,820,390
Xilinx 10-k’s
The table above shows the quarter’s sales figures from the 2007 year all the way until
the beginning of 2009. All of the numbers are stated until the fourth quarter of 2008
and the first quarter in 2009. After looking over this data you can see that there has
never been a variation larger than a 7% increase in the quarterly data over the past 10
quarters. This gave us some estimate in order to properly forecast Xilinx sales in 2009.
We believe that the fourth quarter of 2008 will decrease due to the major economic
events that happened during this quarter which will be a major blow to our consumer
sector which contains a majority of our sales. We believe that a -10 percent drop in
sales is a reasonable number for the 2008 fourth quarters due to the scale of which
economist are viewing our current recession. Then we believe it will move up to -4
percent in the first quarter of 2009. The primary reason for these two percentages is
two-fold; the demand for consumer electronics and automotive industry as well as
corporate spending on new technology has slowed due to the recession. In years past,
the strong demands in both areas leads to solid sales growth. While we acknowledge
demand still exist in these sectors we believe that the downward trend of consumer and
corporate spending will continue to decrease for at least the next two years beginning
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to rebound in the latter half of 2009. This is supported by the International Monetary
Fund which states, “the advanced economies would be in, or close to recession in the
second half of 2008 and early 2009, and the anticipated recovery later in 2009 will be
exceptionally gradual by past standards” (IMF.org).
Using these assumptions we estimated that the negative effect of macroeconomic
conditions will lead to a negative 1 percent sales growth for Xilinx in 2009. This follows
the trend of the past years while compensating for recessionary data. We then
concluded that after the recession, sales would rebound slowly, acknowledging a likely
economic turn-around which would result in an increase in spending spurring in an
initial growth of 1 percent then slowly increasing 2 percent every two years until a
target of 6 percent growth is reached in 2018. The other line items highlighted in the
introduction of this section are all then based off a smoothed average of their percent in
relation to net sales. It is worth noting that as forecast look further into the future
estimation error is likely to increase due to undeterminable events.
After forecasting the sales growth, you can use these numbers to forecast the cost of
goods sold, gross profit margin, research and development, operating expenses, and
net income. For cost of goods sold, we took the average over the last five years can
calculated an average of 38% of sales and then took this number and times it by the
sales for the forecasted year. With sales and the cost of goods sold numbers you can
then get the gross margin. The research and development account was consistently
20% percent of our sales, so with this you can get the forecasted out research and
development cost. For operating expenses and net income we took the average
number from the year prior and then applied the growth rate of the sales for that year
to get these numbers.
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Income Statement 2003 2004 2005 2006 2007 2008 Q 2 Q 3 Q 4 Q 1 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
sales growth % 20.92% 12.55% 9.73% 6.75% -0.07% -1% -10% -4% -1% -2% 2% 2% 2% 4% 4% 4% 5% 6% 6%
Net revenues $1,155,977 $1,397,846 $1,573,233 $1,726,250 $1,842,739 $1,841,372 $488,246 $483,500 $435,183 $416,029 $1,822,958 $1,786,499 $1,822,229 $1,858,674 $1,895,847 $1,971,681 $2,050,548 $2,132,570 $2,239,199 $2,373,551 $2,515,964
Cost of revenues $473,551 $529,968 $576,284 $657,119 $718,643 $686,988 $176,506 $177,400 $165,892 $175,114 $694,912 $681,013 $694,634 $708,526 $722,697 $751,605 $781,669 $812,936 $853,583 $904,798
% of Cost of Rev of Sales $0 $0 $0 $0 $0 $0 $0
Gross margin $682,426 $867,878 $996,949 $1,069,131 $1,124,096 $1,154,384 $311,740 $306,100 $269,291 $240,915 $1,128,047 $1,105,486 $1,127,595 $1,150,147 $1,173,150 $1,220,076 $1,268,879 $1,319,634 $1,385,616 $1,468,753
Operating expenses: 0.192 0.177 0.195 0.189 0.211 0.194
Research and development $222,139 $247,609 $307,448 $326,126 $388,101 $358,063 $90,734 $89,500 $87,037 $97,321 364,592 357,300 364,446 371,735 379,169 394,336 410,110 426,514 447,840 474,710
Selling, general and administrative $235,347 $266,664 $303,595 $316,302 $375,510 $365,325 $93,004 $88,100
Amortization of acquisition-related $14,580 $9,725 $6,668 $6,976 $8,009 $6,802 $1,425 $1,400
intangibles
Litigation settlements and contingencies $6,400 $3,165 $2,500
Stock-based compensation related to prior $2,209
years
Write-off of acquired in-process research $6,969 $7,198 $4,500
and development
Total operating expenses $472,066 $537,367 $624,909 $657,069 $776,329 $730,190 $204,699 $181,494
Operating income $155,669 $327,135 $372,040 $412,062 $347,767 $424,194 $102,420 $95,635 $87,037 $87,782 $372,873 $365,416 $372,724 $380,179 $387,782 $403,293 $419,425 $436,202 $458,012 $485,493
Impairment loss on investments $(10,425) $(3,099) $(1,418) $(1,950) $(2,850) $(4,621) $(29,001)
Interest and other, net $24,628 $23,409 $31,603 $45,958 $85,329 $52,750 $5,705 $8,490
Income before income taxes $169,872 $350,544 $400,544 $456,602 $431,146 $474,094 $108,125 $104,125
Provision for income taxes $44,167 $47,555 $87,821 $102,453 $80,474 $100,047 $24,196 $22,300
Net income $125,705 $302,989 $312,723 $354,149 $350,672 $374,047 $83,929 $81,825 $82,685 $87,088 $335,527 $328,816 $335,393 $342,100 $348,942 $362,900 $377,416 $392,513 $412,138 $436,867
Net income per common share:
Basic $0.37 $0.89 $0.90 $1.01 $1.04 $1.27 $0.30 $0.30
Diluted $0.36 $0.85 $0.87 $1.00 $1.02 $1.25 $0.30 $0.29
Shares used in per share calculations:
Basic 337,069 341,427 347,810 349,026 337,920 295,050 278,165 $276,169
Diluted 348,622 354,551 358,230 355,065 343,636 298,636 280,881 $277,714
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Common Size Income Statement
2008 2009
Forecast Financial Statements
2003 2004 2005 2006 2007 2008 Q 2 Q 3 Q 4 Q 1 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Net revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues 40.97% 37.91% 36.63% 38.07% 39.00% 37.31% 36% 37% 38% 42% 38% 38% 38% 38% 38% 38% 38% 38% 38% 38%
Gross margin 59.03% 62.09% 63.37% 61.93% 61.00% 62.69% 64% 63% 62% 58% 62% 62% 62% 62% 62% 62% 62% 62% 62% 62%
Operating expenses:
Research and development 19.22% 17.71% 19.54% 18.89% 21.06% 19.45% 19% 19% 20% 23% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Selling, general and administrative 20.36% 19.08% 19.30% 18.32% 20.38% 19.84% 19%
Amortization of acquisition-related intangibles 1.26% 0.70% 0.42% 0.40% 0.43% 0.37% 0%
Litigation settlements and contingencies 0.46% 0.18% 0.14%
Stock-based compensation related to prior years 0.12%
Write-off of acquired in-process research and development 0.50% 0.46% 0.26%
Total operating expenses 40.84% 38.44% 39.72% 38.06% 42.13% 39.65%
Operating income 13.47% 23.40% 23.65% 23.87% 18.87% 23.04% 21% 20% 20% 21% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Impairment loss on investments -0.90%
Interest and other, net 2.13% 1.67% 2.01% 2.66% 4.63% 2.86% 1%
Income before income taxes 14.70% 25.08% 25.46% 26.45% 23.40% 25.75% 22%
Provision for income taxes 3.82% 3.40% 5.58% 5.94% 4.37% 5.43% 5%
Net income 10.87% 21.68% 19.88% 20.52% 19.03% 20.31% 17% 17% 19% 21% 18% 18% 18% 18% 18% 18% 18% 18% 18% 18%
Net income per common share:
Basic
Diluted
Shares used in per share calculations:
Basic 29.16% 24.43% 22.11% 20.22% 18.34% 16.02%
Diluted 30.16% 25.36% 22.77% 20.57% 18.65% 16.22%
136

Restated Income Statement Forecast
The following graph shows the result of the restatement of two items which both effect
accounts on the income statement. The first of which is the capitalization of research
and development expenses which has the effect of increasing operating income by
decreasing operating expense. The capitalization effect changed the research and
development expense from an average of 20 percent of sales to 16 percent of sales.
With this change, it increased operating income by 4 percent. The second is the
impairment loss on investment (goodwill) which created a bigger affect on the income
statement over the capitalization of research and development. The net income
dropped with this impairment cost of -3.6 percent compared to stated income
statement, offsetting the increase in operating income due to capitalization. With this
analysis, we can see why Xilinx impairing goodwill without capitalization of R&D can
have a -8 percent decreases in net income. This is why companies do their best to not
impair goodwill.
The second is the impairment loss on investments (goodwill) which decreases operating
income slightly although not offsetting the increase caused by the significant reduction
in operating expense caused by the capitalization of R&D costs. We feel this shows a
more accurate financial picture of the firm highlighting the value of the earlier discussed
key accounting principle. The overall effect of this restatement is a 10 percent increase
in operating income and a 9 percent increase in net income in each accounts relation to
net sales.
137

Actual Financials 2008 2009
Forecast Financial Statements
Income Statement Restated 2003 2004 2005 2006 2007 2008 Q 2 Q 3 Q 4 Q 1 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
sales growth % 20.92% 12.55% 9.73% 6.75% -0.07% 0% -1% -10% -4% -1% -2% 2% 2% 2% 4% 4% 4% 5% 6% 6%
Net revenues $1,155,977 $1,397,846 $1,573,233 $1,726,250 $1,842,739 $1,841,372 $488,246 $483,500 $435,183 $416,029 $1,822,958 $1,786,499 $1,822,229 $1,858,674 $1,895,847 $1,971,681 $2,050,548 $2,132,570 $2,239,199 $2,373,551 $2,515,964
Cost of revenues $473,551 $529,968 $576,284 $657,119 $718,643 $686,988 $176,506 $177,400 $165,892 $175,114 $694,912 $681,013 $694,634 $708,526 $722,697 $751,605 $781,669 $812,936 $853,583 $904,798
Gross margin $682,426 $867,878 $996,949 $1,069,131 $1,124,096 $1,154,384 $311,740 $306,100 $269,291 $240,915 $1,128,047 $1,105,486 $1,127,595 $1,150,147 $1,173,150 $1,220,076 $1,268,879 $1,319,634 $1,385,616 $1,468,753
Operating expenses:
Research and development $222,139 $247,609 $307,448 $326,126 $388,101 $358,063 $72,587 $71,601 $65,277 $155,126 364,592 357,300 364,446 371,735 379,169 394,336 410,110 426,514 447,840 474,710
RND EXPENSE CAP $44,330 $49,522 $61,490 $65,226 $77,620 $71,612 $18,147 $17,900 $17,407 $19,464 $72,918 $71,460 $72,889 $74,347 $75,834 $78,867 $82,022 $85,303 $89,568 $94,942
Research and development (net) $177,809 $198,087 $245,958 $260,900 $310,481 $286,451 $72,918 $72,918 $72,918 $72,918 $291,673 $285,840 $291,557 $297,388 $303,336 $315,469 $328,088 $341,211 $358,272 $379,768
Selling, general and administrative $235,347 $266,664 $303,595 $316,302 $375,510 $365,325 $93,004 $88,100 16% 16% 16% 16% 16% 16% 16% 16% 16% 16%
Amortization of acquisition-related intangibles $14,580 $9,725 $6,668 $6,976 $8,009 $6,802 $1,425 $1,400 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Litigation settlements and contingencies $6,400 $3,165 $2,500
Stock-based compensation related to prior years $2,209
Write-off of acquired in-process research $6,969 $7,198 $4,500
and development
Total operating expenses $427,736 $487,845 $563,419 $591,843 $698,709 $658,578 $204,699 $181,494
Operating income $199,999 $376,657 $388,625 $392,361 $404,755 $398,747 $116,937 $109,955 $100,092 $61,322 $388,307 $380,541 $388,151 $395,914 $403,833 $419,986 $436,785 $454,257 $476,970 $505,588
Impairment loss on investments $(35,606) $(27,907) $(32,923) $(32,689) $(31,439) $(32,339) $(4,621) $(29,001) 4% 4% 4% 4% 4% 4% 4% 4% 4% 4%
Interest and other, net $24,628 $23,409 $31,603 $45,958 $85,329 $52,750 $5,705 $8,490
Income before income taxes $189,021 $372,159 $387,305 $405,630 $458,645 $419,158 $118,021 $89,444
Provision for income taxes $37,804 $74,432 $77,461 $81,126 $91,729 $83,832 $23,604 $17,889
Net income $151,217 $297,727 $309,844 $324,504 $366,916 $335,326 $94,417 $71,555 $80,899 $76,724 $323,595 $317,123 $323,465 $329,935 $336,533 $349,995 $363,995 $378,554 $397,482 $421,331
Net income per common share: -3.56% -3.56% -3.56% -3.56% -3.56% -3.56% -3.56% -3.56% -3.56% -3.56%
Basic $0.37 $0.89 $0.90 $1.01 $1.04 $1.27
Diluted $0.36 $0.85 $0.87 $1.00 $1.02 $1.25
Shares used in per share calculations:
Basic 337,069 341,427 347,810 349,026 337,920 295,050
Diluted 348,622 354,551 358,230 355,065 343,636 298,636
138

Common Size
2008 Forecast Financial Statements
2003 2004 2005 2006 2007 2008 Q 2 Q 3 Q 4 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Net revenues 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues 41% 38% 37% 38% 39% 37% 36% 37% 38% 42% 38% 38% 38% 38% 38% 38% 38% 38% 38% 38%
Gross margin 59% 62% 63% 62% 61% 63% 64% 63% 62% 58% 62% 62% 62% 62% 62% 62% 62% 62% 62% 62%
Operating expenses:
Research and development 19% 18% 20% 19% 21% 19% 15% 15% 15% 37% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
RND EXPENSE CAP 4% 4% 4% 4% 4% 4% 4% 4% 4% 5% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4%
Research and development (net) 15% 14% 16% 15% 17% 16% 15% 15% 17% 18% 16% 16% 16% 16% 16% 16% 16% 16% 16% 16%
Selling, general and administrative 20% 19% 19% 18% 20% 20% 19% 18%
Amortization of acquisition-related intangibles 1% 1% 0% 0% 0% 0%
Litigation settlements and contingencies 0% 0% 0%
Stock-based compensation related to prior years 0%
Write-off of acquired in-process research 0% 0% 0%
and development
Total operating expenses 37% 35% 36% 34% 38% 36% 42% 38%
Operating income 17% 27% 25% 23% 22% 22% 24% 23% 23% 15% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21%
Impairment loss on investments -3% -2% -2% -2% -2% -2% -1% -6%
Interest and other, net 2% 2% 2% 3% 5% 3% 1% 2%
Income before income taxes 16% 27% 25% 23% 25% 23% 24% 18%
Provision for income taxes 3% 5% 5% 5% 5% 5% 5% 4%
Net income 13% 21% 20% 19% 20% 18% 19% 15% 19% 18% 18% 18% 18% 18% 18% 18% 18% 18% 18% 18%
Net income per common share:
139

Balance Sheet
After forecasting the income statement the next financial statement to forecast is the
balance sheet. Like the income statement, forecasted sales will drive the majority of
the forecast on the balance sheet. The ratio that connects the income statement to the
balance sheet is the asset turnover ratio. The asset turnover ratio is calculated by
dividing the sales in the current year by the total assets of the preceding year. There is
a lag in this formula due to the fact that the assets in the prior year are the real assets
that contributed to the sales in the current year. This is why we have to do this lag in
this ratio. Our calculated asset turnover ratio of .58; algebraic manipulation allows for
us to find future total assets by forecasting future sales. Other line items to forecast
out are the cash, accounts receivable, and inventory. To do this we took the
percentage of the account to its sum in that account, (Current Assets mentioned next
paragraph) then times the previous year’s percent average to the sum in that account
for the year forecasted.
The next part of the balance sheet that needs to be forecasted is the non-current asset
section. To forecast out non-current assets the most logical way is to take the average
over the past five years of the percentage on noncurrent assets against total assets.
Xilinx averaged 49.3 percent of non-current assets over total assets over the last five
years. To forecast, you just take the percentage times the total assets in order for you
to get non-current asset for that forecasted year. Within noncurrent assets is the
forecasted out PPE and goodwill. PPE was forecasted by the last five years average of
itself divided by total assets. This was 14 perecent, and then times this percent by total
assets to give us our forecasted numbers. Goodwill we used the same methodology but
took the average from noncurrent assets, instead of total assets. The next item that is
then forecasted is current assets. To do this, you simply take the total assets of that
year minus the noncurrent assets of the same year. With the current assets forecasted
out you can then forecast current liabilities by using the current ratio. The current ratio
140

chosen was more heavily weighted on the last two year to show the most realistic ratio
number due to the current financials numbers. 5.3 was our current ratio number
chosen for Xilinx. To get current liabilities, take the current assets for that year divided
by the current ratio.
The final aspect of the forecasting process for the balance sheet is the stockholders
equity section. The first step in forecasting this section is the find the forecasted
Retained Earnings. To get this we use the equation (=BB re + NI for year - forecast
dividends for year). With the Retained Earnings, you can now forecast Stockholders
Equity. To get stockholders equity you take the previous year’s stockholder equity and
add it to the change in the present year R.E. and the previous year R.E. Now you can
get the total liabilities by taking the total assets minus the total stockholders’ equity.
One important item to notice is that our change in sales and total assets is different
with sales changing from 2009 to 2018 are different because of the lagged asset
turnover ratio used to calculate total assets affecting most of the forecasted items on
the balance sheet. Our change from 2009 to 2018 in total assets was around 41
percent, but the change in sales over the same period of time was 30 percent. If you
change the sales years from 2018 to 2019 and compute the change, the sales now
increase 38 percent which goes along better with our change in total assets.
141

Balance Sheet
Actual Financials 2008 Forecast Financial Statements
2003 2004 2005 2006 2007 2008 Q 2 Q 3 Q 4 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
ASSETS
Current assets:
Cash and cash equivalents $213,995 $337,343 $449,388 $783,366 $635,879 $866,995 $769,476 $701,406 $659,792 $618,179 $593,452 $605,321 $617,427 $629,776 $654,967 $681,165 $708,412 $743,833 $788,462
Short-term investments $461,600 $461,617 $412,170 $201,551 $502,036 $429,440 $469,237 $599,607
Accounts receivable, net of allowances $197,690 $248,956 $213,459 $194,205 $182,295 $249,147 $205,480 $234,078 $216,321 $198,563 $202,534 $206,585 $210,717 $219,145 $227,911 $237,028 $248,879 $263,812 $279,641
for doubtful accounts and customer
returns of $3,634 and $3,737 in 2008 and
2007, respectively
% inv
Inventories $111,504 $102,454 $185,722 $201,029 $174,572 $130,250 $140,372 $141,704 $148,591 $155,479 $158,588 $161,760 $164,995 $171,595 $178,459 $185,597 $194,877 $206,570 $218,964
Deferred tax assets $150,147 $90,386 $125,342 $110,928 $100,344 $106,842 $95,861 $85,831
Prepaid expenses and other current assets $40,346 $60,796 $66,476 $119,884 $104,976 $37,522 $52,072 $60,065
Total current assets $1,175,282 $1,301,552 $1,452,557 $1,648,248 $1,700,102 $1,820,196 $1,732,498 $1,822,691 $1,691,861 $1,561,031 $1,592,251 $1,624,096 $1,656,578 $1,722,841 $1,791,755 $1,863,425 $1,956,596 $2,073,992 $2,198,432
Property, plant and equipment, at cost:
Land $72,974 $61,445 $63,521 $63,521 $94,187 $94,184
Buildings $247,452 $226,833 $235,699 $246,550 $281,334 $288,338
Machinery and equipment $254,616 $254,854 $285,445 $311,516 $337,037 $357,103
Furniture and fixtures $37,108 $38,603 $45,147 $44,773 $47,639 $49,821
Other PPL $612,150 $581,735 $629,812 $666,360 $760,197 $789,446
Accumulated depreciation and amortization ($229,167) ($246,621) ($285,296) ($308,103) ($347,161) ($385,016) ($399,376) ($410,558)
Net property, plant and equipment $382,983 $335,114 $344,516 $358,257 $413,036 $404,430 $398,882 $397,350 $423,527 $449,705 $458,699 $467,873 $477,230 $496,320 $516,172 $536,819 $563,660 $597,480 $633,329
Long-term investments $434,369 $767,671 $766,596 $616,296 $675,713 $564,269 $607,253 $472,268
Investment in United Microelectronics $209,293 $324,026 $246,110 $239,209 $67,050
Corporation
Goodwill $100,724 $111,627 $119,415 $125,084 $117,955 $117,955 $117,955 $117,955 $123,207 $123,207 $125,671 $128,184 $130,748 $135,978 $141,417 $147,074 $154,427 $163,693 $173,515
Acquisition-related intangibles, net $18,690 $16,813 $20,004 $22,651 $14,626 $7,825 $6,399 $4,974
Other assets $100,335 $80,670 $89,998 $163,802 $190,873 $222,432 $228,068 $233,590
Total non current $1,246,394 $1,635,921 $1,586,639 $1,525,299 $1,479,253 $1,316,911 $1,358,557 $1,226,137 $1,372,639 $1,519,140 $1,549,523 $1,580,514 $1,612,124 $1,676,609 $1,743,673 $1,813,420 $1,904,091 $2,018,337 $2,139,437
% of Non c. to TA $1 $1 $1 $0 $0 $0 $0
Total Assets $2,421,676 $2,937,473 $3,039,196 $3,173,547 $3,179,355 $3,137,107 $3,091,055 $3,048,828 $3,064,499 $3,080,171 $3,141,774 $3,204,610 $3,268,702 $3,399,450 $3,535,428 $3,676,845 $3,860,687 $4,092,329 $4,337,868
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable $41,739 $77,936 $63,172 $71,004 $78,912 $59,402 $63,867 $82,887 $70,764 $58,642 $59,815 $61,011 $62,231 $64,720 $67,309 $70,001 $73,502 $77,912 $82,586
Accrued payroll and related liabilities $48,736 $54,607 $61,616 $79,260 $83,949 $100,730 $114,029 $96,990
Income taxes payable $85,198 $60,430 $45,835 $30,048 $24,210 $39,258 $6,787 $9,172
Deferred income on shipments to distributors $120,831 $150,979 $102,511 $126,558 $89,052 $111,678 $99,789 $94,141
Other accrued liabilities $17,330 $37,178 $25,260 $38,154 $27,246 $29,598 $52,998 $35,773
Total current liabilities $313,834 $381,130 $298,394 $345,024 $303,369 $340,666 $337,470 $318,963 $306,749 $294,534 $300,425 $306,433 $312,562 $325,064 $338,067 $351,590 $369,169 $391,319 $414,798
Convertible debentures $999,597 $999,851 $999,552 $999,563
Deferred tax liabilities $157,103 $73,281 $67,294 $92,153 $102,329 $84,486 $100,548 $95,639
Long-term income taxes payable $39,122 $42,756 $73,631
Other long-term liabilities $3,390 $3,470 $7,485 $1,320 $1,159 $1,138 $1,118
Commitments and contingencies
Total Liabilities $470,937 $454,411 $365,688 $444,662 $1,406,615 $1,465,284 $1,481,464 $1,173,586 $1,197,040 $1,220,494 $1,109,075 $1,000,881 $896,276 $861,022 $827,102 $794,721 $800,866 $847,000 $894,769
Stockholders equity:
Preferred stock, $.01 par value; 2,000
shares authorized; none issued and outstanding
Common stock, $.01 par value; 2,000,000
shares authorized; 280,519 and 295,902
shares issued and outstanding in 2008 and $3,502 $3,426 $2,959 $2,805 $2,761 $2,739
2007, respectively
Additional paid-in capital $744,166 $903,991 $906,929 $1,375,120 $849,888 $858,172 $822,891 $804,713
Retained earnings $1,218,579 $1,521,568 $1,762,873 $1,334,530 $916,292 $805,042 $780,931 $764,949 $878,923 $992,896 $1,165,918 $1,336,947 $1,505,645 $1,671,647 $1,841,545 $2,015,344 $2,193,040 $2,378,548 $2,576,319
Accumulated other comprehensive income ($14,855) $55,064 $204 $15,809 $3,601 $5,804 $3,008 ($12,507)
Total stockholders equity $1,950,739 $2,483,062 $2,673,508 $2,728,885 $1,772,740 $1,671,823 $1,609,591 $1,875,242 $1,867,460 $1,859,677 $2,032,699 $2,203,728 $2,372,426 $2,538,428 $2,708,326 $2,882,125 $3,059,821 $3,245,329 $3,443,100
Total Liabilities and Stockholders Equity $2,421,676 $2,937,473 $3,039,196 $3,173,547 $3,179,355 $3,137,107 $3,091,055 $3,048,828 $3,064,499 $3,080,171 $3,141,774 $3,204,610 $3,268,702 $3,399,450 $3,535,428 $3,676,845 $3,860,687 $4,092,329 $4,337,868
142

Balance Sheet Common Size
Actual Financials 2008 Forecast Financial Statements
2003 2004 2005 2006 2007 2008 Q 2 Q 3 Q 4 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
ASSETS
Current assets:
Cash and cash equivalents 9% 11% 15% 25% 20% 28% 25% 23% 22% 20% 19% 19% 19% 19% 19% 19% 18% 18% 18%
Short-term investments 19% 16% 14% 6% 16% 14% 15% 20% 0%
Accounts receivable, net of allowances 8% 8% 7% 6% 6% 8% 7% 8% 7% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%
for doubtful accounts and customer
returns of $3,634 and $3,737 in 2008 and
2007, respectively
Inventories 5% 3% 6% 6% 5% 4% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5%
Deferred tax assets 6% 3% 4% 3% 3% 3% 3% 3%
Prepaid expenses and other current assets 2% 2% 2% 4% 3% 1% 2% 2%
Total current assets 49% 44% 48% 52% 53% 58% 56% 60% 55% 51% 51% 51% 51% 51% 51% 51% 51% 51% 51%
Property, plant and equipment, at cost:
Land 3% 2% 2% 2% 3% 3%
Buildings 10% 8% 8% 8% 9% 9%
Machinery and equipment 11% 9% 9% 10% 11% 11%
Furniture and fixtures 2% 1% 1% 1% 1% 2%
Other PPL 25% 20% 21% 21% 24% 25%
Accumulated depreciation and amortization -9% -8% -9% -10% -11% -12% -13% -13%
Net property, plant and equipment 16% 11% 11% 11% 13% 13% 13% 13% 14% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15%
Long-term investments 18% 26% 25% 19% 21% 18% 20% 15%
Investment in United Microelectronics 9% 11% 8% 8% 2%
Corporation
Goodwill 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4%
Acquisition-related intangibles, net 1% 1% 1% 1% 0% 0% 0% 0%
Other assets 4% 3% 3% 5% 6% 7% 7% 8%
Total non current 51% 56% 52% 48% 47% 42% 44% 40% 45% 49% 49% 49% 49% 49% 49% 49% 49% 49% 49%
Total Assets 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable 2% 3% 2% 2% 2% 2% 2% 3% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%
Accrued payroll and related liabilities 2% 2% 2% 2% 3% 3% 4% 3%
Income taxes payable 4% 2% 2% 1% 1% 1% 0% 0%
Deferred income on shipments to distributors 5% 5% 3% 4% 3% 4% 3% 3%
Other accrued liabilities 1% 1% 1% 1% 1% 1% 2% 1%
Total current liabilities 13% 13% 10% 11% 10% 11% 11% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
Convertible debentures 31% 32% 32% 33%
Deferred tax liabilities 6% 2% 2% 3% 3% 3% 3% 3%
Long-term income taxes payable 1% 1% 2%
Other long-term liabilities 0% 0% 0% 0% 0% 0% 0%
Commitments and contingencies
Total Liabilities 19% 15% 12% 14% 44% 47% 48% 38% 39% 40% 35% 31% 27% 25% 23% 22% 21% 21% 21%
Stockholders equity:
Preferred stock, $.01 par value; 2,000
shares authorized; none issued and outstanding
Common stock, $.01 par value; 2,000,000
shares authorized; 280,519 and 295,902
shares issued and outstanding in 2008 and 0% 0% 0% 0% 0% 0%
2007, respectively
Additional paid-in capital 31% 31% 30% 43% 27% 27% 27% 26%
Retained earnings 50% 52% 58% 42% 29% 26% 25% 25% 29% 32% 37% 42% 46% 49% 52% 55% 57% 58% 59%
Accumulated other comprehensive income -1% 2% 0% 0% 0% 0% 0% 0%
Total stockholders equity 81% 85% 88% 86% 56% 53% 52% 62% 61% 60% 65% 69% 73% 75% 77% 78% 79% 79% 79%
Total Liabilities and Stockholders Equity 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
143

Restated Balance Sheet
It is noteworthy that despite the change in goodwill because of impairment on on the
restated balance sheet the asset turnover remained the same at .58, due to the small
scale of the impairment. This means that the total assets are still going to be the same
on the restated balance sheet. Due to this fact, the liabilities on this statement will be
slightly incorrect because the assets will remain the same as on the stated balance
sheet. The retained earnings, stockholders equity, and total liabilities, however, will
change. The retained earnings will differ because of the new net income change due to
the capitalization of R&D and impairment of goodwill. With this change, retained
earnings increases in 2018 60 percent from stated to restated. This shouldn’t happen
because the net income from the restated income statement sheet is lower than on the
stated statement. Our group found that the method of getting retained earnings using
beginning retained earnings plus net income minus dividend payments wasn’t what
Xilinx doing on their balance sheet. The main problem was that the dividend payments
were reported on the cash flow statement was not the number used in order to get the
retained earnings. This is why the retained earnings increased so much from the stated
to the restated balance sheet. The unreliable nature of forecasting dividend payments is
a primary reason for this increase. If Xilinx does have this kind of retained earnings,
however, the value of Xilinx, denoted by total stockholder’s equity, is significantly
greater due to restatements. Common stock is indicative of market value; therefore, the
prospect for future returns via the secondary market is promising. The stockholders
equity increased 42 percent from the stated in 2018 dramatically increasing the value of
the firm. The total liabilities began to decrease relative to the increase in stockholders’
equity to make up for the amount in the total assets.
144

Restated Balance Sheet
Actual Financials 2008 Forecast Financial Statements
2003 2004 2005 2006 2007 2008 Q 2 Q 3 Q 4 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
ASSETS
Current assets:
Cash and cash equivalents $213,995 $337,343 $449,388 $783,366 $635,879 $866,995 $769,476 $701,406 $659,792 $618,179 $593,452 $605,321 $617,427 $629,776 $654,967 $681,165 $708,412 $743,833 $788,462
Short-term investments $461,600 $461,617 $412,170 $201,551 $502,036 $429,440 $469,237 $599,607
Accounts receivable, net of allowances $197,690 $248,956 $213,459 $194,205 $182,295 $249,147 $205,480 $234,078 $216,321 $202,326 $198,279 $202,245 $206,290 $210,416 $218,832 $227,586 $236,689 $248,523 $263,435
for doubtful accounts and customer
returns of $3,634 and $3,737 in 2008 and
2007, respectively
Inventories $111,504 $102,454 $185,722 $201,029 $174,572 $130,250 $140,372 $141,704 $148,591 $158,425 $155,256 $158,362 $161,529 $164,759 $171,350 $178,204 $185,332 $194,599 $206,274
Deferred tax assets $150,147 $90,386 $125,342 $110,928 $100,344 $106,842 $95,861 $85,831
Prepaid expenses and other current assets $40,346 $60,796 $66,476 $119,884 $104,976 $37,522 $52,072 $60,065
Total current assets $1,175,282 $1,301,552 $1,452,557 $1,648,248 $1,700,102 $1,820,196 $1,732,498 $1,822,691 $1,691,861 $1,590,612 $1,558,800 $1,589,976 $1,621,776 $1,654,211 $1,720,380 $1,789,195 $1,860,762 $1,953,801 $2,071,029
Property, plant and equipment, at cost:
Land $72,974 $61,445 $63,521 $63,521 $94,187 $94,184
Buildings $247,452 $226,833 $235,699 $246,550 $281,334 $288,338
Machinery and equipment $254,616 $254,854 $285,445 $311,516 $337,037 $357,103
Furniture and fixtures $37,108 $38,603 $45,147 $44,773 $47,639 $49,821
Other PPL $612,150 $581,735 $629,812 $666,360 $760,197 $789,446
Accumulated depreciation and amortization $(229,167) $(246,621) $(285,296) $(308,103) $(347,161) $(385,016) ($399,376) ($410,558)
Net property, plant and equipment $382,983 $335,114 $344,516 $358,257 $413,036 $404,430 $398,882 $397,350 $423,527 $458,227 $449,062 $458,044 $467,204 $476,549 $495,611 $515,435 $536,052 $562,855 $596,626
Long-term investments $434,369 $767,671 $766,596 $616,296 $675,713 $564,269 $607,253 $472,268
Investment in United Microelectronics $209,293 $324,026 $246,110 $239,209 $67,050
Corporation
Goodwill Restated $75,543 $83,720 $89,591 $93,813 $88,466 $88,466 $88,466 $88,466 $88,466 $94,291 $92,405 $94,253 $96,138 $98,061 $101,984 $106,063 $110,305 $115,821 $122,770
Capitalized RND Expenditures $44,330 $49,522 $61,490 $65,226 $77,620 $71,612
Acquisition-related intangibles, net $18,690 $16,813 $20,004 $22,651 $14,626 $7,825 $6,399 $4,974
Other assets $100,335 $80,670 $89,998 $163,802 $190,873 $222,432 $228,068 $233,590
Total non current $1,265,543 $1,657,536 $1,618,305 $1,559,254 $1,527,384 $1,359,034 $1,358,557 $1,427,453 $1,530,797 $1,547,928 $1,516,970 $1,547,309 $1,578,255 $1,609,820 $1,674,213 $1,741,182 $1,810,829 $1,901,370 $2,015,452
Total Assets $2,440,825 $2,959,088 $3,070,862 $3,207,502 $3,227,486 $3,179,230 $3,091,055 $3,108,712 $3,135,196 $3,143,032 $3,080,171 $3,141,774 $3,204,610 $3,268,702 $3,399,450 $3,535,428 $3,676,845 $3,860,687 $4,092,329
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable $41,739 $77,936 $63,172 $71,004 $78,912 $59,402 $63,867 $82,887 $71,320 $59,753 $58,558 $59,729 $60,924 $62,142 $64,628 $67,213 $69,901 $73,397 $77,800
Accrued payroll and related liabilities $48,736 $54,607 $61,616 $79,260 $83,949 $100,730 $114,029 $96,990
Income taxes payable $85,198 $60,430 $45,835 $30,048 $24,210 $39,258 $6,787 $9,172
Deferred income on shipments to distributors $120,831 $150,979 $102,511 $126,558 $89,052 $111,678 $99,789 $94,141
Other accrued liabilities $17,330 $37,178 $25,260 $38,154 $27,246 $29,598 $52,998 $35,773
Total current liabilities $313,834 $381,130 $298,394 $345,024 $303,369 $340,666 $337,470 $318,963 $309,539 $300,116 $294,113 $299,995 $305,995 $312,115 $324,600 $337,584 $351,087 $368,642 $390,760
Convertible debentures $999,597 $999,851 $999,552 $999,563
Deferred tax liabilities $157,103 $73,281 $67,294 $92,153 $102,329 $84,486 $100,548 $95,639
Long-term income taxes payable $39,122 $42,756 $73,631
Other long-term liabilities $3,390 $3,470 $7,485 $1,320 $1,159 $1,138 $1,118
Commitments and contingencies
Total Liabilities $385,868 $606,404 $477,989 $387,315 $161,216 ($82,392) $1,481,464 $1,233,469 $469,478 ($294,513) ($518,702) ($616,201) ($709,897) ($799,398) ($825,642) ($850,042) ($872,363) ($859,372) ($809,965)
Stockholders equity:
Preferred stock, $.01 par value; 2,000
shares authorized; none issued and outstanding
Common stock, $.01 par value; 2,000,000
shares authorized; 280,519 and 295,902
shares issued and outstanding in 2008 and $3,502 $3,426 $2,959 $2,805 $2,761 $2,739
2007, respectively
Additional paid-in capital $744,166 $903,991 $906,929 $1,375,120 $849,888 $858,172 $822,891 $804,713
Retained earnings $1,258,498 $1,556,225 $1,796,414 $2,023,728 $2,269,811 $2,465,163 $780,931 $764,949 $1,703,017 $2,641,086 $2,802,414 $2,961,516 $3,118,048 $3,271,641 $3,428,634 $3,589,011 $3,752,749 $3,923,600 $4,105,835
Accumulated other comprehensive income ($14,855) $55,064 $204 $15,809 $3,601 $5,804 $3,008 ($12,507)
Total stockholders equity $2,054,957 $2,352,684 $2,592,873 $2,820,187 $3,066,270 $3,261,622 $1,609,591 $1,875,242 $2,656,394 $3,437,545 $3,598,873 $3,757,975 $3,914,507 $4,068,100 $4,225,093 $4,385,470 $4,549,208 $4,720,059 $4,902,294
Total Liabilities and Stockholders Equity $2,440,825 $2,959,088 $3,070,862 $3,207,502 $3,227,486 $3,179,230 $3,091,055 $3,048,828 $3,095,930 $3,143,032 $3,080,171 $3,141,774 $3,204,610 $3,268,702 $3,399,450 $3,535,428 $3,676,845 $3,860,687 $4,092,329
145

Restated Common Size Balance Sheet
Actual Financials 2008 Forecast Financial Statements
2003 2004 2005 2006 2007 2008 Q 2 Q 3 Q 4 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
ASSETS
Current assets:
Cash and cash equivalents 9% 11% 15% 24% 20% 27% 25% 23% 21% 20% 19% 19% 19% 19% 19% 19% 19% 19% 19%
Short-term investments 19% 16% 13% 6% 16% 14% 15% 19%
Accounts receivable, net of allowances 8% 8% 7% 6% 6% 8% 7% 8% 7% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%
for doubtful accounts and customer
returns of $3,634 and $3,737 in 2008 and
2007, respectively
Inventories 5% 3% 6% 6% 5% 4% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5%
Deferred tax assets 6% 3% 4% 3% 3% 3% 3% 3%
Prepaid expenses and other current assets 2% 2% 2% 4% 3% 1% 2% 2%
Total current assets 48% 44% 47% 51% 53% 57% 56% 59% 54% 51% 51% 51% 51% 51% 51% 51% 51% 51% 51%
Property, plant and equipment, at cost:
Land 3% 2% 2% 2% 3% 3%
Buildings 10% 8% 8% 8% 9% 9%
Machinery and equipment 10% 9% 9% 10% 10% 11%
Furniture and fixtures 2% 1% 1% 1% 1% 2%
Other PPL 25% 20% 21% 21% 24% 25%
Accumulated depreciation and amortization -9% -8% -9% -10% -11% -12% -13% -13%
Net property, plant and equipment 16% 11% 11% 11% 13% 13% 13% 13% 14% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15%
Long-term investments 18% 26% 25% 19% 21% 18% 20% 15%
Investment in United Microelectronics 9% 11% 8% 7% 2%
Corporation
Goodwill Restated 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%
Capitalized RND Expenditures 2% 2% 2% 2% 2% 2%
Acquisition-related intangibles, net 1% 1% 1% 1% 0% 0% 0% 0%
Other assets 4% 3% 3% 5% 6% 7% 7% 8%
Total non current 52% 56% 53% 49% 47% 43% 44% 46% 49% 49% 49% 49% 49% 49% 49% 49% 49% 49% 49%
Total Assets 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable 2% 3% 2% 2% 2% 2% 2% 3% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%
Accrued payroll and related liabilities 2% 2% 2% 2% 3% 3% 4% 3%
Income taxes payable 3% 2% 1% 1% 1% 1% 0% 0%
Deferred income on shipments to distributors 5% 5% 3% 4% 3% 4% 3% 3%
Other accrued liabilities 1% 1% 1% 1% 1% 1% 2% 1%
Total current liabilities 13% 13% 10% 11% 9% 11% 11% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
Convertible debentures 31% 31% 32% 32%
Deferred tax liabilities 6% 2% 2% 3% 3% 3% 3% 3%
Long-term income taxes payable 1% 1% 2%
Other long-term liabilities 0% 0% 0% 0% 0% 0% 0%
Commitments and contingencies
Total Liabilities 16% 20% 16% 12% 5% -3% 48% 40% 15% -9% -17% -20% -22% -24% -24% -24% -24% -22% -20%
Stockholders equity: 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Preferred stock, $.01 par value; 2,000
shares authorized; none issued and outstanding
Common stock, $.01 par value; 2,000,000
shares authorized; 280,519 and 295,902
shares issued and outstanding in 2008 and 0% 0% 0% 0% 0% 0%
2007, respectively
Additional paid-in capital 30% 31% 30% 43% 26% 27% 27% 26%
Retained earnings 52% 53% 58% 63% 70% 78% 25% 25% 54% 84% 91% 94% 97% 100% 101% 102% 102% 102% 100%
Accumulated other comprehensive income -1% 2% 0% 0% 0% 0% 0% 0%
Total stockholders equity 84% 80% 84% 88% 95% 103% 52% 60% 85% 109% 117% 120% 122% 124% 124% 124% 124% 122% 120%
Total Liabilities and Stockholders Equity 100% 100% 100% 100% 100% 100% 100% 98% 99% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
146

Statement of Cash Flows
The last statement forecasted is the statement of cash flows. This is the hardest
statement to forecast due to its volatility and unreliability to forecast from year to year.
Even with this statement’s lack of reliability it is still important to forecast out for
investors. The three main parts that are forecasted for this statement is the Cash flows
from Operations (CFFO), Cash flows from Investing (CFFI), and forecasting dividend
payments to stockholders.
Forecasting the Cash flows from Operations can be done several ways. They are
CFFO/Sales, CFFO/Operating Income (OI), or CFFO/Net Income (NI). After finding
these ratios we looked at which one had the most consistent data and for our case it
was CFFO/Sales with an average over five years of 28 percent. With this average you
can use the sales of that particular year times the CFFO/Sales percent which will give
you the Cash flows from operations for that year.
Cash flows from investing involve a different method of forecasting. Xilinx ‘s CFFI
forecast needs include the fact that they actively trade in the stock market rather than
focusing on investing back into the company. Additionally, we took the research and
development cost then added the last year’s purchases in PPE and also added the
change in PPE from the current year to the year prior.
The last section to forecast and the toughest to forecast out the statement of cash
flows was the Cash Flows from Financing. Due to the volatility of this section the most
accurate way to forecast is to forecast the dividends paid to the stockholders. The
average percentage increase paid to stockholders from 2005 to 2008 was around 5.5
percent. With this growth estimate we then added this growth to the dividends ten
years out.
147

Cash Flow Statement
Actual Financials 2008 Forecast Financial Statements
2003 2004 2005 2006 2007 2008 Q 2 Q 3 Q 4 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Cash flows from operating activities:
Net income $125,705 $302,989 $312,723 $354,149 $350,672 $374,047 $83,929 $93,861 $140,791 $335,047 $328,346 $334,913 $341,612 $348,444 $362,382 $376,877 $391,952 $411,550 $436,243
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation $52,190 $53,666 $51,921 $53,326 $55,998 $54,199
Amortization $20,260 $14,257 $11,141 $16,223 $17,926 $17,756
Stock-based compensation $6,390 $3,767 $504 $90,292 $66,427
Stock-based compensation related to prior years $6,969 $7,198 $2,209
Net (gain) loss on sale of available-for-sale securities ($5,454) ($6,650) ($505) $4,981 ($814) $5,139
Impairment loss on investments $10,425 $3,099 $1,418 $1,950 $2,850
Convertible debt derivatives revaluation and amortization ($403) $254
Write-off of acquired in-process research and development $4,500
Noncash compensation expense $735
Provision for deferred income taxes ($24,423) $49,974 $59,552 $26,032 $7,091 $669
Tax benefit from exercise of stock options $17,093 $109,236 $51,854 $40,596 $35,765 $15,794
Excess tax benefit from stock-based compensation ($27,413) ($22,459)
Changes in assets and liabilities, net
of effects from acquisition of business:
Accounts receivable, net ($49,259) ($50,160) $35,490 $19,380 $11,911 ($66,853)
Inventories ($14,858) $9,614 ($83,268) ($15,307) $28,617 $43,647
Deferred income taxes $20,338 ($61,065) ($53,229) ($1,891) $3,532 ($891)
Prepaid expenses and other current assets $45,384 ($10,035) $4,509 ($34,897) $35,652 $35,160
Other assets ($4,447) $6,234 ($32,116) ($29,910) ($15,636) $4,404
Accounts payable $5,008 $35,867 ($15,371) $7,811 $7,908 ($19,509)
Accrued liabilities $15,084 $11,872 ($5,976) $18,917 ($10,939) $19,276
Income taxes payable $20,331 ($83,709) ($23,572) ($687) ($5,244) $28,464
Deferred income on shipments to distributors $51,050 $29,898 ($48,468) $24,047 ($37,506) $22,626
Net cash provided by operating activities $345,000 $432,500 $275,486 $489,423 $551,568 $581,000 $158,497 $301,495 $515,991 $510,793 $500,577 $510,589 $520,800 $531,216 $552,465 $574,564 $597,546 $627,423 $665,069
Cash flows from investing activities:
Purchases of available-for-sale securities ($1,544,365) ($2,181,741) ($2,161,606) ($1,459,248) ($1,864,582) ($2,147,828)
Proceeds from sale and maturity of available-for-sale securities $1,228,813 $1,855,933 $2,196,321 $1,812,580 $1,693,152 $2,380,055
Distribution from United Microelectronics Corporation $10,693
Purchases of property, plant and equipment ($46,049) ($41,040) ($61,377) ($67,040) ($110,777) ($45,593)
Acquisition of business, net of cash acquired ($19,476)
Other investing activities ($24,436) ($1,564) ($5,308)
Net cash provided by (used in) investing activities ($355,138) ($354,798) ($45,095) $242,380 ($283,771) $192,019 $(98,619) $(20717.8) $96,134 ($410,071) ($439,070) ($446,026) ($453,121) ($450,813) ($465,195) ($480,152) ($490,339) ($504,655) ($529,458)
Cash flows from financing activities: $100,722 $61,507 $64,563 $67,679 $80,403 $87,270 $94,412 $107,208 $122,768 $135,611
Repurchases of common stock ($60,846) ($62,328) ($133,755) ($401,584) ($1,430,000) ($550,000)
Proceeds from issuance of common stock $54,643 $107,974 $85,064 $100,949 $128,136 $125,612
through various stock plans
Proceeds from issuance of convertible $980,000
debentures, net of issuance costs
Payment of dividends to stockholders ($69,655) ($97,190) ($120,833) ($139,974) $(38928) $(86625) $(158171) $ (147,672.57) $ (155,794.56) $ (164,363.26) $ (173,403.24) $ (182,940.42) $ (193,002.14) $ (203,617.26) $ (214,816.21) $ (226,631.10) $ (239,095.81)
Excess tax benefit from stock-based compensation $27,413 $22,459
Net cash used in financing activities ($6,203) $45,646 ($118,346) ($397,825) ($415,284) ($541,903)
Net increase (decrease) in cash and cash equivalents ($16,341) $123,348 $112,045 $333,978 ($147,487) $231,116
Cash and cash equivalents at beginning of year $230,336 $213,995 $337,343 $449,388 $783,366 $635,879
Cash and cash equivalents at end of year $213,995 $337,343 $449,388 $783,366 $635,879 $866,995
Supplemental schedule of non-cash activities:
Accrual of affordable housing credit investments $19,357 $0 $0
Supplemental disclosure of cash flow information:
Interest paid $0 $0 $32,118
Income taxes paid, net of refunds ($62,984) $34,163 $52,026 $37,159 $39,330 $56,012
148

Cash Flow Statement Common Size
Actual Financials 2008 Forecast Financial Statements
2003 2004 2005 2006 2007 2008 Q 2 Q 3 Q 4 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Cash flows from operating activities:
Net income 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 42% 18% 17% 15% 16% 14%
Amortization 16% 5% 4% 5% 5% 5%
Stock-based compensation 5% 1% 0% 26% 18%
Stock-based compensation related to prior years 2% 2% 1%
Net (gain) loss on sale of available-for-sale securities -4% -2% 0% 1% 0% 1%
Impairment loss on investments 8% 1% 0% 1% 1%
Convertible debt derivatives revaluation and amortization 0% 0%
Write-off of acquired in-process research and development 1%
Noncash compensation expense 0%
Provision for deferred income taxes -19% 16% 19% 7% 2% 0%
Tax benefit from exercise of stock options 14% 36% 17% 11% 10% 4%
Excess tax benefit from stock-based compensation -8% -6%
Changes in assets and liabilities, net
of effects from acquisition of business:
Accounts receivable, net -39% -17% 11% 5% 3% -18%
Inventories -12% 3% -27% -4% 8% 12%
Deferred income taxes 16% -20% -17% -1% 1% 0%
Prepaid expenses and other current assets 36% -3% 1% -10% 10% 9%
Other assets -4% 2% -10% -8% -4% 1%
Accounts payable 4% 12% -5% 2% 2% -5%
Accrued liabilities 12% 4% -2% 5% -3% 5%
Income taxes payable 16% -28% -8% 0% -1% 8%
Deferred income on shipments to distributors 41% 10% -15% 7% -11% 6%
Net cash provided by operating activities 274% 143% 88% 138% 157% 155% 189% 321% 366% 152% 152% 152% 152% 152% 152% 152% 152% 152% 152%
Cash flows from investing activities:
Purchases of available-for-sale securities -1229% -720% -691% -412% -532% -574%
Proceeds from sale and maturity of available-for-sale securities 978% 613% 702% 512% 483% 636%
Distribution from United Microelectronics Corporation $10,693
Purchases of property, plant and equipment -37% -14% -20% -19% -32% -12%
Acquisition of business, net of cash acquired -5%
Other investing activities -7% 0% -1%
Net cash provided by (used in) investing activities -283% -117% -14% 68% -81% 51% -118% -22% 68% -122% -134% -133% -133% -129% -128% -127% -125% -123% -121%
Cash flows from financing activities: 30% 19% 19% 20% 23% 24% 25% 27% 30% 31%
Repurchases of common stock -48% -21% -43% -113% -408% -147%
Proceeds from issuance of common stock 43% 36% 27% 29% 37% 34%
through various stock plans
Proceeds from issuance of convertible 279%
debentures, net of issuance costs
Payment of dividends to stockholders -22% -27% -34% -37% -46% -92% -112% -44% -47% -49% -51% -53% -53% -54% -55% -55% -55%
Excess tax benefit from stock-based compensation $27,413 $22,459
Net cash used in financing activities -5% 15% -38% -112% -118% -145%
Net increase (decrease) in cash and cash equivalents -13% 41% 36% 94% -42% 62%
Cash and cash equivalents at beginning of year 183% 71% 108% 127% 223% 170%
Cash and cash equivalents at end of year 170% 111% 144% 221% 181% 232%
Supplemental schedule of non-cash activities:
Accrual of affordable housing credit investments 5% 0% 0%
Supplemental disclosure of cash flow information:
Interest paid 0% 0% 9%
Income taxes paid, net of refunds -50% 11% 17% 10% 11% 15%
149

Restated Cash flows
Using the majority of the same methods mentioned above you can forecast the cash
flow statement. The difference on the restated cash flow statement appeared when we
forecasted the CFFO. Before we used the method of CFFO/Sales, the problem with this
method on the restated sheet was that the changes made would not have affected the
adjustments made in the restatement of cash flows which were the impairment of
goodwill and the expense for Research and Development. To forecast this new cash
flow, CFFO/OI gave us a more effective ratio to forecast CFFO. The restatement of
both goodwill and R&D had a significant effect on the CFFO increasing it two fold. This
is important because operating activities drive the value of any company. The
significant increase experienced in the CFFO by Xilinx is a result of effective cost
management; it also indicates strong future business value.
For the cash flows from investing we used the same method as on the stated cash flow
sheet but added the research and development capitalization cost which decreased the
overall investing activities. This was done because we used the research and
development cost in the stated cash flow statement and with the capitalization affected
changed the research and development cost.
The last section, cash flows from financing, did not change because the dividends paid
to stockholders were not affected by the restatement.
150

Restated Cash Flow Statement
Actual Financials 2008 Forecast Financial Statements
2003 2004 2005 2006 2007 2008 Q 2 Q 3 Q 4 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Cash flows from operating activities:
Net income $125,705 $302,989 $312,723 $354,149 $350,672 $374,047 $83,929 $93,861 $140,791 $323,132 $316,670 $323,003 $329,463 $336,053 $349,495 $363,474 $378,013 $396,914 $420,729
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation $52,190 $53,666 $51,921 $53,326 $55,998 $54,199
Amortization $20,260 $14,257 $11,141 $16,223 $17,926 $17,756
Stock-based compensation $6,390 $3,767 $504 $90,292 $66,427
Stock-based compensation related to prior years $6,969 $7,198 $2,209
Net (gain) loss on sale of available-for-sale securities ($5,454) ($6,650) ($505) $4,981 ($814) $5,139
Impairment loss on investments $10,425 $3,099 $1,418 $1,950 $2,850
Convertible debt derivatives revaluation and amortization ($403) $254
Write-off of acquired in-process research and development $4,500
Noncash compensation expense $735
Provision for deferred income taxes ($24,423) $49,974 $59,552 $26,032 $7,091 $669
Tax benefit from exercise of stock options $17,093 $109,236 $51,854 $40,596 $35,765 $15,794
Excess tax benefit from stock-based compensation ($27,413) ($22,459)
Changes in assets and liabilities, net
of effects from acquisition of business:
Accounts receivable, net ($49,259) ($50,160) $35,490 $19,380 $11,911 ($66,853)
Inventories ($14,858) $9,614 ($83,268) ($15,307) $28,617 $43,647
Deferred income taxes $20,338 ($61,065) ($53,229) ($1,891) $3,532 ($891)
Prepaid expenses and other current assets $45,384 ($10,035) $4,509 ($34,897) $35,652 $35,160
Other assets ($4,447) $6,234 ($32,116) ($29,910) ($15,636) $4,404
Accounts payable $5,008 $35,867 ($15,371) $7,811 $7,908 ($19,509)
Accrued liabilities $15,084 $11,872 ($5,976) $18,917 ($10,939) $19,276
Income taxes payable $20,331 ($83,709) ($23,572) ($687) ($5,244) $28,464
Deferred income on shipments to distributors $51,050 $29,898 ($48,468) $24,047 ($37,506) $22,626
Net cash provided by operating activities $345,000 $432,500 $275,486 $489,423 $551,568 $581,000 $158,497 $301,495 $515,991 $458,202 $449,038 $458,019 $467,179 $476,523 $495,583 $515,407 $536,023 $562,824 $596,594
Cash flows from investing activities:
Purchases of available-for-sale securities ($1,544,365) ($2,181,741) ($2,161,606) ($1,459,248) ($1,864,582) ($2,147,828)
Proceeds from sale and maturity of available-for-sale securities $1,228,813 $1,855,933 $2,196,321 $1,812,580 $1,693,152 $2,380,055
Distribution from United Microelectronics Corporation $10,693
Purchases of property, plant and equipment ($46,049) ($41,040) ($61,377) ($67,040) ($110,777) ($45,593)
Acquisition of business, net of cash acquired ($19,476)
Other investing activities ($24,436) ($1,564) ($5,308)
Net cash provided by (used in) investing activities ($355,138) ($354,798) ($45,095) $242,380 ($283,771) $192,019 $(98,619) $(20717.8) $96,134 -318,798 -349,623 -354,790 -360,060 -355,891 -366,476 -377,484 -383,564 -392,542 -410,618
Cash flows from financing activities: $139,404 $99,415 $103,229 $107,119 $120,632 $129,108 $137,923 $152,459 $170,283 $185,976
Repurchases of common stock ($60,846) ($62,328) ($133,755) ($401,584) ($1,430,000) ($550,000)
Proceeds from issuance of common stock $54,643 $107,974 $85,064 $100,949 $128,136 $125,612
through various stock plans
Proceeds from issuance of convertible $980,000
debentures, net of issuance costs
Payment of dividends to stockholders ($69,655) ($97,190) ($120,833) ($139,974) $(38928) $(86625) $(158171) $ (147,672.57) $ (155,794.56) $ (164,363.26) $ (173,403.24) $ (182,940.42) $ (193,002.14) $ (203,617.26) $ (214,816.21) $ (226,631.10) $ (239,095.81)
Excess tax benefit from stock-based compensation $27,413 $22,459
Net cash used in financing activities ($6,203) $45,646 ($118,346) ($397,825) ($415,284) ($541,903)
Net increase (decrease) in cash and cash equivalents ($16,341) $123,348 $112,045 $333,978 ($147,487) $231,116
Cash and cash equivalents at beginning of year $230,336 $213,995 $337,343 $449,388 $783,366 $635,879
Cash and cash equivalents at end of year $213,995 $337,343 $449,388 $783,366 $635,879 $866,995
Supplemental schedule of non-cash activities:
Accrual of affordable housing credit investments $19,357 $0 $0
Supplemental disclosure of cash flow information:
Interest paid $0 $0 $32,118
Income taxes paid, net of refunds ($62,984) $34,163 $52,026 $37,159 $39,330 $56,012
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Restated Cash Flows Common Size
Actual Financials 2008 Forecast Financial Statements
2003 2004 2005 2006 2007 2008 Q 2 Q 3 Q 4 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Cash flows from operating activities:
Net income 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 42% 18% 17% 15% 16% 14%
Amortization 16% 5% 4% 5% 5% 5%
Stock-based compensation 5% 1% 0% 26% 18%
Stock-based compensation related to prior years 2% 2% 1%
Net (gain) loss on sale of available-for-sale securities -4% -2% 0% 1% 0% 1%
Impairment loss on investments 8% $3,099 0% 1% 1%
Convertible debt derivatives revaluation and amortization 0% 0%
Write-off of acquired in-process research and development 1%
Noncash compensation expense 0%
Provision for deferred income taxes -19% 16% 19% 7% 2% 0%
Tax benefit from exercise of stock options 14% 36% 17% 11% 10% 4%
Excess tax benefit from stock-based compensation -8% -6%
Changes in assets and liabilities, net
of effects from acquisition of business:
Accounts receivable, net -39% -17% 11% 5% 3% -18%
Inventories -12% 3% -27% -4% 8% 12%
Deferred income taxes 16% -20% -17% -1% 1% 0%
Prepaid expenses and other current assets 36% -3% 1% -10% 10% 9%
Other assets -4% 2% -10% -8% -4% 1%
Accounts payable 4% 12% -5% 2% 2% -5%
Accrued liabilities 12% 4% -2% 5% -3% 5%
Income taxes payable 16% -28% -8% 0% -1% 8%
Deferred income on shipments to distributors 41% 10% -15% 7% -11% 6%
Net cash provided by operating activities 274% 143% 88% 138% 157% 155% 189% 321% 366% 142% 142% 142% 142% 142% 142% 142% 142% 142% 142%
Cash flows from investing activities:
Purchases of available-for-sale securities -1229% -720% -691% -412% -532% -574%
Proceeds from sale and maturity of available-for-sale securities 978% 613% 702% 512% 483% 636%
Distribution from United Microelectronics Corporation 3%
Purchases of property, plant and equipment -37% -14% -20% -19% -32% -12%
Acquisition of business, net of cash acquired -5%
Other investing activities -7% 0% -1%
Net cash provided by (used in) investing activities -283% -117% -14% 68% -81% 51% -118% -22% 68% -99% -110% -110% -109% -106% -105% -104% -101% -99% -98%
Cash flows from financing activities: 43% 31% 32% 33% 36% 37% 38% 40% 43% 44%
Repurchases of common stock -48% -21% -43% -113% -408% -147%
Proceeds from issuance of common stock 43% 36% 27% 29% 37% 34%
through various stock plans
Proceeds from issuance of convertible 279%
debentures, net of issuance costs
Payment of dividends to stockholders -22% -27% -34% -37% -46% -92% -112% -46% -49% -51% -53% -54% -55% -56% -57% -57% -57%
Excess tax benefit from stock-based compensation 8% 6%
Net cash used in financing activities -5% 15% -38% -112% -118% -145%
Net increase (decrease) in cash and cash equivalents -13% 41% 36% 94% -42% 62%
Cash and cash equivalents at beginning of year 183% 71% 108% 127% 223% 170%
Cash and cash equivalents at end of year 170% 111% 144% 221% 181% 232%
Supplemental schedule of non-cash activities:
Accrual of affordable housing credit investments 5% 0% 0%
Supplemental disclosure of cash flow information:
Interest paid 0% 0% 9%
Income taxes paid, net of refunds -50% 11% 17% 10% 11% 15%
152

VALUATION RATIO’S
Introduction
Earnings valuation multiples are commonly used to measure relative value. Each ratio
provides its own specific insights into the financial position of a firm and/or industry.
But misuse of valuation ratios is common, so we must discuss four basic steps
necessary to properly use these ratios. First, the multiples must be clearly and
consistently be defined; this ensures that comparable firms are measured uniformly.
The second step is to be aware of differences across firms that may impede a ratio’s
relevance to the analysis. Third, one must understand the multiple and its
fundamentals in order to correctly analyze the results. And finally, it is extremely
important that firms are actually comparable. This means that the firms experience
similar cash flows and business risk.
All of our ratios are valued as of November 3, 2008. Competitors’ information was
taken from yahoo finance.
Price to Earnings Ratio
The price to earnings ratio is consistently defined as the market price of equity divided
by earnings per share. However, this ratio has variations on the earnings per share
used in its computation; these derivations depend on whether you are calculating
forward earnings or using the trailing earnings. These variations can create very
different results due to the potential volatility in earnings per share; this can cause
forward PE to be very different from trailing PE. However different these results may
be, the interpretation remains the same; higher PE ratios are often accompanied by
higher growth, lower risk and higher payout.
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P/E Trailing Twelve Months
The trailing price to earnings multiple (PE) is defined as the market price of equity
divided by the last four quarters of earnings per share. We compiled the necessary
data and have displayed the results in the following table.
P/E (ttm)
Comparables
Company PPS EPS P/E (ttm) Industry Avg. XLNX PPS
Xilinx 17.62 1.3342 13.21 13.56 18.07
Xilinx (Restated) 17.62 2.3431 7.52 13.56 31.77
Altera 16.71 1.0823 15.44
Actel N/A N/A N/A
Lattice Semiconductor 1.73 0.148243 11.67
It can be argued that this ratio is more accurate than the forward price-to-earnings
ratio because it uses actual earnings. The industry’s competitors’ information was
provided by www.finance.yahoo.com and was the only data used in the industry
average calculation. Actel Corporations data was unavailable and thus not incorporated
into our calculations.
To estimate company value we multiplied the average industry trailing P/E by Xilinx’s
trailing EPS for the last 12 months. This calculation estimates Xilinx price-per-share to
be $18.07, which is within 15% of the closing price on November 3, 2008 and therefore
suggests that Xilinx is fairly priced. However, this ratio is derived using historical
information and is not a measure used in predicting future value.
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P/E Forward
The forward price to earnings multiple (PE) is defined as the market price of equity
divided by the earnings per share in the next financial year. We compiled the necessary
data and have displayed the results in the following table.
P/E (forecast)
Comparables
Company PPS EPS P/E (forecast) Industry Avg. XLNX PPS
Xilinx 17.62 1.136 15.51 20.99 23.84
Xilinx (Restated) 17.62 1.6781 10.5 20.99 35.22
Altera 16.71 1.2109 13.8
Actel 12.3 0.4366 28.17
Lattice Semiconductor N/A N/A N/A
We discussed our earnings forecast earlier in our analysis; this number, when divided
by the number of shares outstanding, will yield the estimate needed in calculating the
forward P/E.
The forward P/E will be lower than the trailing P/E if earnings growth is expected.
Xilinx’s PE TTM is lower than its forward PE by 2.3, which implies growth; in our
forecasted financials we have presented slight contraction. We recognize that this
contradicts our short-term predictions; however, the growth implied by the difference
between the PE ratios is in agreement with our long-term forecast. The forward P/E
suggests that Xilinx is undervalued because it estimates true value is approximately
35% higher than the markets current value at $23.84.
The estimated P/E is inherently erroneous because it limits the forecast to one year in
the future and ignores potential earnings growth beyond 12 months. Without additional
data neither the forward nor the trailing price-to-earnings ratio will render accurate
valuation estimates.
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Price to EBITDA
This ratio is calculated by dividing the market cap by the earnings before interest, tax,
depreciation, and amortization (EBITDA). Essentially, the lower the ratio is the more
profitable business operations are because EBITDA represents an operating cash flow.
Additionally, low ratios indicate a strong correlation between the value generated by the
firm and the markets valuation of firm assets. Put another way, this ratios measures
how operating cash flows justified the markets value of equity.
However, one weakness is that this ratio ignores a company’s ability to manage debt
and taxes; if management lacks adeptness in these two areas profitability can be
destroyed.
Company
Price/EBITDA
EBITDA
Market Cap ($Millions) ($Millions)
P/EBITDA
Industry
Avg.
Comparables
XLNX PPS
Xilinx 4,942.00 533.646 0.033 0.06 32.53
Xilinx (Restated) 4,942.00 874.057 0.0202 0.06 52.44
Altera 4,519.00 274.953 0.061
Actel 211.46 N/A N/A
Lattice
Semiconductor 180.09 N/A N/A
The data above only includes one of Xilinx’s competitors and comparability is difficult to
interpret without an industry benchmark. However, Xilinx does have a really low
price/EBITDA ratio, which suggests that it is significantly undervalued. The accuracy of
this ratio valuation is highly questionable and should be viewed with caution.
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Price to Book
The price to book ratio is useful in investment analysis for several reasons. First, is that
a firm’s book value is a fairly stable measure of firm value that can easily be compared
to market value. This offers investors a much simpler benchmark. Second, because
the specialized-semiconductor industry has reasonable consistency in accounting
standards, the price to book ratio can be used to signal over- or undervaluations.
Finally, price to book is not affected by firms that experiences negative earnings; which
is one of the limitations to the price to earnings ratio. However, price to book is not
without its own limits. The book value of a firm is an accounting number and thus
inherently susceptible to manipulations in policy (i.e. depreciation, amortization, and
leasing). If accounting policies vary amongst industry competitors the price to book
values will not be useful in comparison. Additionally, firms that generate most of their
value from intangible assets will not find comparing price to book ratios very insightful.
The ratio is calculated by dividing the current period’s price per share by the current
book value of equity per share. The book value per share is calculated by dividing the
book value of equity by the number of shares of common stock outstanding. After
determining the P/B ratios for each firm, we took the industry average, excluding Xilinx,
and multiplied that average by Xilinx’s book value of equity per share. According to the
price to book ratio, Xilinx is undervalued in the market because their current share price
of $17.62 is much less than the price we calculated for the industry average which is
$28.55.
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Price/Book
Comparables
Company PPS BPS P/B Industry Avg. P/B Xilinx PPS
Xilinx 17.62 10.73 1.64 2.66 28.55
Xilinx (Restated) 17.62 10.73 1.64 2.66 N/A
Altera 16.76 2.77 6.05 N/A N/A
Actel 12.3 10.88 1.13 N/A N/A
Lattice 1.73 2.16 .8 N/A N/A
Dividends to Price
This ratio consisted of the dividends per share divided by the price per share. Out of
the three Xilinx competitors only one paid dividends, this was Altera. With only one
competitor to take the industry average from to get the price made this valuation not as
reliable as the others. To get the price, we took Xilinx’s dividends per share and divided
it by the industry average dividends over price to get the price of Xilinx, which came out
to 3.9. From this calculation led us to say that Xilinx under this method was
overvalued.
Dividends/Price
Comparables
Company D/P Industry Avg. D/P Xilinx Price
Xilinx .78 .2 3.9
Xilinx (Restated) .78 .2 N/A
Altera .2 N/A N/A
Actel N/A N/A N/A
Lattice N/A N/A N/A
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Price Earnings Growth
The PEG ratio compares the PE of a firm to its expected growth rate with the intention
of identifying undervalued and overvalued stocks. The growth rate used must be the
growth in earnings per share; this follows the rule of consistency that we mentioned in
the introduction. Firms that have a growth rate that exceeds their PE ratio are viewed
as undervalued; said differently, a lower PEG ratio indicates that a firm is undervalued.
The PEG ratio is calculated by dividing expected growth into the PE ratio. One caveat is
that the forward PE ratio should never be used in the calculation of PEG because it
would result in double counting growth. The following chart provides the data we have
collected and calculated for the specialized-semiconductor industry.
Price Earnings Growth
Comparables
Company P.E.G Industry Avg. Xilinx PPS
Xilinx 6.6071 .92 2.45
Xilinx (Restated) 6.6071 .92 N/A
Altera .95 N/A N/A
Actel N/A N/A N/A
Lattice 1.85 N/A N/A
For the purpose of comparison, lower-growth firms have higher PEG ratios and are
overvalued. The specialized-semiconductor industry has an average PEG ratio of .92,
while Xilinx has a PEG ratio of 6.6; this suggests that Xilinx is a low growth firm and is
significantly overvalued.
Price to Free Cash Flows per share
The price to free cash flows per share ratio offers insight into the value of operating
cash flows relative to the market price. The larger the ratio, the more expensive the
firm is from the investors perspective. The ratio is calculated by dividing free cash
flows per share into the market share price. This ratio can’t be used in analyzing the
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specialized-semiconductor industry because all of Xilinx’s competitors have a negative
ratio, therefore the negative industry average made this valuation irrelevant.
Enterprise Value to EBITDA
The enterprise value to EBITDA ratio is calculated by dividing EBITDA into enterprise
value. The analysis of this ratio avoids two major ratio limitations. First, fewer firms
have a negative EBITDA than the number of firms with negative earnings; this means
that more firms can be valued. Second, accounting differences in line items like
depreciation have no effect on EBITDA.
Company
Enterprise Value/EBITDA
Enterprise EBITDA
Value ($Millions)
EV/EBITDA
Industry
Avg.
Comparables
XLNX PPS
Xilinx 4,547.00 533.646 8.52 0.77 28.04
Xilinx (Restated) 4,547.00 874.057 5.20 0.77 45.03
Altera 3,850.00 274.953 14.00239
Actel 134.67 ‐12.099 ‐11.1307
Lattice
Semiconductor 134.46 ‐241.838 ‐0.55599
Generally, the higher the multiple, the more overvalued a firm appears. The industry
average is skew due to the negative ratios for two primary competitors; therefore an
accurate industry benchmark is not known. The table indicates that Xilinx is
undervalued.
Conclusion
The valuation ratios’ present a wide range of speculative value and overall present
conflicting results. The PE forward, price/EBITDA, price/book, and EV/EBITDA all
indicate that Xilinx is undervalued relative to the industry; the dividends/price and PEG
ratio indicate that Xilinx is overvalued; and PE ttm indicates that they are fairly priced.
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The overall valuation is more skew towards Xilinx being undervalued; however a
substantive conclusion is impossible using these ratios alone.
Valuation Ratios
PE ttm
PE Forward
Price/EBITDA
Price/Book
Dividends/Price
PEG
Price/FCF
Enterprise Value/EBITDA
Valuation Results
fairly priced
undervalued
undervalued
undervalued
overvalued
overvalued
N/A
undervalued
Intrinsic Valuation Models
The intrinsic valuation models are used to estimate a company’s market value price per
share. Each valuation model generates a sensitivity analysis using weighted average
cost of capital, size-adjusted cost of equity, and growth rates (positive/negative) to
illustrate the affects of various scenarios. The intrinsic valuation models will include
Discounted Dividends Model, Residual Income Model, Free Cash Flow Model, Abnormal
Earnings Growth (AEG) and Long Run Residual Income Model. Each specific model
provides another perspective to value the firm but all are benchmarked against our
forecasting for 2009 until 2018. The forecasting line items used included are from the
income statement, balance sheet, and statement of cash flows. The forecast has
several red flags due to inherent errors in CFFI, retained earnings and dividend
payouts; these issues are why some of the models below look different from a normal
161

analysis. We are confident however, that the models and theory behind them are
correct.
Discounted Dividends Model
The foundation for the discounted dividend model is built on the idea that the only cash
flow investors receive from a firm are its dividends. This is the simplest model for
valuing equity; the value of the stock is the present value of all expected dividends.
The two basic inputs of this model are the expected dividends and the cost of equity.
The expected dividends are derived from assumptions made about future earnings
growth rates and payout ratios.
This model is viewed as the most unreliable in estimating equity value and has several
limitations, albeit it is supported by some of the most important financial theories. The
most significant limitation is the models sensitivity to growth rate inputs. Incorrectly
estimating growth rates will have a significant impact on the results of the model; this is
because the model goes on into infinity. Additionally, analysts could miss value firms
that do not return to their stockholders what they can afford.
After finding the present value of the total year by year dividends, the dividend discount
model requires that you find the value of the perpetuity. We estimated the value of
Xilinx’s dividends per share in perpetuity to be $.899 in year 2018; we then found the
terminal value of the perpetuity by discounting it back to year zero using the cost of
equity. These two numbers are then summed in order to calculate the implied model
price as of 3/31/08 (Xilinx’s year end). However, since we are valuing the firm as of
11/3/08 it is necessary to calculate the time consistent price; this is performed by
exponentially multiplying the implied model price by the fraction of the year that has
come to pass, which is (7/12) in this specific case. The time consistent price is then
compared to the actual closing price as of 11/3/08 in order to determine whether the
firm is over- or undervalued.
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Discount Dividends Model Sensitivity Analysis
Growth Rate
Ke 0 0.015 0.03 0.055 0.08 0.11 0.14
0.13 4.76 4.97 5.23 5.9 7.25 13.3 N/A
0.15 4.56 4.71 4.89 5.34 6.09 8.26 23.39
0.16 4.47 4.6 4.76 5.13 5.73 7.25 13.3
0.17 4.4 4.51 4.65 4.97 5.45 6.57 9.94
0.18 4.33 4.43 4.56 4.83 5.23 6.09 8.26
0.19 4.27 4.36 4.47 4.71 5.05 5.73 7.25
0.21 4.17 4.25 4.33 4.51 4.76 5.23 6.09
Green Orange = Fairly Valued Red
Undervalued $14.62 < $17.62 < $20.62 Overvalued
Above is our sensitivity evaluation of the discounted dividend model. Our calculated
cost of equity was 17.2% and a growth rate of 5.5% yielded a valuation price of $4.94;
which would imply that Xilinx is overvalued when compared to the observed market
price of $17.62. The lack of comparability to the observed price can be attributed to
the volatility of the changing cost of equity and growth rates in the model. Even with
the lack of variability in this model, it still shows the company as being overvalued.
Residual Income Model
The residual income model has the highest explanatory power, making this model the
most reliable and least sensitive to the growth rates. The summation of the book value
of equity, the total present value of the year by year residual income and the terminal
value of the perpetuity is what comprises this valuation model. The calculation of this
method will result in the amount of value that has been either destroyed or added by
the company.
To begin, the annual normal income is calculated by multiplying the previous year’s
book value of equity by the cost of equity; it denotes the growth/retraction in net
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income. Next, the annual residual income is calculated; it is defined as the difference
between the net income and the annual normal income from the same year. And
finally, the present value of the year by year residual income is calculated by multiplying
the annual residual income by its present value factor. These are then summed in the
same way that it has been in the other models. Then the terminal value of the
perpetuity is calculated in the same manner as the other valuation models and summed
with the book value of equity, which is denoted on the firm’s balance sheet. The
summation of these three items denotes the residual income models market value of
equity as of the year end 3/31/08. The time consistent price is once again calculated
(in the same manner) and used to compare with the closing price as of 11/3/08. The
results of this process will allow for judgment as to whether Xilinx is over- or
undervalued.
If the annual residual income is a negative then the firm destroyed value over the
period. On the other hand, if the annual residual income is positive then the firm has
added value for shareholders.
To break down this valuation model we had to use the first year out of our forecasting
for 2009 with a net income of $335,526.84 with the rest of the years following up until
2018. The next step was taking the total dividends $147,672.57 for 2009 and the rest
to 2018. Then, we simply took the previous year’s book value of equity and multiplied
that number by our size adjusted cost of equity of 17.2%. After taking the Benchmark
amount subtracted by the current year’s net income it worked out to find the annual
residual income for all ten forecasted years.
To find the total present value of residual income, the calculation was then added on a
yearly basis to equal the terminal value of perpetuity, which is extremely low when
comparing the sensitivity to discount dividends and free cash flow models. The
perpetuity that we used for this model was our size-adjusted cost of equity of 17.2%
and our growth rate of -.10% and discounts back to time-zero dollars to create the
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terminal value perpetuity of a loss for $96,700.36. The percentage of value in
comparison to the market value of equity equaled a -6.77%. The result of having a
negative percentage for the terminal value perpetuity has caused a “red flag” due to
Xilinx business model not correctly matching this outcome. For example, Xilinx is a high
research and development company and should be a positively high percentage.
The following data will be summed by adding the book value of equity, $1,671,823,
total present value of year by year residual income, loss of $146,424, and the terminal
value perpetuity, loss of $96,700.36, to reach the market value of equity at 3/31/2008
for $1,428,699.11. This amount will then have to be divided by the amount of shares
outstanding for 280,519,000 to come up with the price per share. The time consistent
price will be found by multiplying the amount we just calculated by one plus the sizeadjusted
cost of equity and raised to seven over twelve (to adjust for our fiscal year
end). The initial price per share that we will use as a benchmark was found through
yahoo finance closed on November 3 rd , 2008 at $17.62.
Residual Income Model Sensitivity Analysis
Growth Rate
Ke ‐0.1 ‐0.2 ‐0.3 ‐0.4 ‐0.5
0.11 9.18 9.01 8.92 8.87 8.83
0.12 8.4 8.31 8.26 8.23 8.22
0.13 7.71 7.68 7.67 7.66 7.66
0.15 6.56 6.62 6.65 6.67 6.69
0.16 6.09 6.17 6.22 6.25 6.27
0.17 5.67 5.76 5.82 5.86 5.88
0.18 5.29 5.4 5.46 5.51 5.54
0.19 4.95 5.07 5.14 5.18 5.22
0.21 4.38 4.5 4.57 4.62 4.65
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Restated Residual Income Model Sensitivity Analysis
Growth Rate
Ke ‐0.1 ‐0.2 ‐0.3 ‐0.4 ‐0.5
0.08 7.42 7.35 7.32 7.3 7.29
0.10 5.64 5.71 5.75 5.77 5.78
0.13 3.1 3.31 3.42 3.49 3.54
0.15 1.47 1.74 1.89 1.99 2.06
0.16 0.67 0.97 1.13 1.24 1.32
0.17 N/A 0.2 0.38 0.5 0.58
0.18 N/A N/A N/A N/A N/A
0.19 N/A N/A N/A N/A N/A
0.21 N/A N/A N/A N/A N/A
The two charts show the sensitivity analysis of the residual income growth and the
restated residual income growth model. After reviewing the results, our graphs have
been consistently overvalued. The residual income model based off our size-adjusted
cost of equity was a price of $5.59. This price was found with a -10% growth rate but
can range to a price of $5.81 when using a -50% growth rate. The greater the growth
rate becomes, the slower the return to equilibrium; the smaller the growth rate
becomes, the faster the return to equilibrium. We believe the return to equilibrium will
be moderate, so our analysis focuses on the middle growth rate. Additionally, it is
important to note that if the terminal value of the perpetuity starts as a negative
number then a decreasing growth rate will increase the market value. If the terminal
value of the perpetuity starts as a positive number then a decreasing growth rate will
decrease the market value. This theory demonstrates that the terminal value of the
perpetuity will always approach equilibrium.
In relation to the residual income cost of equity lower bounds, we have extended our
ranges further to 11% and 12% in order to reach a positive percentage of value in the
total present value of yearly residual income and terminal value perpetuity. The time
consistent prices were still overvalued ranging from $8.22 to $9.18 using this cost of
equities. The industry that Xilinx is a part of must have this positive percentage of
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value because of its business model. If this was a commodities company then the
percentage of value would primarily be in the book value of equity.
As for the restated residual income, the upper and lower bounds did have the sizeadjustments
added in with the same growth rates but did not have the extension to the
lower bounds. When pertaining to the higher cost of equities closer to the upper
bound, the reason for the N/A is due to a negative number.
Discounted Free Cash Flows Model
The discounted free cash flows model is a valuation model that attempts to determine
the intrinsic value of a company by summing the present value of a firm’s year by year
free cash flow and the present value of the free cash flow perpetuity.
Before beginning this model it is necessary to understand its fundamental foundation.
The cash flows from operating (CFFO) and cash flows from investing (CFFI) are the two
numbers from which the model depends. Both line items are found on the statement of
cash flows; however, for Xilinx we have made an adjustment to its CFFI. The CFFI
includes the capitalized amount of R&D expenditures because it can be viewed as an
investment in product development.
The process is relatively simple, but has many steps. To begin, the year by year cash
flow is calculated by subtracting the cash flows from investing (CFFI) from the cash
flows from operating (CFFO). This is performed for each forecasted year in the model;
and the sum of these two cash flows are then multiplied by their present value factors
to determine the present value for each year. The present value of the year by year
free cash flows is then summed. The total present value of the year by year free cash
flows is then added to the present value of the free cash flow perpetuity; this
calculation yields the total market value of assets, which we found to be $936,298. The
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market value of assets is then divided by the total shares outstanding (280,519) to find
the price per share as of 3/31/08 (Xilinx’s year end). Similar to the discounted
dividends model, a time consistent price is needed for comparability; this number is
calculated the same way it was found in the DDM and then used to compare the
forecasted results with the actual market price as of 11/3/08. The table below
illustrates our sensitivity analysis.
The sensitivity analysis for this model focuses on the relationship between the growth
rate and the weighted average cost of capital. By manipulating the rates in the formula
the analysis yields an outcome that can be compared to the time consistent price, which
can then be used to determine whether the firm is over- or undervalued. The table that
is used is based off of the upper and lower bounds of Xilinx’s weighted average cost of
capitals. In order for the model to work, the growth rate needs to be greater than one
and less than the cost of capital. Another problem with this model is that it assumes
that the perpetuity growth rate is constant to infinity. In reality a company cannot
sustain a high growth rate for a long time and eventually will reach a sustainable
growth rate.
Discount Free Cash Flow Sensitivity Analysis
Growth Rate
Wacc(bt) 0.02 0.032 0.044 0.056 0.068 0.08 0.09
0.11 3.47 3.74 4.10 4.62 5.45 6.94 9.54
0.12 3.30 3.51 3.79 4.17 4.74 5.64 6.94
0.13 3.15 3.33 3.55 3.84 4.25 4.86 5.64
0.14 3.04 3.18 3.36 3.59 3.90 4.34 4.86
0.15 2.94 3.06 3.21 3.40 3.64 3.96 4.34
0.16 2.85 2.95 3.08 3.24 3.43 3.69 3.96
0.17 2.78 2.87 2.97 3.10 3.27 3.47 3.69
Green Orange = Fairly Valued Red
Undervalued $14.62 < $17.62 < $20.62 Overvalued
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We forecasted Xilinx’s CFFO to gradually climb out of the recession to a growth rate of
6% by 2018. The CFFI was estimated using the growth in plant, property and
equipment. The forecasted growth in CFFI is justified because Xilinx has the change in
plant, property, and equipment as well as the research and development expense. This
trend will continue to have a cash outflow for the company. The market observed price
as of 11/3/08 for Xilinx is $17.62. In comparison to their initial weighted average cost
of capital of 13.96% and growth rate of 5.55% the price was calculated to be $3.6,
which implies Xilinx is overvalued.
Restated Discount Free Cash Flow Sensitivity Analysis
Growth rate
Wacc(bt) 0.02 0.032 0.044 0.056 0.068 0.08 0.09
0.11 4.910 5.270 5.760 6.470 7.590 9.600 13.120
0.12 4.670 4.960 5.340 5.860 6.620 7.840 9.600
0.13 4.480 4.710 5.020 5.410 5.970 6.780 7.840
0.14 4.320 4.520 4.760 5.070 5.490 6.080 6.780
0.15 4.180 4.350 4.550 4.810 5.140 5.580 6.080
0.16 4.070 4.210 4.380 4.590 4.860 5.200 5.580
0.17 3.970 4.090 4.240 4.410 4.630 4.910 5.200
Abnormal Earnings Growth Model (AEG)
The abnormal earnings growth model (AEG) is based on a forward price to earnings per
share ratio that is calculated through accounting assumptions. This valuation model is
based off the forecasted net income and total dividends starting in year 2010 until
2018. We will have to use the forecasted net income and total dividends for 2009 to
create the actual drip method. The drip method is a calculation of cumulative dividends
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y taking the size-adjusted cost of equity 17.2% multiplied by a negative one to the
previous year’s total dividends amount.
The “drip” method is a concept that is an understanding of what certain dividends are
distributed throughout a company. If a company doesn’t provide any dividends then it
was completely a direct wealth dividend policy. On the other hand, if there are
dividends then this dividend policy would be an indirect and direct wealth transfer
within the company policy.
After finding the dividends that must be reinvested at the appropriate cost of equity
rate, then we calculated the sum of the current year’s net income and dividend amount
that had to be reinvested at 17.2% to equal the cumulative dividends throughout the
entire forecasted ten years.
The normal earnings calculation is the next step to lead into the AEG results. This
equation used will be this below:
Now that we have determined the cumulative dividends and the normal earnings for the
forecasted abnormal earnings growth model; the subtraction of the two will then
conclude the abnormal earnings (AEG). The actual amount for AEG will then
demonstrate the amount of actual value that has been destroyed on a yearly basis by
the firm. The table below is proof that our AEG model follows the Residual Income
check figure by taking the yearly change; for example the annual residual income of
2010 subtracted by 2009.
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Abnormal Earnings Growth Model
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Net Income 335527 328816.3 335392.6 342100.5 348942.5 362900.2 377416.2 392512.8 412138.5 436866.8
Total Div ‐147673 ‐155795 ‐164363 ‐173403 ‐182940 ‐193002 ‐203617 ‐214816 ‐226631 ‐239096
Div Reinvest at 17%
Drip 25399.68 26796.66 28270.48 29825.36 31465.75 33196.37 35022.17 36948.39 38980.55
Cum‐Div 354216 362189.3 370371 378767.8 394365.9 410612.6 427535 449086.9 475847.3
Normal Earnings 393237.5 385372.7 393080.2 400941.8 408960.6 425319 442331.8 460025.1 483026.3
Abnormal Earnings
(AEG) ‐39021.5 ‐23183.4 ‐22709.2 ‐22173.9 ‐14594.7 ‐14706.5 ‐14796.8 ‐10938.2 ‐7178.96
PV Factor 0.853242 0.728022 0.62118 0.530017 0.452233 0.385864 0.329236 0.280918 0.239691
PV of AEG ‐33294.8 ‐16878 ‐14106.5 ‐11752.5 ‐6600.18 ‐5674.69 ‐4871.62 ‐3072.73 ‐1720.73
Residual Inc Check
Figure ‐39021.5 ‐23183.4 ‐22709.2 ‐22173.9 ‐14594.7 ‐14706.5 ‐14796.8 ‐10938.2 ‐7178.96
RI PROOF 0 0 0 0 0 0 0 0 0
Abnormal Earnings Growth Sensitivity Analysis
Growth Rate
Ke ‐0.1 ‐0.2 ‐0.3 ‐0.4 ‐0.5
0.11 9.81 9.75 9.72 9.7 9.68
0.12 8.69 8.66 8.65 8.64 8.63
0.13 7.78 7.77 7.77 7.77 7.76
0.15 6.38 6.4 6.41 6.42 7.04
0.16 5.85 5.87 5.88 5.89 5.9
0.17 5.38 5.41 5.43 5.44 5.44
0.18 4.99 5.02 5.03 5.04 5.05
0.19 4.64 4.67 4.69 4.7 4.71
0.21 4.07 4.1 4.11 4.13 4.13
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Restated Abnormal Earnings Growth Sensitivity Analysis
Growth Rate
Ke ‐0.1 ‐0.2 ‐0.3 ‐0.4 ‐0.5
0.11 9.63 9.56 9.52 9.5 9.48
0.12 8.54 8.51 8.49 8.47 8.47
0.13 7.65 7.64 7.63 7.63 7.62
0.15 6.3 6.31 6.31 6.32 6.32
0.16 5.77 5.79 5.8 5.8 5.81
0.17 5.32 5.34 5.35 5.36 5.37
0.18 4.93 4.95 4.97 4.98 4.98
0.19 4.59 4.62 4.63 4.64 4.65
0.21 4.04 4.06 4.07 4.08 4.09
The two charts above represent the sensitivity analysis for the abnormal earnings
growth and the restated abnormal earnings growth model. There are similarities with
the residual income model because this model is also less sensitive to the negative
growth rates in an assumption that we will not be able to beat the cost of equity of
17.2%. As take into consideration the sensitivity analysis for this model, the chart
demonstrates that our firm is consistently overvalued. The firm itself has a November
3 rd , 2008 initial price of $17.62. The closest to that price that we get is during a growth
rate of -10% and with a cost of equity of 11% coming out with $9.63. Using our actual
size-adjusted cost of equity of 17.2% with an average of -30% was a price per share of
$5.34. As for the restated abnormal earnings growth model, it resulted in the same
conclusion as the previous chart proving that the results were consistently overvalued.
To demonstrate an understanding of how much of a change the size-adjusted cost of
equity we derived through multiple costs of equities to find where we would come
across a fairly valued price. To receive a fairly valued shared price, it would have to
have a 7.2% size-adjusted cost of equity to have a $17.65 price per share.
LONG RUN RESIDUAL INCOME MODEL
The long run residual income model applies most of the same methods from the
residual income model but there are some differences between the models. This model
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is focused on the long run and in the residual income model used dividends as one of
the bases of calculating market value of equity (MVe). Dividends, however, are hard to
forecast in the long run, therefore the results are. The long run residual income uses a
different calculation to get market value of equity that takes a more long term approach
for this model. The new equation for MVe is listed below.
Mve = Be(t0) * [1+(Roe-Ke)/(Ke-g)]
This new equation for Mve takes into account ROE and growth as new factors for this
equation. To get ROE, we took the average on the ROE forecasted out and took out
the outliers giving us a ROE of 18.06%. For our growth, we determined it to be around
6%. With these numbers we found a time consistent price of $.5. This number is
clearly nowhere close to the comparable price of $17.62. The main justification for this
is because our growth rate is nowhere near the cost of equity. Since the growth rate is
based off of the net income, which is calculated using a low sales growth, the growth
for this model is also low.
Actual
Growth
Ke 0.03 0.04 0.05 0.06 0.07 0.08 0.09
0.13 3.31 3.68 4.14 4.73 5.51 6.62 8.27
0.15 1.67 1.82 2 2.22 2.5 2.86 3.33
0.16 1.04 1.12 1.22 1.35 1.5 1.68 1.92
0.17 0.5 0.53 0.58 0.63 0.69 0.77 0.87
0.18 0.03 0.03 0.03 0.03 0.04 0.04 0.04
0.19 N/A N/A N/A N/A N/A N/A N/A
0.21 N/A N/A N/A N/A N/A N/A N/A
Constant ROE 18.06
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Roe
Ke 0.15 0.16 0.17 0.1806 0.19 0.2 0.21
0.13 1.87 2.8 3.74 4.67 5.6 6.54 7.47
0.15 N/A 0.73 1.45 2.18 2.91 3.63 4.36
0.16 N/A N/A 0.65 1.31 1.96 2.62 3.27
0.17 N/A N/A N/A 0.59 1.19 1.78 2.38
0.18 N/A N/A N/A N/A 0.54 1.09 1.63
0.19 N/A N/A N/A N/A N/A 0.5 1.01
0.21 N/A N/A N/A N/A N/A N/A N/A
Constant Growth 6%
Roe
Growth 0.15 0.16 0.17 0.1806 0.19 0.2 0.21
0.03 N/A N/A N/A 0.37 0.83 1.29 1.75
0.04 N/A N/A N/A 0.4 0.89 1.39 1.88
0.05 N/A N/A N/A 0.43 0.96 1.5 2.04
0.06 N/A N/A N/A 0.47 1.05 1.63 2.22
0.07 N/A N/A N/A 0.51 1.15 1.79 2.44
0.08 N/A N/A N/A 0.57 1.28 1.99 2.7
0.09 N/A N/A N/A 0.64 1.44 2.23 3.03
Constant Ke 17.2%
Growth Rate RESTATED
Ke 0.03 0.04 0.05 0.06 0.07 0.08 0.09
0.13 1.96 2.18 2.45 2.8 3.27 3.92 4.9
0.15 0.54 0.59 0.65 0.73 0.82 0.93 1.09
0.16 N/A N/A N/A N/A N/A N/A N/A
0.17 N/A N/A N/A N/A N/A N/A N/A
0.18 N/A N/A N/A N/A N/A N/A N/A
0.19 N/A N/A N/A N/A N/A N/A N/A
0.21 N/A N/A N/A N/A N/A N/A N/A
Constant ROE of 16%
Considering that this model incorporates book value of equity, and Roe, this model
needs a restated portion. There was a new book value of equity used for this
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estatement as well as a new Roe percentage from the restated net income and equity.
The constant Roe dropped, which also dropped the prices around 50%.
Analyst Recommendation
After a significant amount of due diligence and analytical research, it is our opinion the
Xilinx is overvalued. This opinion is comprised of thorough discussion and analysis of
Xilinx’s competitors, accounting policies, and financial position. In order to arrive at this
conclusion, we had to restate and accurately forecast Xilinx’s financial statements. Our
forecasts enabled us to implement several valuation models aimed at capturing the
intrinsic value of the firm. All of our valuation models suggest that Xilinx is dramatically
overvalued, and therefore it is our opinion that current shareholders should sell their
holdings.
To expose the true economic value, we must understand all of the economic influences
that add and subtract value to Xilinx. We begin by discussing the business environment
in which they operate. The specialized-semiconductor industry is one of tremendous
competition. Success relies on technological innovation, product differentiation, and
large economies of scope. Xilinx and its fiercest competitor Altera hold a strong
majority of market share in the designing and marketing of programmable logic devices
(PLD), which are used in everything from cell phones to automobile manufacturing.
The industry has been experiencing a slowing growth, suggesting maturity; however,
there will always be a need for PLD’s because of the strong consumer demand for new
and innovative electronic devices. The industry has a high concentration of
competitors, significant threats of substitute products, moderate influence of suppliers,
and low bargaining power over customers, which all lead to a fiercely competitive
nature and are crucial for success. These key success factors helped narrow our focus
as we began the accounting, financial, and prospective analysis.
The focus of the next stage of analysis is the key accounting policies employed by Xilinx
and the quality of disclosure articulated. Key accounting policies can be categorically
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segmented between business activities relating to success factors and those policies
that materially distort the financial statements. The key accounting policies dealing with
business activities involve foreign currency and product liability warranties. Foreign
currency policy has a significant impact on business success because over 60% of
Xilinx’s total sales occur overseas; additionally, they have a significant amount invested
in fixed assets abroad Product warranties are important because of the fact that if the
warranty liability increases in relation to sales over time it indicates poor product
quality; ultimately having adverse affects on the bottom line. The accounting policies
dealing with items that can materially distort their financial position involve research
and development and goodwill. GAAP regulation requires all R&D be expensed in the
period incurred, which negatively impacts Xilinx’s financials because a great deal of
their products is a result of significant investments in research and development. These
expenses would better represent their financial position if they were capitalized. The
SEC does not demand that firms amortize goodwill at a certain pace, and leaves it up to
the individual firm’s to decide the most appropriate rate. Xilinx has not amortized
goodwill in recent years; we address this issue thoroughly in our restatements. The
accounting restatements that our findings require affect both the financial and
prospective analysis.
The financial analysis begins to quantitatively access how well Xilinx operates
independently and relative to its competitors. We used commonly accepted ratios to
depict Xilinx’s liquidity, profitability, and capital structure. We found Xilinx has adequate
liquidity and outperforms the industry. Additionally, they demonstrate above average
profitability, however they are not more profitable than Altera. Xilinx has historically
outperformed the industry in capital structure ratios, however, the firm is trending
downward and we believe the outlook is not positive.
The most critical part of our analysis is the portion that performs the actual valuation.
We employed several different models that are all supported by fundamental financial
theory. The ratios used in the method of comparables portion of the analysis yielded
conflicting results; half of the ratios indicated Xilinx was undervalued, two ratios
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indicated they were overvalued, one ratio indicated fair value and one ratio was thrown
out because of unreliable information. This level of dissension is not unusual when
performing relative valuation; these ratios are poor methods of accurately depicting a
firm’s economic circumstance. However, a clear and uniform perspective manifested
when we employed intrinsic valuation models. All of the models agreed that Xilinx was
overvalued. The residual income model, which is the most reliable model, estimated
Xilinx’s market price to be $5.75. This outcome is substantially lower than the markets
actual price of $17.62. For all of these reasons, we feel that Xilinx is worth substantially
less than the current market price.
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Appendices
Sales Manipulation diagnostics
Sales Manipulation Diagnostics
Xilinx 2003 2004 2005 2006 2007 2008
Net Sales $1,155,977 $1,397,846 $1,573,233 $1,726,250 $1,842,739 $1,841,372
Net Sales (Revenue) /
Cash from Sales
Net Sales/Account
Receivables (RAW)
Net Sales/Account
Receivables (CHANGE)
Net Sales/Inventory
(RAW)
Net Sales/Inventory
(CHANGE)
Net Sales/ Warranty
Expenses (Liabilities)
Net Sales/ Pension
Expenses (Liabilities)
0.85 0.96 1.02 1.01 1.01 0.96
5.85 5.61 7.37 8.89 10.11 7.39
5.85 4.72 -4.94 -7.95 -9.78 -0.02
10.37 13.64 8.47 8.59 10.56 14.14
10.37 (26.73) 2.11 10.00 (4.40) 0.03
N/A N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A N/A
Sales Manipulation Diagnostics
Altera 2003 2004 2005 2006 2007 2008
Net Sales $827,207 $1,016,364 $1,123,739 $1,285,535 $1,263,548 -
Net Sales (Revenue) /
Cash from Sales
Net Sales/Account
Receivables (RAW)
Net Sales/Account
Receivables (CHANGE)
Net Sales/Inventory
(RAW)
Net Sales/Inventory
(CHANGE)
Net Sales/ Warranty
Expenses (Liabilities)
Net Sales/ Pension
Expenses (Liabilities)
0.90 1.02 0.99 0.99 0.92 -
9.49 15.05 13.96 13.78 6.35 -
9.49 -9.61 8.27 12.69 -0.21 -
18.55 15.07 15.89 16.38 17.05 -
18.55 8.27 32.97 20.83 5.03 -
N/A N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A N/A
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Sales Manipulation Diagnostics
Actel 2003 2004 2005 2006 2007 2008
Net Sales $149,910 $165,402 $178,947 $191,499 $197,043 -
Net Sales (Revenue) / Cash
from Sales
Net Sales/Account
Receivables (RAW)
Net Sales/Account
Receivables (CHANGE)
Net Sales/Inventory
(RAW)
Net Sales/Inventory
(CHANGE)
Net Sales/ Warranty
Expenses (Liabilities)
Net Sales/ Pension Expenses
(Liabilities)
0.88 1.02 0.96 1.02 1.02 -
7.30 9.35 7.08 8.70 10.88 -
7.30 -5.43 1.78 -3.84 -1.42 -
3.88 4.01 4.79 4.88 5.54 -
3.88 6.07 -3.52 6.86 -1.53 -
N/A N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A N/A
Sales Manipulation Diagnostics
Lattice 2003 2004 2005 2006 2007 2008
Net Sales $209,662 $225,832 $211,060 $245,459 $228,709 -
Net Sales (Revenue) / 0.89 1.03 0.98 1.00 0.97 -
Cash from Sales
Net Sales/Account
-
Receivables (RAW) 7.82 11.53 8.95 10.89 7.81
Net Sales/Account 7.82 -2.24 -3.70 -33.33 -2.48 -
Receivables (CHANGE)
Net Sales/Inventory 4.50 5.89 7.38 6.32 5.72 -
(RAW)
Net Sales/Inventory 4.50 -1.96 1.51 3.36 -14.09 -
(CHANGE)
Net Sales/ Warranty N/A N/A N/A N/A N/A N/A
Expenses (Liabilities)
Net Sales/ Pension
Expenses (Liabilities)
N/A N/A N/A N/A N/A N/A
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Expense Manipulation Diagnostics
Expense Manipulation Diagnostics
Xilinx 2003 2004 2005 2006 2007 2008
Asset Turnover 0.48 0.48 0.52 0.54 0.58 0.59
CFFO/OI (Raw) 2.22 1.32 0.74 1.19 1.59 1.37
CFFO/OI (Change) 2.22 0.51 -3.50 5.35 -0.97 0.39
CFFO/NOA (Raw) 0.90 1.29 0.80 1.37 1.34 1.44
CFFO/NOA (Change) 0.90 -1.83 -16.70 15.57 1.13 -3.42
Total Accruals/ Sales 0.19 0.09 -0.02 0.08 0.11 0.11
Expense Manipulation Diagnostics
Altera 2003 2004 2005 2006 2007 2008
Asset Turnover 0.56 0.58 0.62 0.58 0.71 -
CFFO/OI (Raw) 1.65 1.00 1.29 1.41 0.99 -
CFFO/OI (Change) 1.65 -0.12 13.98 -0.47 5.82 -
CFFO/NOA (Raw) 2.04 4.65 5.16 4.56 1.37 -
CFFO/NOA (Change) 2.04 -1.64 26.77 27.01 1.70 -
Total Accruals/ Sales 0.21 0.04 0.12 0.08 -0.01 -
Expense Manipulation Diagnostics
Actel 2003 2004 2005 2006 2007 2008
Asset Turnover 0.47 0.52 0.49 0.56 0.54 -
CFFO/OI (Raw) 6.12 -8.28 3.85 -2.72 -0.89 -
CFFO/OI (Change) 6.12 2.25 1.80 -0.13 4.47 -
CFFO/NOA (Raw) 1.00 0.43 0.95 1.08 0.42 -
CFFO/NOA (Change) 1.00 -3.49 12.03 -1.79 -5.20 -
Total Accruals/ Sales 0.09 0.05 0.09 0.14 0.07 -
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Expense Manipulation Diagnostics
Lattice 2003 2004 2005 2006 2007 2008
Asset Turnover 0.25 0.28 0.29 0.34 0.61 -
CFFO/OI (Raw) -0.37 -0.09 -0.30 1.13 0.11 -
CFFO/OI (Change) -0.37 -0.90 -0.20 -0.07 0.06 -
CFFO/NOA (Raw) 0.65 0.13 -0.44 -0.31 -0.65 -
CFFO/NOA (Change) 0.65 4.64 12.14 4.40 4.55 -
Total Accruals/ Sales 0.60 0.26 -0.33 -0.07 0.92 -
Liquidity Ratios
Current Ratio
2003 2004 2005 2006 2007 2008
Xilinx 3.74 3.41 4.87 4.78 5.6 5.34
Altera 4.78 3.3 3.2 2.7 2.87 3.13
Actel 10.64 4.48 4.03 3.83 3.83 4.58
Lattice 8.63 10.3 5.53 5.34 3.01 2.36
Industry
Average
6.95 5.37 4.4 4.16 3.83 3.85
Quick Asset Ratio
2003 2004 2005 2006 2007 2008
Xilinx 2.78 2.75 3.6 3.42 4.35 4.54
Altera 4.16 2.91 2.62 2.25 2.38 2.49
Actel 7.94 3 2.89 2.66 2.66 3.46
Lattice 6.63 7.79 4.35 4.5 2.33 1.41
Industry
Average
5.38 4.11 3.37 3.2 2.93 2.98
181

Inventory Turnover
2003 2004 2005 2006 2007 2008
Xilinx 8.97 10.45 6.47 3.27 4.12 5.27
Altera 6.73 5.96 4.6 5.18 4.66 5.77
Actel 1.37 1.45 1.88 1.87 1.93 4.5
Lattice 1.63 1.91 2.51 3.36 4.5 2.58
Industry Average 4.68 4.94 3.87 3.42 3.8 3.98
Days’ Supply Inventory
2003 2004 2005 2006 2007 2008
Xilinx 40.69 34.93 56.43 111.66 88.67 69.2
Altera 54.24 61.21 79.38 70.53 78.27 63.2
Actel 266.6 251.3 193.75 195.26 189.23 157.71
Lattice 224.24 190.67 145.59 108.75 81.1 141.55
Industry Average 146.44 134.53 118.79 121.55 109.32 107.92
Accounts Receivable Turnover
2003 2004 2005 2006 2007 2008
Xilinx 5.85 5.61 7.37 8.89 10.11 7.39
Altera 12.46 9.49 15.05 13.96 12.05 6.46
Actel 6.54 8.48 6.4 8.13 8.7 10.88
Lattice 8.69 7.82 11.53 8.95 10.89 7.81
Industry Average 8.39 7.85 10.09 9.98 10.44 8.14
182

Days’ Sales Outstanding
2003 2004 2005 2006 2007 2008
Xilinx 62.42 65.01 49.52 41.06 36.11 49.39
Altera 29.29 38.48 24.25 26.15 30.29 56.47
Actel 55.79 43.06 57 44.91 41.96 33.56
Lattice 42.01 46.65 31.66 40.77 33.52 46.75
Industry Average 47.38 48.3 40.61 38.22 35.47 46.54
Cash to Cash Cycle
2003 2004 2005 2006 2007 2008
Xilinx 103.11 99.94 105.95 152.72 124.78 118.59
Altera 83.53 99.96 103.63 96.68 108.56 119.67
Actel 322.39 294.36 250.75 240.17 231.19 191.27
Lattice 266.25 237.32 177.25 149.52 114.62 188.3
Industry Average 193.82 182.83 159.4 159.77 144.79 154.46
Working Capital Turnover
2003 2004 2005 2006 2007 2008
Xilinx 1.34 1.52 1.36 1.32 1.32 1.24
Altera .78 .93 .95 1.19 .99 1.23
Actel .62 .93 .94 .94 1 .95
Lattice .66 .58 .69 .76 1.11 2.07
Industry Average .85 .99 .99 1.05 1.1 1.37
183

Profitability Ratios
Gross Profit Margin
2003 2004 2005 2006 2007 2008
Xilinx 59.3% 62.09% 63.37% 61.93% 61.00% 62.69%
Altera 63.04% 67.86% 69.48% 67.43% 67.43% 66.71%
Actel 60.60% 60.06% 57.43% 59.05% 60.51% 58.20%
Lattice 60.05% 57.42% 57.11% 54.55% 56.52% 54.90%
Industry Average 61% 62% 62% 61% 61% 61%
Operating Profit Margin
2003 2004 2005 2006 2007 2008
Xilinx 13.47% 23.40% 23.65% 23.87% 18.87% 23.04%
Xilinx (Restated) 17.30% 30.12% 33.53% 36.65% 35.06% 43.13%
Altera 23.96% 30.99% 28.67% 28.67% 23.42% 21.76%
Actel -2.73% -0.51% -0.80% 3.28% -4.71% -6.14%
Lattice -43.45% -45.12% -27.91% -31.25% -5.22% -110.1%
Industry Average -5% 0.43% 7% 6% 9% -17%
Net Profit Margin
2003 2004 2005 2006 2007 2008
Xilinx 10.87% 21.68% 19.88% 20.52% 19.03% 20.31%
Xilinx (Restated) 13.08% 23.84% 26.76% 29.94% 30.39% 35.39%
Altera 18.75% 27.07% 24.81% 24.81% 25.14% 22.95%
Actel 0.06% 2.37% 1.68% 3.93% -1.13% -1.47%
Lattice -76.48% -43.79% -23.02% -23.27% 1.26% -104.8%
Industry Average -13% -.24% 7% 6% 11% -15%
184

Asset Turnover
2004 2005 2006 2007 2008
Xilinx .58 .54 .57 .58 .58
Altera .68 .64 .62 .58 .71
Actel .47 .52 .53 .52 .53
Lattice .22 .28 .26 .34 .32
Industry Average .47 .51 .50 .51 .50
Return on Assets
2004 2005 2006 2007 2008
Xilinx 12.51% 10.65% 11.65% 11.05% 11.76%
Xilinx (Restated) 13.91% 14.47% 17.17% 17.82% 20.69%
Altera 18.49% 15.81% 15.30% 14.47% 16.39%
Actel 1.12% 0.88% 2.07% -0.58% -0.79%
Lattice -9.75% -6.37% -6.06% 0.43% -33.04%
Industry Average 4% 6% 6% 7% -2%
185

Return on Equity
2004 2005 2006 2007 2008
Xilinx 15.53% 12.59% 13.25% 12.85% 21.10%
Xilinx (Restated) 17.08% 16.95% 19.33% 20.52% 36.76%
Altera 24.96% 21.81% 22.06% 20.10% 33.67%
Actel .1.34% 1.05% 2.58% -0.74% -1.00%
Lattice -13.89% -8.58% -9.05% 0.62% -46.86%
Industry Average 4% 8% 7% 9% -2%
Internal Growth Rate
2004 2005 2006 2007 2008
Xilinx 13% 13.44% 14.8% 14.86% 16.23%
Altera 18.67% 15.08% 14.99% 14.47% 16.39%
Actel 1.12% 0.88% 2.07% -0.17% -0.38%
Lattice -9.75 -6.37% -5.96% .43% -33.04%
Industry Average 5.59% 5.83% 6.54% 7.25% -0.32%
Sustainable Growth Rate
2004 2005 2006 2007 2008
Xilinx 16.04% 10.01% 10.21% 7.98% 12.86%
Altera 25.02% 21.86% 22.08% 20.01% 33.98%
Actel 1.02% .97% 2.96% -1.17% 0.04%
Lattice -14.27% -9.11% -9.07% 1.16% -47.72%
Industry Average 6.95% 5.79% 6.55% 7% -.21%
186

Capital Structure Ratios
Debt to Equity Ratio
2003 2004 2005 2006 2007 2008
Xilinx .24 .18 .14 .16 .79 .88
Altera .21 .35 .38 .44 .39 1.05
Actel .20 .19 .24 .27 .27 .25
Lattice .42 .41 .49 .44 .42 .31
Industry
Average
.27 .28 .32 .33 .47 .62
Debt Service Margin
2004 2005 2006 2007 2008
Xilinx 1.38 0.72 1.64 1.60 1.92
Xilinx (Restated) 0.95 0.75 1.10 0.39 0.40
Altera 0.81 0.86 0.77 0.45 N/A
Actel 0.44 0.49 0.42 0.16 N/A
Lattice 0.76 0.15 -0.28 -0.23 -0.26
Industry Average .98 .53 .66 .57 N/A
Z-Score
2004 2005 2006 2007 2008
Xilinx 4.31 5.22 6.58 5.74 2.63
Xilinx (Restated) 5.13 6.40 5.61 2.57 2.59
Altera 5.13 4.12 4.18 3.88 3.83
Actel 4.59 4.57 3.87 3.63 3.53
Lattice 1.90 1.90 1.64 1.64 1.90
Industry Average 3.98 3.78 4.07 3.72 2.97
187

Times Interest Earned
2003 2004 2005 2006 2007 2008
Xilinx 6.32 14.58 11.77 9.24 5.04 8.04
Altera 13.89 19.86 9.24 9.25 5.14 4.39
Actel -0.14 -0.24 -0.39 1.5 1.42 1.41
Lattice -16.07 30.87 -6.04 -5.54 -0.76 -20.07
Industry
Average
1.02 14.61 3.87 3.38 2.71 -2.07
188

Cost of Debt
Short and Long Term Amount Weight Rate Resources
Liabilities
Accounts payable $59,402 4% 1.95 St. Louis AA Non-Financial Commercial
Paper
Accrued payroll and
related liabilities
$100,730 7% 1.95 St. Louis AA Non-Financial Commercial
Paper
Income taxes payable $39,258 3% 3.69 10-year Treasury Constant Maturity Rate
Deferred income on
shipments to
distributors
$111,678 8% 1.95 St. Louis AA Non-Financial Commercial
Paper
Other accrued liabilities $29,598 2% 1.95 St. Louis AA Non-Financial Commercial
Paper
Convertible Debentures $999,851 68% 3.125 Xilinx 10-K
Deferred Tax Liabilities $84,486 6% 3.69 10-year Treasury Constant Maturity Rate
Long-term income taxes $39,122 2% 3.69 10-year Treasury Constant Maturity Rate
payable
Other Long Term
$1,159 0% 3.125 Xilinx 10-K
Liabilities
Total Liabilities $1,465,284 100% N/A Xilinx 10-k
Weighted Average Cost of Capital
Value of Debt* 1.47
Value of Equity* 4.94
Total* 6.41
Cost of Debt 2.94%
Cost of Equity 17.20%
Upper Bound 21.16%
Lower Bound 13.24%
Alternative Cost of Equity 11.41%
Upper Bound WACC 21.16%
Lower Bound WACC 13.24%
WACC 13.96%
*In Billions
189

Table in thousands
Regressions
3 Month
SUMMARY
OUTPUT 24
Regression Statistics
Multiple R 0.592659916
R Square 0.351245777
Adjusted R
Square 0.341977859
Standard Error 0.078601747
Observations 72
ANOVA
df SS MS F
Significance
F
Regression 1 0.23414956 0.23414956 37.89910488 4.14306E-08
Residual 70 0.43247642 0.006178235
Total 71 0.66662598
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.005299268 0.009307529 0.569352773 0.570939297
-
0.013264014 0.02386255
-
0.013264014 0.02386255
X Variable 1 1.746216031 0.283650462 6.156224889 4.14306E-08 1.180493031 2.311939031 1.180493031 2.311939031
SUMMARY
OUTPUT 36
Regression Statistics
Multiple R 0.511618332
R Square 0.261753318
Adjusted R
Square 0.249024926
Standard Error 0.070946215
Observations 60
ANOVA
df SS MS F
Significance
F
Regression 1 0.103508768 0.103508768 20.56452508 2.94277E-05
190

Residual 58 0.291935192 0.005033365
Total 59 0.39544396
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.000464787 0.009160328 0.050739116 0.959707745
-
0.017871602 0.018801175
-
0.017871602 0.018801175
X Variable 1 1.404632287 0.309744287 4.534812574 2.94277E-05 0.784611737 2.024652836 0.784611737 2.024652836
SUMMARY
OUTPUT 48
Regression Statistics
Multiple R 0.50312401
R Square 0.253133769
Adjusted R
Square 0.236897547
Standard Error 0.067978363
Observations 48
ANOVA
df SS MS F
Significance
F
Regression 1 0.07204544 0.07204544 15.59068132 0.000267624
Residual 46 0.212568661 0.004621058
Total 47 0.284614102
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.003337554 0.009825405 0.339686159 0.735639016
-
0.016439959 0.023115067
-
0.016439959 0.023115067
X Variable 1 1.277578825 0.323560247 3.948503681 0.000267624 0.626285839 1.928871812 0.626285839 1.928871812
SUMMARY
OUTPUT 60
Regression Statistics
Multiple R 0.502455971
R Square 0.252462003
Adjusted R
Square 0.230475591
Standard Error 0.071844808
Observations 36
ANOVA
df SS MS F Significance
191

F
Regression 1 0.059269662 0.059269662 11.48263784 0.001791173
Residual 34 0.175497001 0.005161677
Total 35 0.234766663
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.005219725 0.012074664 0.432287356 0.668262054
-
0.019318946 0.029758395
-
0.019318946 0.029758395
X Variable 1 1.263772633 0.372947854 3.388604114 0.001791173 0.505851408 2.021693858 0.505851408 2.021693858
SUMMARY
OUTPUT 72
Regression Statistics
Multiple R 0.55219006
R Square 0.304913862
Adjusted R
Square 0.273319038
Standard Error 0.062780932
Observations 24
ANOVA
df SS MS F
Significance
F
Regression 1 0.038037918 0.038037918 9.650753501 0.005145503
Residual 22 0.086711798 0.003941445
Total 23 0.124749716
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.015605662 0.013111493 1.190227689 0.246642593 -0.01158591 0.042797233 -0.01158591 0.042797233
X Variable 1 1.086832595 0.349850133 3.106566191 0.005145503 0.36128783 1.812377359 0.36128783 1.812377359
2 Year
SUMMARY
OUTPUT 24
Regression Statistics
Multiple R 0.593054624
R Square 0.351713787
192

Adjusted R
Square 0.342452556
Standard Error 0.07857339
Observations 72
ANOVA
df SS MS F
Significance
F
Regression 1 0.234461548 0.234461548 37.97699938 4.03722E-08
Residual 70 0.432164432 0.006173778
Total 71 0.66662598
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.005931709 0.009294688 0.638182693 0.52543712
-
0.012605962 0.02446938
-
0.012605962 0.02446938
X Variable 1 1.746985477 0.283484273 6.162548124 4.03722E-08 1.181593929 2.312377025 1.181593929 2.312377025
SUMMARY
OUTPUT 36
Regression Statistics
Multiple R 0.512854932
R Square 0.263020182
Adjusted R
Square 0.250313633
Standard Error 0.070885315
Observations 60
ANOVA
df SS MS F
Significance
F
Regression 1 0.104009742 0.104009742 20.69957704 2.79374E-05
Residual 58 0.291434218 0.005024728
Total 59 0.39544396
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.000954226 0.009151346 0.104271699 0.917313477
-
0.017364183 0.019272636
-
0.017364183 0.019272636
X Variable 1 1.407856873 0.309440938 4.549678784 2.79374E-05 0.788443541 2.027270205 0.788443541 2.027270205
SUMMARY
OUTPUT 48
193

Regression Statistics
Multiple R 0.503772655
R Square 0.253786887
Adjusted R
Square 0.237564863
Standard Error 0.067948634
Observations 48
ANOVA
df SS MS F
Significance
F
Regression 1 0.072231327 0.072231327 15.64458815 0.000261999
Residual 46 0.212382775 0.004617017
Total 47 0.284614102
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.003621847 0.009825107 0.368631787 0.714093403
-
0.016155067 0.02339876
-
0.016155067 0.02339876
X Variable 1 1.277547311 0.322994349 3.955324026 0.000261999 0.627393416 1.927701205 0.627393416 1.927701205
SUMMARY
OUTPUT 60
Regression Statistics
Multiple R 0.502897513
R Square 0.252905909
Adjusted R
Square 0.230932553
Standard Error 0.071823474
Observations 36
ANOVA
df SS MS F
Significance
F
Regression 1 0.059373876 0.059373876 11.50966256 0.001771874
Residual 34 0.175392787 0.005158611
Total 35 0.234766663
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.005333494 0.012075263 0.441687588 0.661511829
-
0.019206394 0.029873382
-
0.019206394 0.029873382
X Variable 1 1.261571792 0.371861035 3.392589359 0.001771874 0.505859249 2.017284335 0.505859249 2.017284335
194

SUMMARY
OUTPUT 72
Regression Statistics
Multiple R 0.552349738
R Square 0.305090233
Adjusted R
Square 0.273503425
Standard Error 0.062772966
Observations 24
ANOVA
df SS MS F
Significance
F
Regression 1 0.03805992 0.03805992 9.658786575 0.005129969
Residual 22 0.086689796 0.003940445
Total 23 0.124749716
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.015673112 0.013114264 1.195119462 0.244765188
-
0.011524207 0.042870431
-
0.011524207 0.042870431
X Variable 1 1.084086295 0.348820957 3.107858841 0.005129969 0.36067591 1.807496681 0.36067591 1.807496681
5 Year
SUMMARY
OUTPUT 24
Regression Statistics
Multiple R 0.591242745
R Square 0.349567983
Adjusted R
Square 0.340276097
Standard Error 0.07870332
Observations 72
ANOVA
df SS MS F
195
Significance
F
Regression 1 0.233031099 0.233031099 37.62077847 4.54514E-08
Residual 70 0.433594881 0.006194213

Total 71 0.66662598
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.006763207 0.009299509 0.727264938 0.469489083
-
0.011784079 0.025310492
-
0.011784079 0.025310492
X Variable 1 1.74310513 0.284190589 6.13357795 4.54514E-08 1.17630488 2.30990538 1.17630488 2.30990538
SUMMARY
OUTPUT 36
Regression Statistics
Multiple R 0.511730606
R Square 0.261868213
Adjusted R
Square 0.249141803
Standard Error 0.070940694
Observations 60
ANOVA
df SS MS F
Significance
F
Regression 1 0.103554203 0.103554203 20.57675425 2.92894E-05
Residual 58 0.291889757 0.005032582
Total 59 0.39544396
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.00145572 0.009158668 0.158944494 0.874264776
-
0.016877346 0.019788786
-
0.016877346 0.019788786
X Variable 1 1.404128584 0.309541188 4.536160739 2.92894E-05 0.784514581 2.023742587 0.784514581 2.023742587
SUMMARY
OUTPUT 48
Regression Statistics
Multiple R 0.502075083
R Square 0.252079389
Adjusted R
Square 0.235820245
Standard Error 0.06802633
Observations 48
ANOVA
df SS MS F Significance
196

F
Regression 1 0.071745349 0.071745349 15.5038539 0.000276953
Residual 46 0.212868753 0.004627582
Total 47 0.284614102
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.003849914 0.009840104 0.391247278 0.697420907
-
0.015957188 0.023657015
-
0.015957188 0.023657015
X Variable 1 1.269848534 0.322501759 3.937493352 0.000276953 0.620686172 1.919010895 0.620686172 1.919010895
SUMMARY
OUTPUT 60
Regression Statistics
Multiple R 0.501014775
R Square 0.251015805
Adjusted R
Square 0.228986858
Standard Error 0.071914271
Observations 36
ANOVA
df SS MS F
Significance
F
Regression 1 0.058930143 0.058930143 11.39481635 0.001855454
Residual 34 0.17583652 0.005171662
Total 35 0.234766663
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.005487048 0.012097397 0.453572598 0.653018342
-
0.019097821 0.030071917
-
0.019097821 0.030071917
X Variable 1 1.252180168 0.370948105 3.375620883 0.001855454 0.498322924 2.006037413 0.498322924 2.006037413
SUMMARY
OUTPUT 72
Regression Statistics
Multiple R 0.551088489
R Square 0.303698523
Adjusted R
Square 0.272048456
197

Standard Error 0.062835793
Observations 24
ANOVA
df SS MS F
Significance
F
Regression 1 0.037886304 0.037886304 9.595509588 0.005253751
Residual 22 0.086863411 0.003948337
Total 23 0.124749716
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.015886768 0.013143646 1.208703302 0.239608141
-
0.011371485 0.043145021
-
0.011371485 0.043145021
X Variable 1 1.077908499 0.347974865 3.097661955 0.005253751 0.356252803 1.799564196 0.356252803 1.799564196
7 Year
SUMMARY
OUTPUT 24
Regression Statistics
Multiple R 0.590422543
R Square 0.348598779
Adjusted R
Square 0.339293047
Standard Error 0.078761936
Observations 72
ANOVA
df SS MS F
Significance
F
Regression 1 0.232385003 0.232385003 37.46065208 4.79446E-08
Residual 70 0.434240978 0.006203443
Total 71 0.66662598
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.00715301 0.009302118 0.768965702 0.444500505
-
0.011399479 0.025705499
-
0.011399479 0.025705499
X Variable 1 1.741395825 0.284518056 6.12051077 4.79446E-08 1.173942463 2.308849188 1.173942463 2.308849188
SUMMARY 36
198

OUTPUT
Regression Statistics
Multiple R 0.511158708
R Square 0.261283225
Adjusted R
Square 0.248546729
Standard Error 0.070968799
Observations 60
ANOVA
df SS MS F
Significance
F
Regression 1 0.103322873 0.103322873 20.51452943 3.00001E-05
Residual 58 0.292121087 0.00503657
Total 59 0.39544396
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.00169501 0.009162851 0.184987226 0.853884406
-
0.016646429 0.02003645
-
0.016646429 0.02003645
X Variable 1 1.402166198 0.309577019 4.529296792 3.00001E-05 0.782480472 2.021851924 0.782480472 2.021851924
SUMMARY
OUTPUT 48
Regression Statistics
Multiple R 0.501234521
R Square 0.251236045
Adjusted R
Square 0.234958567
Standard Error 0.068064672
Observations 48
ANOVA
df SS MS F
Significance
F
Regression 1 0.071505321 0.071505321 15.43458119 0.00028464
Residual 46 0.213108781 0.0046328
Total 47 0.284614102
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.003986449 0.009848075 0.404794732 0.687504674
-
0.015836697 0.023809595
-
0.015836697 0.023809595
X Variable 1 1.26645316 0.322360416 3.928686954 0.00028464 0.617575308 1.915331012 0.617575308 1.915331012
199

SUMMARY
OUTPUT 60
Regression Statistics
Multiple R 0.500090945
R Square 0.250090954
Adjusted R
Square 0.228034805
Standard Error 0.071958657
Observations 36
ANOVA
df SS MS F
Significance
F
Regression 1 0.058713019 0.058713019 11.33883164 0.001897714
Residual 34 0.176053644 0.005178048
Total 35 0.234766663
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.005592022 0.012109549 0.461786187 0.647175836
-
0.019017542 0.030201586
-
0.019017542 0.030201586
X Variable 1 1.248022185 0.370627937 3.367318168 0.001897714 0.4948156 2.00122877 0.4948156 2.00122877
SUMMARY
OUTPUT 72
Regression Statistics
Multiple R 0.550447839
R Square 0.302992824
Adjusted R
Square 0.271310679
Standard Error 0.062867627
Observations 24
ANOVA
df SS MS F
Significance
F
Regression 1 0.037798269 0.037798269 9.563520068 0.005317579
Residual 22 0.086951447 0.003952339
Total 23 0.124749716
200

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.016016232 0.013160252 1.217015559 0.236493071
-
0.011276461 0.043308925
-
0.011276461 0.043308925
X Variable 1 1.075228082 0.347689609 3.09249415 0.005317579 0.354163969 1.796292196 0.354163969 1.796292196
10 Year
SUMMARY
OUTPUT 24
Regression Statistics
Multiple R 0.589655125
R Square 0.347693166
Adjusted R
Square 0.338374497
Standard Error 0.078816666
Observations 72
ANOVA
df SS MS F
Significance
F
Regression 1 0.231781298 0.231781298 37.31146202 5.03944E-08
Residual 70 0.434844682 0.006212067
Total 71 0.66662598
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.007554437 0.009304559 0.81190703 0.419597393
-
0.011002921 0.026111795
-
0.011002921 0.026111795
X Variable 1 1.739002551 0.284694506 6.108310898 5.03944E-08 1.171197271 2.306807831 1.171197271 2.306807831
SUMMARY
OUTPUT 36
Regression Statistics
Multiple R 0.510372876
R Square 0.260480473
Adjusted R
Square 0.247730136
Standard Error 0.071007349
201

Observations 60
ANOVA
df SS MS F
Significance
F
Regression 1 0.10300543 0.10300543 20.42930155 3.10027E-05
Residual 58 0.29243853 0.005042044
Total 59 0.39544396
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.001967384 0.009168836 0.214572911 0.830852961
-
0.016386035 0.020320803
-
0.016386035 0.020320803
X Variable 1 1.399074154 0.309538001 4.519878489 3.10027E-05 0.779466529 2.018681778 0.779466529 2.018681778
SUMMARY
OUTPUT 48
Regression Statistics
Multiple R 0.500214585
R Square 0.250214631
Adjusted R
Square 0.233914949
Standard Error 0.068111081
Observations 48
ANOVA
df SS MS F
Significance
F
Regression 1 0.071214612 0.071214612 15.35089038 0.000294226
Residual 46 0.213399489 0.004639119
Total 47 0.284614102
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.004167218 0.009858205 0.422715689 0.67447227
-
0.015676319 0.024010755
-
0.015676319 0.024010755
X Variable 1 1.262211493 0.322155348 3.918021233 0.000294226 0.613746422 1.910676565 0.613746422 1.910676565
SUMMARY
OUTPUT 60
Regression Statistics
Multiple R 0.498934869
R Square 0.248936003
Adjusted R 0.226845886
202

Square
Standard Error 0.072014049
Observations 36
ANOVA
df SS MS F
Significance
F
Regression 1 0.058441875 0.058441875 11.26911176 0.001951786
Residual 34 0.176324788 0.005186023
Total 35 0.234766663
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.005748571 0.012125962 0.474071322 0.638479477
-
0.018894349 0.030391491
-
0.018894349 0.030391491
X Variable 1 1.242936709 0.370257762 3.35694977 0.001951786 0.490482409 1.995391009 0.490482409 1.995391009
SUMMARY
OUTPUT 72
Regression Statistics
Multiple R 0.54963919
R Square 0.30210324
Adjusted R
Square 0.27038066
Standard Error 0.062907733
Observations 24
ANOVA
df SS MS F
Significance
F
Regression 1 0.037687293 0.037687293 9.52328718 0.005399073
Residual 22 0.087062423 0.003957383
Total 23 0.124749716
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper
95.0%
Intercept 0.016200471 0.013182983 1.228892634 0.23209533
-
0.011139362 0.043540303
-
0.011139362 0.043540303
X Variable 1 1.071988694 0.347373564 3.085982369 0.005399073 0.351580018 1.79239737 0.351580018 1.79239737
203

Method of Comparables
Price/Earnings (trailing twelve months)
Company PPS EPS P/E (ttm) Industry Avg. XLNX PPS
Xilinx 17.62 1.3342 13.21 13.56 18.07
Xilinx-Restated 17.62 2.3431 7.52 13.56 31.77
Altera 16.71 1.0823 15.44
Actel N/A N/A N/A
Lattice Semiconductor 1.73 0.148243 11.67
P/E (forecast)
Company PPS EPS P/E (forecast) Industry Avg. XLNX PPS
Xilinx 17.62 1.136 15.51 20.99 23.84
Xilinx-Restated 17.62 1.6781 10.5 20.99 35.22
Altera 16.71 1.2109 13.8
Actel 12.3 0.4366 28.17
Lattice Semiconductor N/A N/A N/A
Price/EBITDA
Company Market Cap ($Millions) EBITDA ($Millions) P/EBITDA
Industry
Avg. XLNX PPS
Xilinx 4,942.00 533.646 0.033 0.06 32.53
Xilinx-Restated 4,942.00 874.057 0.0202 0.06 52.44
Altera 4,519.00 274.953 0.061
Actel 211.46 N/A N/A
Lattice Semiconductor 180.09 N/A N/A
Price/Book
Company PPS BPS P/B Industry Avg. P/B Xilinx PPS
Xilinx 17.62 10.73 1.64 2.66 28.55
Xilinx restated 17.62 10.73 1.64 2.66 N/A
Altera 16.76 2.77 6.05 N/A N/A
Actel 12.3 10.88 1.13 N/A N/A
Lattice 1.73 2.16 .8 N/A N/A
204

Dividends/Price
Company PPS BPS D/P Industry Avg. D/P Xilinx Price
Xilinx 17.62 10.73 .78 .2 3.9
Xilinx restated 17.62 10.73 .78 .2 N/A
Altera 16.76 2.77 .2 N/A N/A
Actel 12.3 10.88 N/A N/A N/A
Lattice 1.73 2.16 N/A N/A N/A
Price Earnings Growth
Company PPS P.E.G Industry Avg. Xilinx PPS
Xilinx 17.62 6.6071 .92 2.45
Xilinx restated 17.62 6.6071 .92 N/A
Altera 16.76 .95 N/A N/A
Actel 12.3 N/A N/A N/A
Lattice 1.73 1.85 N/A N/A
EV/EBITDA
Company PPS # of Shares EV EBITDA EV/EBITDA Industry Average Xilinx PPS
Xilinx 17.62 280.52 4547.32 874.057 8.52 14.00 28.04
Xilinx restated 17.62 280.52 4547.32 874.057 5.20 14.00 45.03
Altera 16.76 301.34 3850 274.953 10.578
Actel 12.3 25.73 134.67 -12.099 N/A
Lattice 1.73 115.37 134.46 -241.838 21.093
Price/Free Cash Flows
Company PPS # of Shares FCF P/FCF Industry Average Xilinx PPS
Xilinx 17.62 280.52 646 12.71 -.04 -8.30
Xilinx restated 17.62 280.52 646 12.71 -.04 -4.99
Altera 16.76 301.34 -788.49 -11.30
Actel 12.3 25.73 -9.67 -282.57
205

Lattice 1.73 115.37 -3.04 -1.67
Discounted Dividends Model
Intrinsic Valuations Model
Residual Income Model
206

Restated Residual Income Model
Discounted Free Cash Flows Model
207

Restated Discounted Free Cash Flows Model
Abnormal Earnings Growth Model
Restated Abnormal Earnings Growth Model
208

Long Run Residual Income Model
Restated Long Run Residual Income Model
209

References
1. Xilinx 10-k
2. Xilinx 8-Q
3. Xilinx Investors Factsheet
4. Altera 10-k
5. Altera 8-Q
6. Actel 10-k
7. Actel 8-Q
8. Lattice Semiconductor 10-k
9. Lattice Semiconductor 8-Q
10. Yahoo Finance
11. Wikipedia.com
12. Investopedia.com
13. The Wall Street Journal
210