Altera_2013Q3_10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q
 
(Mark One)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 27, 2013
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number 0-16617
 
 
 
ALTERA CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
DELAWARE
 
77-0016691
(State or other jurisdiction of
incorporation or organization) 
 
(I.R.S. Employer
Identification Number)
101 INNOVATION DRIVE
SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices) (zip code)
408-544-7000

(Registrant's telephone number, including area code)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]

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

Large accelerated filer [x]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]

Number of shares of common stock outstanding at October 10, 2013: 321,128,555
 
 
 



 
PAGE
NUMBER
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1:
Financial Statements
ALTERA CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value amount)
 
September 27,
2013
 
December 31,
2012
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
2,956,085

 
$
2,876,627

Short-term investments
 
151,159

 
140,958

Total cash, cash equivalents, and short-term investments
 
3,107,244

 
3,017,585

Accounts receivable, net
 
436,421

 
323,708

Inventories
 
158,441

 
152,721

Deferred income taxes — current
 
62,575

 
59,049

Deferred compensation plan — marketable securities
 
58,402

 
60,321

Deferred compensation plan — restricted cash equivalents
 
20,270

 
17,116

Other current assets
 
30,479

 
49,852

Total current assets
 
3,873,832

 
3,680,352

Property and equipment, net
 
198,642

 
206,148

Long-term investments
 
713,651

 
704,758

Deferred income taxes — non-current
 
13,548

 
17,082

Goodwill
 
93,073

 
2,329

Acquisition-related intangible assets, net
 
86,500

 
4,874

Other assets, net
 
40,518

 
42,285

Total assets
 
$
5,019,764

 
$
4,657,828

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
52,224

 
$
50,036

Accrued liabilities
 
37,525

 
29,005

Accrued compensation and related liabilities
 
43,544

 
40,606

Deferred compensation plan obligations
 
78,672

 
77,437

Deferred income and allowances on sales to distributors
 
444,705

 
345,993

Total current liabilities
 
656,670

 
543,077

Income taxes payable — non-current
 
266,395

 
272,000

Long-term debt
 
500,000

 
500,000

Other non-current liabilities
 
8,916

 
9,304

Total liabilities
 
1,431,981

 
1,324,381

Commitments and contingencies
 


 


(See “Note 14 — Commitments and Contingencies”)
 
 
 
 
Stockholders' equity:
 
 
 
 
Common stock: $.001 par value; 1,000,000 shares authorized; outstanding - 321,105 shares at September 27, 2013 and 319,564 shares at December 31, 2012
 
321

 
320

Capital in excess of par value
 
1,214,586

 
1,122,555

Retained earnings
 
2,374,005

 
2,204,980

Accumulated other comprehensive (loss)/ income
 
(1,129
)
 
5,592

Total stockholders' equity
 
3,587,783

 
3,333,447

Total liabilities and stockholders' equity
 
$
5,019,764

 
$
4,657,828

See accompanying notes to consolidated financial statements.

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Table of Contents

ALTERA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share amounts)
 
September 27,
2013
 
September 28,
2012
 
September 27,
2013
 
September 28,
2012
Net sales
 
$
445,945

 
$
495,010

 
$
1,278,205

 
$
1,343,595

Cost of sales
 
141,525

 
152,007

 
402,712

 
408,156

Gross margin
 
304,420

 
343,003

 
875,493

 
935,439

Research and development expense
 
95,336

 
91,393

 
278,542

 
265,619

Selling, general, and administrative expense
 
78,907

 
74,243

 
235,376

 
215,824

Amortization of acquisition-related intangible assets
 
1,846

 
213

 
2,974

 
640

Compensation expense — deferred compensation plan
 
3,462

 
3,274

 
6,724

 
6,697

Gain on deferred compensation plan securities
 
(3,462
)
 
(3,274
)
 
(6,724
)
 
(6,697
)
Interest income and other
 
(2,214
)
 
(2,775
)
 
(6,651
)
 
(5,997
)
(Gain)/loss reclassified from other comprehensive income
 
(33
)
 
108

 
(129
)
 
(63
)
Interest expense
 
2,511

 
2,333

 
8,365

 
5,386

Income before income taxes
 
128,067

 
177,488

 
357,016

 
454,030

Income tax expense
 
8,635

 
19,999

 
15,885

 
18,028

Net income
 
119,432

 
157,489

 
341,131

 
436,002

 
 
 
 
 
 
 
 
 
Other comprehensive income/(loss):
 
 
 
 
 
 
 
 
Unrealized holding gain/(loss) on investments:
 
 
 
 
 
 
 
 
Unrealized holding gain/(loss) on investments arising during period, net of tax of $30, $43, ($12) and $108
 
2,419

 
3,620

 
(6,613
)
 
6,723

Less: Reclassification adjustments for gain on investments included in net income, net of tax of $11, $1, $21 and $6
 
(22
)
 
(41
)
 
(108
)
 
(64
)
 
 
2,397

 
3,579

 
(6,721
)
 
6,659

Unrealized (loss)/gain on derivatives:
 
 
 
 
 
 
 
 
Unrealized (loss)/gain on derivatives arising during period, net of tax of ($6) and $36
 

 
(10
)
 


67

Less: Reclassification adjustments for loss on derivatives included in net income, net of tax of $53 and $2
 

 
97

 


5

 
 

 
87

 


72

Other comprehensive income/(loss)
 
2,397

 
3,666

 
(6,721
)

6,731

Comprehensive income
 
$
121,829

 
$
161,155

 
$
334,410


$
442,733

 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.37

 
$
0.49

 
$
1.07


$
1.36

Diluted
 
$
0.37

 
$
0.49

 
$
1.05

 
$
1.34

 
 
 
 
 
 
 
 
 
Shares used in computing per share amounts:
 
 
 
 
 
 
 
 
Basic
 
320,445

 
319,870

 
320,266

 
321,200

Diluted
 
323,505

 
323,560

 
323,355

 
325,275

 
 
 
 
 
 
 
 
 
Dividends per common share
 
$
0.15

 
$
0.10

 
$
0.35

 
$
0.26

 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

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Table of Contents

ALTERA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Nine Months Ended
 
September 27,
2013
 
September 28,
2012
 
 
 
 
Cash Flows from Operating Activities:
 
 
 
Net income
$
341,131

 
$
436,002

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
34,256

 
25,786

Amortization of acquisition-related intangible assets
2,974

 
640

Stock-based compensation
73,011

 
70,790

Net gain on sale of available-for-sale securities
(129
)
 

Amortization of investments, net
2,575

 

Deferred income tax benefit
(5,629
)
 
(3,367
)
Tax effect of employee stock plans
5,405

 
14,381

Excess tax benefit from employee stock plans
(4,165
)
 
(20,790
)
Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable, net
(111,231
)
 
(116,000
)
Inventories
(2,494
)
 
(35,569
)
Other assets
29,517

 
5,478

Accounts payable and other liabilities
12,509

 
(34,670
)
Deferred income and allowances on sales to distributors
95,961

 
120,475

Income taxes payable
(8,753
)
 
(650
)
Deferred compensation plan obligations
(5,489
)
 
(2,001
)
Net cash provided by operating activities
459,449

 
460,505

Cash Flows from Investing Activities:
 
 
 
Purchases of property and equipment
(31,216
)
 
(53,712
)
Proceeds from sales of deferred compensation plan securities, net
5,489

 
2,001

Purchases of available-for-sale securities
(258,809
)
 
(819,662
)
Proceeds from sale and maturity of available-for-sale securities
228,292

 
135,650

Acquisitions, net of cash acquired
(145,321
)
 

Purchases of intangible assets

 
(2,280
)
Purchases of other investments
(2,101
)
 
(4,510
)
Net cash used in investing activities
(203,666
)
 
(742,513
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of common stock through various stock plans
38,748

 
37,514

Shares withheld for employee taxes
(24,787
)
 
(30,529
)
Payment of dividends to stockholders
(112,175
)
 
(83,570
)
Payment of debt assumed in acquisitions
(22,000
)


Proceeds from issuance of long term debt

 
500,000

Repayment of credit facility

 
(500,000
)
Long-term debt and credit facility issuance costs

 
(5,244
)
Repurchases of common stock
(60,276
)
 
(179,057
)
Excess tax benefit from employee stock plans
4,165

 
20,790

Net cash used in financing activities
(176,325
)
 
(240,096
)
Net increase (decrease) in cash and cash equivalents
79,458

 
(522,104
)
Cash and cash equivalents at beginning of period
2,876,627

 
3,371,933

Cash and cash equivalents at end of period
$
2,956,085

 
$
2,849,829


See accompanying notes to consolidated financial statements.

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Table of Contents

ALTERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Organization and Basis of Presentation

The accompanying unaudited consolidated financial statements of Altera Corporation and its subsidiaries, collectively referred to herein as “Altera”, “we”, “us”, or “our”, have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. This financial information reflects all adjustments which are, in the opinion of our management, of a normal recurring nature and necessary for a fair statement of the results for the periods presented. The December 31, 2012 consolidated balance sheet data was derived from our audited consolidated financial statements included in our 2012 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC”), but does not include all disclosures required by U.S. GAAP. The consolidated financial statements include our accounts as well as those of our wholly-owned subsidiaries after elimination of all significant inter-company balances and transactions.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

These consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2012 included in our Annual Report on Form 10-K. The consolidated operating results for the three and nine months ended September 27, 2013 are not necessarily indicative of the results to be expected for any future period.

Certain prior year amounts in the consolidated financial statements and the notes thereto have been reclassified to conform to the current year presentation. These reclassifications did not affect the prior period total assets, total liabilities, stockholders' equity, net income or net cash provided by operating activities.


Note 2 — Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, “Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This standard requires an entity to present unrecognized tax benefits as a reduction to deferred tax assets when a net operating loss carryforward, similar tax loss or a tax credit carryforward exists, with limited exceptions. This standard is effective for fiscal years beginning on or after December 15, 2013, and for interim periods within those fiscal years. We are currently assessing the potential impact of ASU No. 2013-11 on our financial statements.

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This standard requires entities to present information about reclassification adjustments from accumulated other comprehensive income in the annual financial statements in a single note or on the face of the financial statements. Public companies will also have to provide this information in their interim financial statements. The new requirements are effective as of the beginning of a fiscal year that begins after December 15, 2012 and interim and annual periods thereafter. We early adopted this guidance in our fiscal year 2012 and it did not have a material impact on our consolidated financial statements.


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Note 3 — Acquisitions

During the three months ended June 28, 2013, we completed two acquisitions qualifying as business combinations in exchange for aggregate net cash consideration of $145.3 million, net of cash acquired. Substantially all of the consideration was allocated to Goodwill and Acquisition-related intangible assets, net. For information on the goodwill arising from our acquisitions, see Note 4 - Goodwill and for information on the classification of intangible assets, see Note 5 - Acquisition-Related Intangible Assets, Net. In connection with one of these acquisitions, we assumed debt of $22.0 million, which was paid off in full immediately following the closing of the acquisition. We have no outstanding debt as of September 27, 2013 relating to these acquisitions. These acquisitions, both individually and in the aggregate, were not significant to our consolidated results of operations.

As of September 27, 2013, we had not yet finalized the valuation of the deferred tax assets in connection with these acquisitions. The finalization of these amounts is not expected to have a material effect on our consolidated financial position.

Note 4 — Goodwill

Goodwill activity was as follows:

 
 
Nine Months Ended
(In thousands)
 
September 27, 2013
Beginning Balance
 
$
2,329

Additions due to acquisitions
 
90,744

Ending Balance
 
$
93,073


Goodwill is tested for impairment annually during the fourth quarter unless a triggering event would require an expedited analysis. Adverse changes in operating results and/or unfavorable changes in economic factors used to estimate fair value could result in a non-cash impairment charge in the future.




Note 5 — Acquisition-Related Intangible Assets, Net

Acquisition-related intangible assets, net were as follows:

 
 
September 27, 2013
(In thousands)
 
Gross Assets
 
Accumulated Amortization
 
Net
 
Weighted-Average Amortization Period
Developed technology
 
$
43,070

 
$
(3,270
)
 
$
39,800

 
9.2 years
Customer relationships
 
12,910

 
(1,123
)
 
11,787

 
6.8 years
Trade name
 
3,700

 
(148
)
 
3,552

 
8.9 years
Non-competition agreements
 
700

 
(125
)
 
575

 
2.0 years
Other intangible assets
 
930

 
(744
)
 
186

 
1.2 years
Acquisition-related intangible assets, net subject to amortization
 
61,310

 
(5,410
)
 
55,900

 
 
In-process research & development
 
30,600

 

 
30,600

 
 
Total acquisition-related intangible assets, net
 
$
91,910

 
$
(5,410
)
 
$
86,500

 
 


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Table of Contents

 
 
December 31, 2012
(In thousands)
 
Gross Assets
 
Accumulated Amortization
 
Net
 
Weighted-Average Amortization Period
Developed technology
 
$
5,670

 
$
(1,342
)
 
$
4,328

 
8.8 years
Customer relationships
 
910

 
(364
)
 
546

 
5.0 years
Other intangible assets
 
730

 
(730
)
 

 
1.0 year
Acquisition-related intangible assets subject to amortization, net
 
7,310

 
(2,436
)
 
4,874

 
 
Total acquisition-related intangible assets, net
 
$
7,310

 
$
(2,436
)
 
$
4,874

 
 

Based on the carrying value of acquisition-related intangible assets, net as of September 27, 2013, the annual amortization expense for acquisition-related intangible assets, net is expected to be as follows:

Fiscal Year
 
Amortization Expense
 
 
 (In thousands)

2013 (remaining three months)
 
$
1,850

2014
 
7,398

2015
 
7,186

2016
 
6,867

2017
 
6,692

Thereafter
 
25,907

Total
 
$
55,900





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Note 6 — Financial Instruments

Cash, Cash Equivalents and Marketable Securities

The following tables summarize our cash and available-for-sale securities by significant investment category.
    
 
 
September 27, 2013
(In thousands)
 
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Marketable Securities
 
Long-Term Marketable Securities

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
55,645

 
$

 
$

 
$
55,645

 
$
55,645

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
2,875,377

 

 

 
2,875,377

 
2,875,377

 

 

U.S. treasury securities
 
595,841

 
18

 
(1,369
)
 
594,490

 
22,525

 
50,248

 
521,717

Subtotal
 
3,471,218

 
18

 
(1,369
)
 
3,469,867

 
2,897,902

 
50,248


521,717

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities
 
59,850

 
35

 
(27
)
 
59,858

 
2,538

 
14,272

 
43,048

Non-U.S. government securities
 
17,389

 
5

 
(1
)
 
17,393

 

 
9,338

 
8,055

Municipal bond
 
1,606

 

 
(6
)
 
1,600

 

 
606

 
994

Corporate securities
 
216,277

 
371

 
(116
)
 
216,532

 

 
76,695

 
139,837

Subtotal
 
295,122

 
411

 
(150
)
 
295,383

 
2,538

 
100,911

 
191,934

Total
 
$
3,821,985

 
$
429

 
$
(1,519
)
 
$
3,820,895

 
$
2,956,085

 
$
151,159

 
$
713,651

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

 
 
December 31, 2012
(In thousands)
 
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Marketable Securities
 
Long-Term Marketable Securities

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
89,194

 
$

 
$

 
$
89,194

 
$
89,194

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
2,739,904

 

 

 
2,739,904

 
2,739,904

 

 

U.S. treasury securities
 
564,713

 
5,231

 
(3
)
 
569,941

 
33,519

 
22,493

 
513,929

Subtotal
 
3,304,617

 
5,231

 
(3
)
 
3,309,845

 
2,773,423

 
22,493

 
513,929

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities
 
116,802

 
58

 
(1
)
 
116,859

 
11,799

 
53,438

 
51,622

Non-U.S. government securities
 
11,644

 
10

 
(2
)
 
11,652

 

 
2,730

 
8,922

Municipal bond
 
1,372

 
1

 

 
1,373

 

 
752

 
621

Corporate securities
 
193,048

 
436

 
(64
)
 
193,420

 
2,211

 
61,545

 
129,664

Subtotal
 
322,866

 
505

 
(67
)
 
323,304

 
14,010

 
118,465

 
190,829

Total
 
$
3,716,677

 
$
5,736

 
$
(70
)
 
$
3,722,343

 
$
2,876,627

 
$
140,958

 
$
704,758

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

We have certain cost method investments of approximately $7.0 million. These investments are included within Other assets, net  in our consolidated balance sheets.  

The adjusted cost and estimated fair value of marketable debt securities (corporate securities, municipal bonds, U.S. and foreign government securities, and U.S. treasury securities) as of September 27, 2013, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.
 
 
September 27, 2013
(In thousands)
 
Cost
 
Estimated Fair Value
Due in one year or less
 
$
176,134

 
$
176,222

Due after one year through five years
 
714,829

 
713,651

 
 
$
890,963

 
$
889,873


As of September 27, 2013, $609.7 million of our total available-for-sale securities has been in a continuous unrealized loss position for less than 12 months with a gross unrealized loss of $1.5 million. As of December 31, 2012, $118.7 million of the total available-for-sale securities was in a continuous loss position for less than 12 months with a gross unrealized loss of $0.1 million.

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Note 7 — Accounts Receivable, Net and Significant Customers

Accounts receivable, net was comprised of the following:

(In thousands)
 
September 27,
2013
 
December 31,
2012
Gross accounts receivable
 
$
436,961

 
$
324,260

Allowance for doubtful accounts
 
(500
)
 
(500
)
Allowance for sales returns
 
(40
)
 
(52
)
Accounts receivable, net
 
$
436,421

 
$
323,708


We sell our products to original equipment manufacturers ("OEMs") and to electronic components distributors who resell these products to OEMs, or their subcontract manufacturers. Net sales by customer type and net sales to significant customers were as follows:
 
 
Three Months Ended
 
Nine Months Ended
(Percentage of Net Sales)
 
September 27,
2013
 
September 28,
2012
 
September 27, 2013
 
September 28, 2012
 
 
 
 
 
 
 
 
 
Sales to distributors
 
76
%
 
69
%
 
76
%
 
70
%
Sales to OEMs
 
24
%
 
31
%
 
24
%
 
30
%
 
 
100
%
 
100
%
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
Significant Distributors(1):
 
 
 
 
 
 
 
 
Arrow Electronics, Inc. ( “Arrow”)
 
41
%
 
40
%
 
41
%
 
39
%
Macnica, Inc. (“Macnica”)
 
23
%
 
19
%
 
23
%
 
21
%

(1)
Except as presented above, no other distributor accounted for greater than 10% of our net sales for the three and nine months ended September 27, 2013 or September 28, 2012.

One OEM accounted for 11% and 12%, respectively, of our net sales for quarterly and year-to-date periods ended September 27, 2013, and 16% and 18%, respectively, for the quarterly and year-to-date periods ended September 28, 2012.

As of September 27, 2013, accounts receivable from Arrow and Macnica individually accounted for approximately 40% and 44%, respectively, of our total accounts receivable. As of December 31, 2012, accounts receivable from Arrow and Macnica individually accounted for approximately 30% and 47%, respectively, of our total accounts receivable. No other distributor or OEM accounted for more than 10% of our accounts receivable as of September 27, 2013 or December 31, 2012.
 
Note 8 — Inventories

Inventories were comprised of the following:

(In thousands)
 
September 27,
2013
 
December 31,
2012
Raw materials
 
$
8,926

 
$
12,447

Work in process
 
113,900

 
88,643

Finished goods
 
35,615

 
51,631

Total inventories
 
$
158,441

 
$
152,721



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Note 9 — Property and Equipment, Net

Property and equipment, net was comprised of the following:

(In thousands)
 
September 27,
2013
 
December 31,
2012
Land and land rights
 
$
23,157

 
$
23,157

Buildings
 
158,566

 
159,247

Equipment and software
 
269,758

 
256,725

Office furniture and fixtures
 
24,338

 
24,531

Leasehold improvements
 
12,303

 
11,915

Construction in progress
 
3,417

 
1,705

Property and equipment, at cost
 
491,539

 
477,280

Accumulated depreciation
 
(292,897
)
 
(271,132
)
Property and equipment, net
 
$
198,642

 
$
206,148


Depreciation expense was $10.8 million and $31.2 million for the three and nine months ended September 27, 2013. Depreciation expense was $8.7 million and $23.7 million for the three and nine months ended September 28, 2012. Depreciation and amortization expense as presented in our consolidated statements of cash flows includes the above amounts, together with amortization expense on our non-acquisition related intangible assets.

Note 10 — Deferred Income and Allowances on Sales to Distributors
 
Deferred income and allowances on sales to distributors was comprised of the following:

(In thousands)
 
September 27,
2013
 
December 31,
2012
 
 
 
 
 
Deferred revenue on shipment to distributors
 
$
461,748

 
$
363,641

Deferred cost of sales on shipment to distributors
 
(29,449
)
 
(28,101
)
Deferred income on shipment to distributors
 
432,299

 
335,540

Other deferred revenue (1)
 
12,406

 
10,453

Total
 
$
444,705

 
$
345,993


(1)
Principally represents revenue deferred on our software and intellectual property licenses.


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The Deferred income and allowances on sales to distributors activity was as follows:

 
 
Nine Months Ended
(In thousands)
 
September 27,
2013
 
September 28,
2012
 
 
 
 
 
Balance at beginning of period
 
$
345,993

 
$
279,876

Deferred revenue recognized upon shipment to distributors
 
4,343,526

 
4,006,945

Deferred cost of sales recognized upon shipment to distributors
 
(194,429
)
 
(181,660
)
Revenue recognized upon sell-through to end customers
 
(776,649
)
 
(763,141
)
Cost of sales recognized upon sell-through to end customers
 
190,124

 
176,455

Earned distributor price concessions (1)
 
(3,410,814
)
 
(3,057,927
)
Returns
 
(57,532
)
 
(61,531
)
Other
 
4,486

 
1,334

Balance at end of period
 
$
444,705

 
$
400,351


(1)
Average aggregate price concessions typically range from 65% to 80% of our list price on an annual basis, depending upon the composition of our sales, volumes and factors associated with timing of shipments to distributors.

We sell the majority of our products to distributors worldwide at a list price. However, distributors resell our products to end customers at a very broad range of individually negotiated prices based on a variety of factors, including customer, product, quantity, geography and competitive differentiation. The majority of our distributors' sales to their customers are priced at a discount from our list price. Under these circumstances, we remit back to the distributor a portion of its original purchase price after the resale transaction is completed, and we validate the distributor's resale information, including end customer, device, quantity and price, against the distributor price concession that we have approved in advance. To receive a price concession, a distributor must submit the price concession claim to us for approval within 60 days of the resale of the product to an end customer. It is our practice to apply these negotiated price discounts to future purchases, requiring the distributor to settle receivable balances, on a current basis, generally within 30 days, for amounts originally invoiced.


Note 11 — Accumulated Other Comprehensive (Loss)/ Income

The following table presents the components of, and the changes in, accumulated other comprehensive (loss)/ income, net of tax:

(In thousands)
 
December 31,
2012
 
Other Comprehensive (Loss)/ Income
 
September 27,
2013
 
 
 
 
 
 
 
Accumulated unrealized gain (loss) on available-for-sale securities, net of tax
 
$
5,592

 
$
(6,721
)
 
$
(1,129
)
Accumulated other comprehensive income/ (loss)
 
$
5,592

 
$
(6,721
)
 
$
(1,129
)




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Note 12 — Income Per Share

A reconciliation of basic and diluted income per share is presented below:

 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share amounts)
 
September 27,
2013
 
September 28,
2012
 
September 27, 2013
 
September 28, 2012
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
119,432

 
$
157,489

 
$
341,131

 
$
436,002

Basic weighted shares outstanding
 
320,445

 
319,870

 
320,266

 
321,200

Net income per share
 
$
0.37

 
$
0.49

 
$
1.07

 
$
1.36

 
 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
119,432

 
$
157,489

 
$
341,131

 
$
436,002

 
 
 
 
 
 
 
 
 
Weighted shares outstanding
 
320,445

 
319,870

 
320,266

 
321,200

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options, employee stock purchase plan, and restricted stock unit shares
 
3,060

 
3,690

 
3,089

 
4,075

 
 
 
 
 
 
 
 
 
Diluted weighted shares outstanding
 
323,505

 
323,560

 
323,355

 
325,275

 
 
 
 
 
 
 
 
 
Net income per share
 
$
0.37

 
$
0.49

 
$
1.05

 
$
1.34


In applying the treasury stock method, we excluded 1.9 million stock option shares and restricted stock unit shares for each of the three and nine month periods ended September 27, 2013, and 1.7 million and 1.4 million stock option shares and restricted stock unit shares for the three and nine months ended September 28, 2012, respectively, because their effect was anti-dilutive. While these shares have been anti-dilutive, they could be dilutive in the future.

Note 13 — Credit Facility and Long-Term Debt

Credit Facility

On June 29, 2012, we entered into a five-year $250 million unsecured revolving credit facility (the "Facility"). Under certain circumstances, upon our request and with the consent of the lenders, the commitments under the Facility may be increased up to an additional $250 million. Borrowings under the Facility will bear interest at a base rate determined in accordance with the Facility, plus an applicable margin based upon the debt rating of our non-credit enhanced, senior unsecured long-term debt. In addition, we are obligated to pay a quarterly commitment fee, payable in arrears, based on the available commitments. This facility fee varies and is also determined based on our debt rating. The terms of the Facility require compliance with certain financial and non-financial covenants, which we have satisfied as of September 27, 2013. As of September 27, 2013, we have not borrowed any funds under the Facility.

Long-term Debt

On May 8, 2012, we completed a public offering of $500 million aggregate principal amount of 1.75% senior notes that will mature on May 15, 2017 (the "Notes") with an effective interest rate of 1.91%. Interest on the Notes is payable semiannually in arrears on May 15 and November 15 of each year, beginning on November 15, 2012. The Notes are governed by a base and supplemental indenture between Altera and U.S. Bank National Association, as trustee. The Notes are our unsecured and unsubordinated obligations, ranking equally in right of payment to all of our existing and future unsecured and unsubordinated indebtedness and senior in right of payment to any of our future indebtedness that is expressly subordinated to the Notes. We may redeem the Notes, in whole or in part, at any time and from time to time for cash at the redemption prices described in the indenture.

We received net proceeds of $495.5 million from issuance of the Notes, after deduction of issuance costs of $3.7 million and a discount of $0.8 million. The debt issuance costs and discount are recorded in Other assets, net and are being amortized to

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interest expense over five years using the effective interest method. We used the net proceeds of the Notes to re-pay our former credit facility.

The estimated fair value of Altera's long-term debt was approximately $497.5 million at September 27, 2013. Our long-term debt is classified within Level 1 of the fair value hierarchy and the estimated fair value of the debt is based on quoted market prices.

Note 14 — Commitments and Contingencies

Indemnification and Product Warranty

We indemnify certain customers, distributors, suppliers, and subcontractors for attorney's fees and damages and costs awarded against these parties in certain circumstances in which our products are alleged to infringe third party intellectual property rights, including patents, trade secrets, trademarks or copyrights. We cannot estimate the amount of potential future payments, if any, that we might be required to make as a result of these agreements. To date, we have not paid any claim or been required to defend any action related to our indemnification obligations, and, accordingly, we have not accrued any amounts for such indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.

We generally warrant our devices for one year against defects in materials, workmanship and material non-conformance to our specifications. We accrue for known warranty issues if a loss is probable and can be reasonably estimated, and accrue for estimated but unidentified issues based on historical activity. If there is a material increase in customer claims compared with our historical experience or if the costs of servicing warranty claims are greater than expected, we may record a charge against cost of sales. Warranty expense was not significant for any period presented in our consolidated statements of comprehensive income.

Purchase Obligations

We depend entirely upon subcontractors to manufacture our silicon wafers and provide assembly and test services. Due to lengthy subcontractor lead times, we must order these materials and services from these subcontractors well in advance, and we are obligated to pay for the materials and services once they are completed. As of September 27, 2013, we had approximately $132.1 million of outstanding purchase commitments to such subcontractors. We expect to receive and pay for these materials and services over the next six months.

Operating Leases

We lease facilities under non-cancelable lease agreements expiring at various times through 2021. There have been no significant changes to our operating lease obligations since December 31, 2012.

Legal Proceedings

On December 8, 2010, Intellectual Ventures I LLC and Intellectual Ventures II LLC (“Intellectual Ventures”) filed a lawsuit in the United States District Court for the District of Delaware against Altera, Microsemi Corporation, and Lattice Semiconductor Corporation (“Lattice”) alleging that Altera infringes five patents. The complaint requests unspecified monetary damages including enhanced damages for willful infringement. In February 2011, Intellectual Ventures filed a First Amended Complaint adding Xilinx, Inc. as a defendant. In March 2011, Altera answered the complaint and asserted counterclaims against Intellectual Ventures for non-infringement and invalidity of the asserted patents. The defendants filed motions in the District of Delaware to transfer the case to the United States District Court for the Northern District of California and to stay the action pending re-examination proceedings in the United States Patent and Trademark Office. Intellectual Ventures opposed the motions. In January 2012, the United States District Court for the District of Delaware denied the defendants' motion to transfer the case to the Northern District of California, and in February 2012, the court denied the defendants' motion to stay. Three of the four defendants, including Altera, filed a writ of mandamus in the Court of Appeals for the Federal Circuit requesting that the case be transferred to the Northern District of California. In July 2012, the Court of Appeals for the Federal Circuit denied the writ of mandamus. In January 2013, Intellectual Ventures and Microsemi announced a settlement agreement, which included a dismissal of all claims against Microsemi. In March 2013, Intellectual Ventures and Lattice announced a settlement agreement, which included a dismissal of all claims against Lattice. At this stage in the litigation, we believe that the resolution of this case will not have a material adverse impact on our consolidated results of operations.

We file income tax returns with the Internal Revenue Service (“IRS”) and in various U.S. states and foreign jurisdictions. In 2008, the IRS completed field examinations of our tax returns for 2002 through 2004 and proposed an additional tax liability of $34.5 million, excluding interest. We contested this proposed additional tax liability in the IRS Office of Appeals and resolved

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several of the issues. On December 8, 2011, the IRS issued a Statutory Notice of Deficiency, revising the assessment of additional taxes for 2002 through 2004 to $19.8 million, excluding interest. The Notice relates primarily to inter-company adjustments between related companies, computational adjustments to the research and development ("R&D") credit and reductions to the benefits of tax credit carrybacks and carryforwards to subsequent years. On March 6, 2012, we filed a petition in the U.S. Tax Court to request a redetermination of the tax deficiency regarding certain IRS adjustments for 2004. We deposited $18.0 million as a cash bond with the IRS in 2008, and converted this amount to tax payments in March 2012. On May 8, 2012, the IRS filed its petition response in the U.S. Tax Court, in which the IRS conceded the R&D credit adjustment for 2004. In June 2012, the federal statute of limitations for the 2002 and 2003 tax years expired.

In addition, in 2010 the IRS completed field examinations for 2005 through 2007 and proposed an additional tax liability of $34.2 million, excluding interest. On January 23, 2012, the IRS issued a Statutory Notice of Deficiency, revising the assessment of additional taxes for 2005 through 2007 to $21.4 million, excluding interest. The Notice relates primarily to inter-company adjustments between related companies and reductions to the benefits of tax credit carrybacks and carryforwards to subsequent years. On April 20, 2012, we filed a petition in the U.S. Tax Court to request a redetermination of the tax deficiencies regarding certain IRS adjustments for 2005 through 2007. On June 21, 2012, the IRS filed its petition response in the U.S. Tax Court.

On August 15, 2012, the case for the 2004 tax year was combined with that for the 2005 through 2007 tax years. A judge has been assigned to our case and a motion for continuance has been granted. We believe we have made adequate tax payments or accrued adequate amounts for our tax liabilities for 2004 through 2007 and that the outcome of the above matters will not have a material adverse effect on our consolidated operating results or financial position.

On January 31, 2013, the IRS conceded an adjustment for certain inter-company transactions in our litigation regarding the 2004 through 2007 tax years. The concession only impacted our 2007 tax year. Our other inter-company transactions continue to be subject to litigation for 2004 through 2007. As a result of this concession, we recognized a tax and interest benefit of $6.8 million during the three months ended March 29, 2013 due to the release of certain tax reserves.

Altera and the IRS agreed to file motions for partial summary judgment regarding one of the remaining inter-company transactions subject to litigation for the 2004 through 2007 tax years.  As part of the partial summary judgment process, both sides filed three briefs on May 28, 2013, July 25, 2013 and September 9, 2013.  We expect to present our legal arguments on other inter-company transactions that are subject to litigation to the U.S. Tax Court during 2014.

On April 19, 2013, the IRS notified us that we would be audited for each of the 2010 and 2011 tax years. We believe we have made adequate tax payments or accrued adequate amounts for our tax liabilities for 2010 and 2011 and that the outcome of the audit will not have a material adverse effect on our consolidated operating results or financial position.


Note 15 — Stock-Based Compensation

Our equity incentive program is a broad-based, long-term retention program intended to attract, motivate, and retain talented employees as well as align stockholder and employee interests. The program provides stock-based incentive compensation (“awards”) to both our eligible employees and non-employee directors. Awards that may be granted under the program include non-qualified and incentive stock options, restricted stock units (“RSU”s), performance-based restricted stock units (“PRSU”s), restricted stock awards, stock appreciation rights, and stock bonus awards. To date, awards granted under the program consist of stock options, RSUs and PRSUs. The majority of stock-based awards granted under the program vest over four years. Stock options granted under the program have a maximum contractual term of ten years.

We have issued PRSUs to a certain group of senior executives with vesting that is contingent on both market performance and continued service ("market-based PRSUs"). For market-based PRSUs issued in 2012 and 2013, the number of shares of Altera stock to be received at vesting will range from 0% to 200% of the target amount based on the percentage by which our total shareholder return ("TSR") exceeds or falls below the Philadelphia Semiconductor Index ("SOX") TSR during a 3-year measurement period. We estimate the fair value of market-based PRSUs using a Monte Carlo simulation model on the date of grant. The model incorporates assumptions for the risk-free interest rate, Altera and SOX price volatility, the correlation between Altera and the SOX index, and dividend yields. Compensation expense is recognized ratably over the 3-year measurement period.


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Stock-based compensation expense included in our consolidated statements of comprehensive income was as follows:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 27,
2013
 
September 28,
2012
 
September 27, 2013
 
September 28, 2012
 
 
 
 
 
 
 
 
 
Cost of sales
 
$
515

 
$
492

 
$
1,460

 
$
1,416

Research and development expense
 
11,324

 
11,065

 
32,125

 
31,393

Selling, general, and administrative expense
 
13,898

 
13,033

 
39,426

 
37,981

Pre-tax stock-based compensation expense
 
25,737

 
24,590

 
73,011

 
70,790

Less: income tax benefit
 
(6,720
)
 
(6,606
)
 
(18,908
)
 
(18,412
)
Net stock-based compensation expense
 
$
19,017

 
$
17,984

 
$
54,103

 
$
52,378


No stock-based compensation was capitalized during any period presented above. As of September 27, 2013, unrecognized stock-based compensation cost related to outstanding unvested stock options, RSUs, market-based PRSUs and Employee Stock Purchase Plan ("ESPP") shares that are expected to vest was approximately $174.3 million. This unrecognized stock-based compensation cost is expected to be recognized over a weighted average period of approximately 2.5 years. We apply an expected forfeiture rate when amortizing stock-based compensation expense. To the extent our actual forfeiture rate is different from our estimate, stock-based compensation related to these awards will be different from our expectations.

The assumptions used to estimate the fair value of ESPP and RSUs were as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 27,
2013
 
September 28,
2012
 
September 27, 2013
 
September 28, 2012
ESPP purchase rights:
 
 
 
 
 
 
 
 
Expected term (in years)
 

 

 
1.0

 
1.0

Expected stock price volatility
 

 

 
31.2
%
 
39.1
%
Risk-free interest rate
 

 

 
0.1
%
 
0.2
%
Dividend yield
 

 

 
1.3
%
 
0.9
%
Weighted-average estimated fair value
 
$

 
$

 
$
8.41

 
$
10.54

 
 
 
 
 
 
 
 
 
RSUs:
 
 
 
 
 
 
 
 
Risk-free interest rate
 
0.5
%
 
0.3
%
 
0.3
%
 
0.3
%
Dividend yield
 
1.7
%
 
1.1
%
 
1.2
%
 
1.0
%
Weighted-average estimated fair value
 
$
33.41

 
$
35.68

 
$
32.20

 
$
33.52


On May 6, 2013 and July 30, 2012, we granted 262,647 and 66,489 market-based PRSUs, respectively, to a certain group of senior executives. As of September 27, 2013, the majority of these market-based PRSUs are still outstanding, and no market-based PRSUs have vested. For market-based PRSU grants made on May 6, 2013 and July 30, 2012, the weighted average grant date fair value was $33.03 and $41.18, respectively.


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A summary of activity for our RSUs and PRSUs for the nine months ended September 27, 2013 and information regarding RSUs and PRSUs outstanding and expected to vest as of September 27, 2013 is as follows:
(In thousands, except per share
amounts and terms)
 
Number of Shares
 
Weighted-Average Grant-Date Fair Market Value Per Share
 
Weighted-Average Remaining Contractual
Term (in Years)
 
Aggregate Intrinsic Value (1)
Outstanding, December 31, 2012
 
6,960

 
$
34.03

 
 
 
 
Grants
 
2,663

 
$
33.20

 
 
 
 
Vested
 
(2,359
)
 
$
31.05

 
 
 
 
Forfeited
 
(426
)
 
$
34.97

 
 
 
 
Outstanding, September 27, 2013
 
6,838

 
$
34.68

 
1.6
 
$
252,746

Vested and expected to vest, September 27, 2013
 
5,991

 
$
34.68

 
1.5
 
$
221,439


(1)
Aggregate intrinsic value represents the closing price per share of our stock on September 27, 2013, multiplied by the number of RSUs and market-based PRSUs outstanding or vested and expected to vest as of September 27, 2013.

A summary of stock option activity for the nine months ended September 27, 2013 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of September 27, 2013 is as follows:
(In thousands, except per share
amounts and terms)
 
Number of Shares
 
Weighted-Average Exercise Price Per Share
 
Weighted-Average Remaining Contractual
Term (in Years)
 
Aggregate Intrinsic Value (1)
Outstanding, December 31, 2012
 
5,163

 
$
25.81

 
 
 
 
Grants
 
72

 
$
14.79

 
 
 
 
Exercises
 
(1,378
)
 
$
20.51

 
 
 
 
Forfeited/Cancelled/Expired
 
(8
)
 
$
25.65

 
 
 
 
Outstanding, September 27, 2013
 
3,849

 
$
27.51

 
4.3
 
$
40,748

Exercisable, September 27, 2013
 
2,820

 
$
24.50

 
2.8
 
$
37,260

Vested and expected to vest, September 27, 2013
 
3,736

 
$
27.27

 
4.1
 
$
40,385


(1)
For those stock options with an exercise price below the closing price per share on September 27, 2013, aggregate intrinsic value represents the difference between the exercise price and the closing price per share of our common stock on September 27, 2013, multiplied by the number of stock options outstanding, exercisable, or vested and expected to vest as of September 27, 2013.

For the three and nine months ended September 27, 2013, 0.5 million and 1.4 million of non-qualified stock option shares were exercised, respectively. The total intrinsic value of stock options exercised for the three and nine months ended September 27, 2013 was $7.9 million and $19.9 million, respectively. The aggregate intrinsic value represents the difference between the exercise price and the selling price received by option holders upon the exercise of stock options during the period. The total cash received as a result of stock option exercises during the three and nine months ended September 27, 2013 was $11.5 million and $28.3 million, respectively.

As of September 27, 2013, our 2005 Equity Incentive Plan had a total of 28.3 million shares reserved for future issuance, of which 18.6 million shares were available for future grants.

ESPP

Our ESPP has two consecutive, overlapping twelve-month offering periods, with a new period commencing on the first trading day on or after May 1 and November 1 of each year and terminating on the last trading day on or before April 30 and October 31. Each twelve-month offering period generally includes two six-month purchase periods. The purchase price at which shares are sold under the ESPP is 85% of the lower of the fair market value of a share of our common stock on (1) the first day of the offering period, or (2) the last trading day of the purchase period. If the fair market value at the end of any purchase period is less than the fair market value at the beginning of the offering period, each participant is automatically withdrawn from the

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current offering period following the purchase of shares on the purchase date and is automatically re-enrolled in the immediately following offering period.

We sold 390,077 shares of common stock under the ESPP at a price of $26.87 during the nine months ended September 27, 2013, and 304,468 shares of common stock under the ESPP at a price of $30.23 during the nine months ended September 28, 2012. As of September 27, 2013, 3.5 million shares were available for future issuance under the ESPP.

Note 16 — Stockholders’ Equity

We repurchase shares under our stock purchase program announced on July 15, 1996, which has no specified expiration. No existing repurchase plans or programs have expired, nor have we decided to terminate any repurchase plans or programs prior to expiration. On August 28, 2013, we announced that our board of directors increased the share repurchase program authorization by an additional 30.0 million shares. Combined with the board’s previous authorization, there is a total of 233.0 million shares authorized for repurchase with approximately 41.1 million shares remaining for further repurchases under our stock repurchase program as of September 27, 2013. Since the inception of the stock purchase program through September 27, 2013, we have repurchased a total of 191.9 million shares of our common stock at an aggregate cost of $4.1 billion.

During the nine months ended September 27, 2013, we repurchased 1.9 million shares of our common stock for a total of $60.3 million under our stock repurchase program at an average price per share of $32.54. During the nine months ended September 28, 2012, we repurchased 5.3 million shares of our common stock for a total of $179.1 million under our stock repurchase program at an average price per share of $33.72. All shares were retired upon acquisition and have been recorded as a reduction of Common stock, Capital in excess of par value and Retained earnings in our consolidated balance sheets.


Note 17 — Income Taxes

We file income tax returns with the IRS and in various U.S. states and foreign jurisdictions. In 2008, the IRS completed field examinations of our tax returns for 2002 through 2004 and proposed an additional tax liability of $34.5 million, excluding interest. We contested this proposed additional tax liability in the IRS Office of Appeals and resolved several of the issues. On December 8, 2011, the IRS issued a Statutory Notice of Deficiency, revising the assessment of additional taxes for 2002 through 2004 to $19.8 million, excluding interest. The Notice relates primarily to inter-company adjustments between related companies, computational adjustments to the R&D credit and reductions to the benefits of tax credit carrybacks and carryforwards to subsequent years. On March 6, 2012, we filed a petition in the U.S. Tax Court to request a redetermination of the tax deficiency regarding certain IRS adjustments for 2004. We deposited $18.0 million as a cash bond with the IRS in 2008, and converted this amount to tax payments in March 2012. On May 8, 2012, the IRS filed its petition response in the U.S. Tax Court, in which the IRS conceded the R&D credit adjustment for 2004. In June 2012, the federal statute of limitations for the 2002 and 2003 tax years expired.

In addition, in 2010 the IRS completed field examinations for 2005 through 2007 and proposed an additional tax liability of $34.2 million, excluding interest. On January 23, 2012, the IRS issued a Statutory Notice of Deficiency, revising the assessment of additional taxes for 2005 through 2007 to $21.4 million, excluding interest. The Notice relates primarily to inter-company adjustments between related companies and reductions to the benefits of tax credit carrybacks and carryforwards to subsequent years. On April 20, 2012, we filed a petition in the U.S. Tax Court to request a redetermination of the tax deficiencies regarding certain IRS adjustments for 2005 through 2007. On June 21, 2012, the IRS filed its petition response in the U.S. Tax Court.

On August 15, 2012, the case for the 2004 tax year was combined with that for the 2005 through 2007 tax years. A judge has been assigned to our case and a motion for continuance has been granted. We believe we have made adequate tax payments or accrued adequate amounts for our tax liabilities for 2004 through 2007 and that the outcome of the above matters will not have a material adverse effect on our consolidated operating results or financial position.

On January 31, 2013, the IRS conceded an adjustment for certain inter-company transactions in our litigation regarding the 2004 through 2007 tax years.  The concession only impacted our 2007 tax year. Our other inter-company transactions continue to be subject to litigation for 2004 through 2007. As a result of this concession, we recognized a tax and interest benefit of $6.8 million during the three months ended March 29, 2013 due to the release of certain tax reserves.

Altera and the IRS agreed to file motions for partial summary judgment regarding one of the remaining inter-company transactions subject to litigation for the 2004 through 2007 tax years.  As part of the partial summary judgment process, both sides filed three briefs on May 28, 2013, July 25, 2013 and September 9, 2013.  We expect to present our legal arguments on other inter-company transactions that are subject to litigation to the U.S. Tax Court during 2014.


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On April 19, 2013, the IRS notified us that we would be audited for each of the 2010 and 2011 tax years. We believe we have made adequate tax payments or accrued adequate amounts for our tax liabilities for 2010 and 2011 and that the outcome of the audit will not have a material adverse effect on our consolidated operating results or financial position.

Other significant jurisdictions in which we are or may be subject to examination for fiscal years 2002 forward include China (including Hong Kong), Denmark, Ireland, Malaysia, Japan, Canada, United Kingdom and the state of California. We believe we have made adequate tax payments and/or accrued adequate amounts such that the outcome of these audits will have no material adverse effect on our consolidated operating results. Due to the potential resolution of various tax examinations, and the expiration of various statutes of limitations, it is possible that our gross unrecognized tax benefits may change within the next twelve months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of potential adjustments to the balance of gross unrecognized tax benefits.

Our effective tax rate reflects the impact of a significant amount of our earnings being taxed in foreign jurisdictions at rates below the U.S. statutory tax rate. Our effective tax rate for the three months ended September 27, 2013 was 6.7% compared to 11.3% for the three months ended September 28, 2012. The net change in our effective tax rate was primarily due to higher one-time tax benefits in 2013 compared to 2012, and the reinstatement of the U.S. federal research and development tax credit in 2013 which had expired in 2011. During the three months ended September 27, 2013, we reversed $30.3 million of liabilities and the related interest for uncertain tax positions upon the expiration of foreign and domestic statutes of limitation, which was substantially offset by $27 million of tax accrued on foreign dividends.

Our effective tax rate for the nine months ended September 27, 2013 was 4.4%, compared with 4.0% for the nine months ended September 28, 2012. The net change in our effective tax rate was primarily due to higher one-time tax benefits in 2012 compared to 2013, partially offset by the reinstatement of the U.S. federal research and development tax credit in 2013 which had expired in 2011. During the nine months ended September 27, 2013, we recognized a benefit of $10.6 million resulting from the enactment of the American Taxpayer Relief Act in January 2013, which extended the federal research and development credit through December 31, 2013. In addition, we reversed $6.8 million of liabilities for uncertain tax liabilities due to the IRS conceding an adjustment for certain 2007 inter-company transactions in our litigation regarding the 2004 through 2007 tax years, $2.3 million of liabilities for uncertain tax positions relating to changes in estimate for certain foreign tax jurisdictions, and $30.3 million of liabilities for uncertain tax positions upon the expiration of foreign and domestic statutes of limitation and the related interest, which was substantially offset by $27 million of tax accrued on foreign dividends.

As of September 27, 2013, we had total gross unrecognized tax benefits of $268.7 million which, if recognized, would impact our effective tax rate. On December 31, 2012, we had total gross unrecognized tax benefits of $275.9 million. We are unable to make a reasonable estimate as to if and when cash settlements with the relevant taxing authorities may occur.
    
We recognize interest and penalties related to uncertain tax positions in our income tax provision. We have accrued approximately $47.7 million and $48.8 million for the payment of interest and penalties related to uncertain tax positions as of September 27, 2013 and December 31, 2012, respectively.

In connection with one of our acquisitions during the nine months ended September 27, 2013, we are indemnified by the selling company for certain potential tax obligations arising prior to the acquisition. We have recognized a tax indemnification receivable of $6.5 million in Other assets, net in our consolidated balance sheets. We do not expect any significant effect on earnings or cash flows related to these potential tax obligations.

Note 18 — Non-Qualified Deferred Compensation Plan

We allow our U.S.-based officers and director-level employees to defer a portion of their compensation under the Altera Corporation Non-Qualified Deferred Compensation Plan (the “NQDC Plan”). Our Retirement Plans Committee administers the NQDC Plan. As of September 27, 2013, there were 122 participants in the NQDC Plan who self-direct their investments, subject to certain limitations. In the event we become insolvent, the NQDC Plan assets are subject to the claims of our general creditors. Since the inception of the NQDC Plan, we have not made any contributions to the NQDC Plan, and we have no commitments to do so in the future. There are no NQDC Plan provisions that provide for any guarantees or minimum return on investments. NQDC Plan participants are prohibited from investing NQDC Plan contributions in Altera common stock. The balance of the NQDC Plan assets and related obligations was $78.7 million and $77.4 million as of September 27, 2013 and December 31, 2012, respectively.

Investment earnings from the NQDC Plan are recorded as Gain on deferred compensation plan securities in our consolidated statements of comprehensive income. The investment gain also represents an increase in the future payout to participants and is recorded as Compensation expense — deferred compensation plan in our consolidated statements of comprehensive income.

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Compensation expense associated with our NQDC Plan obligations is offset by the gain from the related securities. The net effect of investment earnings and related compensation expense has no impact on our income before income taxes, net income or cash balances.

The following tables summarize the fair value of our deferred compensation plan assets by significant investment category:
(In thousands)
 
September 27, 2013
 
December 31, 2012
 
 
 
 
 
Deferred compensation plan assets: (1)
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
Restricted cash equivalents
 
$
20,270

 
$
17,116

Equity securities
 
26,210

 
29,902

Mutual funds
 
30,048

 
27,073

Subtotal
 
76,528

 
74,091

 
 
 
 
 
Level 2:
 
 
 
 
Fixed income securities
 
2,144

 
3,346

Total
 
$
78,672

 
$
77,437

 
 
 
 
 

(1) Included in Deferred compensation plan - marketable securities and Deferred compensation plan - restricted cash equivalents in the accompanying consolidated balance sheets as of September 27, 2013 and December 31, 2012.


Note 19 — Declaration of Dividend Subsequent to September 27, 2013

On October 21, 2013, our board of directors declared a quarterly cash dividend of $0.15 per common share, payable on December 2, 2013 to stockholders of record on November 12, 2013.


ITEM 2:
Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained in the risk factors described in Item 1A of this report and elsewhere in this report, contains forward-looking statements, which are provided under the “safe harbor” protection of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar words. Examples of forward-looking statements include statements regarding (1) our gross margins and factors that affect gross margins; (2) trends in our future sales; (3) our research and development expenditures and efforts; (4) our capital expenditures; (5) our provision for tax liabilities and other critical accounting estimates; and (6) our exposure to market risks related to changes in interest rates, equity prices and foreign currency exchange rates.

Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The forward-looking statements contained in this report are based on information that is currently available to us and expectations and assumptions that we deemed reasonable at the time the statements were made. We do not undertake any obligation to update any forward-looking statements in this report or in any of our other communications, except as required by law. All such forward-looking statements should be read as of the time the statements were made and with the recognition that these forward-looking statements may not be complete or accurate at a later date.

Many factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements contained in this report. These factors include, but are not limited to, those risks described in Part II Item 1A of this report and those risks described under “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2012.


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CRITICAL ACCOUNTING ESTIMATES

The preparation of our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires our management to make judgments and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our management believes that we consistently apply these judgments and estimates and the consolidated financial statements and accompanying notes fairly represent all periods presented. However, any differences between these judgments and estimates and actual results could have a material impact on our consolidated statements of comprehensive income and financial position. Critical accounting estimates, as defined by the Securities and Exchange Commission (“SEC”), are those that are most important to the portrayal of our consolidated financial condition and results of operations and require our management's most difficult and subjective judgments and estimates of matters that are inherently uncertain. Our critical accounting estimates include those regarding (1) revenue recognition, (2) valuation of inventories, and (3) income taxes. For a discussion of our critical accounting estimates, see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2012.


RESULTS OF OPERATIONS

Sales Overview

We design, manufacture, and market high-performance, high-density programmable logic devices, or PLDs; HardCopy® ASIC devices; PowerSoCs; pre-defined software design building blocks known as intellectual property cores, or IP cores; and associated development tools.

Our net sales of $445.9 million for the three months ended September 27, 2013, decreased by $49.1 million, or 10%, from our net sales of $495.0 million for the three months ended September 28, 2012. Our net sales of $1.28 billion for the nine months ended September 27, 2013, decreased by $65.4 million, or 5%, from our net sales of $1.34 billion for the nine months ended September 28, 2012. The decrease in net sales for both the three and nine-month periods was mainly due to a typical decline in Mature and Other Products coupled with a moderate decline in Mainstream Products as our new technologies are being adopted. Sales of New Products had strong growth in both the three and nine-month periods as we continue to experience growth in our 28-nm and 40-nm products. Net sales declined in the Telecom & Wireless and Other vertical markets, partially offset by a slight increase in the Industrial Automation, Military and Automotive vertical market for both periods. We experienced declines in all geographies with the exception of Japan, which exhibited modest growth for the three-month period ended September 27, 2013 from the three month period ended September 28, 2012. We experienced a decrease in net sales in the Americas and Asia Pacific, offset by growth in EMEA and Japan for the nine-month period ended September 27, 2013 from the nine-month period ended September 28, 2012.

The net sales of FPGAs and CPLDs as a percentage of total net sales for both the three and nine-month periods ended September 27, 2013 remained consistent with the prior year. 

Sales by Product Category

We classify our products into three categories: New, Mainstream, and Mature and Other Products. The composition of each product category is as follows:

New Products include the Stratix® V, Stratix IV, Arria® V, Arria II, Cyclone® V, Cyclone IV, MAX® V, HardCopy® IV devices and Enpirion PowerSoCs.

Mainstream Products include the Stratix III, Cyclone III, MAX II and HardCopy III devices.

Mature and Other Products include the Stratix II, Stratix, Arria GX, Cyclone II, Cyclone, Classic™, MAX 3000A, MAX 7000, MAX 7000A, MAX 7000B, MAX 7000S, MAX 9000, HardCopy II, HardCopy, FLEX® series, APEX™ series, Mercury™, and Excalibur™ devices, configuration and other devices, intellectual property cores and software and other tools.


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Net sales by product category were as follows:
 
Three Months Ended
 
Year-
Over-
Year
Change
 
Sequential Change
Nine Months Ended
Year-
Over-
Year
Change
 
September 27,
2013
 
September 28,
2012
 
June 28,
2013
 
 
 
September 27, 2013
 
September 28, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New
44
%
 
31
%
 
41
%
 
27
 %
 
16
 %
 
41
%
 
29
%
 
33
 %
Mainstream
26
%
 
32
%
 
28
%
 
(25
)%
 
0
 %
 
28
%
 
31
%
 
(15
)%
Mature and Other
30
%
 
37
%
 
31
%
 
(28
)%
 
(1
)%
 
31
%
 
40
%
 
(25
)%
Net Sales
100
%
 
100
%
 
100
%
 
(10
)%
 
6
 %
 
100
%
 
100
%
 
(5
)%

Sales by Vertical Market

The following vertical market data is derived from data that is provided to us by our distributors and end customers. With a broad base of customers, who in some cases manufacture end products spanning multiple market segments, the assignment of net sales to a vertical market requires the use of estimates, judgment and extrapolation. As such, actual results may differ from those reported.
 
Three Months Ended
 
Year-
Over-
Year
Change
 
Sequential Change
Nine Months Ended
 
Year-
Over-
Year
Change
 
September 27,
2013

September 28,
2012
 
June 28,
2013
 
 
 
September 27, 2013
 
September 28, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Telecom & Wireless
41
%
 
45
%
 
42
%
 
(18
)%
 
3
 %
 
41
%
 
44
%
 
(10
)%
Industrial Automation, Military & Automotive
23
%
 
20
%
 
22
%
 
1
 %
 
11
 %
 
22
%
 
21
%
 
2
 %
Networking, Computer & Storage
19
%
 
17
%
 
18
%
 
0
 %
 
13
 %
 
19
%
 
17
%
 
2
 %
Other
17
%
 
18
%
 
18
%
 
(12
)%
 
(1
)%
 
18
%
 
18
%
 
(7
)%
Net Sales
100
%
 
100
%
 
100
%
 
(10
)%
 
6
 %
 
100
%
 
100
%
 
(5
)%

Sales of FPGAs and CPLDs

Our PLDs consist of field-programmable gate arrays, or FPGAs, and complex programmable logic devices, or CPLDs. FPGAs consist of our Stratix, Cyclone, Arria, APEX, FLEX and ACEX 1K, as well as our Excalibur and Mercury families. CPLDs consist of our MAX and Classic families. Other Products consist of our Enpirion PowerSoCs, HardCopy ASIC devices and other masked programmed logic devices, configuration devices, software and other tools and IP cores.

Our net sales of FPGAs, CPLDs, and Other Products were as follows:
 
Three Months Ended
 
Year-
Over-
Year
Change
 
Sequential Change
Nine Months Ended
 
Year-
Over-
Year
Change
 
September 27,
2013
 
September 28,
2012
 
June 28,
2013
 
 
 
September 27, 2013
 
September 28, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FPGA
82
%
 
82
%
 
83
%
 
(11
)%
 
4
%
 
83
%
 
83
%
 
(5
)%
CPLD
9
%