Altera_2013Q2_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 June 28, 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 July 10, 2013: 319,472,196
 
 
 



 
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)
 
June 28,
2013
 
December 31,
2012
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
2,788,844

 
$
2,876,627

Short-term investments
 
164,835

 
140,958

Total cash, cash equivalents, and short-term investments
 
2,953,679

 
3,017,585

Accounts receivable, net
 
472,597

 
323,708

Inventories
 
134,298

 
152,721

Deferred income taxes — current
 
87,270

 
59,049

Deferred compensation plan — marketable securities
 
55,753

 
60,321

Deferred compensation plan — restricted cash equivalents
 
18,984

 
17,116

Other current assets
 
40,095

 
49,852

Total current assets
 
3,762,676

 
3,680,352

Property and equipment, net
 
200,823

 
206,148

Long-term investments
 
689,301

 
704,758

Deferred income taxes — non-current
 
5,009

 
17,082

Other assets, net
 
221,594

 
49,488

Total assets
 
$
4,879,403

 
$
4,657,828

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
39,571

 
$
50,036

Accrued liabilities
 
31,072

 
29,005

Accrued compensation and related liabilities
 
37,654

 
40,606

Dividends payable
 
47,937

 

Deferred compensation plan obligations
 
74,737

 
77,437

Deferred income and allowances on sales to distributors
 
399,630

 
345,993

Total current liabilities
 
630,601

 
543,077

Income taxes payable — non-current
 
291,656

 
272,000

Long-term debt
 
500,000

 
500,000

Other non-current liabilities
 
8,948

 
9,304

Total liabilities
 
1,431,205

 
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 - 319,580 shares at June 28, 2013 and 319,564 shares at December 31, 2012
 
320

 
320

Capital in excess of par value
 
1,180,183

 
1,122,555

Retained earnings
 
2,271,221

 
2,204,980

Accumulated other comprehensive (loss) income
 
(3,526
)
 
5,592

Total stockholders' equity
 
3,448,198

 
3,333,447

Total liabilities and stockholders' equity
 
$
4,879,403

 
$
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
 
Six Months Ended
(In thousands, except per share amounts)
 
June 28,
2013
 
June 29,
2012
 
June 28,
2013
 
June 29,
2012
Net sales
 
$
421,759

 
$
464,831

 
$
832,260

 
$
848,585

Cost of sales
 
135,104

 
141,315

 
261,187

 
256,149

Gross margin
 
286,655

 
323,516

 
571,073

 
592,436

Research and development expense
 
95,489

 
92,143

 
183,206

 
174,227

Selling, general, and administrative expense
 
77,869

 
71,796

 
156,469

 
141,581

Amortization of acquisition-related intangible assets
 
915

 
213

 
1,128

 
426

Compensation (benefit) expense — deferred compensation plan
 
(160
)
 
(2,313
)
 
3,262

 
3,423

Loss (gain) on deferred compensation plan securities
 
160

 
2,313

 
(3,262
)
 
(3,423
)
Interest income and other
 
(2,778
)
 
(1,415
)
 
(4,437
)
 
(3,222
)
Gain reclassified from other comprehensive income
 
(42
)
 
(69
)
 
(96
)
 
(171
)
Interest expense
 
3,389

 
2,116

 
5,854

 
3,053

Income before income taxes
 
111,813

 
158,732

 
228,949

 
276,542

Income tax expense (benefit)
 
10,304

 
(3,947
)
 
7,251

 
(1,971
)
Net income
 
101,509

 
162,679

 
221,698

 
278,513

 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Unrealized holding (loss)/gain on investments:
 
 
 
 
 
 
 
 
Unrealized holding (loss)/gain on investments arising during period, net of tax of ($47), $8, ($41) and $66
 
(9,031
)
 
2,799

 
(9,032
)
 
3,103

Less: Reclassification adjustments for gain on investments included in net income, net of tax of $5, $1, $10 and $6
 
(37
)
 
(3
)
 
(86
)
 
(23
)
 
 
(9,068
)
 
2,796

 
(9,118
)
 
3,080

Unrealized gain on derivatives:
 
 
 
 
 
 
 
 
Unrealized gain on derivatives arising during period, net of tax of $34 and $42
 

 
63

 


77

Less: Reclassification adjustments for gain on derivatives included in net income, net of tax of $23 and $50
 

 
(42
)
 


(92
)
 
 

 
21

 


(15
)
Other comprehensive (loss) income
 
(9,068
)
 
2,817

 
(9,118
)

3,065

Comprehensive income
 
$
92,441

 
$
165,496

 
$
212,580


$
281,578

 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.32

 
$
0.51

 
$
0.69


$
0.87

Diluted
 
$
0.31

 
$
0.50

 
$
0.69

 
$
0.85

 
 
 
 
 
 
 
 
 
Shares used in computing per share amounts:
 
 
 
 
 
 
 
 
Basic
 
320,472

 
321,218

 
320,175

 
321,898

Diluted
 
323,527

 
325,285

 
323,279

 
326,172

 
 
 
 
 
 
 
 
 
Cash dividends paid per common share
 
$
0.10

 
$
0.08

 
$
0.20

 
$
0.16

 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

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Table of Contents

ALTERA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Six Months Ended
 
June 28,
2013
 
June 29,
2012
 
 
 
 
Cash Flows from Operating Activities:
 
 
 
Net income
$
221,698

 
$
278,513

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
22,449

 
16,323

Amortization of acquisition-related intangible assets
1,128

 
426

Stock-based compensation
47,274

 
46,200

Deferred income tax benefit
(21,767
)
 
(12,090
)
Tax effect of employee stock plans
1,280

 
16,500

Excess tax benefit from employee stock plans
(1,148
)
 
(16,434
)
Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable, net
(147,407
)
 
(192,994
)
Inventories
21,649

 
(23,811
)
Other assets
29,351

 
6,019

Accounts payable and other liabilities
(19,585
)
 
(19,066
)
Deferred income and allowances on sales to distributors
50,886

 
94,299

Income taxes payable
14,196

 
(16,658
)
Deferred compensation plan obligations
(5,961
)
 
(1,925
)
Net cash provided by operating activities
214,043

 
175,302

Cash Flows from Investing Activities:
 
 
 
Purchases of property and equipment
(23,337
)
 
(31,312
)
Proceeds from sales of deferred compensation plan securities, net
5,961

 
1,925

Purchases of available-for-sale securities
(175,642
)
 
(576,568
)
Proceeds from sale and maturity of available-for-sale securities
155,981

 
92,643

Acquisitions, net of cash acquired
(145,313
)
 

Purchases of other investments
(176
)
 

Net cash used in investing activities
(182,526
)
 
(513,312
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of common stock through various stock plans
27,296

 
26,086

Shares withheld for employee taxes
(6,722
)
 
(6,562
)
Payment of dividends to stockholders
(64,048
)
 
(51,558
)
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
(54,974
)
 
(129,016
)
Excess tax benefit from employee stock plans
1,148

 
16,434

Net cash used in financing activities
(119,300
)
 
(149,860
)
Net decrease in cash and cash equivalents
(87,783
)
 
(487,870
)
Cash and cash equivalents at beginning of period
2,876,627

 
3,371,933

Cash and cash equivalents at end of period
$
2,788,844

 
$
2,884,063


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 six months ended June 28, 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 where necessary 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 February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. 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. 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 June 28, 2013 relating to these acquisitions. These acquisitions, both individually and in the aggregate, were not significant to our consolidated results of operations.

As of June 28, 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:

 
 
Six Months Ended
(In thousands)
 
June 28, 2013
Beginning Balance
 
$
2,329

Additions due to acquisitions
 
90,736

Ending Balance
 
$
93,065


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.

Goodwill is included in Other assets, net in our consolidated balance sheets.



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Note 5 — Acquisition-Related Intangible Assets

Acquisition-related intangible assets were as follows:

 
 
June 28, 2013
(In thousands)
 
Gross Assets
 
Accumulated Amortization
 
Net
 
Weighted-Average Amortization Period
Developed technology
 
$
43,070

 
$
(2,097
)
 
$
40,973

 
9.2 years
Customer relationships
 
12,910

 
(650
)
 
12,260

 
6.8 years
Trade name
 
3,700

 
(44
)
 
3,656

 
8.9 years
Non-competition agreements
 
700

 
(37
)
 
663

 
2.0 years
Other intangible assets
 
930

 
(736
)
 
194

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

 
(3,564
)
 
57,746

 
 
In-process research & development
 
30,600

 

 
30,600

 
 
Total acquisition-related intangible assets
 
$
91,910

 
$
(3,564
)
 
$
88,346

 
 

 
 
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
 
7,310

 
(2,436
)
 
4,874

 
 
Total acquisition-related intangible assets
 
$
7,310

 
$
(2,436
)
 
$
4,874

 
 

Acquisition-related intangible assets are included in Other assets, net in our consolidated balance sheets as of June 28, 2013 and December 31, 2012.

Based on the carrying value of acquisition-related intangible assets as of June 28, 2013, the annual amortization expense for acquisition-related intangible assets is expected to be as follows:

Fiscal Year
 
Amortization Expense
 
 
 (In thousands)

2013 (remaining six months)
 
$
3,696

2014
 
7,398

2015
 
7,186

2016
 
6,867

2017
 
6,692

Thereafter
 
25,907

Total
 
$
57,746




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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.
    
 
 
June 28, 2013
(In thousands)
 
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Marketable Securities
 
Long-Term Marketable Securities

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
61,859

 
$

 
$

 
$
61,859

 
$
61,859

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
2,709,386

 

 

 
2,709,386

 
2,709,386

 

 

U.S. treasury securities
 
571,714

 
6

 
(3,376
)
 
568,344

 
17,599

 
36,809

 
513,936

Subtotal
 
3,281,100

 
6

 
(3,376
)
 
3,277,730

 
2,726,985

 
36,809


513,936

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities
 
83,152

 
26

 
(59
)
 
83,119

 

 
41,992

 
41,127

Non-U.S. government securities
 
16,074

 
2

 
(6
)
 
16,070

 

 
6,758

 
9,312

Municipal bond
 
1,609

 

 
(12
)
 
1,597

 

 
608

 
989

Corporate securities
 
202,691

 
254

 
(340
)
 
202,605

 

 
78,668

 
123,937

Subtotal
 
303,526

 
282

 
(417
)
 
303,391

 

 
128,026

 
175,365

Total
 
$
3,646,485

 
$
288

 
$
(3,793
)
 
$
3,642,980

 
$
2,788,844

 
$
164,835

 
$
689,301

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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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 $5.1 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 June 28, 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.
 
 
June 28, 2013
(In thousands)
 
Cost
 
Estimated Fair Value
Due in one year or less
 
$
182,408

 
$
182,434

Due after one year through five years
 
692,832

 
689,301

 
 
$
875,240

 
$
871,735


As of June 28, 2013, $702.6 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 $3.8 million. As of December 31, 2012, $118.7 million of the total available-for-sale securities has been 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)
 
June 28,
2013
 
December 31,
2012
Gross accounts receivable
 
$
473,119

 
$
324,260

Allowance for doubtful accounts
 
(500
)
 
(500
)
Allowance for sales returns
 
(22
)
 
(52
)
Accounts receivable, net
 
$
472,597

 
$
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
 
Six Months Ended
(Percentage of Net Sales)
 
June 28,
2013
 
June 29,
2012
 
June 28, 2013
 
June 29, 2012
 
 
 
 
 
 
 
 
 
Sales to distributors
 
75
%
 
69
%
 
76
%
 
71
%
Sales to OEMs
 
25
%
 
31
%
 
24
%
 
29
%
 
 
100
%
 
100
%
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
Significant Distributors(1):
 
 
 
 
 
 
 
 
Arrow Electronics, Inc. ( “Arrow”)
 
40
%
 
38
%
 
41
%
 
38
%
Macnica, Inc. (“Macnica”)
 
24
%
 
21
%
 
23
%
 
21
%

(1)
Except as presented above, no other distributor accounted for greater than 10% of our net sales for the three and six months ended June 28, 2013 or June 29, 2012.

One OEM accounted for 11% and 12%, respectively, of our net sales for quarterly and year-to-date periods ended June 28, 2013, and 19% for both the quarterly and year-to-date periods ended June 29, 2012.

As of June 28, 2013, accounts receivable from Arrow and Macnica individually accounted for approximately 34% and 55%, 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 June 28, 2013 or December 31, 2012.
 
Note 8 — Inventories

Inventories were comprised of the following:

(In thousands)
 
June 28,
2013
 
December 31,
2012
Raw materials
 
$
8,674

 
$
12,447

Work in process
 
91,660

 
88,643

Finished goods
 
33,964

 
51,631

Total inventories
 
$
134,298

 
$
152,721



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Note 9 — Property and Equipment, Net

Property and equipment, net was comprised of the following:

(In thousands)
 
June 28,
2013
 
December 31,
2012
Land and land rights
 
$
23,157

 
$
23,157

Buildings
 
158,384

 
159,247

Equipment and software
 
270,271

 
256,725

Office furniture and fixtures
 
24,639

 
24,531

Leasehold improvements
 
12,275

 
11,915

Construction in progress
 
2,090

 
1,705

Property and equipment, at cost
 
490,816

 
477,280

Accumulated depreciation
 
(289,993
)
 
(271,132
)
Property and equipment, net
 
$
200,823

 
$
206,148


Depreciation expense was $10.3 million and $20.5 million for the three and six months ended June 28, 2013. Depreciation expense was $7.7 million and $15.1 million for the three and six months ended June 29, 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)
 
June 28,
2013
 
December 31,
2012
 
 
 
 
 
Deferred revenue on shipment to distributors
 
$
411,334

 
$
363,641

Deferred cost of sales on shipment to distributors
 
(24,095
)
 
(28,101
)
Deferred income on shipment to distributors
 
387,239

 
335,540

Other deferred revenue (1)
 
12,391

 
10,453

Total
 
$
399,630

 
$
345,993


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

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

 
 
Six Months Ended
(In thousands)
 
June 28,
2013
 
June 29,
2012
 
 
 
 
 
Balance at beginning of period
 
$
345,993

 
$
279,876

Deferred revenue recognized upon shipment to distributors
 
2,913,943

 
2,562,024

Deferred cost of sales recognized upon shipment to distributors
 
(121,101
)
 
(117,311
)
Revenue recognized upon sell-through to end customers
 
(501,169
)
 
(493,575
)
Cost of sales recognized upon sell-through to end customers
 
123,566

 
114,534

Earned distributor price concessions (1)
 
(2,323,247
)
 
(1,934,713
)
Returns
 
(42,086
)
 
(37,187
)
Other
 
3,731

 
527

Balance at end of period
 
$
399,630

 
$
374,175



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(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
 
June 28,
2013
 
 
 
 
 
 
 
Accumulated unrealized gain (loss) on available-for-sale securities, net of tax
 
$
5,592

 
$
(9,118
)
 
$
(3,526
)
Accumulated other comprehensive (loss) income
 
$
5,592

 
$
(9,118
)
 
$
(3,526
)


Note 12 — Income Per Share

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

 
 
Three Months Ended
 
Six Months Ended
(In thousands, except per share amounts)
 
June 28,
2013
 
June 29,
2012
 
June 28, 2013
 
June 29, 2012
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
101,509

 
$
162,679

 
$
221,698

 
$
278,513

Basic weighted shares outstanding
 
320,472

 
321,218

 
320,175

 
321,898

Net income per share
 
$
0.32

 
$
0.51

 
$
0.69

 
$
0.87

 
 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
101,509

 
$
162,679

 
$
221,698

 
$
278,513

 
 
 
 
 
 
 
 
 
Weighted shares outstanding
 
320,472

 
321,218

 
320,175

 
321,898

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options, employee stock purchase plan, and restricted stock unit shares
 
3,055

 
4,067

 
3,104

 
4,274

 
 
 
 
 
 
 
 
 
Diluted weighted shares outstanding
 
323,527

 
325,285

 
323,279

 
326,172

 
 
 
 
 
 
 
 
 
Net income per share
 
$
0.31

 
$
0.50

 
$
0.69

 
$
0.85


In applying the treasury stock method, we excluded 2.2 million and 1.9 million stock option shares and restricted stock unit shares for the three and six months ended June 28, 2013, respectively, and 1.6 million and 1.2 million stock option shares and

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restricted stock unit shares for the three and six months ended June 29, 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 June 28, 2013. As of June 28, 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 are recorded in other assets, net and are being amortized to 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 that was entered into on August 31, 2007.

The estimated fair value of Altera's long-term debt was approximately $495.3 million at June 28, 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 June 28, 2013, we had approximately $178.6 million of outstanding purchase commitments to such subcontractors. We expect to receive and pay for these materials and services over the next six months.

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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.  Because the case is at a very early stage, it is not possible for us to determine whether there is a reasonable possibility that a loss has been incurred nor can we estimate the range of potential loss. The case is currently scheduled for trial in May 2014.

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 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 over 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.

On May 28, 2013, both the Company and the IRS filed motions for partial summary judgment regarding the inter-company transactions that continue to be subject to litigation for the 2004 through 2007 tax years. We expect to present our legal arguments on other inter-company transactions that are subject to ligation to the U.S. Tax Court by the end of 2013.

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The IRS notified us that we would be audited for each of the 2010 and 2011 tax years on April 19, 2013. 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 to a group of senior executives PRSUs 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.

Stock-based compensation expense included in our consolidated statements of comprehensive income was as follows:
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
June 28,
2013
 
June 29,
2012
 
June 28, 2013
 
June 29, 2012
 
 
 
 
 
 
 
 
 
Cost of sales
 
$
501

 
$
476

 
$
945

 
$
924

Research and development expense
 
11,014

 
10,475

 
20,801

 
20,328

Selling, general, and administrative expense
 
13,517

 
12,856

 
25,528

 
24,948

Pre-tax stock-based compensation expense
 
25,032

 
23,807

 
47,274

 
46,200

Less: income tax benefit
 
(6,510
)
 
(6,102
)
 
(12,189
)
 
(11,806
)
Net stock-based compensation expense
 
$
18,522

 
$
17,705

 
$
35,085

 
$
34,394


No stock-based compensation was capitalized during any period presented above. As of June 28, 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 $195.8 million. This unrecognized stock-based compensation cost is expected to be recognized over a weighted average period of approximately 2.4 years. 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.


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The assumptions used to estimate the fair value of ESPP and RSUs were as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 28,
2013
 
June 29,
2012
 
June 28, 2013
 
June 29, 2012
ESPP purchase rights:
 
 
 
 
 
 
 
 
Expected term (in years)
 
1.0

 
1.0

 
1.0

 
1.0

Expected stock price volatility
 
31.2
%
 
39.1
%
 
31.2
%
 
39.1
%
Risk-free interest rate
 
0.1
%
 
0.2
%
 
0.1
%
 
0.2
%
Dividend yield
 
1.3
%
 
0.9
%
 
1.3
%
 
0.9
%
Weighted-average estimated fair value
 
$
8.41

 
$
10.54

 
$
8.41

 
$
10.54

 
 
 
 
 
 
 
 
 
RSUs:
 
 
 
 
 
 
 
 
Risk-free interest rate
 
0.3
%
 
0.3
%
 
0.3
%
 
0.3
%
Dividend yield
 
1.2
%
 
0.9
%
 
1.2
%
 
0.9
%
Weighted-average estimated fair value
 
$
32.10

 
$
32.52

 
$
32.13

 
$33.13

On May 6, 2013 and July 30, 2012, we granted 262,647 and 66,489 of market-based PRSUs, respectively, to a group of senior executives. As of June 28, 2013, 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.

In addition, we apply an expected forfeiture rate when amortizing stock-based compensation expense.

A summary of activity for our RSUs and PRSUs for the six months ended June 28, 2013 and information regarding RSUs and PRSUs outstanding and expected to vest as of June 28, 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
 
2,537

 
$
33.12

 
 
 
 
Vested
 
(693
)
 
$
34.96

 
 
 
 
Forfeited
 
(195
)
 
$
34.87

 
 
 
 
Outstanding, June 28, 2013
 
8,609

 
$
33.67

 
1.5
 
$
284,005

Vested and expected to vest, June 28, 2013
 
7,626

 
$
33.67

 
1.4
 
$
251,577


(1)
Aggregate intrinsic value represents the closing price per share of our stock on June 28, 2013, multiplied by the number of RSUs and market-based PRSUs outstanding or vested and expected to vest as of June 28, 2013.

A summary of stock option activity for the six months ended June 28, 2013 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of June 28, 2013 is as follows:

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(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
 
(840
)
 
$
20.02

 
 
 
 
Forfeited/Cancelled/Expired
 
(1
)
 
$
13.47

 
 
 
 
Outstanding, June 28, 2013
 
4,394

 
$
26.74

 
4.1
 
$
35,659

Exercisable, June 28, 2013
 
3,206

 
$
23.32

 
2.5
 
$
33,834

Vested and expected to vest, June 28, 2013
 
4,260

 
$
26.47

 
4.0
 
$
35,497


(1)
For those stock options with an exercise price below the closing price per share on June 28, 2013, aggregate intrinsic value represents the difference between the exercise price and the closing price per share of our common stock on June 28, 2013, multiplied by the number of stock options outstanding, exercisable, or vested and expected to vest as of June 28, 2013.

For the three and six months ended June 28, 2013, 0.4 million and 0.8 million of non-qualified stock option shares were exercised, respectively. The total intrinsic value of stock options exercised for the three and six months ended June 28, 2013 was $5.3 million and $11.9 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 from employees as a result of employee stock option exercises during the three and six months ended June 28, 2013 was $8.4 million and $16.8 million, respectively.

As of June 28, 2013, our 2005 Equity Incentive Plan had a total of 29.9 million shares reserved for future issuance, of which 18.3 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 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 six months ended June 28, 2013, and 304,519 shares of common stock under the ESPP at a price of $30.23 during the six months ended June 29, 2012. As of June 28, 2013, 3.5 million shares were available for future issuance under the ESPP.

Note 16 — 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

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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 over 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.

On May 28, 2013, both Altera and the IRS filed motions for partial summary judgment regarding the inter-company transactions that continue to be subject to litigation for the 2004 through 2007 tax years. We expect to present our legal arguments on other inter-company transactions that are subject to ligation to the U.S. Tax Court by the end of 2013.

The IRS notified us that we would be audited for each of the 2010 and 2011 tax years on April 19, 2013. 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 possible 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 June 28, 2013 was 9.3%, compared with -2.5% for the three months ended June 29, 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 three months ended June 28, 2013, we reversed $2.3 million of liabilities for uncertain tax positions relating to changes in our estimate for certain foreign jurisdictions.

Our effective tax rate for the six months ended June 28, 2013 was 6.7%, compared with -0.7% for the six months ended June 29, 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 six months ended June 28, 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 positions due to the IRS conceding an adjustment for certain 2007 inter-company transactions in our litigation over the 2004 through 2007 tax years, as well as $2.3 million of liabilities for uncertain tax positions relating to changes in estimate for certain foreign jurisdictions.

As of June 28, 2013, we had total gross unrecognized tax benefits of $291.6 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 will occur.
    
We recognize interest and penalties related to uncertain tax positions in our income tax provision. We accrued approximately $51.2 million and $48.8 million for the payment of interest and penalties related to uncertain tax positions as of June 28, 2013 and December 31, 2012, respectively.

In connection with one of our acquisitions during the three months ended June 28, 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 17 — 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 June 28, 2013, there were 130 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 $74.7 million and $77.4 million as of June 28, 2013 and December 31, 2012, respectively.

Investment income or loss earned by the NQDC Plan is recorded as Loss (gain) on deferred compensation plan securities in our consolidated statements of comprehensive income. The investment loss (gain) also represents a decrease (increase) in the future payout to participants and is recorded as Compensation expense — deferred compensation plan in our consolidated statements of comprehensive income. Compensation (benefit) expense associated with our NQDC Plan obligations is offset by the loss (gain) from related securities. The net effect of investment income or loss and related compensation expense or benefit has no impact on our income before income taxes, net income or cash balances.


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Table of Contents

The following tables summarize the fair value of our deferred compensation plan assets by significant investment category:
(In thousands)
 
June 28, 2013
 
December 31, 2012
 
 
 
 
 
Deferred compensation plan assets: (1)
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
Restricted cash equivalents
 
$
18,984

 
$
17,116

Equity securities
 
25,262

 
29,902

Mutual funds
 
27,467

 
27,073

Subtotal
 
71,713

 
74,091

 
 
 
 
 
Level 2:
 
 
 
 
Fixed income securities
 
3,024

 
3,346

Total
 
$
74,737

 
$
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 June 28, 2013 and December 31, 2012.


Note 18 — Dividends Payable

On June 3, 2013, we declared a quarterly cash dividend of $0.15 per share to be paid on September 3, 2013 to stockholders of record on August 12, 2013. As a result of this declaration, we recognized a dividend payable of $47.9 million in our consolidated balance sheet as of June 28, 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.


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, Power SoCs; pre-defined software design building blocks known as intellectual property cores, or IP cores; and associated development tools.

Our net sales of $421.8 million for the three months ended June 28, 2013, decreased by $43.0 million, or 9%, from our net sales of $464.8 million for the three months ended June 29, 2012. Our net sales of $832.3 million for the six months ended June 28, 2013, decreased by $16.3 million, or 2%, from our net sales of $848.6 million for the six months ended June 29, 2012. The decrease in net sales for both the three and six-month periods was mainly due to an expected decline in Mature Products as our new technologies were adopted. Conversely, sales of New Products had strong growth in both the three and six-months periods as we continue to experience growth in our 28-nm and 40-nm products. Net sales declined in most of the vertical markets mainly driven by the decline in the Telecom & Wireless vertical market, offset by a slight increase in the Industrial Automation, Military and Automotive vertical market for both periods. The overall net sales decrease was primarily in Asia Pacific over both periods and in the Americas, offset by growth primarily in EMEA for both the three and six-month periods.


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Table of Contents

The net sales of FPGAs and CPLDs as a percentage of total net sales for both the three and six-month periods ended June 28, 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.

Net sales by product category were as follows:
 
Three Months Ended
 
Year-
Over-
Year
Change
 
Sequential Change
Six Months Ended
Year-
Over-
Year
Change
 
June 28,
2013
 
June 29,
2012
 
March 29,
2013
 
 
 
June 28, 2013
 
June 29, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New
41
%
 
31
%
 
39
%
 
20
 %
 
6
%
 
40
%
 
28
%
 
38
 %
Mainstream
28
%
 
30
%
 
29
%
 
(14
)%
 
0
%
 
28
%
 
31
%
 
(9
)%
Mature and Other
31
%
 
39
%
 
32
%
 
(28
)%
 
1
%
 
32
%
 
41
%
 
(24
)%
Net Sales
100
%
 
100
%
 
100
%
 
(9
)%
 
3
%
 
100
%
 
100
%
 
(2
)%

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
Six Months Ended
 
Year-
Over-
Year
Change
 
June 28,
2013

June 29,
2012
 
March 29,
2013
 
 
 
June 28, 2013
 
June 29, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Telecom & Wireless
42
%
 
45
%
 
41
%
 
(16
)%
 
4
%
 
41
%
 
43
%
 
(6
)%
Industrial Automation, Military & Automotive
22
%
 
19
%
 
22
%
 
2
 %
 
3
%
 
22
%
 
21
%
 
3
 %
Networking, Computer & Storage
18
%
 
18
%
 
18
%
 
(6
)%
 
0
%
 
18
%
 
17
%
 
4
 %
Other
18
%
 
18
%
 
19
%
 
(8
)%
 
2
%
 
19
%
 
19
%
 
(4
)%
Net Sales
100
%
 
100
%
 
100
%
 
(9
)%
 
3
%
 
100
%
 
100
%
 
(2
)%

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 HardCopy series and other masked programmed logic devices, configuration devices, software and other tools and IP cores.


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Table of Contents

Our net sales of FPGAs, CPLDs, and Other Products were as follows:
 
Three Months Ended
 
Year-
Over-
Year
Change
 
Sequential Change
Six Months Ended
 
Year-
Over-
Year
Change
 
June 28,
2013
 
June 29,
2012
 
March 29,
2013
 
 
 
June 28, 2013
 
June 29, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FPGA
83
%
 
85
%
 
85
%
 
(11
)%
 
1
%
 
84
%
 
84
%
 
(2
)%
CPLD
9
%
 
9
%
 
8
%
 
(10
)%
 
9
%
 
9
%
 
9
%
 
(10
)%
Other Products
8
%
 
6
%
 
7
%
 
19
 %
 
22
%
 
7
%
 
7
%
 
13
 %
Net Sales
100
%
 
100
%
 
100
%
 
(9
)%
 
3
%
 
100
%
 
100