Altera_2014Q3 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 26, 2014
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, 2014: 304,816,766
 
 
 



 
PAGE
NUMBER
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1:
Financial Statements
ALTERA CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value amount)
 
September 26,
2014
 
December 31,
2013
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
2,680,085

 
$
2,869,158

Short-term investments
 
134,059

 
141,487

Total cash, cash equivalents, and short-term investments
 
2,814,144

 
3,010,645

Accounts receivable, net
 
406,708

 
483,032

Inventories
 
186,338

 
163,880

Deferred income taxes — current
 
54,402

 
63,228

Deferred compensation plan — marketable securities
 
65,492

 
66,455

Deferred compensation plan — restricted cash equivalents
 
15,897

 
16,699

Other current assets
 
41,260

 
48,901

Total current assets
 
3,584,241

 
3,852,840

Property and equipment, net
 
197,213

 
204,142

Long-term investments
 
1,744,830

 
1,695,066

Deferred income taxes — non-current
 
21,929

 
10,806

Goodwill
 
74,341

 
73,968

Acquisition-related intangible assets, net
 
74,756

 
82,150

Other assets, net
 
83,720

 
76,676

Total assets
 
$
5,781,030

 
$
5,995,648

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
47,910

 
$
44,163

Accrued liabilities
 
41,403

 
41,218

Accrued compensation and related liabilities
 
73,354

 
51,105

Deferred compensation plan obligations
 
81,389

 
83,154

Deferred income and allowances on sales to distributors
 
397,002

 
487,746

Total current liabilities
 
641,058

 
707,386

Income taxes payable — non-current
 
310,199

 
276,326

Long-term debt
 
1,492,436

 
1,491,466

Other non-current liabilities
 
7,629

 
8,403

Total liabilities
 
2,451,322

 
2,483,581

Commitments and contingencies
 


 


(See “Note 14 — Commitments and Contingencies”)
 
 
 
 
Stockholders' equity:
 
 
 
 
Common stock: $.001 par value; 1,000,000 shares authorized; outstanding - 305,851 shares at September 26, 2014 and 317,769 shares at December 31, 2013
 
306

 
318

Capital in excess of par value
 
1,171,744

 
1,216,826

Retained earnings
 
2,163,647

 
2,322,885

Accumulated other comprehensive loss
 
(5,989
)
 
(27,962
)
Total stockholders' equity
 
3,329,708

 
3,512,067

Total liabilities and stockholders' equity
 
$
5,781,030

 
$
5,995,648

See accompanying notes to consolidated financial statements.

3

Table of Contents

ALTERA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share amounts)
 
September 26,
2014
 
September 27,
2013
 
September 26,
2014
 
September 27,
2013
Net sales
 
$
499,606

 
$
445,945

 
$
1,452,216

 
$
1,278,205

Cost of sales
 
166,019

 
141,525

 
480,279

 
402,712

Gross margin
 
333,587

 
304,420

 
971,937

 
875,493

Research and development expense
 
112,078

 
95,336

 
310,856

 
278,542

Selling, general, and administrative expense
 
77,724

 
78,907

 
231,205

 
235,376

Amortization of acquisition-related intangible assets
 
2,465

 
1,846

 
7,394

 
2,974

Compensation (benefit)/expense — deferred compensation plan
 
(487
)
 
3,462

 
4,093

 
6,724

Loss/(gain) on deferred compensation plan securities
 
487

 
(3,462
)
 
(4,093
)
 
(6,724
)
Interest income and other
 
(4,558
)
 
(2,214
)
 
(18,362
)
 
(6,651
)
Gain reclassified from other comprehensive (loss)/income
 
(59
)
 
(33
)
 
(150
)
 
(129
)
Interest expense
 
10,774

 
2,511

 
32,139

 
8,365

Income before income taxes
 
135,163

 
128,067

 
408,855

 
357,016

Income tax expense
 
17,154

 
8,635

 
47,328

 
15,885

Net income
 
118,009

 
119,432

 
361,527

 
341,131

 
 
 
 
 
 
 
 
 
Other comprehensive (loss)/income:
 
 
 
 
 
 
 
 
Unrealized holding (loss)/gain on investments:
 
 
 
 
 
 
 
 
Unrealized holding (loss)/gain on investments arising during period, net of tax of ($6), $30, $41 and ($12)
 
(4,929
)
 
2,419

 
22,102

 
(6,613
)
Less: Reclassification adjustments for gain on investments included in net income, net of tax of $11, $11, $21 and $21
 
(48
)
 
(22
)
 
(129
)
 
(108
)
Other comprehensive (loss)/income
 
(4,977
)
 
2,397

 
21,973


(6,721
)
Comprehensive income
 
$
113,032

 
$
121,829

 
$
383,500


$
334,410

 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.38

 
$
0.37

 
$
1.16


$
1.07

Diluted
 
$
0.38

 
$
0.37

 
$
1.15

 
$
1.05

 
 
 
 
 
 
 
 
 
Shares used in computing per share amounts:
 
 
 
 
 
 
 
 
Basic
 
308,215

 
320,445

 
311,853

 
320,266

Diluted
 
310,184

 
323,505

 
314,130

 
323,355

 
 
 
 
 
 
 
 
 
Dividends per common share
 
$
0.18

 
$
0.15

 
$
0.48

 
$
0.35

 
 
 
 
 
 
 
 
 
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 26,
2014
 
September 27,
2013
 
 
 
 
Cash Flows from Operating Activities:
 
 
 
Net income
$
361,527

 
$
341,131

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
42,426

 
34,256

Amortization of acquisition-related intangible assets
7,394

 
2,974

Amortization of debt discount and debt issuance costs
2,337

 
844

Stock-based compensation
70,518

 
73,011

Net gain on sale of available-for-sale securities
(150
)
 
(129
)
Amortization of investment discount/premium
1,900

 
2,575

Deferred income tax expense/(benefit)
11,509

 
(5,629
)
Tax effect of employee stock plans
7,434

 
5,405

Excess tax benefit from employee stock plans
(4,719
)
 
(4,165
)
Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable, net
76,324

 
(111,231
)
Inventories
(22,458
)
 
(2,494
)
Other assets
3,939

 
28,673

Accounts payable and other liabilities
32,581

 
12,509

Deferred income and allowances on sales to distributors
(90,744
)
 
95,961

Income taxes payable
21,477

 
(8,753
)
Deferred compensation plan obligations
(5,858
)
 
(5,489
)
Net cash provided by operating activities
515,437

 
459,449

Cash Flows from Investing Activities:
 
 
 
Purchases of property and equipment
(34,946
)
 
(31,216
)
Sales of deferred compensation plan securities, net
5,858

 
5,489

Purchases of available-for-sale securities
(276,867
)
 
(258,809
)
Proceeds from sale of available-for-sale securities
79,424

 
84,900

Proceeds from maturity of available-for-sale securities
175,280

 
143,392

Acquisitions, net of cash acquired

 
(145,321
)
Purchases of intangible assets
(1,269
)
 

Purchases of other investments
(8,224
)
 
(2,101
)
Net cash used in investing activities
(60,744
)
 
(203,666
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of common stock through stock plans
29,871

 
38,748

Shares withheld for employee taxes
(20,852
)
 
(24,787
)
Payment of dividends to stockholders
(149,844
)
 
(112,175
)
Holdback payment for prior acquisition
(3,353
)
 

Payment of debt assumed in acquisitions


(22,000
)
Long-term debt and credit facility issuance costs
(1,321
)
 

Repurchases of common stock
(502,986
)
 
(60,276
)
Excess tax benefit from employee stock plans
4,719

 
4,165

Net cash used in financing activities
(643,766
)
 
(176,325
)
Net (decrease)/increase in cash and cash equivalents
(189,073
)
 
79,458

Cash and cash equivalents at beginning of period
2,869,158

 
2,876,627

Cash and cash equivalents at end of period
$
2,680,085

 
$
2,956,085

See accompanying notes to consolidated financial statements.

5

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, 2013 consolidated balance sheet data was derived from our audited consolidated financial statements included in our 2013 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, 2013 included in our Annual Report on Form 10-K. The consolidated operating results for the three months and nine months ended September 26, 2014 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. Except for the balance sheet reclassification discussed further in Note 2, 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. We adopted this requirement in the first quarter of 2014 with retrospective application as permitted by the standard. Amounts presented in prior periods have been reclassified to conform. This resulted in both Income taxes payablenon-current and Deferred income taxesnon-current declining by approximately $7.9 million and $14.2 million on our consolidated balance sheets as of September 26, 2014 and December 31, 2013, respectively.

In May 2014, the FASB issued a new financial accounting standard on revenue from contracts with customers, ASU No. 2014-09, "Revenue from Contracts with Customers." The standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The accounting standard is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early adoption is not permitted. We are currently evaluating the impact of this accounting standard on our consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, which provides new guidance on accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The update requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition under Accounting Standards Codification Topic ("ASC") 718 Compensation — Stock Compensation, and apply existing guidance as it relates to awards with performance conditions that affect vesting to account for such awards. The update is effective for the interim and annual periods beginning after December 15, 2015. The adoption of this standard is not expected to impact our consolidated financial statements.


6

Table of Contents

Note 3 — Acquisitions

During the year ended December 31, 2013, we completed two acquisitions (collectively the "2013 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 these acquisitions, see Note 4 — Goodwill and for information on the classification of intangible assets, see Note 5 — Acquisition-Related Intangible Assets, Net. These acquisitions, both individually and in the aggregate, were not significant to our consolidated results of operations. 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 had no outstanding debt as of September 26, 2014 relating to these acquisitions. In connection with one of these acquisitions, an amount equal to 10% of the total purchase price was held back for payment to the former parent company on the first anniversary of the closing of the acquisition net of any indemnification obligations. During the three months ended June 27, 2014, we paid this holdback in the amount of $3.4 million.

Note 4 — Goodwill

Goodwill activity was as follows:

 
 
Nine Months Ended
(In thousands)
 
September 26, 2014
Beginning Balance
 
$
73,968

Additions due to 2013 Acquisitions
 
373

Ending Balance
 
$
74,341


Goodwill increased $0.4 million during the nine months ended September 26, 2014 due to a revision in the historical net operating loss carryforwards for one of our 2013 Acquisitions. 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 26, 2014
(In thousands)
 
Gross Assets
 
Accumulated Amortization
 
Net
 
Weighted-Average Amortization Period
Developed technology
 
$
67,670

 
$
(9,817
)
 
$
57,853

 
9.4 years
Customer relationships
 
12,910

 
(3,020
)
 
9,890

 
6.8 years
Trade name
 
3,700

 
(565
)
 
3,135

 
8.9 years
Non-competition agreements
 
700

 
(475
)
 
225

 
2.0 years
Other intangible assets
 
930

 
(777
)
 
153

 
1.2 years
Acquisition-related intangible assets, net subject to amortization
 
85,910

 
(14,654
)
 
71,256

 
 
In-process research & development
 
3,500

 

 
3,500

 
 
Total acquisition-related intangible assets, net
 
$
89,410

 
$
(14,654
)
 
$
74,756

 
 


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Table of Contents

 
 
December 31, 2013
(In thousands)
 
Gross Assets
 
Accumulated Amortization
 
Net
 
Weighted-Average Amortization Period
Developed technology
 
$
60,770

 
$
(4,445
)
 
$
56,325

 
9.4 years
Customer relationships
 
12,910

 
(1,597
)
 
11,313

 
6.8 years
Trade name
 
3,700

 
(253
)
 
3,447

 
8.9 years
Non-competition agreements
 
700

 
(213
)
 
487

 
2.0 years
Other intangible assets
 
930

 
(752
)
 
178

 
1.2 years
Acquisition-related intangible assets subject to amortization, net
 
79,010

 
(7,260
)
 
71,750

 
 
In-process research & development
 
10,400

 

 
10,400

 
 
Total acquisition-related intangible assets, net
 
$
89,410

 
$
(7,260
)
 
$
82,150

 
 

In-process research & development ("IPR&D") assets represent the fair value of incomplete research and development projects that had not reached technological feasibility as of the date of acquisition. In 2013, we capitalized IPR&D of $28.1 million related to the 2013 Acquisitions. Initially, these assets are classified as indefinite-lived intangible assets that are not subject to amortization. IPR&D assets related to projects that have been completed are transferred to the developed technology intangible asset to begin amortization, while IPR&D assets related to abandoned projects are impaired and expensed to Research and development expense in the consolidated statements of comprehensive income. During the nine months ended September 26, 2014, we reclassified $6.9 million of IPR&D costs to the developed technology intangible asset upon finalization of one of the projects. No projects were abandoned. The remaining IPR&D project that made up the IPR&D intangible asset balance as of September 26, 2014 is expected to be completed by the end of 2014.

Based on the carrying values as of September 26, 2014, the annual amortization expense for Acquisition-related intangible assets, net is expected to be as follows:

Fiscal Year
 
Amortization Expense
 
 
 (In thousands)

2014 (remaining three months)
 
$
2,465

2015
 
9,646

2016
 
9,327

2017
 
9,151

2018
 
9,039

Thereafter
 
31,628

Total
 
$
71,256





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Table of Contents

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 26, 2014
(In thousands)
 
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Marketable Securities
 
Long-Term Marketable Securities

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
86,058

 
$

 
$

 
$
86,058

 
$
86,058

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
2,575,403

 

 

 
2,575,403

 
2,575,403

 

 

U.S. treasury securities
 
1,641,228

 
1,762

 
(8,059
)
 
1,634,931

 
18,624

 
45,038

 
1,571,269

Subtotal
 
4,216,631

 
1,762

 
(8,059
)
 
4,210,334

 
2,594,027

 
45,038


1,571,269

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities
 
27,379

 
23

 
(5
)
 
27,397

 

 
11,215

 
16,182

Non-U.S. government securities
 
18,610

 
5

 
(2
)
 
18,613

 

 
17,080

 
1,533

Municipal bonds
 
2,000

 
1

 
(2
)
 
1,999

 

 

 
1,999

Corporate debt securities
 
214,217

 
448

 
(92
)
 
214,573

 

 
60,726

 
153,847

Subtotal
 
262,206

 
477

 
(101
)
 
262,582

 

 
89,021

 
173,561

Total
 
$
4,564,895

 
$
2,239

 
$
(8,160
)
 
$
4,558,974

 
$
2,680,085

 
$
134,059

 
$
1,744,830

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

 
 
December 31, 2013
(In thousands)
 
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Marketable Securities
 
Long-Term Marketable Securities

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
71,880

 
$

 
$

 
$
71,880

 
$
71,880

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
2,763,094

 

 

 
2,763,094

 
2,763,094

 

 

U.S. treasury securities
 
1,604,450

 
15

 
(28,298
)
 
1,576,167

 
34,184

 
39,262

 
1,502,721

Subtotal
 
4,367,544

 
15

 
(28,298
)
 
4,339,261

 
2,797,278

 
39,262

 
1,502,721

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities
 
53,755

 
33

 
(18
)
 
53,770

 

 
26,999

 
26,771

Non-U.S. government securities
 
18,352

 
5

 

 
18,357

 

 
9,306

 
9,051

Municipal bonds
 
2,603

 

 
(7
)
 
2,596

 

 
603

 
1,993

Corporate debt securities
 
219,491

 
425

 
(69
)
 
219,847

 

 
65,317

 
154,530

Subtotal
 
294,201

 
463

 
(94
)
 
294,570

 

 
102,225

 
192,345

Total
 
$
4,733,625

 
$
478

 
$
(28,392
)
 
$
4,705,711

 
$
2,869,158

 
$
141,487

 
$
1,695,066

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

We have made certain cost method investments of approximately $20.6 million. These investments are included within Other assets, net  in our consolidated balance sheets. The investments are in privately held companies in which we have less than a 20% interest and no significant influence over the investees' operations. We report these investments at cost, except when investments are found to be more than temporarily impaired after an impairment review.

The adjusted cost and estimated fair value of marketable debt securities (corporate debt securities, municipal bonds, U.S. and foreign government securities, and U.S. treasury securities) as of September 26, 2014, 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 26, 2014
(In thousands)
 
Cost
 
Estimated Fair Value
Due in one year or less
 
$
152,554

 
$
152,683

Due after one year through five years
 
1,351,050

 
1,343,299

Due between six and ten years
 
399,830

 
401,531

 
 
$
1,903,434

 
$
1,897,513


As of September 26, 2014, we had 113 securities, or $1.2 billion out of our total available-for-sale securities investment portfolio, that were in a continuous unrealized loss position for less than 12 months with a gross unrealized loss of $8.2 million. As of December 31, 2013, we had 137 securities, or $1.6 billion out of our total available-for-sale securities investment portfolio, that were in a continuous unrealized loss position for less than 12 months with a gross unrealized loss of $28.4 million.

We concluded that the declines in market value of our available-for-sale securities investment portfolio were temporary in nature and did not consider any of our investments to be other-than-temporarily impaired.

10

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Note 7 — Accounts Receivable, Net and Significant Customers

Accounts receivable, net was comprised of the following:

(In thousands)
 
September 26,
2014
 
December 31,
2013
Gross accounts receivable
 
$
407,208

 
$
483,628

Allowance for doubtful accounts
 
(500
)
 
(500
)
Allowance for sales returns
 

 
(96
)
Accounts receivable, net
 
$
406,708

 
$
483,032


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 26,
2014
 
September 27,
2013
 
September 26, 2014
 
September 27, 2013
 
 
 
 
 
 
 
 
 
Sales to distributors
 
74
%
 
76
%
 
73
%
 
76
%
Sales to OEMs
 
26
%
 
24
%
 
27
%
 
24
%
 
 
100
%
 
100
%
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
Significant Distributors(1):
 
 
 
 
 
 
 
 
Arrow Electronics, Inc. ( “Arrow”)
 
40
%
 
41
%
 
38
%
 
41
%
Macnica, Inc. (“Macnica”)
 
22
%
 
23
%
 
23
%
 
23
%

(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 26, 2014 or September 27, 2013.

One OEM accounted for 11% of our net sales for the year-to-date period ended September 26, 2014, and 11% and 12%, respectively, of our net sales for quarterly and year-to-date periods ended September 27, 2013. Another OEM accounted for 10% of our net sales for the quarterly period ended September 26, 2014. No other individual OEM accounted for more than 10% of our net sales for the quarterly or year-to-date periods ended September 26, 2014 or September 27, 2013.

As of September 26, 2014, accounts receivable from Arrow and Macnica individually accounted for approximately 33% and 57%, respectively, of our total accounts receivable. As of December 31, 2013, accounts receivable from Arrow and Macnica individually accounted for approximately 26% and 55%, respectively, of our total accounts receivable. No other distributor or OEM accounted for more than 10% of our accounts receivable as of September 26, 2014 or December 31, 2013.
 
Note 8 — Inventories

Inventories were comprised of the following:

(In thousands)
 
September 26,
2014
 
December 31,
2013
Raw materials
 
$
8,596

 
$
8,390

Work in process
 
108,927

 
104,755

Finished goods
 
68,815

 
50,735

Total inventories
 
$
186,338

 
$
163,880



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Note 9 — Property and Equipment, Net

Property and equipment, net was comprised of the following:

(In thousands)
 
September 26,
2014
 
December 31,
2013
Land and land rights
 
$
23,157

 
$
23,157

Buildings
 
159,858

 
159,123

Equipment and software
 
291,465

 
281,197

Office furniture and fixtures
 
24,646

 
24,438

Leasehold improvements
 
12,345

 
12,391

Construction in progress
 
9,572

 
1,798

Property and equipment, at cost
 
521,043

 
502,104

Accumulated depreciation
 
(323,830
)
 
(297,962
)
Property and equipment, net
 
$
197,213

 
$
204,142


Depreciation expense was $11.9 million and $37.1 million for the three and nine months ended September 26, 2014, respectively. Depreciation expense was $10.8 million and $31.2 million for the three and nine months ended September 27, 2013, respectively. 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 26,
2014
 
December 31,
2013
 
 
 
 
 
Deferred revenue on shipment to distributors
 
$
426,157

 
$
512,872

Deferred cost of sales on shipment to distributors
 
(35,518
)
 
(33,809
)
Deferred income on shipment to distributors
 
390,639

 
479,063

Other deferred revenue (1)
 
6,363

 
8,683

Total
 
$
397,002

 
$
487,746


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

12

Table of Contents


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

 
 
Nine Months Ended
(In thousands)
 
September 26,
2014
 
September 27,
2013
 
 
 
 
 
Balance at beginning of period
 
$
487,746

 
$
345,993

Deferred revenue recognized upon shipment to distributors
 
4,421,484

 
4,343,526

Deferred cost of sales recognized upon shipment to distributors
 
(212,856
)
 
(194,429
)
Revenue recognized upon sell-through to end customers
 
(852,256
)
 
(776,649
)
Cost of sales recognized upon sell-through to end customers
 
208,318

 
190,124

Earned distributor price concessions (1)
 
(3,602,558
)
 
(3,410,814
)
Returns
 
(50,615
)
 
(57,532
)
Other
 
(2,261
)
 
4,486

Balance at end of period
 
$
397,002

 
$
444,705


(1)
Average aggregate price concessions typically range from 70% to 85% 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

The following table presents the components of, and the changes in, Accumulated other comprehensive loss, net of tax:

(In thousands)
 
December 31,
2013
 
Other Comprehensive Income
 
September 26,
2014
 
 
 
 
 
 
 
Accumulated unrealized loss on available-for-sale securities, net of tax
 
$
(27,962
)
 
$
21,973

 
$
(5,989
)
Accumulated other comprehensive loss
 
$
(27,962
)
 
$
21,973

 
$
(5,989
)



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Note 12 — Net Income Per Share

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

 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share amounts)
 
September 26,
2014
 
September 27,
2013
 
September 26,
2014
 
September 27,
2013
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
118,009

 
$
119,432

 
$
361,527

 
$
341,131

Basic weighted shares outstanding
 
308,215

 
320,445

 
311,853

 
320,266

Net income per share
 
$
0.38

 
$
0.37

 
$
1.16

 
$
1.07

 
 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
118,009

 
$
119,432

 
$
361,527

 
$
341,131

 
 
 
 
 
 
 
 
 
Weighted shares outstanding
 
308,215

 
320,445

 
311,853

 
320,266

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options, employee stock purchase plan, and restricted stock unit shares
 
1,969

 
3,060

 
2,277

 
3,089

 
 
 
 
 
 
 
 
 
Diluted weighted shares outstanding
 
310,184

 
323,505

 
314,130

 
323,355

 
 
 
 
 
 
 
 
 
Net income per share
 
$
0.38

 
$
0.37

 
$
1.15

 
$
1.05


In applying the treasury stock method, we excluded 1.3 million and 1.8 million stock option shares and restricted stock unit (including performance-based restricted stock unit) shares for the three and nine months ended September 26, 2014, respectively, and 1.9 million stock option shares and restricted stock unit (including performance-based restricted stock unit) shares for each of the three and nine months ended September 27, 2013, 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

In 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 had satisfied as of September 26, 2014. As of September 26, 2014, we had not borrowed any funds under the Facility.


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Table of Contents

Long-term Debt

The carrying values and associated effective interest rates for our Long-term debt were as follows:
(In thousands, except rates)
Effective Interest Rate
 
September 26, 2014
 
December 31, 2013
 
 
 
 
 
 
2013 Senior Notes due November 15, 2018 at 2.50%
2.71%
 
$
597,398

 
$
596,920

2013 Senior Notes due November 15, 2023 at 4.10%
4.29%
 
395,433

 
395,056

2012 Senior Notes due May 15, 2017 at 1.75%
1.94%
 
499,605

 
499,490

Total long-term debt
 
 
$
1,492,436

 
$
1,491,466


In 2013, we issued $600 million aggregate principal amount of 2.50% senior notes (the “2.50% Notes”) and $400 million aggregate principal amount of 4.10% senior notes (the “4.10% Notes”) for stock repurchases and general corporate purposes. We received net proceeds of $991.8 million, after deduction of a discount of $8.2 million, and we capitalized direct debt issuance costs of $5.5 million from issuance of the 2.50% Notes and the 4.10% Notes.

In 2012, we issued $500 million aggregate principal amount of 1.75% senior notes (the "1.75% Notes") to repay our outstanding credit facility. We received net proceeds of $499.2 million, after deduction of a discount of $0.8 million, and we capitalized direct debt issuance costs of $3.7 million from issuance of the 1.75% Notes.

All three of our senior notes (the “Notes”) pay a fixed rate of interest semiannually on May 15 and November 15 of each year. The Notes are governed by a base and supplemental indenture between Altera and U.S. Bank National Association, as trustee. The Notes are 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 indentures.

The direct debt issuance costs associated with the Notes are recorded in Other assets, net in our consolidated balance sheets and are being amortized to Interest expense in our consolidated statements of comprehensive income over the contractual term using the effective interest method.

The carrying values of the Notes are reflected in our consolidated balance sheets as follows:
 
2.50% Notes
 
4.10% Notes
 
1.75% Notes
(In thousands)
Sept. 26, 2014
 
Dec. 31, 2013
 
Sept. 26, 2014
 
Dec. 31, 2013
 
Sept. 26, 2014
 
Dec. 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Principal amount
$
600,000

 
$
600,000

 
$
400,000

 
$
400,000

 
$
500,000

 
$
500,000

Unamortized discount
(2,602
)
 
(3,080
)
 
(4,567
)
 
(4,944
)
 
(395
)
 
(510
)
Net carrying value
$
597,398

 
$
596,920

 
$
395,433

 
$
395,056

 
$
499,605

 
$
499,490



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Table of Contents

Interest expense related to the Notes was included in Interest expense in the consolidated statements of comprehensive income as follows:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 26, 2014
 
September 27, 2013
 
September 26, 2014
 
September 27, 2013
 
 
 
 
 
 
 
 
Contractual coupon interest
$
9,928

 
$
2,172

 
$
29,596

 
$
6,481

Amortization of debt issuance costs
456

 
243

 
1,367

 
729

Amortization of debt discount
323

 
38

 
970

 
115

Total interest expense related to the Notes
$
10,707

 
$
2,453

 
$
31,933

 
$
7,325


The other components of Interest expense in our consolidated statements of comprehensive income are interest expense incurred as part of the assumed debt in one of our 2013 Acquisitions and interest expense incurred related to bank service fees incurred in connection with the Facility.

As of September 26, 2014, future principal payments for the Notes were as follows:
Fiscal Year
 
Payable
 
 
(In thousands)

2014 (remaining three months)
 
$

2015
 

2016
 

2017
 
500,000

2018 and thereafter
 
1,000,000

Total
 
$
1,500,000


Our Notes are classified within Level 1 of the fair value hierarchy and the estimated fair value of the Notes is based on quoted market prices. The estimated fair value of the Notes is as follows:

 
2.50% Notes
 
4.10% Notes
 
1.75% Notes
(In thousands)
Sept. 26, 2014
 
Dec. 31, 2013
 
Sept. 26, 2014
 
Dec. 31, 2013
 
Sept. 26, 2014
 
Dec. 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Estimated fair value
$
608,040

 
$
598,836

 
$
415,200

 
$
392,680

 
$
502,650

 
$
501,310



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.


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Table of Contents

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 26, 2014, we had approximately $143.0 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 2024. There have been no significant changes to our operating lease obligations since December 31, 2013.

Legal Proceedings

On July 17, 2014, PLL Technologies, Inc. (PTI) filed a patent infringement lawsuit against Altera and three additional defendants in the United States District Court for the District of Delaware seeking unspecified damages, interest, costs, and fees.  On October 1, 2014, PTI amended its complaint, and on October 20, 2014, Altera answered the complaint, denying the patents are valid and denying infringement.  Because the case is at a very early stage, we cannot determine at this time whether any loss has been incurred by Altera nor can we reasonably estimate any potential loss or range of potential loss.
On June 20, 2014, Altera filed an action in the United States District Court for the Northern District of California against PACT XPP Technologies, AG (“PACT”), for a declaratory judgment of non-infringement and invalidity relating to several patents that PACT has asserted against us.  On October 8, 2014, PACT answered the complaint and asserted counterclaims that Altera infringes various patents owned by PACT.  Because the case is at a very early stage, we cannot determine at this time whether any loss has been incurred by Altera nor can we reasonably estimate any potential loss or range of potential loss.
We file income tax returns with the Internal Revenue Service (“IRS”) and in various United States ("U.S.") states and foreign jurisdictions. On December 8, 2011 and January 23, 2012, the IRS issued Statutory Notices of Deficiency (the “Notices”) determining, respectively, additional taxes for 2002 through 2004 of $19.8 million and additional taxes for 2005 through 2007 of $21.4 million, excluding interest. The IRS’s determinations relate primarily to inter-company transactions, computational adjustments to the R&D credit and reductions to the benefits of tax credit carry backs and carry forwards. 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 March 6, 2012 and April 20, 2012, we filed petitions challenging the Notices in the U.S. Tax Court. The petitions request redetermination of the deficiencies produced by the IRS’s adjustments. The IRS has filed responses to our petitions, in which the IRS conceded the R&D credit adjustment for 2004. The Tax Court has consolidated the two cases and a judge has been assigned. The federal statute of limitations for the 2002 and 2003 tax years has expired, and the ongoing Tax Court litigation concerns only the 2004 through 2007 years.
On January 31, 2013, the IRS conceded one of the adjustments at issue in the litigation for the 2004 through 2007 tax years. The conceded adjustment related to certain inter-company services transactions. The concession only impacted our 2007 tax year. As a result of this concession, we recognized a tax and interest benefit of $6.8 million in 2013 due to the release of certain tax reserves. Altera and the IRS have filed cross motions for partial summary judgment on the largest adjustment still at issue, which is related to the treatment of stock-based compensation in an inter-company cost-sharing transaction. As part of the partial motion for summary judgment process, both sides filed briefs on May 28, 2013, July 25, 2013 and September 9, 2013.  We expect to present additional legal arguments related to certain affirmative adjustments raised by Altera in the litigation. The parties have filed a series of Joint Status Reports with the court addressing these affirmative adjustments. The parties presented oral arguments on the partial summary judgment issue to the Tax Court on July 24, 2014. 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 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.


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Table of Contents

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 settle employee stock option exercises, ESPP purchases, and the vesting of RSUs and PRSUs with newly issued common shares.

We have issued PRSUs to senior executives with vesting that is contingent on both market performance and continued service ("market-based PRSUs"). For market-based PRSUs issued in 2012, 2013, and 2014, 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
 
Nine Months Ended
(In thousands)
 
September 26,
2014
 
September 27,
2013
 
September 26,
2014
 
September 27,
2013
 
 
 
 
 
 
 
 
 
Cost of sales
 
$
449

 
$
515

 
$
1,410

 
$
1,460

Research and development expense
 
9,172

 
11,324

 
30,323

 
32,125

Selling, general, and administrative expense
 
12,830

 
13,898

 
38,785

 
39,426

Pre-tax stock-based compensation expense
 
22,451

 
25,737

 
70,518

 
73,011

Less: income tax benefit
 
(5,825
)
 
(6,720
)
 
(18,670
)
 
(18,908
)
Net stock-based compensation expense
 
$
16,626

 
$
19,017

 
$
51,848

 
$
54,103


No stock-based compensation was capitalized during any period presented above. As of September 26, 2014, unrecognized stock-based compensation cost related to outstanding unvested stock options, RSUs, PRSUs and Employee Stock Purchase Plan ("ESPP") shares that are expected to vest was approximately $139.7 million. This unrecognized stock-based compensation cost is expected to be recognized over a weighted average period of approximately 2.3 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.


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Table of Contents

The assumptions used to estimate the fair value of the ESPP, RSU, and PRSU awards granted under the equity incentive program were as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 26,
2014
 
September 27,
2013
 
September 26,
2014
 
September 27,
2013
ESPP purchase rights:
 
 
 
 
 
 
 
 
Expected term (in years)
 

 

 
1.0

 
1.0

Expected stock price volatility
 

 

 
25.5
%
 
31.2
%
Risk-free interest rate
 

 

 
0.1
%
 
0.1
%
Dividend yield
 

 

 
1.9
%
 
1.3
%
Weighted-average estimated fair value
 

 

 
$
7.68

 
$
8.41

 
 
 
 
 
 
 
 
 
RSUs:
 
 
 
 
 
 
 
 
Risk-free interest rate
 
0.8
%
 
0.5
%
 
0.7
%
 
0.3
%
Dividend yield
 
2.2
%
 
1.7
%
 
1.9
%
 
1.2
%
Weighted-average estimated fair value
 
$
31.24

 
$
33.41

 
$
30.99

 
$
32.20

 
 
 
 
 
 
 
 
 
PRSUs:
 
 
 
 
 
 
 
 
Expected Altera stock price volatility
 

 

 
32.2
%
 
34.7
%
Expected SOX stock price volatility
 

 

 
24.3
%
 
27.1
%
Risk-free interest rate
 

 

 
0.9
%
 
0.3
%
Dividend yield
 

 

 
1.9
%
 
1.2
%
Weighted-average estimated fair value per share
 

 

 
$
31.18

 
$
33.03

    
We granted 303,260 and 262,647 market-based PRSUs in the nine months ended September 26, 2014 and September 27, 2013, respectively, to senior executives. As of September 26, 2014, the majority of these market-based PRSUs are still outstanding, and no market-based PRSUs have vested.

A summary of activity for our RSUs and PRSUs for the nine months ended September 26, 2014 and information regarding RSUs and PRSUs outstanding and expected to vest as of September 26, 2014 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, 2013
 
6,392

 
$
34.80

 
 
 
 
Grants
 
2,016

 
$
32.48

 
 
 
 
Vested
 
(2,157
)
 
$
34.61

 
 
 
 
Forfeited/Cancelled
 
(483
)
 
$
34.77

 
 
 
 
Outstanding, September 26, 2014
 
5,768

 
$
34.07

 
1.6
 
$
207,776

Vested and expected to vest, September 26, 2014
 
5,076

 
$
34.07

 
1.5
 
$
182,855


(1)
Aggregate intrinsic value represents the closing price per share of our stock on September 26, 2014, multiplied by the number of RSUs and market-based PRSUs outstanding or vested and expected to vest as of September 26, 2014.


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Table of Contents

A summary of stock option activity for the nine months ended September 26, 2014 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of September 26, 2014 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, 2013
 
3,446

 
$
28.11

 
 
 
 
Grants
 

 
$

 
 
 
 
Exercises
 
(937
)
 
$
20.80

 
 
 
 
Forfeited/Cancelled/Expired
 
(62
)
 
$
30.06

 
 
 
 
Outstanding, September 26, 2014
 
2,447

 
$
30.86

 
4.7
 
$
17,752

Exercisable, September 26, 2014
 
1,873

 
$
29.28

 
3.9
 
$
16,427

Vested and expected to vest, September 26, 2014
 
2,402

 
$
30.78

 
4.7
 
$
17,639


(1)
For those stock options with an exercise price below the closing price per share on September 26, 2014, aggregate intrinsic value represents the difference between the exercise price and the closing price per share of our common stock on September 26, 2014, multiplied by the number of stock options outstanding, exercisable, or vested and expected to vest as of September 26, 2014.

For the three and nine months ended September 26, 2014, 0.3 million and 0.9 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 26, 2014 was $4.8 million and $12.8 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 stock option exercises during the three and nine months ended September 26, 2014 was $7.2 million and $19.5 million, respectively.

As of September 26, 2014, our 2005 Equity Incentive Plan had a total of 26.4 million shares reserved for future issuance, of which 17.8 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 376,031 shares of common stock under the ESPP at a price of $27.61 during the nine months ended September 26, 2014, and 390,077 shares of common stock under the ESPP at a price of $26.87 during the nine months ended September 27, 2013. As of September 26, 2014, 3.7 million shares were available for future issuance under the ESPP.

Note 16 — Stockholders’ Equity

We repurchase shares under our stock repurchase 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. In 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 authorizations, there was a total of 233.0 million shares authorized for repurchase with approximately 22.0 million shares remaining for further repurchases under our stock repurchase program as of September 26, 2014. Since the inception of the stock repurchase program through September 26, 2014, we have repurchased a total of 211.0 million shares of our common stock for an aggregate cost of $4.8 billion.


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During the nine months ended September 26, 2014, we repurchased 14.8 million shares of our common stock for a total of $503.0 million under our stock repurchase program at an average price per share of $34.09. 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. 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, as applicable.

Note 17 — Income Taxes
    
We file income tax returns with the IRS and in various U.S. states and foreign jurisdictions. On December 8, 2011 and January 23, 2012, the IRS issued Statutory Notices of Deficiency (the “Notices”) determining, respectively, additional taxes for 2002 through 2004 of $19.8 million and additional taxes for 2005 through 2007 of $21.4 million, excluding interest. The IRS’s determinations relate primarily to inter-company transactions, computational adjustments to the R&D credit and reductions to the benefits of tax credit carry backs and carry forwards. 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 March 6, 2012 and April 20, 2012, we filed petitions challenging the Notices in the U.S. Tax Court. The petitions request redetermination of the deficiencies produced by the IRS’s adjustments. The IRS has filed responses to our petitions, in which the IRS conceded the R&D credit adjustment for 2004. The Tax Court has consolidated the two cases and a judge has been assigned. The federal statute of limitations for the 2002 and 2003 tax years has expired, and the ongoing Tax Court litigation concerns only the 2004 through 2007 years.
On January 31, 2013, the IRS conceded one of the adjustments at issue in the litigation for the 2004 through 2007 tax years. The conceded adjustment related to certain inter-company services transactions. The concession only impacted our 2007 tax year. As a result of this concession, we recognized a tax and interest benefit of $6.8 million in 2013 due to the release of certain tax reserves. Altera and the IRS have filed cross motions for partial summary judgment on the largest adjustment still at issue, which is related to the treatment of stock-based compensation in an inter-company cost-sharing transaction. As part of the partial motion for summary judgment process, both sides filed briefs on May 28, 2013, July 25, 2013 and September 9, 2013.  We expect to present additional legal arguments related to certain affirmative adjustments raised by Altera in the litigation. The parties have filed a series of Joint Status Reports with the court addressing these affirmative adjustments. The parties presented oral arguments on the partial summary judgment issue to the Tax Court on July 24, 2014. 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 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 26, 2014 was 12.7% compared with 6.7% for the three months ended September 27, 2013. The increase in our effective tax rate was primarily due to lower one-time tax benefits in 2014 compared with the same period in 2013, and the expiration of the U.S. federal research and development tax credit for 2014. The U.S. federal research and development tax credit has not been extended beyond 2013. During the three months ended September 26, 2014, we reversed $2.9 million of liabilities and related interest for uncertain tax positions upon the expiration of foreign and domestic statutes of limitation, which was substantially offset by the change in proportionately lower earnings in foreign jurisdictions taxed at rates below the U.S. statutory tax rate. During the three months ended September 27, 2013, the U.S. federal research and development tax credit was reinstated, which had expired in 2011, and 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 $27.7 million of tax accrued on foreign dividends.


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Our effective tax rate for the nine months ended September 26, 2014 was 11.6%, compared with 4.4% for the nine months ended September 27, 2013. The net change in our effective tax rate was primarily due to lower one-time tax benefits in 2014 compared with the same period in 2013, and the expiration of the U.S. federal research and development tax credit for 2014. During the nine months ended September 26, 2014, we reversed $6.9 million of liabilities and the related interest for uncertain tax positions upon the expiration of a domestic and foreign statute of limitations, which was substantially offset by the change in proportionately lower earnings in foreign jurisdictions taxed at rates below the U.S. statutory tax rate. 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 U.S. federal research and development tax 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 estimates 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 $27.7 million of tax accrued on foreign dividends.

As of September 26, 2014, we had total gross unrecognized tax benefits of $330.5 million which, if recognized, would potentially impact our effective tax rate. On December 31, 2013, we had total gross unrecognized tax benefits of $301.3 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 $51.7 million and $48.8 million for the payment of interest and penalties related to uncertain tax positions as of September 26, 2014 and December 31, 2013, respectively.

During the fourth quarter of fiscal 2013, we recorded a deferred charge for the deferral of income tax expense on intercompany profits that resulted from the sale of our newly acquired intellectual property rights from one of our U.S. subsidiaries to one of our foreign subsidiaries. The deferred charge is included in Other current assets and Other assets, net on our consolidated balance sheets. As of September 26, 2014, the deferred charge balance in Other current assets was $2.2 million, and $17.2 million in Other assets, net. The deferred charge will be amortized on a straight-line basis as a component of income tax expense over ten years, based on the economic life of the intellectual property and is not expected to have a material impact on our effective tax rate.

In connection with one of our acquisitions in 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 26, 2014, there were 125 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 $81.4 million and $83.2 million as of September 26, 2014 and December 31, 2013, respectively.

Investment income or loss from the NQDC Plan are 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 (benefit)/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 the 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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The following tables summarize the fair value of our NQDC Plan assets by significant investment category:
(In thousands)
 
September 26, 2014
 
December 31, 2013
 
 
 
 
 
Deferred compensation plan assets: (1)
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
Restricted cash equivalents
 
$
15,897

 
$
16,699

Equity securities
 
30,342

 
32,628

Mutual funds
 
33,244

 
32,521

Subtotal
 
79,483

 
81,848

 
 
 
 
 
Level 2:
 
 
 
 
Fixed income securities
 
1,906

 
1,306

Total
 
$
81,389

 
$
83,154


(1) Included in Deferred compensation planmarketable securities and Deferred compensation planrestricted cash equivalents in the accompanying consolidated balance sheets as of September 26, 2014 and December 31, 2013.

Note 19 — Declaration of Dividend Subsequent to September 26, 2014

On October 20, 2014, our board of directors declared a quarterly cash dividend of $0.18 per common share, payable on December 1, 2014 to stockholders of record on November 10, 2014.


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

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. This interim MD&A should be read in conjunction with the MD&A in our Annual Report on Form 10-K for the year ended December 31, 2013.

The following MD&A, as well as information contained in the risk factors described in Part II 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,” “seek,” “estimate,” “continue,” or other similar words. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, uncertain events or assumptions, and other characteristics of future events or circumstances are forward-looking statements. 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” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.


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, 2013.

RESULTS OF OPERATIONS
    
Overview
 
Three Months Ended
 
Nine Months Ended
(In thousands, except share and per share data)
September 26, 2014
 
June 27, 2014
 
Change
 
September 26, 2014
 
September 27, 2013
 
Change
Net sales
$
499,606