Altera_2015Q2 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 26, 2015
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, 2015: 302,471,922
 
 
 



 
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)
 
June 26,
2015
 
December 31,
2014
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
1,852,753

 
$
2,426,367

Short-term investments
 
221,333

 
151,519

Total cash, cash equivalents, and short-term investments
 
2,074,086

 
2,577,886

Accounts receivable, net
 
424,427

 
377,964

Inventories
 
177,654

 
153,387

Deferred income taxes — current
 
58,645

 
56,048

Deferred compensation plan — marketable securities
 
65,378

 
69,367

Deferred compensation plan — restricted cash equivalents
 
14,484

 
14,412

Other current assets
 
53,888

 
39,479

Total current assets
 
2,868,562

 
3,288,543

Property and equipment, net
 
210,980

 
194,840

Long-term investments
 
2,448,942

 
1,942,343

Deferred income taxes — non-current
 
18,669

 
20,077

Goodwill
 
74,341

 
74,341

Acquisition-related intangible assets, net
 
67,400

 
72,291

Other assets, net
 
95,562

 
81,791

Total assets
 
$
5,784,456

 
$
5,674,226

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
51,618

 
$
49,140

Accrued liabilities
 
44,421

 
28,384

Accrued compensation and related liabilities
 
57,384

 
69,837

Deferred compensation plan obligations
 
79,862

 
83,779

Deferred income and allowances on sales to distributors
 
394,921

 
344,168

Total current liabilities
 
628,206

 
575,308

Income taxes payable — non-current
 
336,173

 
313,447

Long-term debt
 
1,493,406

 
1,492,759

Other non-current liabilities
 
6,878

 
6,886

Total liabilities
 
2,464,663

 
2,388,400

Commitments and contingencies
 


 


(See “Note 11 — Commitments and Contingencies”)
 
 
 
 
Stockholders' equity:
 
 
 
 
Common stock: $.001 par value; 1,000,000 shares authorized; outstanding - 302,467 shares at June 26, 2015 and 302,430 shares at December 31, 2014
 
302

 
302

Capital in excess of par value
 
1,207,688

 
1,165,259

Retained earnings
 
2,114,132

 
2,110,620

Accumulated other comprehensive (loss)/income
 
(2,329
)
 
9,645

Total stockholders' equity
 
3,319,793

 
3,285,826

Total liabilities and stockholders' equity
 
$
5,784,456

 
$
5,674,226

See accompanying notes to consolidated financial statements.

3

Table of Contents

ALTERA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
Three Months Ended
 
Six Months Ended
(In thousands, except per share amounts)
 
June 26,
2015
 
June 27,
2014
 
June 26,
2015
 
June 27,
2014
Net sales
 
$
414,162

 
$
491,517

 
$
849,647

 
$
952,609

Cost of sales
 
126,590

 
162,391

 
282,853

 
314,259

Gross margin
 
287,572

 
329,126

 
566,794

 
638,350

Research and development expense
 
105,345

 
101,121

 
208,576

 
198,778

Selling, general, and administrative expense
 
75,011

 
78,974

 
145,517

 
153,481

Amortization of acquisition-related intangible assets
 
2,427

 
2,464

 
4,891

 
4,929

Merger expenses
 
18,458

 

 
18,458

 

Compensation expense — deferred compensation plan
 
2,732

 
3,126

 
2,759

 
4,580

Gain on deferred compensation plan securities
 
(2,732
)
 
(3,126
)
 
(2,759
)
 
(4,580
)
Interest income and other
 
(8,495
)
 
(7,819
)
 
(15,091
)
 
(13,804
)
Gain reclassified from other comprehensive income
 
(1,463
)
 
(43
)
 
(3,969
)
 
(91
)
Interest expense
 
10,859

 
10,877

 
21,267

 
21,365

Income before income taxes
 
85,430

 
143,552

 
187,145

 
273,692

Income tax expense
 
15,091

 
16,548

 
21,954

 
30,174

Net income
 
70,339

 
127,004

 
165,191

 
243,518

 
 
 
 
 
 
 
 
 
Other comprehensive (loss)/income:
 
 
 
 
 
 
 
 
Unrealized holding gain on investments:
 
 
 
 
 
 
 
 
Unrealized holding (loss)/gain on investments arising during period, net of tax of ($460), $23, ($419) and $46
 
(24,805
)
 
14,471

 
(8,020
)
 
27,031

Less: Reclassification adjustments for gain on investments included in net income, net of tax of $9, $6, $15 and $10
 
(1,454
)
 
(37
)
 
(3,954
)
 
(81
)
Other comprehensive (loss)/income
 
(26,259
)
 
14,434

 
(11,974
)

26,950

Comprehensive income
 
$
44,080

 
$
141,438

 
$
153,217


$
270,468

 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.23

 
$
0.41

 
$
0.55


$
0.78

Diluted
 
$
0.23

 
$
0.41

 
$
0.54

 
$
0.77

 
 
 
 
 
 
 
 
 
Shares used in computing per share amounts:
 
 
 
 
 
 
 
 
Basic
 
301,799

 
311,000

 
301,561

 
313,713

Diluted
 
304,604

 
313,513

 
303,951

 
316,145

 
 
 
 
 
 
 
 
 
Dividends per common share
 
$
0.18

 
$
0.15

 
$
0.36

 
$
0.30

 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

4

Table of Contents

ALTERA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Six Months Ended
 
June 26,
2015
 
June 27,
2014
 
 
 
 
Cash Flows from Operating Activities:
 
 
 
Net income
$
165,191

 
$
243,518

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
27,981

 
28,731

Amortization of acquisition-related intangible assets
4,891

 
4,929

Amortization of debt discount and debt issuance costs
1,558

 
1,558

Stock-based compensation
42,342

 
48,068

Net gain on sale of available-for-sale securities
(3,969
)
 
(91
)
Amortization of investment discount/premium
5,243

 
1,300

Deferred income tax expense
1,770

 
1,573

Tax effect of employee stock plans
2,776

 
121

Excess tax benefit from employee stock plans
(2,881
)
 
(612
)
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(46,463
)
 
30,473

Inventories
(24,267
)
 
(12,848
)
Other assets
(9,990
)
 
(2,751
)
Accounts payable and other liabilities
6,558

 
5,703

Deferred income and allowances on sales to distributors
50,753

 
(72,547
)
Income taxes payable and receivable, net
11,036

 
30,592

Deferred compensation plan obligations
(6,676
)
 
(6,329
)
Net cash provided by operating activities
225,853

 
301,388

Cash Flows from Investing Activities:
 
 
 
Purchases of property and equipment
(43,339
)
 
(21,614
)
Sales of deferred compensation plan securities, net
6,676

 
6,329

Purchases of available-for-sale securities
(1,298,609
)
 
(204,810
)
Proceeds from sale of available-for-sale securities
634,838

 
58,015

Proceeds from maturity of available-for-sale securities
69,711

 
134,212

Purchases of intangible assets
(5,257
)
 
(535
)
Purchases of other investments
(2,000
)
 
(8,224
)
Net cash used in investing activities
(637,980
)
 
(36,627
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of common stock through stock plans
18,709

 
22,696

Shares withheld for employee taxes
(17,125
)
 
(11,240
)
Payment of dividends to stockholders
(108,445
)
 
(94,179
)
Holdback payment for prior acquisition

 
(3,353
)
Long-term debt and credit facility issuance costs

 
(1,321
)
Repurchases of common stock
(57,507
)
 
(358,808
)
Excess tax benefit from employee stock plans
2,881

 
612

Net cash used in financing activities
(161,487
)
 
(445,593
)
Net decrease in cash and cash equivalents
(573,614
)
 
(180,832
)
Cash and cash equivalents at beginning of period
2,426,367

 
2,869,158

Cash and cash equivalents at end of period
$
1,852,753

 
$
2,688,326

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, 2014 consolidated balance sheet data was derived from our audited consolidated financial statements included in our 2014 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, 2014 included in our Annual Report on Form 10-K. The consolidated operating results for the three months and six months ended June 26, 2015 are not necessarily indicative of the results to be expected for any future period.

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

Pending Merger with Intel Corporation

On May 31, 2015, Altera Corporation entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Intel Corporation (“Intel”) and 615 Corporation, a wholly owned subsidiary of Intel (“Merger Sub”). The Merger Agreement provides for the merger of Merger Sub with and into Altera (the “Merger”), with Altera surviving the Merger as a wholly owned subsidiary of Intel. At the effective time of the Merger, each share of common stock issued and outstanding immediately prior to the effective time (other than shares held by (1) Intel, Altera or their respective subsidiaries; or (2) stockholders who have properly exercised and perfected appraisal rights under Delaware law) will be cancelled and extinguished and automatically converted into the right to receive cash in an amount equal to $54.00, without interest thereon (the “Per Share Amount”). In addition, subject to certain exceptions, unvested option awards, restricted stock unit awards and performance-based restricted stock unit awards will be converted into corresponding awards of Intel common stock pursuant to an exchange ratio determined based on Intel’s stock price at closing, with generally the same terms and conditions applicable to the original awards.

The consummation of the merger is conditioned on the receipt of the approval of Altera's stockholders, as well as the satisfaction of other customary closing conditions, including domestic and foreign regulatory approvals and performance in all material respects by each party of its obligations under the Merger Agreement. The Merger is currently expected to close within six to nine months of June 1, 2015. The Merger is not conditioned upon Intel’s receipt of financing.

The Merger Agreement contains certain termination rights for Altera and Intel, including if a governmental body prohibits the Merger or if the Merger is not consummated before May 31, 2016, subject to certain extension rights. Upon termination of the Merger Agreement under specified circumstances, Altera or Intel will be required to pay the other party a termination fee of $500 million. In certain other circumstances, Altera will be required to reimburse Intel’s expenses up to $60 million if the Merger Agreement is terminated.


6

Table of Contents

Note 2 — Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new financial accounting standard on revenue from contracts with customers, Accounting Standards Update ("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. In July 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. We are currently evaluating the impact of this accounting standard on our consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, "Consolidation: Amendments to the Consolidation Analysis". This standard update is intended to improve targeted areas of consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. This ASU simplifies consolidation accounting by reducing the number of consolidation models and improves current U.S. GAAP by (1) placing more emphasis on risk of loss when determining a controlling financial interest; (2) reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity; and (3) changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or variable interest entities. The amendments in this ASU are effective for reporting periods beginning after December 15, 2015, with early adoption permitted. Entities can transition to the standard either retrospectively or as a cumulative effect adjustment as of the date of adoption. The adoption of ASU 2015-02 is not expected to have an impact on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, "Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs". This standard update requires an entity to present debt issuance costs on the balance sheet as a direct deduction from the related debt liability as opposed to an asset. Amortization of the costs will continue to be reported as interest expense. The update is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued, and the new guidance would be applied retrospectively to all prior periods presented. The adoption of this standard update is not expected to have a material impact on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement". This standard update provides  clarification on whether a cloud computing arrangement includes a software license. If a software license is included, the customer should account for the license consistent with its accounting of other software licenses. If a software license is not included, the arrangement should be accounted for as a service contract. The update is effective for reporting periods beginning after December 15, 2015, with early adoption permitted. Entities can elect to adopt the standard update prospectively or retrospectively to arrangements entered into, or materially modified, after the effective date. The adoption of this standard update is not expected to have a material impact on our consolidated financial statements.


7

Table of Contents

Note 3 — Acquisition-Related Intangible Assets, Net

Acquisition-related intangible assets, net were as follows:
 
 
June 26, 2015
(In thousands)
 
Gross Assets
 
Accumulated Amortization
 
Net
 
Weighted-Average Amortization Period
Developed technology
 
$
67,670

 
$
(15,189
)
 
$
52,481

 
9.4 years
Customer relationships
 
12,910

 
(4,442
)
 
8,468

 
6.8 years
Trade name
 
3,700

 
(877
)
 
2,823

 
8.9 years
Non-competition agreements
 
700

 
(700
)
 

 
2.0 years
Other intangible assets
 
930

 
(802
)
 
128

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

 
(22,010
)
 
63,900

 
 
In-process research & development
 
3,500

 

 
3,500

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

 
$
(22,010
)
 
$
67,400

 
 

 
 
December 31, 2014
(In thousands)
 
Gross Assets
 
Accumulated Amortization
 
Net
 
Weighted-Average Amortization Period
Developed technology
 
$
67,670

 
$
(11,607
)
 
$
56,063

 
9.4 years
Customer relationships
 
12,910

 
(3,493
)
 
9,417

 
6.8 years
Trade name
 
3,700

 
(670
)
 
3,030

 
8.9 years
Non-competition agreements
 
700

 
(563
)
 
137

 
2.0 years
Other intangible assets
 
930

 
(786
)
 
144

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

 
(17,119
)
 
68,791

 
 
In-process research & development
 
3,500

 

 
3,500

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

 
$
(17,119
)
 
$
72,291

 
 

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 two 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. No projects were abandoned in 2014 or 2015. The remaining IPR&D project as of June 26, 2015 is expected to be completed in the fourth quarter of 2015.


8

Table of Contents

Based on the carrying value of Acquisition-related intangible assets, net as of June 26, 2015, the annual amortization expense for Acquisition-related intangible assets, net is expected to be as follows:
Fiscal Year
 
Amortization Expense
 
 
 (In thousands)

2015 (remaining six months)
 
$
4,755

2016
 
9,327

2017
 
9,151

2018
 
9,039

2019
 
8,938

2020 and Thereafter
 
22,690

Total
 
$
63,900



Note 4 — Financial Instruments

Cash, Cash Equivalents and Marketable Securities

The following tables summarize our cash and available-for-sale securities by significant investment category.
    
 
 
June 26, 2015
(In thousands)
 
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Marketable Securities
 
Long-Term Marketable Securities

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
71,407

 
$

 
$

 
$
71,407

 
$
71,407

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
1,773,821

 

 

 
1,773,821

 
1,773,821

 

 

U.S. treasury securities
 
1,016,744

 
4,786

 
(268
)
 
1,021,262

 
5,725

 
79,653

 
935,884

Subtotal
 
2,790,565

 
4,786

 
(268
)
 
2,795,083

 
1,779,546

 
79,653


935,884

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities
 
31,432

 
9

 
(30
)
 
31,411

 

 
7,495

 
23,916

Non-U.S. government securities
 
47,888

 
13

 
(38
)
 
47,863

 

 
11,474

 
36,389

Municipal bonds
 
3,507

 
1

 
(5
)
 
3,503

 

 
2,001

 
1,502

Corporate debt securities
 
1,580,979

 
939

 
(8,157
)
 
1,573,761

 
1,800

 
120,710

 
1,451,251

Subtotal
 
1,663,806

 
962

 
(8,230
)
 
1,656,538

 
1,800

 
141,680

 
1,513,058

Total
 
$
4,525,778

 
$
5,748

 
$
(8,498
)
 
$
4,523,028

 
$
1,852,753

 
$
221,333

 
$
2,448,942

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

9

Table of Contents

 
 
December 31, 2014
(In thousands)
 
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Marketable Securities
 
Long-Term Marketable Securities

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
57,505

 
$

 
$

 
$
57,505

 
$
57,505

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
2,366,799

 

 

 
2,366,799

 
2,366,799

 

 

U.S. treasury securities
 
1,338,162

 
12,721

 
(2,302
)
 
1,348,581

 
500

 
38,938

 
1,309,143

Subtotal
 
3,704,961

 
12,721

 
(2,302
)
 
3,715,380

 
2,367,299

 
38,938

 
1,309,143

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities
 
21,186

 
12

 
(7
)
 
21,191

 

 
11,748

 
9,443

Non-U.S. government securities
 
31,281

 
2

 
(17
)
 
31,266

 

 
19,459

 
11,807

Municipal bonds
 
2,000

 
2

 

 
2,002

 

 
1,001

 
1,001

Corporate debt securities
 
693,638

 
362

 
(1,115
)
 
692,885

 
1,563

 
80,373

 
610,949

Subtotal
 
748,105

 
378

 
(1,139
)
 
747,344

 
1,563

 
112,581

 
633,200

Total
 
$
4,510,571

 
$
13,099

 
$
(3,441
)
 
$
4,520,229

 
$
2,426,367

 
$
151,519

 
$
1,942,343

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

As of June 26, 2015, we had cost method investments of approximately $24.6 million. These investments are included within Other assets, net  on our consolidated balance sheets. The investments are non-marketable equity investments in privately held companies in which we have less than a 20% interest and no significant influence over the investee's operations. We report these investments at cost, except when investments are found to be other-than-temporarily impaired after an impairment review. We did not recognize any impairment losses for 2015 or 2014.

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 June 26, 2015, 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 26, 2015
(In thousands)
 
Cost
 
Estimated Fair Value
Due in one year or less
 
$
228,777

 
$
228,858

Due after one year through five years
 
2,046,919

 
2,043,059

Due between six and ten years
 
404,854

 
405,883

 
 
$
2,680,550

 
$
2,677,800


As of June 26, 2015, we had $1.3 billion in available-for-sale securities in our investment portfolio that were in a continuous unrealized loss position for less than 12 months with a gross unrealized loss of $8.5 million. As of December 31, 2014, we had $1.1 billion in available-for-sale securities in our investment portfolio that were in a continuous unrealized loss position for less than 12 months with a gross unrealized loss of $3.4 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

Table of Contents


Note 5 — Accounts Receivable, Net and Significant Customers

Accounts receivable, net consisted of the following:
(In thousands)
 
June 26,
2015
 
December 31,
2014
Gross accounts receivable
 
$
424,927

 
$
380,442

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

 
(1,978
)
Accounts receivable, net
 
$
424,427

 
$
377,964


We sell our products to original equipment manufacturers ("OEMs") and to electronic components distributors who resell these products to OEMs, or their contract 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 26,
2015
 
June 27,
2014
 
June 26, 2015
 
June 27, 2014
 
 
 
 
 
 
 
 
 
Sales to distributors
 
85
%
 
72
%
 
79
%
 
73
%
Sales to OEMs
 
15
%
 
28
%
 
21
%
 
27
%
 
 
100
%
 
100
%
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
Significant Distributors(1):
 
 
 
 
 
 
 
 
Arrow Electronics, Inc. ( “Arrow”)
 
45
%
 
38
%
 
43
%
 
38
%
Macnica, Inc. (“Macnica”)
 
27
%
 
23
%
 
24
%
 
23
%

(1)
Except as presented above, no other distributor accounted for greater than 10% of our net sales for the three months and six months ended June 26, 2015 or June 27, 2014.

No individual OEM accounted for more than 10% of our net sales for the quarterly or year-to-date periods ended June 26, 2015. One OEM accounted for 11% of our net sales for both the quarterly and year-to-date periods ended June 27, 2014. No other individual OEM accounted for more 10% of our net sales for the quarterly or year-to-date periods ended June 27, 2014.

As of June 26, 2015, accounts receivable from Arrow and Macnica individually accounted for approximately 30% and 57%, respectively, of our total accounts receivable. As of December 31, 2014, accounts receivable from Arrow and Macnica individually accounted for approximately 34% 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 26, 2015 or December 31, 2014.
 
Note 6 — Inventories

Inventories consisted of the following:
(In thousands)
 
June 26,
2015
 
December 31,
2014
Raw materials
 
$
6,856

 
$
6,826

Work in process
 
124,226

 
95,675

Finished goods
 
46,572

 
50,886

Total inventories
 
$
177,654

 
$
153,387



11

Table of Contents

Note 7 — Deferred Income and Allowances on Sales to Distributors
 
Deferred income and allowances on sales to distributors consisted of the following:
(In thousands)
 
June 26,
2015
 
December 31,
2014
 
 
 
 
 
Deferred revenue on shipment to distributors
 
$
421,174

 
$
369,560

Deferred cost of sales on shipment to distributors
 
(32,113
)
 
(32,172
)
Deferred income on shipment to distributors
 
389,061

 
337,388

Other deferred revenue (1)
 
5,860

 
6,780

Total
 
$
394,921

 
$
344,168

(1) Principally represents revenue deferred on our maintenance contracts, software and intellectual property licenses.
    
The Deferred income and allowances on sales to distributors activity was as follows:
 
 
Six Months Ended
(In thousands)
 
June 26,
2015
 
June 27,
2014
 
 
 
 
 
Balance at beginning of period
 
$
344,168

 
$
487,746

Deferred revenue recognized upon shipment to distributors
 
3,031,752

 
2,853,749

Deferred cost of sales recognized upon shipment to distributors
 
(143,573
)
 
(134,974
)
Revenue recognized upon sell-through to end customers
 
(535,018
)
 
(559,914
)
Cost of sales recognized upon sell-through to end customers
 
142,606

 
133,531

Earned distributor price concessions (1)
 
(2,422,463
)
 
(2,329,017
)
Returns
 
(21,671
)
 
(35,866
)
Other
 
(880
)
 
(56
)
Balance at end of period
 
$
394,921

 
$
415,199

(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 8 — Accumulated Other Comprehensive (Loss)/Income
    
Accumulated other comprehensive (loss)/income on our consolidated balance sheets as of June 26, 2015 and December 31, 2014 consisted of accumulated unrealized (loss)/gain on available-for-sale securities, net of tax. As of June 26, 2015, accumulated unrecognized loss on available-for-sale securities, net of tax, was $2.3 million. As of December 31, 2014, accumulated unrecognized gain on available-for-sale securities, net of tax, was $9.6 million.


12

Table of Contents

Note 9 — Net Income Per Share

A reconciliation of basic and diluted Net income per share is presented below:
 
 
Three Months Ended
 
Six Months Ended
(In thousands, except per share amounts)
 
June 26,
2015
 
June 27,
2014
 
June 26,
2015
 
June 27,
2014
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Net income
 
$
70,339

 
$
127,004

 
$
165,191

 
$
243,518

Basic weighted shares outstanding
 
301,799

 
311,000

 
301,561

 
313,713

Net income per share
 
$
0.23

 
$
0.41

 
$
0.55

 
$
0.78

 
 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
 
Net income
 
$
70,339

 
$
127,004

 
$
165,191

 
$
243,518

 
 
 
 
 
 
 
 
 
Weighted shares outstanding
 
301,799

 
311,000

 
301,561

 
313,713

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options, employee stock purchase plan, and restricted stock unit shares
 
2,805

 
2,513

 
2,390

 
2,432

 
 
 
 
 
 
 
 
 
Diluted weighted shares outstanding
 
304,604

 
313,513

 
303,951

 
316,145

 
 
 
 
 
 
 
 
 
Net income per share
 
$
0.23

 
$
0.41

 
$
0.54

 
$
0.77


In applying the treasury stock method, we excluded 0.1 million and 0.7 million stock option shares and restricted stock unit shares (including performance-based restricted stock unit shares) for the three and six months ended June 26, 2015, respectively, and 2.2 million and 2.0 million stock option shares and restricted stock unit shares (including performance-based restricted stock unit shares) for the three and six months ended June 27, 2014, respectively, because their effect was anti-dilutive.

Note 10 — 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 June 26, 2015. As of June 26, 2015, we had not borrowed any funds under the Facility.

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
 
June 26, 2015
 
December 31, 2014
 
 
 
 
 
 
2013 Senior Notes due November 15, 2018 at 2.50%
2.71%
 
$
597,876

 
$
597,557

2013 Senior Notes due November 15, 2023 at 4.10%
4.29%
 
395,810

 
395,559

2012 Senior Notes due May 15, 2017 at 1.75%
1.94%
 
499,720

 
499,643

Total long-term debt
 
 
$
1,493,406

 
$
1,492,759



13

Table of Contents

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 repurchase 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.

The indentures governing the Notes contain certain covenants that limit our ability to create liens on certain assets to secure debt, to enter into sale and lease-back transactions, and to consolidate, merge, sell or otherwise dispose of all or substantially all of our assets. As of June 26, 2015, we have satisfied all of our covenants contained in the indentures governing the Notes. Furthermore, we may redeem or be required to redeem the Notes, in whole or in part, for cash at the redemption prices described in the indentures. Upon the occurrence of certain events, which constitute a change in control triggering event as defined in the indentures, each holder of the Notes may require us to repurchase for cash all or a portion of such holder’s notes at a purchase price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest. The Merger that was announced on June 1, 2015 does not constitute a change in control triggering event that would require us to redeem the Notes.

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)
June 26, 2015
 
December 31, 2014
 
June 26, 2015
 
December 31, 2014
 
June 26, 2015
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Principal amount
$
600,000

 
$
600,000

 
$
400,000

 
$
400,000

 
$
500,000

 
$
500,000

Unamortized discount
(2,124
)
 
(2,443
)
 
(4,190
)
 
(4,441
)
 
(280
)
 
(357
)
Net carrying value
$
597,876

 
$
597,557

 
$
395,810

 
$
395,559

 
$
499,720

 
$
499,643


Interest expense related to the Notes is included in Interest expense in the consolidated statements of comprehensive income as follows:
 
Three Months Ended
 
Six Months Ended
(In thousands)
June 26, 2015
 
June 27, 2014
 
June 26, 2015
 
June 27, 2014
 
 
 
 
 
 
 
 
Contractual coupon interest
$
10,016

 
$
10,015

 
$
19,554

 
$
19,667

Amortization of debt issuance costs
455

 
456

 
911

 
911

Amortization of debt discount
324

 
323

 
647

 
647

Total interest expense related to the Notes
$
10,795

 
$
10,794

 
$
21,112

 
$
21,225


The other component of Interest expense in our consolidated statements of comprehensive income is interest expense related to bank service fees incurred in connection with our credit facility.


14

Table of Contents

As of June 26, 2015, future principal payments for the Notes were as follows:
Fiscal Year
 
Payable
 
 
(In thousands)

2015 (remaining six months)
 
$

2016
 

2017
 
500,000

2018
 
600,000

2019
 

2020 and after
 
400,000

Total
 
$
1,500,000


The Notes are measured at fair value on a quarterly basis for disclosure purposes. 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)
June 26, 2015
 
December 31, 2014
 
June 26, 2015
 
December 31, 2014
 
June 26, 2015
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Estimated fair value
$
610,440

 
$
606,564

 
$
416,400

 
$
417,480

 
$
502,320

 
$
501,460


Note 11 — 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 claims nor have we 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 26, 2015, we had approximately $141.5 million of outstanding purchase commitments to such subcontractors. We expect to receive and pay for these materials and services over the next twelve months.

Operating Leases

We lease facilities and equipment under non-cancelable lease agreements expiring at various times through 2020 and beyond. There have been no significant changes to our operating lease obligations since December 31, 2014.


15

Table of Contents

Other Commitments

As of June 26, 2015, we had $11.7 million of outstanding non-cancelable license obligations to providers of electronic design automation software remaining to be paid in equal quarterly installments through December 2017.

Legal Proceedings

In connection with entering into the Merger Agreement, six putative class action lawsuits have been filed by purported Altera stockholders in the Court of Chancery of the State of Delaware against our board of directors, Intel, Merger Sub, and, in some cases, Altera. The actions are captioned Sciabucchi v. Daane et al., Case No. 11108-VCG; Goldstein v. Daane et al., Case No. 11126-VCG; Reinauer v. Altera et al., Case No. 11144-VCG; Braunstein v. Daane et al., Case No. 11146-VGC; Litwin v. Daane et al., Case No. 11160-VCG; and Robinson v. Daane et al., Case No. 11165-VCG. On June 26, 2015, these actions were consolidated as In re Altera Corp. Shareholder Litigation, Case No. 11108-VCG. The complaints allege, among other things, that members of our board of directors breached their fiduciary duties to Altera stockholders by agreeing to a transaction that does not adequately reflect Altera’s true value, and that Intel, Merger Sub, and/or Altera aided and abetted the board of directors' breaches of fiduciary duties. The complaints seek to enjoin the Merger or, alternatively, seek rescission of the Merger or an award of rescissory damages.

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. In May 2015, PTI and Altera entered into a settlement agreement, which included a dismissal of all PTI's claims against Altera and a dismissal of Altera's counterclaims against PTI. The resolution of this case did not have a material adverse impact on our consolidated operating results or financial position.
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 an 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 filed responses to our petitions, in which the IRS conceded the R&D credit adjustment for 2004. The Tax Court consolidated the two cases and a judge was assigned. The federal statute of limitations for the 2002 and 2003 tax years 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 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 and we are awaiting a ruling. 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.


16

Table of Contents

Note 12 — Stock-Based Compensation

Stock-based compensation expense included in our consolidated statements of comprehensive income was as follows:
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
June 26,
2015
 
June 27,
2014
 
June 26,
2015
 
June 27,
2014
 
 
 
 
 
 
 
 
 
Cost of sales
 
$
440

 
$
495

 
$
847

 
$
961

Research and development expense
 
9,670

 
10,877

 
18,613

 
21,150

Selling, general, and administrative expense
 
11,907

 
13,349

 
22,882

 
25,957

Pre-tax stock-based compensation expense
 
22,017

 
24,721

 
42,342

 
48,068

Less: income tax benefit
 
(6,115
)
 
(6,651
)
 
(11,736
)
 
(12,845
)
Net stock-based compensation expense
 
$
15,902

 
$
18,070

 
$
30,606

 
$
35,223


No stock-based compensation was capitalized during any period presented above. As of June 26, 2015, unrecognized stock-based compensation cost related to outstanding unvested stock options, restricted stock units ("RSU"s), performance-based restricted stock units ("PRSU"s) and employee stock purchase plan ("ESPP") shares was approximately $151.0 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.

The assumptions used to estimate the fair value of the RSU awards granted under our stock-based compensation plans were as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 26,
2015
 
June 27,
2014
 
June 26,
2015
 
June 27,
2014
ESPP Purchase Rights:
 
 
 
 
 
 
 
 
Expected term (in years)
 
0.8

 
1.0

 
0.8

 
1.0

Expected stock price volatility
 
41.8
%
 
25.5
%
 
41.8
%
 
25.5
%
Risk-free interest rate
 
0.1
%
 
0.1
%
 
0.1
%
 
0.1
%
Dividend yield
 
1.6
%
 
1.9
%
 
1.6
%
 
1.9
%
Weighted-average estimated fair value
 
$
12.90

 
$
7.68

 
$
12.90

 
$
7.68

 
 
 
 
 
 
 
 
 
RSUs:
 
 
 
 
 
 
 
 
Risk-free interest rate
 
0.8
%
 
0.7
%
 
0.8
%
 
0.7
%
Dividend yield
 
1.6
%
 
1.9
%
 
1.6
%
 
1.9
%
Weighted-average estimated fair value
 
$
43.24

 
$
31.01

 
$
42.63

 
$
30.97

 
 
 
 
 
 
 
 
 
PRSUs:
 
 
 
 
 
 
 
 
Expected Altera stock price volatility
 
30.0
%
 
32.2
%
 
30.0
%
 
32.2
%
Expected Philadelphia Semiconductor Index stock price volatility
 
19.7
%
 
24.3
%
 
19.7
%
 
24.3
%
Risk-free interest rate
 
1.0
%
 
0.9
%
 
1.0
%
 
0.9
%
Dividend yield
 
1.6
%
 
1.9
%
 
1.6
%
 
1.9
%
Weighted-average estimated fair value per share
 
$
58.02

 
$
31.18

 
$
58.02

 
$
31.18

 
 
 
 
 
 
 
 
 
    
We granted 187,604, 303,260, 262,647 and 66,489 market-based PRSUs in 2015, 2014, 2013 and 2012, respectively, to senior executives with vesting that is contingent on both the market performance of Altera stock as compared to the Philadelphia Semiconductor Index during a 3-year measurement period and continued service. As of June 26, 2015, the majority of these market-based PRSUs were still outstanding, and no market-based PRSUs had vested. For market-based PRSU grants made on May 4, 2015, May 13, 2014, May 5, 2014, May 6, 2013 and July 30, 2012, the weighted average grant date fair value was $58.02, $31.13, $31.23, $33.03 and $41.18, respectively.

17

Table of Contents


A summary of activity for our RSUs and PRSUs for the six months ended June 26, 2015 and information regarding RSUs and PRSUs outstanding and expected to vest as of June 26, 2015 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, 2014
 
5,506

 
$
34.00

 
 
 
 
Grants
 
1,843

 
$
44.45

 
 
 
 
Vested
 
(1,353
)
 
$
34.18

 
 
 
 
Forfeited/Cancelled
 
(188
)
 
$
35.24

 
 
 
 
Outstanding, June 26, 2015
 
5,808

 
$
37.24

 
1.6
 
$
297,945

Vested and expected to vest, June 26, 2015
 
5,094

 
$
37.24

 
1.5
 
$
261,331

(1)
Aggregate intrinsic value represents the closing price per share of our stock on June 26, 2015, multiplied by the number of RSUs and market-based PRSUs outstanding or vested and expected to vest as of June 26, 2015.

A summary of stock option activity for the six months ended June 26, 2015 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of June 26, 2015 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, 2014
 
2,074

 
$
32.60

 
 
 
 
Grants
 

 
$

 
 
 
 
Exercises
 
(344
)
 
$
23.57

 
 
 
 
Forfeited/Cancelled/Expired
 
(19
)
 
$
30.46

 
 
 
 
Outstanding, June 26, 2015
 
1,711

 
$
34.45

 
5.2
 
$
28,838

Exercisable, June 26, 2015
 
1,403

 
$
34.10

 
4.9
 
$
24,129

Vested and expected to vest, June 26, 2015
 
1,696

 
$
34.45

 
5.2
 
$
28,583

(1)
For those stock options with an exercise price below the closing price per share on June 26, 2015, aggregate intrinsic value represents the difference between the exercise price and the closing price per share of our common stock on June 26, 2015, multiplied by the number of stock options outstanding, exercisable, or vested and expected to vest as of June 26, 2015.

For the three and six months ended June 26, 2015, 0.2 million and 0.3 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 26, 2015 was $5.1 million and $6.8 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 consideration recorded as a result of stock option exercises during the three and six months ended June 26, 2015 was $6.0 million and $8.1 million, respectively.

As of June 26, 2015, our 2005 Equity Incentive Plan had a total of 25.0 million shares reserved for future issuance, of which 16.7 million shares were available for future grants.

ESPP

We sold 386,613 shares of common stock under the ESPP at a price of $27.41 during the six months ended June 26, 2015 and 376,031 shares of common stock under the ESPP at a price of $27.61 during the six months ended June 27, 2014. As of June 26, 2015, 4.0 million shares were available for future issuance under the ESPP.


18

Table of Contents

Note 13 — 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. There were 233.0 million shares authorized for repurchase with approximately 16.0 million shares remaining for further repurchases under our stock repurchase program as of June 26, 2015. Since the inception of the stock repurchase program through June 26, 2015, we have repurchased a total of 217.0 million shares of our common stock for an aggregate cost of $5.0 billion. In connection with the Merger Agreement, we have suspended our share repurchase program.

During the six months ended June 26, 2015, we repurchased 1.6 million shares of our common stock for a total of $57.5 million under our stock repurchase program at an average price per share of $34.95. During the six months ended June 27, 2014, we repurchased 10.6 million shares of our common stock for a total of $358.8 million under our stock repurchase program at an average price per share of $33.90. 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 14 — 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 filed responses to our petitions, in which the IRS conceded the R&D credit adjustment for 2004. The Tax Court consolidated the two cases and a judge was assigned. The federal statute of limitations for the 2002 and 2003 tax years 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 and we are awaiting a ruling. 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.
    
The IRS is currently examining our 2010 and 2011 tax years. We believe we have made adequate tax payments or accrued adequate amounts for our tax liabilities for these years 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 substantially below the U.S. statutory tax rate. Our effective tax rate for the three months ended June 26, 2015 was 17.7% compared with 11.5% for the three months ended June 27, 2014. The increase in our effective tax rate was primarily due to a combination of adverse geographic mix of earnings and the non-deductible portion of merger-related expenses in 2015 compared with the same period in 2014. During the three months ended June 26, 2015, we recognized a net benefit of $4.2 million related to the deductible portion of merger-related expenses.


19

Table of Contents

Our effective tax rate for the six months ended June 26, 2015 was 11.7% compared with 11.0% for the six months ended June 27, 2014. The net change in our effective tax rate was primarily due to adverse geographic mix of earnings and the non-deductible portion of merger-related expenses offset by higher one-time tax benefits in 2015 compared with the same period in 2014. During the six months ended June 26, 2015, we recognized one-time benefits of $4.2 million related to the deductible portion of merger-related expenses and $7.1 million related to foreign tax credits earned in excess of a foreign dividend, which were offset by $1.2 million of true-up adjustments resulting from the filing of tax returns in foreign jurisdictions. During the six months ended June 27, 2014, we reversed $4.0 million of liabilities and the related interest for uncertain tax positions upon the expiration of a domestic statute of limitations, which was offset by $0.9 million of true-up adjustments resulting from the filing of tax returns in foreign jurisdictions.

As of June 26, 2015, we had total gross unrecognized tax benefits of $362.6 million which, if recognized, would potentially impact our effective tax rate. As of December 31, 2014, we had total gross unrecognized tax benefits of $341.1 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 $49.5 million and $45.8 million for interest and penalties related to uncertain tax positions as of June 26, 2015 and December 31, 2014, respectively.
    
Note 15 — 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 26, 2015, there were 131 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 $79.9 million and $83.8 million as of June 26, 2015 and December 31, 2014, respectively.

Investment income or loss from the NQDC Plan is recorded as Gain on deferred compensation plan securities in our consolidated statements of comprehensive income. The investment (gain)/loss also represents an (increase)/decrease in the future payout to participants and is recorded as Compensation expense — deferred compensation plan in our consolidated statements of comprehensive income. Compensation expense/(benefit) associated with our NQDC Plan obligations is offset by the (gain)/loss 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.

The following tables summarize the fair value of our NQDC Plan assets by significant investment category:
(In thousands)
 
June 26, 2015
 
December 31, 2014
 
 
 
 
 
Deferred compensation plan assets: (1)
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
Restricted cash equivalents
 
$
14,484

 
$
14,412

Equity securities
 
30,766

 
33,521

Mutual funds
 
32,790

 
33,764

Subtotal
 
78,040

 
81,697

 
 
 
 
 
Level 2:
 
 
 
 
Fixed income securities
 
1,822

 
2,082

Total
 
$
79,862

 
$
83,779


(1) Included in Deferred compensation planmarketable securities and Deferred compensation planrestricted cash equivalents in the accompanying consolidated balance sheets as of June 26, 2015 and December 31, 2014.


20

Table of Contents

Note 16 — Declaration of Dividend Subsequent to June 26, 2015

On July 20, 2015, our board of directors declared a cash dividend of $0.18 per common share payable on September 1, 2015 to stockholders of record on August 10, 2015.


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, 2014.

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, as well as statements concerning our expectations regarding the pending merger with Intel Corporation, 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, 2014.


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, 2014.


21

Table of Contents

RESULTS OF OPERATIONS

Pending Merger with Intel Corporation

On May 31, 2015, Altera Corporation entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Intel Corporation (“Intel”) and 615 Corporation, a wholly owned subsidiary of Intel (“Merger Sub”). The Merger Agreement provides for the merger of Merger Sub with and into Altera (the “Merger”), with Altera surviving the Merger as a wholly owned subsidiary of Intel. At the effective time of the Merger, each share of common stock issued and outstanding immediately prior to the effective time (other than shares held by (1) Intel, Altera or their respective subsidiaries; or (2) stockholders who have properly exercised and perfected appraisal rights under Delaware law) will be cancelled and extinguished and automatically converted into the right to receive cash in an amount equal to $54.00, without interest thereon (the “Per Share Amount”). In addition, subject to certain exceptions, unvested option awards, restricted stock unit awards and performance-based restricted stock unit awards will be converted into corresponding awards of Intel common stock pursuant to an exchange ratio determined based on Intel’s stock price at closing, with generally the same terms and conditions applicable to the original awards.

The consummation of the merger is conditioned on the receipt of the approval of Altera's stockholders, as well as the satisfaction of other customary closing conditions, including domestic and foreign regulatory approvals and performance in all material respects by each party of its obligations under the Merger Agreement. The Merger is currently expected to close within six to nine months of June 1, 2015. The Merger is not conditioned upon Intel’s receipt of financing.

The Merger Agreement contains certain termination rights for Altera and Intel, including if a governmental body prohibits the Merger or if the Merger is not consummated before May 31, 2016, subject to certain extension rights. Upon termination of the Merger Agreement under specified circumstances, Altera or Intel will be required to pay the other party a termination fee of $500 million. In certain other circumstances, Altera will be required to reimburse Intel’s expenses up to $60 million if the Merger Agreement is terminated.

Results of Operations Overview
<
 
Three Months Ended
 
Six Months Ended
(In thousands, except share and per share data)
June 26, 2015
 
March 27, 2015
 
Change
 
June 26, 2015
 
June 27, 2014
 
Change
Net sales
$
414,162

 
$
435,485

 
$
(21,323
)
 
$
849,647

 
$
952,609

 
$
(102,962
)
Gross margin
$
287,572

 
$
279,222

 
$
8,350

 
$
566,794

 
$
638,350

 
$
(71,556
)
Operating margin (1)
$
86,331

 
$
103,021

 
$
(16,690
)
 
$
189,352

 
$
281,162

 
$
(91,810
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating cash flows
$
89,220

 
$
136,633

 
$
(47,413
)
 
$
225,853

 
$
301,388

 
$
(75,535
)
Total cash, cash equivalents and investments
$
4,523,028

 
4,515,760

 
$
7,268

 
$
4,523,028

 
$
4,563,243

 
$
(40,215
)
 
 
 
 
 
 
 
 
 
 
 
 
Diluted shares
304,604

 
303,285

 
1,319

 
303,951

 
316,145

 
(12,194
)
Diluted net income per share
$
0.23

 
$
0.31

 
$
(0.08
)
 
$
0.54

 
$
0.77

 
$
(0.23
)
 
 
 
 
 
 
 
 
 
 
 
 
Dividends per common share
$
0.18

 
$
0.18