XNAS:ALTR Altera Corp Quarterly Report 10-Q Filing - 9/28/2012

Effective Date 9/28/2012

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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 28, 2012
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, 2012: 320,572,559
 
 
 



 
PAGE
NUMBER
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32.1
 
Exhibit 32.2
 
EX-101 Instance Document
 
EX-101 Schema Document
 
EX-101 Calculation Linkbase Document
 
EX-101 Label Linkbase Document
 
EX-101 Presentation Linkbase Document
 
EX-101 Definition Linkbase Document
 

2


PART I FINANCIAL INFORMATION

ITEM 1:
Financial Statements
ALTERA CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value amount)
 
September 28,
2012
 
December 31,
2011
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
2,849,829

 
$
3,371,933

Short-term investments
 
144,195

 
65,222

Total cash, cash equivalents, and short-term investments
 
2,994,024

 
3,437,155

Accounts receivable, net
 
348,273

 
232,273

Inventories
 
157,848

 
122,279

Deferred income taxes — current
 
65,223

 
58,415

Deferred compensation plan — marketable securities
 
58,151

 
54,041

Deferred compensation plan — restricted cash equivalents
 
18,524

 
17,938

Other current assets
 
42,134

 
52,710

Total current assets
 
3,684,177

 
3,974,811

Property and equipment, net
 
200,172

 
171,721

Long-term investments
 
685,945

 
74,033

Deferred income taxes — non-current
 
23,047

 
26,629

Other assets, net
 
49,519

 
35,074

Total assets
 
$
4,642,860

 
$
4,282,268

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
45,589

 
$
52,154

Accrued liabilities
 
39,183

 
34,029

Accrued compensation and related liabilities
 
43,563

 
78,181

Deferred compensation plan obligations
 
76,675

 
71,979

Deferred income and allowances on sales to distributors
 
400,351

 
279,876

Credit facility
 

 
500,000

Total current liabilities
 
605,361

 
1,016,219

Income taxes payable — non-current
 
261,843

 
263,423

Long-term debt
 
500,000

 

Other non-current liabilities
 
9,496

 
8,730

Total liabilities
 
1,376,700

 
1,288,372

Commitments and contingencies
 


 


(See “Note 11 — Commitments and Contingencies”)
 
 
 
 
Stockholders' equity:
 
 
 
 
Common stock: $.001 par value; 1,000,000 shares authorized; outstanding - 320,563 shares at September 28, 2012 and 322,054 shares at December 31, 2011
 
321

 
322

Capital in excess of par value
 
1,107,614

 
1,050,752

Retained earnings
 
2,151,627

 
1,942,955

Accumulated other comprehensive income (loss)
 
6,598

 
(133
)
Total stockholders' equity
 
3,266,160

 
2,993,896

Total liabilities and stockholders' equity
 
$
4,642,860

 
$
4,282,268

See accompanying notes to consolidated financial statements.

3


ALTERA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share amounts)
 
September 28,
2012
 
September 30,
2011
 
September 28,
2012
 
September 30,
2011
Net sales
 
$
495,010

 
$
522,474

 
$
1,343,595

 
$
1,606,671

Cost of sales
 
152,007

 
166,938

 
408,156

 
473,565

Gross margin
 
343,003

 
355,536

 
935,439

 
1,133,106

Research and development expense
 
91,606

 
80,771

 
266,259

 
235,438

Selling, general, and administrative expense
 
74,243

 
69,345

 
215,824

 
208,550

Compensation expense (benefit) — deferred compensation plan
 
3,274

 
(6,642
)
 
6,697

 
(4,926
)
(Gain) loss on deferred compensation plan securities
 
(3,274
)
 
6,642

 
(6,697
)
 
4,926

Interest income and other
 
(2,775
)
 
(663
)
 
(5,997
)
 
(2,505
)
Loss/(gain) reclassified from other comprehensive income
 
108

 

 
(63
)
 

Interest expense
 
2,333

 
806

 
5,386

 
2,717

Income before income taxes
 
177,488

 
205,277

 
454,030

 
688,906

Income tax expense
 
19,999

 
19,873

 
18,028

 
64,806

Net income
 
157,489

 
185,404

 
436,002

 
624,100

 
 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
 
Unrealized gain on investments:
 
 
 
 
 
 
 
 
Unrealized holding gain on investments arising during period, net of tax of $43 and $108
 
3,620

 

 
6,723

 

Less: Reclassification adjustments for gain on investments included in net income, net of tax of $1, and $6
 
(41
)
 

 
(64
)
 

 
 
3,579

 

 
6,659

 

Unrealized gain on derivatives:
 
 
 
 
 
 
 
 
Unrealized (loss)/gain on derivatives arising during period, net of tax of $6 and $36
 
(10
)
 

 
67

 

Less: Reclassification adjustments for loss on derivatives included in net income, net of tax of $53, and $2
 
97

 

 
5

 

 
 
87

 

 
72

 

Other comprehensive income
 
3,666

 

 
6,731

 

Comprehensive income
 
$
161,155

 
$
185,404

 
$
442,733

 
$
624,100

 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.49

 
$
0.58

 
$
1.36

 
$
1.94

Diluted
 
$
0.49

 
$
0.57

 
$
1.34

 
$
1.90

 
 
 
 
 
 
 
 
 
Shares used in computing per share amounts:
 
 
 
 
 
 
 
 
Basic
 
319,870

 
321,745

 
321,200

 
322,012

Diluted
 
323,560

 
327,044

 
325,275

 
328,264

 
 
 
 
 
 
 
 
 
Cash dividends per common share
 
$
0.10

 
$
0.08

 
$
0.26

 
$
0.20

 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

4


ALTERA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Nine Months Ended
 
September 28,
2012
 
September 30,
2011
 
 
 
 
Cash Flows from Operating Activities:
 
 
 
Net income
$
436,002

 
$
624,100

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
26,426

 
23,443

Stock-based compensation
70,790

 
59,983

Deferred income tax benefit
(3,367
)
 
(9,549
)
Tax effect of employee stock plans
14,381

 
26,077

Excess tax benefit from employee stock plans
(20,790
)
 
(22,959
)
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(116,000
)
 
(23,228
)
Inventories
(35,569
)
 
12,496

Other assets
5,478

 
47,986

Accounts payable and other liabilities
(34,670
)
 
(40,004
)
Deferred income and allowances on sales to distributors
120,475

 
11,115

Income taxes payable
(650
)
 
30,122

Deferred compensation plan obligations
(2,001
)
 
(345
)
Net cash provided by operating activities
460,505

 
739,237

Cash Flows from Investing Activities:
 
 
 
          Purchases of property and equipment
(53,712
)
 
(23,178
)
          Proceeds from sales of deferred compensation plan securities, net
2,001

 
345

          Purchases of available-for-sale securities
(819,662
)
 
(130,146
)
          Proceeds from sale and maturity of available-for-sale securities
135,650

 
1,750

     Purchases of intangible assets
(2,280
)
 

          Purchases of other investments
(4,510
)
 

Net cash used in investing activities
(742,513
)
 
(151,229
)
Cash Flows from Financing Activities:
 
 
 
          Proceeds from issuance of common stock through various stock plans
37,514

 
93,619

          Shares withheld for employee taxes
(30,529
)
 
(31,122
)
          Payment of dividends to stockholders
(83,570
)
 
(64,328
)
          Proceeds from issuance of long-term debt
500,000

 

          Repayment of credit facility
(500,000
)
 

          Long-term debt and credit facility issuance costs
(5,244
)
 

          Repurchases of common stock
(179,057
)
 
(197,018
)
          Excess tax benefit from employee stock plans
20,790

 
22,959

Net cash used in financing activities
(240,096
)
 
(175,890
)
Net (decrease) increase in cash and cash equivalents
(522,104
)
 
412,118

Cash and cash equivalents at beginning of period
3,371,933

 
2,765,196

Cash and cash equivalents at end of period
$
2,849,829

 
$
3,177,314


See accompanying notes to consolidated financial statements.



5


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, 2011 consolidated balance sheet data was derived from our audited consolidated financial statements included in our 2011 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, 2011 included in our Annual Report on Form 10-K. The consolidated operating results for the three or nine months ended September 28, 2012 are not necessarily indicative of the results to be expected for any future period.

Note 2 — Recent Accounting Pronouncements

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income, which requires companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update eliminates the option to present the components of other comprehensive income as part of the statement of equity. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05, to defer the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. We adopted the guidance in our first quarter of 2012 with no significant impact on our consolidated financial statements or related footnotes.


6


Note 3 — Financial Instruments

Cash, Cash Equivalents and Marketable Securities

The following tables summarize our cash and available-for-sale securities by significant investment category.
    
 
 
September 28, 2012
(In thousands)
 
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Marketable Securities
 
Long-Term Marketable Securities

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
39,112

 
$

 
$

 
$
39,112

 
$
39,112

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
2,744,850

 

 

 
2,744,850

 
2,744,850

 

 

U.S. treasury securities
 
579,281

 
6,113

 
(1
)
 
585,393

 
35,446

 
32,382

 
517,565

Subtotal
 
3,324,131

 
6,113

 
(1
)
 
3,330,243

 
2,780,296

 
32,382


517,565

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities
 
107,799

 
43

 
(3
)
 
107,839

 
27,278

 
40,470

 
40,091

Non-U.S. government securities
 
11,813

 
15

 
(2
)
 
11,826

 

 
6,253

 
5,573

Municipal bond
 
1,370

 
2

 

 
1,372

 

 
752

 
620

Corporate securities
 
189,133

 
484

 
(40
)
 
189,577

 
3,143

 
64,338

 
122,096

Subtotal
 
310,115

 
544

 
(45
)
 
310,614

 
30,421

 
111,813

 
168,380

Total
 
$
3,673,358

 
$
6,657

 
$
(46
)
 
$
3,679,969

 
$
2,849,829

 
$
144,195

 
$
685,945

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

7


 
 
December 31, 2011
(In thousands)
 
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Marketable Securities
 
Long-Term Marketable Securities

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
165,122

 
$

 
$

 
$
165,122

 
$
165,122

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
3,189,462

 

 

 
3,189,462

 
3,189,462

 

 

U.S. treasury securities
 
6,199

 

 

 
6,199

 

 
6,199

 

Corporate securities
 
12,999

 

 

 
12,999

 
10,999

 
2,000

 

Subtotal
 
3,208,660

 

 

 
3,208,660

 
3,200,461

 
8,199



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities
 
41,167

 
11

 
(7
)
 
41,171

 
750

 
25,890

 
14,531

Non-U.S. government securities
 
8,221

 

 
(8
)
 
8,213

 

 
8,213

 

Municipal bond
 
754

 

 
(1
)
 
753

 

 

 
753

Corporate securities
 
87,415

 
84

 
(230
)
 
87,269

 
5,600

 
22,920

 
58,749

Subtotal
 
137,557

 
95

 
(246
)
 
137,406

 
6,350

 
57,023

 
74,033

Total
 
$
3,511,339

 
$
95

 
$
(246
)
 
$
3,511,188

 
$
3,371,933

 
$
65,222

 
$
74,033

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

During the three months ended September 28, 2012, we made certain cost method investments of approximately $4.5 million. These investments are included within Other assets, net  in our consolidated balance sheets.  

The adjusted cost and estimated fair value of marketable debt securities (corporate bonds, municipal bonds, U.S. and foreign government securities, and U.S. treasury securities) as of September 28, 2012, 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.
(In thousands)
 
Cost
 
Estimated Fair Value
Due in one year or less
 
$
210,020

 
$
210,059

Due after one year through five years
 
679,373

 
685,945

 
 
$
889,393

 
$
896,004


Derivative Financial Instruments

We use derivative financial instruments primarily to manage foreign currency exchange rate risk. Substantially all of our operational expenditures are transacted in U.S. dollars. However, operating expenditures of our subsidiaries are incurred in or exposed to other currencies, primarily the Malaysian Ringgit. We hedge portions of the forecasted foreign currency exposure associated with operational expenditures in Malaysia generally up to three months in advance. We record all derivatives at fair value. These forward foreign currency exchange contracts were designated and qualified as cash flow hedges, and the effective portion of the gain or loss on the forward contracts was reported as a component of other comprehensive income and reclassified into net income in the same period during which the hedged transaction affected earnings.



8


The notional amount of our outstanding foreign exchange contracts was $7.8 million as of September 28, 2012. The outstanding forward currency exchange contracts expire at various dates between October 2012 and December 2012. We did not have any hedging activities as of December 31, 2011. These derivative instruments are classified within Level 2 of the fair value hierarchy, as they are not actively traded and are valued using pricing models that use observable market inputs.


Note 4 — Accounts Receivable, Net and Significant Customers

Accounts receivable, net was comprised of the following:

(In thousands)
 
September 28,
2012
 
December 31,
2011
Gross accounts receivable
 
$
348,847

 
$
232,838

Allowance for doubtful accounts
 
(500
)
 
(500
)
Allowance for sales returns
 
(74
)
 
(65
)
Accounts receivable, net
 
$
348,273

 
$
232,273


We sell our products to original equipment manufacturers, or 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 28,
2012
 
September 30,
2011
 
September 28,
2012
 
September 30,
2011
 
 
 
 
 
 
 
 
 
Sales to distributors
 
69
%
 
74
%
 
70
%
 
74
%
Sales to OEMs
 
31
%
 
26
%
 
30
%
 
26
%
 
 
100
%
 
100
%
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
Significant Distributors(1):
 
 
 
 
 
 
 
 
Arrow Electronics, Inc. ( “Arrow”)
 
40
%
 
40
%
 
39
%
 
39
%
Macnica, Inc. (“Macnica”)
 
19
%
 
19
%
 
21
%
 
20
%

(1)
Except as presented above, no other distributor accounted for greater than 10% of our net sales for the quarterly or year-to-date periods ended September 28, 2012 or September 30, 2011.

    One OEM accounted for 16% and 18% of our net sales for the quarterly and year-to-date periods ended September 28, 2012, respectively. The same OEM accounted for 12% and 13% for the quarterly and year-to-date periods ended September 30, 2011, respectively. No other individual OEM accounted for more than 10% of our net sales for the quarterly or year-to-date periods ended September 28, 2012 or September 30, 2011.

As of September 28, 2012, accounts receivable from Arrow and Macnica individually accounted for approximately 34% and 46%, respectively, of our gross accounts receivable. As of December 31, 2011, accounts receivable from Arrow, Macnica and Avnet, Inc. including its affiliates, individually accounted for approximately 30%, 43% and 11%, respectively, of our gross accounts receivable. No other distributor or OEM accounted for more than 10% of our accounts receivable as of September 28, 2012 or December 31, 2011. Accounts receivable from distributors may not be proportionate to net sales and may fluctuate on a quarterly basis due to varying factors, including inventory levels held by distributors and timing of price concessions and payments.
 


9


Note 5 — Inventories

Inventories were comprised of the following:

(In thousands)
 
September 28,
2012
 
December 31,
2011
Raw materials
 
$
9,219

 
$
9,293

Work in process
 
103,902

 
71,696

Finished goods
 
44,727

 
41,290

Total inventories
 
$
157,848

 
$
122,279



Note 6 — Property and Equipment

Property and equipment, net was comprised of the following:

(In thousands)
 
September 28,
2012
 
December 31,
2011
Land and land rights
 
$
23,157

 
$
23,157

Buildings
 
158,612

 
148,323

Equipment and software
 
243,782

 
232,793

Office furniture and fixtures
 
24,012

 
23,440

Leasehold improvements
 
11,618

 
7,652

Construction in progress
 
2,043

 
5,836

Property and equipment, at cost
 
463,224

 
441,201

Accumulated depreciation and amortization
 
(263,052
)
 
(269,480
)
Property and equipment, net
 
$
200,172

 
$
171,721


Depreciation expense was $8.7 million and $23.7 million for the three months and nine months ended September 28, 2012 respectively. Depreciation expense was $7.4 million and $21.1 million for the three months and nine months ended September 30, 2011, respectively. Depreciation and amortization expense as presented in our consolidated statements of cash flows includes the above amounts, together with amortization expense on our intangible assets. Intangible asset amortization expense was not significant for any period presented in our consolidated statements of comprehensive income.


Note 7 — Deferred Income and Allowances on Sales to Distributors
 
Deferred income and allowances on sales to distributors was comprised of the following:

(In thousands)
 
September 28,
2012
 
December 31,
2011
 
 
 
 
 
Deferred revenue on shipment to distributors
 
$
422,826

 
$
302,815

Deferred cost of sales on shipment to distributors
 
(33,180
)
 
(30,536
)
Deferred income on shipment to distributors
 
389,646

 
272,279

Advances to distributors
 

 
(648
)
Other deferred revenue (1)
 
10,705

 
8,245

Total
 
$
400,351

 
$
279,876


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

The Deferred income and allowances on sales to distributors activity for the nine months ended September 28, 2012 and September 30, 2011 was as follows:

10



 
 
Nine Months Ended
(In thousands)
 
September 28,
2012
 
September 30,
2011
 
 
 
 
 
Balance at beginning of period
 
$
279,876

 
$
428,711

Deferred revenue recognized upon shipment to distributors
 
4,006,945

 
3,992,638

Deferred cost of sales recognized upon shipment to distributors
 
(181,660
)
 
(227,189
)
Decrease in advances to distributors
 
648

 
63,803

Revenue recognized upon sell-through to end customers
 
(763,141
)
 
(979,877
)
Cost of sales recognized upon sell-through to end customers
 
176,455

 
224,933

Earned distributor price concessions (1)
 
(3,057,927
)
 
(2,952,593
)
Returns
 
(61,531
)
 
(111,851
)
Other
 
686

 
1,251

Balance at end of period
 
$
400,351

 
$
439,826


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

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


Note 8 — Accumulated Other Comprehensive Income (Loss)

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

(In thousands)
 
December 31,
2011
 
Other Comprehensive Income
 
September 28,
2012
 
 
 
 
 
 
 
Accumulated unrealized (losses) gains on available-for-sale securities, net of tax
 
$
(133
)
 
$
6,659

 
$
6,526

Accumulated unrealized losses on hedging transactions, net of tax
 

 
72

 
72

Accumulated other comprehensive (loss) income
 
$
(133
)
 
$
6,731

 
$
6,598


11



Note 9 — Income Per Share

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

 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share amounts)
 
September 28,
2012
 
September 30,
2011
 
September 28,
2012
 
September 30,
2011
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
157,489

 
$
185,404

 
$
436,002

 
$
624,100

Basic weighted shares outstanding
 
319,870

 
321,745

 
321,200

 
322,012

Net income per share
 
$
0.49

 
$
0.58

 
$
1.36

 
$
1.94

 
 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
157,489

 
$
185,404

 
$
436,002

 
$
624,100

 
 
 
 
 
 
 
 
 
Weighted shares outstanding
 
319,870

 
321,745

 
321,200

 
322,012

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options, ESPP, and restricted stock unit shares
 
3,690

 
5,299

 
4,075

 
6,252

 
 
 
 
 
 
 
 
 
Diluted weighted shares outstanding
 
323,560

 
327,044

 
325,275

 
328,264

 
 
 
 
 
 
 
 
 
Net income per share
 
$
0.49

 
$
0.57

 
$
1.34

 
$
1.90


In applying the treasury stock method, we excluded 1.7 million and 1.4 million stock option shares and restricted stock units for the three and nine months ended September 28, 2012, respectively, and 2.7 million and 1.4 million stock option shares and restricted stock units for the three and nine months ended September 30, 2011, respectively, because their effect was anti-dilutive. While these shares have been anti-dilutive, they could be dilutive in the future.


Note 10 — Credit Facility and Long-Term Debt

Credit Facility

In May 2012, we repaid in full the $500 million outstanding under our former credit agreement dated August 31, 2007.

On June 29, 2012, we entered into a five-year $250 million unsecured revolving credit facility (the "Facility"). Under certain circumstances, upon our request and with the consent of the lenders, the commitments under the Facility may be increased up to an additional $250 million. Borrowings under the Facility will bear interest at a base rate determined in accordance with the Facility, plus an applicable margin based upon the debt rating of our non-credit enhanced, senior unsecured long-term debt. In addition, we are obligated to pay a quarterly commitment fee, payable in arrears, based on the available commitments. This facility fee varies and is also determined based on our debt rating. The terms of the Facility require compliance with certain financial and non-financial covenants, which we have satisfied as of September 28, 2012. As of September 28, 2012, we have not borrowed any funds under the Facility.

12



Long-term Debt

On May 8, 2012, we completed a public offering of $500 million aggregate principal amount of 1.75% senior notes that will mature on May 15, 2017 (the "Notes") with an effective interest rate of 1.91%. Interest on the Notes is payable semiannually in arrears on May 15 and November 15 of each year, beginning on November 15, 2012. The Notes are governed by a base and supplemental indenture between Altera and U.S. Bank National Association, as trustee. The Notes are our unsecured and unsubordinated obligations, ranking equally in right of payment to all of our existing and future unsecured and unsubordinated indebtedness and senior in right of payment to any of our future indebtedness that is expressly subordinated to the Notes. We may redeem the Notes, in whole or in part, at any time and from time to time for cash at the redemption prices described in the indenture.
We received net proceeds of $495.5 million from issuance of the Notes, after deduction of issuance costs of $3.7 million and a discount of $0.8 million. The debt issuance costs are recorded in other assets and are being amortized to interest expense over five years using the effective interest method. We used the net proceeds of the Notes to re-pay our former credit facility that was entered into on August 31, 2007.
The estimated fair value of Altera's long-term debt was approximately $515.7 million at September 28, 2012. Our long-term debt is classified within Level 1 of the fair value hierarchy and the estimated fair value of the debt is based on quoted market prices.


Note 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 claim or been required to defend any action related to our indemnification obligations, and, accordingly, we have not accrued any amounts for such indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.

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

Purchase Obligations

We depend entirely upon subcontractors to manufacture our silicon wafers and provide assembly and test services. Due to lengthy subcontractor lead times, we must order these materials and services from these subcontractors well in advance, and we are obligated to pay for the materials and services once they are completed. As of September 28, 2012, we had approximately $136.7 million of outstanding purchase commitments to such subcontractors. We expect to receive and pay for these materials and services over the next six months.

Operating Leases

We lease facilities under non-cancelable lease agreements expiring at various times through 2021. There have been no significant changes to our operating lease obligations since December 31, 2011.

Legal Proceedings

On December 8, 2010, Intellectual Ventures I LLC and Intellectual Ventures II LLC (“Intellectual Ventures”) filed a lawsuit in the United States District Court for the District of Delaware against Altera, Microsemi Corporation, and Lattice Semiconductor Corporation alleging that Altera infringes five patents. The complaint requests unspecified monetary damages including enhanced damages for willful infringement. In February 2011, Intellectual Ventures filed a First Amended Complaint adding Xilinx, Inc. as a defendant. In March 2011, Altera answered the complaint and asserted counterclaims against Intellectual Ventures for non-infringement and invalidity of the asserted patents. The defendants filed motions in the District of Delaware to transfer the case to the United States District Court for the Northern District of California and to stay the action pending re-examination proceedings

13


in the United States Patent and Trademark Office. Intellectual Ventures opposed the motions. In January 2012, the United States District Court for the District of Delaware denied the defendants' motion to transfer the case to the Northern District of California, and in February 2012, the court denied the defendants' motion to stay. Three of the four defendants, including Altera, filed a writ of mandamus in the Court of Appeals for the Federal Circuit requesting that the case be transferred to the Northern District of California. In July 2012, the Court of Appeals for the Federal Circuit denied the writ of mandamus. Because the case is at a very early stage, it is not possible for us to determine whether there is a reasonable possibility that a loss has been incurred nor can we estimate the range of potential loss. The case is currently scheduled for trial in May 2014.

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

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

On August 15, 2012, the case for the 2004 tax year was combined with that for the 2005 through 2007 tax years. The case is currently scheduled for trial in March 2013. We believe we have made adequate tax payments and/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, cash flows or financial position.


Note 12 — Stock-Based Compensation

Our stock-based compensation plans include the 2005 Equity Incentive Plan (the “2005 Plan”) and the 1987 Employee Stock Purchase Plan (the “ESPP”).


2005 Plan

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 2005 Plan provides stock-based incentive compensation (“awards”) to both our eligible employees and non-employee directors. Awards that may be granted under the 2005 Plan 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 2005 Plan consist of stock options, RSUs and PRSUs. The majority of stock-based awards granted under the 2005 Plan vest over four years. Stock options granted under the 2005 Plan have a maximum contractual term of ten years. As of September 28, 2012, the 2005 Plan had a total of 29.1 million shares reserved for future issuance, of which 22.0 million shares were available for future grants.


14


A summary of activity for our RSUs and PRSUs for the nine months ended September 28, 2012 and information regarding RSUs and PRSUs outstanding and expected to vest as of September 28, 2012 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, 2011
 
8,176

 
$
31.62

 
 
 
 
Grants
 
2,057

 
$
34.12

 
 
 
 
Vested
 
(2,851
)
 
$
27.34

 
 
 
 
Forfeited
 
(565
)
 
$
31.93

 
 
 
 
Outstanding, September 28, 2012
 
6,817

 
$
34.15

 
1.66
 
$
231,766

Vested and expected to vest, September 28, 2012
 
5,953

 
$
34.15

 
1.59
 
$
202,390



15


(1)
Aggregate intrinsic value represents the closing price per share of our stock on September 28, 2012, multiplied by the number of RSUs and PRSUs outstanding or vested and expected to vest as of September 28, 2012.

A summary of stock option activity for the nine months ended September 28, 2012 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of September 28, 2012 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, 2011
 
6,138

 
$
22.96

 
 
 
 
Grants
 
707

 
$
34.43

 
 
 
 
Exercises
 
(1,505
)
 
$
18.81

 
 
 
 
Forfeited/Cancelled/Expired
 
(44
)
 
$
32.50

 
 
 
 
Outstanding, September 28, 2012
 
5,296

 
$
25.59

 
4.20
 
$
51,658

Exercisable, September 28, 2012
 
3,950

 
$
21.75

 
2.60
 
$
50,064

Vested and expected to vest, September 28, 2012
 
5,107

 
$
25.17

 
4.00
 
$
51,535


(1)
For those stock options with an exercise price below the closing price per share on September 28, 2012, aggregate intrinsic value represents the difference between the exercise price and the closing price per share of our common stock on September 28, 2012, multiplied by the number of stock options outstanding, exercisable, or vested and expected to vest as of September 28, 2012.

For the three and nine months ended September 28, 2012, 0.6 million and 1.5 million non-qualified stock option shares were exercised, respectively. The total intrinsic value of stock options exercised for the three and nine months ended September 28, 2012 was $10.1 million and $28.6 million, respectively. The aggregate intrinsic value represents the difference between the exercise price and the selling price received by option holders upon the exercise of stock options during the period. The total cash received from employees as a result of employee stock option exercises during the three and nine months ended September 28, 2012 was $11.4 million and $37.5 million, respectively.


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 304,468 shares of common stock under the ESPP at a price of $30.23 during the nine months ended September 28, 2012, and 402,913 shares of common stock under the ESPP at a price of $22.40 during the nine months ended September 30, 2011. As of September 28, 2012, 3.2 million shares were available for future issuance under the ESPP.


VALUATION AND EXPENSE INFORMATION

The assumptions used to estimate the fair value of ESPP, RSUs and PRSUs were as follows:


16


 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28,
2012
 
September 30,
2011
 
September 28,
2012
 
September 30,
2011
 
 
 
 
 
 
 
 
 
ESPP purchase rights:
 
 
 
 
 
 
 
 
Expected term (in years)
 

 

 
1.0

 
0.8

Expected stock price volatility
 

 

 
39.1
%
 
34.5
%
Risk-free interest rate
 

 

 
0.2
%
 
0.2
%
Dividend yield
 

 

 
0.9
%
 
0.5
%
Weighted-average estimated fair value
 
$

 
$

 
$
10.54

 
$
12.88

 
 
 
 
 
 
 
 
 
RSUs and PRSUs:
 
 
 
 
 
 
 
 
Risk-free interest rate
 
0.3
%
 
0.5
%
 
0.3
%
 
0.6
%
Dividend yield
 
1.1
%
 
0.8
%
 
1.0
%
 
0.7
%
Weighted-average estimated fair value
 
$
35.68

 
$
41.50

 
$
33.52

 
$
41.71


In addition, we apply an expected forfeiture rate when amortizing stock-based compensation expense. Our stock-based compensation expense included in the consolidated statements of comprehensive income for the three and nine months ended September 28, 2012 and September 30, 2011 was as follows:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 28,
2012
 
September 30,
2011
 
September 28,
2012
 
September 30,
2011
 
 
 
 
 
 
 
 
 
Cost of sales
 
$
492

 
$
450

 
$
1,416

 
$
1,200

Research and development expense
 
11,065

 
9,923

 
31,393

 
26,393

Selling, general, and administrative expense
 
13,033

 
12,178

 
37,981

 
32,390

Pre-tax stock-based compensation expense
 
24,590

 
22,551

 
70,790

 
59,983

Less: income tax benefit
 
(6,606
)
 
(5,907
)
 
(18,412
)
 
(16,210
)
Net stock-based compensation expense
 
$
17,984

 
$
16,644

 
$
52,378

 
$
43,773


No stock-based compensation was capitalized during any period presented above. As of September 28, 2012, unrecognized stock-based compensation cost related to outstanding unvested stock options, RSUs, PRSUs and ESPP shares that are expected to vest was approximately $181.3 million. This unrecognized stock-based compensation cost is expected to be recognized over a weighted average period of approximately 2.6 years. To the extent the actual forfeiture rate is different from what we have anticipated, stock-based compensation related to these awards will be different from that presented.


Note 13 — Income Taxes

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

17



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

On August 15, 2012, the case for the 2004 tax year was combined with that for the 2005 through 2007 tax years. The case is currently scheduled for trial in March 2013. 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, cash flows 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), Ireland, Malaysia, Japan, United Kingdom and the state of California. We believe we have made adequate tax payments and/or accrued adequate amounts such that the outcome of these audits will have no material adverse effect on our consolidated operating results. Due to the potential resolution of various tax examinations, and the expiration of various statutes of limitations, it is possible that our gross unrecognized tax benefits may change within the next twelve months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.

Our effective tax rate reflects the impact of a significant amount of our earnings being taxed in foreign jurisdictions at rates below the U.S. statutory tax rate.

Our effective tax rate for the three months ended September 28, 2012 was 11.3%, compared with 9.7% for the three months ended September 30, 2011. The net increase in our effective tax rate was primarily due to lower one-time tax benefits due primarily to the expiration of the statute of limitations in foreign jurisdictions in 2012 compared to 2011, partially offset by the absence of a U.S. federal research and development tax credit in 2012 due to its expiration in 2011. During the three months ended September 28, 2012, the effective tax rate includes a $3.9 million net tax benefit primarily associated with the release of liabilities for uncertain tax positions upon the expiration of foreign statutes of limitation and the reversal of the related interest accruals.

Our effective tax rate for the nine months ended September 28, 2012 was 4.0%, compared with 9.4% for the nine months ended September 30, 2011. The net decrease in our effective tax rate was primarily due to higher one-time tax benefits in 2012 compared to 2011, partially offset by the absence of a U.S. federal research and development tax credit in 2012, due to its expiration in 2011. During the nine months ended September 28, 2012, the effective tax rate includes the following net tax benefits associated with the release of liabilities for uncertain tax positions: 1) a $24.4 million net tax benefit primarily associated with the expiration of the federal statutes of limitation, the reassessment and recognition of previously unrecognized federal tax benefits, and the reversal of the related interest accruals; 2) a $6.9 million net tax benefit as a result of a Statutory Notice of Deficiency received from the IRS for 2005 to 2007; and 3) a $9.1 million net tax benefit as a result of the expiration of the statutes of limitations for certain foreign jurisdictions.

As of September 28, 2012, we had total gross unrecognized tax benefits of $263.9 million, if recognized, would impact our effective tax rate. On December 31, 2011, we had total gross unrecognized tax benefits of $284.9 million. We are unable to make a reasonable estimate as to when cash settlements with the relevant taxing authorities will occur.
    
We recognize interest and penalties related to uncertain tax positions in our income tax provision. We accrued approximately $47.6 million and $54.8 million for the payment of interest and penalties related to uncertain tax positions as of September 28, 2012 and December 31, 2011, respectively.


Note 14 — 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 28, 2012, there were 123 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 $76.7 million and $72.0 million as of September 28, 2012 and December 31, 2011, respectively.

Investment income or loss earned by the NQDC Plan is recorded as (Gain) Loss 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 (benefit) — 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 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 deferred compensation plan assets by significant investment category:
(In thousands)
 
September 28, 2012
 
December 31, 2011
 
 
 
 
 
Deferred compensation plan assets: (1)
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
Restricted cash equivalents
 
$
18,524

 
$
17,938

Equity securities
 
27,852

 
23,530

Mutual funds
 
26,895

 
25,375

Subtotal
 
73,271

 
66,843

 
 
 
 
 
Level 2:
 
 
 
 
Fixed income securities
 
3,404

 
5,136

Total
 
$
76,675

 
$
71,979

 
 
 
 
 

(1) Included in Deferred compensation plan - marketable securities and Deferred compensation plan - restricted cash equivalents in the accompanying consolidated balance sheets as of September 28, 2012 and December 31, 2011.


Note 15 — Subsequent Event

On October 15, 2012 our board of directors declared a quarterly cash dividend of $0.10 per common share, payable on December 3, 2012 to stockholders of record on November 13, 2012.

18


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

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

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

Many factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements contained in this report. These factors include, but are not limited to, those risks described in Part II Item 1A of this report and those risks described under “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2011.


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, 2011.


RESULTS OF OPERATIONS

Sales Overview

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

Our net sales of $495.0 million for the three months ended September 28, 2012, decreased by $27.5 million, or 5%, from our net sales of $522.5 million for the three months ended September 30, 2011. Our net sales of $1.3 billion for the nine months ended September 28, 2012 decreased by $263.1 million, or 16%, from our net sales of $1.6 billion for the nine months ended September 30, 2011. The decrease in net sales for  the three-month period was a result of weakened demand in Europe, Japan and Asia Pacific, partially offset by growth in North America and declines in all other vertical markets with the exception of Telecom and Wireless which exhibited modest growth.  For the nine months ended September 28, 2012, the decrease in net sales was a result of weakened demand in all geographies and vertical markets.

Net sales of new products increased as sales of 28 nm products accelerated strongly.   The net sales of FPGAs and CPLDs as a percentage of total net sales for the three-month period remained consistent with the prior year.    For the nine-month period,

19


FPGAs increased modestly as a percentage of total net sales compared with CPLDs.  For the three-month period, the Americas increased as a percentage of total net sales, partially offset by a  decline in Japan with all other geographies essentially unchanged.  For the nine-month period, Asia Pacific increased as a percentage of total net sales, partially offset by a decline in EMEA with all other geographies essentially unchanged.

Sales by Product Category

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

New Products include the Stratix® V (including GS, GT and GX), Stratix IV (including E, GX and GT), Arria® V, Arria II (including GX and GZ), Cyclone® V, Cyclone IV (including E and GX), MAX® V and HardCopy® IV devices.

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

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


Net sales by product category were as follows:
 
Three Months Ended
 
Year-
Over-
Year
Change
 
Sequential Change
 
Nine Months Ended
 
Year-
Over-
Year
Change
 
September 28,
2012
 
September 30,
2011
 
June 29,
2012
 
 
 
September 28,
2012
 
September 30,
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New
31
%
 
27
%
 
31
%
 
8
 %
 
8
%
 
29
%
 
20
%
 
16
 %
Mainstream
32
%
 
32
%
 
30
%
 
(8
)%
 
13
%
 
31
%
 
34
%
 
(23
)%
Mature and Other
37
%
 
41
%
 
39
%
 
(12
)%
 
1
%
 
40
%
 
46
%
 
(27
)%
Net Sales
100
%
 
100
%
 
100
%
 
(5
)%
 
6
%
 
100
%
 
100
%
 
(16
)%


Sales by Vertical Market

The following vertical market data is derived from data that is provided to us by our distributors and end customers. With a broad base of customers, who in some cases manufacture end products spanning multiple market segments, the assignment of net sales to a vertical market requires the use of estimates, judgment and extrapolation. As such, actual results may differ from those reported.
 
Three Months Ended
 
Year-
Over-
Year
Change
 
Sequential Change
 
Nine Months Ended
 
Year-
Over-
Year
Change
 
September 28,
2012
 
September 30,
2011
 
June 29,
2012
 
 
 
September 28,
2012
 
September 30,
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Telecom & Wireless
45
%
 
42
%
 
45
%
 
2
 %
 
7
%
 
44
%
 
43
%
 
(15
)%
Industrial Automation, Military & Automotive
20
%
 
22
%
 
19
%
 
(11
)%
 
11
%
 
21
%
 
22
%
 
(24
)%
Networking, Computer & Storage
17
%
 
20
%
 
18
%
 
(21
)%
 
5
%
 
17
%
 
17
%
 
(13
)%
Other
18
%
 
16
%
 
18
%
 
3
 %
 
3
%
 
18
%
 
18
%
 
(13
)%
Net Sales
100
%
 
100
%
 
100
%
 
(5
)%
 
6
%
 
100
%
 
100
%
 
(16
)%




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Sales of FPGAs and CPLDs

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

Our net sales of FPGAs, CPLDs, and Other Products were as follows:
 
Three Months Ended
 
Year-
Over-
Year
Change
 
Sequential Change
 
Nine Months Ended
 
Year-
Over-
Year
Change
 
September 28,
2012
 
September 30,
2011
 
June 29,
2012
 
 
 
September 28,
2012
 
September 30,
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FPGA
82
%
 
82
%
 
85
%
 
(5
)%
 
4
%
 
83
%
 
81
%
 
(14
)%
CPLD
9
%
 
9
%
 
9
%
 
(9
)%
 
4
%
 
9
%
 
10
%
 
(24
)%
Other Products
9
%
 
9
%
 
6
%
 
(6
)%
 
45
%
 
8
%
 
9
%
 
(29
)%
Net Sales
100
%
 
100
%
 
100
%
 
(5
)%
 
6
%
 
100
%
 
100
%
 
(16
)%


Sales by Geography

The following table is based on the geographic location of the original equipment manufacturers or the distributors who purchased our products. The geographic location of distributors may be different from the geographic location of the ultimate end users.

Net sales by geography were as follows:
 
Three Months Ended
 
Year-
Over-
Year
Change
 
Sequential Change
 
Nine Months Ended
 
Year-
Over-
Year
Change
 
September 28,
2012
 
September 30,
2011
 
June 29,
2012
 
 
 
September 28,
2012
 
September 30,
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
19
%
 
16
%
 
17
%
 
6
 %
 
15
 %
 
18
%
 
19
%
 
(20
)%
Asia Pacific
43
%
 
44
%
 
46
%
 
(6
)%
 
1
 %
 
44
%
 
41
%
 
(10
)%
EMEA
25
%
 
25
%
 
23
%
 
(5
)%
 
18
 %
 
24
%
 
26
%
 
(23
)%
Japan
13
%
 
15
%
 
14
%
 
(16
)%
 
(4
)%
 
14