Edgar Filing: ALTERA CORP

Altera_2014Q1_10-Q

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 March 28, 2014



[ ]	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 April 10, 2014: 313,256,406



	PAGE NUMBER

PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements (Unaudited)

Consolidated Balance Sheets	3

Consolidated Statements of Comprehensive Income	5

Consolidated Statements of Cash Flows	6

Notes to Consolidated Financial Statements	7

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	22

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	32

ITEM 4. Controls and Procedures	33

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings	33

ITEM 1A. Risk Factors	33

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	34

ITEM 6. Exhibits	35

Signatures	36

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PART I FINANCIAL INFORMATION


ITEM 1:	Financial Statements

ALTERA CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)



(In thousands, except par value amount)	March 28, 2014			December 31, 2013
Assets
Current assets:
Cash and cash equivalents	$	2,752,111		$	2,869,158
Short-term investments	157,136			141,487
Total cash, cash equivalents, and short-term investments	2,909,247			3,010,645
Accounts receivable, net	443,409			483,032
Inventories	158,137			163,880
Deferred income taxes — current	60,209			63,228
Deferred compensation plan — marketable securities	65,646			66,455
Deferred compensation plan — restricted cash equivalents	19,636			16,699
Other current assets	50,535			48,901
Total current assets	3,706,819			3,852,840
Property and equipment, net	198,266			204,142
Long-term investments	1,718,237			1,695,066
Deferred income taxes — non-current	18,422			10,806
Goodwill	74,341			73,968
Acquisition-related intangible assets, net	79,685			82,150
Other assets, net	77,280			76,676
Total assets	$	5,873,050		$	5,995,648
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	35,997		$	44,163
Accrued liabilities	42,814			41,218
Accrued compensation and related liabilities	49,838			51,105
Deferred compensation plan obligations	85,282			83,154
Deferred income and allowances on sales to distributors	414,519			487,746
Total current liabilities	628,450			707,386
Income taxes payable — non-current	286,603			276,326
Long-term debt	1,491,789			1,491,466
Other non-current liabilities	8,295			8,403
Total liabilities	2,415,137			2,483,581
Commitments and contingencies
(See “Note 14 — Commitments and Contingencies”)
Stockholders' equity:
Common stock: $.001 par value; 1,000,000 shares authorized; outstanding - 313,609 shares at March 28, 2014 and 317,769 shares at December 31, 2013	314			318
Capital in excess of par value	1,197,456			1,216,826
Retained earnings	2,275,589			2,322,885
Accumulated other comprehensive loss	(15,446		)	(27,962		)
Total stockholders' equity	3,457,913			3,512,067
Total liabilities and stockholders' equity	$	5,873,050		$	5,995,648

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See accompanying notes to consolidated financial statements.

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ALTERA CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended
(In thousands, except per share amounts)	March 28, 2014			March 29, 2013
Net sales	$	461,092		$	410,501
Cost of sales	151,868			126,083
Gross margin	309,224			284,418
Research and development expense	97,657			87,717
Selling, general, and administrative expense	74,507			78,600
Amortization of acquisition-related intangible assets	2,465			213
Compensation expense — deferred compensation plan	1,454			3,422
Gain on deferred compensation plan securities	(1,454		)	(3,422		)
Interest income and other	(5,985		)	(1,659		)
Gain reclassified from other comprehensive income	(48		)	(54		)
Interest expense	10,488			2,465
Income before income taxes	130,140			117,136
Income tax expense/(benefit)	13,626			(3,053		)
Net income	116,514			120,189

Other comprehensive income/(loss):
Unrealized holding gain/(loss) on investments:
Unrealized holding gain/(loss) on investments arising during period, net of tax of $24 and ($5)	12,560			(1		)
Less: Reclassification adjustments for gain on investments included in net income, net of tax of $4 and $5	(44		)	(49		)
Other comprehensive income/(loss)	12,516			(50		)
Comprehensive income	$	129,030		$	120,139

Net income per share:
Basic	$	0.37		$	0.38
Diluted	$	0.37		$	0.37

Shares used in computing per share amounts:
Basic	316,552			319,867
Diluted	318,901			323,021

Dividends per common share	$	0.15		$	0.10

See accompanying notes to consolidated financial statements.

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ALTERA CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



	Three Months Ended
	March 28, 2014			March 29, 2013

Cash Flows from Operating Activities:
Net income	$	116,514		$	120,189
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	14,628			11,161
Amortization of acquisition-related intangible assets	2,465			213
Amortization of debt discount and debt issuance costs	779			281
Stock-based compensation	23,347			22,242
Net gain on sale of available-for-sale securities	(48		)	—
Amortization of investment discount/premium	685			—
Deferred income tax expense/(benefit)	9,211			(15,606		)
Tax effect of employee stock plans	(217		)	861
Excess tax benefit from employee stock plans	(326		)	(741		)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable, net	39,623			(42,709		)
Inventories	5,743			13,439
Other assets	(3,992		)	13,036
Accounts payable and other liabilities	(3,425		)	(9,660		)
Deferred income and allowances on sales to distributors	(73,227		)	36,649
Income taxes payable	(2,004		)	6,239
Deferred compensation plan obligations	674			(6,116		)
Net cash provided by operating activities	130,430			149,478
Cash Flows from Investing Activities:
Purchases of property and equipment	(12,622		)	(14,586		)
(Purchases)/sales of deferred compensation plan securities, net	(674		)	6,116
Purchases of available-for-sale securities	(103,982		)	(121,111		)
Proceeds from sale of available-for-sale securities	35,562			48,978
Proceeds from maturity of available-for-sale securities	41,548			34,416
Purchase of other investments	—			(176		)
Net cash used in investing activities	(40,168		)	(46,363		)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock through stock plans	6,082			8,442
Shares withheld for employee taxes	(3,048		)	(3,360		)
Payment of dividends to stockholders	(47,554		)	(31,978		)
Long-term debt and credit facility issuance costs	(1,321		)	—
Repurchases of common stock	(161,794		)	—
Excess tax benefit from employee stock plans	326			741
Net cash used in financing activities	(207,309		)	(26,155		)
Net (decrease)/increase in cash and cash equivalents	(117,047		)	76,960
Cash and cash equivalents at beginning of period	2,869,158			2,876,627
Cash and cash equivalents at end of period	$	2,752,111		$	2,953,587

See accompanying notes to consolidated financial statements.

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ALTERA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Organization and Basis of Presentation

The accompanying unaudited consolidated financial statements of Altera Corporation and its subsidiaries, collectively referred to herein as “Altera”, “we”, “us”, or “our”, have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. This financial information reflects all adjustments which are, in the opinion of our management, of a normal recurring nature and necessary for a fair statement of the results for the periods presented. The December 31, 2013 consolidated balance sheet data was derived from our audited consolidated financial statements included in our 2013 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC”), but does not include all disclosures required by U.S. GAAP. The consolidated financial statements include our accounts as well as those of our wholly-owned subsidiaries after elimination of all significant inter-company balances and transactions.

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

These consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2013 included in our Annual Report on Form 10-K. The consolidated operating results for the three months ended March 28, 2014 are not necessarily indicative of the results to be expected for any future period.

Certain prior year amounts in the consolidated financial statements and the notes thereto have been reclassified to conform to the current year presentation. Except for the balance sheet reclassification discussed further in Note 2, these reclassifications did not affect the prior period total assets, total liabilities, stockholders' equity, net income or net cash provided by operating activities.

Note 2 — Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, “Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This standard requires an entity to present unrecognized tax benefits as a reduction to deferred tax assets when a net operating loss carryforward, similar tax loss or a tax credit carryforward exists, with limited exceptions. We adopted this requirement in the first quarter of 2014 with retrospective application as permitted by the standard. Amounts presented in prior periods have been reclassified to conform. This resulted in both Income taxes payable—non-current and Deferred income taxes—non-current declining by approximately $10.9 million and $14.2 million on our consolidated balance sheets as of March 28, 2014 and December 31, 2013, respectively.

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Note 3 — Acquisitions

During the year ended December 31, 2013, we completed two acquisitions (collectively the "2013 Acquisitions") qualifying as business combinations in exchange for aggregate net cash consideration of $145.3 million, net of cash acquired. Substantially all of the consideration was allocated to Goodwill and Acquisition-related intangible assets, net. For information on the goodwill arising from these acquisitions, see Note 4 — Goodwill and for information on the classification of intangible assets, see Note 5 — Acquisition-Related Intangible Assets, Net. In connection with one of these acquisitions, we assumed debt of $22.0 million, which was paid off in full immediately following the closing of the acquisition. We had no outstanding debt as of March 28, 2014 relating to these acquisitions. These acquisitions, both individually and in the aggregate, were not significant to our consolidated results of operations.

As of March 28, 2014, we had not yet finalized the valuation of the deferred tax assets in connection with the 2013 Acquisitions. The finalization of these amounts is not expected to have a material effect on our consolidated financial position.

Note 4 — Goodwill

Goodwill activity was as follows:



	Three Months Ended
(In thousands)	March 28, 2014
Beginning Balance	$	73,968
Additions due to 2013 Acquisitions	373
Ending Balance	$	74,341

Goodwill increased $0.4 million during the three months ended March 28, 2014 due to a revision in the historical net operating loss carryforwards for one of our 2013 Acquisitions. Goodwill is tested for impairment annually during the fourth quarter unless a triggering event would require an expedited analysis. Adverse changes in operating results and/or unfavorable changes in economic factors used to estimate fair value could result in a non-cash impairment charge in the future.

Note 5 — Acquisition-Related Intangible Assets, Net

Acquisition-related intangible assets, net were as follows:



	March 28, 2014
(In thousands)	Gross Assets		Accumulated Amortization			Net		Weighted-Average Amortization Period
Developed technology	$	67,670	$	(6,236	)	$	61,434	9.4 years
Customer relationships	12,910		(2,071		)	10,839		6.8 years
Trade name	3,700		(357		)	3,343		8.9 years
Non-competition agreements	700		(300		)	400		2.0 years
Other intangible assets	930		(761		)	169		1.2 years
Acquisition-related intangible assets, net subject to amortization	85,910		(9,725		)	76,185
In-process research & development	3,500		—			3,500
Total acquisition-related intangible assets, net	$	89,410	$	(9,725	)	$	79,685

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	December 31, 2013
(In thousands)	Gross Assets		Accumulated Amortization			Net		Weighted-Average Amortization Period
Developed technology	$	60,770	$	(4,445	)	$	56,325	9.4 years
Customer relationships	12,910		(1,597		)	11,313		6.8 years
Trade name	3,700		(253		)	3,447		8.9 years
Non-competition agreements	700		(213		)	487		2.0 years
Other intangible assets	930		(752		)	178		1.2 years
Acquisition-related intangible assets subject to amortization, net	79,010		(7,260		)	71,750
In-process research & development	10,400		—			10,400
Total acquisition-related intangible assets, net	$	89,410	$	(7,260	)	$	82,150

In-process research & development ("IPR&D") assets represent the fair value of incomplete research and development projects that had not reached technological feasibility as of the date of acquisition. In 2013, we capitalized IPR&D of $28.1 million related to the 2013 Acquisitions. Initially, these assets are classified as indefinite-lived intangible assets that are not subject to amortization. IPR&D assets related to projects that have been completed are transfered to the developed technology intangible asset to begin amortization, while IPR&D assets related to abandoned projects are impaired and expensed to research and development expense in the consolidated statements of comprehensive income. During the three months ended March 28, 2014, we reclassified $6.9 million of IPR&D costs to the developed technology intangible asset upon finalization of one of the projects. No projects were abandoned. The remaining IPR&D project that made up the IPR&D intangible asset balance as of March 28, 2014 is expected to be completed by the end of 2014.

Based on the carrying values as of March 28, 2014, the annual amortization expense for acquisition-related intangible assets, net is expected to be as follows:



Fiscal Year	Amortization Expense
	(In thousands)
2014 (remaining nine months)	$	7,394
2015	9,646
2016	9,327
2017	9,151
2018	9,039
Thereafter	31,628
Total	$	76,185

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Note 6 — Financial Instruments

Cash, Cash Equivalents and Marketable Securities

The following tables summarize our cash and available-for-sale securities by significant investment category.



	March 28, 2014
(In thousands)	Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short-Term Marketable Securities		Long-Term Marketable Securities

Cash	$	69,655	$	—	$	—		$	69,655	$	69,655	$	—	$	—

Available-for-sale:
Level 1:
Money market funds	2,672,956		—		—			2,672,956		2,672,956		—		—
U.S. treasury securities	1,611,928		26		(15,845		)	1,596,109		9,500		63,624		1,522,985
Subtotal	4,284,884		26		(15,845		)	4,269,065		2,682,456		63,624		1,522,985

Level 2:
U.S. agency securities	54,624		23		(25		)	54,622		—		27,152		27,470
Non-U.S. government securities	15,818		4		—			15,822		—		11,784		4,038
Municipal bond	2,000		—		(3		)	1,997		—		—		1,997
Corporate debt securities	215,881		512		(70		)	216,323		—		54,576		161,747
Subtotal	288,323		539		(98		)	288,764		—		93,512		195,252
Total	$	4,642,862	$	565	$	(15,943	)	$	4,627,484	$	2,752,111	$	157,136	$	1,718,237

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

Cash	$	71,880	$	—	$	—		$	71,880	$	71,880	$	—	$	—

Available-for-sale:
Level 1:
Money market funds	2,763,094		—		—			2,763,094		2,763,094		—		—
U.S. treasury securities	1,604,450		15		(28,298		)	1,576,167		34,184		39,262		1,502,721
Subtotal	4,367,544		15		(28,298		)	4,339,261		2,797,278		39,262		1,502,721

Level 2:
U.S. agency securities	53,755		33		(18		)	53,770		—		26,999		26,771
Non-U.S. government securities	18,352		5		—			18,357		—		9,306		9,051
Municipal bond	2,603		—		(7		)	2,596		—		603		1,993
Corporate debt securities	219,491		425		(69		)	219,847		—		65,317		154,530
Subtotal	294,201		463		(94		)	294,570		—		102,225		192,345
Total	$	4,733,625	$	478	$	(28,392	)	$	4,705,711	$	2,869,158	$	141,487	$	1,695,066

We have made certain cost method investments of approximately $12.4 million. These investments are included within Other assets, net in our consolidated balance sheets. The investments are in privately held companies in which we have less than a 20% interest and no significant influence over the investees' operations. We report our cost method investments at cost, except when investments are found to be more than temporarily impaired after an impairment review.

The adjusted cost and estimated fair value of marketable debt securities (corporate debt securities, municipal bonds, U.S. and foreign government securities, and U.S. treasury securities) as of March 28, 2014, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.



	March 28, 2014
(In thousands)	Cost		Estimated Fair Value
Due in one year or less	$	166,559	$	166,636
Due after one year through five years	1,733,692		1,718,237
	$	1,900,251	$	1,884,873

As of March 28, 2014, we had 127 securities or $1.6 billion out of our total available-for-sale securities investment portfolio that were in a continuous unrealized loss position for less than 12 months with a gross unrealized loss of $15.9 million. As of December 31, 2013, we had 137 securities or $1.6 billion out of our total available-for-sale securities investment portfolio that were in a continuous unrealized loss position for less than 12 months with a gross unrealized loss of $28.4 million.

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

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Note 7 — Accounts Receivable, Net and Significant Customers

Accounts receivable, net was comprised of the following:



(In thousands)	March 28, 2014			December 31, 2013
Gross accounts receivable	$	443,959		$	483,628
Allowance for doubtful accounts	(500		)	(500		)
Allowance for sales returns	(50		)	(96		)
Accounts receivable, net	$	443,409		$	483,032

We sell our products to original equipment manufacturers ("OEMs") and to electronic components distributors who resell these products to OEMs, or their subcontract manufacturers. Net sales by customer type and net sales to significant customers were as follows:



	Three Months Ended
(Percentage of Net Sales)	March 28, 2014		March 29, 2013

Sales to distributors	74	%	76	%
Sales to OEMs	26	%	24	%
	100	%	100	%

Significant Distributors⁽¹⁾:
Arrow Electronics, Inc. ( “Arrow”)	38	%	43	%
Macnica, Inc. (“Macnica”)	24	%	23	%


(1)	Except as presented above, no other distributor accounted for greater than 10% of our net sales for the three months ended March 28, 2014 or March 29, 2013.

For the quarterly periods ended March 28, 2014 and March 29, 2013, one OEM accounted for 11% and 13%, respectively, of our net sales.

As of March 28, 2014, accounts receivable from Arrow and Macnica individually accounted for approximately 32% and 54%, respectively, of our total accounts receivable. As of December 31, 2013, accounts receivable from Arrow and Macnica individually accounted for approximately 26% and 55%, respectively, of our total accounts receivable. No other distributor or OEM accounted for more than 10% of our accounts receivable as of March 28, 2014 or December 31, 2013.

Note 8 — Inventories

Inventories were comprised of the following:



(In thousands)	March 28, 2014		December 31, 2013
Raw materials	$	5,787	$	8,390
Work in process	99,306		104,755
Finished goods	53,044		50,735
Total inventories	$	158,137	$	163,880

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Note 9 — Property and Equipment, Net

Property and equipment, net was comprised of the following:



(In thousands)	March 28, 2014			December 31, 2013
Land and land rights	$	23,157		$	23,157
Buildings	159,845			159,123
Equipment and software	282,283			281,197
Office furniture and fixtures	24,490			24,438
Leasehold improvements	12,600			12,391
Construction in progress	2,755			1,798
Property and equipment, at cost	505,130			502,104
Accumulated depreciation	(306,864		)	(297,962		)
Property and equipment, net	$	198,266		$	204,142

Depreciation expense was $13.0 million and $10.2 million for the three months ended March 28, 2014 and March 29, 2013, respectively. Depreciation and amortization expense as presented in our consolidated statements of cash flows includes the above amounts, together with amortization expense on our non-acquisition related intangible assets.

Note 10 — Deferred Income and Allowances on Sales to Distributors

Deferred income and allowances on sales to distributors was comprised of the following:



(In thousands)	March 28, 2014			December 31, 2013

Deferred revenue on shipment to distributors	$	439,994		$	512,872
Deferred cost of sales on shipment to distributors	(32,828		)	(33,809		)
Deferred income on shipment to distributors	407,166			479,063
Other deferred revenue ⁽¹⁾	7,353			8,683
Total	$	414,519		$	487,746


(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:



	Three Months Ended
(In thousands)	March 28, 2014			March 29, 2013

Balance at beginning of period	$	487,746		$	345,993
Deferred revenue recognized upon shipment to distributors	1,354,597			1,535,965
Deferred cost of sales recognized upon shipment to distributors	(66,527		)	(58,008		)
Revenue recognized upon sell-through to end customers	(277,671		)	(250,048		)
Cost of sales recognized upon sell-through to end customers	66,733			59,479
Earned distributor price concessions ⁽¹⁾	(1,137,745		)	(1,226,899		)
Returns	(11,163		)	(23,244		)
Other	(1,451		)	(596		)
Balance at end of period	$	414,519		$	382,642

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(1)	Average aggregate price concessions typically range from 70% to 85% of our list price on an annual basis, depending upon the composition of our sales, volumes and factors associated with timing of shipments to distributors.

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

Note 11 — Accumulated Other Comprehensive Loss

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



(In thousands)	December 31, 2013			Other Comprehensive Income		March 28, 2014

Accumulated unrealized loss on available-for-sale securities, net of tax	$	(27,962	)	$	12,516	$	(15,446	)
Accumulated other comprehensive loss	$	(27,962	)	$	12,516	$	(15,446	)

Note 12 — Income Per Share

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



	Three Months Ended
(In thousands, except per share amounts)	March 28, 2014		March 29, 2013

Basic:

Net income	$	116,514	$	120,189
Basic weighted shares outstanding	316,552		319,867
Net income per share	$	0.37	$	0.38

Diluted:

Net income	$	116,514	$	120,189

Weighted shares outstanding	316,552		319,867
Effect of dilutive securities:
Stock options, employee stock purchase plan, and restricted stock unit shares	2,349		3,154

Diluted weighted shares outstanding	318,901		323,021

Net income per share	$	0.37	$	0.37

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In applying the treasury stock method, we excluded 1.9 million and 1.6 million stock option shares and restricted stock unit (including performance-based restricted stock unit) shares for the three months ended March 28, 2014 and March 29, 2013, respectively, because their effect was anti-dilutive. While these shares have been anti-dilutive, they could be dilutive in the future.

Note 13 — Credit Facility and Long-Term Debt

Credit Facility

In 2012, we entered into a five-year $250 million unsecured revolving credit facility (the "Facility"). Under certain circumstances, upon our request and with the consent of the lenders, the commitments under the Facility may be increased up to an additional $250 million. Borrowings under the Facility will bear interest at a base rate determined in accordance with the Facility, plus an applicable margin based upon the debt rating of our non-credit enhanced, senior unsecured long-term debt. In addition, we are obligated to pay a quarterly commitment fee, payable in arrears, based on the available commitments. This Facility fee varies and is also determined based on our debt rating. The terms of the Facility require compliance with certain financial and non-financial covenants, which we had satisfied as of March 28, 2014. As of March 28, 2014, 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	March 28, 2014		December 31, 2013

2013 Senior Notes due November 15, 2018 at 2.50%	2.71%	$	597,080	$	596,920
2013 Senior Notes due November 15, 2023 at 4.10%	4.29%	395,181		395,056
2012 Senior Notes due May 15, 2017 at 1.75%	1.94%	499,528		499,490
Total long-term debt		$	1,491,789	$	1,491,466

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

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

All three of our senior notes (the “Notes”) pay a fixed rate of interest semiannually on May 15 and November 15 of each year. The Notes are governed by a base and supplemental indenture between Altera and U.S. Bank National Association, as trustee. The Notes are unsecured and unsubordinated obligations, ranking equally in right of payment to all of our existing and future unsecured and unsubordinated indebtedness and senior in right of payment to any of our future indebtedness that is expressly subordinated to the Notes. We may redeem the Notes, in whole or in part, at any time and from time to time for cash at the redemption prices described in the indentures.

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

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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)	Mar. 28, 2014			Dec. 31, 2013			Mar. 28, 2014			Dec. 31, 2013			Mar. 28, 2014			Dec. 31, 2013

Principal amount	$	600,000		$	600,000		$	400,000		$	400,000		$	500,000		$	500,000
Unamortized discount	(2,920		)	(3,080		)	(4,819		)	(4,944		)	(472		)	(510		)
Net carrying value	$	597,080		$	596,920		$	395,181		$	395,056		$	499,528		$	499,490

Interest expense related to the Notes were included in Interest expense in the consolidated statements of comprehensive income as follows:



	Three Months Ended
(In thousands)	March 28, 2014		March 29, 2013

Contractual coupon interest	$	9,652	$	2,127
Amortization of debt issuance costs	456		243
Amortization of debt discount	323		38
Total interest expense related to the Notes	$	10,431	$	2,408

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

As of December 31, 2013, future principal payments for the Notes were as follows:



Fiscal Year	Payable
	(In thousands)
2014 (remaining nine months)	$	—
2015	—
2016	—
2017	500,000
2018 and thereafter	1,000,000
Total	$	1,500,000

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



	2.50% Notes				4.10% Notes				1.75% Notes
(In thousands)	Mar. 28, 2014		Dec. 31, 2013		Mar. 28, 2014		Dec. 31, 2013		Mar. 28, 2014		Dec. 31, 2013

Estimated fair value	$	602,370	$	598,836	$	405,328	$	392,680	$	503,721	$	501,310

Note 14 — Commitments and Contingencies

Indemnification and Product Warranty

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

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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 March 28, 2014, we had approximately $169.1 million of outstanding purchase commitments to such subcontractors. We expect to receive and pay for these materials and services over the next six months.

Operating Leases

We lease facilities under non-cancelable lease agreements expiring at various times through 2024. There have been no significant changes to our operating lease obligations since December 31, 2013.

Legal Proceedings

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 two Notices respectively, in the U.S. Tax Court. The petitions request redetermination of the deficiencies produced by the IRS’s adjustments. The IRS has filed responses to our petitions, in which the IRS conceded the R&D credit adjustment for 2004. The Tax Court has consolidated the two cases and a judge has been assigned. The federal statute of limitations for the 2002 and 2003 tax years has expired, and the ongoing Tax Court litigation concerns only the 2004 through 2007 years.

On January 31, 2013, the IRS conceded one of the adjustments at issue in the litigation for the 2004 through 2007 tax years. The conceded adjustment related to certain inter-company services transactions. The concession only impacted our 2007 tax year. As a result of this concession, we recognized a tax and interest benefit of $6.8 million in 2013 due to the release of certain tax reserves. Altera and the IRS have filed cross motions for partial summary judgment on the largest adjustment still at issue, which is related to the treatment of stock-based compensation in an inter-company cost-sharing transaction. As part of the partial motion for summary judgment process, both sides filed briefs on May 28, 2013, July 25, 2013 and September 9, 2013. We expect to present additional legal arguments related to certain affirmative adjustments raised by Altera in the litigation. The parties filed a Joint Status Report addressing these affirmative adjustments with the Tax Court on February 5, 2014. The parties expect to file another Joint Status Report in June 2014. We believe we have made adequate tax payments or accrued adequate amounts for our tax liabilities for 2004 through 2007 and that the outcome of the above matters will not have a material adverse effect on our consolidated operating results or financial position.

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

Note 15 — Stock-Based Compensation

Our equity incentive program is a broad-based, long-term retention program intended to attract, motivate, and retain talented employees as well as align stockholder and employee interests. The program provides stock-based incentive compensation (“awards”) to both our eligible employees and non-employee directors. Awards that may be granted under the program include non-qualified and incentive stock options, restricted stock units (“RSU”s), performance-based restricted stock units (“PRSU”s),

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restricted stock awards, stock appreciation rights, and stock bonus awards. To date, awards granted under the program consist of stock options, RSUs and PRSUs. The majority of stock-based awards granted under the program vest over four years. Stock options granted under the program have a maximum contractual term of ten years.

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

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

Stock-based compensation expense included in our consolidated statements of comprehensive income was as follows:



	Three Months Ended
(In thousands)	March 28, 2014			March 29, 2013

Cost of sales	$	467		$	445
Research and development expense	10,273			9,786
Selling, general, and administrative expense	12,607			12,011
Pre-tax stock-based compensation expense	23,347			22,242
Less: income tax benefit	(6,194		)	(5,678		)
Net stock-based compensation expense	$	17,153		$	16,564

No stock-based compensation was capitalized during any period presented above. As of March 28, 2014, unrecognized stock-based compensation cost related to outstanding unvested stock options, RSUs, PRSUs and Employee Stock Purchase Plan ("ESPP") shares that are expected to vest was approximately $136.9 million. This unrecognized stock-based compensation cost is expected to be recognized over a weighted average period of approximately 2.2 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 RSUs granted under the equity incentive program were as follows:



	Three Months Ended
	March 28, 2014			March 29, 2013
RSUs:
Risk-free interest rate	0.6		%	0.4		%
Dividend yield	1.9		%	1.2		%
Weighted-average estimated fair value	$	30.40		$	32.52

On May 6, 2013 and July 30, 2012, we granted 260,537 and 66,489 market-based PRSUs, respectively, to senior executives. As of March 28, 2014, the majority of these market-based PRSUs are still outstanding, and no market-based PRSUs have vested. For market-based PRSU grants made on May 6, 2013 and July 30, 2012, the weighted average grant date fair value was $33.03 and $41.18, respectively.

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A summary of activity for our RSUs and PRSUs for the three months ended March 28, 2014 and information regarding RSUs and PRSUs outstanding and expected to vest as of March 28, 2014 is as follows:



(In thousands, except per share amounts and terms)	Number of Shares		Weighted-Average Grant-Date Fair Market Value Per Share		Weighted-Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value ⁽¹⁾
Outstanding, December 31, 2013	6,392		$	34.80
Grants	115		$	31.88
Vested	(231	)	$	37.96
Forfeited	(115	)	$	34.94
Outstanding, March 28, 2014	6,161		$	34.63	1.3	$	218,402
Vested and expected to vest, March 28, 2014	5,543		$	34.63	1.2	$	196,496


(1)	Aggregate intrinsic value represents the closing price per share of our stock on March 28, 2014, multiplied by the number of RSUs and market-based PRSUs outstanding or vested and expected to vest as of March 28, 2014.

A summary of stock option activity for the three months ended March 28, 2014 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of March 28, 2014 is as follows:



(In thousands, except per share amounts and terms)	Number of Shares		Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value ⁽¹⁾
Outstanding, December 31, 2013	3,446		$	28.11
Grants	—		$	—
Exercises	(298	)	$	20.44
Forfeited/Cancelled/Expired	(13	)	$	13.97
Outstanding, March 28, 2014	3,135		$	28.90	4.53	$	26,180
Exercisable, March 28, 2014	2,248		$	26.10	3.24	$	24,507
Vested and expected to vest, March 28, 2014	3,055		$	28.73	4.44	$	26,023


(1)	For those stock options with an exercise price below the closing price per share on March 28, 2014, aggregate intrinsic value represents the difference between the exercise price and the closing price per share of our common stock on March 28, 2014, multiplied by the number of stock options outstanding, exercisable, or vested and expected to vest as of March 28, 2014.

For the three months ended March 28, 2014, 0.3 million non-qualified stock option shares were exercised. The total intrinsic value of stock options exercised for the three months ended March 28, 2014 was $4.1 million. The aggregate intrinsic value represents the difference between the exercise price and the selling price received by option holders upon the exercise of stock options during the period. The total cash received from employees as a result of stock option exercises during the three months ended March 28, 2014 was $6.1 million.

As of March 28, 2014, our 2005 Equity Incentive Plan had a total of 27.8 million shares reserved for future issuance, of which 18.8 million shares were available for future grants.

ESPP

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

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There were no shares sold to the employee under the ESPP during the three months ended March 28, 2014, and March 29, 2013. As of March 28, 2014, 3.1 million shares were available for future issuance under the ESPP.

Note 16 — Stockholders’ Equity

We repurchase shares under our stock purchase program announced on July 15, 1996, which has no specified expiration. No existing repurchase plans or programs have expired, nor have we decided to terminate any repurchase plans or programs prior to expiration. In 2013, we announced that our board of directors increased the share repurchase program authorization by an additional 30.0 million shares. Combined with the board’s previous authorization, there was a total of 233.0 million shares authorized for repurchase with approximately 32.2 million shares remaining for further repurchases under our stock repurchase program as of March 28, 2014. Since the inception of the stock purchase program through March 28, 2014, we have repurchased a total of 201.0 million shares of our common stock for an aggregate cost of $4.4 billion.

During the three months ended March 28, 2014, we repurchased 4.6 million shares of our common stock for a total of $161.8 million under our stock repurchase program at an average price per share of $35.16. All shares were retired upon acquisition and have been recorded as a reduction of Common stock, Capital in excess of par value and Retained earnings, as applicable.

Note 17 — Income Taxes

We file income tax returns with the IRS and in various U.S. states and foreign jurisdictions. On December 8, 2011 and January 23, 2012, the IRS issued Statutory Notices of Deficiency (the “Notices”) determining, respectively, additional taxes for 2002 through 2004 of $19.8 million and additional taxes for 2005 through 2007 of $21.4 million, excluding interest. The IRS’s determinations relate primarily to inter-company transactions, computational adjustments to the R&D credit and reductions to the benefits of tax credit carry backs and carry forwards. We deposited $18.0 million as a cash bond with the IRS in 2008, and converted this amount to tax payments in March 2012. On March 6, 2012 and April 20, 2012, we filed petitions challenging the two Notices respectively, in the U.S. Tax Court. The petitions request redetermination of the deficiencies produced by the IRS’s adjustments. The IRS has filed responses to our petitions, in which the IRS conceded the R&D credit adjustment for 2004. The Tax Court has consolidated the two cases and a judge has been assigned. The federal statute of limitations for the 2002 and 2003 tax years has expired, and the ongoing Tax Court litigation concerns only the 2004 through 2007 years.

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

Our effective tax rate reflects the impact of a significant amount of our earnings being taxed in foreign jurisdictions at rates below the U.S. statutory tax rate. Our effective tax rate for the three months ended March 28, 2014 was 10.5% compared to -2.6% for the three months ended March 29, 2013. The increase in our effective tax rate was primarily due to lower one-time tax benefits in 2014 compared to the same period in 2013, and the expiration of the US federal research and development tax credit for 2014.

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The U.S. federal research and development tax credit has not been extended beyond 2013. During the three months ended March 28, 2014, we reversed $4.0 million of liabilities and the related interest for uncertain tax positions upon the expiration of 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. During the three months ended March 29, 2013, we recognized a benefit of $10.6 million resulting from the enactment of the American Taxpayer Relief Act in January 2013, which extended retroactively, the federal research and development credit for two years from January 1, 2012 through December 31, 2013. In addition, we reversed $6.8 million of liabilities for uncertain tax positions due to the IRS conceding an adjustment for certain 2007 inter-company transactions in our litigation over the 2004 through 2007 tax years.

As of March 28, 2014, we had total gross unrecognized tax benefits of $309.2 million which, if recognized, would potentially impact our effective tax rate. On December 31, 2013, we had total gross unrecognized tax benefits of $301.3 million. We are unable to make a reasonable estimate as to if and when cash settlements with the relevant taxing authorities may occur.

We recognize interest and penalties related to uncertain tax positions in our income tax provision. We have accrued approximately $48.7 million and $48.8 million for the payment of interest and penalties related to uncertain tax positions as of March 28, 2014 and December 31, 2013, respectively.

During the fourth quarter of fiscal 2013 we recorded a deferred charge for the deferral of income tax expense on intercompany profits that resulted from the sale of our newly acquired intellectual property rights from an Altera U.S. entity to one of our foreign subsidiaries. The deferred charge is included in Other current assets and Other assets, net on our consolidated balance sheets. As of March 28, 2014, the deferred charge balance in Other current assets was $2.2 million, and $18.4 million in Other assets, net. The deferred charge will be amortized on a straight-line basis as a component of income tax expense over ten years, based on the economic life of the intellectual property and is not expected to have a material impact on our effective tax rate.

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

Note 18 — Non-Qualified Deferred Compensation Plan

We allow our U.S.-based officers and director-level employees to defer a portion of their compensation under the Altera Corporation Non-Qualified Deferred Compensation Plan (the “NQDC Plan”). Our Retirement Plans Committee administers the NQDC Plan. As of March 28, 2014, there were 127 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 $85.3 million and $83.2 million as of March 28, 2014 and December 31, 2013, respectively.

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

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The following tables summarize the fair value of our NQDC Plan assets by significant investment category:



(In thousands)	March 28, 2014		December 31, 2013

Deferred compensation plan assets: (1)

Level 1:
Restricted cash equivalents	$	19,636	$	16,699
Equity securities	32,969		32,628
Mutual funds	31,612		32,521
Subtotal	84,217		81,848

Level 2:
Fixed income securities	1,065		1,306
Total	$	85,282	$	83,154

(1) Included in Deferred compensation plan - marketable securities and Deferred compensation plan - restricted cash equivalents in the accompanying consolidated balance sheets as of March 28, 2014 and December 31, 2013.

Note 19 — Declaration of Dividend Subsequent to March 28, 2014

On April 21, 2014, our board of directors declared a quarterly cash dividend of $0.15 per common share, payable on June 2, 2014 to stockholders of record on May 12, 2014.


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

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

The following MD&A, as well as information contained in the risk factors described in Item 1A of this report and elsewhere in this report, contains forward-looking statements, which are provided under the “safe harbor” protection of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” “seek,” “estimate,” “continue,” or other similar words. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, uncertain events or assumptions, and other characteristics of future events or circumstances are forward-looking statements. Examples of forward-looking statements include statements regarding (1) our gross margins and factors that affect gross margins; (2) trends in our future sales; (3) our research and development expenditures and efforts; (4) our capital expenditures; (5) our provision for tax liabilities and other critical accounting estimates; and (6) our exposure to market risks related to changes in interest rates, equity prices and foreign currency exchange rates.

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

Many factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements contained in this report. These factors include, but are not limited to, those risks described in Part II Item 1A of this report and

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those risks described under “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.

CRITICAL ACCOUNTING ESTIMATES

The preparation of our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires our management to make judgments and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our management believes that we consistently apply these judgments and estimates and the consolidated financial statements and accompanying notes fairly represent all periods presented. However, any differences between these judgments and estimates and actual results could have a material impact on our consolidated statements of comprehensive income and financial position. Critical accounting estimates, as defined by the Securities and Exchange Commission (“SEC”), are those that are most important to the portrayal of our consolidated financial condition and results of operations and require our management's most difficult and subjective judgments and estimates of matters that are inherently uncertain. Our critical accounting estimates include those regarding (1) revenue recognition, (2) valuation of inventories, and (3) income taxes. For a discussion of our critical accounting estimates, see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2013.

RESULTS OF OPERATIONS

Overview



	Three Months Ended							Three Months Ended
(In thousands, except share and per share data)	March 28, 2014		December 31, 2013		Change			March 28, 2014		March 29, 2013		Change
Net sales	$	461,092	$	454,367	$	6,725		$	461,092	$	410,501	$	50,591
Gross margin	$	309,224	$	310,343	$	(1,119	)	$	309,224	$	284,418	$	24,806

Operating cash flows	$	130,430	$	130,759	$	(329	)	$	130,430	$	149,478	$	(19,048	)
Total cash, cash equivalents and investments	$	4,627,484	$	4,705,711	$	(78,227	)	$	4,627,484	$	3,836,970	$	790,514

Diluted shares	318,901		322,018		(3,117		)	318,901		323,021		(4,120		)
Diluted net income per share	$	0.37	$	0.31	$	0.06		$	0.37	$	0.37	$	—

Dividends per common share	$	0.15	$	0.15	$	—		$	0.15	$	0.10	$	0.05

Our first quarter 2014 net sales of $461.1 million increased 1.5% from the fourth quarter of 2013. Net sales to Wireless customers drove the net sales growth, largely due to the accelerated pace of the deployment of the Long-Term Evolution ("LTE") communication equipment in China. Industrial grew for the fourth straight quarter and Automotive increased by double digits on a percentage basis, while Computer decreased sharply. Our 28 nm and 40 nm product families continue to be the most significant contributors to net sales. Our gross margin percentage decreased from 68.3% in the fourth quarter of 2013 to 67.1% for the first quarter of 2014. The decrease was primarily driven by an unfavorable customer mix as a result of our increased sales to Wireless customers. For the second quarter of 2014 we are forecasting a 2-6% increase in net sales from the first quarter of 2014. The forecast reflects anticipated continued strength in Wireless. Both Telecom & Wirelsss and Networking, Computer & Storage are expected to grow. Industrial Automation, Military & Automotive is expected to decline. Other will remain flat. As a result of the continued strength in Wireless, we expect our second quarter gross margin to be consistent with the first quarter.

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We continue to generate strong operating cash flows, with $130.4 million in cash flows from operations for the first quarter of 2014. We ended the quarter with $4.6 billion in cash, cash equivalents and investments. During the first quarter of 2014 we returned cash to shareholders by both paying $47.6 million in dividends and repurchasing $161.8 million of common stock through our stock repurchase program. On April 21, 2014, our board of directors declared a cash dividend of $0.15 per share for the second quarter of 2014.

Results of operations expressed as a percentage of net sales were as follows:



	Three Months Ended
	March 28, 2014		March 29, 2013
Net sales	100.0	%	100.0	%
Cost of sales	32.9	%	30.7	%
Gross margin	67.1	%	69.3	%
Research and development expense	21.2	%	21.4	%
Selling, general, and administrative expense	16.2	%	19.1	%
Amortization of acquisition-related intangible assets	0.5	%	0.1	%
Compensation expense - deferred compensation plan	0.3	%	0.8	%
Gain on deferred compensation plan securities	(0.3	)%	(0.8	)%
Interest income and other	(1.3	)%	(0.4	)%
Interest expense	2.3	%	0.6	%
Income tax expense/(benefit)	3.0	%	(0.7	)%
Net income	25.3	%	29.3	%

Our net sales for the first quarter of 2014 increased by 12.3% from the first quarter of 2013. The increase was primarily due to an increase in our Telecom & Wireless, Industrial Automation, Military & Automotive, and Other vertical markets which was driven by growth in our New Products. We experienced strong growth in net sales in all geographies, except the Americas, in the first quarter of 2014 compared with the first quarter of 2013.

Sales by Product Category

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


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


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


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

New Products are primarily comprised of our most advanced products. Customers typically select these products for their latest generation of electronic systems. Demand is generally driven by prototyping and production needs. Mainstream Products are somewhat older products that are generally no longer design-win vehicles. Demand is driven by customers' later stage production-based needs. Mature Products are yet older products with demand generated by the oldest customer systems still in production. This category also includes sales of software, intellectual property and other miscellaneous devices.

Table of Contents

Net sales by product category were as follows:



	Three Months Ended						Year- Over- Year Change		Sequential Change
	March 28, 2014		March 29, 2013		December 31, 2013		Year- Over- Year Change		Sequential Change

New	49	%	39	%	47	%	39	%	4	%
Mainstream	23	%	29	%	24	%	(12	)%	(4	)%
Mature and Other	28	%	32	%	29	%	2	%	1	%
Net Sales	100	%	100	%	100	%	12	%	1	%

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
	March 28, 2014		March 29, 2013		December 31, 2013		Year- Over- Year Change		Sequential Change

Telecom & Wireless	45	%	41	%	40	%	23	%	14	%
Industrial Automation, Military & Automotive	22	%	22	%	22	%	13	%	1	%
Networking, Computer & Storage	15	%	18	%	19	%	(7	)%	(20	)%
Other	18	%	19	%	19	%	7	%	(3	)%
Net Sales	100	%	100	%	100	%	12	%	1	%

Sales of FPGAs and CPLDs

Our PLDs consist of field-programmable gate arrays, or FPGAs, including those referred to as system-on-chip FPGAs ("SoC FPGAs") that incorporate hard embedded processor cores, 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 family. Other Products consist of our Enpirion PowerSoCs, HardCopy ASIC 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
	March 28, 2014		March 29, 2013		December 31, 2013		Year- Over- Year Change		Sequential Change

FPGA	83	%	85	%	83	%	10	%	2	%
CPLD	9	%	8	%	9	%	17	%	(2	)%
Other Products	8	%	7	%	8	%	32	%	0	%
Net Sales	100	%	100	%	100	%	12	%	1	%

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.

Table of Contents

Net sales by geography were as follows:



	Three Months Ended						Year- Over- Year Change		Sequential Change
	March 28, 2014		March 29, 2013		December 31, 2013		Year- Over- Year Change		Sequential Change

Americas	15	%	20	%	19	%	(13	)%	(17	)%
Asia Pacific	43	%	38	%	41	%	24	%	6	%
EMEA	26	%	27	%	24	%	11	%	11	%
Japan	16	%	15	%	16	%	18	%	(4	)%
Net Sales	100