The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included in Item 8 and the Risk Factors included in Item 1A of this Annual Report on Form 10-K. 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. MD&A is organized as follows:
• Overview - Discussion of our business and overall analysis of financial
and other highlights to provide context for the MD&A
• Critical Accounting Estimates - Accounting estimates that management
believes are the most important to understanding the assumptions and
judgments incorporated in our financial results and forecasts
• Results of Operations - An analysis of our financial results
• Financial Condition, Liquidity, Credit Facility and Capital Resources - An
analysis of changes in our balance sheets and cash flows and a discussion
of our financial condition and potential sources of liquidity
Overview Three Months Ended Years Ended (In thousands, except share and December 31, September 27, December 31, December 31, per share data) 2013 2013 Change 2013 2012 Change Net sales
$ 454,367 $ 445,945 $ 8,422 $ 1,732,572 $ 1,783,035 $ (50,463 )Gross margin $ 310,343 $ 304,420 $ 5,923 $ 1,185,836 $ 1,241,512 $ (55,676 )Operating cash flows $ 130,759 $ 245,406 $ (114,647 ) $ 590,208 $ 587,214 $ 2,994Total cash, cash equivalents and investments $ 4,705,711 $ 3,820,895 $ 884,816 $ 4,705,711 $ 3,722,343983,368 Diluted shares 322,018 323,505 (1,487 ) 323,018 324,497 $ (1,479 )Diluted net income per share $ 0.31 $ 0.37 $ (0.06 )$ 1.36 $ 1.72 $ (0.36 )Dividends per common share $ 0.15 $ 0.15 $ - $ 0.50 $ 0.36 $ 0.14Our net sales for 2013 were down 3% from 2012 as we were impacted by reduced demand in certain vertical markets, particularly in Telecom & Wireless, driven by the lack of demand in the Telecom sub-vertical. Of our eleven sub-vertical markets, seven grew during 2013 as we had continued success in penetrating new markets and displacing ASICs in existing markets. Our Industrial Automation, Military and Automotive sub-vertical markets each grew in 2013. Our Networking, Computer & Storage sub-vertical markets also increased as we are in the early stage of FPGA adoption in data center applications. The Telecom & Wireless sub-vertical markets each decreased, with Telecom down significantly, as carriers redirected spending to Wireless. Wireless was down slightly due to an ASIC conversion partially offset by an increase in Long-Term Evolution (LTE) related growth in Chinathat positively impacted our second-half revenue. Our gross margin percentage for 2013 decreased from 69.6% to 68.4%, due to an unfavorable mix in vertical markets along with an unfavorable customer and product mix within the sub-vertical markets. Our fourth quarter net sales of $454.4 millionincreased 2% sequentially from the third quarter of 2013 as a result of improved demand in certain vertical markets, particularly in Networking, Computer & Storage, with the Computer sub-vertical market up sharply. The Telecom & Wireless sub-vertical markets were flat. Industrial Automation, Military and Automotive decreased slightly, although the Industrial sub-vertical market had growth for the third consecutive quarter. Our gross margin percentage increased slightly to 68.4% when compared to the third quarter gross margin percentage of 68.3%.
Our 28-nanometer and 40-nanometer product families continue to be the most significant contributors to revenue, driving the 10% sequential and 31% annual growth in our New Product category.
32 -------------------------------------------------------------------------------- During 2013, we made significant strategy and product announcements. During the first quarter, we announced that we had entered into an agreement with Intel for the future manufacture of certain Altera FPGAs on Intel's 14 nm Tri-Gate transistor technology. This established us as the only major FPGA company with access to this technology, which we believe will significantly strengthen our next-generation competitive position. During the second quarter, we announced our Generation 10 FPGAs and SoC FPGAs, which will offer system developers higher levels of performance and power efficiency. During the fourth quarter, we released a new version of our
Quartus II Softwarethat supports our Arria 10 FPGAs, making us the first FPGA supplier to offer publicly available software support for 20 nm FPGAs. We continue to generate strong operating cash flows, with $590.2 millionin cash flows from operations for 2013. We returned $361.5 million, or 61.3%, of the cash flow from operations to our stockholders during the year in the form of dividends and repurchases of common stock. During the fourth quarter of 2013, for the second time in two years, we capitalized on the continued low interest rate environment, issuing $1 billionin senior notes for general corporate purposes including future common stock repurchases. We ended the year with $4.7 billionin cash, cash equivalents and investments. On January 20, 2014, our board of directors declared a cash dividend of $.0.15per share for the first quarter of 2014. We continue to evaluate strategic business acquisitions and, during 2013, we made two key acquisitions to enhance our product offerings. During the first quarter, we acquired TPACK. TPACK's FPGA-based optical transport network ( OTN) IPand expertise will enable us to accelerate and expand our OTN solutions road map. During the second quarter, we acquired Enpirion, Inc., a leading provider of high-efficiency, integrated power conversion products known as PowerSoCs. We believe the combination of our FPGAs with Enpirion'sPowerSoCs offers customers higher performance, lower system power, higher reliability, smaller footprint and faster time-to-market.
We believe that we are well positioned in many of our vertical markets to see growth that will primarily be driven by our New Product category.
Critical Accounting Estimates
The preparation of our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in
the United States of America("U.S. GAAP") requires our management to make certain judgments and estimates that affect the amounts reported in our consolidated financial statements. Our management believes that we consistently apply these judgments and estimates and the consolidated financial statements 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 our consolidated balance sheets. Critical accounting estimates, as defined by the Securities and Exchange Commission("SEC"), are those that are most important to the portrayal of our 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.
We sell the majority of our products to distributors for subsequent resale to OEMs or their subcontract manufacturers. In most cases, sales to distributors are made under agreements allowing for subsequent price adjustments and returns. We generally defer recognition of revenue and costs until the products are resold by the distributor. Our revenue reporting is highly dependent on receiving pertinent and accurate data from our distributors in a timely fashion. Distributors provide us with periodic data regarding the product, price, quantity and end customer when products are resold as well as the quantities of our products they still have in stock. We maintain system controls to validate distributor data and to verify that reported data is accurate. At times, we must use estimates and apply judgments to reconcile distributors' reported inventories to their activities. This reconciliation process requires us to estimate the amount of in-transit shipments (net of in-transit returns) to our distributors. In-transit days can significantly vary among geographies and individual distributors. We also apply judgment when estimating the total value of price concessions earned by our distributors but not claimed by the end of the reporting period. This is because there is a time lag between the price concessions earned and claimed by the distributors for any underlying resale of products. Any error in our judgment could lead to inaccurate reporting of our net sales, deferred income and allowances on sales to distributors, and net income.
Valuation of Inventories
Inventories are recorded at the lower of cost determined on a first-in-first-out basis (approximated by standard cost) or market. We routinely compare our inventory against projected demand and record provisions for excess and obsolete inventories as necessary. We establish provisions for inventory for technological obsolescence or if inventory levels on hand are in excess of projected customer demand. Such provisions result in a write-down of inventory to net realizable value and a charge to cost of sales. Historically, it has been difficult to forecast customer demand. Actual demand may materially differ from our projected 33 -------------------------------------------------------------------------------- demand, and this difference could have a material impact on our gross margin and inventory balances based on additional provisions for excess or obsolete inventory or a benefit from inventory previously written down. Many of the orders we receive from our customers and distributors request delivery of product on relatively short notice and with lead times less than our manufacturing cycle time. In order to provide competitive delivery times to our customers, we build and stock a certain amount of inventory in anticipation of customer demand that may not materialize. Moreover, as is common in the semiconductor industry, we generally allow customers to cancel orders with minimal advance notice. Thus, even product built to satisfy specific customer orders may not ultimately be required to fulfill customer demand.
We establish a tax provision for the anticipated tax consequences of the reported results of operations. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax carryforwards. We record valuation allowances, when necessary, to reduce our deferred tax assets to the amount that management estimates is more likely than not to be realized. If, in the future, we determine that we are not likely to realize all or part of our net deferred tax assets, an adjustment to the deferred tax asset valuation allowance would be recorded as a charge to earnings in the period such determination is made. We measure and recognize uncertain tax positions in accordance with U.S. GAAP, whereby we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the merits of the position. The calculation of our tax liabilities involves the inherent uncertainty associated with the application of U.S. GAAP and complex tax laws. We are subject to examination by various taxing authorities. We believe we have adequately provided in our financial statements for additional taxes that we estimate may be required to be paid as a result of such examinations. If the payment ultimately proves to be unnecessary, the reversal of the tax liabilities would result in tax benefits being recognized in the period we determine the liabilities are no longer necessary. If an ultimate tax assessment exceeds our estimate of tax liabilities, an additional charge to expense will result.
Results of Operations
Results of operations expressed as a percentage of net sales were as follows: 2013 2012 2011 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 31.6 % 30.4 % 29.6 % Gross margin 68.4 % 69.6 % 70.4 % Research and development expense 22.2 % 20.2 % 15.7 % Selling, general, and administrative expense 18.5 % 16.3 % 13.5 % Amortization of acquisition-related intangible assets 0.3 % 0.0 % 0.1 % Compensation expense (benefit) - deferred compensation plan 0.6 % 0.4 % (0.1 )% (Gain) loss on deferred compensation plan securities (0.6 )% (0.4 )% 0.1 % Interest income and other (0.7 )% (0.5 )% (0.2 )% Interest expense 1.0 % 0.4 % 0.2 % Income tax expense 1.8 % 2.0 % 3.8 % Net income 25.4 % 31.2 % 37.3 % Net sales were
$1.73 billionin 2013, $1.78 billionin 2012 and $2.06 billionin 2011. Net sales decreased by 3% in 2013 from 2012. The decrease in Net sales in 2013 was mainly due to a typical decline in Mature and Other Products coupled with a moderate decline in Mainstream Products as our new technologies are being adopted. Sales of New Products had strong growth in 2013 as we continued to experience growth in our 28-nm and 40-nm products. Net sales declined in the Telecom & Wireless vertical market, partially offset by slight increases in the Industrial, Automation, Military & Automotive and Networking, Computer & Storage vertical markets. We experienced a decrease in net sales in 2013 in Asia Pacific, offset by modest growth in Japanand EMEA. 34 -------------------------------------------------------------------------------- Net sales decreased by 14% in 2012 from 2011. The Net sales decrease in 2012 was due to a decrease in customer demand across all vertical markets and in all geographies. We saw strong growth in sales of our New Products while there was a decrease in our Mainstream and Mature Product categories. Huawei Technologies Co., Ltd. ("Huawei"), an original equipment manufacturer ("OEM"), individually accounted for 11% of net sales in 2013, 16% in 2012 and 13% in 2011. No other individual OEM accounted for more than 10% of net sales in 2013, 2012 or 2011. See Note 7: Accounts Receivable, Net and Significant Customers to our consolidated financial statements.
We classify our products into three categories: New, Mainstream, and Mature and Other Products. The composition of each product category is as follows:
• New Products include the Stratix® V, Stratix IV, Arria® V, Arria II,
Cyclone® V, Cyclone IV, MAX® V, HardCopy® IV devices and
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™, Excalibur™ devices, configuration and other devices, intellectual property cores, and software and other tools. The product categories above approximate the relative life cycle stages of our products. 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.
Net Sales by product category were as follows:
Annual Growth Rate 2013 2012 2011 2013 2012 New 43 % 32 % 22 % 31 % 22 % Mainstream 27 % 30 % 34 % (14 )% (22 )% Mature and Other 30 % 38 % 44 % (22 )% (26 )% Net Sales 100 % 100 % 100 % (3 )% (14 )% Vertical Markets 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. 35 --------------------------------------------------------------------------------
Net Sales by vertical market were as follows:
Annual Growth Rate 2013 2012 2011 2013 2012 Telecom & Wireless 41 % 44 % 43 % (9 )% (12 )% Industrial Automation, Military & Automotive 22 % 21 % 23 % 4 % (22 )% Networking, Computer & Storage 19 % 17 % 17 % 6 % (11 )% Other 18 % 18 % 17 % (3 )% (10 )% Net Sales 100 % 100 % 100 % (3 )% (14 )% 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 and Classic families. Other Products consist of our Enpirion PowerSoCs, HardCopy ASIC devices, configuration devices, software and other tools and IP cores.
Net sales of FPGAs, CPLDs and Other Products were as follows:
Annual Growth Rate 2013 2012 2011 2013 2012 FPGA 83 % 84 % 81 % (4 )% (11 )% CPLD 9 % 9 % 10 % (4 )% (22 )% Other Products 8 % 7 % 9 % 9 % (27 )% Net Sales 100 % 100 % 100 % (3 )% (14 )% 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:
Annual Growth Rate 2013 2012 2011 2013 2012 Americas 18 % 18 % 19 % (1 )% (18 )% Asia Pacific 40 % 43 % 41 % (10 )% (9 )% EMEA 26 % 25 % 25 % 4 % (15 )% Japan 16 % 14 % 15 % 5 % (18 )% Net Sales 100 % 100 % 100 % (3 )% (14 )%
Price Concessions and Product Returns from Distributors
We sell the majority of our products to distributors worldwide at a list price. Our 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. 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 price concessions, distributors must submit the price concession claims to us for approval within 60 days of the resale of the product to an end customer. Primarily because of the uncertainty related to the final price, we defer revenue recognition on sales to distributors until 36 -------------------------------------------------------------------------------- our products are sold from the distributor to the end customer, which is when our price is fixed or determinable. Accordingly, these pricing uncertainties impact our results of operations, liquidity and capital resources. Total price concessions earned by distributors were
$4.6 billionand $4.3 billionfor 2013 and 2012, respectively. See Note 10: Deferred Income and Allowances on Sales to Distributors to our consolidated financial statements. 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, volume and factors associated with timing of shipments to distributors or payment of price concessions. Our distributors have certain rights under our contracts to return defective, overstocked, obsolete and discontinued products. Our stock rotation program generally allows distributors to return unsold product to Altera, subject to certain contract limits, based on a percentage of sales occurring over various periods prior to the stock rotation. Products resold by the distributor to end customers are no longer eligible for return, unless specifically authorized by us. In addition, we generally warrant our products against defects in material, workmanship and non-conformance to our specifications. Returns from distributors totaled $88.1 millionand $82.6 millionfor 2013 and 2012, respectively. See Note 10: Deferred Income and Allowances on Sales to Distributors to our consolidated financial statements.
2013 2012 2011
Gross Margin Percentage 68.4 % 69.6 % 70.4 %
Our gross margin rates are heavily influenced by both vertical market mix and the timing of material cost improvements. While these variables will continue to fluctuate on a cyclical basis, our gross margin target over the long term is 67%. We believe that the 67% gross margin target will enable us to achieve our desired balance between growth and profitability. Our gross margin percentage decreased in 2013 by 1.2 points when compared with 2012. The decrease was primarily attributable to an unfavorable mix within vertical markets along with an unfavorable customer and product mix within certain of the vertical markets when compared with 2012. Our gross margin percentage decreased in 2012 by 0.8 points when compared with 2011. The decrease was primarily attributable to an unfavorable vertical market mix when compared with 2011.
Research and Development Expense
Research and development expense includes costs for compensation and benefits, development masks, prototype wafers, and depreciation and amortization. These expenditures are for the design of new products, the development of process technologies, new package technology, software to support new products and design environments, and IP cores. We will continue to make significant investments in the development of new products and focus our efforts on the development of new programmable logic devices that use advanced semiconductor wafer fabrication processes, as well as related development software. We are currently investing in the development of future silicon products, as well as our Quartus II software, PowerSoCs, library of IP cores and other future products. 2013 vs. 2012 2012 vs. 2011 ($ in millions) 2013 2012 2011 Change Change
Research and Development Expense
7 % 11 % Percentage of Net Sales 22.2 % 20.2 % 15.7 % Research and development expense for 2013 increased by
$25.6 million, or 7%, compared with 2012. The increase was primarily attributable to a $24.4 millionincrease in personnel-related costs due to an increase in the number of employees to support product development and from our recent acquisitions, a $6.9 millionincrease in depreciation expense, a $6.2 millionincrease in variable compensation expense, a $2.7 millionincrease in rental and license costs in connection with our product development activities, a $2.6 millionincrease in professional services, and a $0.9 millionincrease in stock-based compensation expense due to an increase in the number of employees. These increases were partially offset by an $18.8 milliondecrease related to timing of external costs for product development activities. 37 -------------------------------------------------------------------------------- Research and development expense for 2012 increased by $35.4 million, or 11%, compared with 2011. The increase was primarily attributable to a $27.4 millionincrease in personnel-related costs due to an increase in the number of employees, a $12.4 millionincrease in product development activities, a $6.8 millionincrease in rental and telephone expense, a $5.2 millionincrease in stock-based compensation driven by an increase in the number of employees and a $4.8 millionincrease in depreciation and maintenance and repair expenses. These increases were partially offset by a $24.4 milliondecrease in variable compensation expenses based on lower operating results in 2012.
Selling, General, and Administrative Expense
Selling, general, and administrative expense primarily includes compensation and benefits related to sales, marketing and administrative employees, commissions and incentives, depreciation, legal, advertising, facilities and travel expenses. 2013 vs. 2012 2012 vs. 2011 ($ in millions) 2013 2012 2011 Change Change
Selling, General and Administrative Expense
$ 320.1 $ 289.9 $ 279.210 % 4 % Percentage of Net Sales 18.5 % 16.3 % 13.5 % Selling, general, and administrative expense for 2013 increased by $30.2 million, or 10%, when compared with 2012. The increase was primarily attributable to a $12.8 millionincrease in personnel-related costs due to an increase in the number of employees to support the business, a $4.5 millionincrease in variable compensation expense, a $3.8 millionincrease in professional services and consulting fees, a non-recurring $3.0 millionincrease in local, non-income taxes, a $2.5 millionincrease in depreciation expense, a $2.1 millionincrease in stock-based compensation due to an increase in the number of employees, and a $2.1 millionincrease in rental and license costs. Selling, general, and administrative expense for 2012 increased by $10.7 million, or 4%, when compared with 2011. The increase was primarily attributable to a $9.8 millionincrease in personnel-related costs due to an increase in the number of employees to support the business, a $5.4 millionincrease in stock-based compensation driven by an increase in the number of employees, and an $8.4 millionincrease in professional services and consulting fees. These increases were partially offset by a $13.4 milliondecrease in variable compensation expenses based on lower operating results in 2012.
Amortization of Acquisition-Related Intangible Assets
Amortization of acquisition-related intangible assets for 2013 increased by
$4.0 millionwhen compared with 2012, primarily due to the acquisitions in the second quarter of 2013. 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"). 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. 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. We reported (gain)/ loss on NQDC Plan assets of $(10.6) million, $(7.1) millionand $2.0 millionin 2013, 2012 and 2011, respectively. These amounts resulted from the overall market performance of the underlying securities. The investment (gain)/loss also represents an (increase) decrease in the future payout to employees and is recorded as Compensation expense (benefit) - deferred compensation plan in our consolidated statements of comprehensive income. The compensation expense (benefit) associated with our deferred compensation plan obligations is offset by (gain)/loss from related securities. The net effect of the investment income or loss and related compensation expense or benefit has no impact on our income before income taxes, net income, or cash balances. See Note 18: Employee Benefits Plans to our consolidated financial statements for a detailed discussion of our NQDC Plan.
Interest Income and Other
Interest income and other consists mainly of interest income generated from investments in bonds, money market funds and high-quality fixed income securities. The increase in Interest income and other in both 2013 and 2012 compared with 2012 and 2011,
38 -------------------------------------------------------------------------------- respectively, was primarily due to higher cash and investments and changes in our investment portfolio composition during 2013 and 2012 that generated higher investment income. Interest Expense The increase in Interest expense in 2013 compared with 2012 was mainly attributable to the new long-term debt issued in the fourth quarter of 2013 and a one-time interest charge on debt assumed in connection with our acquisitions in the second quarter of 2013. See Note 19: Credit Facility and Long-Term Debt for further discussion.
The increase in Interest expense in 2012 compared with 2011 was mainly due to the long-term debt issued in the second quarter of 2012, which has a higher effective interest rate than the former credit facility.
Income Tax Expense
Our effective tax rate reflects the impact of significant amounts of our earnings being taxed in foreign jurisdictions at rates substantially below the U.S. statutory rate. Our effective tax rates were 6.5% for 2013, 5.9% for 2012 and 9.2% for 2011. The net increase in our effective tax rate in 2013 when compared with 2012 was primarily due to lower one-time tax benefits in 2013 compared to 2012, partially offset by the absence of a U.S. federal research and development tax credit in 2012, which expired in 2011. During 2013, the effective tax rate included the benefit of
$10.6 millionresulting from the enactment of the American Taxpayer Relief Act in January 2013, which retroactively extended the federal research and development credit for two years from January 1, 2012through December 31, 2013. In addition, we reversed $6.8 millionof liabilities for uncertain tax liabilities after the IRSconceded an adjustment for certain 2007 inter-company transactions in our litigation regarding the 2004 through 2007 tax years (plus related interest), $2.3 millionof liabilities for uncertain tax positions relating to changes in estimates for certain foreign tax jurisdictions, and $30.3 millionof liabilities for uncertain tax positions upon the expiration of foreign and domestic statutes of limitation and related interest, which was substantially offset by $27.7 millionof tax accrued on foreign dividends. For 2012, the effective tax rate included tax benefits associated with the following: a release of liabilities for uncertain tax positions of $24.4 million, 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, a $6.9 millionnet tax benefit as a result of a Statutory Notice of Deficiency received from the IRSfor 2005 to 2007, and a $9.1 millionnet tax benefit as a result of the expiration of the statutes of limitations for certain foreign jurisdictions. 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 December 31, 2013, the deferred charge balance in Other current assets was $2.2 million, and $18.9 millionin 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. The significant net decrease in our effective tax rate in 2012 when compared with 2011 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. For 2012, the effective tax rate includes the following net tax benefits associated with the release of liabilities for uncertain tax positions: a $24.4 millionnet 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; a $6.9 millionnet tax benefit as a result of a Statutory Notice of Deficiency received from the IRSfor 2005 to 2007; and a $9.1 millionnet tax benefit as a result of the expiration of the statutes of limitations for certain foreign jurisdictions. In 2011, we reversed $4.3 millionof liabilities for uncertain tax positions as a result of a Statutory Notice of Deficiency received from the Internal Revenue Service for 2002 through 2004. In addition, in 2011 we reversed $8.2 millionof liabilities for uncertain tax positions upon expiration of the statutes of limitations and settlement with certain foreign jurisdictions.
Financial Condition, Liquidity, Credit Facility and Capital Resources
We derive our liquidity and capital resources primarily from our cash flows from operations. We continue to generate strong positive operating cash flows. In
October 2013, we issued $600 millionaggregate principal amount of 2.5% senior notes (the "2.50% Notes") and $400 millionaggregate principal amount of 4.10% senior notes (the "4.10% Notes") that will mature on November 15, 2018, and November 15, 2023, respectively, for general corporate purposes, including stock repurchases (collectively the "2013 Notes"). In May 2012, we issued $500 millionaggregate principal amount of 1.75% senior notes (the "1.75% Notes") 39 -------------------------------------------------------------------------------- that will mature on May 15, 2017to repay our former credit facility (the "2012 Notes"). In June 2012, we entered into a credit agreement that provides for a $250 millionunsecured revolving line of credit (the "Facility"), which is scheduled to mature in June 2017. As of December 31, 2013, we had no borrowings under the Facility. As such, the $250 millionavailable under the Facility represents a source of liquidity. See Note 19: Credit Facility and Long-Term Debt to our consolidated financial statements for further discussion. We purchased $1.5 billionin U.S. Treasury securities over the past two years, which provide an approximate economic hedge of the interest rate exposure on our 2013 and 2012 Notes. Overall, our investment portfolio is invested primarily in highly-rated securities and our investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade with the objective of minimizing the potential risk of principal loss. We currently use cash to fund dividends, capital expenditures and repurchases of our common stock. Based on past performance and current expectations, we believe that our existing cash, cash equivalents, investments, together with cash expected to be generated from operations, the Facility and our access to capital markets will be sufficient to satisfy our operations, cash dividends, capital expenditures and stock repurchases over the next 12 months.
Common Stock Repurchases and Dividends
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. On August 28, 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 in prior years, there is a total of 233.0 million shares authorized for repurchase with approximately 36.8 million shares remaining for further repurchases under our stock repurchase program as of December 31, 2013. Since the inception of the stock purchase program through December 31, 2013, we have repurchased a total of 196.2 million shares of our common stock for an aggregate cost of $4.3 billion. Management believes that this authorization is sufficient to support the company's share repurchase objectives through mid-2015. Common stock repurchase activity was as follows: (In millions, except per share amounts) 2013 2012 2011 Shares repurchased 6.2 6.9 4.8 Cost of shares repurchased $ 201.1 $ 229.1 $ 197.0Average price per share $ 32.33 $ 33.10 $ 41.05In 2013, we paid $160.4 millionin cash dividends to stockholders, representing $0.15per common share for an aggregate amount of $96.4 millionin the third and fourth quarters of 2013 and $0.10per common share for an aggregate amount of $64.0 millionin the first and second quarters of 2013. On January 20, 2014, our board of directors declared a cash dividend of $0.15per share for the first quarter of 2014.
Shelf Registration Statement
We have an effective shelf registration statement on file with the
Securities and Exchange Commissionthat allows us to issue senior debt securities from time to time in one or more offerings. Each issuance under the shelf registration will require the filing of a prospectus supplement identifying the amount and terms of the securities to be issued. The registration statement does not limit the amount of debt securities that may be issued thereunder. Our ability to issue debt securities is subject to market conditions and other factors impacting our borrowing capacity, including our credit ratings and compliance with the covenants in our credit agreement. 40 --------------------------------------------------------------------------------
Our cash and cash equivalents balance decreased by
$7.5 millionduring the year ended December 31, 2013. The change in cash and cash equivalents for 2013, 2012 and 2011 was as follows: (In millions) 2013 2012
Net cash provided by operating activities
$ 590.2 $ 587.2 $ 959.6Net cash used in investing activities (1,236.5 ) (767.2 ) (170.9 ) Net cash provided by (used in) financing activities 638.8 (315.3 ) (181.9 ) Net (decrease) increase in cash and cash equivalents $ (7.5 ) $ (495.3 ) $ 606.8
Total cash and cash equivalents accounted for 48% and 62% of total assets at
In 2013, our operating activities provided
$590.2 millionin cash, primarily attributable to net income of $440.1 million, adjusted for non-cash stock-based compensation expense of $98.9 million(net of related tax effects), depreciation and amortization (including amortization of acquisition-related intangible assets) of $52.0 million, a deferred income tax expense of $3.6 million, net amortization of investment discount/premium of $3.4 million, and amortization of debt discount and debt issuance costs of $1.5 million. The net change in working capital accounts (excluding cash and cash equivalents and effects of acquisitions) was primarily due to a $157.8 millionincrease in Accounts receivable, net, a $7.9 millionincrease in Inventories, a $1.3 millionincrease in Other assets, a $9.4 millionincrease in Accounts payable and other liabilities, a $139.0 millionincrease in Deferred income and allowances on sales to distributors, and a $14.4 millionincrease in Income tax payable. Our sales to distributors are primarily made under agreements allowing for subsequent price adjustments and returns in most cases, and we generally defer recognition of revenue until the products are resold by the distributor. At the time of shipment to distributors for the majority of our sales, we (1) record a trade receivable at the list selling price since there is a legally enforceable obligation from the distributor to pay us currently for product delivered, (2) relieve inventory for the carrying value of goods shipped since legal title has passed to the distributor, and (3) record deferred revenue and deferred cost of sales in Deferred income and allowances on sales to distributors in the liability section of our consolidated balance sheets. Increases in Accounts receivable, net associated with higher billings are generally offset by corresponding increases in Deferred income and allowances on sales to distributors. However, timing differences between gross billings, discounts earned, collections, revenue recognition and changes in the mix of sales to OEMs and distributors may result in a temporary interruption to the normal relationship between these two accounts. The $157.8 millionincrease in Accounts receivable, net, and the $139.0 millionincrease in Deferred income and allowances on sales to distributors was primarily attributable to increased gross billings to distributors near the end of the period in the fourth quarter of 2013 compared with the same period in 2012. A contributing factor to the increase in Accounts receivable, net was due to timing of utilization of subsequent price concessions by certain distributors.
$1.3 millionincrease in Other assets is primarily attributable to a deferred charge related to the deferral of income tax expense on intercompany profits that arose from the sale of our newly acquired intellectual property rights from an Altera U.S. entity to one of our foreign subsidiaries, an increase in income taxes receivable due to prior year overpayments of domestic income taxes and an increase in interest receivable due to the increase in the balance of our investment portfolio. These increases were offset by a decrease due to the timing of other prepaid items. The $9.4 millionincrease in Accounts payable and other liabilities was primarily attributable to an increase in accrued interest payable due to our bond offering in the fourth quarter of 2013, an increase in accrued variable compensation and also for certain compensation arrangements as a result of our recent acquisitions and an increase in accounts payable and various other accrued liabilities due to timing.
In 2012, our operating activities provided
$587.2 millionin cash, primarily attributable to net income of $556.8 million, adjusted for non-cash stock-based compensation expense of $87.1 million(net of related tax effects), depreciation and amortization 41 -------------------------------------------------------------------------------- (including amortization of acquisition-related intangible assets) of $36.9 million, a deferred income tax expense of $8.8 millionand changes in working capital accounts. Significant changes in working capital accounts (excluding cash and cash equivalents) included a $91.4 millionincrease in Accounts receivable, net, a $30.4 millionincrease in Inventories, a $3.7 millionincrease in Other assets, a $50.6 milliondecrease in Accounts payable and other liabilities, a $66.1 millionincrease in Deferred income and allowances on sales to distributors, and an $8.6 millionincrease in Income taxes payable.
During 2013, our investing activities resulted in a use of cash, primarily for the purchase of available for sale securities of
$1.3 billion. This included $1.0 billionused to purchase U.S. Treasury securities, which provide an approximate economic hedge of the interest rate exposure on our 2013 Notes. In addition, we paid $145.3 million(net of cash acquired) for acquisitions, the purchase of other cost basis investments of $7.4 million, purchases of intangible assets of $13.5 million, and purchases of property, plant and equipment of $42.6 million. These items were partially offset by proceeds from the sale of available-for-sale securities of $136.8 million, proceeds from maturity of available-for-sale securities of $178.2 million, and sales of deferred compensation plan securities, net of $4.9 million. During 2012, our investing activities resulted in a use of cash primarily for the purchase of available for sale securities of $921.4 million. This included $501.1 millionused to purchase U.S. Treasury securities, which provide an approximate economic hedge of the interest rate exposure of our 2012 Notes. In addition, we made purchases of property and equipment of $60.9 millionand purchases of intangible assets and other investments of $7.2 million, partially offset by cash proceeds from the sale of available-for-sale securities of $105.4 millionand proceeds from maturity of available-for-sale securities of $115.4 million. Financing Activities During 2013, our financing activities included a use of cash for the repurchase of common stock of $201.1 million, dividend payments of $160.4 million, a use of cash for the payment of debt assumed in acquisitions of $22.0 million, minimum statutory withholding for vested restricted stock units of $28.3 million, and long-term debt and credit facility issuance costs of $4.1 million. These purchases were partially offset by cash proceeds from the issuance of long-term debt of $991.8 million, cash proceeds of $58.2 millionfrom the issuance of common stock to employees through our employee stock plans, and the excess tax benefit from employee stock plans of $4.7 million. During 2012, our financing activities included repayment of our former credit facility in the aggregate principal amount of $500.0 million, a use of cash for the repurchase of common stock of $229.1 million, dividend payments of $115.5 million, and minimum statutory withholding for vested restricted stock units of $31.5 million, partially offset by cash proceeds of $500.0 millionfrom the issuance of long-term debt and cash proceeds of $49.7 millionfrom the issuance of common stock to employees through our employee stock plans.
Our dividend policy could be impacted in the future by, among other items, future changes in our cash flows from operations and our capital spending needs such as those relating to research and development, investments and acquisitions, common stock repurchases and other strategic investments.
The following table summarizes our significant contractual cash obligations as of
December 31, 2013, and the effect that such obligations are expected to have on liquidity and cash flows in future periods: Payments Due by Period Less than 1 More than 5 (In millions) Total Year 1-3 Years 3-5 Years Years Operating lease obligations (1) $ 29.0 $ 8.2 $ 8.6 $ 5.5 $ 6.7Wafer purchase obligations (2) 158.2 158.2 - - - Long term debt 1,500.0 - - 1,100.0 400.0 Interest on long term debt (3) 269.7 40.2 80.3 67.2 82.0 Obligations under service award program (4) 7.9 2.5 1.3 1.3 2.8 Electronic design automation software licenses (5) 2.8 2.8 - - - Total contractual cash obligations $ 1,967.6 $ 211.9 $ 90.2 $ 1,174.0 $ 491.5(1) We lease facilities under non-cancelable lease agreements expiring at
various times through 2019 and beyond. Rental expense under all operating
in 2011. (2) Due to lengthy subcontractor lead times, we must order materials and
services from these subcontractors well in advance, and we are obligated
to pay for the materials once they are completed. We expect to receive and
pay for these materials in 2014. (3) Interest is based on our
$600 millionaggregate principal amount of 2.50%
senior notes (the "2.50% Notes"), our
amount of 4.10% senior notes (the "4.10% Notes"), and our
aggregate principal amount of 1.75% senior notes (the "1.75% Notes").
Interest on the 2.50% Notes, the 4.10% Notes, and the 1.75% Notes is
payable semiannually in arrears on
All three of our senior notes are governed by a base and supplemental
(4) We offer to the majority of our U.S and non-U.S. employees participation
in the Service Award Program ("SAP"). The SAP provides employees with one
to four weeks of additional paid vacation upon their attainment of five,
ten, fifteen, twenty, and twenty-five year service anniversaries. See Note
18: Employee Benefits Plans to our consolidated financial statements.
(5) As of
obligations to providers of electronic design automation software and maintenance expiring at various dates through
December 2014. Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits as of December 31, 2013, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, $290.5 millionof unrecognized tax benefits classified as Income tax payable- non-current in the accompanying consolidated balance sheet as of December 31, 2013, have been excluded from the contractual obligations table above. See Note 16: Income Taxes to our consolidated financial statements for a discussion of income taxes. In addition to the above obligations, we enter into a variety of agreements and financial commitments in the normal course of business. It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments pursuant to such agreements have not been material. We believe that any future payments required pursuant to such agreements would not be significant to our consolidated financial condition or operating results.
Impact of Foreign Currency and Inflation
We have international operations and incur expenditures in currencies other than U.S. dollars. For non-U.S. subsidiaries and branches, foreign currency transaction gains and losses and the impact of the remeasurement of local currency assets and liabilities into U.S. dollars in 2013, 2012 and 2011 were not significant. We do not enter into foreign exchange transactions for trading or speculative purposes. 43
Off-balance Sheet Arrangements
New Accounting Pronouncements
The information contained in Note 2: Significant Accounting Policies to our consolidated financial statements in Part II, Item 8 under the heading "Recent Accounting Pronouncements" is incorporated by reference into this Part II, Item 7. 44