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ALTERA CORP - 10-Q - : Management's Discussion and Analysis of Financial Condition and Results of Operations
[July 25, 2014]

ALTERA CORP - 10-Q - : Management's Discussion and Analysis of Financial Condition and Results of Operations


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



The following MD&A, as well as information contained in the risk factors described in Part II Item 1A of this report and elsewhere in this report, contains forward-looking statements, which are provided under the "safe harbor" protection of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are generally written in the future tense and/or are preceded by words such as "will," "may," "should," "could," "expect," "suggest," "believe," "anticipate," "intend," "plan," "seek," "estimate," "continue," or other similar words. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, uncertain events or assumptions, and other characteristics of future events or circumstances are forward-looking statements. Examples of forward-looking statements include statements regarding (1) our gross margins and factors that affect gross margins; (2) trends in our future sales; (3) our research and development expenditures and efforts; (4) our capital expenditures; (5) our provision for tax liabilities and other critical accounting estimates; and (6) our exposure to market risks related to changes in interest rates, equity prices and foreign currency exchange rates.


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

Many factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements contained in this report. These factors include, but are not limited to, those risks described in Part II Item 1A of this report and those risks described under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013.

21-------------------------------------------------------------------------------- Table of Contents 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 Six Months Ended (In thousands, except share and per share data) June 27, 2014 March 28, 2014 Change June 27, 2014 June 28, 2013 Change Net sales $ 491,517 $ 461,092 $ 30,425 $ 952,609 $ 832,260 $ 120,349 Gross margin $ 329,126 $ 309,224 $ 19,902 $ 638,350 $ 571,073 $ 67,277 Operating margin (1) $ 146,567 $ 134,595 $ 11,972 $ 281,162 $ 230,270 $ 50,892 Operating cash flows $ 170,958 $ 130,430 $ 40,528 $ 301,388 $ 214,043 $ 87,345 Total cash, cash equivalents and investments $ 4,563,243 $ 4,627,484 $ (64,241 ) $ 4,563,243 $ 3,642,980 $ 920,263 Diluted shares 313,513 318,901 (5,388 ) 316,145 323,279 (7,134 ) Diluted net income per share $ 0.41 $ 0.37 $ 0.04 $ 0.77 $ 0.69 $ 0.08 Dividends per common share $ 0.15 $ 0.15 $ - $ 0.30 $ 0.20 $ 0.10 (1) We define operating margin as gross margin less research and development expense, selling, general and administrative expense and amortization of acquisition-related intangible assets. This presentation differs from income from operations as defined by United States ("U.S.") Generally Accepted Accounting Principles ("GAAP"), as it excludes the effect of compensation associated with the deferred compensation plan obligations.

Our second quarter 2014 net sales of $491.5 million increased 6.6% from the first quarter of 2014. Our second quarter net sales represented the fifth straight quarter of sequential net sales growth. Net sales increased in all of our vertical markets with Telecom & Wireless net sales growing 9% sequentially.

Net sales of New Products grew 15% sequentially in the second quarter of 2014 mostly due to an increase in net sales of our 28 nm products. Our gross margin percentage decreased slightly from 67.1% in the first quarter of 2014 to 67.0% for the second quarter of 2014. The slight decline was driven by an unfavorable product mix across vertical markets.

For the third quarter of 2014, we are forecasting a range of a 2% increase to a 2% decrease in net sales compared with the second quarter of 2014. The forecast reflects anticipated continued strength in our 28 nm products. Both the Telecom & Wirelsss and Industrial Automation, Military & Automative vertical markets are expected to remain flat in the third quarter of 2014 while our Networking, Computer & Storage vertical market is expected to grow. The Other vertical market category is expected to decline.

We continue to generate strong operating cash flows, with $171.0 million in cash flows from operations for the second quarter of 2014. We ended the quarter with $4.6 billion in cash, cash equivalents and investments. During the second quarter of 2014, we returned cash to shareholders by both paying $46.6 million in dividends and repurchasing $197.0 million of common stock through our stock repurchase program. On July 21, 2014, our board of directors declared a cash dividend of $0.18 per share for the third quarter of 2014, an increase of 20% over the previous quarter's dividend.

22-------------------------------------------------------------------------------- Table of Contents Results of operations expressed as a percentage of net sales were as follows: Three Months Ended Six Months Ended June 27, 2014 June 28, 2013 June 27, 2014 June 28, 2013 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 33.0 % 32.0 % 33.0 % 31.4 % Gross margin 67.0 % 68.0 % 67.0 % 68.6 % Research and development expense 20.6 % 22.6 % 20.9 % 22.0 % Selling, general, and administrative expense 16.1 % 18.5 % 16.1 % 18.8 % Amortization of acquisition-related intangible assets 0.5 % 0.2 % 0.5 % 0.1 % Compensation expense/(benefit) - deferred compensation plan 0.6 % 0.0 % 0.5 % 0.4 % (Gain)/ loss on deferred compensation plan securities (0.6 )% 0.0 % (0.5 )% (0.4 )% Interest income and other (1.6 )% (0.7 )% (1.4 )% (0.5 )% Interest expense 2.2 % 0.8 % 2.2 % 0.7 % Income tax expense 3.4 % 2.4 % 3.2 % 0.9 % Net income 25.8 % 24.1 % 25.6 % 26.6 % Our net sales for the second quarter of 2014 increased by 16.5% from the second quarter of 2013. The increase was mainly due to significant growth in demand for our New Products, specifically in our 28 nm and 40 nm products. Net sales of our 28 nm products increased over 200% in the second quarter of 2014 compared with the second quarter of 2013. We also experienced growth in our Industrial Automation, Military & Automotive and Other vertical markets. We experienced a net sales increase in all geographies in the second quarter of 2014 compared with the second quarter of 2013.

Our net sales for the six months ended June 27, 2014 increased by 14.5% from the six months ended June 28, 2013. The increase was primarily due to significant growth in demand for our New Products. Net sales of our 28 nm products increased significantly while net sales of our 40 nm products also experienced growth in the six months ended June 27, 2014 compared with the same period in 2013. We experienced growth in a majority of our vertical markets, with the Telecom & Wireless and Industrial Automation, Military & Automotive vertical markets being particularly strong. Net sales increased in all geographies except North America, which experienced a slight decrease in net sales for the six months ended June 27, 2014 compared with the six months ended June 28, 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 Arria® 10, Stratix® V, Stratix IV, Arria V, Arria II, Cyclone® V, Cyclone IV, 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.

23-------------------------------------------------------------------------------- Table of Contents Net sales by product category were as follows: Year- Year- Three Months Ended Over- Six Months Ended Over- June 27, June 28, March 28, Year Year 2014 2013 2014 Change Sequential Change June 27, 2014 June 28, 2013 Change New 53 % 41 % 49 % 53 % 15 % 51 % 40 % 46 % Mainstream 21 % 28 % 23 % (11 )% 2 % 22 % 28 % (11 )% Mature and Other 26 % 31 % 28 % (5 )% (4 )% 27 % 32 % (2 )% Net Sales 100 % 100 % 100 % 17 % 7 % 100 % 100 % 14 % 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.

Year- Year- Three Months Ended Over- Six Months Ended Over- June 27, June 28, March 28, Year Year 2014 2013 2014 Change Sequential Change June 27, 2014 June 28, 2013 Change Telecom & Wireless 46 % 42 % 45 % 28 % 9 % 46 % 41 % 26 % Industrial Automation, Military & Automotive 21 % 22 % 22 % 14 % 3 % 21 % 22 % 13 % Networking, Computer & Storage 15 % 18 % 15 % (6 )% 1 % 15 % 18 % (7 )% Other 18 % 18 % 18 % 16 % 10 % 18 % 19 % 12 % Net Sales 100 % 100 % 100 % 17 % 7 % 100 % 100 % 14 % 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: Year- Year- Three Months Ended Over- Six Months Ended Over- June 27, June 28, March 28, Year Year 2014 2013 2014 Change Sequential Change June 27, 2014 June 28, 2013 Change FPGA 84 % 83 % 83 % 18 % 8 % 84 % 84 % 14 % CPLD 8 % 9 % 9 % 7 % 0 % 8 % 9 % 12 % Other Products 8 % 8 % 8 % 12 % 3 % 8 % 7 % 21 % Net Sales 100 % 100 % 100 % 17 % 7 % 100 % 100 % 14 % 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.

24-------------------------------------------------------------------------------- Table of Contents Net sales by geography were as follows: Year- Year- Three Months Ended Over- Six Months Ended Over- June 27, June 28, March 28, Year June 27, June 28, Year 2014 2013 2014 Change Sequential Change 2014 2013 Change Americas 16 % 17 % 15 % 9 % 8 % 15 % 18 % (3 )% Asia Pacific 43 % 39 % 43 % 28 % 8 % 43 % 39 % 26 % EMEA 27 % 28 % 26 % 13 % 9 % 27 % 27 % 12 % Japan 14 % 16 % 16 % 3 % (2 )% 15 % 16 % 10 % Net Sales 100 % 100 % 100 % 17 % 7 % 100 % 100 % 14 % Price Concessions and Product Returns from 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. 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 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. 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 the price concession. Total price concessions earned by distributors were $2.3 billion in each of the six months ended June 27, 2014 and June 28, 2013.

Our distributors have certain rights under our contracts to return defective, overstocked, obsolete or 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 $35.9 million and $42.1 million for the six months ended June 27, 2014 and June 28, 2013, respectively.

Gross Margin Three Months Ended Six Months Ended June 27, June 28, March 28, June 27, June 28, 2014 2013 2014 2014 2013 Gross Margin Percentage 67.0 % 68.0 % 67.1 % 67.0 % 68.6 % 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 next two to three years is between 67% and 70%. We believe that this gross margin target will enable us to achieve our desired balance between growth and profitability.

Our gross margin percentage for the three months ended June 27, 2014 decreased by 1.0 points compared with the same period of 2013. Our gross margin percentage for the six months ended June 27, 2014 decreased by 1.6 points compared with the same period of 2013. The decrease in both the three and six-month periods is primarily attributable to an unfavorable net sales mix across vertical markets, customers, and geographies when compared with the same periods of 2013.

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.

25-------------------------------------------------------------------------------- Table of Contents 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, our expanding library of IP cores and other future products.

Year- Year- Three Months Ended Over- Six Months Ended Over- June 27, June 28, March 28, Year June 27, June 28, Year (In millions) 2014 2013 2014 Change Sequential Change 2014 2013 Change Research and Development Expense $ 101.1 $ 95.5 $ 97.7 6 % 3 % $ 198.8 $ 183.2 9 % Percentage of Net Sales 20.6 % 22.6 % 21.2 % 20.9 % 22.0 % Research and development expense for the three months ended June 27, 2014 increased by $5.6 million, or 6%, compared with the three months ended June 28, 2013. The increase was primarily attributable to a $5.2 million increase in variable compensation expense based upon improved operating results for the three months ended June 27, 2014 and a $2.2 million increase in depreciation and amortization expense. These increases were partially offset by a $1.2 million decrease in tools and supplies and a $0.9 million decrease in professional services in connection with our product development activities.

Research and development expense for the six months ended June 27, 2014 increased by $15.6 million, or 9%, compared with the six months ended June 28, 2013. The increase was attributable to a $10.0 million increase in variable compensation expense based upon improved operating results for the six months ended June 27, 2014, a $5.3 million increase in depreciation and amortization expense, a $1.7 million increase in license costs in connection with our product development activities, and a $1.1 million increase related to timing of external product development costs. These increases were partially offset by a $2.1 million decrease in professional services in connection with our product development activities.

Selling, General, and Administrative Expense Selling, general, and administrative expense includes costs for compensation and benefits related to sales, marketing, and administrative employees, commissions and incentives, depreciation, legal, advertising, facilities and travel expenses.

Year- Year- Three Months Ended Over- Six Months Ended Over- June 27, June 28, March 28, Year Year (In millions) 2014 2013 2014 Change Sequential Change June 27, 2014 June 28, 2013 Change Selling, General and Administrative Expense $ 79.0 $ 77.9 $ 74.5 1 % 6 % $ 153.5 $ 156.5 (2 )% Percentage of Net Sales 16.1 % 18.5 % 16.2 % 16.1 % 18.8 % Selling, general, and administrative expense for the three months ended June 27, 2014 increased by $1.1 million, or 1%, compared with the three months ended June 28, 2013. The increase was primarily attributable to a $3.7 million increase in variable compensation expense based upon improved operating results for the three months ended June 27, 2014. This increase was offset by a $1.5 million decrease in external professional services and a $1.0 million decrease in personnel-related costs.

Selling, general, and administrative expense for the six months ended June 27, 2014 decreased by $3.0 million, or 2%, compared with the six months ended June 28, 2013. The decrease was attributable to a non-recurring $3.0 million 2013 expense for local non-income taxes, a $3.0 million decrease in external professional services, and a $2.1 million decrease in personnel-related costs due to the absence in 2014 of acquisition expenses incurred in the same period of 2013. These decreases were offset by a $4.9 million increase in variable compensation expense based upon improved operating results for the six months ended June 27, 2014.

26-------------------------------------------------------------------------------- Table of Contents Amortization of Acquisition-Related Intangible Assets Amortization of acquisition-related intangible assets increased by $1.5 million for the three months ended June 27, 2014, when compared with the same period in 2013, primarily due to acquisitions in the second quarter of 2013.

Amortization of acquisition-related intangible assets increased by $3.8 million for the six months ended June 27, 2014, when compared with the same period in 2013, primarily due to 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 a net investment gain of $3.1 million and $4.6 million on NQDC Plan assets for the three and six months ended June 27, 2014. We reported a net investment loss of $0.2 million and a gain of $3.3 million on NQDC Plan assets for the three and six months ended June 28, 2013, 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 NQDC Plan obligations is offset by (gains)/loss from the 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 - Non-Qualified Deferred Compensation Plan to our consolidated financial statements for a detailed discussion of the NQDC Plan.

Interest Income and Other Interest income and other, consisting mainly of interest income generated from investments in bonds, money market funds and high quality fixed income securities, increased by $5.0 million and $9.4 million for the three and six months ended June 27, 2014, respectively, when compared with the same periods in 2013, primarily due to the purchase of higher yielding securities to facilitate an economic hedge relative to our issuance of public debt.

Interest Expense Interest expense increased by $7.5 million and $15.5 million for the three and six months ended June 27, 2014, respectively, when compared with the same periods in the prior year, primarily due to the long-term debt issued in the fourth quarter of 2013.

Income Tax Expense 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 June 27, 2014 was 11.5% compared with 9.2% for the three months ended June 28, 2013. The increase in our effective tax rate was primarily due to lower one-time tax benefits in 2014 compared with the same period in 2013, and the expiration of the U.S.

federal research and development tax credit for 2014. The U.S. federal research and development tax credit has not been extended beyond 2013. During the three months ended June 28, 2013, we reversed $2.3 million of liabilities for uncertain tax positions relating to changes in our estimate for certain foreign jurisdictions.

Our effective tax rate for the six months ended June 27, 2014 was 11.0% compared with 3.2% for the six months ended June 28, 2013. The net change in our effective tax rate was primarily due to lower one-time tax benefits in 2014 compared with the same period in 2013, and the expiration of the U.S. federal research and development tax credit for 2014. During the six months ended June 27, 2014, we reversed $4.0 million of liabilities and the related interest for uncertain tax positions upon the expiration of a domestic statute of limitations, which was offset by $0.9 million of true-up adjustments resulting from the filing of tax returns in foreign jurisdictions. During the six months ended June 28, 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 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 well as $2.3 million of liabilities for uncertain tax positions relating to changes in estimates for certain foreign jurisdictions.

27-------------------------------------------------------------------------------- Table of Contents As of June 27, 2014, we had total gross unrecognized tax benefits of $320.5 million which, if recognized, would potentially impact our effective tax rate.

On December 31, 2013, we had total gross unrecognized tax benefits of $301.3 million. We are unable to make a reasonable estimate as to if and when cash settlements with the relevant taxing authorities may occur.

We recognize interest and penalties related to uncertain tax positions in our income tax provision. We have accrued approximately $50.2 million and $48.8 million for the payment of interest and penalties related to uncertain tax positions as of June 27, 2014 and December 31, 2013, respectively.

During the fourth quarter of fiscal 2013 we recorded a deferred charge for the deferral of income tax expense on intercompany profits that resulted from the sale of our newly acquired intellectual property rights from one of our U.S.

subsidiaries to one of our foreign subsidiaries. The deferred charge is included in Other current assets and Other assets, net on our consolidated balance sheets. As of June 27, 2014, the deferred charge balance in Other current assets was $2.2 million, and $17.8 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, 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.

FINANCIAL CONDITION, LIQUIDITY 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 2013, we issued $600 million aggregate principal amount of 2.5% senior notes (the "2.50% Notes") and $400 million aggregate principal amount of 4.10% senior notes (the "4.10% Notes") that will mature on November 15, 2018, and November 15, 2023, respectively, for stock repurchases and general corporate purposes (collectively the "2013 Notes"). In 2012, we issued $500 million aggregate principal amount of 1.75% senior notes (the "1.75% Notes") that will mature on May 15, 2017 to repay our former credit facility (the "2012 Notes").

In 2012, we entered into a credit agreement that provides for a $250 million unsecured revolving line of credit (the "Facility"), which is scheduled to mature in June 2017. As of June 27, 2014, we had no borrowings under the Facility. As such, the $250 million available under the Facility represents a source of liquidity.

We purchased $1.6 billion in U.S. Treasury securities over the past two years, of which $1.5 billion provides an economic hedge of the interest rate exposure on our 2013 and 2012 Notes. Overall, our investment portfolio is invested in mid to high investment grade securities and our investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments to be investment grade with the objective of minimizing the potential risk of principal loss.

We currently use cash to fund our operations, dividends, capital expenditures and for 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.

We earn a significant amount of our operating income outside of the U.S., which is deemed to be indefinitely reinvested in foreign jurisdictions. For at least the next 12 months, we have sufficient cash in the U.S. and we expect domestic cash flow to sustain our operating activities and our expected use of cash for quarterly dividends and share buy-backs. Most of the amounts held outside of the U.S. could be repatriated to the U.S. but, under the current law, would be subject to U.S. federal income taxes, less applicable foreign tax credits. As of June 27, 2014, we had approximately $1.9 billion of cash and cash equivalents and short-term investments held by our non-U.S. subsidiaries. We believe our U.S. sources of cash and liquidity, including external sources of financing, are sufficient to meet our business needs in the U.S. without repatriating aggregate unremitted earnings of our foreign subsidiaries.

28-------------------------------------------------------------------------------- Table of Contents Share Repurchases and Dividends We repurchase shares under our stock repurchase program that was 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 is a total of 233.0 million shares authorized for repurchase with approximately 26.2 million shares remaining for further repurchases under our stock repurchase program as of June 27, 2014. Since the inception of the stock repurchase program through June 27, 2014, we have repurchased a total of 206.8 million shares of our common stock for an aggregate cost of $4.6 billion. Management believes that this authorization is sufficient to support our share repurchase objectives through mid-2015.

During the six months ended June 27, 2014, we paid $94.2 million in cash dividends to stockholders, representing $0.30 per common share. On July 21, 2014, our board of directors declared a cash dividend of $0.18 per share for the third quarter of 2014.

Shelf Registration Statement We have an effective shelf registration statement on file with the Securities and Exchange Commission that 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.

Cash Flows Our cash and cash equivalents balance during the six months ended June 27, 2014 decreased by $180.8 million. The change in cash and cash equivalents was as follows: Six Months Ended June 27, June 28, (In thousands) 2014 2013 Net cash provided by operating activities $ 301,388 $ 214,043 Net cash used in investing activities (39,980 ) (182,526 ) Net cash used in financing activities (442,240 ) (119,300 ) Net decrease in cash and cash equivalents $ (180,832 ) $ (87,783 ) Total cash and cash equivalents accounted for 46% and 48% of total assets at June 27, 2014 and December 31, 2013, respectively.

Operating Activities For the six months ended June 27, 2014, our operating activities provided $301.4 million in cash, primarily attributable to net income of $243.5 million, adjusted for non-cash stock-based compensation expense of $47.6 million (net of related tax effects), depreciation and amortization (including amortization of acquisition-related intangible assets) of $33.7 million, deferred income tax expense of $12.5 million, amortization of debt discount and debt issuance costs of $1.6 million, and net amortization of investment discount/premium of $1.3 million. The net change in working capital accounts (excluding cash and cash equivalents and effects of acquisitions) was primarily due to a $30.5 million decrease in Accounts receivable, net, a $12.8 million increase in Inventories, an $11.1 million decrease in Other assets, a $5.7 million increase in Accounts payable and other liabilities, a $72.5 million decrease in Deferred income and allowances on sales to distributors, a $5.9 million increase in Income taxes payable and a $6.3 million decrease in deferred compensation plan obligations.

29-------------------------------------------------------------------------------- Table of Contents Our sales to distributors are primarily made under agreements allowing for subsequent price adjustments and returns, and we defer recognition of revenue until the products are resold by the distributor. At the time of shipment to distributors, 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. Accordingly, 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 $30.5 million decrease in Accounts receivable, net was primarily due to the timing of subsequent price concessions by certain distributors. The $72.5 million decrease in Deferred income and allowances on sales to distributors was due to net sales out-pacing gross billings to distributors near the end of the period.

The $12.8 million increase in Inventories was mainly due to an increase in production near the end of the period associated with an increase in demand for our new products.

The $11.1 million decrease in Other assets was primarily attributable to a decrease in income tax receivable due to the receipt of a federal income tax refund in the second quarter of 2014.

The $5.7 million increase in Accounts payable and other liabilities was primarily attributable to an increase in accounts payable due to an increase in inventory purchases during the second quarter of 2014 compared with the same period in 2013 associated with an increase in demand for our products. The increase was also attributable to an increase in accrued variable compensation expense based upon higher operating results for the six months ended June 27, 2014 and various other accrued items as a result of timing. These increases were partially offset by a decrease in accrued interest payable for our senior notes due to a semi-annual interest payment made in the second quarter of 2014 and a decrease in other accrued liabilities due to a holdback payment for one of our 2013 acquisitions.

The $5.9 million increase in Income taxes payable was primarily related to higher tax liabilities in the U.S. and certain foreign jurisdictions from accrual for tax exposures related to cost sharing and transfer pricing. The increase was partially offset by a decrease in unrecognized tax benefits resulting from a new accounting pronouncement adopted in the first quarter of 2014 and the reversal of uncertain tax positions for the expiration of domestic statute of limitations in the first quarter of 2014.

Investing Activities Cash used in investing activities in the six months ended June 27, 2014, primarily consisted of purchases of available for sale securities of $204.8 million, purchases of property and equipment of $21.6 million, a holdback payment for a 2013 acquisition of $3.4 million, purchase of intangible assets of $0.5 million and purchase of other investments of $8.2 million. These items were partially offset by the sale of deferred compensation plan securities, net of $6.3 million, proceeds from the maturity of available-for-sale securities of $134.2 million, and proceeds from sales of available-for-sale securities of $58.0 million.

Financing Activities Cash used in financing activities in the six months ended June 27, 2014, primarily consisted of repurchases of common stock of $358.8 million, cash dividend payments of $94.2 million, minimum statutory withholding for vested restricted stock units of $11.2 million, and long-term debt and credit facility issuance costs of $1.3 million. These items were partially offset by proceeds of $22.7 million from the issuance of common stock to employees through our employee stock plans and an excess tax benefit from stock-based compensation of $0.6 million.

CONTRACTUAL OBLIGATIONS We depend entirely upon subcontractors to manufacture our silicon wafers and provide assembly and test services. Due to lengthy subcontractor lead times, we must order these materials and services from these subcontractors well in advance, and we are obligated to pay for the materials and services once they are completed. As of June 27, 2014, we had approximately $190.0 million of outstanding purchase commitments to such subcontractors. We expect to receive and pay for these materials and services over the next six months.

As of June 27, 2014, we had $1.3 million of non-cancelable license obligations to providers of electronic design automation software and maintenance obligations expiring at various dates through December 2014.

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.

30-------------------------------------------------------------------------------- Table of Contents In addition to these lease and purchase obligations, in the normal course of business we enter into a variety of agreements and financial commitments. It is not possible to predict the maximum potential amount of future payments under these 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 position or operating results.

As of June 27, 2014, we had total gross unrecognized tax benefits of $320.5 million. Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits, as of June 27, 2014, we are unable to make a reasonably reliable estimate as to if and when cash settlements with the relevant taxing authorities will occur.

OFF-BALANCE SHEET ARRANGEMENTS As of June 27, 2014, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

SUBSEQUENT EVENT On July 21, 2014, our board of directors declared a quarterly cash dividend of $0.18 per common share, payable on September 2, 2014 to stockholders of record on August 11, 2014.

RECENT ACCOUNTING PRONOUNCEMENTS The information contained in Note 2 - Recent Accounting Pronouncements to our consolidated financial statements in Part I, Item 1 is incorporated by reference into this Part I, Item 2.

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