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| ALTR > SEC Filings for ALTR > Form 10-Q on 3-Nov-2008 | All Recent SEC Filings |
3-Nov-2008
Quarterly Report
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations, as well as information contained in the risk factors
described in Item 1A of this report and elsewhere in this report, contains
forward-looking statements, which are provided under the "safe harbor"
protection of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are generally written in the future tense and/or are
preceded by words such as "will," "may," "should," "could," "expect," "suggest,"
"believe," "anticipate," "intend," "plan," or other similar words.
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) the impact of accounting pronouncements, (6) our provision for tax
liabilities and other critical accounting estimates.
Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The forward-looking statements contained in this report are based on information that is currently available to us and expectations and assumptions that we deemed reasonable at the time the statements were made. We do not undertake any obligation to update any forward-looking statements in this report or in any of our other communications, except as required by law. All such forward-looking statements should be read as of the time the statements were made and with the recognition that these forward-looking statements may not be complete or accurate at a later date.
Many factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements contained in this report. These factors include, but are not limited to, those risks described in Part II Item 1A of this report and those risks described under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 28, 2007.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our condensed 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 condensed consolidated financial statements
and accompanying notes. Our management believes that we consistently apply these
judgments and estimates and the condensed 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 condensed consolidated statement of 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,
(3) income taxes, and (4) stock-based compensation. Critical accounting
estimates related to revenue recognition are described below. For a discussion
of our other 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 28, 2007.
Revenue Recognition
We sell our products to original equipment manufacturers, or OEMs, and to electronic components distributors who resell these products to OEMs, or their subcontract manufacturers. We sell more than 90% of our products to distributors for subsequent resale to OEMs or their subcontract manufacturers. In almost all cases, sales to distributors are made under agreements allowing for subsequent price adjustments and returns, and we defer recognition of revenue 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. Because the data set is so large and because there may be errors in the reported data, 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 revenues, deferred income and allowances on sales to distributors, and net income.
RESULTS OF OPERATIONS
Sales Overview
We design, manufacture, and market high-performance, high-density programmable logic devices, or PLDs; HardCopy® ASIC devices; pre-defined software design building blocks known as intellectual property cores, or IP cores; and associated development tools.
We classify our products into three categories: New, Mainstream, and Mature and Other Products as follows:
• New Products include the Stratix® II (and GX), Stratix III, Arria™, Cyclone® II, Cyclone III, MAX® II, HardCopy, and HardCopy II devices;
• Mainstream Products include the Stratix (and GX), Cyclone, and MAX 3000A devices; and
• Mature and Other Products include the Classic™, MAX 7000, MAX 7000A, MAX 7000B, MAX 7000S, MAX 9000, FLEX ® series, APEX™ series, Mercury™, Excalibur™, configuration and other devices, intellectual property cores, and software and other tools.
The product categories above have been constructed to approximate the relative life cycle stages of our products. The product categories' compositions are adjusted approximately every two to three years. New Products are primarily comprised of the company's most advanced products. Customers 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 which 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.
Our net sales of $356.8 million for the three months ended September 26, 2008 increased by $41.0 million, or 13%, over our net sales of $315.8 million for the three months ended September 28, 2007. Our net sales of $1,052.7 million for the nine months ended September 26, 2008 increased by $112.3 million, or 12%, over our net sales of $940.4 million for the nine months ended September 28, 2007. The year-over-year increase in net sales was due to growth in sales of our New Products, led by higher sales of our Stratix II, Stratix III, Cyclone II, Cyclone III, Max II and HardCopy II families.
Sales for the three and nine months ended September 26, 2008 were driven by strong double-digit growth in New Products, partially offset by declines in the Mainstream and Mature Product categories, and PLD expansion into new applications across all four major market segments, enabled by advances in technology and performance.
Sales by product category, as a percentage of total sales, as well as year-over-year and sequential growth or decline for the periods indicated, were as follows:
Three Months Ended Nine Months Ended
Year- Year-
September 26, September 28, June 27, Over-Year Sequential September 26, September 28, Over-Year
2008 2007 2008 Change Change 2008 2007 Change
New 46 % 35 % 42 % 52 % 8 % 43 % 30 % 61 %
Mainstream 25 % 29 % 27 % -4 % -8 % 26 % 31 % -6 %
Mature and Other 29 % 36 % 31 % -10 % -7 % 31 % 39 % -11 %
Total Sales 100 % 100 % 100 % 13 % -1 % 100 % 100 % 12 %
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Sales by Market Segment
The following market segment 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 revenue to a market segment requires the use of estimates, judgment, and extrapolation. As such, actual results may differ from those reported.
Sales by market segment, as a percentage of total sales, as well as year-over-year and sequential growth or decline for the periods indicated, were as follows:
Three Months Ended Nine Months Ended
Year- Year-
September 26, September 28, June 27, Over-Year Sequential September 26, September 28, Over-Year
2008 2007 2008 Change Change 2008 2007 Change
Communications 44 % 40 % 43 % 24 % 0 % 43 % 40 % 20 %
Industrial 36 % 33 % 35 % 25 % 4 % 35 % 35 % 13 %
Consumer 14 % 18 % 14 % -13 % -5 % 14 % 16 % 1 %
Computer and Storage 6 % 9 % 8 % -23 % -18 % 8 % 9 % -7 %
Total Sales 100 % 100 % 100 % 13 % -1 % 100 % 100 % 12 %
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In the three and nine months ended September 26, 2008, sales in the Communications and Industrial segments advanced versus the comparable period in 2007, primarily as result of strong traction in ASIC and ASSP replacement. Additionally, prior year sales in these market segments were lower due to wide-spread customer inventory reduction programs. Sales in the Computer and Storage segment declined for the three months ended September 26, 2008 versus the comparable period in 2007, primarily as a result of customers ramping down older generation programs. Sales in the Computer and Storage segment declined for the nine months ended September 26, 2008 versus the comparable period in 2007, primarily as a result of inventory reductions and program transitions by customers. Sales in the Consumer segment declined for the three months ended September 26, 2008, when compared to the same period in 2007, primarily due to customer program transitions and a slowdown in the world-wide economy.
Sales of FPGAs and CPLDs
Our PLDs consist of field-programmable gate arrays, or FPGAs, and complex programmable logic devices, or CPLDs. FPGAs consist of our Stratix, Cyclone, Arria, APEX, FLEX, and ACEX series, as well as our Excalibur and Mercury families. CPLDs consist of our MAX, MAX II, and Classic families. Our other products consist of HardCopy, HardCopy II and other masked programmed logic devices, configuration devices, software and other tools and IP cores (collectively, "Other Products"). Sales of Other Products for the three and nine months ended September 26, 2008 decreased by 11% and 9%, respectively, when compared to the three and nine months ended September 28, 2007. These decreases were primarily attributable to customers ramping down older generation programs. Our sales of FPGAs and CPLDs, and Other Products as a percentage of total sales, as well as year-over-year and sequential growth or decline for the periods indicated, were as follows:
Three Months Ended Nine Months Ended
Year- Year-
September 26, September 28, June 27, Over-Year Sequential September 26, September 28, Over-Year
2008 2007 2008 Change Change 2008 2007 Change
FPGA 75 % 70 % 74 % 20 % 0 % 74 % 71 % 16 %
CPLD 17 % 19 % 18 % 2 % -4 % 18 % 19 % 6 %
Other Products 8 % 11 % 8 % -11 % 0 % 8 % 10 % -9 %
Total Sales 100 % 100 % 100 % 13 % -1 % 100 % 100 % 12 %
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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. Sales by geography, as a percentage of total sales, as well as year-over-year and sequential growth or decline for the periods indicated, were as follows:
Three Months Ended Nine Months Ended
Year- Year-
September 26, September 28, June 27, Over-Year Sequential September 26, September 28, Over-Year
2008 2007 2008 Change Change 2008 2007 Change
North America 23 % 22 % 24 % 17 % -7 % 24 % 22 % 20 %
Asia Pacific 35 % 34 % 35 % 19 % 3 % 34 % 33 % 15 %
Europe 23 % 24 % 23 % 6 % -2 % 23 % 25 % 4 %
Japan 19 % 20 % 18 % 6 % 3 % 19 % 20 % 8 %
Total Sales 100 % 100 % 100 % 13 % -1 % 100 % 100 % 12 %
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Price Concessions and Product Returns from Distributors
We sell each item in our product catalog to all of our distributors worldwide at a list price. However, distributors resell our products to end customers at a very broad range of individually negotiated price points based on a variety of factors, including customer, product, quantity, geography and competitive differentiation. The majority of our distributors' sales to their customers are priced at a discount from our list price. Often, under these circumstances, we remit back to the distributor a portion of their 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 approved distributor price concession. 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 since the final price earned and cash received for our products varies based on the extent of high volume of product purchased by an end customer and individual competitive situation. For the nine months ended September 26, 2008 and September 28, 2007, total price concessions earned by distributors were $3.0 billion and $2.2 billion, respectively. Price concessions represent 70% and 71% of our list price for the nine months ended September 26, 2008 and September 28, 2007, respectively.
Our distributors have certain return rights, including stock rotation and return of defective and overstocked products, subject to certain limitations. Our stock rotation program generally allows distributors to return to Altera product, subject to certain limits based on a percentage of net billings for the six months immediately prior to the stock rotation. Such rights of return expire upon the products being resold by the distributor to end customers. For the nine months ended September 26, 2008 and September 28, 2007, returns from distributors totaled $89.7 million and $96.3 million, respectively.
Gross Margin
Three Months Ended Nine Months Ended
September 26, September 28, June 27, September 26, September 28,
2008 2007 2008 2008 2007
Gross Margin Percentage 67.1 % 63.8 % 67.1 % 66.5 % 64.7 %
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Gross margin percentages increased by 3.3 points to 67.1% for the three months ended September 26, 2008 compared to the same period in the prior year. Gross margin percentages increased by 1.8 points to 66.5% for the nine months ended September 26, 2008 compared to the same period in the prior year. Gross margin rates are heavily influenced by both market
segment mix and the timing of material cost improvements. While these variables will continue to fluctuate on a quarterly basis, the company is targeting a 65% gross margin over the long term. We believe the 65% gross margin target affords us the right mix of growth opportunities across all served markets.
Stock-based compensation expense recognized during the three and nine months ended September 26, 2008 and September 28, 2007 did not have a significant impact on our gross margin.
Research and Development
Three Months Ended Nine Months Ended
Year- Year-
September 26, September 28, June 27, Over-Year Sequential September 26, September 28, Over-Year
($ in millions) 2008 2007 2008 Change Change 2008 2007 Change
Research and Development $ 61.4 $ 71.4 $ 64.2 -14 % -4 % $ 183.8 $ 192.9 -5 %
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Research and development expenses include expenditures for compensation and benefits, stock-based compensation expense, masks, prototype wafers, depreciation and amortization. These expenditures are for the design of new PLD and ASIC families, the development of process technologies, new package technology, software to support new products and design environments, and IP cores. Also included in research and development expenses is the mark-to-market impact of the Altera Non-Qualified Deferred Compensation Plan ("NQDC Plan"), which consisted of a $2.7 million and $5.1 million benefit for the three and nine months ended September 26, 2008, as compared to a $1.4 million and $3.5 million expense for the same periods in 2007. This mark-to-market impact of the NQDC Plan is completely offset in interest and other income, net.
Research and development expenses for the three months ended September 26, 2008 decreased by $10.0 million, or 14%, when compared to the three months ended September 28, 2007. This decrease was attributable to a $9.7 million decrease in spending on masks and wafers and a $4.1 million decrease in the mark-to-market impact of our NQDC Plan noted above. These decreases were partially offset by a $3.1 million increase in compensation and benefits.
Research and development expenses for the nine months ended September 26, 2008 decreased by $9.1 million, or 5%, when compared to the nine months ended September 28, 2007. This decrease was attributable to a $14.9 million decrease in spending on masks and wafers and an $8.6 million decrease in the mark-to-market impact of our NQDC Plan noted above. These decreases were partially offset by a $3.8 million increase in spending on prototypes and a $9.4 million increase in compensation and benefits.
We will continue to make significant investments in the development of new products and focus our efforts on the development of new programmable logic devices that use advanced semiconductor wafer fabrication processes, as well as related development software. We are currently investing in the development of future silicon products, as well as our Quartus ® II software, our library of IP cores, and other future products.
Selling, General, and Administrative
Three Months Ended Nine Months Ended
Year- Year-
September 26, September 28, June 27, Over-Year Sequential September 26, September 28, Over-Year
($ in millions) 2008 2007 2008 Change Change 2008 2007 Change
Selling, General and Administrative $ 64.9 $ 66.1 $ 64.0 -2 % 1 % $ 189.9 $ 205.7 -8 %
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Selling, general, and administrative expenses primarily include compensation and benefits related to sales, marketing, and administrative personnel as well as stock-based compensation expense, commissions and incentives, depreciation, legal, advertising, facilities, and travel expenses. Also included in selling, general, and administrative expenses is the mark-to-market impact of our NQDC Plan, which consisted of a $0.4 million and $2.7 million benefit for the three and nine months ended September 26, 2008, as compared to a $0.8 million and $2.8 million expense for the same periods in 2007. The mark-to-market impact of the NQDC Plan is completely offset in interest and other income, net.
Selling, general, and administrative expenses for the three months ended September 26, 2008 decreased by $1.2 million, or 2%, when compared to the three months ended September 28, 2007. This decrease was primarily due to a $2.5 million decrease in spending on consulting and outside services, a $1.3 million decrease in stock-based compensation expense as a result of headcount reductions and a $1.2 million decrease in the mark-to-market impact of our NQDC Plan noted above. These decreases were partially offset by a $2.8 million increase in commission expense due to non-recurring charges related to the elimination of some external sales representatives and certain employee termination costs.
Selling, general, and administrative expenses for the nine months ended September 26, 2008 decreased by $15.8 million, or 8%, when compared to the nine months ended September 28, 2007. This decrease was primarily due to our ongoing efforts to increase efficiency and reduce costs by reducing headcount, consulting services and stock-based compensation expense. Selling, general, and administrative expenses for the nine months ended September 26, 2008 were also favorably affected by $5.5 million associated with the mark-to-market impact of our NQDC Plan noted above. Consulting costs for the nine months ended September 26, 2008 decreased by $5.6 million, as compared to the same period in 2007. The decrease in consulting costs was primarily due to the absence in 2008 of costs incurred in 2007 related to the implementation of our enterprise resource planning ("ERP") system. In addition, stock-based compensation expense decreased by $3.8 million for the nine months ended September 26, 2008 as compared to the same period in 2007.
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