Stock-Based Compensation

Our equity incentive program is a broad-based, long-term retention program intended to attract, motivate, and retain talented employees as well as align stockholder and employee interests. The program provides stock-based incentive compensation (“awards”) to both our eligible employees and non-employee directors. Awards that may be granted under the program include non-qualified and incentive stock options, restricted stock units (“RSU”s), performance-based restricted stock units (“PRSU”s), restricted stock awards, stock appreciation rights, and stock bonus awards. To date, awards granted under the program consist of stock options, RSUs and PRSUs. The majority of stock-based awards granted under the program vest over four years. Stock options granted under the program have a maximum contractual term of ten years.

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

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



	Three Months Ended						Nine Months Ended
(In thousands)	September 27, 2013			September 28, 2012			September 27, 2013			September 28, 2012

Cost of sales	$	515		$	492		$	1,460		$	1,416
Research and development expense	11,324			11,065			32,125			31,393
Selling, general, and administrative expense	13,898			13,033			39,426			37,981
Pre-tax stock-based compensation expense	25,737			24,590			73,011			70,790
Less: income tax benefit	(6,720		)	(6,606		)	(18,908		)	(18,412		)
Net stock-based compensation expense	$	19,017		$	17,984		$	54,103		$	52,378

No stock-based compensation was capitalized during any period presented above. As of September 27, 2013, unrecognized stock-based compensation cost related to outstanding unvested stock options, RSUs, market-based PRSUs and Employee Stock Purchase Plan ("ESPP") shares that are expected to vest was approximately $174.3 million. This unrecognized stock-based compensation cost is expected to be recognized over a weighted average period of approximately 2.5 years. We apply an expected forfeiture rate when amortizing stock-based compensation expense. To the extent our actual forfeiture rate is different from our estimate, stock-based compensation related to these awards will be different from our expectations.

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



	Three Months Ended						Nine Months Ended
	September 27, 2013			September 28, 2012			September 27, 2013			September 28, 2012
ESPP purchase rights:
Expected term (in years)	—			—			1.0			1.0
Expected stock price volatility	—			—			31.2		%	39.1		%
Risk-free interest rate	—			—			0.1		%	0.2		%
Dividend yield	—			—			1.3		%	0.9		%
Weighted-average estimated fair value	$	—		$	—		$	8.41		$	10.54

RSUs:
Risk-free interest rate	0.5		%	0.3		%	0.3		%	0.3		%
Dividend yield	1.7		%	1.1		%	1.2		%	1.0		%
Weighted-average estimated fair value	$	33.41		$	35.68		$	32.20		$	33.52

On May 6, 2013 and July 30, 2012, we granted 262,647 and 66,489 market-based PRSUs, respectively, to a certain group of senior executives. As of September 27, 2013, the majority of these market-based PRSUs are still outstanding, and no market-based PRSUs have vested. For market-based PRSU grants made on May 6, 2013 and July 30, 2012, the weighted average grant date fair value was $33.03 and $41.18, respectively.

A summary of activity for our RSUs and PRSUs for the nine months ended September 27, 2013 and information regarding RSUs and PRSUs outstanding and expected to vest as of September 27, 2013 is as follows:



(In thousands, except per share amounts and terms)	Number of Shares		Weighted-Average Grant-Date Fair Market Value Per Share		Weighted-Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value ⁽¹⁾
Outstanding, December 31, 2012	6,960		$	34.03
Grants	2,663		$	33.20
Vested	(2,359	)	$	31.05
Forfeited	(426	)	$	34.97
Outstanding, September 27, 2013	6,838		$	34.68	1.6	$	252,746
Vested and expected to vest, September 27, 2013	5,991		$	34.68	1.5	$	221,439


(1)	Aggregate intrinsic value represents the closing price per share of our stock on September 27, 2013, multiplied by the number of RSUs and market-based PRSUs outstanding or vested and expected to vest as of September 27, 2013.

A summary of stock option activity for the nine months ended September 27, 2013 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of September 27, 2013 is as follows:



(In thousands, except per share amounts and terms)	Number of Shares		Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value ⁽¹⁾
Outstanding, December 31, 2012	5,163		$	25.81
Grants	72		$	14.79
Exercises	(1,378	)	$	20.51
Forfeited/Cancelled/Expired	(8	)	$	25.65
Outstanding, September 27, 2013	3,849		$	27.51	4.3	$	40,748
Exercisable, September 27, 2013	2,820		$	24.50	2.8	$	37,260
Vested and expected to vest, September 27, 2013	3,736		$	27.27	4.1	$	40,385


(1)	For those stock options with an exercise price below the closing price per share on September 27, 2013, aggregate intrinsic value represents the difference between the exercise price and the closing price per share of our common stock on September 27, 2013, multiplied by the number of stock options outstanding, exercisable, or vested and expected to vest as of September 27, 2013.

For the three and nine months ended September 27, 2013, 0.5 million and 1.4 million of non-qualified stock option shares were exercised, respectively. The total intrinsic value of stock options exercised for the three and nine months ended September 27, 2013 was $7.9 million and $19.9 million, respectively. The aggregate intrinsic value represents the difference between the exercise price and the selling price received by option holders upon the exercise of stock options during the period. The total cash received as a result of stock option exercises during the three and nine months ended September 27, 2013 was $11.5 million and $28.3 million, respectively.

As of September 27, 2013, our 2005 Equity Incentive Plan had a total of 28.3 million shares reserved for future issuance, of which 18.6 million shares were available for future grants.

ESPP

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

We sold 390,077 shares of common stock under the ESPP at a price of $26.87 during the nine months ended September 27, 2013, and 304,468 shares of common stock under the ESPP at a price of $30.23 during the nine months ended September 28, 2012. As of September 27, 2013, 3.5 million shares were available for future issuance under the ESPP.