UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended | ||
or | ||
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to . | ||
Commission file number:000-30361
Illumina, Inc.
(Exact name of Registrant as Specified in Its Charter)
Delaware | 33-0804655 | |
| (State or other Jurisdiction of | (I.R.S. Employer | |
| Incorporation or Organization) | Identification No.) | |
9885 Towne Centre Drive, | ||
San Diego, California | 92121 (zip code) | |
| (Address of Principal Executive Offices) |
Registrant’s telephone number, including area code:
(858) 202-4500
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Exchange on Which Registered | |
| Common Stock, $0.01 par value (including associated Preferred Stock Purchase Rights) | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No þ
As of February 1, 2008,5, 2010, there were 55,545,039120,298,934 shares (excluding 7,409,54524,068,450 shares held in treasury) of the Registrant’s Common Stock outstanding. The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of June 29, 200728, 2009 (the last business day of the Registrant’s most recently completed second fiscal quarter), based on the closing price for the Common Stock on The NASDAQ Global Select Market on that date, was $2,112,729,064.$4,649,494,956. This amount excludes an aggregate of 1,874,3292,197,137 shares of Common Stock held by officers and directors and each person known by the Registrant to own 10% or more of the outstanding Common Stock. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, directly or indirectly, to direct or cause the direction of the management or policies of the Registrant, or that the Registrant is controlled by or under common control with such person.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for the annual meeting of stockholders expected to be held on May 16, 200812, 2010 are incorporated by reference into Items 10 through 14 of Part III of this Report.
ILLUMINA, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDEDDECEMBER 30, 2007JANUARY 3, 2010
TABLE OF CONTENTS
FOR THE FISCAL YEAR ENDED
TABLE OF CONTENTS
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This Annual Reportannual report onForm 10-K may contain forward-looking statementscontains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934.1934, as amended. These statements relate todiscuss our current expectations concerning future results or events, orincluding our future financial performance. We have attempted to identifymake these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. These statements include, among others:
| • | statements concerning our expectations as to our future financial performance, results of operations, or other operational results or metrics; | |
| • | statements concerning the benefits that we expect will result from our business activities and certain transactions we have completed, such as increased revenue, decreased expenses, and avoided expenses and expenditures; and | |
| • | statements of our expectations, beliefs, future plans and strategies, anticipated developments (including new products), and other matters that are not historical facts. |
These statements may be made expressly in this document or may be incorporated by terminology includingreference to other documents we have filed or will file with the Securities and Exchange Commission, or SEC. You can identify many of these statements by looking for words such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should”“should,” or “will” or the negative of these terms or other comparable terminology.terminology and similar references to future periods. These forward-looking statements are only predictionssubject to numerous assumptions, risks, and involve known and unknown risks, uncertainties and other factors, including the risks outlined under “Item 1A. Risk Factors” in this Annual Report, that may cause our actual results levels of activity, performance or achievementsevents to be materially different from any future results levels or activity, performance or achievementsevents expressed or implied by us in those statements. Many of the factors that will determine or effect these forward-looking statements. Although we believeresults or events are beyond our ability to control or project. Specific factors that the expectations reflectedcould cause actual results or events to differ from those in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not unduly rely on theseinclude:
| • | our ability to develop and commercialize further our Solexa®, BeadArraytm, and VeraCode® technologies and to deploy new sequencing, genotyping, and gene expression products and applications for our technology platforms; | |
| • | our ability to manufacture robust instrumentation, consumables, and reagents; | |
| • | reductions in the funding levels to our primary customers, including as the result of timing and amount of funding provided by the American Recovery and Reinvestment Act of 2009; and | |
| • | other factors detailed in our filings with the SEC, including the risks, uncertainties, and assumptions described in Item 1A “Risk Factors” below, or in information disclosed in public conference calls, the date and time of which are released beforehand. |
Our forward-looking statements which speak only as of the date of this Annual Report.annual report. We areundertake no obligation, and do not under any dutyintend, to publicly update any of theor revise forward-looking statements, after the date we file this Annual Report onForm 10-Kto review or confirm analysts’ expectations, or to conformprovide interim reports or updates on the progress of any current financial quarter, whether as a result of new information, future events, or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this annual report. Given these statementsuncertainties, we caution investors not to actual results, unless required by law. You should, however, review the factors and risks we describe in the reports we file from time to time with the Securities and Exchange Commission.unduly rely on our forward-looking statements.
Available Information
Our annual report onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K, and all amendments to those reports are available free of charge on our website, www.illumina.com.www.illumina.com. The information on our website is not incorporated by reference into this report. Such reports are made available as soon as
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reasonably practicable after filing with, or furnishing to, the Securities and Exchange Commission.SEC. The SEC also maintains an Internet site atwww.sec.govthat contains reports, proxy and information statements, and other information regarding issuers that electronically file with the SEC. Copies of our annual report onForm 10-K will be made available, free of charge, upon written request.
Illumina®, Array of Arraystm, BeadArraytm, BeadXpress®, CSPro®, DASL®, Genetic Energytm, GoldenGate®, GoldenGate Indexingtm, GenomeStudio®, illuminaDxtm, HiSeqtm, Infinium®, IntelliHyb®, iSelect®, Making Sense Out of Life®, Oligator®, Sentrix®, Solexa®, and VeraCode® are our trademarks. This report also contains brand names, trademarks, or service marks of companies other than Illumina, and these brand names, trademarks, and service marks are the property of their respective holders.
Unless the context requires otherwise, references in this annual report onForm 10-K to “Illumina,” the “Company,” “we,” “us,” and “our” refer to Illumina, Inc. and its subsidiaries.
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PART I
| ITEM 1. | Business |
Overview
We are a leading developer, manufacturer, and marketer of integrated systems for the large scale analysis of genetic variation and biological function. We were incorporated in California in April 1998 and reincorporated in Delaware in July 2000. Our principal executive offices are located at 9885 Towne Centre Drive, San Diego, California 92121. Our telephone number is(858) 202-4500.
Using our proprietary technologies, we provide a comprehensive line of products and services that currently serve the sequencing, genotyping, and gene expression markets. In the future,markets, and we expect to enter the market for molecular diagnostics. Our customers include leading genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations, and biotechnology companies.
We develop and commercialize sequencing technologies used to perform a range of analyses, including de novo sequencing, whole genome re-sequencing, gene expression analysis, and small RNA analysis. Our product and service offerings also include leading-edge solutions for single-nucleotide polymorphism (SNP) genotyping, copy number variation (CNV), DNA methylation studies, gene expression profiling, and low-multiplex analysis of DNA, RNA, and protein. We believe we are the only company with genome-scale technology for sequencing, genotyping, and gene expression — the three cornerstones of modern genetic analysis.
Our tools provide researchers around the world with the performance, throughput, cost effectiveness, and flexibility necessary to performdetermine and analyze the billions of bits of genetic testsinformation needed to extract valuable medical information from advances in genomics and proteomics. We believe this information will enable researchers to correlate genetic variation and biological function, which will enhance drug discovery and clinical research, allow diseases to be detected earlier, and permit better choices of drugs for individual patients.
In April 2005, we completed the acquisition of CyVera Corporation (Cyvera). The aggregate consideration for the transaction was $17.5 million, consisting of approximately 1.5 million shares of our common stock and payment of approximately $2.3 million of CyVera’s liabilities at the closing.
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Industry Background
DNA, RNA, and Protein
The genetic content that controls an organism’s living cells is encoded in deoxyribonucleic acid, or DNA. The human body, for instance, is composed of billions of cells, each containing DNA, which encodes the basic instructions for cellular function. The complete set of an organism’s DNA is called its genome. The human genome is organized into 23 pairs of chromosomes that are further divided into over 30,000 smaller regions called genes. Each gene is comprised of a string of nucleotide bases labeled A, C, G, and T, representing adenine, cytosine, guanine, and thymine, respectively. Human DNA has approximately 3 billion nucleotide bases and their precise order is known as the DNA sequence. When a gene is “expressed,” a partial copy of its DNA sequence — called messenger RNA or mRNA — is used as a template to direct the synthesis of a protein. Proteins, in turn, direct all cellular function.
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Genetic Variation and Biological Function
Every person inherits two copies of each gene — one from each parent. The two copies of each gene may be identical, or they may be different. These differences are referred to as genetic variation. Examples of the physical consequences of genetic variation include differences in eye and hair color. Genetic variation can also have important medical consequences. Genetic variation affects disease susceptibility, including predisposition to cancer, diabetes, cardiovascular disease, and Alzheimer’s disease. In addition, genetic variation may cause people to respond differently to the same drug treatment. Some people may respond well, others may not respond at all, and still others may experience adverse side effects. A common form of genetic variation is a single-nucleotide polymorphism, or SNP. A SNP is a variation in a single position of a nucleotide base in a DNA sequence. It is estimated that the human genome contains over nine30 million SNPs.
While in some cases a single SNP will be responsible for medically important effects, it is now believed that combinations of SNPs may contribute to the development of most majorcommon diseases. Since there are millions of SNPs, it is important to investigate many representative, well-chosen SNPs simultaneously in order to discover medically valuable information.
Another contributor to disease and dysfunction is the over- or under-expression of genes within an organism’s cells. A very complex network of genes interacts to maintain health in complex organisms. The challenge for scientists is to delineate the associated genes’ expression patterns and their relationship to disease. Until recently,Historically, this problem was addressed by investigating effects on agene-by-gene basis. This is time consuming, and difficulties exist when several pathways cannot be observed or “controlled” at the same time. With the advent of microarray technology, thousands of genes can now be tested at the same time.
There are multiple methods of studying genetic variation and biological function, including sequencing, SNP genotyping, and gene expression profiling, each of which is uniquely addressed in our breadth of products and services. Our broad portfolio of current products and services supports a range of applications, from highest multiplexing (for whole-genome discovery and profiling) to mid-and low-multiplexing options (for high-throughput targeted screening). Furthermore, our products and services support both the upstream discovery process and the downstream test development process in order to understand genetic variation at the DNA, RNA, and protein levels.
Sequencing
DNA sequencing is the process of determining the order of nucleotide bases (A, C, G, or T) in a DNA sample, which can be further divided into de novo sequencing, re-sequencing, and tag sequencing. In de novo sequencing, the goal is to determine the sequence of a representative sample from a species never before sequenced. Understanding the similarities and differences in DNA sequence between many species can help our understanding of the function of the protein structures encoded in the DNA.
In re-sequencing, the sequence of nucleotide bases is compared to a standard or reference sequence from a given species to identify changes that reflect genetic variation. Re-sequencing studies can be performed on a genome-wide basis, which is referred to as whole-genome re-sequencing, or on targeted areas of the genome (for example, regions identified by genome-wide association studies), which is known as targeted re-sequencing. This is an extremely comprehensive form of genetic analysis, in which every base is characterized for possible mutations. We believe that these underlying discoveries will likely feed the development of new array products for broader testing and biomarker validation.
In tag sequencing, short sequences, often representative of a larger molecule or genomic location, are detected and counted. In these applications, the number of times that each tag is seen provides quantification of an underlying biological process. As an example, in digital gene expression, one or more tag sequences may be analyzed for each expressed gene, and the number of copies of these tags that are detected in an experiment is a measure of how actively that gene is being expressed in the tissue sample being analyzed. Similarly, a tag sequencing approach known as ChIP sequencing is used to determine the locations and extent of protein and DNA interactions throughout the genome.
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SNP Genotyping
SNP genotyping is the process of determining which nucleotide base (A, C, G, or T) is present at a particular site in the genome within any organism. The most common use of SNP genotyping is for genome-wide association studies (GWAS) to look for an individualassociation between DNA sequence variants and a specific phenotype of interest. This is commonly done by studying the DNA of individuals that are affected by a common disease or other organism.that exhibit a specific trait against the DNA of control individuals who do not have this disease or trait. The use of SNP genotyping to obtain meaningful statistics on the effect of an individual SNP or a collection of SNPs and to apply that information to clinical trials and diagnostic testing, requires the analysis of millions of SNP genotypes and the testing of large populations for each disease. For example, a single large clinical trialstudy could involve genotyping more than 1,000,000 SNPs per patientsample in more than 1,000 patients,samples, thus requiring 1one billion assays. Using previously available technologies, this scale of SNP genotyping was both impractical and prohibitively expensive.
Large-scale SNP genotyping can be used in a variety of ways, including studies designed to understand the genetic contributions to disease (disease association studies), genomics-basedgenomics based drug development, clinical trial analysis (responders and non-responders, and adverse event profiles), disease predisposition testing, and disease diagnosis. SNP genotyping can also be used outside of healthcare, for example in the development of plants and animals with commercially desirable commercial characteristics. These markets will require billions of SNP genotyping assays annually.
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Gene Expression Profiling
Gene expression profiling is the process of determining which genes are active in a specific cell or group of cells and is accomplished by measuring mRNA, the intermediary messenger between genes (DNA) and proteins. Variation in gene expression can cause disease, or act as an important indicator of disease or predisposition to disease. By comparing gene expression patterns between cells from different environments, such as normal tissue compared to diseased tissue or in the presence or absence of a drug, specific genes or groups of genes that play a role in these processes can be identified. Studies of this type, often used in drug discovery, require monitoring thousands, and preferably tens of thousands, of mRNAs in large numbers of samples. Once a smaller set of genes of interest has been identified, researchers can then examine how these genes are expressed or suppressed across numerous samples, for example, within a clinical trial.
As gene expression patterns are correlated to specific diseases, gene expression profiling is becoming an increasingly important diagnostic tool. Diagnostic use of expression profiling tools is anticipated to grow rapidly with the combination of the sequencing of various genomes and the availability of more cost-effective technologies.
Our Principal Markets
From our inception, we have believed that the analysis of genetic variation and function will play an increasingly important role in molecular biology and that by empowering genetic analysis, our tools will further disease research, drug development, and the development of molecular tests. Our customers include leading genomic research centers, academic institutions, clinical research organizations, and pharmaceutical
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and biotechnology companies. In addition, fundamental developments in recent years have created significant new opportunities for us in the emerging market of molecular diagnostics.
Life Sciences Research Market
The life sciences research market consists of laboratories generally associated with universities, medical research centers, government institutions such as the United States National Institutes of Health, and other research institutions as well as biotechnology and pharmaceutical companies. Researchers at these institutions are using our products and services in a DNA sample,broad spectrum of scientific activities, such as: next-generation sequencing,mid-to-high-complexity genotyping and gene expression (for whole-genome discovery and profiling), and low complexity genotyping and gene expression (for high-throughput targeted screening). Next-generation sequencing is the most rapidly growing of these three areas. It is fueled by private and public funding, new global initiatives to broadly characterize genetic variation, and the migration of legacy genetic applications to sequencing based technologies.
Applied Markets
We provide products and services to enable or improve activities in particular markets, which can be further divided into de novo sequencing, re-sequencing,we refer to as applied markets. A current focus of our products for these markets is in the area of agricultural research, including microarrays that contain SNPs for custom and tagfocused genotyping of seeds and crops (such as maize) and livestock (such as cattle, horses, pigs, and sheep). The applied markets may also include opportunities for our products and services in the fields of forensic analysis, veterinary diagnostics, cytogenics, retail pet genomics, and consumer genotyping and sequencing. In de novoJuly 2009, we launched a service program to provide high-quality personal genome sequencing the goal isfor consumers. In connection with our personal sequencing service, we collaborate with a number of partners, including 23andMe, Inc.; deCODE genetics ehf; Knome, Inc.; National Center for Genome Resources; Navigenics, Inc.; and Pathway Genomics, to determine the sequenceencourage secondary data analysis of a representative sample frompersonal genome, such as calculation of disease risk, ancestry, and information on traits of interest. Although we do not perform personal genotyping directly as a species never before sequenced. Understandingservice, several companies use our technology and products to provide personal genotyping services.
Molecular Diagnostics Market
The primary growth drivers in the similaritiesmolecular diagnostics market are the continued discovery of genetic markers with proven clinical utility, the increasing adoption of genetic based diagnostic tests, and differencesthe expansion of reimbursement programs to include a greater number of approved diagnostic tests. We believe that molecular diagnostic tests will create a fundamental shift in DNA sequence between many species can help to improve our understandingboth the practice of medicine and the economics of the functionpharmaceutical industry by creating an increased emphasis on preventative and predictive molecular medicine. Physicians will be able to use these tests for the early detection of disease and to treat patients on a personalized basis, allowing them to select the most effective therapy with the fewest side effects. We believe our BeadXpress instrument platform, using our VeraCode technology, is ideally suited to provide a cost-effective, high-throughput, mid- to low-multiplex solution to the molecular diagnostic market. During the third quarter of 2009, we submitted our BeadXpress instrument platform for review by the U.S. Food and Drug Administration (FDA). Assuming FDA approval of this instrument platform, we plan to develop clinical diagnostic testing panels for use on the BeadXpress instrument platform, including possible panels for multi-drug resistant organisms, herpes, and respiratory viruses, and we expect to continue research into the potential development of cancer diagnostic panels, initially focusing on ovarian cancer and gastric cancer. In addition, during the fourth quarter of 2009 we made a pre-IDE (investigational device exemption) submission with the FDA for a cytogenetics test intended to be used as an aid in the postnatal diagnosis of chromosomal abnormalities known to be associated with developmental delay and mental retardation. The pre-IDE package included our iScan instrument platform together with associated microarrays, reagents, and software. Following completion of the structures found inIDE process, we intend to seek FDA clearance for the DNA.
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Our Principal Technologies
Sequencing Technology
Our DNA sequencing technology is based on the use of our proprietary SBS biochemistry. In SBS, single stranded DNA is extended from a priming site, one base at a time, using reversible terminator nucleotides. These are DNA bases that can be added to a growing second strand, but which initially cannot be further extended. This means that at each cycle of the chemistry, only one base can be added. Each base that is added includes a fluorescent label that is specific to the particular base (A, C, G, or T). Thus, following incorporation, the fluorescence can be imaged, its color determined, and the base itself can be inferred. Once this is done, an additional step removes both the fluorescence and the blocking group that had prevented further extension of the second strand. This allows another base to be added, and the cycle can then be repeated. Our technology is capable of generating over 100 billion bases of DNA sequence from a single experiment with a single sample preparation. The reversible terminator bases that we use are novel synthetic molecules that we manufacture. They are not well incorporated by naturally occurring polymerases, so we have also developed proprietary polymerase enzymes for this purpose. Both the nucleotides and enzymes are the subject of significant intellectual property owned by us.
In our DNA sequencing systems, we apply the SBS biochemistry on microscopic islands of DNA, referred to as DNA clusters. Each cluster starts as a single DNA molecule fragment, typically a few hundred bases long, attached to the inside surface of a flow cell. We then use a proprietary amplification biochemistry to create copies of each starting molecule. As the copies are made, they are covalently linked to the surface, so they cannot diffuse away. After a number of cycles of amplification, each cluster might have approximately 1,000 copies of the original starting molecule, but still be only about a micron (one-millionth of a meter) in diameter. By making so many copies, the fluorescent signal from each cluster is significantly increased. Because the clusters are so small, hundreds of millions of clusters can be independently formed inside a single flow cell. This large number of clusters can then be sequenced simultaneously by alternate cycles of SBS biochemistry and fluorescent imaging. Sequence reads are aligned against a reference genome and genetic differences are called using specially developed data analysis software.
BeadArray Technology
Our proprietary BeadArray technology combines microwells etched into a substrate and specially preparedconsists of 2-micron silica beads that self-assemble into microwells etched into an array.array substrate. We have deployed our BeadArray technology in two different array formats, the Array Matrix and the BeadChip. Our first bead-basedbead based product was the Array Matrix, which incorporates fiber optic bundles. The fiber optic bundles which we cut into lengths of less than one inch, are manufactured to our specifications. Each bundle is comprised of approximately 50,000 individual fibers, andwith 96 of these bundles are placed into an aluminum plate which formsto form an Array Matrix. In late 2009, we announced that during 2010 we would no longer sell Array Matrix products and would instead deploy our BeadArray technology only on BeadChips. BeadChips are fabricated in microscope slide-shaped sizesslide-size silicon wafers with varying numbers of sample sites per slide. Both formatsBeadChips are chemically etched to create tens to hundreds of thousandsmillions of wells for each sample site.
In a separate process, we create sensors by affixing hundreds of thousands of copies of a specific type of oligonucleotide molecule to each of the billions of microscopic beads in a batch. We make different batches of
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beads, with the beads in a given batch coated with one particular type of molecule. The particular molecules on a bead define that bead’s function as a sensor. For example, we create a batch of SNP sensors by attaching a particular DNA sequence, or oligo, to each bead in the batch. We combine batches of coated beads to form a pool specific to the type of array we intend to create. A bead pool one milliliter in volume contains sufficient beads to produce thousands of arrays.
To form an array, a pool of coated beads is brought into contact with the array surface where they are randomly drawn into the wells, one bead per well. The tens of thousands of beads in the wells comprise our individual arrays. Because the beads assemble randomly into the wells, we perform a final procedure called ’decoding’“decoding” in order to determine which bead type occupies which well in the array. We employ several proprietary methods for decoding, which is a process that requires only a few steps to identify all the beads in the array. One beneficial by-product of the decoding process is a functional validation of each bead in the array. This quality control test characterizes the performance of each bead and can identify and eliminate use of any empty wells. We ensure that each bead type on the array is sufficiently represented by including multiple copies of each bead type. Multiple bead type copies improve the reliability and accuracy of the resulting data by allowing statistical processing of the results of identical beads. We believe we are the only microarray company to provide this level of quality control in the industry.
An experiment is performed by preparing a sample, such as DNA, from a patient, and introducing it to the array. The design features of our Array Matrix allow it to be simply dipped into a solution containing the sample, whereas our BeadChip allows processing of samples on a slide-sized platform. The molecules in the sample bind to their matching molecules on the coated bead. Thesebeads. The molecules in either the sample or on the bead are labeled with a fluorescent dye either before or after the binding. The BeadArray Reader detects the fluorescent dyebinding, which can be detected by shining a laser on the fiber optic bundle or on the BeadChip. This allows the detection of the molecules resulting in a quantitative analysis of the sample.
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VeraCode Technology
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Our StrategyProducts
molecular diagnostics. The first implementationmajority of our BeadArray technology, the Array Matrix, is a disposable matrix with 96 fiber optic bundles arranged in a pattern that matches the standard 96-well microtiter plate. Each fiber optic bundle performs more than 1,500 unique assays. The BeadChip, introduced in 2003, is fabricated in multiple configurations to support multiple applicationsproduct sales consist of instruments and scanning technologies.
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| Product | Product Description | Applications | Launch Date | ||||||
| HiSeq 2000 | Instrument for high-throughput (up to 200 Gb per run and up to 25 GB per day) sequencing using our SBS sequencing technology | DNA sequencing, gene regulation analysis, sequencing-based transcriptome analysis, SNP discovery and structural variation analysis, cytogenetic analysis, DNA-protein interaction analysis (ChIP-seq), sequencing-based methylation analysis, and small RNA discovery and analysis | Q1 2010 | ||||||
| Genome Analyzer IIx | Instrument for medium to high-throughput (up to 95 Gb per run) sequencing using our SBS sequencing technology | DNA sequencing, gene regulation analysis, sequencing-based transcriptome analysis, SNP discovery and structural variation analysis, cytogenetic analysis, DNA-protein interaction analysis (ChIP-seq), sequencing-based methylation analysis, and small RNA discovery and analysis | Q2 2009 | ||||||
| Genome Analyzer IIe | Instrument for low to medium throughput (up to 40 Gb per run) sequencing using our SBS sequencing technology | DNA sequencing, gene regulation analysis, sequencing-based transcriptome analysis, SNP discovery and structural variation analysis, cytogenetic analysis, DNA-protein interaction analysis (ChIP-seq), sequencing-based methylation analysis, and small RNA discovery and analysis | Q1 2010 | ||||||
| iScan System | High-resolution imaging instrument to rapidly scan our BeadArray based assays | SNP genotyping and CNV analysis, custom genotyping, cytogenetic analysis, focused genotyping, linkage analysis, whole-genome genotyping and copy number analysis, gene regulation and epigenetic analysis, array-based methylation analysis, gene expression analysis, array-based transcriptome analysis, FFPE sample analysis, and whole-genome gene expression analysis | Q1 2008 | ||||||
| BeadXpress Reader | Low- to mid-multiplex, high-throughput instrument for readout of assays (e.g., biomarker validation and development of molecular diagnostics) deployed on VeraCode bead technology | Custom low- to mid-plex genotyping, custom low- to mid-plex methylation analysis, SNP screening, and protein screening | Q1 2007 | ||||||
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Consumables
| Product | Product Description | Applications | Launch Date | ||||||
| InfiniumHD Whole-Genome BeadChips | Multi-sample DNA Analysis microarrays that interrogate up to 1.2 million markers per sample, depending on the BeadChip. Product line includes the following BeadChips with human and agriculturally relevant genome panels: HumanOmniExpress, HumanOmni1-Quad, Human1M-Duo, and BovineHD | Array based whole-genome genotyping | Q1 2008 through Q1 2010 | ||||||
| iSelect Custom Genotyping BeadChips | Customer designable SNP genotyping arrays for 3,000 to 200,000 markers for use with any species | Array based custom genotyping | Q2 2006 through Q1 2010 | ||||||
| GoldenGate Assay Method | High throughput assay and genotyping system | High throughput, array based genotyping | Q3 2009 | ||||||
| GoldenGate Universal-32 Sample BeadChip | 32 sample GoldenGate genotyping arrays | Array based genotyping | Q4 2008 | ||||||
| Paired-End Genomic DNA Sample Prep Kit | Streamlined library preparation kit to generate 200 — 500 kb insert paired-end reads | Whole-genome sequencing, targeted sequencing, gene expression discovery and profiling, and epigenomics analysis | Q2 2008 | ||||||
| VeraCode GoldenGate | Flexible low plex GoldenGate genotyping arrays compatible with the BeadXpress System | High throughput, array based genotyping | FY 2007 | ||||||
| Standard Sequencing Kit | Reagents used for SBS chemistry on our sequencing platforms | Whole-genome sequencing, targeted sequencing, gene expression discovery and profiling, and epigenomics analysis | Q1 2007 | ||||||
| Infinium Assay Kit | Reagents used to perform Infinium assays on the iScan platform | Array-based genotyping | Q1 2008 through Q1 2010 | ||||||
Our Collaborative PartnersServices
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includes novel custom products as well as all released products. These applications include but are not limited to human whole exome and Licensing Agreement (the Development Agreement) with deCODE genetics, ehf. (deCODE). Pursuant to the Development Agreement, the parties agreed to collaborate exclusively to develop, validatecustom targeted re-sequencing, de novo sequencing, small RNA discovery and commercialize specific diagnostic tests for variants in genes involved in three disease-related pathways: the gene-encoding leukotriene A4 hydrolase, linked to heart attack; the gene-encoding transcription factor 7-like 2 (TCF7L2), linked to type 2 diabetes;profiling, gene expression using random primed RNA sampling technology, ChIP SEQ, and the gene-encoding BARD1, linked to breast cancer. With deCODE, we are developing diagnostic tests based on these variants for use on our BeadXpress system.methylome interrogation.
We have been offering genotyping services since 2002. Our genotyping services offer all of our genotyping products, including standard and custom GoldenGate, standard Infinium and Infinium HD, as well as iSelect Infinium. Our projects range in size from a few hundred samples to over 10,000 samples. Our customer base includes academic institutions, and biotech and pharmaceutical companies.
Intellectual Property
We have an extensive patentintellectual property portfolio, including, as of February 1, 2008,2010, ownership of, or exclusive licenses to, 119159 issued U.S. patents and 153171 pending U.S. patent applications, including fiveeight allowed applications that have not yet issued as patents, some of which derive from a common parent application. This portfolio includes patents acquired as part of our acquisition of Solexa on January 26, 2007.patents. Our issued patents which areinclude those directed atto various aspects of our arrays, assays, oligo synthesis, sequencing technology, instruments, and chemical detection technologies, and have terms that expire between 2010 and 2025.2027. We are seekingcontinue to extend the patents directed atfile new patent applications to protect the full range of our technologies. We have receivedfiled or filedhave been granted counterparts for many of these patents and applications in one or more foreign countries.
We also rely upon trade secrets, know-how, copyright, and trademark protection, as well as continuing technological innovation and licensing opportunities to develop and maintain our competitive position. Our success will depend in part on our ability to obtain patent protection for our products and processes, to preserve our trade secrets, to enforce our patents, copyrights and trademarks, to operate without infringing the proprietary rights of third parties, and to acquire licenses related to enabling technology or products.
We are party to various exclusive and non-exclusive license agreements and other arrangements with third parties whichthat grant us rights to use key aspects of our array and sequencing technologies, assay methods, chemical detection methods, reagent kits, and scanning equipment. We have exclusive licenses from Tufts University to patents that are directed atto our use of BeadArray technology. These patents were filed by Dr. David Walt, who is a member of our board of directors, the Chairman of our Scientific Advisory Board, and one of our founders. Our exclusive licenses expire with the termination of the underlying patents, which will occur between 2010 and 2020. We also have additional nonexclusive licenses fromlicense agreements with various third parties for other components of our products. In most cases, the agreements remain in effect over the term of the underlying patents, may be terminated at our request without further obligation, and require that we pay customary royalties while the agreement is in effect.
Research and Development
We have made substantial investments in research and development since our inception. We have assembled a team of skilled engineers and scientists who are specialists in biology, chemistry, informatics, instrumentation, optical systems, software, manufacturing, and other related areas required to complete the development of our products. Our research and development efforts have focused primarily on the
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tasks required to optimize our sequencing, BeadArray, Oligator, VeraCode, and sequencingoligo synthesis technologies and to support commercialization of the products and services derived from these technologies. As of December 30, 2007, we had a total of 277 employees engaged in research and development activities.
Our research and development expenses for 2009, 2008, and 2007 2006, and 2005 (inclusive of charges relating to stock-based compensation of $10.0were $140.6 million, $3.9$100.0 million, and $0.1 million, respectively) were $73.9 million, $33.4 million, and $27.8 million, respectively. Compared to 2007, weWe expect research and development expense to increase during 20082010 as we continue to expand our research and product development efforts.
Marketing and Distribution
Our current products address the genetic analysis portion of the life sciences market, in particular, experiments involving sequencing, SNP genotyping, and gene expression profiling. These experiments may be
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involved in many areas of biologic research, including basic human disease research, pharmaceutical drug discovery and development, pharmacogenomics, toxicogenomics, and agricultural research. Our potential customers include pharmaceutical, biotechnology, agrichemical, diagnostics, and consumer products companies, as well as academic or private research centers. The genetic analysis market is relatively new and emerging and its size and speed of development will ultimately be ultimately driven by, among other items:
| • | the ability of the research community to extract medically valuable information from genomics and to apply that knowledge to multiple areas of disease-related research and treatment; | |
| • | the availability of sufficiently low cost, high-throughput research tools to enable the large amount of experimentation required to study genetic variation and biological function; and | |
| • | the availability of government and private industry funding to perform the research required to extract medically relevant information from genomic analysis. |
We market and distribute our products directly to customers in North America, major European markets, Japan Singapore,Europe, and China.the Asia-Pacific region. In each of these areas, we have dedicated sales, service, and application support personnel responsible for expanding and managing their respective customer bases. In smalleraddition, in certain markets inwithin Europe, the Pacific Rim countriesAsia-Pacific region, the Middle East, and Europe,South Africa we sell our products and provide services to customers through distributors that specialize in life science products. We expect to significantlycontinue to increase our sales and distribution resources during 20082010 and beyond as we launch a number of new products and expand the number of customers that can use our products.
Manufacturing
We manufacture oursequencing and array and sequencinginstrument platforms, reagent kits, scanning equipment, and oligos. Our manufacturing capacity for BeadChipsconsumables and instruments has grown during 2009 to support our increased 50% over the level as of January 1, 2007, despite the substantial increase in complexity associated with manufacturing these products. We intend to continue to increase capacity both domestically and internationally as needed to manufacture our products in sufficient quantity to meet our business plan for 2008. We expect to continue expanding our manufacturing capacity in Singapore. We have signed a lease agreement and plan to commence manufacturing operations in the latter half of 2008.customer demand. We are also focused on continuing to enhance the quality and manufacturing yield of our Array MatricesBeadChips and BeadChipsflow cells. To continue to increase throughput and improve the quality and manufacturing yield as we increase the complexity of our products, we are exploring ways to continue increasing the level of automation in the manufacturing process. In addition, we have implemented information management systems for many of our manufacturing and services operations to manage all aspects of material and sample use. We adhere to access and safety standards required by federal, state, and local health ordinances, such as standards for the use, handling, and disposal of hazardous substances.
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Raw Materials
Our manufacturing operations require a wide variety of raw materials, electronic and mechanical components, chemical and biochemical materials, and other supplies. We have multiple commercial sources for many of our components and supplies; however, there are some raw materials we obtain from single source suppliers. To mitigate potential risks arising from single source suppliers, we believe that we can redesign our products for alternative components or use alternative reagents. In addition, while we generally attempt to keep our inventory at minimal levels, we purchase incremental inventory as circumstances warrant to protect our supply chain.
Competition
Although we expect that our products and services will provide significant advantages over products and services currently available from other sources, we expect to encounter intense competition from other companies that offer products and services for the sequencing, SNP genotyping, gene expression, and sequencingmolecular diagnostics markets. These include companies such as Affymetrix, Inc.; Agilent Applera Corporation, Applied Biosystems,Technologies, Inc.; Beckman Coulter, Inc.; Complete Genomics, Fluidigm, GE Corp.,Inc.; General Electric Company; Helicos BioSciences Corporation; Life Technologies Corporation; Luminex Corporation; Pacific Biosciences, Perlegen Sciences,Inc.; Roche Diagnostics Corp.; Sequenom, Inc.; and Third Wave Technologies.Qiagen N.V. Some of these companies have or will have substantially greater financial, technical, research, and other resources and larger, more established marketing, sales, distribution, and service organizations than we do. In addition, they may have greater name recognition than we do in the markets we need to address and in some cases a larger installed base of systems. Each of these markets is very competitive and we expect new competitors to emerge and the intensity of competition to increase. In
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order to effectively compete with these companies, we will need to demonstrate that our products have superior throughput, cost, and accuracy advantages over the competing products. Rapid technological development may result in our products or technologies becoming obsolete. Products offered by us could be made obsolete either by less expensive or more effective products based on similar or other technologies. Although we believe that our technology and products will offer advantages that will enable us to compete effectively with these companies, we cannot assure you that we will be successful.
Segment and Geographic Information
Backlog
Our backlog was $227.6 million and $113.0 million at January 3, 2010 and December 28, 2008, respectively. Generally, our backlog consists of orders believed to be firm as of the balance sheet date; however, we may allow customers to make product substitutions as we launch new products. The timing of shipments depends on several factors including, agreed upon shipping schedules, which may span multiple quarters, and whether the product is catalog or custom. We reasonably expect an estimated 90% of the backlog as of January 3, 2010 to be shipped within the fiscal year ending January 2, 2011. Although we generally recognize revenue at the time of shipment and transfer of title to a customer, we may be required to defer the recognition of revenue even after shipment depending on the specific arrangement with a customer and the applicable accounting treatment. A material portion of our backlog at January 3, 2010 is associated with a large order we received from one customer for which we anticipate using operating lease accounting that will require us to recognize revenue over a period of three years with the majority of that revenue recognized in 2011 and 2012.
Seasonality
Historically, customer purchasing patterns have not shown significant seasonal variation, although demand for our products is usually lowest in the first quarter of the calendar year and highest in the third quarter of the calendar year as a result, in part, of U.S. academic customers spendspending unused budget allocations before the end of the U.S. government’s fiscal year.
Environmental Matters
We are dedicatedcommitted to the protection of our employees and the environment. Our operations require the use of hazardous materials whichthat subject us to a variety of federal, state, and local environmental and safety laws and regulations. We believe we are in material compliance, in all material respects, with current applicable laws and regulations; however, we could be held liable for damages and fines should contamination
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of the environment or individual exposures to hazardous substances occur. In addition, we cannot predict how changes in these laws and regulations, or the development of new laws and regulations, will affect our business operations or the cost of compliance.
Our products are not currently subject to FDA clearance or approval if they are not intended to be used for the diagnosis of disease. However, as we entered into a lease agreement with BioMed Realty Trust, Inc.expand our product line to expand into a new office buildingencompass products that are intended to be used for the diagnosis of disease, such as molecular diagnostic products, regulation by governmental authorities in San Diego, California. This new buildingthe United States and other countries will be LEED certified.a significant factor in the development, testing, production, and marketing of such products. Products that we develop in the molecular diagnostic markets, depending on their intended use, will be regulated as medical devices by the FDA and comparable agencies of other countries and may require either receiving clearance following a pre-market notification process, also known as a 510(k) clearance, or premarket approval (PMA), from the FDA prior to marketing. Obtaining the requisite regulatory approvals can be expensive and may involve considerable delay.
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The shorter 510(k) clearance process, which generally takes from three to six months after submission, but can take significantly longer, may be utilized if it is demonstrated that the new product is “substantially equivalent” to a similar product that has already been cleared by the FDA. The longer PMA process is much more costly, uncertain, and generally takes from nine months to two years after filing. Because we cannot assure you that any molecular diagnostic products that we develop will be subject to the shorter 510(k) clearance process, or will ultimately be approved at all, the regulatory approval process for such products may be significantly delayed and may be significantly more expensive than anticipated. If we fail to obtain, or experience significant delays in obtaining, regulatory approvals for molecular diagnostic products that we develop, we may not be able to launch or successfully commercialize such products in a timely manner, or at all.
Changes to the current regulatory framework, including the imposition of additional or new regulations, could arise at any time during the development or marketing of our products, which may negatively affect our ability to obtain or maintain FDA or comparable regulatory approval of our products, if required.
In addition, the regulatory approval or clearance process required to manufacture, market, and sell our existing and future products that are intended for, and marketed and labeled as, “Research Use Only,” or RUO, is uncertain if such products are used or could be used, even without our consent, for the diagnosis of disease. If the FDA or other regulatory authorities assert that any of our RUO products are subject to regulatory clearance or approval, our business, financial condition, or results of operations could be adversely affected.
Employees
As of December 30, 2007,January 3, 2010, we had a total of 1,041 employees, 195 of whom hold Ph.D. degrees. Ninety-seven of our employees with Ph.D. degrees are engaged in full-time research and development activities.1,781 employees. None of our employees are represented by a labor union. We consider our employee relations to be positive.
Our executive officers assuccess will depend in large part upon our ability to attract and retain employees. In addition, we employ a number of February 1, 2008, are as follows:
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| ITEM 1A. | Risk |
Our business is subject to various risks, including those described below. In addition to the other information included in thisForm 10-K, the following issues could adversely affect our operating results or our stock price.
We expectface intense competition, in our target markets, which could render our products obsolete, result in significant price reductions, or substantially limit the volume of products that we sell. This would limit our ability to compete and maintain profitability. If we cannot continuously develop and commercialize new products, our revenue may not grow as intended.
We compete with life sciences companies that design, manufacture, and market instrumentsproducts for analysis of genetic variation and biological function and other applications using technologies such as two-dimensional electrophoresis, capillary electrophoresis, mass spectrometry, flow cytometry, microfluidics, nanotechnology, next-generation DNA sequencing and mechanically deposited, inkjet and photolithographic arrays.a wide-range of competing technologies. We anticipate that we will continue to face increased competition in the future as existing companies develop new or
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improved products and as new companies enter the market with new technologies. The markets for our products are characterized by rapidly changing technology, evolving industry standards, changes in customer needs, emerging competition, new product introductions and strong price competition. For example, prices per data point for genotyping have fallen significantly over the last two years and we anticipate that prices will continue to fall. One or more of our competitors may render our technology obsolete or uneconomical. Some of our competitors have greater financial and personnel resources, broader product lines, a more established customer base, and more experience in research and development than we do. Furthermore, life sciences and pharmaceutical companies, which are our potential customers and strategic partners, could also develop competing products. For example, duringWe believe that customers in our markets display a significant amount of loyalty to their initial supplier of a particular product; therefore, it may be difficult to generate sales to potential customers who have purchased products from competitors. To the third quarter of fiscal 2007, Applied Biosystems Group, a business segment of Applera Corporation, launched the SOLIDtm System,its next generation sequencing technology. Ifextent we are unable to be the first to develop or supply new products, our competitive position may suffer.
The market for molecular diagnostics products is currently limited and highly competitive, with several large companies already having significant market share, intellectual property portfolios, and regulatory expertise. Established diagnostic companies also have an installed base of instruments in several markets, including clinical and reference laboratories, which could deter acceptance of our products. In addition, some of these companies have formed alliances with genomics companies that provide them access to genetic information that may be incorporated into their diagnostic tests.
Our success depends upon the continued emergence and growth of markets for analysis of genetic variation and biological function.
We design our products primarily for applications in the life sciences, agricultural, and pharmaceutical industries. The usefulness of our technologies depends in part upon the availability of genetic data and its usefulness in identifying or treating disease. We are focusing on markets for analysis of genetic variation and biological function, namely sequencing, genotyping, and gene expression profiling. These markets are new and emerging, and they may not develop as quickly as we anticipate, or reach their full potential. Other methods of analysis of genetic variation and biological function may emerge and displace the methods we are developing. Also, researchers may not seek or be able to convert raw genetic data into medically valuable information through the analysis of genetic variation and biological function. For instance, demand for our microarray products may be adversely affected if researchers fail to find meaningful correlations between genetic variation, such as SNPs, and disease susceptibility through genome wide association studies. In addition, factors affecting research and development spending generally, such as changes in the regulatory environment affecting life sciences and pharmaceutical companies, and changes in government programs that provide funding to companies and research institutions, could harm our business. If useful genetic data is not available or if our target markets do not develop in a timely manner, demand for our products may grow at a slower rate than we expect, and we may not be able to sustain profitability.
If the quality of our products does not meet our customers’ expectations, then our sales and operating earnings, and ultimately our reputation, could be negatively impacted.
In the course of conducting our business, we must adequately address quality issues associated with our products and services, including defects in our engineering, design, and manufacturing processes, as well as defects in third-party components included in our products. Because our instruments and reagents are highly complex, the occurrence of defects may increase as we continue to introduce new products and services. Although we have established internal procedures to minimize risks that may arise from product quality issues, there can be no assurance that we will be able to eliminate or mitigate occurrences of these issues and associated liabilities. In addition, identifying the root cause of quality issues, particularly those affecting reagents, may be difficult, which increases the time needed to address quality issues as they arise and increases the risk that similar problems could recur. Finding solutions to quality issues can be expensive and we may incur significant costs or lost revenue in connection with, for example, shipment holds, product recalls, and warranty or other service obligations. In addition, quality issues can impair our relationships with new or existing customers and adversely affect our brand image, and our reputation as a producer of high quality products could suffer, which could adversely affect our business as well as our financial results.
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If we do not successfully manage the development and launch of new products or services, including product transitions, our financial results could be adversely affected.
We face risks associated with launching new products and pre-announcing products and services when the products or services have not been fully developed or tested. If our products and services are not able to develop enhancementsdeliver the performance or results expected by our target markets or are not delivered on a timely basis, our reputation and credibility may suffer. If we encounter development challenges or discover errors in our products late in our development cycle it may cause us to delay our product launch date. In addition, we may experience difficulty in managing or forecasting customer reactions, purchasing decisions, or transition requirements or programs (such as trade-in programs) with respect to newly launched products (or products in development) relative to our technology and rapidly deployexisting products, which could adversely affect sales of our existing products. The expenses or losses associated with unsuccessful product development or launch activities or lack of market acceptance of our new product offerings,products could adversely affect our business, financial condition, andor results of operations will suffer.operations.
We continue to ramp upincrease our capacity to meet the anticipated demand for our products. Although we have significantly increased our manufacturing capacity and we believe we have plans in place sufficient to ensure we have adequate capacity to meet our business plan in 2008 and 2009,for 2010, there are uncertainties inherent in expanding our manufacturing capabilities and we may not be able to sufficiently increase our capacity in a timely manner. For example, manufacturing and product quality issues may arise as we increase production rates at our manufacturing facilities and launch new products. Also, we may not manufacture the right product mix to meet customer demand, especially as we introduce new products. As a result, we may experience difficulties in meeting customer, collaborator, and internal demand, in which case we could lose customers or be required to delay new product introductions, and demand for our products could decline. Additionally, in the past, we have experienced variations in manufacturing conditions and quality control issues that have temporarily reduced or suspended production yields.of certain products. Due to the intricate nature of manufacturing products that contain DNA, we may encounter similar or previously unknown manufacturing difficulties in the future that could significantly reduce production yields, impact our ability to launch or sell these products or(or to produce them economically,economically), prevent us from achieving expected performance levels, or cause us to set prices that hinder wide adoption by customers.
Additionally, we currently manufacture in a limited number of locations. Our manufacturing facilities are located in San Diego and Hayward, California; Singapore; and Little Chesterford, United Kingdom. These areas are subject to natural disasters such as earthquakes, wildfires, or floods. If a natural disaster were to damage one of our facilities significantly or if other events were to cause our operations to fail, we may be unable to manufacture our products, provide our services or develop new products.
Also, many of our manufacturing processes are automated and are controlled by our custom-designed Laboratory Information Management System (LIMS). Additionally, the decoding process in our array manufacturing requires significant network and storage infrastructure. If either our LIMS system or our networks or storage infrastructure were to fail for an extended period of time, it may adversely impact our ability to manufacture our products on a timely basis and could prevent us from achieving our expected shipments in any given period.
As part of our strategy to develop and identify new products, services, and technologies, we have made, and may continue to make, acquisitions of technologies, products, or businesses. Acquisitions involve
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numerous risks and operational, financial, and managerial challenges, including the following, any of which could adversely affect our business, financial condition, or results of operations:
| • | difficulties in integrating new operations, technologies, products, and personnel; | |
| • | lack of synergies or the inability to realize expected synergies and cost-savings; | |
| • | difficulties in managing geographically dispersed operations; | |
| • | underperformance of any acquired technology, product, or business relative to our expectations and the price we paid; | |
| • | negative near-term impacts on financial results after an acquisition, including acquisition-related earnings charges; | |
| • | the potential loss of key employees, customers, and strategic partners of acquired companies; | |
| • | claims by terminated employees and shareholders of acquired companies or other third parties related to the transaction; | |
| • | the issuance of dilutive securities, assumption or incurrence of additional debt obligations or expenses, or use of substantial portions of our cash; | |
| • | diversion of management’s attention and company resources from existing operations of the business; | |
| • | inconsistencies in standards, controls, procedures, and policies; | |
| • | the impairment of intangible assets as a result of technological advancements, orworse-than-expected performance of acquired companies; and | |
| • | assumption of, or exposure to, unknown contingent liabilities or liabilities that are difficult to identify or accurately quantify. |
In addition, the successful integration of acquired businesses requires significant efforts and expense across all operational areas, including sales and marketing, research and development, manufacturing, finance, legal, and information technologies. We cannot assure you that any of the acquisitions we make will be successful or will be, or will remain, profitable. Our failure to successfully address the above risks may prevent us from achieving the anticipated benefits from any acquisition in a reasonable time frame, or at all.
The timing and extent of funding provided by the American Recovery and Reinvestment Act of 2009 (the Recovery Act) could adversely affect our business, financial condition, or results of operations.
The Recovery Act was enacted in February 2009 to provide stimulus to the U.S. economy in the wake of the economic downturn. As part of the Recovery Act legislation, over $10 billion in funding was provided to the National Institute of Health through September 2010 to support the advancement of scientific research. A portion of the stimulus funding may support the analysis of genetic variation and biological function and have a significant positive impact on our business. In the short-term, however, our customers may delay or reduce their purchases of our products as they wait to learn whether, and to what extent, they will receive stimulus funding. If our customers are unable to obtain stimulus money they may reduce their research and development budgets resulting in a decrease in demand for our products. In addition, it is unclear what will happen to demand for our products after the stimulus funds from the Recovery Act have been allocated and spent. A decline in demand will reduce our revenues, which would adversely affect our business, financial condition, or results of operations.
Unfavorable global economic conditions could adversely affect our business, financial condition, or results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. The recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, such as the recent global financial
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crisis, could result in a variety of risks to our business, including, in particular, reductions or delays in planned improvements to healthcare systems, research and development funding, and purchases of our products and services, or cost-containment efforts by governments and private organizations that could adversely affect our business, financial condition, or results of operations. In addition, the liquidity of our investment portfolio could be impaired such as when more than $50 million of auction rate securities that we held for investment became illiquid in February 2008 because their scheduled auctions failed. Furthermore, as is the case for almost any other business, we face the following risks from a severe or prolonged economic downturn:
| • | severely limited access to financing over an extended period of time, which may limit our ability to fund our growth strategy, could result in a need to delay capital expenditures, acquisitions, or research and development projects; | |
| • | losses from our investment portfolio or to a counterparty’s inability to fulfill its payment obligations; | |
| • | inability to refinance existing debt at competitive rates, reasonable terms, or sufficient amounts; and | |
| • | increased volatility or adverse movements in foreign currency exchange rates. |
In addition, certain of our customers may face challenges gaining timely access to sufficient credit, which could result in an impairment of their ability to make timely payments to us. If that were to occur, our allowance for doubtful accounts and our days sales outstanding could increase. Additionally, these economic conditions may cause our smaller suppliers to be unable to supply in a timely manner sufficient quantities of customized components, which would impair our ability to manufacture on schedule and at commercially reasonable costs. Suppliers may also extend lead times, limit supplies, or increase prices due to capacity constraints or other factors.
Our continued growth is dependent on continuously developing and commercializing new products.
Our target markets are characterized by rapid technological change, evolving industry standards, changes in customer needs, existing and emerging competition, strong price competition, and frequent new product introductions. Accordingly, our continued growth depends on continuously developing and commercializing new products and services, including improving our existing products and services, in order to address evolving market requirements on a timely basis. If we fail to innovate or adequately invest in new technologies, our products and services will become dated and we could lose our competitive position in the markets that we serve as customers purchase new products offered by our competitors. We believe that successfully introducing new products and technologies in our target markets on a timely basis provides a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product and may be reluctant to switch once that selection is made.
To the extent that we fail to introduce new and innovative products, or such products are not accepted in the market or suffer significant delays in development, we may lose market share to our competitors, which will be difficult or impossible to regain. An inability, for technological or other reasons, to successfully develop and introduce new products could reduce our growth rate or otherwise have an adverse effect on our business. In the past, we have experienced, and are likely to experience in the future, delays in the development and introduction of new products. We cannot assure you that we will keep pace with the rapid rate of change in our markets or that our new products will adequately meet the requirements of the marketplace, achieve market acceptance, or compete successfully with competing technologies. Some of the factors affecting market acceptance of new products and services include:
| • | availability, quality, and price relative to competing products and services; | |
| • | the functionality of new and existing products and services; | |
| • | the timing of introduction of the new product or service relative to competing products and services; | |
| • | scientists’ and customers’ opinions of the utility of the new product or service; | |
| • | citation of the new product or service in published research; |
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| • | regulatory trends and approvals; and | |
| • | general trends in life sciences research and applied markets. |
We depend on third-party manufacturers and suppliers for components and materials used in our products, and if shipments from these manufacturers or suppliers are delayed or interrupted, or if the quality of the components or materials supplied do not meet our requirements, we may not be able to launch, manufacture, or ship our products in a timely manner, or at all.
The nature of our products requires customized components and materials that currently are available from a limited number of sources, and, in the case of some components and materials, from only a single source. If deliveries from these vendors are delayed or interrupted for any reason, or if we are otherwise unable to secure a sufficient supply, we may not be able to obtain these components or materials timely or in sufficient quantities or qualities, or at all, in order to meet demand for our products. We may need to enter into contractual relationships with manufacturers for commercial-scale production of some of our products, or develop these capabilities internally, and we cannot assure you that we will be able to do this on a timely basis, in sufficient quantities, or on commercially reasonable terms. Accordingly, we may not be able to establish or maintain reliable, high-volume manufacturing at commercially reasonable costs. In addition, the manufacture or shipment of our products may be delayed or interrupted if the quality of the components or materials supplied by our vendors does not meet our requirements. Any delay or interruption to our manufacturing process or in shipping our products could result in lost revenue, which would adversely affect our business, financial condition, or results of operations.
An inability to manage our growth or the expansion of our operations could adversely affect our business, financial condition, or results of operations.
Our business has grown rapidly, with total revenues increasing from $73.5 million for the year ended January 1, 2006 to $666.3 million for the year ended January 3, 2010 and with the number of employees increasing from 375 to 1,781 during the same period. We expect to continue to experience rapid and substantial growth in order to achieve our operating plans, which willplans. The rapid expansion of our business and addition of new personnel may place a strain on our humanmanagement and capital resources. If we are unable to manage this growth effectively, our profitability could suffer.operational systems. Our ability to effectively manage our operations and growth effectively requires us to continue to expend funds to enhance our operational, financial, and management controls, reporting systems, and procedures and to attract and retain sufficient numbers of talented employees.employees on a global basis. If we are unable to scale up and implement improvements to our manufacturing process and control systems in an efficient or timely manner, or if we encounter deficiencies in existing systems and controls, then we will not be able to make available the products required to successfully commercialize our technology. FailureOur future operating results will depend on the ability of our management to attractcontinue to implement and retain sufficient numbersimprove our research, product development, manufacturing, sales and marketing, and customer support programs, enhance our operational and financial control systems, expand, train, and manage our employee base, integrate acquired businesses, and effectively address new issues related to our growth as they arise. There can be no assurance that we will be able to manage our recent or any future expansion or acquisition successfully, and any inability to do so could adversely affect our business, financial condition, or results of talented employees will further strain our human resources and could impede our growth.operations.
If we lose our key personnel or are unable to attract and retain additional personnel, we may be unable to achieve our goals.
We are highly dependent on our management and scientific personnel, including Jay Flatley, our president and chief executive officer. The loss of their services could adversely impact our ability to achieve our business objectives. WeIn addition, we will need to hire additional qualified personnel with expertise in molecular biology, chemistry, biological information processing, sales, marketing, and technical support. We compete for qualified management and scientific personnel with other life science companies, universities, and research institutions, particularly those focusing on genomics. Competition for these individuals, particularly in the San Diego and San Francisco area, is intense, and the turnover rate can be high. Failure to attract and retain management and scientific personnel would prevent us from pursuing collaborations or developing our products or technologies.
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products or technologies. Additionally, integration of acquired companies and businesses can be disruptive, causing key employees of the acquired business to leave. Further, we use stock options and restricted stock to provide incentives for our key personnel to remain with us and to align their interests with those of the Company by building long-term stockholder value. If our stock price decreases, the value of these equity awards decreases and therefore reduces a key employee’s incentive to stay.
Conducting and launching operations on an international scale requires close coordination of activities across multiple jurisdictions and time zones and consumes significant management resources. If we fail to coordinate and manage these activities effectively, including the risks noted below, our business, financial condition, or results of operations could be adversely affected. We currently manufactureare focused on expanding our international operations in a limited number of locations. Ourkey markets. We have sales offices located internationally throughout Europe and the Asia-Pacific region, as well as manufacturing facilities are located in San Diego and Hayward, California and Little Chesterford, United Kingdom. We are in the process of expanding our manufacturing operations into Singapore, a country in which we have no past manufacturing experience. These areas are subject to natural disasters such as earthquakes or floods. If a natural disaster were to significantly damage oneUnited Kingdom and Singapore. During 2009, the majority of our facilities or if other eventssales to international customers and purchases of raw materials from international suppliers were denominated in U.S. dollars. Shipments to causecustomers outside the United States comprised 48%, 51%, and 43% of our operationstotal revenue for the years ended January 3, 2010, December 28, 2008, and December 30, 2007, respectively. We intend to fail, these events could prevent us from developingcontinue to expand our international presence by selling to customers located outside of the United States and manufacturing our products and services.we expect the total amount ofnon-U.S. sales to continue to grow.
| • | longer payment cycles and difficulties in collecting accounts receivable outside of the United States; | |
| • | currency exchange fluctuations; | |
| • | challenges in staffing and managing foreign operations; | |
| • | tariffs and other trade barriers; | |
| • | unexpected changes in legislative or regulatory requirements of foreign countries into which we sell our products; | |
| • | difficulties in obtaining export licenses or in overcoming other trade barriers and restrictions resulting in delivery delays; and | |
| • | significant taxes or other burdens of complying with a variety of foreign laws. |
Changes in the value of the decoding steprelevant currencies may affect the cost of certain items required in our array manufacturing process,operations. Changes in currency exchange rates may also affect the relative prices at which we record several images of each array to identify what bead is in each location on the array and to validate each beadare able sell products in the array. This requires significant network and storage infrastructure. If eithersame market. Our revenues from international customers may be negatively impacted as increases in the U.S. dollar relative to our LIMS system orinternational customers local currency could make our networks or storage infrastructure were to fail for an extended period of time, it may adversely impactproducts more expensive, impacting our ability to manufacture our products on a timely basis and would prevent uscompete. Our costs of materials from achieving our expected shipmentsinternational suppliers may increase if in any given period.
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We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments based on interpretations of existing tax laws or regulations are required in
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determining the provision for income taxes. Our effective income tax rate could be adversely affected by various factors, including, but not limited to, changes in the mix of earnings in tax jurisdictions with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in existing tax laws or tax rates,
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changes in the level of non-deductible expenses including(including share-based compensation,compensation), changes in our future levels of research and development spending, mergers and acquisitions, andor the result of examinations by various tax authorities.
In addition, we could lose some or all of the tax deduction for interest expense associated with our $400 million aggregate principal amount of convertible notes due in 2014 if these notes are not subject to the special Treasury Regulations governing contingent payment debt instruments, the notes are converted, or we invest in non-taxable investments.
Any inability to adequatelyeffectively protect our proprietary technologies could harm our competitive position.
Our success will depend in partdepends to a large extent on our ability to develop proprietary products and technologies and to obtain patents and maintain adequate protection of our intellectual property in the United States and other countries. If we do not protect our intellectual property adequately, competitors may be able to use our technologies and thereby erode our competitive advantage. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant challenges in protectingestablishing and enforcing their proprietary rights abroad.outside of the United States. These challenges can be caused by the absence of rules and methods for the establishment and enforcement of intellectual property rights abroad.outside of the United States.
The patent positions of companies developing tools for the life sciences, agricultural, and pharmaceutical industries, including our patent position, generally are uncertain and involve complex legal and factual questions. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. In addition, patent applications in the United States may be maintained in secrecy until patents issue, and publication of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months. We intend to apply for patents covering our technologies and products as we deem appropriate. However, our patent applications may be challenged and may not result in issued patents or may be invalidated or narrowed in scope after they are issued. Questions as to inventorship or ownership may also arise. Any finding that our patents andor applications are unenforceable could harm our ability to prevent others from practicing the related technology, and a finding that others have inventorship or ownership rights to our patents and applications could require us to obtain certain rights to practice related technologies, which may not be available on favorable terms, if at all. Furthermore, as issued patents expire, we may lose some competitive advantage as others develop competing products, and, as a result, we may lose revenue.
In addition, our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. There is also isthe risk that others may independently develop similar or alternative technologies or design around our patented technologies. Also, our patents may fail to provide us with any competitive advantage. We may need to initiate additional lawsuits to protect or enforce our patents, or litigate against third party claims, which would be expensive, and, if we lose, may cause us to lose some of our intellectual property rights and reduce our ability to compete in the marketplace. Furthermore, these lawsuits may divert the attention of our management and technical personnel.
We also rely upon trade secretsecrets and proprietary know-how protection for our confidential and proprietary information. Weinformation, and we have taken security measures to protect our confidentialthis information. These measures, however, may not provide adequate protection for our trade secrets, know-how, or other confidential information. Among other things, we seek to protect our trade secrets and confidential information by entering into confidentiality agreements with employees, collaborators, and consultants. Nevertheless,There can be no assurance that any confidentiality agreements that we have with our employees, collaborators, orand consultants may still disclose our confidential information, and we may not otherwise be able to effectively protectwill provide meaningful protection for our trade secrets. Accordingly, others may gain access to oursecrets and confidential information or maywill provide adequate remedies in the event of unauthorized use or disclosure of such information. Accordingly, there also can be no assurance that our trade secrets will not otherwise become known or be independently develop substantially equivalent information or techniques.developed by competitors.
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Litigation, or other proceedings, or third party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from selling our products or services or impact our stock price.services.
Our commercial success depends, in part, on our non-infringement of the patents or proprietary rights of third parties and on our ability to protect our own intellectual property.parties. Third parties have asserted orand may in the future assert that we are employing their proprietary technology without authorization. As we
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enter new markets, we expect that competitors will likely assertclaim that our products infringe their intellectual property rights as part of a business strategy to impede our successful entry into those markets. In addition, third parties may have obtained and may in the future obtain patents allowing them to claim that the use of our technologies infringes these patents. We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against any of these claims. Any adverse ruling or perception of an adverse ruling in defending ourselves against these claims could have a materialan adverse impact on our stock price, which may be disproportionate to the actual import of the ruling itself. Furthermore, parties making claims against us may be able to obtain injunctive or other relief, which effectively could block our ability to develop further, commercialize, andor sell products, and could result in the award of substantial damages against us. In the event of a successful infringement claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties, or be prohibited from selling certain products. In addition, we may be unable to obtain these licenses at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. In addition, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products, and the prohibition of sale of any of our products could materiallyadversely affect our ability to grow andor maintain profitability.
Our products are not currently subject to FDA clearance or approval if they are not intended to be used for the diagnosis of disease. However, as we expand our product line to encompass products that are intended to be used for the diagnosis of disease, certain of our products are likely to become subject to regulation by the FDA, or comparable agencies of other countries, including requirements for regulatory approval of such products before they can be marketed. Such regulatory approval processes or clearances may be expensive, time-consuming, and uncertain, and our failure to obtain or comply with such approvals and clearances could have an adverse effect on our business, financial condition, or operating results. In addition, changes to the current regulatory framework, including the imposition of additional or new regulations, could arise at any time during the development or marketing of our products, which may negatively affect our ability to obtain or maintain FDA or comparable regulatory approval of our products, if required.
Molecular diagnostic products, in particular, depending on their intended use, may be regulated as medical devices by the FDA and comparable agencies of other countries and may require either receiving clearance from the FDA following a pre-market notification process or premarket approval from the FDA, in each case prior to marketing. Obtaining the requisite regulatory approvals can be expensive and may involve considerable delay. If we fail to obtain, or experience significant amount of indebtedness. Wedelays in obtaining, regulatory approvals for molecular diagnostic products that we develop, we may not be able to make payments onlaunch or successfully commercialize such products in a timely manner, or at all.
In addition, the regulatory approval or clearance process required to manufacture, market, and sell our indebtedness,existing and future products that are intended for, and marketed and labeled as, “Research Use Only,” or RUO, is uncertain if such products are used or could be used, even without our consent, for the diagnosis of disease. If the FDA or other regulatory authorities assert that any of our RUO products are subject to regulatory clearance or approval, our business, financial condition, or results of operations could be adversely affected.
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Our operating results may vary significantly from period to period, and we may incur additional indebtedness in the future, which could adversely affect our operation and profitability.
Our revenue is subject to fluctuations due to the timing of sales of high-value products and services, projects,the effects of new product launches and related promotions, the impact of seasonal spending patterns, the timing and size of research projects our customers perform, the timing of our customers’ funding, changes in overall spending levels in the life sciences industry, and other unpredictable factors that may affect customer ordering patterns. Given the difficulty in predicting the timing and magnitude of sales for our products and services, we may experiencequarter-to-quarter fluctuations in revenue resulting in the potential for a sequential decline in quarterly revenue. While we anticipate future growth, there is some uncertainty as to the timing of revenue recognition on a quarterly basis. This is because a substantial portion of our quarterly revenue is typically recognized in the last month of a quarter and because the pattern for revenue generation during that month is normally not linear, with a concentration of orders in the final week of the quarter. In light of that, our revenue cut-off and recognition procedures, together with our manufacturing and shipping operations, may experience increased pressure and demand during the time period shortly before the end of a fiscal quarter.
A large portion of our expenses areis relatively fixed, including expenses for facilities, equipment, and personnel. In addition, we expect operating expenses to continue to increase significantly in absolute dollars.dollars, and we expect that our research and development and selling and marketing expenses will increase at a higher rate in the future as a result of the development and launch of new products. Accordingly, our ability to sustain profitability will depend, in part, on the rate of growth, if any, of our revenue and on the level of our expenses, and if revenue does not grow as anticipated, we may not be able to maintain annual or quarterly profitability. Any significant
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delays in the commercial launch of our products, unfavorable sales trends in our existing product lines, or impacts from the other factors mentioned above, could adversely affect our future revenue growth or cause a sequential decline in quarterly revenue. In addition, non-cash stock-based compensation expense and expenses related to prior and future acquisitions are also likely to continue to adversely affect our future profitability. Due to the possibility of significant fluctuations in our revenue and expenses, particularly from quarter to quarter, we believe that quarterly comparisons of our operating results are not a good indication of our future performance. If our operating results fluctuate or do not meet the expectations of stock market analysts and investors, our stock price could decline.
From time to time, we receive large orders that have a significant effect on our operating results in the period in which the order is recognized as revenue. The timing of such orders is difficult to predict, and the timing of revenue recognition from such orders may affect period to period changes in net sales. As a result, our operating results could vary materially from quarter to quarter based on the receipt of such orders and their ultimate recognition as revenue.
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regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, such concerns may lead individuals to refuse to use genetics tests even if permissible. These and other ethical, legal, and social concerns about genetic testing may limit market acceptance of our revenuetechnology for certain applications or reduce the years ended December 30, 2007, December 31, 2006 and January 1, 2006, respectively, was derived from shipments to customers outside the United States. We intend to continue to expandpotential markets for our international presence and export sales to international customers and we expect the total amounttechnology, either ofnon-U.S. sales to continue to grow. Export sales entail a variety of risks, including:
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| Item 1B. | Unresolved Staff Comments. |
None.
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| Item 2. | Properties. |
The following chart indicates the facilities we lease as of December 30, 2007,January 3, 2010, the location and size of each such facility, and their designated use. During 2007, we expandedWe believe our facilities are adequate for our current and leasednear-term needs, and that we will be able to locate additional space to accommodate growth in our business. We anticipate continuing to expand our facilities over the next several years as we continue to expand our worldwide commercial operations and our manufacturing capabilities.needed.
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| Item 3. | Legal Proceedings. |
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| Item 4. | Submission of Matters to a Vote of Security Holders. |
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2007.2009.
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market Information
Our common stock has been quoted on The NASDAQ Global Select Market under the symbol “ILMN” since July 28, 2000. Prior to that time, there was no public market for our common stock. The following table sets forth, for the periods indicated, the quarterly high and low sales prices per share of our common stock as reported on The NASDAQ Global Select Market. Our present policy is to retain earnings, if any, to finance
| 2009 | 2008 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| First Quarter | $ | 38.87 | $ | 23.43 | $ | 38.30 | $ | 27.89 | ||||||||
| Second Quarter | 39.53 | 34.27 | 43.50 | 34.90 | ||||||||||||
| Third Quarter | 41.23 | 31.10 | 47.88 | 36.97 | ||||||||||||
| Fourth Quarter | 43.74 | 26.50 | 42.32 | 18.82 | ||||||||||||
Stock Performance Graph
The graph below compares the cumulative total stockholder returns on our common stock for the last five fiscal years with the cumulative total stockholder returns on the NASDAQ Composite Index and the NASDAQ Biotechnology Index for the same period. The graph assumes that $100 was invested on December 31, 2004 in our common stock and in each index and that all dividends were reinvested. No cash dividends have been declared on our common stock. Stockholder returns over the indicated period should not be considered indicative of future growth. stockholder returns.
Holders
As of February 5, 2010 we had 400 record holders of our common stock.
Dividends
We have never paid cash dividends and have no present intention to pay cash dividends in the foreseeable future. In addition, the indenture for our convertible senior notes due 2014, which are convertible into cash
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and, in certain circumstances, shares of our common stock, requires us to increase the conversion rate applicable to the notes if we pay any cash dividends.
| 2007 | ||||||||
| High | Low | |||||||
| First Quarter | $ | 42.19 | $ | 28.11 | ||||
| Second Quarter | 42.08 | 28.94 | ||||||
| Third Quarter | 53.88 | 40.04 | ||||||
| Fourth Quarter | 63.38 | 50.34 | ||||||
Purchases of Equity Securities by the Issuer
| 2006 | ||||||||
| High | Low | |||||||
| First Quarter | $ | 27.98 | $ | 13.75 | ||||
| Second Quarter | 32.00 | 21.60 | ||||||
| Third Quarter | 40.00 | 27.02 | ||||||
| Fourth Quarter | 45.87 | 32.20 | ||||||
In July 2009, our board of directors authorized a $75 million stock repurchase program and concurrently terminated a $120 million stock repurchase program authorized by our board of directors in October 2008, under which we had purchased stock totaling $70.8 million in 2008. In November 2009, upon the completion of the repurchase plan authorized in July 2009, our board of directors authorized an additional $100 million stock repurchase program, which was completed in December 2009. The following table summarizes shares repurchased pursuant to these programs during the quarter ended January 3, 2010:
| Total Number of | Approximate Dollar | |||||||||||||||
| Shares Purchased as | Value of Shares | |||||||||||||||
| Total Number of | Part of Publicly | that May Yet Be | ||||||||||||||
| Shares | Average Price | Announced | Purchased Under | |||||||||||||
Period | Purchased(1) | Paid per Share(1) | Programs(1) | the Programs(1) | ||||||||||||
| September 28 – October 25, 2009 | — | $ | — | — | $ | 75,000,000 | ||||||||||
| October 26 – November 22, 2009 | 1,289,331 | 30.87 | 1,289,331 | 35,197,269 | ||||||||||||
| November 23, 2009 – January 3, 2010 | 4,766,696 | 28.36 | 4,766,696 | — | ||||||||||||
| Total | 6,056,027 | $ | 28.90 | 6,056,027 | $ | — | ||||||||||
| (1) | All shares purchased during the quarter ended January 3, 2010 were in connection with our stock repurchase programs authorized by our board of directors in July 2009 and November 2009. All stock repurchases were made in open-market transactions or under a 10b5-1 trading program. |
Sales of Unregistered Securities and Issuer Purchases of Equity Securities
None during the fourth quarter of fiscal 2007.2009.
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| Item 6. | Selected Financial Data. |
The following table sets forth selected historical consolidated financial data for each of our last five fiscal years during the period ended December 30, 2007.January 3, 2010.
Statement of Operations Data
| Year Ended | Year Ended | Year Ended | Year Ended | Year Ended | ||||||||||||||||
| December 30, | December 31 | January 1, | January 2, | December 28, | ||||||||||||||||
| 2007 | 2006 | 2006 | 2005 | 2003 | ||||||||||||||||
| (52 weeks) | (52 weeks) | (52 weeks) | (53 weeks) | (52 weeks) | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
| Revenue: | ||||||||||||||||||||
| Product revenue | $ | 326,699 | $ | 155,811 | $ | 57,752 | $ | 40,497 | $ | 18,378 | ||||||||||
| Service and other revenue | 40,100 | 28,775 | 15,749 | 10,086 | 9,657 | |||||||||||||||
| Total revenue | 366,799 | 184,586 | 73,501 | 50,583 | 28,035 | |||||||||||||||
| Costs and expenses: | ||||||||||||||||||||
| Cost of product revenue (including non-cash stock compensation expense of $4,045, $1,289, $0, $0 and $0, respectively) | 119,991 | 51,271 | 19,920 | 11,572 | 7,437 | |||||||||||||||
| Cost of service and other revenue (including non-cash stock compensation expense of $279, $235, $0, $0 and $0, respectively) | 12,445 | 8,073 | 3,261 | 1,687 | 2,600 | |||||||||||||||
| Research and development (including non-cash stock compensation expense of $10,016, $3,891, $84, $348 and $1,289, respectively) | 73,943 | 33,373 | 27,809 | 21,462 | 23,800 | |||||||||||||||
| Selling, general and administrative (including non-cash stock compensation expense of $19,406, $8,889, $186, $496 and $1,165, respectively) | 101,256 | 54,057 | 28,158 | 25,576 | 20,064 | |||||||||||||||
| Amortization of acquired intangible assets | 2,429 | — | — | — | — | |||||||||||||||
| Acquired in-process research and development(1) | 303,400 | — | 15,800 | — | — | |||||||||||||||
| Litigation settlements (judgment), net(2) | 54,536 | — | — | (4,201 | ) | 756 | ||||||||||||||
| Total costs and expenses | 668,000 | 146,774 | 94,948 | 56,096 | 54,657 | |||||||||||||||
| Income (loss) from operations(1),(2) | (301,201 | ) | 37,812 | (21,447 | ) | (5,513 | ) | (26,622 | ) | |||||||||||
| Interest income | 16,026 | 5,368 | 1,404 | 941 | 1,821 | |||||||||||||||
| Interest and other expense, net | (3,610 | ) | (560 | ) | (668 | ) | (1,518 | ) | (2,262 | ) | ||||||||||
| Income (loss) before income taxes | (288,785 | ) | 42,620 | (20,711 | ) | (6,090 | ) | (27,063 | ) | |||||||||||
| Provision (benefit) for income taxes(5) | (10,426 | ) | 2,652 | 163 | 135 | — | ||||||||||||||
| Net income (loss) | $ | (278,359 | ) | $ | 39,968 | $ | (20,874 | ) | $ | (6,225 | ) | $ | (27,063 | ) | ||||||
| Net income (loss) per basic share | $ | (5.14 | ) | $ | 0.90 | $ | (0.52 | ) | $ | (0.17 | ) | $ | (0.85 | ) | ||||||
| Net income (loss) per diluted share | $ | (5.14 | ) | $ | 0.82 | $ | (0.52 | ) | $ | (0.17 | ) | $ | (0.85 | ) | ||||||
| Shares used in calculating basic net income (loss) per share(3) | 54,154 | 44,501 | 40,147 | 35,845 | 31,925 | |||||||||||||||
| Shares used in calculating diluted net income (loss) per share(3) | 54,154 | 48,754 | 40,147 | 35,845 | 31,925 | |||||||||||||||
| Year Ended_ | ||||||||||||||||||||
| January 3, | December 28, | December 30, | December 31 | January 1, | ||||||||||||||||
| 2010 | 2008 | 2007 | 2006 | 2006 | ||||||||||||||||
| (53 weeks) | (52 weeks)(1) | (52 weeks)(1) | (52 weeks) | (52 weeks) | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
| Total revenue | $ | 666,324 | $ | 573,225 | $ | 366,799 | $ | 184,586 | $ | 73,501 | ||||||||||
| Income (loss) from operations(2),(3),(4) | 125,597 | 80,457 | (301,201 | ) | 37,812 | (21,447 | ) | |||||||||||||
| Net income (loss) | 72,281 | 39,416 | (287,305 | ) | 39,968 | (20,874 | ) | |||||||||||||
| Net income (loss) per share: | ||||||||||||||||||||
| Basic | 0.59 | 0.34 | (2.65 | ) | 0.45 | (0.26 | ) | |||||||||||||
| Diluted | 0.53 | 0.30 | (2.65 | ) | 0.41 | (0.26 | ) | |||||||||||||
| Shares used in calculating net income (loss) per share: | ||||||||||||||||||||
| Basic | 123,154 | 116,855 | 108,308 | 89,002 | 80,294 | |||||||||||||||
| Diluted | 137,096 | 133,607 | 108,308 | 97,508 | 80,294 | |||||||||||||||
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Balance Sheet Data
| December 30, | December 31, | January 1, | January 2, | December 28, | ||||||||||||||||
| 2007 | 2006 | 2006 | 2005 | 2003 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Cash, cash equivalents and short-term investments(2) | $ | 386,082 | $ | 130,804 | $ | 50,822 | $ | 66,994 | $ | 33,882 | ||||||||||
| Working capital | 397,040 | 159,950 | 57,992 | 64,643 | 32,229 | |||||||||||||||
| Total assets | 987,732 | 300,584 | 100,610 | 94,907 | 99,234 | |||||||||||||||
| Long-term debt, less current portion(4) | 400,000 | — | 54 | — | 24,999 | |||||||||||||||
| Accumulated deficit | (382,977 | ) | (104,618 | ) | (144,586 | ) | (123,712 | ) | (117,487 | ) | ||||||||||
| Total stockholders’ equity(1),(2),(4) | 411,678 | 247,342 | 72,497 | 72,262 | 47,388 | |||||||||||||||
| January 3, | December 28, | December 30, | December 31, | January 1, | ||||||||||||||||
| 2010 | 2008(1) | 2007(1) | 2006 | 2006 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Cash, cash equivalents and short-term investments(4),(5),(6),(7) | $ | 693,527 | $ | 640,075 | $ | 386,082 | $ | 130,804 | $ | 50,822 | ||||||||||
| Working capital | 540,354 | 483,113 | 397,040 | 159,950 | 57,992 | |||||||||||||||
| Total assets | 1,429,937 | 1,327,171 | 929,981 | 300,584 | 100,610 | |||||||||||||||
| Long-term debt, current portion(7) | 290,202 | 276,889 | 16 | — | — | |||||||||||||||
| Long-term debt, less current portion(7) | — | — | 258,007 | — | 54 | |||||||||||||||
| Total stockholders’ equity(2),(3),(4),(5),(6) | 864,248 | 798,667 | 353,927 | 247,342 | 72,497 | |||||||||||||||
In addition to the following notes, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data” for further information regarding our consolidated results of operations and financial position for periods reported therein and for known factors that will impact comparability of future results.
| (1) | Adjusted for required retroactive adoption of authoritative accounting guidance for convertible debt instruments that may be settled in cash upon conversion effective December 29, 2008. See Note 7 of Notes to Consolidated Financial Statements for further information. | |
| (2) | The consolidated financial statements include results of operations of acquired companies commencing on their respective acquisition dates. | |
| (4) | For the year ended December 30, 2007, | |
| In August 2008, a total of 8,050,000 shares were sold to the public at a public offering price of $43.75 per share, raising net proceeds to us of $342.7 million. See Note 9 of Notes to Consolidated Financial Statements. | ||
| (6) | For the years ended January 3, 2010, December 28, 2008 and December 30, 2007, we repurchased 6.1 million, 3.1 million and 14.8 million shares, respectively, of common stock for $175.1 million, $70.8 million and $251.6 million, respectively. See Note 9 of Notes to Consolidated Financial Statements. | |
| (7) | In February 2007, we issued $400.0 million principal amount of 0.625% Convertible Senior Notes | |
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of |
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Item 1A of this Annual Report onForm 10-K. Thereport for a discussion and analysis in this Annual Report onForm 10-K contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or similar words or phrases, or the negatives of these words, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward looking. Examples of forward-looking statements include, among others, statements regarding the integration of Solexa’s and CyVera’s technology with our existing technology, the commercial launch of new products, including products based on Solexa’s and CyVera’s technology, and the duration which our existing cash and other resources is expected to fund our operating activities.
Business Overview
We are a leading developer, manufacturer, and marketer of integrated systems for the large scale analysis of genetic variation and biological function. Using our proprietary technologies, we provide a comprehensive line of products and services that currently serve the sequencing, genotyping, and gene expression markets. In the future,markets, and we expect to enter the market for molecular diagnostics. Our customers include leading genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations, and biotechnology companies.
We develop and commercialize sequencing technologies used to perform a range of analyses, including de novo sequencing, whole genome re-sequencing, gene expression analysis, and small RNA analysis. Our product and service offerings also include leading-edge solutions for single-nucleotide polymorphism (SNP) genotyping, copy number variation (CNV), DNA methylation studies, gene expression profiling, and low-multiplex analysis of DNA, RNA, and protein. We believe we are the only company with genome-scale technology for sequencing, genotyping, and gene expression — the three cornerstones of modern genetic analysis.
Our tools provide researchers around the world with the performance, throughput, cost effectiveness, and flexibility necessary to performdetermine and analyze the billions of bits of genetic testsinformation needed to extract valuable medical information from advances in genomics and proteomics. We believe this information will enable researchers to correlate genetic variation and biological function, which will enhance drug discovery and clinical research, allow diseases to be detected earlier, and permit better choices of drugs for individual patients.
During the first quarter of 2008, we reorganized our operating structure into a newly created Life Sciences Business Unit, which includes all products and services that are primarily related to the research market, namely those based on our sequencing, BeadArray and Veracode technologies. We also created a Diagnostics Business Unit to focus on the emerging opportunity in molecular diagnostics. For the year ended January 3, 2010, we had limited activity related to the Diagnostics Business Unit and operating results were reported on an aggregate basis to the chief operating decision maker, the chief executive officer. Accordingly, we operated in one segment for the year ended January 3, 2010. We will begin reporting in two segments once revenues, operating profit or loss, or assets of the Diagnostics Business Unit exceed 10% of the consolidated amounts.
Our analysis presented below is organized to provide the information we believe will be useful for understanding the relevant trends going forward. However, this discussion should be read in conjunction with our consolidated financial statements and the notes thereto in Item 15 of this report.
Business Trends and Outlook
Our financial results have been, and will continue to be, impacted by several significant trends, which are described below:
Next Generation Sequencing
Strong demand for next generation sequencing applications continues to drive both sequencing instrument and consumable sales. In April 2005,2009 we completedmade advances to our sequencing technology, including enhanced chemistry, algorithms, and hardware which substantially improved accuracy, read length, data density, and ease of use. The combination of these advances increased the output and decreased the cost of sequencing and expanded the number of applications that researchers can perform on our sequencing systems. In early 2010 we expect to begin customer shipments of our recently announced HiSeq 2000 next generation sequencing instrument, which we believe will allow customers to sequence whole human genomes for less than $10,000 in reagent costs. We anticipate our revenue for 2010 will have higher growth in the second half of the year
29
compared to the first half due to the timing of the manufacturingscale-up of the HiSeq 2000 and other significant product launches scheduled for later in the year. We believe that as the cost of next generation sequencing continues to decline, the number of samples available for sequencing will significantly increase.
Genome Wide Association Studies (GWAS)
We experienced a slowdown in the sales of our microarray products during 2009 that was largely attributable to researchers reducing or suspending the initiation of new studies as they waited for rare variant content emerging from the 1000 Genomes Project, an international research effort launched in 2008 to establish the most detailed catalog of human genetic variation. Despite advances in sequencing technology, we believe microarrays remain a cheaper, faster and materially more accurate technology for use when genetic content is known. The information content of specific microarrays is fixed and reproducible; as such, specific microarrays provide repeatable, standardized assays for certain subsets of bases within the overall genome. During 2010, as part of our previously announced GWAS roadmap, we plan to launch arrays that will feature millions of more markers per BeadChip and new rare variant content from the 1000 Genomes Project. As these arrays become available, we believe activity in the microarray market will increase relative to 2009.
American Recovery and Reinvestment Act of 2009 (the Recovery Act)
The Recovery Act was enacted in February 2009 to provide stimulus to the U.S. economy in the wake of the economic downturn. As part of the Recovery Act legislation, over $10 billion in funding was provided to the National Institute of Health (NIH) through September 2010 to support the advancement of scientific research. In the second and third quarters of 2009 we experienced negative unintended consequences of the Recovery Act as customers delayed orders while they waited to receive stimulus funds. During the fourth quarter of 2009, we believe we saw an increase in the distribution of Recovery Act funds and received an estimated $16 million in orders directly related to Recovery Act grants. We believe a significant portion of Recovery Act awards may be distributed in 2010, which may create a pipeline of opportunity in the upcoming year.
Life Science Research Funding Across Regional Markets
We have developed a broad sales and distribution network with a sales presence in more than 40 countries. Our financial results will continue to be impacted by significant regional trends in life science research funding as described below:
| • | United States. A significant increase to the NIH budget in addition to Recovery Act stimulus funds has made for a strong funding environment in the United States that we expect to continue into 2010. | |
| • | Asia-Pacific. Strong funding in China was partially offset by a funding decrease in Japan due to a change in government that resulted in the suspension of supplemental life science research funding during the second and third quarters of 2009. During the fourth quarter of 2009, we saw an increase in activity in the Japanese market as funds began to be released, which we expect to continue into 2010. | |
| • | Europe. Central and southern European markets had a strong year driven by the establishment and expansion of genome centers. However, there was a decrease in funding in northern European countries, primarily due to reduced institutional funding in areas like the United Kingdom and the financial crisis in Iceland. We saw some positive signs during the fourth quarter of 2009 in Northern Europe, and, although we expect funding to stabilize, we do not expect a material increase in activity in this region in 2010. |
Cost of Revenue
Our cost of revenue as a percentage of revenue declined during 2009 due to cost efficiencies in our manufacturing process and an improved mix of sequencing consumables driven by growth in the installed base of our sequencing systems. We expect changes in our product mix to continue to affect our cost of revenue as a percentage of revenue, particularly in the latter half of the year. We anticipate cost of revenue as a
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percentage of revenue to be lower in the first half of the year and then increase as the mix shifts to newer products and the effects of our trade-in promotions associated with the launch of the HiSeq 2000 are realized. Additionally, we expect price competition to continue in our market causing added variability in our cost of revenue as a percentage of revenue on a quarterly and annual basis.
Operating Expense
We expect to incur additional operating costs to support the expected growth in our business. As a result of revenues growing faster in the second half of 2010, we expect operating expenses as a percentage of revenue to be higher in the first half of the year compared with the second half. We believe a substantial investment in research and development is essential to remaining competitive and expanding into additional markets. Accordingly, we expect our research and development expenses to increase in absolute dollars as we expand our product base. Selling, general and administrative expenses are also expected to increase in absolute dollars as we continue to expand our staff and add sales and marketing infrastructure.
While these trends are important to understanding and evaluating our financial results, the other transactions, events and trends discussed in “Risk Factors” in Item 1A of this report may also materially impact our business operations and financial results.
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Results of Operations
To enhance comparability, the following table sets forth audited consolidated statement of operations data for the years ended January 3, 2010, December 28, 2008 and December 30, 2007 stated as a percentage of total revenue.
| Year Ended | ||||||||||||
| January 3, | December 28, | December 30, | ||||||||||
| 2010 | 2008 | 2007 | ||||||||||
| Revenue: | ||||||||||||
| Product revenue | 94 | % | 93 | % | 89 | % | ||||||
| Service and other revenue | 6 | 7 | 11 | |||||||||
| Total revenue | 100 | 100 | 100 | |||||||||
| Costs and expenses: | ||||||||||||
| Cost of product revenue (excluding impairment of manufacturing equipment and amortization of intangible assets) | 29 | 34 | 33 | |||||||||
| Cost of service and other revenue | 2 | 2 | 3 | |||||||||
| Research and development | 21 | 17 | 20 | |||||||||
| Selling, general and administrative | 26 | 26 | 27 | |||||||||
| Impairment of manufacturing equipment | — | 1 | — | |||||||||
| Amortization of intangible assets | 1 | 2 | 1 | |||||||||
| Acquired in-process research and development | 2 | 4 | 83 | |||||||||
| Litigation settlements | — | — | 15 | |||||||||
| Total costs and expenses | 81 | 86 | 182 | |||||||||
| Income (loss) from operations | 19 | 14 | (82 | ) | ||||||||
| Other income (expense): | ||||||||||||
| Interest income | 2 | 2 | 4 | |||||||||
| Interest expense | (4 | ) | (4 | ) | (5 | ) | ||||||
| Other income (expense), net | — | 1 | — | |||||||||
| Total other expense, net | (2 | ) | (1 | ) | (1 | ) | ||||||
| Income (loss) before income taxes | 17 | 13 | (83 | ) | ||||||||
| Provision (benefit) for income taxes | 6 | 6 | (4 | ) | ||||||||
| Net income (loss) | 11 | % | 7 | % | (79 | )% | ||||||
Comparison of Years Ended January 3, 2010 and December 28, 2008
Our fiscal year is the 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The year ended January 3, 2010 was 53 weeks and the year end December 28, 2008 was 52 weeks.
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Revenue
| Year Ended | ||||||||||||||||
| January 3, | December 28, | Percentage | ||||||||||||||
| 2010 | 2008 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Product revenue | $ | 627,240 | $ | 532,390 | $ | 94,850 | 18 | % | ||||||||
| Service and other revenue | 39,084 | 40,835 | (1,751 | ) | (4 | ) | ||||||||||
| Total revenue | $ | 666,324 | $ | 573,225 | $ | 93,099 | 16 | % | ||||||||
Product revenue consists primarily of revenue from the sale of consumables and instruments.
Consumable revenue increased $57.6 million, or 17%, to $391.3 million for the year ended January 3, 2010 compared to $333.7 million for the year ended December 28, 2008. Microarray consumable revenue, which constituted more than half of our consumable revenue, declined $11.4 million, or 4%, primarily attributable to lower sales of whole-genome genotyping arrays partially offset by growth in focused content arrays. The decline was driven by customers delaying the start of new GWAS in anticipation of new and rare variant content from the 1000 Genome Project, order delays directly related to stimulus funding under the Recovery Act and the impact of reduced foundation funding at a few key customers. Sales volume for our Infinium BeadChip product lines, which constitute a majority of our microarray consumable sales, was relatively flat on a sample basis during 2009 compared to 2008. The average selling price per sample, however, declined due to a change in product mix attributable to growth in the sales of our focused content arrays coupled with lower sales of whole-genome genotyping arrays and an increase in the average number of samples per BeadChip.
Revenue from sequencing consumables increased $68.9 million, or 144%, driven by growth in the installed base of our Genome Analyzer systems and the progression of customer labs ramping to production scale. The increase was partially offset by a loss of sales related to a quality issue affecting our paired-end cluster kits that arose in September 2009 when some of our larger sequencing customers began experiencing higher than average error rates on the second read of their paired-end analysis. During the fourth quarter, we began shipping reformulated paired-end cluster kits at full capacity and cleared the related shipping backlog.
Revenue from the sale of instruments increased $40.0 million, or 22%, to $225.7 million for the year ended January 3, 2010 compared to $185.7 million for the year ended December 28, 2008 primarily due to a $56.4 million, or 43%, increase in sales of our sequencing systems. During 2009 as compared to 2008 both units sold and average selling prices increased for our Genome Analyzer systems, which constitute a majority of sequencing instrument revenue. The increase in units sold was driven by increased demand for next generation sequencing and oursequencing-by-synthesis technology. The increase in average selling prices was attributable to the product transition from the Genome Analyzer I to the Genome Analyzer II in the second quarter of 2008 and technological improvements leading to the launch of the Genome Analyzer IIx in the second quarter of 2009. The increase in sequencing instrument revenue was partially offset by a $16.4 million, or 30%, decrease in the sales of our microarray systems, which declined primarily due to customers delaying the start of new GWAS in anticipation of new and rare variant content from the 1000 Genomes Project, order delays directly related to stimulus funding under the Recovery Act and the impact of reduced foundation funding at a few key customers.
Cost of Product and Service and Other Revenue
| Year Ended | ||||||||||||||||
| January 3, | December 28, | Percentage | ||||||||||||||
| 2010 | 2008 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Cost of product revenue | $ | 190,714 | $ | 192,868 | $ | (2,154 | ) | (1 | )% | |||||||
| Cost of service and other revenue | 15,055 | 12,756 | 2,299 | 18 | ||||||||||||
| Total cost of revenue | $ | 205,769 | $ | 205,624 | $ | 145 | — | % | ||||||||
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Total cost of revenue, which excludes the impairment of manufacturing equipment and the amortization of intangible assets, remained flat despite higher sales, primarily due to a decrease in manufacturing costs and improved efficiencies.
Cost of product revenue as a percentage of related revenue was 30% for the year ended January 3, 2010, compared to 36% for the year ended December 28, 2008. The decrease was primarily due to lower costs for our sequencing consumables and instrumentation. The cost of sequencing consumables decreased as a percentage of related revenue due to improved overhead absorption from increased volumes and the benefit of decreased costs associated with the reformulation of our sequencing kits launched at the end of the third quarter of 2008. The cost of sequencing instruments decreased as a percentage of related revenue due to production efficiencies and reduced material costs coupled with higher average selling prices.
Operating Expenses
| Year Ended | ||||||||||||||||
| January 3, | December 28, | Percentage | ||||||||||||||
| 2010 | 2008 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Research and development | $ | 140,616 | $ | 99,963 | $ | 40,653 | 41 | % | ||||||||
| Selling, general and administrative | 176,337 | 148,014 | 28,323 | 19 | ||||||||||||
| Total operating expenses | $ | 316,953 | $ | 247,977 | $ | 68,976 | 28 | % | ||||||||
The increase in research and development was driven primarily by a $22.9 million increase in personnel-related expenses, including salaries, non-cash stock-based compensation and benefits, a $10.4 million increase to non-personnel related expenses and an increase in outside services of $3.2 million attributable to consulting fees. These increases are primarily related to the growth in our efforts to optimize and commercialize our sequencing and BeadArray technologies.
The increase in selling, general and administrative expenses was driven by an increase of $26.6 million in personnel-related expenses associated with the growth of our business, including salaries, non-cash stock-based compensation and benefits.
Acquired In-Process Research and Development (IPR&D)
| Year Ended | ||||||||||||||||
| January 3, | December 28, | Percentage | ||||||||||||||
| 2010 | 2008 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Acquired in-process research and development | $ | 11,325 | $ | 24,660 | $ | (13,335 | ) | (54 | )% | |||||||
During the year ended December 28, 2008, we recorded acquired IPR&D charges of $24.7 million as a result of the Avantome, Inc. acquisition in August 2008. During the year ended January 3, 2010, we recorded additional IPR&D charges of CyVera. $11.3 million related to milestone payments made to Avantome Inc.’s former shareholders.
Other Income (Expense), Net
| Year Ended | ||||||||||||||||
| January 3, | December 28, | Percentage | ||||||||||||||
| 2010 | 2008 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Interest income | $ | 11,029 | $ | 12,519 | $ | (1,490 | ) | (12 | )% | |||||||
| Interest expense | (23,718 | ) | (22,210 | ) | (1,508 | ) | 7 | |||||||||
| Other income, net | 1,217 | 1,921 | (704 | ) | (37 | ) | ||||||||||
| Total other expense, net | $ | (11,472 | ) | $ | (7,770 | ) | $ | (3,702 | ) | 48 | % | |||||
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Interest income decreased despite an increase in our average cash and investment balance due to an overall decline in interest rates during 2009. Interest expense increased due to the amortization of the discount on our convertible senior notes. Other income, net decreased due to a decrease of $1.5 million in gains on net foreign currency transactions, which was partially offset by a gain of $0.8 million on the conversion of a portion of our debt during the first quarter of 2009.
Provision for Income Taxes
| Year Ended | ||||||||||||||||
| January 3, | December 28, | Percentage | ||||||||||||||
| 2010 | 2008 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Provision for income taxes | $ | 41,844 | $ | 33,271 | $ | 8,573 | 26 | % | ||||||||
The aggregateincrease in the provision for income taxes was attributable to the increase in the consolidated income before income taxes. The effective tax rate decreased from 45.8% in 2008 to 36.7% in 2009 predominately because the amount of nondeductible acquired IPR&D recognized for financial reporting purposes was lower by $13.3 million. Additionally, the percentage of consolidated income before income taxes earned in foreign jurisdictions, which primarily have lower statutory tax rates than the U.S. statutory tax rate, increased from 36% in 2008 to 43% in 2009.
Comparison of Years Ended December 28, 2008 and December 30, 2007
Our fiscal year is 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The years ended December 28, 2008 and December 30, 2007 were both 52 weeks.
Revenue
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Product revenue | $ | 532,390 | $ | 326,699 | $ | 205,691 | 63 | % | ||||||||
| Service and other revenue | 40,835 | 40,100 | 735 | 2 | ||||||||||||
| Total revenue | $ | 573,225 | $ | 366,799 | $ | 206,426 | 56 | % | ||||||||
Product revenue consists primarily of revenue from the sale of consumables and instruments.
Revenue from the sale of consumables increased $140.2 million, or 72%, to $333.7 million for the year ended December 28, 2008 compared to $193.5 million for the year ended December 30, 2007. Growth in consumable revenue was primarily attributable to strong demand for our Infinium and sequencing products, which led to increased sales of $104.8 million and $35.4 million, respectively. The increase in revenue associated with our Infinium products was attributable to the strong demand for our Infinium High-Density BeadChips, particularly the Human610-Quad, which we began shipping during the first quarter of 2008. Of the overall increase in Infinium BeadChip sales, approximately 79% was due to new product introductions with higher average selling prices, while the remaining 21% can be attributed to increased volume. The increase in sequencing consumables was primarily attributable to the growth of our installed base of instruments and the progression of customer labs ramping to production scale.
Revenue from the sale of instruments increased $64.8 million, or 54%, to $185.7 million for the year ended December 28, 2008 compared to $120.9 million for the year ended December 30, 2007. The increase was primarily attributable to a $63.0 million increase in sales of our Genome Analyzer driven by both an increase in sales volume and average selling prices. Additionally, during the second quarter of 2008, we launched the iScan System, our next-generation BeadChip scanner to replace the BeadArray Reader. Any increase in revenue resulting from shipments of this new system was offset by a reduction in sales of our BeadArray Reader as we stopped manufacturing this product upon the launch of our iScan System.
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Cost of Product and Service and Other Revenue
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Cost of product revenue | $ | 192,868 | $ | 119,991 | $ | 72,877 | 61 | % | ||||||||
| Cost of service and other revenue | 12,756 | 12,445 | 311 | 2 | ||||||||||||
| Total cost of product and service and other revenue | $ | 205,624 | $ | 132,436 | $ | 73,188 | 55 | % | ||||||||
Total cost of revenue, which excludes the impairment of manufacturing equipment and the amortization of intangible assets, increased primarily due to higher instrument and consumable sales.
Cost of product revenue as a percentage of related revenue was 36% for the year ended December 28, 2008 compared to 37% for the year ended December 30, 2007. The decrease was primarily due to favorable product mix driven by increased sales of our new High-Density Infinium Beadchips, with higher average selling prices as compared to the Infinium Beadchips sold in the prior year. This was partially offset by increased provisions for inventory obsolescence of $7.2 million for the year ended December 28, 2008 compared to $1.9 million for the year ended December 30, 2007. The increase in the inventory reserve was primarily associated with product transitions. During the year, we recorded reserves for product obsolescence associated with the launch of our new Infinium Beadchips and the launch of a new sequencing kit. Instrument cost of sales as a percentage of related revenue increased slightly over the prior year due to lower average selling prices mainly associated with promotional campaigns as we launched our next generation Beadarray Reader, the iScan in the first half of 2008.
Operating Expenses
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Research and development | $ | 99,963 | $ | 73,943 | $ | 26,020 | 35 | % | ||||||||
| Selling, general and administrative | 148,014 | 101,256 | 46,758 | 46 | ||||||||||||
| Total operating expenses | $ | 247,977 | $ | 175,199 | $ | 72,778 | 42 | % | ||||||||
The increase in research and development was driven by a $17.4 million increase in personnel-related expenses associated with increased headcount, including salaries, non-cash stock-based compensation and benefits, an $11.6 million increase to non-personnel related expenses associated with the growth of our business and a $1.5 million increase to accrued compensation expense associated with contingent consideration for the Avantome acquisition completed on August 1, 2008. These increases were partially offset by a decrease in outside services of $4.5 million primarily related to a decrease in consulting fees.
The increase in selling, general and administrative expenses was driven primarily by an increase of $42.8 million in personnel-related expenses, including salaries, non-cash stock-based compensation and benefits and a $4.0 million increase to non-personnel related expenses. These increases were primarily associated with the growth of our business.
Acquired In-Process Research and Development (IPR&D)
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Acquired in-process research and development | $ | 24,660 | $ | 303,400 | $ | (278,740 | ) | (92 | )% | |||||||
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As a result of the Avantome, Inc. acquisition in August 2008 and the Solexa Inc. acquisition in January 2007, we recorded acquired IPR&D charges of $24.7 million and $303.4 million, respectively.
Litigation Settlements
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Litigation settlements | $ | — | $ | 54,536 | $ | (54,536 | ) | (100 | )% | |||||||
During the year ended December 30, 2007, we recorded a charge of $54.5 million associated with two settlement agreements. The total charge is comprised primarily of $54.0 million related to a $90.0 million settlement with Affymetrix entered into on January 9, 2008 for certain patent litigation between the parties. See Note 4 of Notes to Consolidated Financial Statements for further information regarding the Affymetrix settlement.
Other Income (Expense), Net
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Interest income | $ | 12,519 | $ | 16,025 | $ | (3,506 | ) | (22 | )% | |||||||
| Interest expense | (22,210 | ) | (18,297 | ) | (3,913 | ) | 21 | |||||||||
| Other income (expense), net | 1,921 | (47 | ) | 1,968 | (4,187 | ) | ||||||||||
| Total other expense, net | $ | (7,770 | ) | $ | (2,319 | ) | $ | (5,451 | ) | (235 | )% | |||||
Interest income decreased due to a change in our cash and investment portfolio to a mix of shorter duration maturities and an increased number of agency-rated investments coupled with the overall decline in interest rates due to market conditions. Interest expense increased due to the amortization of the discount on our convertible senior notes and an additional month and a half of interest expense recorded in the year ended December 28, 2008 compared to the year ended December 30, 2007. Other income (expense), net increased primarily due to $1.9 million in net foreign currency transaction gains for the year ended December 28, 2008 compared to immaterial losses recorded in the year ended December 30, 2007.
Provision (benefit) for Income Taxes
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Provision (benefit) for income taxes | $ | 33,271 | $ | (16,215 | ) | $ | 49,486 | (305 | )% | |||||||
The provision (benefit) for income taxes in 2008 was $14.5different than in 2007 primarily because the amount of nondeductible acquired IPR&D recognized for financial reporting purposes was lower by $278.7 million. In addition, for the year ended December 30, 2007, the provision for income taxes was reduced by $17.1 million consistingas a result of the release of the valuation allowance against a significant portion of our U.S. deferred tax assets.
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Liquidity and Capital Resources
Cash flow summary
| Year Ended | Year Ended | Year Ended | ||||||||||
| January 3, | December 28, | December 30, | ||||||||||
| 2010 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
| Net cash provided by operating activities | $ | 174,496 | $ | 87,882 | $ | 56,294 | ||||||
| Net cash used in investing activities | (255,718 | ) | (277,249 | ) | (67,686 | ) | ||||||
| Net cash (used in) provided by financing activities | (98,862 | ) | 337,672 | 148,292 | ||||||||
| Effect of foreign currency translation | (2,307 | ) | 3,778 | (345 | ) | |||||||
| Net (decrease) increase in cash and cash equivalents | $ | (182,391 | ) | $ | 152,083 | $ | 136,555 | |||||
Operating Activities
Cash provided by operating activities for the year ended January 3, 2010 consists of net income of $72.3 million plus net non-cash adjustments of $113.5 million and an $11.3 million increase in net operating assets. The primary non-cash expenses added back to net income included share based compensation of $60.8 million and depreciation and amortization expense related to property and equipment, intangibles and the debt discount on our convertible notes totaling $51.5 million. The main drivers in the change in net operating assets included increases in accounts receivable, inventory, accounts payable and accrued liabilities. These increases were primarily related to the growth of our business.
Investing Activities
Cash used in investing activities totaled $255.7 million for the year ended January 3, 2010. We purchased and soldavailable-for-sale securities totaling $694.5 million and $515.2 million, respectively. We incurred $51.8 million in capital expenditures primarily associated with the expansion of our facilities and infrastructure at our San Diego, Hayward and UK locations. Additionally, in January 2009, we executed a strategic alliance with Oxford Nanopore Technologies, which consisted of a commercialization agreement and an $18.0 million equity investment. We also agreed to make an additional equity investment upon the achievement of a specific technical milestone.
In August 2008, we completed our acquisition of Avantome, Inc. As consideration for the acquisition, we paid $25.8 million in cash, including transaction costs, at the closing of the acquisition, and have subsequently paid $15.0 million as of February 1, 2010 based on the achievement of, or amendments relating to, certain milestones. We may pay up to an additional $20.0 million in contingent cash consideration to Avantome’s former shareholders based on the achievement of certain remaining milestones.
In January 2008, as part of our Affymetrix settlement, we recorded a $36.0 million intangible asset for licensed technology obtained in the settlement. See Note 4 of Notes to Consolidated Financial Statements for further information regarding intangible assets.
In January of 2007, we completed our acquisition of Solexa, Inc. in astock-for-stock merger transaction. The Company issued approximately 1.526.2 million shares of its common stock as consideration for this merger. The acquisition resulted in net cash acquired of $72.1 million.
Financing Activities
Cash used in financing activities totaled $98.9 million for the year ended January 3, 2010. During the year we repurchased approximately 6.1 million shares of our common stock for $175.1 million, which was partially offset by $39.4 million in proceeds received from the exercise of stock options and paymentthe sale of approximately $2.3shares under our Employee Stock Purchase Plan and $39.3 million of CyVera’s liabilitiesincremental tax benefits related to stock options exercised.
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In August 2008, we issued a total of 8.1 million shares at a public offering price of $43.75 per share, raising net proceeds to the closing.
In February 2007, we issued $400.0 million principal amount of 0.625% convertible senior notes due 2014. The net proceeds from the offering, after deducting the initial purchasers’ discount and commercializes genetic analysis technologiesoffering expenses, were approximately $390.3 million. We used $201.6 million of the net proceeds to performpurchase approximately 11.6 million shares of our common stock in privately negotiated transactions concurrently with the offering. We used $46.6 million of the net proceeds of this offering to pay the net cost of convertible note hedge and warrant transactions, which are designed to reduce the potential dilution upon conversion of the notes. See Note 7 of Notes to Consolidated Financial Statements for further information regarding our convertible senior notes.
Liquidity
We manage our business to maximize operating cash flows as the primary source of our liquidity. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing and financing needs. Historically, we have issued debt and equity securities to finance our requirements to the extent that cash provided by operating activities was not sufficient to fund our needs. We may require additional funding in the future and our failure to raise capital on acceptable terms, when needed, could have a rangematerial adverse effect on our business.
At January 3, 2010, we had approximately $693.5 million in cash and short-term investments. Short-term investments include marketable securities and auction rate securities totaling $494.0 million and $54.9 million, respectively. Our marketable securities consist of analyses including whole genome resequencing, gene expressing analysisdebt securities in government sponsored entities, corporate debt securities and small RNA analysis.U.S treasury notes. We believedo not hold securities backed by mortgages. Our auction rate securities were issued primarily by municipalities and universities. The markets for auction rate securities effectively ceased when the vast majority of auctions failed in February 2008, preventing investors from selling their auction rate securities. As of January 3, 2010, the securities continued to fail auction and remained illiquid. In November 2008, we signed a settlement agreement allowing us to sell our combined company isauction rate securities at par value to UBS AG (UBS) at our discretion during the only company with genome-scale technologyperiod of June 30, 2010 through July 2, 2012. Because we intend to exercise this right when it becomes available, we have classified our auction rate securities as short-term on the balance sheet. See Note 3 of Notes to Consolidated Financial Statements for genotyping, gene expression and sequencing, the three cornerstones of modern genetic analysis.further information regarding our auction rate securities.
Our revenue isoutstanding convertible senior notes were convertible into cash and, if applicable, shares of our common stock for the period from April 1, 2008 through December 31, 2008 and became convertible again beginning April 1, 2009 through December 31, 2009. On December 29, 2008, a noteholder converted notes in an aggregate principal amount of $10.0 million. On February 4, 2009, the settlement date, we paid the noteholder the conversion value of the notes in cash, up to the principal amount of the notes. The excess of the conversion value over the principal amount, totaling $2.9 million, was paid in shares of common stock. This equity dilution upon conversion of the notes was offset by the reacquisition of the shares under the convertible note hedge transactions entered into in connection with the offering of the notes. See Note 7 of Notes to Consolidated Financial Statements for further discussion of the terms of the convertible senior notes.
Our primary short-term needs for capital, which are subject to fluctuations due to the timing of sales of high-value products and service projects, the impact of seasonal spending patterns, the timing and size of research projects our customers perform, changes in overall spending levels in the life science industry and other unpredictable factors that may affect our customer ordering patterns. Any significant delays in the commercial launch or any lack or delay of commercial acceptance of new products, unfavorable sales trends in our existing product lines, or impacts from the other factors mentioned above, could adversely affect our revenue growth or cause a sequential decline in quarterly revenue. Due to the possibility of fluctuations in our revenue and net income or loss, we believe quarterly comparisons of our operating results are not a good indication of our future performance.change, include expenditures related to:
| • | potential strategic acquisitions and investments; | |
| • | support of our commercialization efforts related to our current and future products, including expansion of our direct sales force and field support resources both in the United States and abroad; | |
| • | the continued advancement of research and development efforts; | |
| • | the acquisition of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities; |
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| • | improvements in our manufacturing capacity and efficiency; and | |
| • | the expansion needs of our facilities, including costs of leasing additional facilities. |
We expect that our product revenue and the resulting operating income, as well as the status of December 30, 2007,each of our accumulated deficit was $383.0 millionnew product development programs, will significantly impact our cash management decisions.
We anticipate that our current cash and total stockholders’ equity was $411.7 million.cash equivalents and income from operations will be sufficient to fund our operating needs in 2010, barring unforeseen circumstances. Operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. At the present time, we have no material commitments for capital expenditures. Our lossesfuture capital requirements and the adequacy of our available funds will depend on many factors, including:
| • | our ability to successfully commercialize and further develop our technologies and create innovative products in our markets; | |
| • | scientific progress in our research and development programs and the magnitude of those programs; | |
| • | competing technological and market developments; and | |
| • | the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings. |
Off-Balance Sheet Arrangements
We do not participate in any transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have principally occurred as a result of acquired in-process research and development charges of $303.4 million related to our acquisition of Solexa in 2007, the substantial resources requiredbeen established for the research, developmentpurpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. During the fiscal year ended January 3, 2010, we were not involved in any “off balance sheet arrangements” within the meaning of the rules of the Securities and manufacturingExchange Commission.
Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude orders for goods and services a chargeentered into in the normal course of $54.5 millionbusiness that are not enforceable or legally binding. The following table represents our contractual obligations as of January 3, 2010, aggregated by type (amounts in 2007 primarily related to settlement of our litigation with Affymetrix and $15.8 million related to our acquisition of CyVera in 2005. We expect to continue to incur substantial costs for research, development and manufacturingscale-up activities over the next several years. We will also need to increase our selling, general and administrative costs as we build up our sales and marketing infrastructure to expand and support the sale of systems, other products and services.thousands):
| Payments Due by Period(1) | ||||||||||||||||||||
| Less Than | More Than | |||||||||||||||||||
Contractual Obligation | Total | 1 Year | 1 – 3 Years | 3 – 5 Years | 5 Years | |||||||||||||||
| Debt obligations(2) | $ | 400,968 | $ | 2,437 | $ | 4,875 | $ | 393,656 | $ | — | ||||||||||
| Operating leases | 148,415 | 11,668 | 24,870 | 22,310 | 89,567 | |||||||||||||||
| Contingent consideration(3) | 10,000 | 10,000 | — | — | — | |||||||||||||||
| Amounts due under executive deferred compensation plan | 4,007 | 4,007 | — | — | — | |||||||||||||||
| Total | $ | 563,390 | $ | 28,112 | $ | 29,745 | $ | 415,966 | $ | 89,567 | ||||||||||
| (1) | Excludes $11.8 million of uncertain tax benefits. We have not included this amount in the table because we cannot make a reasonably reliable estimate regarding the timing of settlements with taxing authorities, if any. See Note 11 of Notes to the Consolidated Financial Statements for further discussion of our uncertain tax positions. | |
| (2) | Debt obligations include the principal amount of our convertible senior notes and interest payments totaling 0.625% per annum. Although these notes mature in 2014, we classify the notes as current liabilities because the conditions to convertibility were satisfied during the last three fiscal quarters of |
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| 2009 and may be satisfied during certain quarters in 2010. See Note 7 of Notes to Consolidated Financial Statements for further discussion of the terms of the convertible senior notes. | ||
| (3) | The $10.0 million included within contingent consideration is the amount owed to the former shareholders of Avantome, Inc. for the achievement of a certain date-specific milestones. The table excludes $20.0 million in additional contingent cash consideration we may be required to pay based on the achievement of certain additional milestones that do not have a fixed funding date and are subject to certain conditions that may or may not occur. |
To enhance comparability, the following table sets forth audited consolidated statement of operations data for the years ended January 3, 2010, December 28, 2008 and December 30, 2007 stated as a percentage of total revenue.
| Year Ended | ||||||||||||
| January 3, | December 28, | December 30, | ||||||||||
| 2010 | 2008 | 2007 | ||||||||||
| Revenue: | ||||||||||||
| Product revenue | 94 | % | 93 | % | 89 | % | ||||||
| Service and other revenue | 6 | 7 | 11 | |||||||||
| Total revenue | 100 | 100 | 100 | |||||||||
| Costs and expenses: | ||||||||||||
| Cost of product revenue (excluding impairment of manufacturing equipment and amortization of intangible assets) | 29 | 34 | 33 | |||||||||
| Cost of service and other revenue | 2 | 2 | 3 | |||||||||
| Research and development | 21 | 17 | 20 | |||||||||
| Selling, general and administrative | 26 | 26 | 27 | |||||||||
| Impairment of manufacturing equipment | — | 1 | — | |||||||||
| Amortization of intangible assets | 1 | 2 | 1 | |||||||||
| Acquired in-process research and development | 2 | 4 | 83 | |||||||||
| Litigation settlements | — | — | 15 | |||||||||
| Total costs and expenses | 81 | 86 | 182 | |||||||||
| Income (loss) from operations | 19 | 14 | (82 | ) | ||||||||
| Other income (expense): | ||||||||||||
| Interest income | 2 | 2 | 4 | |||||||||
| Interest expense | (4 | ) | (4 | ) | (5 | ) | ||||||
| Other income (expense), net | — | 1 | — | |||||||||
| Total other expense, net | (2 | ) | (1 | ) | (1 | ) | ||||||
| Income (loss) before income taxes | 17 | 13 | (83 | ) | ||||||||
| Provision (benefit) for income taxes | 6 | 6 | (4 | ) | ||||||||
| Net income (loss) | 11 | % | 7 | % | (79 | )% | ||||||
Our discussionfiscal year is the 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.September 30. The preparation of financial statements requires that management make estimates, assumptions and judgments with respect to the application of accounting policies that affect the reported amounts of assets, liabilities, revenue and expenses,year ended January 3, 2010 was 53 weeks and the disclosures of contingent assets and liabilities. Actual results could differ from those estimates.
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Revenue
| Year Ended | ||||||||||||||||
| January 3, | December 28, | Percentage | ||||||||||||||
| 2010 | 2008 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Product revenue | $ | 627,240 | $ | 532,390 | $ | 94,850 | 18 | % | ||||||||
| Service and other revenue | 39,084 | 40,835 | (1,751 | ) | (4 | ) | ||||||||||
| Total revenue | $ | 666,324 | $ | 573,225 | $ | 93,099 | 16 | % | ||||||||
Product revenue consists primarily of revenue from the sale of consumables and instruments.
Consumable revenue increased $57.6 million, or 17%, to $391.3 million for the year ended January 3, 2010 compared to $333.7 million for the year ended December 28, 2008. Microarray consumable revenue, which constituted more than half of our consumable revenue, declined $11.4 million, or 4%, primarily attributable to lower sales of whole-genome genotyping arrays partially offset by growth in focused content arrays. The decline was driven by customers delaying the start of new GWAS in anticipation of new and rare variant content from the 1000 Genome Project, order delays directly related to stimulus funding under the Recovery Act and the impact of reduced foundation funding at a few key customers. Sales volume for our Infinium BeadChip product lines, which constitute a majority of our microarray consumable sales, was relatively flat on a sample basis during 2009 compared to 2008. The average selling price per sample, however, declined due to a change in product mix attributable to growth in the sales of our focused content arrays coupled with lower sales of whole-genome genotyping arrays and an increase in the average number of samples per BeadChip.
Revenue from sequencing consumables increased $68.9 million, or 144%, driven by growth in the installed base of our Genome Analyzer systems and the progression of customer labs ramping to production scale. The increase was partially offset by a loss of sales related to a quality issue affecting our paired-end cluster kits that arose in September 2009 when some of our larger sequencing customers began experiencing higher than average error rates on the second read of their paired-end analysis. During the fourth quarter, we began shipping reformulated paired-end cluster kits at full capacity and cleared the related shipping backlog.
Revenue from the sale of instruments increased $40.0 million, or 22%, to $225.7 million for the year ended January 3, 2010 compared to $185.7 million for the year ended December 28, 2008 primarily due to a $56.4 million, or 43%, increase in sales of our sequencing systems. During 2009 as compared to 2008 both units sold and average selling prices increased for our Genome Analyzer systems, which constitute a majority of sequencing instrument revenue. The increase in units sold was driven by increased demand for next generation sequencing and oursequencing-by-synthesis technology. The increase in average selling prices was attributable to the product transition from the Genome Analyzer I to the Genome Analyzer II in the second quarter of 2008 and technological improvements leading to the launch of the Genome Analyzer IIx in the second quarter of 2009. The increase in sequencing instrument revenue was partially offset by a $16.4 million, or 30%, decrease in the sales of our microarray systems, which declined primarily due to customers delaying the start of new GWAS in anticipation of new and rare variant content from the 1000 Genomes Project, order delays directly related to stimulus funding under the Recovery Act and the impact of reduced foundation funding at a few key customers.
Cost of Product and Service and Other Revenue
| Year Ended | ||||||||||||||||
| January 3, | December 28, | Percentage | ||||||||||||||
| 2010 | 2008 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Cost of product revenue | $ | 190,714 | $ | 192,868 | $ | (2,154 | ) | (1 | )% | |||||||
| Cost of service and other revenue | 15,055 | 12,756 | 2,299 | 18 | ||||||||||||
| Total cost of revenue | $ | 205,769 | $ | 205,624 | $ | 145 | — | % | ||||||||
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Total cost of revenue, which excludes the impairment of manufacturing equipment and the amortization of intangible assets, remained flat despite higher sales, primarily due to a decrease in manufacturing costs and improved efficiencies.
Cost of product revenue as a percentage of related revenue was 30% for the year ended January 3, 2010, compared to 36% for the year ended December 28, 2008. The decrease was primarily due to lower costs for our sequencing consumables and instrumentation. The cost of sequencing consumables decreased as a percentage of related revenue due to improved overhead absorption from increased volumes and the benefit of decreased costs associated with the reformulation of our sequencing kits launched at the end of the third quarter of 2008. The cost of sequencing instruments decreased as a percentage of related revenue due to production efficiencies and reduced material costs coupled with higher average selling prices.
Operating Expenses
| Year Ended | ||||||||||||||||
| January 3, | December 28, | Percentage | ||||||||||||||
| 2010 | 2008 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Research and development | $ | 140,616 | $ | 99,963 | $ | 40,653 | 41 | % | ||||||||
| Selling, general and administrative | 176,337 | 148,014 | 28,323 | 19 | ||||||||||||
| Total operating expenses | $ | 316,953 | $ | 247,977 | $ | 68,976 | 28 | % | ||||||||
The increase in research and development was driven primarily by a $22.9 million increase in personnel-related expenses, including salaries, non-cash stock-based compensation and benefits, a $10.4 million increase to non-personnel related expenses and an increase in outside services of $3.2 million attributable to consulting fees. These increases are primarily related to the growth in our efforts to optimize and commercialize our sequencing and BeadArray technologies.
The increase in selling, general and administrative expenses was driven by an increase of $26.6 million in personnel-related expenses associated with the growth of our business, including salaries, non-cash stock-based compensation and benefits.
Acquired In-Process Research and Development (IPR&D)
| Year Ended | ||||||||||||||||
| January 3, | December 28, | Percentage | ||||||||||||||
| 2010 | 2008 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Acquired in-process research and development | $ | 11,325 | $ | 24,660 | $ | (13,335 | ) | (54 | )% | |||||||
During the year ended December 28, 2008, we recorded acquired IPR&D charges of $24.7 million as a result of the Avantome, Inc. acquisition in August 2008. During the year ended January 3, 2010, we recorded additional IPR&D charges of $11.3 million related to milestone payments made to Avantome Inc.’s former shareholders.
Other Income (Expense), Net
| Year Ended | ||||||||||||||||
| January 3, | December 28, | Percentage | ||||||||||||||
| 2010 | 2008 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Interest income | $ | 11,029 | $ | 12,519 | $ | (1,490 | ) | (12 | )% | |||||||
| Interest expense | (23,718 | ) | (22,210 | ) | (1,508 | ) | 7 | |||||||||
| Other income, net | 1,217 | 1,921 | (704 | ) | (37 | ) | ||||||||||
| Total other expense, net | $ | (11,472 | ) | $ | (7,770 | ) | $ | (3,702 | ) | 48 | % | |||||
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Interest income decreased despite an increase in our average cash and investment balance due to an overall decline in interest rates during 2009. Interest expense increased due to the amortization of the discount on our convertible senior notes. Other income, net decreased due to a decrease of $1.5 million in gains on net foreign currency transactions, which was partially offset by a gain of $0.8 million on the conversion of a portion of our debt during the first quarter of 2009.
Provision for Income Taxes
| Year Ended | ||||||||||||||||
| January 3, | December 28, | Percentage | ||||||||||||||
| 2010 | 2008 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Provision for income taxes | $ | 41,844 | $ | 33,271 | $ | 8,573 | 26 | % | ||||||||
The increase in the provision for income taxes was attributable to the increase in the consolidated income before income taxes. The effective tax rate decreased from 45.8% in 2008 to 36.7% in 2009 predominately because the amount of nondeductible acquired IPR&D recognized for financial reporting purposes was lower by $13.3 million. Additionally, the percentage of consolidated income before income taxes earned in foreign jurisdictions, which primarily have lower statutory tax rates than the U.S. statutory tax rate, increased from 36% in 2008 to 43% in 2009.
Comparison of Years Ended December 28, 2008 and December 30, 2007
Our fiscal year is 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The years ended December 28, 2008 and December 30, 2007 were both 52 weeks.
Revenue
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Product revenue | $ | 532,390 | $ | 326,699 | $ | 205,691 | 63 | % | ||||||||
| Service and other revenue | 40,835 | 40,100 | 735 | 2 | ||||||||||||
| Total revenue | $ | 573,225 | $ | 366,799 | $ | 206,426 | 56 | % | ||||||||
Product revenue consists primarily of revenue from the sale of consumables and instruments.
Revenue from the sale of consumables increased $140.2 million, or 72%, to $333.7 million for the year ended December 28, 2008 compared to $193.5 million for the year ended December 30, 2007. Growth in consumable revenue was primarily attributable to strong demand for our Infinium and sequencing products, which led to increased sales of $104.8 million and $35.4 million, respectively. The increase in revenue associated with our Infinium products was attributable to the strong demand for our Infinium High-Density BeadChips, particularly the Human610-Quad, which we began shipping during the first quarter of 2008. Of the overall increase in Infinium BeadChip sales, approximately 79% was due to new product introductions with higher average selling prices, while the remaining 21% can be attributed to increased volume. The increase in sequencing consumables was primarily attributable to the growth of our installed base of instruments and the progression of customer labs ramping to production scale.
Revenue from the sale of instruments increased $64.8 million, or 54%, to $185.7 million for the year ended December 28, 2008 compared to $120.9 million for the year ended December 30, 2007. The increase was primarily attributable to a $63.0 million increase in sales of our Genome Analyzer driven by both an increase in sales volume and average selling prices. Additionally, during the second quarter of 2008, we launched the iScan System, our next-generation BeadChip scanner to replace the BeadArray Reader. Any increase in revenue resulting from shipments of this new system was offset by a reduction in sales of our BeadArray Reader as we stopped manufacturing this product upon the launch of our iScan System.
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Cost of Product and Service and Other Revenue
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Cost of product revenue | $ | 192,868 | $ | 119,991 | $ | 72,877 | 61 | % | ||||||||
| Cost of service and other revenue | 12,756 | 12,445 | 311 | 2 | ||||||||||||
| Total cost of product and service and other revenue | $ | 205,624 | $ | 132,436 | $ | 73,188 | 55 | % | ||||||||
Total cost of revenue, which excludes the impairment of manufacturing equipment and the amortization of intangible assets, increased primarily due to higher instrument and consumable sales.
Cost of product revenue as a percentage of related revenue was 36% for the year ended December 28, 2008 compared to 37% for the year ended December 30, 2007. The decrease was primarily due to favorable product mix driven by increased sales of our new High-Density Infinium Beadchips, with higher average selling prices as compared to the Infinium Beadchips sold in the prior year. This was partially offset by increased provisions for inventory obsolescence of $7.2 million for the year ended December 28, 2008 compared to $1.9 million for the year ended December 30, 2007. The increase in the inventory reserve was primarily associated with product transitions. During the year, we recorded reserves for product obsolescence associated with the launch of our new Infinium Beadchips and the launch of a new sequencing kit. Instrument cost of sales as a percentage of related revenue increased slightly over the prior year due to lower average selling prices mainly associated with promotional campaigns as we launched our next generation Beadarray Reader, the iScan in the first half of 2008.
Operating Expenses
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Research and development | $ | 99,963 | $ | 73,943 | $ | 26,020 | 35 | % | ||||||||
| Selling, general and administrative | 148,014 | 101,256 | 46,758 | 46 | ||||||||||||
| Total operating expenses | $ | 247,977 | $ | 175,199 | $ | 72,778 | 42 | % | ||||||||
The increase in research and development was driven by a $17.4 million increase in personnel-related expenses associated with increased headcount, including salaries, non-cash stock-based compensation and benefits, an $11.6 million increase to non-personnel related expenses associated with the growth of our business and a $1.5 million increase to accrued compensation expense associated with contingent consideration for the Avantome acquisition completed on August 1, 2008. These increases were partially offset by a decrease in outside services of $4.5 million primarily related to a decrease in consulting fees.
The increase in selling, general and administrative expenses was driven primarily by an increase of $42.8 million in personnel-related expenses, including salaries, non-cash stock-based compensation and benefits and a $4.0 million increase to non-personnel related expenses. These increases were primarily associated with the growth of our business.
Acquired In-Process Research and Development (IPR&D)
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Acquired in-process research and development | $ | 24,660 | $ | 303,400 | $ | (278,740 | ) | (92 | )% | |||||||
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As a result of the Avantome, Inc. acquisition in August 2008 and the Solexa Inc. acquisition in January 2007, we recorded acquired IPR&D charges of $24.7 million and $303.4 million, respectively.
Litigation Settlements
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Litigation settlements | $ | — | $ | 54,536 | $ | (54,536 | ) | (100 | )% | |||||||
During the year ended December 30, 2007, we recorded a charge of $54.5 million associated with two settlement agreements. The total charge is comprised primarily of $54.0 million related to a $90.0 million settlement with Affymetrix entered into on January 9, 2008 for certain patent litigation between the parties. See Note 4 of Notes to Consolidated Financial Statements for further information regarding the Affymetrix settlement.
Other Income (Expense), Net
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Interest income | $ | 12,519 | $ | 16,025 | $ | (3,506 | ) | (22 | )% | |||||||
| Interest expense | (22,210 | ) | (18,297 | ) | (3,913 | ) | 21 | |||||||||
| Other income (expense), net | 1,921 | (47 | ) | 1,968 | (4,187 | ) | ||||||||||
| Total other expense, net | $ | (7,770 | ) | $ | (2,319 | ) | $ | (5,451 | ) | (235 | )% | |||||
Interest income decreased due to a change in our cash and investment portfolio to a mix of shorter duration maturities and an increased number of agency-rated investments coupled with the overall decline in interest rates due to market conditions. Interest expense increased due to the amortization of the discount on our convertible senior notes and an additional month and a half of interest expense recorded in the year ended December 28, 2008 compared to the year ended December 30, 2007. Other income (expense), net increased primarily due to $1.9 million in net foreign currency transaction gains for the year ended December 28, 2008 compared to immaterial losses recorded in the year ended December 30, 2007.
Provision (benefit) for Income Taxes
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Provision (benefit) for income taxes | $ | 33,271 | $ | (16,215 | ) | $ | 49,486 | (305 | )% | |||||||
The provision (benefit) for income taxes in 2008 was different than in 2007 primarily because the amount of nondeductible acquired IPR&D recognized for financial reporting purposes was lower by $278.7 million. In addition, for the year ended December 30, 2007, the provision for income taxes was reduced by $17.1 million as a result of the release of the valuation allowance against a significant portion of our U.S. deferred tax assets.
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Liquidity and Capital Resources
Cash flow summary
| Year Ended | Year Ended | Year Ended | ||||||||||
| January 3, | December 28, | December 30, | ||||||||||
| 2010 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
| Net cash provided by operating activities | $ | 174,496 | $ | 87,882 | $ | 56,294 | ||||||
| Net cash used in investing activities | (255,718 | ) | (277,249 | ) | (67,686 | ) | ||||||
| Net cash (used in) provided by financing activities | (98,862 | ) | 337,672 | 148,292 | ||||||||
| Effect of foreign currency translation | (2,307 | ) | 3,778 | (345 | ) | |||||||
| Net (decrease) increase in cash and cash equivalents | $ | (182,391 | ) | $ | 152,083 | $ | 136,555 | |||||
Operating Activities
Cash provided by operating activities for the year ended January 3, 2010 consists of net income of $72.3 million plus net non-cash adjustments of $113.5 million and an $11.3 million increase in net operating assets. The primary non-cash expenses added back to net income included share based compensation of $60.8 million and depreciation and amortization expense related to property and equipment, intangibles and the debt discount on our convertible notes totaling $51.5 million. The main drivers in the change in net operating assets included increases in accounts receivable, inventory, accounts payable and accrued liabilities. These increases were primarily related to the growth of our business.
Investing Activities
Cash used in investing activities totaled $255.7 million for the year ended January 3, 2010. We purchased and soldavailable-for-sale securities totaling $694.5 million and $515.2 million, respectively. We incurred $51.8 million in capital expenditures primarily associated with the expansion of our facilities and infrastructure at our San Diego, Hayward and UK locations. Additionally, in January 2009, we executed a strategic alliance with Oxford Nanopore Technologies, which consisted of a commercialization agreement and an $18.0 million equity investment. We also agreed to make an additional equity investment upon the achievement of a specific technical milestone.
In August 2008, we completed our acquisition of Avantome, Inc. As consideration for the acquisition, we paid $25.8 million in cash, including transaction costs, at the closing of the acquisition, and have subsequently paid $15.0 million as of February 1, 2010 based on the achievement of, or amendments relating to, certain milestones. We may pay up to an additional $20.0 million in contingent cash consideration to Avantome’s former shareholders based on the achievement of certain remaining milestones.
In January 2008, as part of our Affymetrix settlement, we recorded a $36.0 million intangible asset for licensed technology obtained in the settlement. See Note 4 of Notes to Consolidated Financial Statements for further information regarding intangible assets.
In January of 2007, we completed our acquisition of Solexa, Inc. in astock-for-stock merger transaction. The Company issued approximately 26.2 million shares of its common stock as consideration for this merger. The acquisition resulted in net cash acquired of $72.1 million.
Financing Activities
Cash used in financing activities totaled $98.9 million for the year ended January 3, 2010. During the year we repurchased approximately 6.1 million shares of our common stock for $175.1 million, which was partially offset by $39.4 million in proceeds received from the exercise of stock options and the sale of shares under our Employee Stock Purchase Plan and $39.3 million of incremental tax benefits related to stock options exercised.
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In August 2008, we issued a total of 8.1 million shares at a public offering price of $43.75 per share, raising net proceeds to the Company of $342.7 million, after deducting underwriting discounts and commissions and offering expenses. During the year ended December 28, 2008, we also repurchased approximately 3.1 million shares of our common stock for $70.8 million.
In February 2007, we issued $400.0 million principal amount of 0.625% convertible senior notes due 2014. The net proceeds from the offering, after deducting the initial purchasers’ discount and offering expenses, were approximately $390.3 million. We used $201.6 million of the net proceeds to purchase approximately 11.6 million shares of our common stock in privately negotiated transactions concurrently with the offering. We used $46.6 million of the net proceeds of this offering to pay the net cost of convertible note hedge and warrant transactions, which are designed to reduce the potential dilution upon conversion of the notes. See Note 7 of Notes to Consolidated Financial Statements for further information regarding our convertible senior notes.
Liquidity
We manage our business to maximize operating cash flows as the primary source of our liquidity. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing and financing needs. Historically, we have issued debt and equity securities to finance our requirements to the extent that cash provided by operating activities was not sufficient to fund our needs. We may require additional funding in the future and our failure to raise capital on acceptable terms, when needed, could have a material adverse effect on our business.
At January 3, 2010, we had approximately $693.5 million in cash and short-term investments. Short-term investments include marketable securities and auction rate securities totaling $494.0 million and $54.9 million, respectively. Our marketable securities consist of debt securities in government sponsored entities, corporate debt securities and U.S treasury notes. We do not hold securities backed by mortgages. Our auction rate securities were issued primarily by municipalities and universities. The markets for auction rate securities effectively ceased when the vast majority of auctions failed in February 2008, preventing investors from selling their auction rate securities. As of January 3, 2010, the securities continued to fail auction and remained illiquid. In November 2008, we signed a settlement agreement allowing us to sell our auction rate securities at par value to UBS AG (UBS) at our discretion during the period of June 30, 2010 through July 2, 2012. Because we intend to exercise this right when it becomes available, we have classified our auction rate securities as short-term on the balance sheet. See Note 3 of Notes to Consolidated Financial Statements for further information regarding our auction rate securities.
Our outstanding convertible senior notes were convertible into cash and, if applicable, shares of our common stock for the period from April 1, 2008 through December 31, 2008 and became convertible again beginning April 1, 2009 through December 31, 2009. On December 29, 2008, a noteholder converted notes in an aggregate principal amount of $10.0 million. On February 4, 2009, the settlement date, we paid the noteholder the conversion value of the notes in cash, up to the principal amount of the notes. The excess of the conversion value over the principal amount, totaling $2.9 million, was paid in shares of common stock. This equity dilution upon conversion of the notes was offset by the reacquisition of the shares under the convertible note hedge transactions entered into in connection with the offering of the notes. See Note 7 of Notes to Consolidated Financial Statements for further discussion of the terms of the convertible senior notes.
Our primary short-term needs for capital, which are subject to change, include expenditures related to:
| • | potential strategic acquisitions and investments; | |
| • | support of our commercialization efforts related to our current and future products, including expansion of our direct sales force and field support resources both in the United States and abroad; | |
| • | the continued advancement of research and development efforts; | |
| • | the acquisition of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities; |
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| • | improvements in our manufacturing capacity and efficiency; and | |
| • | the expansion needs of our facilities, including costs of leasing additional facilities. |
We expect that our product revenue and the resulting operating income, as well as the status of each of our new product development programs, will significantly impact our cash management decisions.
We anticipate that our current cash and cash equivalents and income from operations will be sufficient to fund our operating needs in 2010, barring unforeseen circumstances. Operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. At the present time, we have no material commitments for capital expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors, including:
| • | our ability to successfully commercialize and further develop our technologies and create innovative products in our markets; | |
| • | scientific progress in our research and development programs and the magnitude of those programs; | |
| • | competing technological and market developments; and | |
| • | the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings. |
Off-Balance Sheet Arrangements
We do not participate in any transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. During the fiscal year ended January 3, 2010, we were not involved in any “off balance sheet arrangements” within the meaning of the rules of the Securities and Exchange Commission.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude orders for goods and services entered into in the normal course of business that are not enforceable or legally binding. The following table represents our contractual obligations as of January 3, 2010, aggregated by type (amounts in thousands):
| Payments Due by Period(1) | ||||||||||||||||||||
| Less Than | More Than | |||||||||||||||||||
Contractual Obligation | Total | 1 Year | 1 – 3 Years | 3 – 5 Years | 5 Years | |||||||||||||||
| Debt obligations(2) | $ | 400,968 | $ | 2,437 | $ | 4,875 | $ | 393,656 | $ | — | ||||||||||
| Operating leases | 148,415 | 11,668 | 24,870 | 22,310 | 89,567 | |||||||||||||||
| Contingent consideration(3) | 10,000 | 10,000 | — | — | — | |||||||||||||||
| Amounts due under executive deferred compensation plan | 4,007 | 4,007 | — | — | — | |||||||||||||||
| Total | $ | 563,390 | $ | 28,112 | $ | 29,745 | $ | 415,966 | $ | 89,567 | ||||||||||
| (1) | Excludes $11.8 million of uncertain tax benefits. We have not included this amount in the table because we cannot make a reasonably reliable estimate regarding the timing of settlements with taxing authorities, if any. See Note 11 of Notes to the Consolidated Financial Statements for further discussion of our uncertain tax positions. | |
| (2) | Debt obligations include the principal amount of our convertible senior notes and interest payments totaling 0.625% per annum. Although these notes mature in 2014, we classify the notes as current liabilities because the conditions to convertibility were satisfied during the last three fiscal quarters of |
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| 2009 and may be satisfied during certain quarters in 2010. See Note 7 of Notes to Consolidated Financial Statements for further discussion of the terms of the convertible senior notes. | ||
| (3) | The $10.0 million included within contingent consideration is the amount owed to the former shareholders of Avantome, Inc. for the achievement of a certain date-specific milestones. The table excludes $20.0 million in additional contingent cash consideration we may be required to pay based on the achievement of certain additional milestones that do not have a fixed funding date and are subject to certain conditions that may or may not occur. |
Results of Operations
To enhance comparability, the following table sets forth audited consolidated statement of operations data for the years ended January 3, 2010, December 28, 2008 and December 30, 2007 December 31, 2006, and January 1, 2006 stated as a percentage of total revenue.
| Year Ended | Year Ended | Year Ended | Year Ended | |||||||||||||||||||||
| December 30, | December 31, | January 1, | January 3, | December 28, | December 30, | |||||||||||||||||||
| 2007 | 2006 | 2006 | 2010 | 2008 | 2007 | |||||||||||||||||||
| Revenue | ||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Product revenue | 89 | % | 84 | % | 79 | % | 94 | % | 93 | % | 89 | % | ||||||||||||
| Service and other revenue | 11 | 16 | 21 | 6 | 7 | 11 | ||||||||||||||||||
| Total revenue | 100 | 100 | 100 | 100 | 100 | 100 | ||||||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Cost of product revenue | 33 | 28 | 27 | |||||||||||||||||||||
| Cost of product revenue (excluding impairment of manufacturing equipment and amortization of intangible assets) | 29 | 34 | 33 | |||||||||||||||||||||
| Cost of service and other revenue | 3 | 5 | 4 | 2 | 2 | 3 | ||||||||||||||||||
| Research and development | 20 | 18 | 38 | 21 | 17 | 20 | ||||||||||||||||||
| Selling, general and administrative | 27 | 29 | 38 | 26 | 26 | 27 | ||||||||||||||||||
| Amortization of acquired intangible assets | 1 | — | — | |||||||||||||||||||||
| Impairment of manufacturing equipment | — | 1 | — | |||||||||||||||||||||
| Amortization of intangible assets | 1 | 2 | 1 | |||||||||||||||||||||
| Acquired in-process research and development | 83 | — | 22 | 2 | 4 | 83 | ||||||||||||||||||
| Litigation settlements | 15 | — | — | — | — | 15 | ||||||||||||||||||
| Total costs and expenses | 182 | 80 | 129 | 81 | 86 | 182 | ||||||||||||||||||
| Income (loss) from operations | (82 | ) | 20 | (29 | ) | 19 | 14 | (82 | ) | |||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||
| Interest income | 4 | 3 | 2 | 2 | 2 | 4 | ||||||||||||||||||
| Interest and other expense, net | (1 | ) | — | (1 | ) | |||||||||||||||||||
| Interest expense | (4 | ) | (4 | ) | (5 | ) | ||||||||||||||||||
| Other income (expense), net | — | 1 | — | |||||||||||||||||||||
| Total other expense, net | (2 | ) | (1 | ) | (1 | ) | ||||||||||||||||||
| Income (loss) before income taxes | (79 | ) | 23 | (28 | ) | 17 | 13 | (83 | ) | |||||||||||||||
| Provision (benefit) for income taxes | (3 | ) | 1 | — | 6 | 6 | (4 | ) | ||||||||||||||||
| Net income (loss) | (76 | )% | 22 | % | (28 | )% | 11 | % | 7 | % | (79 | )% | ||||||||||||
Comparison of Years Ended December 30, 2007January 3, 2010 and December 31, 200628, 2008
Our fiscal year is the 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The yearsyear ended January 3, 2010 was 53 weeks and the year end December 30, 2007 and December 31, 2006 were both28, 2008 was 52 weeks.
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Revenue
| Year Ended | Year Ended | Year Ended | ||||||||||||||||||||||||||
| December 30, | December 31, | Percentage | January 3, | December 28, | Percentage | |||||||||||||||||||||||
| 2007 | 2006 | Change | 2010 | 2008 | Change | Change | ||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||
| Product revenue | $ | 326,699 | $ | 155,811 | 110 | % | $ | 627,240 | $ | 532,390 | $ | 94,850 | 18 | % | ||||||||||||||
| Service and other revenue | 40,100 | 28,775 | 39 | 39,084 | 40,835 | (1,751 | ) | (4 | ) | |||||||||||||||||||
| Total revenue | $ | 366,799 | $ | 184,586 | 99 | % | $ | 666,324 | $ | 573,225 | $ | 93,099 | 16 | % | ||||||||||||||
Product revenue consists primarily of revenue from the sale of consumables and instruments.
Consumable revenue increased $57.6 million, or 17%, to $326.7$391.3 million for the year ended January 3, 2010 compared to $333.7 million for the year ended December 30, 200728, 2008. Microarray consumable revenue, which constituted more than half of our consumable revenue, declined $11.4 million, or 4%, primarily attributable to lower sales of whole-genome genotyping arrays partially offset by growth in focused content arrays. The decline was driven by customers delaying the start of new GWAS in anticipation of new and rare variant content from $155.8the 1000 Genome Project, order delays directly related to stimulus funding under the Recovery Act and the impact of reduced foundation funding at a few key customers. Sales volume for our Infinium BeadChip product lines, which constitute a majority of our microarray consumable sales, was relatively flat on a sample basis during 2009 compared to 2008. The average selling price per sample, however, declined due to a change in product mix attributable to growth in the sales of our focused content arrays coupled with lower sales of whole-genome genotyping arrays and an increase in the average number of samples per BeadChip.
Revenue from sequencing consumables increased $68.9 million, or 144%, driven by growth in the installed base of our Genome Analyzer systems and the progression of customer labs ramping to production scale. The increase was partially offset by a loss of sales related to a quality issue affecting our paired-end cluster kits that arose in September 2009 when some of our larger sequencing customers began experiencing higher than average error rates on the second read of their paired-end analysis. During the fourth quarter, we began shipping reformulated paired-end cluster kits at full capacity and cleared the related shipping backlog.
Revenue from the sale of instruments increased $40.0 million, or 22%, to $225.7 million for the year ended January 3, 2010 compared to $185.7 million for the year ended December 31, 2006. Consumable products and instruments
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Cost of Product and Service and Other Revenue
| Year Ended | Year Ended | Year Ended | ||||||||||||||||||||||||||
| December 30, | December 30, | Percentage | January 3, | December 28, | Percentage | |||||||||||||||||||||||
| 2007 | 2006 | Change | 2010 | 2008 | Change | Change | ||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||
| Cost of product revenue | $ | 119,991 | $ | 51,271 | 134 | % | $ | 190,714 | $ | 192,868 | $ | (2,154 | ) | (1 | )% | |||||||||||||
| Cost of service and other revenue | 12,445 | 8,073 | 54 | 15,055 | 12,756 | 2,299 | 18 | |||||||||||||||||||||
| Total cost of product and service and other revenue | $ | 132,436 | $ | 59,344 | 123 | % | ||||||||||||||||||||||
| Total cost of revenue | $ | 205,769 | $ | 205,624 | $ | 145 | — | % | ||||||||||||||||||||
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Total cost of revenue, which excludes the impairment of manufacturing equipment and the amortization of intangible assets, remained flat despite higher sales, primarily due to a decrease in manufacturing costs and improved efficiencies.
Cost of product and service and other revenue represents manufacturing costs incurred inas a percentage of related revenue was 30% for the production process, including component materials, assembly labor and overhead, installation, warranty, packaging and delivery costs, as well as costs associated with performing genotyping and sequencing services on behalf of our customers. Cost of product revenue increasedyear ended January 3, 2010, compared to $120.0 million36% for the year ended December 30, 2007, compared to $51.3 million for the year ended December 31, 2006, primarily driven by higher consumable and instrument sales. Cost of product revenue for the years ended December 30, 2007 and December 31, 2006 included non-cash stock-based compensation expense of $4.0 million and $1.3 million, respectively. Gross margin on product revenue decreased to 63.3% for the year ended December 30, 2007, compared to 67.1% for the year ended December 31, 2006.28, 2008. The decrease in the gross margin percentage iswas primarily due to the shift in product mix towards instruments. In addition, the gross margin percentage was adversely impacted by the increase in non-cash stock-based compensation expense as well as $0.7 million associated with the amortizationlower costs for our sequencing consumables and instrumentation. The cost of inventory revaluation costs related to our acquisition of Solexa in January 2007. The impact of non-cash stock-based compensation chargessequencing consumables decreased our gross margin by 41 basis points for the year ended December 30, 2007 compared to the year ended December 31, 2006. The inventory revaluation costs decreased our gross margin by 24 basis points for the year ended December 30, 2007, compared to the year ended December 31, 2006.
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| Year Ended | Year Ended | |||||||||||
| December 30, | December 31, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Research and development | $ | 73,943 | $ | 33,373 | 122 | % | ||||||
Operating Expenses
| Year Ended | ||||||||||||||||
| January 3, | December 28, | Percentage | ||||||||||||||
| 2010 | 2008 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Research and development | $ | 140,616 | $ | 99,963 | $ | 40,653 | 41 | % | ||||||||
| Selling, general and administrative | 176,337 | 148,014 | 28,323 | 19 | ||||||||||||
| Total operating expenses | $ | 316,953 | $ | 247,977 | $ | 68,976 | 28 | % | ||||||||
The increase in research and development expenses associated with our acquisition of Solexa in January 2007. Costs to support our BeadArray technology research activities increased approximately $8.5was driven primarily by a $22.9 million for the year ended December 30, 2007, compared to the year ended December 31, 2006, primarily due to an overall increase in personnel-related expenses, and increased lab and material expenses. Several new Infinium chip products, including the Human 1M DNA Analysis BeadChip, HumanCNV370-Duo BeadChip and HumanHap550-Duo BeadChip, have been introduced to the market in 2007. In addition,salaries, non-cash stock-based compensation expense increased approximately $6.1and benefits, a $10.4 million comparedincrease to the year ended December 31, 2006.non-personnel related expenses and an increase in outside services of $3.2 million attributable to consulting fees. These increases were partially offset by a $1.0 million decrease in research and development expensesare primarily related to the VeraCode technology, comparedgrowth in our efforts to the year ended December 31, 2006. We began shippingoptimize and commercialize our BeadXpress System, which is based on our VeraCode technology, during the first quarter of 2007. As a result of completing the development of this product, the related researchsequencing and development expenses have decreased.BeadArray technologies.
| Year Ended | Year Ended | |||||||||||
| December 30, | December 31, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Selling, general and administrative | $ | 101,256 | $ | 54,057 | 87 | % | ||||||
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| Year Ended | Year Ended | |||||||||||
| December 30, | December 31, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Amortization of acquired intangible assets | $ | 2,429 | $ | — | N/A | |||||||
Acquired In-Process Research and Development (IPR&D)
| Year Ended | Year Ended | |||||||||||
| December 30, | December 30, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Acquired in-process research and development | $ | 303,400 | $ | — | N/A | |||||||
| Year Ended | ||||||||||||||||
| January 3, | December 28, | Percentage | ||||||||||||||
| 2010 | 2008 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Acquired in-process research and development | $ | 11,325 | $ | 24,660 | $ | (13,335 | ) | (54 | )% | |||||||
During the year ended December 30, 2007,28, 2008, we recorded $303.4 million of acquired IPR&D resulting fromcharges of $24.7 million as a result of the Solexa acquisition. At theAvantome, Inc. acquisition date, Solexa’s ongoing research and development initiatives were primarily involved with the development of its genetic analysis platform for sequencing and expression profiling. These in-process research and development projects are comprised of Solexa’s reversible terminating nucleotide biochemistry platform, referred to assequencing-by-synthesis (SBS) biochemistry, as well as Solexa’s reagent, analyzer and sequencing services related technologies, which were valued at $237.2 million, $44.2 million, $19.1 million and $2.9 million, respectively, at the acquisition date. Although these projects were approximately 95% complete at the acquisition date, they had not reached technological feasibility and had no alternative future use. Accordingly, the amounts allocated to those projects were written off in the first quarter of 2007, the period the acquisition was consummated. Acquisitions of businesses, products or technologies by us in the future may result in substantial charges for acquired IPR&D that may cause fluctuations in our interim or annual operating results. There were no charges resulting from any acquisitions during the same period in fiscal 2006.
| Year Ended | Year Ended | |||||||||||
| December 30, | December 31, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Litigation settlements | $ | 54,536 | $ | — | N/A | |||||||
August 2008. During the year ended December 30, 2007,January 3, 2010, we recorded a chargeadditional IPR&D charges of $54.5 million associated with two settlement agreements entered into subsequent to year-end. The total charge is comprised primarily of $54.0$11.3 million related to a $90.0 million settlement with Affymetrix entered into on January 9, 2008 for certain patent litigation between the parties. See Note 8 of Notesmilestone payments made to Consolidated Financial Statements for further information regarding this settlement.
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| Year Ended | Year Ended | |||||||||||
| December 30, | December 31, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Interest income | $ | 16,026 | $ | 5,368 | 199 | % | ||||||
| Year Ended | Year Ended | |||||||||||
| December 30, | December 31, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Interest and other expense, net | $ | (3,610 | ) | $ | (560 | ) | 545 | % | ||||
| Year Ended | Year Ended | |||||||||||
| December 30, | December 31, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Provision (benefit) for income taxes | $ | (10,426 | ) | $ | 2,652 | (493 | %) | |||||
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| Year Ended | Year Ended | |||||||||||
| December 31, | January 1, | Percentage | ||||||||||
| 2006 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Product revenue | $ | 155,811 | $ | 57,752 | 170 | % | ||||||
| Service and other revenue | 28,775 | 15,749 | 83 | |||||||||
| Total revenue | $ | 184,586 | $ | 73,501 | 151 | % | ||||||
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| Year Ended | Year Ended | |||||||||||
| December 31, | January 1, | Percentage | ||||||||||
| 2006 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Cost of product revenue | $ | 51,271 | $ | 19,920 | 157 | % | ||||||
| Cost of service and other revenue | 8,073 | 3,261 | 148 | |||||||||
| Total cost of product and service and other revenue | $ | 59,344 | $ | 23,181 | 156 | % | ||||||
| Year Ended | Year Ended | |||||||||||
| December 31, | January 1, | Percentage | ||||||||||
| 2006 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Research and development | $ | 33,373 | $ | 27,809 | 20 | % | ||||||
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| Year Ended | Year Ended | |||||||||||
| December 31, | January 1, | Percentage | ||||||||||
| 2006 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Selling, general and administrative | $ | 54,057 | $ | 28,158 | 92 | % | ||||||
| Year Ended | Year Ended | |||||||||||
| December 31, | January 1, | Percentage | ||||||||||
| 2006 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Interest income | $ | 5,368 | $ | 1,404 | 282 | % | ||||||
| Year Ended | ||||||||||||||||
| January 3, | December 28, | Percentage | ||||||||||||||
| 2010 | 2008 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Interest income | $ | 11,029 | $ | 12,519 | $ | (1,490 | ) | (12 | )% | |||||||
| Interest expense | (23,718 | ) | (22,210 | ) | (1,508 | ) | 7 | |||||||||
| Other income, net | 1,217 | 1,921 | (704 | ) | (37 | ) | ||||||||||
| Total other expense, net | $ | (11,472 | ) | $ | (7,770 | ) | $ | (3,702 | ) | 48 | % | |||||
4034
Interest income decreased despite an increase in our average cash and investment balance due to an overall decline in interest rates during 2009. Interest expense increased due to the amortization of the discount on our cash and cash equivalents and investments was $5.4 million and $1.4 million for the years ended December 31, 2006 and January 1, 2006, respectively. The increase wasconvertible senior notes. Other income, net decreased due to higher average cash balances and higher effective interest rates compared toa decrease of $1.5 million in gains on net foreign currency transactions, which was partially offset by a gain of $0.8 million on the prior year.conversion of a portion of our debt during the first quarter of 2009.
| Year Ended | Year Ended | |||||||||||
| December 31, | January 1, | Percentage | ||||||||||
| 2006 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Interest and other expense, net | $ | (560 | ) | $ | (668 | ) | (16 | %) | ||||
Provision for Income Taxes
| Year Ended | Year Ended | |||||||||||
| December 31, | January 1, | Percentage | ||||||||||
| 2006 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Provision for income taxes | $ | 2,652 | $ | 163 | 1,527 | % | ||||||
| Year Ended | ||||||||||||||||
| January 3, | December 28, | Percentage | ||||||||||||||
| 2010 | 2008 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Provision for income taxes | $ | 41,844 | $ | 33,271 | $ | 8,573 | 26 | % | ||||||||
The increase in the provision for income taxes was attributable to the increase in the consolidated income before income taxes. The effective tax rate decreased from 45.8% in 2008 to 36.7% in 2009 predominately because the amount of nondeductible acquired IPR&D recognized for financial reporting purposes was lower by $13.3 million. Additionally, the percentage of consolidated income before income taxes earned in foreign jurisdictions, which primarily have lower statutory tax rates than the U.S. statutory tax rate, increased from 36% in 2008 to 43% in 2009.
Comparison of Years Ended December 28, 2008 and December 30, 2007
Our fiscal year is 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The years ended December 28, 2008 and December 30, 2007 were both 52 weeks.
Revenue
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Product revenue | $ | 532,390 | $ | 326,699 | $ | 205,691 | 63 | % | ||||||||
| Service and other revenue | 40,835 | 40,100 | 735 | 2 | ||||||||||||
| Total revenue | $ | 573,225 | $ | 366,799 | $ | 206,426 | 56 | % | ||||||||
Product revenue consists primarily of revenue from the sale of consumables and instruments.
Revenue from the sale of consumables increased $140.2 million, or 72%, to $333.7 million for the year ended December 28, 2008 compared to $193.5 million for the year ended December 30, 2007. Growth in consumable revenue was primarily attributable to strong demand for our Infinium and sequencing products, which led to increased sales of $104.8 million and $35.4 million, respectively. The increase in revenue associated with our Infinium products was attributable to the strong demand for our Infinium High-Density BeadChips, particularly the Human610-Quad, which we began shipping during the first quarter of 2008. Of the overall increase in Infinium BeadChip sales, approximately $2.779% was due to new product introductions with higher average selling prices, while the remaining 21% can be attributed to increased volume. The increase in sequencing consumables was primarily attributable to the growth of our installed base of instruments and the progression of customer labs ramping to production scale.
Revenue from the sale of instruments increased $64.8 million, or 54%, to $185.7 million for the year ended December 28, 2008 compared to $120.9 million for the year ended December 30, 2007. The increase was primarily attributable to a $63.0 million increase in sales of our Genome Analyzer driven by both an increase in sales volume and average selling prices. Additionally, during the second quarter of 2008, we launched the iScan System, our next-generation BeadChip scanner to replace the BeadArray Reader. Any increase in revenue resulting from shipments of this new system was offset by a reduction in sales of our BeadArray Reader as we stopped manufacturing this product upon the launch of our iScan System.
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Cost of Product and Service and Other Revenue
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Cost of product revenue | $ | 192,868 | $ | 119,991 | $ | 72,877 | 61 | % | ||||||||
| Cost of service and other revenue | 12,756 | 12,445 | 311 | 2 | ||||||||||||
| Total cost of product and service and other revenue | $ | 205,624 | $ | 132,436 | $ | 73,188 | 55 | % | ||||||||
Total cost of revenue, which excludes the impairment of manufacturing equipment and the amortization of intangible assets, increased primarily due to higher instrument and consumable sales.
Cost of product revenue as a percentage of related revenue was 36% for the year ended December 28, 2008 compared to 37% for the year ended December 30, 2007. The decrease was primarily due to favorable product mix driven by increased sales of our new High-Density Infinium Beadchips, with higher average selling prices as compared to the Infinium Beadchips sold in the prior year. This was partially offset by increased provisions for inventory obsolescence of $7.2 million for the year ended December 28, 2008 compared to $1.9 million for the year ended December 30, 2007. The increase in the inventory reserve was primarily associated with product transitions. During the year, we recorded reserves for product obsolescence associated with the launch of our new Infinium Beadchips and the launch of a new sequencing kit. Instrument cost of sales as a percentage of related revenue increased slightly over the prior year due to lower average selling prices mainly associated with promotional campaigns as we launched our next generation Beadarray Reader, the iScan in the first half of 2008.
Operating Expenses
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Research and development | $ | 99,963 | $ | 73,943 | $ | 26,020 | 35 | % | ||||||||
| Selling, general and administrative | 148,014 | 101,256 | 46,758 | 46 | ||||||||||||
| Total operating expenses | $ | 247,977 | $ | 175,199 | $ | 72,778 | 42 | % | ||||||||
The increase in research and development was driven by a $17.4 million increase in personnel-related expenses associated with increased headcount, including salaries, non-cash stock-based compensation and benefits, an $11.6 million increase to non-personnel related expenses associated with the growth of our business and a $1.5 million increase to accrued compensation expense associated with contingent consideration for the Avantome acquisition completed on August 1, 2008. These increases were partially offset by a decrease in outside services of $4.5 million primarily related to a decrease in consulting fees.
The increase in selling, general and administrative expenses was driven primarily by an increase of $42.8 million in 2006, up from $0.2personnel-related expenses, including salaries, non-cash stock-based compensation and benefits and a $4.0 million increase to non-personnel related expenses. These increases were primarily associated with the growth of our business.
Acquired In-Process Research and Development (IPR&D)
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Acquired in-process research and development | $ | 24,660 | $ | 303,400 | $ | (278,740 | ) | (92 | )% | |||||||
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As a result of the Avantome, Inc. acquisition in 2005. In 2006,August 2008 and the provision principally consistsSolexa Inc. acquisition in January 2007, we recorded acquired IPR&D charges of federal$24.7 million and state alternative minimum tax and income tax expense related to foreign operations. In 2005, the provision for income taxes consisted of income tax expense related to foreign operations.$303.4 million, respectively.
Litigation Settlements
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Litigation settlements | $ | — | $ | 54,536 | $ | (54,536 | ) | (100 | )% | |||||||
During the year ended December 31, 2006,30, 2007, we utilized approximately $25.9recorded a charge of $54.5 million associated with two settlement agreements. The total charge is comprised primarily of $54.0 million related to a $90.0 million settlement with Affymetrix entered into on January 9, 2008 for certain patent litigation between the parties. See Note 4 of Notes to Consolidated Financial Statements for further information regarding the Affymetrix settlement.
Other Income (Expense), Net
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Interest income | $ | 12,519 | $ | 16,025 | $ | (3,506 | ) | (22 | )% | |||||||
| Interest expense | (22,210 | ) | (18,297 | ) | (3,913 | ) | 21 | |||||||||
| Other income (expense), net | 1,921 | (47 | ) | 1,968 | (4,187 | ) | ||||||||||
| Total other expense, net | $ | (7,770 | ) | $ | (2,319 | ) | $ | (5,451 | ) | (235 | )% | |||||
Interest income decreased due to a change in our cash and $16.6investment portfolio to a mix of shorter duration maturities and an increased number of agency-rated investments coupled with the overall decline in interest rates due to market conditions. Interest expense increased due to the amortization of the discount on our convertible senior notes and an additional month and a half of interest expense recorded in the year ended December 28, 2008 compared to the year ended December 30, 2007. Other income (expense), net increased primarily due to $1.9 million in net foreign currency transaction gains for the year ended December 28, 2008 compared to immaterial losses recorded in the year ended December 30, 2007.
Provision (benefit) for Income Taxes
| Year Ended | ||||||||||||||||
| December 28, | December 30, | Percentage | ||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Provision (benefit) for income taxes | $ | 33,271 | $ | (16,215 | ) | $ | 49,486 | (305 | )% | |||||||
The provision (benefit) for income taxes in 2008 was different than in 2007 primarily because the amount of our federal and state net operating loss carryforwards, respectively, to reduce our federal and state income taxes. As of December 31, 2006, we had net operating loss carryforwardsnondeductible acquired IPR&D recognized for federal and state taxfinancial reporting purposes of approximately $76.4 million and $39.1 million, respectively, which begin to expire in 2022 and 2013, respectively, unless previously utilized.was lower by $278.7 million. In addition, we also had U.S. federal and state research and development tax credit carryforwards of approximately $6.4for the year ended December 30, 2007, the provision for income taxes was reduced by $17.1 million and $6.3 million respectively, which begin to expire in 2018 and 2019 respectively, unless previously utilized.
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Liquidity and Capital Resources
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 30, | December 31, | January 1, | ||||||||||
| 2007 | 2006 | 2006 | ||||||||||
| (In thousands) | ||||||||||||
| Net cash provided by (used in) operating activities | $ | 56,294 | $ | 39,000 | $ | (9,008 | ) | |||||
| Net cash used in investing activities | (67,686 | ) | (160,735 | ) | (1,535 | ) | ||||||
| Net cash provided by financing activities | 148,292 | 109,296 | 5,963 | |||||||||
| Effect of foreign currency translation | (345 | ) | 3 | 613 | ||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 136,555 | $ | (12,436 | ) | $ | (3,967 | ) | ||||
| Year Ended | Year Ended | Year Ended | ||||||||||
| January 3, | December 28, | December 30, | ||||||||||
| 2010 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
| Net cash provided by operating activities | $ | 174,496 | $ | 87,882 | $ | 56,294 | ||||||
| Net cash used in investing activities | (255,718 | ) | (277,249 | ) | (67,686 | ) | ||||||
| Net cash (used in) provided by financing activities | (98,862 | ) | 337,672 | 148,292 | ||||||||
| Effect of foreign currency translation | (2,307 | ) | 3,778 | (345 | ) | |||||||
| Net (decrease) increase in cash and cash equivalents | $ | (182,391 | ) | $ | 152,083 | $ | 136,555 | |||||
Cash provided by operating activities for the year ended January 3, 2010 consists of net income of $72.3 million plus net non-cash adjustments of $113.5 million and an $11.3 million increase in net operating assets. The primary non-cash expenses added back to net income included share based compensation of $60.8 million and depreciation and amortization expense related to property and equipment, intangibles and the debt discount on our convertible notes totaling $51.5 million. The main drivers in the change in net operating assets included increases in accounts receivable, inventory, accounts payable and accrued liabilities. These increases were primarily related to the growth of our business.
Cash used in investing activities totaled $255.7 million for the year ended January 3, 2010. We purchased and soldavailable-for-sale securities totaling $694.5 million and $515.2 million, respectively. We incurred $51.8 million in capital expenditures primarily associated with the expansion of our facilities and infrastructure at our San Diego, Hayward and UK locations. Additionally, in January 2009, we executed a strategic alliance with Oxford Nanopore Technologies, which consisted of a commercialization agreement and an $18.0 million equity investment. We also agreed to make an additional equity investment upon the achievement of a specific technical milestone.
In January 2008, as part of our funds in U.S. dollar-based short maturity mutual funds, commercial paper, corporate bonds, treasury notes, auction rate securities and municipal bonds. We do not hold securities backed by mortgages. As of December 30, 2007, our short-term investments included $14.7Affymetrix settlement, we recorded a $36.0 million of high-grade (AAA rated) auction rate securities issued primarily by municipalities and universities. See Part I Item 1A: “Risk Factors — Negative conditionsintangible asset for licensed technology obtained in the global credit markets may impair the liquiditysettlement. See Note 4 of a portion of our investment portfolio.”Notes to Consolidated Financial Statements for further information regarding intangible assets.
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Financing Activities
Cash used in financing activities totaled $98.9 million for the year ended December 30, 2007 were attributable toJanuary 3, 2010. During the purchase of available-for-sale securities foryear we repurchased approximately $598.4 million, the repurchase of an aggregate of 7.46.1 million shares of our common stock for $175.1 million, which was partially offset by $39.4 million in proceeds received from the exercise of stock options and the sale of shares under our Employee Stock Purchase Plan and $39.3 million of incremental tax benefits related to stock options exercised.
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In August 2008, we issued a total of 8.1 million shares at a public offering price of $43.75 per share, raising net proceeds to the Company of $342.7 million, after deducting underwriting discounts and commissions and offering expenses. During the year ended December 28, 2008, we also repurchased approximately $251.63.1 million as well as approximately $139.0 millionshares of our common stock for the purchase of a convertible note hedge. These convertible note transactions and our stock repurchase program are discussed in detail below.$70.8 million.
Liquidity
We are usingmanage our business to maximize operating cash flows as the primary source of our liquidity. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing and financing needs. Historically, we have issued debt and equity securities to finance our requirements to the extent that cash provided by operating activities was not sufficient to fund our needs. We may require additional funding in the future and our failure to raise capital on acceptable terms, when needed, could have a material adverse effect on our business.
At January 3, 2010, we had approximately $693.5 million in cash and short-term investments. Short-term investments include marketable securities and auction rate securities totaling $494.0 million and $54.9 million, respectively. Our marketable securities consist of debt securities in government sponsored entities, corporate debt securities and U.S treasury notes. We do not hold securities backed by mortgages. Our auction rate securities were issued primarily by municipalities and universities. The markets for auction rate securities effectively ceased when the vast majority of auctions failed in February 2008, preventing investors from selling their auction rate securities. As of January 3, 2010, the securities continued to fail auction and remained illiquid. In November 2008, we signed a settlement agreement allowing us to sell our auction rate securities at par value to UBS AG (UBS) at our discretion during the period of June 30, 2010 through July 2, 2012. Because we intend to exercise this right when it becomes available, we have classified our auction rate securities as short-term on the balance sheet. See Note 3 of the net proceedsNotes to Consolidated Financial Statements for other general corporate purposes, which may include acquisitionsfurther information regarding our auction rate securities.
Our outstanding convertible senior notes were convertible into cash and, additional repurchasesif applicable, shares of our common stock. The notes mature on February 15, 2014 and bear interest semi-annually at a rate of 0.625% per year, payable on February 15 and August 15 of each year, beginning on August 15, 2007. In addition, we may in certain circumstances be obligated to pay additional interest. If a “designated event,” as defined in the indenturestock for the period from April 1, 2008 through December 31, 2008 and became convertible again beginning April 1, 2009 through December 31, 2009. On December 29, 2008, a noteholder converted notes occurs, holdersin an aggregate principal amount of $10.0 million. On February 4, 2009, the settlement date, we paid the noteholder the conversion value of the notes may require us to repurchase all or a portion of their notes forin cash, at a repurchase price equalup to the principal amount of the notes to be repurchased, plus accrued and unpaid interest. In addition,notes. The excess of the conversion value over the principal amount, totaling $2.9 million, was paid in shares of common stock. This equity dilution upon conversion of the notes we must paywas offset by the principal portion in cash. The notes will become convertible only in certain circumstances based on conditions relating to the trading pricereacquisition of the notes and our common stock or uponshares under the occurrenceconvertible note hedge transactions entered into in connection with the offering of specified corporate events, and we expect the notesnotes. See Note 7 of Notes to becomeConsolidated Financial Statements for further discussion of the terms of the convertible beginning in the second quarter of 2008 if the trading price of our common stock does not decline from current levels. The notes also will, by their terms, become convertible at any time from, and including, November 15, 2013 through the third scheduled trading day immediately preceding February 15, 2014.
Our primary short-term needs for capital, which are subject to change, include expenditures related to:
| • | ||
| • | support of our commercialization efforts related to our current and future products, including expansion of our direct sales force and field support resources both in the United States and abroad; | |
| • | the continued advancement of research and development efforts; | |
| • | the acquisition of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities; |
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| • | improvements in our manufacturing capacity and | |
| • | the expansion needs of our facilities, including costs of leasing additional facilities. |
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We anticipate that our current cash and cash equivalents and income from operations will be sufficient to fund our operating needs for at least the next 12 months.in 2010, barring unforeseen circumstances. Operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. At the present time, we have no material commitments for capital expenditures. Due to expansion of our facilities and manufacturing operations, we anticipate spending approximately $25.0 million in capital expenditures during 2008. Our future capital requirements and the adequacy of our available funds will depend on many factors, including:
| • | our ability to successfully commercialize | |
| • | scientific progress in our research and development programs and the magnitude of those programs; | |
| • | competing technological and market developments; and | |
| • | the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings. |
Off-Balance Sheet Arrangements
We do not participate in any transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, (SPEs), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. During the fiscal year ended December 30, 2007,January 3, 2010, we were not involved in any “off balance sheet arrangements” within the meaning of the rules of the Securities and Exchange Commission.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude orders for goods and services entered into in the normal course of business that are not enforceable or legally binding and contingent liabilities for which we cannot reasonably predict future payment. Additionally, the table excludes uncertain tax positions of $21.4 million. The expected timing of payment of the obligations presented below is estimated based on current information. Timing of payments and actual amounts paid may be different depending on changes toagreed-upon terms or amounts for some obligations.
binding. The following charttable represents our contractual obligations as of December 30, 2007,January 3, 2010, aggregated by type (amounts in thousands):
| Payments Due by Period | Payments Due by Period(1) | |||||||||||||||||||||||||||||||||||||||
| Less Than | More Than | Less Than | More Than | |||||||||||||||||||||||||||||||||||||
Contractual Obligation | Total | 1 Year | 1 – 3 Years | 3 – 5 Years | 5 Years | Total | 1 Year | 1 – 3 Years | 3 – 5 Years | 5 Years | ||||||||||||||||||||||||||||||
| Long-term debt obligations(1) | $ | 416,250 | $ | 2,500 | $ | 5,000 | $ | 5,000 | $ | 403,750 | ||||||||||||||||||||||||||||||
| Debt obligations(2) | $ | 400,968 | $ | 2,437 | $ | 4,875 | $ | 393,656 | $ | — | ||||||||||||||||||||||||||||||
| Operating leases | 120,435 | 10,329 | 15,036 | 15,412 | 79,658 | 148,415 | 11,668 | 24,870 | 22,310 | 89,567 | ||||||||||||||||||||||||||||||
| Other(3) | 90,536 | 90,536 | — | — | — | |||||||||||||||||||||||||||||||||||
| Contingent consideration(3) | 10,000 | 10,000 | — | — | — | |||||||||||||||||||||||||||||||||||
| Amounts due under executive deferred compensation plan | 4,007 | 4,007 | — | — | — | |||||||||||||||||||||||||||||||||||
| Total | $ | 627,221 | $ | 103,365 | $ | 20,036 | $ | 20,412 | $ | 483,408 | $ | 563,390 | $ | 28,112 | $ | 29,745 | $ | 415,966 | $ | 89,567 | ||||||||||||||||||||
| (1) | ||
| (2) | Debt obligations include the principal amount of our |
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| 2009 and may be satisfied during certain quarters in 2010. See Note | ||
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Management bases its estimates on historical experience, market and other conditions and various other assumptions it believes to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, the estimation process is by its nature uncertain given that estimates depend on events over which we may not have control. If market and other conditions change from those that we anticipate, our consolidated financial statements may be materially affected. In addition, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material effect on our consolidated financial statements.
We believe that the following critical accounting policies and estimates have a higher degree of inherent uncertainty and require our most significant judgments. In addition, had we used estimates different from any of these, our consolidated financial statements could have been materially different from those presented. Members of our senior management have discussed the development and selection of our critical accounting policies and estimates, and our disclosure regarding them, with the audit committee of our board of directors. Our accounting policies are more fully described in Note 1 of the Consolidated Financial Statements.
Revenue Recognition
Our revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of arrays, reagents, flow cells and instrumentation. Service and other revenue consists of revenue received for performing genotyping and sequencing services, extended warranty sales and amounts earned under research agreements with government grants, which are recognized in the period during which the related costs are incurred. The timing of revenue recognition and the amount of revenue actually recognized in each case depends upon a variety of factors, including the specific terms of each arrangement and the nature of our deliverables and obligations. Determination of the appropriate amount of revenue recognized involves significant judgments and estimates and actual results may differ from our estimates.
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectibility is reasonably assured. In instances where final acceptance of the product or system is required, revenue is deferred until all the acceptance criteria have been met. All revenue is recorded net of any discounts.
Revenue for product sales is recognized generally upon shipment and transfer of title to the customer, provided no significant obligations remain and collection of the receivable is reasonably assured. Revenue for genotyping and sequencing services is recognized when earned, which is generally at the time the genotyping or sequencing analysis data is delivered to the customer or agreed-to milestones are reached.
In order to assess whether the price is fixed or determinable, we ensure there are no refund rights. If payment terms are based on future performance, we defer revenue recognition until the price becomes fixed or determinable. We assess collectibility based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If we determine that collection of a payment is not reasonably assured, revenue recognition is deferred until the time collection becomes reasonably assured, which is generally upon receipt of payment.
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Sales of instrumentation generally include a standard one-year warranty. We also sell separately priced maintenance (extended warranty) contracts, which are generally for one year, starting upon the expiration of the initial warranty. Revenue for extended warranty sales is recognized ratably over the term of the extended warranty period. Reserves are provided for estimated product warranty expenses at the time the associated revenue is recognized. If we were to experience an increase in warranty claims or if costs of servicing its products under warranty were greater than its estimates, gross margins could be adversely affected.
We regularly enter into contracts where revenue is derived from multiple deliverables including any mix of productsand/or services. These productsand/or services are generally delivered within a short time frame, approximately three to six months, of the contract execution date. Revenue recognition for contracts with multiple deliverables is based on the individual units of accounting determined to exist in the contract. A delivered item is considered a separate unit of accounting when the delivered item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis.
For transactions entered into in 2009, consideration is allocated at the inception of the contract to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence (VSOE) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence exists, we use best estimate of the selling price for the deliverable. SeeRecent Accounting Pronouncementsin Note 1 of Notes to Consolidated Financial Statements for further information related to our change in authoritative accounting guidance for revenue recognition.
For transactions entered into prior to 2009, consideration was generally allocated to each unit of accounting based upon its relative fair value when objective and reliable evidence of fair value existed for all units of accounting in an arrangement. The fair value of an item was generally the price charged for the product, if the item was regularly sold on a stand-alone basis. In those instances when objective and reliable evidence of fair value existed for the undelivered items but not for the delivered items, the residual method was used to allocate the arrangement consideration. Under the residual method, the amount of arrangement consideration allocated to the delivered items equaled the total arrangement consideration less the aggregate fair value of the undelivered items. When we were unable to establish stand-alone value for delivered items or when fair value of undelivered items had not been established, revenue was deferred until all elements were delivered and services had been performed, or until fair value could objectively be determined for any remaining undelivered elements.
In order to establish VSOE of selling price, we must regularly sell the productand/or service on a standalone basis with a substantial majority priced within a relatively narrow range. VSOE of selling price is usually the midpoint of that range. If there is not a sufficient number of standalone sales and VSOE of selling price cannot be determined, then we consider whether third party evidence can be used to establish selling price. Due to the lack of similar products and services sold by other companies within the industry, we have rarely established selling price using third-party evidence. If neither VSOE nor third party evidence of selling price exists, we determine its best estimate of selling price using average selling prices over a rolling 12 month period as well as market conditions. If the product or service has no history of sales, we rely upon prices set by our pricing committee adjusted for applicable discounts.
We recognize revenue for delivered elements only when we determine there are no uncertainties regarding customer acceptance.
Investments
We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use
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of unobservable inputs. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:
| • | Level 1 — Quoted prices in active markets for | |
| • | Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of | |
| • | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
In using this fair value hierarchy, management may be required to make assumptions of pricing by market participants and assumptions about risk, specifically when using unobservable inputs to determine fair value. These assumptions are judgmental in nature and may significantly affect our results of operations.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We evaluate the collectibility of our accounts receivable based on a combination of factors. We regularly analyze customer accounts, review the length of time receivables are outstanding, review historical loss rates and assess current economic trends that may impact the level of credit losses in the future. Our allowance for doubtful accounts has generally been adequate to cover our actual credit losses. However, since we cannot reliably predict future changes in the financial stability of our customers, we cannot guarantee that our reserves will continue to be adequate.
Inventory Valuation
We record adjustments to inventory for potentially excess, obsolete or impaired goods in order to state inventory at net realizable value. We must make assumptions about future demand, market conditions and the release of new products that will supersede old ones. We regularly review inventory for excess and obsolete products and components, taking into account product life cycle and development plans, product expiration and quality issues, historical experience and our current inventory levels. If actual market conditions are less favorable than anticipated, additional inventory adjustments could be required.
Contingencies
We are subject to legal proceedings primarily related to intellectual property matters. We routinely assess the likelihood of adverse judgments or outcomes to these matters, as well as ranges of probable losses, to the extent losses are reasonably estimable. If losses are probable and reasonably estimable, we will record a liability and an expense for the estimated loss. Disclosure for specific legal contingencies is provided if the likelihood of occurrence is probable and the exposure is considered material to the consolidated financial statements. In making determinations of likely outcomes of litigation matters, management considers many factors. These factors include, but are not limited to, past history, scientific and other evidence, and the specifics and status of each matter. We may change our estimates if our assessment of the various factors changes, which may result in the recording of an accrual or a change in a previously recorded accrual. Predicting the outcome of claims and litigation, and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from estimates and accruals.
Business Combinations and Intangible Asset Valuation
Under the purchase method of accounting, we allocate the purchase price of acquired companies to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. We record the excess of purchase price over the aggregate fair values as goodwill. We engage third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. These
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valuations require us to make significant estimates and assumptions, especially with respect to intangible assets.
The Company’s intangible assets are comprised primarily of licensed technology from the Affymetrix settlement entered into on January 9, 2008 and acquired core technology and customer relationships from the Solexa acquisition. Management uses a discounted cash flow method to value our intangible assets. This method requires significant management judgment to forecast future operating results and establish residual growth rates and discount factors. The estimates we use to value and amortize intangible assets are consistent with the plans and estimates that we use to manage our business and are based on available historical information and industry estimates and averages. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.
Goodwill, Intangible Assets and Other Long-Lived Assets — Impairment Assessments
We estimate the fair value of intangible assets and other long-lived assets that have finite useful lives whenever an event or change in circumstances indicates that the carrying value of the asset may not be recovered through undiscounted future operating cash flows. We test for potential impairment of goodwill annually in our second fiscal quarter or whenever indicators of impairment arise.
In order to estimate the fair value of purchased intangible assets and other long-lived assets that have finite useful lives, we estimate the present value of future cash flows from those assets. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows and the time value of money. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. We had a total of $213.4 million in goodwill, $117.2 million in net property and equipment and $43.8 million in net intangible assets on our balance sheet at January 3, 2010.
In order to estimate the fair value of goodwill, we use a weighted combination of a discounted cash flow model (known as the income approach) and comparisons to publicly traded companies engaged in similar businesses (known as the market approach). The income approach requires us to use a number of assumptions, including market factors specific to the business, the amount and timing of estimated future cash flows to be generated by the business over an extended period of time, long-term growth rates for the business, and a rate of return that considers the relative risk of achieving the cash flows and the time value of money. Although the assumptions we use in our discounted cash flow model are consistent with the assumptions we use to generate our internal strategic plans and forecasts, significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. When using the market approach, we make judgments about the comparability of publicly traded companies engaged in similar businesses. We base our judgments on factors such as size, growth rates, profitability, risk, and return on investment. We also make judgments when adjusting market multiples of revenue, operating income, and earnings for these companies to reflect their relative similarity to our own businesses.
Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units, we may be required to record future impairment charges for purchased intangible assets and goodwill. Impairment charges could materially decrease our future net income and result in lower asset values on our balance sheet.
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Convertible Senior Notes
During the first quarter of 2009, we adopted new authoritative guidance that significantly impacts the accounting for our convertible senior notes by requiring us to account separately for the liability and equity components of the notes. The liability component is measured so the effective interest expense associated with the notes reflects the issuer’s borrowing rate at the date of issuance for similar debt instruments without the conversion feature. The difference between the cash proceeds associated with the notes and this estimated fair value is recorded as a debt discount and amortized to interest expense over the life of the notes.
Determining the fair value of the liability component requires the use of accounting estimates and assumptions. These estimates and assumptions are judgmental in nature and could have a significant impact on the determination of the liability component and, in effect, the associated interest expense. According to the guidance, the carrying amount of the liability component is determined by measuring the fair value of a similar liability that does not have an associated equity component. If no similar liabilities exist, estimates of fair value are primarily determined using assumptions that market participants would use in pricing the liability component, including market interest rates, credit standing, yield curves and volatilities.
Stock-Based Compensation
We are required to measure and recognize compensation expense for all stock-based payment awards made to employees and directors based on estimated fair value. We estimate the fair value of stock options granted and stock purchases under our employee stock purchase plan using the Black-Scholes-Merton (BSM) option-pricing model. The fair value of our restricted stock units is based on the market price of our common stock on the date of grant.
The determination of fair value of stock-based awards using the BSM model requires the use of certain estimates and highly judgmental assumptions that affect the amount of stock-based compensation expense recognized in our Consolidated Statements of Operations. These include estimates of the expected volatility of our stock price, expected option life, expected dividends and the risk-free interest rate. We determine the volatility of our stock price by equally weighing the historical and implied volatility of our common stock. The historical volatility of our common stock over the most recent period is generally commensurate with the estimated expected life of our stock options, adjusted for the impact of unusual fluctuations not reasonably expected to recur and other relevant factors. Implied volatility is calculated from the implied market volatility of exchange-traded call options on our common stock. The expected option life of an award is based on historical forfeiture experience, exercise activity and on the terms and conditions of the stock awards granted to employees. We determined expected dividend yield to be 0% given we have never declared or paid any cash dividends on our common stock and we currently do not anticipate paying such cash dividends. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially from what we have recorded in the current period.
Income Taxes
Our provision for income taxes, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid. Significant judgments and estimates based on interpretations of existing tax laws or regulations in the U.S. and the numerous foreign jurisdictions where we are subject to income tax are required in determining our provision for income taxes. Changes in tax laws, statutory tax rates and estimates of the company’s future taxable income could impact the deferred tax assets and liabilities provided for in the consolidated financial statements and would require an adjustment to the provision for income taxes.
Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when we believe it is more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating our ability to recover deferred tax assets within the jurisdiction which they arise we consider all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled
45
reversals of deferred tax liabilities, our history of earnings and reliable forecasting, projections of pre-tax book income over the foreseeable future, and the impact of any feasible and prudent tax planning strategies. Based on the available evidence as of January 3, 2010, we were not able to conclude it is more likely than not certain U.S. and foreign deferred tax assets will be realized. Therefore, we recorded a valuation allowance of $2.8 million and $12.1 million against certain U.S. and foreign deferred tax assets, respectively.
We recognize the impact of a tax position in our financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Tax authorities regularly examine our returns in the jurisdictions in which we do business and we regularly assess the tax risk of the company’s return filing positions. Due to the complexity of some of the uncertainties, the ultimate resolution may result in payments that are materially different from our current estimate of the tax liability. These differences, as well as any interest and penalties, will be reflected in the provision for income taxes in the period in which they are determined.
Recent Accounting Pronouncements
Information with respect to recent accounting pronouncements is included in Note 1 of Notes to Consolidated Financial Statements.
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
Interest Rate Sensitivity
Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The fair market value of fixed rate securities may be adversely impacted by fluctuations in interest rates while income earned on floating rate securities may decline as a result of decreases in interest rates. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in investment grade securities. We have historically maintained a relatively short average maturity for our investment portfolio, and we believe a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive financial instruments. For example, if a 100 basis point change in overall interest rates were to occur in 2010, our interest income would change by approximately $6.9 million in relation to amounts we would expect to earn, based on our cash, cash equivalents, and short-term investments as of January 3, 2010.
Market Price Sensitive Instruments
In order to reduce the potential equity dilution, in connection with the issuance (and potential conversion) of our convertible notes, we entered into a convertible note hedge contracttransactions, entitling us to purchase a maximum of 11,451,480up to 18,322,320 shares of our common stock (subject to adjustment) at an initiala strike price of $43.66$21.83 per share, (subjectsubject to adjustment). Upon conversionadjustment. In addition, we sold to the hedge transaction counterparties warrants exercisable on a net-share basis, for up to 18,322,320 shares of our Convertible Senior Notes, this hedge contract is expected to reduce the equity dilution if the daily volume-weighted averagecommon stock at a strike price of $31.435 per share, subject to adjustment. The anti-dilutive effect of the note hedge transactions, if any, could be partially or fully offset to the extent the trading price of our commonscommon stock exceeds the strike price of the hedge. We also entered into warrant transactions withwarrants on the counterparties of the convertible note hedge transactions entitling them to acquire a maximum of 18,322,320 shares of our common stock (subject to adjustment) at an initial strike price of $62.87 per share (subject to adjustment). The warrant transactions could have a dilutive effect on our earnings per share to the extent that the price of our common stock during the measurement period at maturityexercise dates of the warrants, exceedswhich occur during 2014, assuming the strike price of the warrants. We did not hold any material derivative financial instruments for the year ended December 31, 2006.warrants are exercised.
Foreign Currency Exchange Risk
46
net currency exchange gain on business transactions, net of hedging transactions, of $0.4 million and $1.9 million for the years ended January 3, 2010 and December 28, 2008, respectively, which are realizedincluded in other income (expense), net, in the consolidated statements of operations.
During 2009, we began using forward exchange contracts to manage a portion of the foreign currencies. As a result, ourcurrency exposure risk for foreign subsidiaries with monetary assets and liabilities denominated in currencies other than the entity’s functional currency. We only use derivative financial results could be affected by factors such as changes ininstruments to reduce foreign currency exchange ratesrate risks; we do not hold any derivative financial instruments for trading or weak economic conditions inspeculative purposes. We primarily use forward exchange contracts to hedge foreign markets. The functional currenciescurrency exposures, and they generally have terms of our subsidiaries are their respective local currencies. Accordingly,one month or less. Realized and unrealized gains or losses on the accountsvalue of financial contracts entered into to hedge the exchange rate exposure of these operationsmonetary assets and liabilities are translated fromalso included in the local currency todetermination of net income (loss), as they have not been designated for hedge accounting. These contracts, which settle monthly, effectively fix the U.S. dollar using the current exchange rate at which these specific monetary assets and liabilities will be settled, so that gains or losses on the forward contracts offset the losses or gains from changes in effect at the balance sheet date forvalue of the balance sheet accounts,underlying monetary assets and using the average exchange rate during the period for revenue and expense accounts. The effectsliabilities. At January 3, 2010, we had an immaterial amount of translation are recorded in accumulated other comprehensive income as a separate component of stockholders’ equity.foreign currency forward contracts outstanding to hedge foreign currency risk.
| Item 8. | Financial Statements and Supplementary Data. |
The Report of Independent Registered Public Accounting Firm, Financial Statements and Notes to Financial Statements begin onpage F-1 immediately following the signature page and are incorporated herein by reference.
45
| Item 9. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
| Item 9A. | Controls and Procedures. |
We design our internal controls to provide reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported in conformity with U.S. generally accepted accounting principles. We also maintain internal controls and procedures to ensure that we comply with applicable laws and our established financial policies.
We have carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined inRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act), as of December 30, 2007.January 3, 2010. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of December 30, 2007,January 3, 2010, our disclosure controls and procedures were effective to ensure that (a) the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (b) such information is accumulated and communicated to our management, including our principal executive officer and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management have concluded that the disclosure controls and procedures are effective at the reasonable assurance level. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
An evaluation was also performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of any change in our internal control over financial reporting that occurred during the fourth quarter of 20072009 and that has materially affected, or is
47
reasonably likely to materially affect, our internal control over financial reporting. Other than completing the integration of Solexa, Inc.’s internal controls over financial reporting into our financial reporting systems during the fourth quarter of 2007, thatThe evaluation did not identify any such change.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRules 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 30, 2007.January 3, 2010. The effectiveness of our internal control over financial reporting as of December 30, 2007January 3, 2010 has been audited by Ernst & Young LLP, an independent registered accounting firm, as stated in their report which is included herein.
4648
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Illumina, Inc.
We have audited Illumina, Inc.’s internal control over financial reporting as of December 30, 2007,January 3, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Illumina, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Illumina, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 30, 2007,January 3, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Illumina, Inc. as of December 30, 2007January 3, 2010 and December 31, 2006,28, 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 30, 2007January 3, 2010 of Illumina, Inc. and our report dated February 22, 200826, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Diego, California
February 22, 2008
26, 2010
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| Item 9B. | Other Information. |
None.
PART III
| Item 10. | Directors, |
(a) Identification of Directors. Information concerning our directors is incorporated by reference from the section entitled “Proposal One: Election of Directors”Directors,” “Information About Directors,” “Director Compensation” and “Board of Directors and Corporate Governance” to be contained in our definitive Proxy Statement with respect to our 20082010 Annual Meeting of Stockholders to be filed with the SEC no later than April 28, 2008.7, 2010.
(b) Identification of Executive Officers. Information concerning our executive officers is set forth underincorporated by reference from the section entitled “Executive Officers” to be contained in Part Iour definitive Proxy Statement with respect to our 2010 Annual Meeting of this Annual Report onForm 10-K and is incorporated herein by reference.Stockholders to be filed with the SEC no later than April 7, 2010.
(c) Compliance with Section 16(a) of the Exchange Act. Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the section entitled “Compliance with Section 16(a) of the Securities Exchange Act” to be contained in our definitive Proxy Statement with respect to our 20082010 Annual Meeting of Stockholders to be filed with the SEC no later than April 28, 2008.7, 2010.
(d) Information concerning the audit committee financial expert as defined by the SEC rules adopted pursuant to the Sarbanes-Oxley Act of 2002 is incorporated by reference from the section entitled “Board of Directors and Corporate Governance” to be contained in our definitive Proxy Statement with respect to our 20082010 Annual Meeting of Stockholders to be filed with the SEC no later than April 28, 2008.7, 2010.
Code of Ethics
We have adopted a code of ethics for our directors, officers and employees, which is available on our website at www.illumina.com in the Corporate Governance portal of the Investor InformationRelations section under “Corporate.“Company.” A copy of the Code of Ethics is available in print free of charge to any stockholder who requests a copy. Interested parties may address a written request for a printed copy of the Code of Ethics to: Corporate Secretary, Illumina, Inc., 9885 Towne Centre Dr., San Diego, California 92121. We intend to satisfy the disclosure requirement regarding any amendment to, or a waiver from, a provision of the Code of Ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such information on our website. The information on, or that can be accessed from, our website is not incorporated by reference into this report.
| Item 11. | Executive Compensation. |
Information concerning executive compensation is incorporated by reference from the sections entitled “Compensation Discussion and Analysis,” “Director Compensation” and “Executive Compensation and Other Information”Compensation” to be contained in our definitive Proxy Statement with respect to our 20082010 Annual Meeting of Stockholders to be filed with the SEC no later than April 28, 2008.7, 2010.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Information concerning the security ownership of certain beneficial owners and management and information covering securities authorized for issuance under equity compensation plans is incorporated by reference from the sectionsections entitled “Ownership“Stock Ownership of Securities”Principal Stockholders and Management,” “Executive Compensation” and “Equity Compensation Plan Information” to be contained in our definitive Proxy
50
Statement with respect to our 20082010 Annual Meeting of Stockholders to be filed with the SEC no later than April 28, 2008.
48
| (c) Number of | ||||||||||||
| Securities | ||||||||||||
| Remaining | ||||||||||||
| Available for | ||||||||||||
| Future Issuance | ||||||||||||
| (a) Number of | (b) Weighted- | Under Equity | ||||||||||
| Securities to be | Average | Compensation | ||||||||||
| Issued Upon | Exercise Price | Plans (Excluding | ||||||||||
| Exercise of | per Share | Securities | ||||||||||
| Outstanding | of Outstanding | Reflected in | ||||||||||
Plan Category | Options | Options | Column (a)) | |||||||||
| Equity compensation plans approved by security holders | 10,423,934 | $ | 24.26 | 5,869,564 | (1)(2) | |||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | 10,423,934 | $ | 24.26 | 5,869,564 | ||||||||
| Item 13. | Certain Relationships and Related |
Information concerning certain relationships and related transactions, and director independence is incorporated by reference from the sections entitled “Proposal One: Election of Directors,” “Information About Directors,” “Director Compensation,” “Executive Compensation and Other Information”Compensation” and “Certain Relationships and Related Party Transactions” to be contained in our definitive Proxy Statement with respect to our 20082010 Annual Meeting of Stockholders to be filed with the SEC no later than April 28, 2008.7, 2010.
| Item 14. | Principal |
Information concerning principal accountingaccountant fees and services is incorporated by reference from the sections entitled “Proposal Two: Ratification of Independent Registered Public Accounting Firm” and “Independent Registered Public Accountants” to be contained in our definitive Proxy Statement with respect to our 20082010 Annual Meeting of Stockholders to be filed with the SEC no later than April 28, 2008.7, 2010.
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PART IV
| Item 15. | Exhibits, Financial Statement Schedules. |
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements:
| Page | ||||
| Index to Consolidated Financial Statements | F-1 | |||
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
(2)Financial Statement Schedule: | ||||
| F-39 | ||||
(3)Exhibits: | ||||
Incorporated by Reference | ||||||||||||||||||||
| Exhibit | Exhibit | Exhibit | Filing | Filed | ||||||||||||||||
Number | Number | Description of Document | Number | Exhibit Description | Form | File Number | Exhibit | Date | Herewith | |||||||||||
| 2 | .1(16) | Agreement and Plan of Merger, dated as of November 12, 2006, among Solexa, Inc., Callisto Acquisition Corp. and the Registrant. | 3 | .1 | Amended and Restated Certificate of Incorporation | 8-K | 000-30361 | 3 | .1 | 09/23/08 | ||||||||||
| 3 | .1(2) | Corrected Amended and Restated Certificate of Incorporation. | 3 | .2 | Amended and Restated Bylaws | 8-K | 000-30361 | 3 | .2 | 04/29/09 | ||||||||||
| 3 | .2(30) | Amended Bylaws. | 3 | .3 | Certificate of Designation for Series A Junior Participating Preferred Stock (included as Exhibit A to exhibit 4.3) | 8-A | 000-30361 | 4 | .3 | 05/14/01 | ||||||||||
| 3 | .3(5) | Certificate of Designation for Series A Junior Participating Preferred Stock (included as an exhibit to exhibit 4.3). | 4 | .1 | Specimen Common Stock Certificate | S-1/A | 333-33922 | 4 | .1 | 07/03/00 | ||||||||||
| 4 | .1(1) | Specimen Common Stock Certificate. | 4 | .2 | Rights Agreement, dated as of May 3, 2001, between Illumina and Equiserve Trust Company, N.A. | 8-A | 000-30361 | 4 | .3 | 05/14/01 | ||||||||||
| 4 | .2(1) | Second Amended and Restated Stockholders Rights Agreement, dated November 5, 1999, by and among the Registrant and certain stockholders of the Registrant. | ||||||||||||||||||
| 4 | .3(5) | Rights Agreement, dated as of May 3, 2001, between the Registrant and Equiserve Trust Company, N.A. | ||||||||||||||||||
| 4 | .4(35) | Indenture related to the 0.625% Convertible Senior Notes due 2014, dated as of February 16, 2007, between the Registrant and the Bank of New York, as trustee. | ||||||||||||||||||
| 4 | .5(36) | Registration Rights Agreement, dated as of February 16, 2007, between the Registrant and the Purchasers named therein. | ||||||||||||||||||
| +10 | .1(1) | Form of Indemnification Agreement between the Registrant and each of its directors and officers. | ||||||||||||||||||
| +10 | .2(1) | 1998 Incentive Stock Plan. | ||||||||||||||||||
| +10 | .3(7) | 2000 Employee Stock Purchase Plan, as amended and restated through July 20, 2006. | ||||||||||||||||||
| 10 | .4(1) | Sublease Agreement dated August 1998 between Registrant and Gensia Sicor Inc. for the Registrant’s principal offices. | ||||||||||||||||||
| 10 | .5(37) | License Agreement dated May 1998 between Tufts and Registrant. | ||||||||||||||||||
| 10 | .6(1) | Master Loan and Security Agreement, dated March 6, 2000, by and between Registrant and FINOVA Capital Corporation. | ||||||||||||||||||
| +10 | .7(20) | 2000 Stock Plan, as amended and restated through March 21, 2002. | ||||||||||||||||||
| 10 | .8(1) | Eastgate Pointe Lease, dated July 6, 2000, between Diversified Eastgate Venture and Registrant. | ||||||||||||||||||
50
| Exhibit | ||||
Number | Description of Document | |||
| 10 | .9(1) | Option Agreement and Joint Escrow Instructions, dated July 6, 2000, between Diversified Eastgate Venture and Registrant. | ||
| 10 | .10(4) | First Amendment to Joint Development Agreement dated March 27, 2001 between Registrant and PE Corporation, now known as Applied Biosystems Group (with certain confidential portions omitted). | ||
| 10 | .11(6) | First Amendment to Option Agreement and Escrow Instructions dated May 25, 2001 between Diversified Eastgate Venture and Registrant. | ||
| 10 | .12(13) | Second Amendment to Option Agreement and Escrow Instructions dated July 18, 2001 between Diversified Eastgate Venture and Registrant. | ||
| 10 | .13(14) | Third Amendment to Option Agreement and Escrow Instructions dated September 27, 2001 between Diversified Eastgate Venture and Registrant. | ||
| 10 | .14(15) | First Amendment to Eastgate Pointe Lease dated September 27, 2001 between Diversified Eastgate Venture and Registrant. | ||
| 10 | .15(8) | Replacement Reserve Agreement, dated as of January 10, 2002, between the Registrant and BNY Western Trust Company as Trustee for Washington Capital Joint Master Trust Mortgage Income Fund. | ||
| 10 | .16(17) | Loan Assumption and Modification Agreement, dated as of January 10, 2002, between the Registrant, Diversified Eastgate Venture and BNY Western Trust Company as Trustee for Washington Capital Joint Master Trust Mortgage Income Fund. | ||
| 10 | .17(18) | Tenant Improvement and Leasing Commission Reserve Agreement, dated as of January 10, 2002, between the Registrant and BNY Western Trust Company as Trustee for Washington Capital Joint Master Trust Mortgage Income Fund. | ||
| +10 | .18(42) | Solexa Share Option Plan for Consultants. | ||
| +10 | .19(43) | Solexa Enterprise Management Incentive Plan. | ||
| 10 | .20(21) | Non-exclusive License Agreement dated January 2002 between Amersham Biosciences Corp. and Registrant (with certain confidential portions omitted). | ||
| 10 | .21(22) | License Agreement dated June 2002 between Dade Behring Marburg GmbH and Registrant (with certain confidential portions omitted). | ||
| 10 | .22(23) | Purchase and Sale Agreement and Escrow Instructions dated June 18, 2004 between Bernardo Property Advisors, Inc. and Registrant. | ||
| 10 | .23(24) | Single Tenant Lease dated August 18, 2004 between BMR-9885 Towne Centre Drive LLC and Registrant. | ||
| 10 | .24(25) | Settlement and Cross License Agreement dated August 18, 2004 between Applera Corporation and Registrant (with certain confidential portions omitted). | ||
| 10 | .25(39) | Solexa 2005 Equity Incentive Plan | ||
| 10 | .26(40) | Solexa 1992 Stock Option Plan | ||
| 10 | .27(41) | Solexa Unapproved Company Share Option Plan | ||
| 10 | .28(26) | Collaboration Agreement dated December 17, 2004 between Invitrogen Incorporated and Registrant (with certain confidential portions omitted). | ||
| 10 | .29(27) | Offer letter for Christian O. Henry dated April 26, 2005. | ||
| 10 | .30(28) | Forms of Stock Option Agreement under 2000 Stock Plan. | ||
| 10 | .31(29) | Secured Convertible Debenture Indenture between Genizon BioSciences Inc., Computershare Trust Company of Canada and the Registrant, dated March 24, 2006. | ||
| 10 | .32(30) | Joint Development and Licensing Agreement dated May 15, 2006 between deCODE genetics, ehf. and Registrant (with certain confidential portions omitted). | ||
| 10 | .33(31) | Form of Change in Control Severance Agreement between the Registrant and Jay T. Flatley. | ||
| 10 | .34(31) | Form of Change in Control Severance Agreement between the Registrant and Christian O. Henry. | ||
| 10 | .35(31) | Form of Change in Control Severance Agreement between the Registrant and Tristan B. Orpin. | ||
| 10 | .36(31) | Form of Change in Control Severance Agreement between the Registrant and John R. Stuelpnagel. | ||
51
Incorporated by Reference | ||||||||||||||||||||
| Exhibit | Exhibit | Exhibit | Filing | Filed | ||||||||||||||||
Number | Number | Description of Document | Number | Exhibit Description | Form | File Number | Exhibit | Date | Herewith | |||||||||||
| 10 | .37(31) | Form of Change in Control Severance Agreement between the Registrant and Arthur L. Holden. | 4 | .3 | Indenture related to the 0.625% Convertible Senior Notes due 2014, dated as of February 16, 2007, between Illumina and The Bank of New York, as trustee | 8-K | 000-30361 | 4 | .1 | 02/16/07 | ||||||||||
| 10 | .38(31) | Form of Change in Control Severance Agreement between the Registrant and Christian G. Cabou. | +10 | .1 | Form of Indemnification Agreement between Illumina and each of its directors and officers | S-1/A | 333-33922 | 10 | .1 | 07/03/00 | ||||||||||
| 10 | .39(34) | Securities Purchase Agreement, dated as of November 12, 2006, between Solexa, Inc. and the Registrant. | +10 | .2 | 1998 Incentive Stock Plan | S-1/A | 333-33922 | 10 | .2 | 07/03/00 | ||||||||||
| 10 | .40(50) | Lease between The Irvine Company LLC and the Registrant, dated September 29, 2006. | +10 | .3 | 2000 Employee Stock Purchase Plan, as amended and restated through October 28, 2009 | X | ||||||||||||||
| 10 | .41(37) | Amended and Restated Lease between BMR-9885 Towne Centre Drive LLC and the Registrant for the 9885 Towne Centre Drive property, dated January 26, 2007. | +10 | .4 | 2000 Stock Plan, as amended and restated through March 21, 2002 | 10-Q | 000-30361 | 10 | .22 | 05/13/02 | ||||||||||
| 10 | .42(37) | Lease between BMR-9885 Towne Centre Drive LLC and the Registrant for the 9865 Towne Centre Drive property, dated January 26, 2007. | +10 | .5 | 2005 Stock and Incentive Plan, as amended and restated through October 28, 2009 | X | ||||||||||||||
| 10 | .43(38) | Amended and Restated 2005 Stock and Incentive Plan. | +10 | .6 | Form of Restricted Stock Unit Agreement for Non-Employee Directors under 2005 Stock and Incentive Plan | 10-K | 000-30361 | 10 | .35 | 02/26/09 | ||||||||||
| 10 | .44 | Settlement and Release Agreement between Affymetrix, Inc. and the Registrant, dated January 9, 2008. | +10 | .7 | New Hire Stock and Incentive Plan, as amended and restated through October 28, 2009 | X | ||||||||||||||
| 10 | .45(44) | Confirmation of Convertible Bond Hedge Transaction, dated February 12, 2007, by and between the Registrant and Goldman, Sachs & Co. | 10 | .8 | License Agreement, effective as of May 6, 1998, between Tufts University and Illumina | 10-Q | 000-30361 | 10 | .5 | 05/03/07 | ||||||||||
| 10 | .46(45) | Confirmation of Convertible Bond Hedge Transaction, dated February 12, 2007, by and between the Registrant and Deutsche Bank AG London. | +10 | .9 | The Solexa Unapproved Company Share Option Plan | 8-K | 000-30361 | 99 | .3 | 11/26/07 | ||||||||||
| 10 | .47(46) | Confirmation Issuer Warrant Transaction, dated February 12, 2007, by and between the Registrant and Goldman, Sachs & Co. | +10 | .10 | The Solexa Share Option Plan for Consultants | 8-K | 000-30361 | 99 | .4 | 11/26/07 | ||||||||||
| 10 | .48(47) | Confirmation Issuer Warrant Transaction, dated February 12, 2007, by and between the Registrant and Deutsche Bank AG London. | +10 | .11 | Solexa Limited Enterprise Management Incentive Plan | 8-K | 000-30361 | 99 | .5 | 11/26/07 | ||||||||||
| 10 | .49(48) | Amendment to the Confirmation of Issuer Warrant Transaction, dated February 13, 2007, by and between the Registrant and Goldman, Sachs & Co. | +10 | .12 | Amended and Restated Solexa 2005 Equity Incentive Plan | 10-K | 000-30361 | 10 | .25 | 02/26/09 | ||||||||||
| 10 | .50(49) | Amendment to the Confirmation of Issuer Warrant Transaction, dated February 13, 2007, by and between the Registrant and Deutsche Bank AG London. | +10 | .13 | Amended and Restated Solexa 1992 Stock Option Plan | 10-K | 000-30361 | 10 | .26 | 02/26/09 | ||||||||||
| 14 | (10) | Code of Ethics. | 10 | .14 | License Agreement, dated June 24, 2002, between Dade Behring Marburg GmbH and Illumina (with certain confidential portions omitted) | S-3/A | 333-111496 | 10 | .23 | 03/02/04 | ||||||||||
| 21 | .1 | Subsidiaries of the Registrant. | 10 | .15 | Non-exclusive License Agreement, dated January 24, 2002, between Amersham Biosciences Corp. and Illumina (with certain confidential portions omitted) | S-3/A | 333-111496 | 10 | .24 | 03/02/04 | ||||||||||
| 23 | .1 | Consent of Independent Registered Public Accounting Firm. | 10 | .16 | Amended and Restated Lease between BMR-9885 Towne Centre Drive LLC and Illumina for the 9885 Towne Centre Drive property, dated January 26, 2007 | 10-Q | 000-30361 | 10 | .41 | 05/03/07 | ||||||||||
| 24 | .1 | Power of Attorney (included on the signature page). | 10 | .17 | Settlement and Cross License Agreement dated August 18, 2004 between Applera Corporation and Illumina (with certain confidential portions omitted) | 10-Q | 000-30361 | 10 | .27 | 11/12/04 | ||||||||||
| 31 | .1 | Certification of Jay T. Flatley pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | 10 | .18 | Collaboration Agreement, dated December 17, 2004, between Invitrogen Corporation and Illumina (with certain confidential portions omitted) | 10-K | 000-30361 | 10 | .28 | 03/08/05 | ||||||||||
| 31 | .2 | Certification of Christian O. Henry pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||||||||||||||
| 32 | .1 | Certification of Jay T. Flatley pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||||||||||||||
| 32 | .2 | Certification of Christian O. Henry pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||||||||||||||
52
Incorporated by Reference | ||||||||||||||||
| Exhibit | Filing | Filed | ||||||||||||||
Number | Exhibit Description | Form | File Number | Exhibit | Date | Herewith | ||||||||||
| +10 | .19 | Offer letter for Christian O. Henry dated April 26, 2005 | 10-Q | 000-30361 | 10 | .33 | 08/08/05 | |||||||||
| 10 | .20 | Joint Development and Licensing Agreement, dated May 15, 2006, between deCODE genetics, ehf. and Illumina (with certain confidential portions omitted) | 10-Q | 000-30361 | 10 | .32 | 08/02/06 | |||||||||
| +10 | .21 | Amended and Restated Change in Control Severance Agreement between Illumina and Jay T Flatley, dated October 22, 2008 | 10-K | 000-30361 | 10 | .33 | 02/26/09 | |||||||||
| +10 | .22 | Form of Amended and Restated Change in Control Severance Agreement between Illumina and its executive officers | 10-K | 000-30361 | 10 | .34 | 02/26/09 | |||||||||
| +10 | .23 | Form of Restricted Stock Unit Agreement for Non-Employee Directors under Illumina’s 2005 Stock and Incentive Plan | 10-K | 000-30361 | 10 | .35 | 02/26/09 | |||||||||
| 10 | .24 | Lease between BMR-9885 Towne Centre Drive LLC and Illumina for the 9865 Towne Centre Drive property, dated January 26, 2007 | 10-Q | 000-30361 | 10 | .42 | 05/03/07 | |||||||||
| 10 | .25 | Settlement and Release Agreement between Affymetrix, Inc. and Illumina, dated January 9, 2008 | 10-K | 000-30361 | 10 | .44 | 02/26/08 | |||||||||
| 10 | .26 | Confirmation of Convertible Bond Hedge Transaction, dated February 12, 2007, by and between Illumina and Goldman, Sachs & Co. | 8-K | 000-30361 | 10 | .1 | 02/16/07 | |||||||||
| 10 | .27 | Confirmation of Convertible Bond Hedge Transaction, dated February 12, 2007, by and between Illumina and Deutsche Bank AG London | 8-K | 000-30361 | 10 | .2 | 02/16/07 | |||||||||
| 10 | .28 | Confirmation Issuer Warrant Transaction, dated February 12, 2007, by and between Illumina and Goldman, Sachs & Co. | 8-K | 000-30361 | 10 | .3 | 02/16/07 | |||||||||
| 10 | .29 | Confirmation Issuer Warrant Transaction, dated February 12, 2007, by and between Illumina and Deutsche Bank AG London | 8-K | 000-30361 | 10 | .4 | 02/16/07 | |||||||||
| 10 | .30 | Amendment to the Confirmation of Issuer Warrant Transaction, dated February 13, 2007, by and between Illumina and Goldman, Sachs & Co. | 8-K | 000-30361 | 10 | .5 | 02/16/07 | |||||||||
| 10 | .31 | Amendment to the Confirmation of Issuer Warrant Transaction, dated February 13, 2007, by and between Illumina and Deutsche Bank AG London | 8-K | 000-30361 | 10 | .6 | 02/16/07 | |||||||||
| +10 | .32 | Indemnification Agreement between Illumina and Gregory F. Heath | 10-Q | 000-30361 | 10 | .55 | 07/25/08 | |||||||||
| +10 | .33 | Indemnification Agreement between Illumina and Joel McComb | 10-Q | 000-30361 | 10 | .56 | 07/25/08 | |||||||||
| +10 | .34 | Severance and Release Agreement, dated February 22, 2010, between Joel McComb and Illumina | X | |||||||||||||
| 21 | .1 | Subsidiaries of Illumina | X | |||||||||||||
| 23 | .1 | Consent of Independent Registered Public Accounting Firm | X | |||||||||||||
| 24 | .1 | Power of Attorney (included on the signature page) | X | |||||||||||||
53
Incorporated by Reference | ||||||||||||||||
| Exhibit | Filing | Filed | ||||||||||||||
Number | Exhibit Description | Form | File Number | Exhibit | Date | Herewith | ||||||||||
| 31 | .1 | Certification of Jay T. Flatley pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||
| 31 | .2 | Certification of Christian O. Henry pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||
| 32 | .1 | Certification of Jay T. Flatley pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||
| 32 | .2 | Certification of Christian O. Henry pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||
| + | Management contract or corporate plan or arrangement | |
52
53
Supplemental Information
No Annual Report to stockholders or proxy materials has been sent to stockholders as of the date of this report. The Annual Report to stockholders and proxy material will be furnished to our stockholders subsequent to the filing of this Annual Report onForm 10-K and we will furnish such material to the SEC at that time.
54
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 26, 2008.2010.
Illumina, Inc.
| By | /s/ Jay T. Flatley |
Jay T. Flatley
President and Chief Executive Officer
February 26, 20082010
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Jay T. Flatley and Christian O. Henry, and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report onForm 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report onForm 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Jay T. Flatley | President, Chief Executive Officer and Director (Principal Executive Officer) | February 26, | ||||
/s/ Christian O. Henry | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | February 26, | ||||
/s/ William H. Rastetter | Chairman of the Board of Directors | February 26, | ||||
/s/ A. Blaine Bowman A. Blaine Bowman | Director | February 26, 2010 | ||||
/s/ Daniel M. Bradbury | Director | February 26, | ||||
/s/ Karin Eastham | Director | February 26, | ||||
55
/s/ Jack Goldstein | Director | February 26, | ||||
/s/ Paul Grint | Director | February 26, | ||||
/s/ | February 26, | |||||
/s/ | Director | February 26, | ||||
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Illumina, Inc.
We have audited the accompanying consolidated balance sheets of Illumina, Inc. as of December 30, 2007January 3, 2010 and December 31, 2006,28, 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 30, 2007.January 3, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Illumina, Inc., at December 30, 2007January 3, 2010 and December 31, 2006,28, 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 30, 2007,January 3, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Staff Position No. APB14-1,Accounting For Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)(Codified in FASB ASC Topic 470,Debt Conversions and Other Options)effective Januaryas of December 29, 2008 and retroactively adjusted all periods presented in the consolidated financial statements for this change. Also described in Note 1 2006, Illumina, Inc. changedis the Company’s 2009 change in its method of accounting for share-based payments in accordancerevenue recognition with Statementthe adoption of amendments to the Financial Accounting Standards Board Accounting Standards Codification resulting from Accounting Standards Update No. 123R, Share-Based Payment.2009-13,Multiple-Deliverable Revenue Arrangements, and Accounting Standards UpdateNo. 2009-14,Certain Revenue Arrangements That Include Software Elements, both adopted effective December 29, 2008.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Illumina, Inc.’s internal control over financial reporting as of December 30, 2007,January 3, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 200826, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Diego, California
February 22, 200826, 2010
F-2
ILLUMINA, INC.
| December 30, | December 31, | January 3, | December 28, | |||||||||||||
| 2007 | 2006 | 2010 | 2008(1) | |||||||||||||
| (In thousands, except share amounts) | (In thousands) | |||||||||||||||
ASSETS | ASSETS | ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 174,941 | $ | 38,386 | $ | 144,633 | $ | 327,024 | ||||||||
| Short-term investments | 211,141 | 92,418 | 548,894 | 313,051 | ||||||||||||
| Accounts receivable, net | 83,119 | 39,984 | 157,751 | 133,266 | ||||||||||||
| Inventory, net | 53,980 | 20,169 | 92,776 | 73,431 | ||||||||||||
| Deferred tax assets — current portion | 26,934 | 259 | ||||||||||||||
| Deferred tax assets, current portion | 20,021 | 8,635 | ||||||||||||||
| Prepaid expenses and other current assets | 12,640 | 2,510 | 17,515 | 14,154 | ||||||||||||
| Total current assets | 562,755 | 193,726 | 981,590 | 869,561 | ||||||||||||
| Property and equipment, net | 46,274 | 25,634 | 117,188 | 89,436 | ||||||||||||
| Investment in Solexa | — | 67,784 | ||||||||||||||
| Long-term investments | — | 55,900 | ||||||||||||||
| Goodwill | 228,734 | 2,125 | 213,452 | 213,452 | ||||||||||||
| Intangible assets, net | 58,116 | 108 | 43,788 | 47,755 | ||||||||||||
| Deferred tax assets — long term portion | 80,245 | 294 | ||||||||||||||
| Other assets, net | 11,608 | 10,913 | ||||||||||||||
| Deferred tax assets, long-term portion | 47,371 | 46,242 | ||||||||||||||
| Other assets | 26,548 | 4,825 | ||||||||||||||
| Total assets | $ | 987,732 | $ | 300,584 | $ | 1,429,937 | $ | 1,327,171 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 24,311 | $ | 9,853 | $ | 52,781 | $ | 29,204 | ||||||||
| Litigation settlements payable | 90,536 | — | ||||||||||||||
| Accrued liabilities | 50,852 | 23,860 | 98,253 | 80,355 | ||||||||||||
| Current portion of long-term debt | 16 | 63 | ||||||||||||||
| Long-term debt, current portion | 290,202 | 276,889 | ||||||||||||||
| Total current liabilities | 165,715 | 33,776 | 441,236 | 386,448 | ||||||||||||
| Long-term debt, less current portion | 400,000 | — | ||||||||||||||
| Deferred gain on sale of land and building | 2,485 | 2,468 | ||||||||||||||
| Deferred income tax liabilities | — | 6,987 | ||||||||||||||
| Other long-term liabilities | 7,854 | 10,011 | 24,656 | 18,946 | ||||||||||||
| Commitments and contingencies | ||||||||||||||||
| Conversion option subject to cash settlement | 99,797 | 123,110 | ||||||||||||||
| Stockholders’ equity: | ||||||||||||||||
| Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding at December 30, 2007 and December 31, 2006 | — | — | ||||||||||||||
| Common stock, $0.01 par value, 120,000,000 shares authorized, 62,803,677 shares issued and outstanding at December 30, 2007, 46,857,512 shares issued and outstanding at December 31, 2006 | 628 | 469 | ||||||||||||||
| Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued at January 3, 2010 and December 28, 2008 | — | — | ||||||||||||||
| Common stock, $0.01 par value, 320,000,000 shares authorized, 143,544,265 shares issued at January 3, 2010, 138,936,582 shares issued at December 28, 2008 | 1,436 | 1,389 | ||||||||||||||
| Additional paid-in capital | 1,044,302 | 340,197 | 1,637,751 | 1,469,770 | ||||||||||||
| Accumulated other comprehensive income | 1,347 | 11,294 | 2,830 | 2,422 | ||||||||||||
| Accumulated deficit | (382,977 | ) | (104,618 | ) | (280,226 | ) | (352,507 | ) | ||||||||
| Treasury stock, at cost (7,409,545 shares at December 30, 2007 and no shares at December 31, 2006) | (251,622 | ) | — | |||||||||||||
| Treasury stock, at cost (24,068,450 shares at January 3, 2010 and 17,927,983 shares at December 28, 2008) | (497,543 | ) | (322,407 | ) | ||||||||||||
| Total stockholders’ equity | 411,678 | 247,342 | 864,248 | 798,667 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 987,732 | $ | 300,584 | $ | 1,429,937 | $ | 1,327,171 | ||||||||
| (1) | Adjusted for required retroactive adoption of authoritative accounting guidance for convertible debt instruments that may be settled in cash upon conversion effective December 29, 2008. |
See accompanying notes to consolidated financial statements
F-3
ILLUMINA, INC.
| Year Ended | Year Ended | Year Ended | Year Ended_ | |||||||||||||||||||||
| December 30, | December 31, | January 1, | January 3, | December 28, | December 30, | |||||||||||||||||||
| 2007 | 2006 | 2006 | 2010 | 2008(1) | 2007(1) | |||||||||||||||||||
| (In thousands, except per share amounts) | (In thousands, except per share amounts) | |||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Product revenue | $ | 326,699 | $ | 155,811 | $ | 57,752 | $ | 627,240 | $ | 532,390 | $ | 326,699 | ||||||||||||
| Service and other revenue | 40,100 | 28,775 | 15,749 | 39,084 | 40,835 | 40,100 | ||||||||||||||||||
| Total revenue | 366,799 | 184,586 | 73,501 | 666,324 | 573,225 | 366,799 | ||||||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Cost of product revenue (including non-cash stock compensation expense of $4,045, $1,289, and $0, respectively) | 119,991 | 51,271 | 19,920 | |||||||||||||||||||||
| Cost of service and other revenue (including non-cash stock compensation expense of $279, $235, and $0, respectively) | 12,445 | 8,073 | 3,261 | |||||||||||||||||||||
| Research and development (including non-cash stock compensation expense of $10,016, $3,891, and $84, respectively) | 73,943 | 33,373 | 27,809 | |||||||||||||||||||||
| Selling, general and administrative (including non-cash stock compensation expense of $19,406, $8,889, and $186, respectively) | 101,256 | 54,057 | 28,158 | |||||||||||||||||||||
| Amortization of acquired intangible assets | 2,429 | — | — | |||||||||||||||||||||
| Cost of product revenue (excluding impairment of manufacturing equipment and amortization of intangible assets) | 190,714 | 192,868 | 119,991 | |||||||||||||||||||||
| Cost of service and other revenue | 15,055 | 12,756 | 12,445 | |||||||||||||||||||||
| Research and development | 140,616 | 99,963 | 73,943 | |||||||||||||||||||||
| Selling, general and administrative | 176,337 | 148,014 | 101,256 | |||||||||||||||||||||
| Impairment of manufacturing equipment | — | 4,069 | — | |||||||||||||||||||||
| Amortization of intangible assets | 6,680 | 10,438 | 2,429 | |||||||||||||||||||||
| Acquired in-process research and development | 303,400 | — | 15,800 | 11,325 | 24,660 | 303,400 | ||||||||||||||||||
| Litigation settlements | 54,536 | — | — | — | — | 54,536 | ||||||||||||||||||
| Total costs and expenses | 668,000 | 146,774 | 94,948 | 540,727 | 492,768 | 668,000 | ||||||||||||||||||
| Income (loss) from operations | (301,201 | ) | 37,812 | (21,447 | ) | 125,597 | 80,457 | (301,201 | ) | |||||||||||||||
| Other income (expense), net: | ||||||||||||||||||||||||
| Interest income | 16,026 | 5,368 | 1,404 | 11,029 | 12,519 | 16,025 | ||||||||||||||||||
| Interest and other expense, net | (3,610 | ) | (560 | ) | (668 | ) | ||||||||||||||||||
| Interest expense | (23,718 | ) | (22,210 | ) | (18,297 | ) | ||||||||||||||||||
| Other income (expense), net | 1,217 | 1,921 | (47 | ) | ||||||||||||||||||||
| Total other expense, net | (11,472 | ) | (7,770 | ) | (2,319 | ) | ||||||||||||||||||
| Income (loss) before income taxes | (288,785 | ) | 42,620 | (20,711 | ) | 114,125 | 72,687 | (303,520 | ) | |||||||||||||||
| Provision (benefit) for income taxes | (10,426 | ) | 2,652 | 163 | 41,844 | 33,271 | (16,215 | ) | ||||||||||||||||
| Net income (loss) | $ | (278,359 | ) | $ | 39,968 | $ | (20,874 | ) | $ | 72,281 | $ | 39,416 | $ | (287,305 | ) | |||||||||
| Net income (loss) per basic share | $ | (5.14 | ) | $ | 0.90 | $ | (0.52 | ) | $ | 0.59 | $ | 0.34 | $ | (2.65 | ) | |||||||||
| Net income (loss) per diluted share | $ | (5.14 | ) | $ | 0.82 | $ | (0.52 | ) | $ | 0.53 | $ | 0.30 | $ | (2.65 | ) | |||||||||
| Shares used in calculating basic net income (loss) per share | 54,154 | 44,501 | 40,147 | 123,154 | 116,855 | 108,308 | ||||||||||||||||||
| Shares used in calculating diluted net income (loss) per share | 54,154 | 48,754 | 40,147 | 137,096 | 133,607 | 108,308 | ||||||||||||||||||
| (1) | Adjusted for required retroactive adoption of authoritative accounting guidance for convertible debt instruments that may be settled in cash upon conversion effective December 29, 2008. |
See accompanying notes to consolidated financial statements
F-4
ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Deferred | Comprehensive | Accumulated | Treasury Stock | Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Compensation | Income | Deficit | Shares | Amount | Equity | ||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||
| Balance as of January 2, 2005 | 38,121 | $ | 381 | $ | 195,653 | $ | (156 | ) | $ | 96 | $ | (123,712 | ) | — | — | $ | 72,262 | |||||||||||||||||||
| Issuance of common stock for cash | 1,592 | 16 | 6,030 | — | — | — | — | — | 6,046 | |||||||||||||||||||||||||||
| Issuance of common stock in conjunction with an acquisition | 1,580 | 16 | 14,812 | — | — | — | — | — | 14,828 | |||||||||||||||||||||||||||
| Deferred compensation related to unvested CyVera stock options assumed | — | — | — | (197 | ) | — | — | — | — | (197 | ) | |||||||||||||||||||||||||
| Compensation expense related to acceleration of options for terminated employees | — | — | 79 | — | — | — | — | — | 79 | |||||||||||||||||||||||||||
| Deferred compensation related to a restricted stock award | 1 | — | 192 | (192 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
| Amortization of deferred compensation | — | — | — | 191 | — | — | — | — | 191 | |||||||||||||||||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale securities | — | — | — | — | 29 | — | — | — | 29 | |||||||||||||||||||||||||||
| Unrealized gain on hedging contracts | — | — | — | — | 56 | — | — | — | 56 | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | 77 | — | — | — | 77 | |||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (20,874 | ) | — | — | (20,874 | ) | |||||||||||||||||||||||||
| Comprehensive loss | (20,712 | ) | ||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2006 | 41,294 | 413 | 216,766 | (354 | ) | 258 | (144,586 | ) | — | — | 72,497 | |||||||||||||||||||||||||
| Issuance of common stock | 5,563 | 56 | 114,440 | — | — | — | — | — | 114,496 | |||||||||||||||||||||||||||
| May 2006 offering costs | — | — | (6,530 | ) | — | — | — | — | — | (6,530 | ) | |||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 14,082 | 354 | — | — | — | — | 14,436 | |||||||||||||||||||||||||||
| Incremental tax benefit related to stock options exercised | — | — | 1,439 | — | — | — | — | — | 1,439 | |||||||||||||||||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale securities, net of deferred tax | — | — | — | — | 10,693 | — | — | — | 10,693 | |||||||||||||||||||||||||||
| Unrealized gain on hedging contracts | — | — | — | — | (10 | ) | — | — | — | (10 | ) | |||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | 353 | — | — | — | 353 | |||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 39,968 | — | — | 39,968 | |||||||||||||||||||||||||||
| Comprehensive income | 51,004 | |||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2006 | 46,857 | 469 | 340,197 | — | 11,294 | (104,618 | ) | — | — | 247,342 | ||||||||||||||||||||||||||
| Issuance of common stock | 2,327 | 23 | 30,067 | — | — | — | — | — | 30,090 | |||||||||||||||||||||||||||
| Issuance of common stock for the acquisition of Solexa, Inc. | 13,221 | 132 | 530,592 | — | — | — | — | — | 530,724 | |||||||||||||||||||||||||||
| Fair value of options assumed from Solexa, Inc. | — | — | 75,334 | — | — | — | — | — | 75,334 | |||||||||||||||||||||||||||
| Convertible note hedge | — | — | (139,040 | ) | — | — | — | — | — | (139,040 | ) | |||||||||||||||||||||||||
| Warrants issued in connection with the convertible debt issuance | — | — | 92,440 | — | — | — | — | — | 92,440 | |||||||||||||||||||||||||||
| Warrants exercised | 399 | 4 | 6,071 | — | — | — | — | — | 6,075 | |||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 33,926 | — | — | — | — | — | 33,926 | |||||||||||||||||||||||||||
| Incremental tax benefit related to stock options exercised | — | — | 20,086 | — | — | — | — | — | 20,086 | |||||||||||||||||||||||||||
| Incremental tax benefit related to convertible debt issuance | — | — | 54,629 | — | — | — | — | — | 54,629 | |||||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | — | (7,410 | ) | (251,622 | ) | (251,622 | ) | ||||||||||||||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||
| Unrealized loss on available-for-sale securities, net of deferred tax | — | — | — | — | (10,529 | ) | — | — | — | (10,529 | ) | |||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | 582 | — | — | — | 582 | |||||||||||||||||||||||||||
| Net income | — | — | — | — | — | (278,359 | ) | — | — | (278,359 | ) | |||||||||||||||||||||||||
| Comprehensive loss | (288,306 | ) | ||||||||||||||||||||||||||||||||||
| Balance as of December 30, 2007 | 62,804 | $ | 628 | $ | 1,044,302 | $ | — | $ | 1,347 | $ | (382,977 | ) | (7,410 | ) | $ | (251,622 | ) | $ | 411,678 | |||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Comprehensive | Accumulated | Treasury Stock | Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Income | Deficit | Shares | Amount | Equity | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Balance as of January 1, 2007 | 93,714 | $ | 938 | $ | 339,728 | $ | 11,294 | $ | (104,618 | ) | — | $ | — | $ | 247,342 | |||||||||||||||||
| Components of comprehensive loss: | ||||||||||||||||||||||||||||||||
| Net loss(1) | — | — | — | — | (287,305 | ) | — | — | (287,305 | ) | ||||||||||||||||||||||
Unrealized loss onavailable-for-sale securities, net of deferred tax | — | — | — | (10,529 | ) | — | — | — | (10,529 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | 582 | — | — | — | 582 | ||||||||||||||||||||||||
| Comprehensive loss | (297,252 | ) | ||||||||||||||||||||||||||||||
| Issuance of common stock | 4,654 | 46 | 30,044 | — | — | — | — | 30,090 | ||||||||||||||||||||||||
| Issuance of common stock for the acquisition of Solexa, Inc. | 26,442 | 264 | 530,460 | — | — | — | — | 530,724 | ||||||||||||||||||||||||
| Fair value of options assumed from Solexa, Inc. | — | — | 75,334 | — | — | — | — | 75,334 | ||||||||||||||||||||||||
| Convertible note hedge | — | — | (139,040 | ) | — | — | — | — | (139,040 | ) | ||||||||||||||||||||||
| Warrants issued in connection with the convertible debt issuance | — | — | 92,440 | — | — | — | — | 92,440 | ||||||||||||||||||||||||
| Warrants exercised | 798 | 8 | 6,067 | — | — | — | — | 6,075 | ||||||||||||||||||||||||
| Stock-based compensation | — | — | 33,926 | — | — | — | — | 33,926 | ||||||||||||||||||||||||
| Incremental tax benefit related to stock options exercised | — | — | 20,086 | — | — | — | — | 20,086 | ||||||||||||||||||||||||
| Incremental tax benefit related to convertible debt issuance | — | — | 54,629 | — | — | — | — | 54,629 | ||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | (14,819 | ) | (251,622 | ) | (251,622 | ) | |||||||||||||||||||||
| Impact of convertible debt(1) | — | — | (48,805 | ) | — | — | — | — | (48,805 | ) | ||||||||||||||||||||||
| Balance as of December 30, 2007(1) | 125,608 | 1,256 | 994,869 | 1,347 | (391,923 | ) | (14,819 | ) | (251,622 | ) | 353,927 | |||||||||||||||||||||
| Components of comprehensive income: | ||||||||||||||||||||||||||||||||
| Net income(1) | — | — | — | — | 39,416 | — | — | 39,416 | ||||||||||||||||||||||||
Unrealized gain onavailable-for-sale securities, net of deferred tax | — | — | — | 920 | — | — | — | 920 | ||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | (16 | ) | 155 | — | — | — | 139 | |||||||||||||||||||||||
| Comprehensive income | 40,475 | |||||||||||||||||||||||||||||||
| Issuance of common stock in conjunction with secondary offering, net of issuance costs | 8,050 | 80 | 342,570 | — | — | — | — | 342,650 | ||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | 4,923 | 49 | 44,281 | — | — | — | — | 44,330 | ||||||||||||||||||||||||
| Warrants exercised | 356 | 4 | 2,987 | — | — | — | — | 2,991 | ||||||||||||||||||||||||
| Stock-based compensation | — | — | 47,695 | — | — | — | — | 47,695 | ||||||||||||||||||||||||
| Incremental tax benefit related to stock options exercised | — | — | 18,501 | — | — | — | — | 18,501 | ||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | (3,109 | ) | (70,785 | ) | (70,785 | ) | |||||||||||||||||||||
| Impact of convertible debt(1) | — | — | 18,883 | — | — | — | — | 18,883 | ||||||||||||||||||||||||
| Balance as of December 28, 2008(1) | 138,937 | 1,389 | 1,469,770 | 2,422 | (352,507 | ) | (17,928 | ) | (322,407 | ) | 798,667 | |||||||||||||||||||||
| Components of comprehensive income: | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 72,281 | — | — | 72,281 | ||||||||||||||||||||||||
Unrealized gain onavailable-for-sale securities, net of deferred tax | — | — | 408 | — | — | — | 408 | |||||||||||||||||||||||||
| Comprehensive income | 72,689 | |||||||||||||||||||||||||||||||
| Issuance of common stock | 3,569 | 36 | 39,343 | — | — | — | — | 39,379 | ||||||||||||||||||||||||
| Warrants exercised | 954 | 10 | 7,566 | — | — | — | — | 7,576 | ||||||||||||||||||||||||
| Stock-based compensation | — | — | 60,813 | — | — | — | — | 60,813 | ||||||||||||||||||||||||
| Incremental tax benefit related to stock options exercised | — | — | 39,319 | — | — | — | — | 39,319 | ||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | (6,140 | ) | (175,136 | ) | (175,136 | ) | |||||||||||||||||||||
| Impact of convertible debt | 84 | 1 | 20,940 | — | — | — | — | 20,941 | ||||||||||||||||||||||||
| Balance as of January 3, 2010 | 143,544 | $ | 1,436 | $ | 1,637,751 | $ | 2,830 | $ | (280,226 | ) | (24,068 | ) | $ | (497,543 | ) | $ | 864,248 | |||||||||||||||
| (1) | Adjusted for required retroactive adoption of authoritative accounting guidance for convertible debt instruments that may be settled in cash upon conversion effective December 29, 2008. |
See accompanying notes to consolidated financial statements
F-5
ILLUMINA, INC.
| Year Ended | Year Ended | Year Ended | Year Ended | |||||||||||||||||||||
| December 30, | December 31, | January 1, | January 3, | December 28, | December 30, | |||||||||||||||||||
| 2007 | 2006 | 2006 | 2010 | 2008(1) | 2007(1) | |||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||||||
| Net income (loss) | $ | (278,359 | ) | $ | 39,968 | $ | (20,874 | ) | $ | 72,281 | $ | 39,416 | $ | (287,305 | ) | |||||||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||||||||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||||||||||
| Acquired in-process research and development | 303,400 | — | 15,800 | 11,325 | 24,660 | 303,400 | ||||||||||||||||||
| Amortization of increase in inventory valuation | 942 | — | — | |||||||||||||||||||||
| Amortization of acquired intangible assets | 2,429 | — | — | |||||||||||||||||||||
| Amortization of debt issuance costs | 1,176 | — | — | |||||||||||||||||||||
| Amortization of intangible assets | 6,680 | 10,438 | 2,429 | |||||||||||||||||||||
| Amortization of debt discount | 20,286 | 18,883 | 15,335 | |||||||||||||||||||||
| Depreciation expense | 11,464 | 6,032 | 3,824 | 24,504 | 17,285 | 11,464 | ||||||||||||||||||
| Loss on disposal of property and equipment | 15 | 116 | 293 | |||||||||||||||||||||
| Amortization of premium on investments | — | — | (14 | ) | ||||||||||||||||||||
| Impairment of manufacturing equipment | — | 4,069 | — | |||||||||||||||||||||
| Stock-based compensation expense | 33,746 | 14,304 | 270 | 60,811 | 47,688 | 33,746 | ||||||||||||||||||
| Incremental tax benefit related to stock options exercised | (20,086 | ) | (1,439 | ) | — | (39,319 | ) | (18,501 | ) | (20,086 | ) | |||||||||||||
| Amortization of gain on sale of land and building | (187 | ) | (375 | ) | (375 | ) | ||||||||||||||||||
| Deferred income taxes | 29,704 | 31,533 | (17,197 | ) | ||||||||||||||||||||
| Other non-cash adjustments | (487 | ) | 803 | 1,347 | ||||||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||||||
| Accounts receivable | (37,060 | ) | (21,733 | ) | (7,039 | ) | (18,578 | ) | (57,672 | ) | (37,060 | ) | ||||||||||||
| Inventory | (27,130 | ) | (9,728 | ) | (6,502 | ) | (19,201 | ) | (19,560 | ) | (27,130 | ) | ||||||||||||
| Prepaid expenses and other current assets | (6,127 | ) | (1,591 | ) | 290 | (3,429 | ) | 2,322 | (6,128 | ) | ||||||||||||||
| Deferred income taxes | (11,408 | ) | (548 | ) | — | |||||||||||||||||||
| Other assets | 2,612 | (5,212 | ) | 687 | (2,670 | ) | (1,815 | ) | 2,612 | |||||||||||||||
| Accounts payable | 12,262 | 2,438 | 3,193 | 11,778 | 4,840 | 12,262 | ||||||||||||||||||
| Litigation settlements payable | 54,536 | — | — | — | (54,536 | ) | 54,536 | |||||||||||||||||
| Accrued income taxes | 1,586 | 1,809 | 144 | 2,378 | 2,377 | 1,586 | ||||||||||||||||||
| Accrued liabilities | 15,901 | 9,066 | 4,070 | 17,619 | 29,339 | 15,901 | ||||||||||||||||||
| Litigation judgment | — | — | (5,957 | ) | ||||||||||||||||||||
| Other long-term liabilities | (3,418 | ) | 5,893 | 3,182 | 814 | 6,313 | (3,418 | ) | ||||||||||||||||
| Net cash provided by (used in) operating activities | 56,294 | 39,000 | (9,008 | ) | ||||||||||||||||||||
| Net cash provided by operating activities | 174,496 | 87,882 | 56,294 | |||||||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||||||
| Net cash obtained from (paid for) acquisitions | 72,075 | — | (2,388 | ) | ||||||||||||||||||||
| Investment in secured convertible debentures | — | (3,036 | ) | — | ||||||||||||||||||||
| Cash (paid for) obtained in acquisition, including cash paid for transaction costs | (1,325 | ) | (24,666 | ) | 72,075 | |||||||||||||||||||
| Sale of secured convertible debentures | 3,593 | — | — | — | — | 3,593 | ||||||||||||||||||
| Investment in Solexa | — | (50,000 | ) | — | ||||||||||||||||||||
| Purchases of available-for-sale securities | (598,383 | ) | (236,331 | ) | — | (694,487 | ) | (568,707 | ) | (598,383 | ) | |||||||||||||
| Sales and maturities of available-for-sale securities | 479,415 | 143,846 | 12,248 | 515,216 | 411,817 | 479,415 | ||||||||||||||||||
| Proceeds from sale of fixed assets | 42 | — | — | |||||||||||||||||||||
| Purchase of property and equipment | (24,343 | ) | (15,114 | ) | (11,395 | ) | (51,822 | ) | (59,693 | ) | (24,301 | ) | ||||||||||||
| Investments in other entities | (19,900 | ) | — | — | ||||||||||||||||||||
| Cash paid for intangible assets | (85 | ) | (100 | ) | — | (3,400 | ) | (36,000 | ) | (85 | ) | |||||||||||||
| Net cash used in investing activities | (67,686 | ) | (160,735 | ) | (1,535 | ) | (255,718 | ) | (277,249 | ) | (67,686 | ) | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||||||
| Payments on long-term debt | (95 | ) | (109 | ) | (83 | ) | ||||||||||||||||||
| Payments on current portion of long-term debt | (10,000 | ) | (15 | ) | (95 | ) | ||||||||||||||||||
| Proceeds from issuance of convertible debt, net of issuance costs | 390,269 | — | — | — | — | 390,269 | ||||||||||||||||||
| Purchase of convertible note hedges | (139,040 | ) | — | — | — | — | (139,040 | ) | ||||||||||||||||
| Sale of warrants | 92,440 | — | — | |||||||||||||||||||||
| Proceeds from warrant exercises | 6,075 | — | — | |||||||||||||||||||||
| Proceeds from the exercise of warrants | 7,576 | 2,991 | 98,515 | |||||||||||||||||||||
| Common stock repurchases | (251,622 | ) | — | — | (175,136 | ) | (70,785 | ) | (251,622 | ) | ||||||||||||||
| Proceeds from secondary offering, net of issuance cost | — | 342,650 | — | |||||||||||||||||||||
| Proceeds from issuance of common stock | 30,179 | 107,966 | 6,046 | 39,379 | 44,330 | 30,179 | ||||||||||||||||||
| Incremental tax benefit related to stock options exercised | 20,086 | 1,439 | — | 39,319 | 18,501 | 20,086 | ||||||||||||||||||
| Net cash provided by financing activities | 148,292 | 109,296 | 5,963 | |||||||||||||||||||||
| Net cash (used in) provided by financing activities | (98,862 | ) | 337,672 | 148,292 | ||||||||||||||||||||
| Effect of foreign currency translation on cash and cash equivalents | (345 | ) | 3 | 613 | (2,307 | ) | 3,778 | (345 | ) | |||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 136,555 | (12,436 | ) | (3,967 | ) | |||||||||||||||||||
| Cash and cash equivalents at beginning of the year | 38,386 | 50,822 | 54,789 | |||||||||||||||||||||
| Net (decrease) increase in cash and cash equivalents | (182,391 | ) | 152,083 | 136,555 | ||||||||||||||||||||
| Cash and cash equivalents at beginning of period | 327,024 | 174,941 | 38,386 | |||||||||||||||||||||
| Cash and cash equivalents at end of the year | $ | 174,941 | $ | 38,386 | $ | 50,822 | ||||||||||||||||||
| Cash and cash equivalents at end of period | $ | 144,633 | $ | 327,024 | $ | 174,941 | ||||||||||||||||||
| Supplemental disclosures of cash flow information: | ||||||||||||||||||||||||
| Cash paid during the year for interest | $ | 1,378 | $ | 11 | $ | 15 | ||||||||||||||||||
| Cash paid for interest | $ | 2,437 | $ | 2,553 | $ | 1,378 | ||||||||||||||||||
| Cash paid during the year for income taxes | $ | 2,581 | $ | 1,392 | $ | 33 | ||||||||||||||||||
| Cash paid (refunded) for income taxes | $ | 10,361 | $ | (1,653 | ) | $ | 2,581 | |||||||||||||||||
| (1) | Adjusted for required retroactive adoption of authoritative accounting guidance for convertible debt instruments that may be settled in cash upon conversion effective December 29, 2008. |
See accompanying notes to consolidated financial statements
F-6
ILLUMINA, INC.
Unless the context requires otherwise, references in this report to “Illumina,” “we,” “us,” the “Company,” and “our” refer to Illumina, Inc. and its consolidated subsidiaries.
| 1. | Organization and Summary of Significant Accounting Policies |
Organization and Business
Illumina, Inc. (the Company) was incorporated on April 28, 1998. The Company is a leading developer, manufacturer and marketer of integrated systems for the large-scale analysis of genetic variation and biological function. Using the Company’s proprietary technologies, the CompanyIllumina provides a comprehensive line of products and services that currently serve the sequencing, genotyping and gene expression markets. Themarkets and the Company also expects to enter the market for molecular diagnostics. The Company’s tools provide researchers around the world with the performance, throughput, cost effectiveness and flexibility necessary to perform the billions of genetic tests needed to extract valuable medical information from advances in genomics and proteomics. The Company believes this information will enable researchers to correlate genetic variation and biological function, which will enhance drug discovery andcustomers include leading genomic research centers, pharmaceutical companies, academic institutions, clinical research allow diseases to be detected earlierorganizations and permit better choices of drugs for individual patients.biotechnology companies.
Acquisitions
On August 1, 2008, the Company completed its acquisition of Avantome, Inc., a development-stage company creating a low cost, long-read sequencing technology. At the time of the acquisition, the Company paid $25.8 million in cash, including transaction costs, and recorded a charge of $24.7 million for purchased in-process research and development (IPR&D). As part of the acquisition agreement, Illumina agreed to pay Avantome’s former shareholders up to an additional $35.0 million in contingent cash consideration based on the achievement of certain milestones. For the year ended January 3, 2010, the Company recorded IPR&D of $11.3 million and compensation expense of $3.7 million associated with these milestones. For the year ended December 28, 2008, compensation expense of $1.5 million was recorded associated with these milestones. Compensation expense associated with the Avantome acquisition is included in research and development in the consolidated statements of operations.
On January 26, 2007, the Company completed its acquisition of Solexa, Inc., in astock-for-stock merger transaction. The Company issued 26.2 million shares of its common stock as consideration for this merger. Based on the estimated fair values at the acquisition date, the Company allocated $303.4 million to IPR&D, $62.2 million to tangible assets acquired and liabilities assumed and $24.4 million to intangible assets. The remaining excess of the purchase price over the fair value of net assets acquired of $213.4 million was allocated to goodwill.
Basis of Presentation
The consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Fiscal Year
The Company’s fiscal year is 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The year ended January 3, 2010 was 53 weeks; the years ended December 28, 2008 and December 30, 2007 December 31, 2006 and January 1, 2006 were all 52 weeks.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation. During the fourth quarter of 2007,2009, the Company classified research revenue as partdetermined that pre-acquisition net operating loss carryforwards of serviceSolexa that were included in goodwill could be utilized by the Company. Therefore, the Company has updated the Consolidated Financial Statements and other revenue. Research revenue consistsrelated disclosures to reclassify $15.3 million from goodwill to
F-7
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
long-term deferred tax assets to correctly reflect the tax effect of government grants and other research funding. ForSolexa’s pre-acquisition net operating losses that can be utilized by the years ended December 30, 2007, December 31, 2006, and January 1, 2006, research revenue represented approximately $0.5 million, $1.3 million, and $1.8 million, respectively.Company.
Use of Estimates
The preparation of financial statements requires that management make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses goodwill and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
During the first quarter of 2008, the Company reorganized its operating structure into a newly created Life Sciences Business Unit, which includes all products and services that are primarily related to the research market, namely the sequencing, BeadArray, and VeraCode product lines. The Company also created a Diagnostics Business Unit to focus on the emerging opportunity in molecular diagnostics. For the year ended January 3, 2010, the Company had limited activity related to the Diagnostics Business Unit and operating results were reported on an aggregate basis to the chief operating decision maker of the Company, the chief executive officer. Accordingly, the Company operated in one segment for the year ended January 3, 2010. The Company will begin reporting in two segments once revenues, operating profit or loss, or assets of the Diagnostics Business Unit exceed 10% of the consolidated amounts.
Cash Equivalents and Investments
Cash and cash equivalents are comprised of short-term, highly liquid investments with maturities of 90 days or less from the date of purchase.
F-7
F-8
ILLUMINA, INC.
Fair Value of Financial Instruments
The carrying amounts of certainfinancial instruments such as cash equivalents, foreign cash accounts, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate the related fair values due to the short-term maturities of these instruments. The estimated fair value of the convertible senior notes is determined by using available market information as of the latest trading date prior to the Company’s fiscal year-end provided by a third party financial institution. The par value and fair value of the Company’s financial instruments, including cashconvertible notes was $390.0 million and cash equivalents, accounts$553.2 million, respectively, at January 3, 2010 and notes receivable, accounts payable, accrued liabilities,$400.0 million and convertible senior notes approximate fair value.$473.0 million, respectively, at December 28, 2008.
Accounts and Notes Receivable
Trade accounts receivable are recorded at the net invoice value and notes receivable are recorded at contractual value plus earned interest. Interest income on notes receivable is recognized according to the terms of each related agreement.not interest bearing. The Company considers receivables past due based on the contractual payment terms. The Company reviews its exposure to amounts receivable and reserves specific amounts if collectibility is no longer reasonably assured. The Company also reserves a percentage of its trade receivable balance based on collection history.history and current economic trends that might impact the level of future credit losses. The Company re-evaluates such reserves on a regular basis and adjusts its reserves as needed.
Concentrations of Risk
The Company is also subject to risks related to its financial instruments including its cash and cash equivalents, investments and accounts receivable are financial instruments that potentially subject the Company to concentrations of credit risk.receivable. Most of the Company’s cash and cash equivalents as of December 30, 2007January 3, 2010 were deposited with financial institutions in the United States and theStates. The Company’s investment policy restricts the amount of credit exposure to any one issuer to 5% of the portfolio at the time of purchase and to any one typeindustry sector, as defined by Bloomberg classifications, to 25% of investment, other thanthe portfolio at the time of purchase. There is no limit to the percentage of the portfolio that may be maintained in securities issued by the U.S. government.U.S government and money market funds. The Company has historically not experienced significant credit losses from investments and accounts receivable. The Company performs a regular review of customer activity and associated credit risks and generally does not require collateral. The Company maintains an allowance for doubtful accounts based upon a percentage of its trade receivable balance based on collection history and re-evaluates such reserves on a regular basis.risks.
The Company’s products require customized components that currently are available from a limited number of sources. The Company obtains certain key components included in its products from single vendors. No assurance can be given that these or other product components will be available in sufficient quantities at acceptable costs in the future.
F-8
balance as of December 30, 2007January 3, 2010 and December 31, 2006, respectively, was related to customers outside the United States.28, 2008, respectively. Sales to territories outside of the United States are generally denominated in U.S. dollars. International sales entail a variety of risks, including currency exchange fluctuations, longer payment cycles and greater difficulty in accounts receivable collection. The Company is also subject to general geopolitical risks, such as political, social and economic instability and changes in diplomatic and trade relations. The risks of international sales are mitigated in part by the extent to which sales are geographically distributed.
Aggregated accounts receivable from one customer comprised more than 10% of gross customer receivable at January 3, 2010.
F-9
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventories
Inventories are stated at the lower of standard cost (which approximates actual cost)(on a first in, first out basis) or market. Inventory includes raw materials and finished goods that may be used in the research and development process and such items are expensed as consumed.consumed or expired. Provisions for slow moving, excess and obsolete inventories are provided based on product life cycle and development plans, product expiration and quality issues, historical experience and inventory levels.
Property and Equipment
Property and equipment are stated at cost, subject to review of impairment, and depreciated over the estimated useful lives of the assets (generally three to seven years) using the straight-line method. Amortization of leasehold improvements is computed over the shorter of the lease term or the estimated useful life of the related assets. Maintenance and repairs are charged to operations as incurred. When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operating expense.
Goodwill, Intangible Assets and Other Long-Lived Assets
Goodwill represents the excess of the cost over the fair value of net assets acquired. SFAS No. 142,Intangible assets include acquired technology, customer relationships, other license agreements and licensed technology (capitalized as part of the Affymetrix litigation). The cost of identified intangible assets is amortized on a straight-line basis over periods ranging from three to ten years unless the expected benefit pattern is declining, in which case an accelerated method is used.
The Company regularly performs reviews to determine if the carrying values of the long-lived assets are impaired. Goodwill and Other Intangible Assets, requiresother intangible assets that goodwill be testedhave indefinite useful lives are reviewed for impairment at least annually for impairmentduring the second fiscal quarter, or more frequently if events and circumstances warrant,an event occurs indicating the potential for impairment. The Company performed its annual impairment test of goodwill in May of 2009, utilizing a test that begins with an estimate of the fair value of the reporting unit or intangible asset. The Company tests goodwill annually and whenever events or circumstances occur indicating that goodwill might be impaired. The Company performed its annual impairment test of goodwill as of May 1, 2007,asset, noting no impairment and has determined there hashave been no impairment ofindicators for goodwill through December 30, 2007.
F-9
Reserve for Product Warranties
The Company generally provides a one-year warranty on instrumentation.genotyping, gene expression and sequencing systems. Additionally, the Company provides a warranty on its consumable sales through the expiry date, which generally ranges from six to twelve months after the manufacture date. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with system sales.based on historical experience as well as anticipated product performance. This expense is recorded as a component of cost of product revenue. Estimated warranty expenses associated with extended maintenance contracts for systems are recorded as a cost of service and other revenue ratably over the term of the maintenance contract. See Note 6 for further detailed discussion.
F-10
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue Recognition
The Company’s revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of arrays, reagents, flow cells instrumentation, and oligonucleotides (oligos), which are short sequences of DNA.instrumentation. Service and other revenue consists of revenue received for performing genotyping and sequencing services, extended warranty sales and amounts earned under research agreements with government grants, which isare recognized in the period during which the related costs are incurred.
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectibility is reasonably assured. In instances where final acceptance of the product or system is required, revenue is deferred until all the acceptance criteria have been met. All revenue is recorded net of any applicable allowances for returns or discounts.
Revenue for product sales is recognized generally upon shipment and transfer of title to the customer, provided no significant obligations remain and collection of the receivablesreceivable is reasonably assured. Revenue from the sale of instrumentation is recognized when earned, which is generally upon shipment. Revenue for genotyping and sequencing services is recognized when earned, which is generally at the time the genotyping andor sequencing analysis data is deliveredmade available to the customer.customer or agreed upon milestones are reached.
In order to assess whether the price is fixed andor determinable, the Company ensures there are no refund rights. If payment terms are based on future performance, the Company defers revenue recognition until the price becomes fixed andor determinable. The Company assesses collectibility based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If the Company determines that collection of a payment is not reasonably assured, revenue recognition is deferred until the time collection becomes reasonably assured, which is generally upon receipt of payment.
Sales of instrumentation generally include a standard one-year warranty. The Company also sells separately priced maintenance (extended warranty) contracts, which are generally for one or two years,year, upon the expiration of the initial warranty. Revenue for extended warranty sales is recognized ratably over the term of the extended warranty period. Reserves are provided for estimated product warranty expenses at the time the associated revenue is recognized. If the Company were to experience an increase in warranty claims or if costs of servicing its warrantied products under warranty were greater than its estimates, gross margins could be adversely affected.
F-10
item has value to the customer on a stand-alone basis, there is objective and reliable evidence of the fair value of the undelivered items and, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered items is considered probable and substantially in the Company’s control.basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis. Fair value
For transactions entered into during 2009, consideration is allocated at the inception of an itemthe contract to all deliverables based on their relative selling price. The relative selling price for each deliverable is generallydetermined using vendor specific objective evidence (VSOE) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence exists, the Company uses its best estimate of the selling price charged for the product when regularly sold on a stand-alone basis. When objective and reliable evidence of fair value existsdeliverable. SeeRecent Accounting Pronouncementsin Note 1 for all units offurther information related to the Company’s change in authoritative accounting in an arrangement, arrangementguidance for revenue recognition.
For transactions entered into prior to 2009, consideration iswas generally allocated to each unit of accounting based upon theirits relative fair values. In those instancesvalue when objective and reliable evidence of fair value existsexisted for all units of accounting in an arrangement. The fair value of an item was generally the price charged for the product, if the item was regularly sold on a stand-alone basis. In those instances when objective and reliable
F-11
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
evidence of fair value existed for the undelivered items but not for the delivered items, the residual method iswas used to allocate the arrangement consideration. Under the residual method, the amount of arrangement consideration allocated to the delivered items equalsequaled the total arrangement consideration less the aggregate fair value of the undelivered items. When the Company iswas unable to establish stand-alone value for delivered items or when fair value of undelivered items hashad not been established, revenue iswas deferred until all elements arewere delivered and services havehad been performed, or until fair value cancould objectively be determined for any remaining undelivered elements.
In order to establish VSOE of selling price, the Company must regularly sell the productand/or service on a standalone basis with a substantial majority priced within a relatively narrow range. VSOE of selling price is usually the midpoint of that range. If there is not a sufficient number of standalone sales and VSOE of selling price cannot be determined, then the Company considers whether third party evidence can be used to establish selling price. Due to the lack of similar products and services sold by other companies within the industry, the Company has rarely established selling price using third-party evidence. If neither VSOE nor third party evidence of selling price exists, the Company determines its best estimate of selling price using average selling prices over a rolling 12 month period as well as market conditions. If the product or service has no history of sales, the Company relies upon prices set by the Company’s pricing committee adjusted for applicable discounts.
The Company recognizes revenue for delivered elements only when it determines that the fair values of undelivered elements are known and there are no uncertainties regarding customer acceptance. Changes in the allocation of the sales price between delivered and undelivered elements can impact the timing of revenue recognition but do not change the total revenue recognized on any arrangement.
Fair Value Measurements
The Company determines the fair value of its assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:
| • | Level 1 —Quoted prices in active markets for identical assets or liabilities. | |
| • | Level 2 —Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| • | Level 3 —Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following table presents the Company’s fair value hierarchy for assets measured at fair value on a recurring basis as of January 3, 2010 (in thousands):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Debt securities in government sponsored entities | $ | 289,701 | $ | — | $ | — | $ | 289,701 | ||||||||
| Corporate debt securities | 192,821 | — | — | 192,821 | ||||||||||||
| Auction rate securities | — | — | 54,900 | 54,900 | ||||||||||||
| U.S. Treasury securities | 11,472 | — | — | 11,472 | ||||||||||||
| Total assets measured at fair value | $ | 493,994 | $ | — | $ | 54,900 | $ | 548,894 | ||||||||
F-12
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Shipping and Handling Expenses
Shipping and handling expenses are included in cost of product revenue and totaled $2.2$4.8 million, $1.8$3.7 million and $1.3$2.2 million for the years ended January 3, 2010, December 28, 2008 and December 30, 2007, December 31, 2006 and January 1, 2006, respectively.
Research and Development
Research and development expenses consist of costs incurred for internal and grant-sponsored research and development. Research and development expenses include salaries, contractor fees, facilities costs, utilities and allocations of benefits. Expenditures relating to research and development are expensed in the period incurred.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were $2.8$4.2 million, $1.9$3.4 million and $1.2$2.8 million for the years ended January 3, 2010, December 28, 2008 and December 30, 2007, December 31, 2006respectively.
Leases
Leases are reviewed and January 1, 2006, respectively.classified as capital or operating at their inception. For leases that contain rent escalations, the Company records the total rent payable on a straight-line basis over the term of the lease, which includes the construction build-out period but excludes lease extension periods. The difference between rent payments and straight-line rent expense is recorded in other long-term liabilities. Landlord allowances are also recorded in other long-term liabilities, which are amortized on a straight-line basis over the lease term as a reduction to rent expense.
Income Taxes
Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when the Company believes it is more likely than not the future realization of all or some of thea deferred tax assetsasset will not be achieved. The evaluation ofIn evaluating the need for a valuation allowance is performed on aability to recover deferred tax assets within the jurisdiction by jurisdiction basis, and includes a review ofwhich they arise the Company considers all available positive and negative evidence. AsFactors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of December 30, 2007,deferred tax liabilities, history of earnings and reliable forecasting, projections of pre-tax book income over the Company maintained a valuation allowance only against certain U.S.foreseeable future, and
F-11
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company adopted FASB Interpretation (FIN) No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires recognition ofrecognizes the impact of a tax position in the Company’s financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense.
Prior to the third quarter of 2008, the Company identified the local currency as the functional currency in each of its foreign subsidiaries, with all translation adjustments recorded as part of other comprehensive income. Beginning in the third quarter of 2008, the Company reorganized its international structure to execute a more efficient relationship between product development, product manufacturing and sales. This reorganization increased the foreign subsidiaries’ dependence on the U.S. entity for management decisions, financial support, production assets and inventory, thereby making the foreign subsidiaries a direct and integral component of the U.S. entity’s operations. As a result, the Company reassessed the primary economic environment of its foreign subsidiaries, resulting in a U.S. dollar functional currency determination. Beginning in the third quarter of 2008, the Company remeasures its foreign subsidiaries’ assets and liabilities and revenue and expense accounts related to monetary assets and liabilities to the U.S. dollar and records the net gains or losses resulting from remeasurement in other income (expense), net in the consolidated statements of operations. Gains resulting from remeasurement were $0.4 million and $1.9 million for the years ended January 3, 2010 and December 28, 2008, respectively. There were no gains or losses resulting from remeasurement in the year ended December 30, 2007.
Derivatives
The functional currenciesCompany is exposed to foreign exchange rate risks in the normal course of business. To manage a portion of the Company’s wholly-owned subsidiaries are their respective local currencies. Accordingly, all balance sheet accounts of these operations are translated to U.S. dollars using theaccounting exposure resulting from changes in foreign currency exchange rates, the Company enters into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in effectcurrencies other than the functional currency of its subsidiaries. These foreign exchange contracts are carried at fair value and do not qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in the balance sheet date, and revenues and expensesvalue of the derivative are translated usingrecognized in other income (expense), net, in the average exchange rates in effect duringconsolidated statements of operations for the period. The gains and losses from foreign currency translation of these subsidiaries’ financial statements are recorded as a separate component of stockholders’ equity undercurrent period, along with an offsetting gain or loss on the caption “accumulated other comprehensive income.”underlying assets or liabilities.
Stock-Based Compensation
F-12
| Year Ended | ||||
| January 1, | ||||
| 2006 | ||||
| Net loss as reported | $ | (20,874 | ) | |
| Add: Stock-based compensation expense recorded | 270 | |||
| Less: Assumed stock-based compensation expense | (8,393 | ) | ||
| Pro forma net loss | $ | (28,997 | ) | |
| Basic and diluted net loss per share: | ||||
| As reported | $ | (0.52 | ) | |
| Pro forma | $ | (0.72 | ) | |
The Company uses the Black-Scholes-Merton option-pricing model to determineestimate the fair-valuefair value of stock-based awardsstock options granted and stock purchases under SFAS No. 123R.the Employee Stock Purchase Plan (ESPP). This model incorporates various assumptions including expected volatility, expected option life, expected dividends, and the risk-free interest rates. Historically, theThe Company used an expected stock-pricedetermines volatility assumption that was primarily based on historical realized volatility of the underlying stock during a period of time. Beginning the third quarter of 2007, volatility was determined by equally weighing the historical and implied volatility of the Company’s common stock. The historical volatility of the Company’s common stock over the most recent period is generally commensurate with the estimated expected life of the Company’s stock options, adjusted for the impact of unusual fluctuations not reasonably expected to recur and other relevant factors. The implied volatility is calculated from the implied market volatility of exchange-traded call options on the Company’s common stock. The expected life of an award is based on historical forfeiture experience, exercise activity, and on the terms and conditions of the stock awards granted to employees.
F-14
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The assumptions used for the specified reporting periods and the resulting estimates of weighted-average fair value per share of options and restricted stock units granted and for stock purchases under the ESPP during those periods are as follows:
| Year Ended | Year Ended | Year Ended | Year Ended | |||||||||
| December 30, | December 31, | January 1, | January 3, | December 28, | December 30, | |||||||
| 2007 | 2006 | 2006 | 2010 | 2008 | 2007 | |||||||
| Interest rate — stock options | 3.68 - 4.90% | 4.73% | 4.08% | 1.69 - 1.97% | 2.31 - 3.52% | 3.68 - 4.90% | ||||||
| Interest rate — stock purchases | 4.71 - 4.86% | 4.08 - 4.85% | 3.25 - 4.08% | 0.28 - 2.90% | 1.88 - 4.71% | 4.71 -4.86% | ||||||
| Volatility — stock options | 55 - 70% | 76% | 90% | 55 - 58% | 51 - 65% | 55-70% | ||||||
| Volatility — stock purchases | 69 - 76% | 76 - 90% | 90 - 103% | 48 - 58% | 53 - 69% | 69 - 76% | ||||||
| Expected life — stock options | 6 years | 6 years | 5 years | 5 years | 5 - 6 years | 6 years | ||||||
| Expected life — stock purchases | 6 - 12 months | 6 - 12 months | 6 - 24 months | 6 - 12 months | 6 - 12 months | 6 - 12 months | ||||||
| Expected dividend yield | 0% | 0% | 0% | 0% | 0% | 0% | ||||||
| Weighted average fair value per share of options granted | $25.71 | $18.88 | $7.38 | $14.79 | $18.31 | $12.86 | ||||||
| Weighted average fair value per share of restricted stock units granted | $51.37 | — | — | |||||||||
| Weighted average fair value per share of employee stock purchases | $14.66 | $4.76 | $1.81 | $9.24 | $11.45 | $7.33 | ||||||
The fair value of restricted stock units granted during the years ended January 3, 2010 and December 28, 2008 was based on the market price of our common stock on the date of grant.
As of January 3, 2010, $153.1 million of total unrecognized compensation cost related to stock options, restricted stock and ESPP shares issued to date is expected to be recognized over a weighted-average period of approximately 1.67 years.
Total share-based compensation expense for employee stock options and stock purchases consists of the following (in thousands, except per share data):
| Year Ended | ||||||||||||
| January 3, | December 28, | December 30, | ||||||||||
| 2010 | 2008 | 2007 | ||||||||||
| Cost of product revenue | $ | 4,776 | $ | 4,710 | $ | 4,045 | ||||||
| Cost of service and other revenue | 514 | 400 | 279 | |||||||||
| Research and development | 19,960 | 14,086 | 10,016 | |||||||||
| Selling, general and administrative | 35,561 | 28,492 | 19,406 | |||||||||
| Share-based compensation expense before taxes | 60,811 | 47,688 | 33,746 | |||||||||
| Related income tax benefits | (20,121 | ) | (15,844 | ) | (11,005 | ) | ||||||
| Share-based compensation expense, net of taxes | $ | 40,690 | $ | 31,844 | $ | 22,741 | ||||||
| Net share-based compensation expense per share of common stock: | ||||||||||||
| Basic | $ | 0.33 | $ | 0.27 | $ | 0.21 | ||||||
| Diluted | $ | 0.30 | $ | 0.24 | $ | 0.21 | ||||||
Net Income (Loss) per Share
On July 22, 2008, the Company announced atwo-for-one stock split in the form of a 100% stock dividend with a record date of September 10, 2008 and a distribution date of September 22, 2008. Share and per share amounts have been restated to reflect the stock split for all periods presented.
F-13F-15
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Basic and diluted net income (loss) per common share is presented in conformity with SFAS No. 128,Earnings per Share,for all periods presented. In accordance with SFAS No. 128, basic net income (loss)or loss per share is computed usingby dividing net income or loss by the weighted-average number of shares of common stockshares outstanding during the period, less shares subject to repurchase.reporting period. Diluted net income (loss) per share is typically computed usingby dividing net income by the weighted average number of common andshares outstanding during the reporting period increased to include dilutive potential common equivalent shares from stock options using the treasury stock method. Dilutive potential common shares consist of stock options with combined exercise prices and unrecognized compensation expense that are less than the average market price of the Company’s common stock, restricted stock units with unrecognized compensation expense, convertible debt when the average market price of the Company’s common stock is above the conversion price of $21.83 and warrants with exercise prices that are less than the average market price of the Company’s common stock. Under the treasury stock method, the amount that must be paid to exercise stock options and warrants, the amount of compensation expense for future services that the Company has not yet recognized for stock options and restricted stock units and the amount of tax benefits that will be recorded in additional paid-in capital when the awards become deductible are assumed to be used to repurchase shares. In loss periods, basic net loss per share and diluted net loss per share are identical since the effect of dilutive potential common shares is anti-dilutive and therefore excluded.
The following table presents the calculation of weighted-average shares used to calculate basic and diluted net income (loss) per share (in thousands):
| Year Ended | Year Ended | Year Ended | Year Ended | |||||||||||||||||||||
| December 30, | December 31, | January 1, | January 3, | December 28, | December 30, | |||||||||||||||||||
| 2007 | 2006 | 2006 | 2010 | 2008 | 2007 | |||||||||||||||||||
| Weighted-average shares outstanding | 54,164 | 44,537 | 40,199 | 123,154 | 116,855 | 108,328 | ||||||||||||||||||
| Less: Weighted-average shares of common stock subject to repurchase | (10 | ) | (36 | ) | (52 | ) | — | — | (20 | ) | ||||||||||||||
| Weighted-average shares used in calculating basic net income (loss) per share | 54,154 | 44,501 | 40,147 | 123,154 | 116,855 | 108,308 | ||||||||||||||||||
| Plus: Effect of dilutive potential common shares | — | 4,253 | — | |||||||||||||||||||||
| Plus: Effect of dilutive Convertible Senior Notes | 6,497 | 6,653 | — | |||||||||||||||||||||
| Plus: Effect of dilutive equity awards | 4,335 | 5,373 | — | |||||||||||||||||||||
| Plus: Effect of dilutive warrants sold in connection with the Convertible Senior Notes | 1,566 | 2,487 | — | |||||||||||||||||||||
| Plus: Effect of dilutive warrants assumed in the acquisition of Solexa | 1,544 | 2,239 | — | |||||||||||||||||||||
| Weighted-average shares used in calculating diluted net income (loss) per share | 54,154 | 48,754 | 40,147 | 137,096 | 133,607 | 108,308 | ||||||||||||||||||
| Weighted average shares excluded from calculation due to anti-dilutive effect | 924 | 370 | 42,882 | |||||||||||||||||||||
Comprehensive Income
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on the Company’savailable-for-sale securities changes in the fair value of derivatives designated as effective cash flow hedges, and foreign currency translation adjustments. The Company has disclosed comprehensive income as a component of stockholders’ equity.
F-16
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of accumulated other comprehensive income are as follows (in thousands):
| Year Ended | Year Ended | |||||||||||||||
| December 30, | December 31, | January 3, | December 28, | |||||||||||||
| 2007 | 2006 | 2010 | 2008 | |||||||||||||
| Foreign currency translation adjustments | $ | 1,183 | $ | 601 | $ | 1,338 | $ | 1,338 | ||||||||
| Unrealized gain on available-for-sale securities, net of deferred tax | 164 | 10,693 | 1,492 | 1,084 | ||||||||||||
| Total other comprehensive income | $ | 1,347 | $ | 11,294 | $ | 2,830 | $ | 2,422 | ||||||||
F-14
Recent Accounting Pronouncements
Adopted Accounting Pronouncements
Convertible Debt Instruments
In September 2006May 2008, the Financial Accounting Standards Board (FASB) issued authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The Company adopted the guidance effective December 29, 2008, impacting the accounting for the Company’s convertible senior notes by requiring the Company to account separately for the liability and equity components of the convertible debt. The liability component is measured at its estimated fair value such that the effective interest expense associated with the convertible debt reflects the issuer’s borrowing rate at the date of issuance for similar debt instruments without the conversion feature. The difference between the cash proceeds associated with the convertible debt and this estimated fair value is recorded as a debt discount and amortized to interest expense over the life of the convertible debt using the effective interest rate method. Upon application of this guidance, the only change to diluted earnings per share resulted from the effects of increased interest expense and the associated tax effects. The guidance requires retrospective application to the terms of instruments as they existed for all periods presented. See Note 7 for information on the impact of our adoption of the guidance and the assumptions we used to estimate the fair value of the liability component.
Derivatives
In June 2008, the FASB issued SFAS No. 157,Fair Value Measurements. SFAS No. 157 defines fair value, establishesratified authoritative guidance addressing the accounting for certain instruments (or embedded features) determined to be indexed to an entity’s own stock. This guidance provides that an entity should use a framework for measuring fair value in accordance with GAAP,two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007.settlement provisions. The Company is currently evaluatingadopted this guidance effective December 29, 2008, requiring the impact, if any,Company to perform additional analyses on both its freestanding equity derivatives and embedded equity derivative features. However, the adoption of this pronouncement willguidance did not have a material effect on the Company’s consolidated financial statements.
Fair Value of Financial Instruments
In February 2007,April 2009, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 allows companies to elect to measure certain assets and liabilities at fair value and is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, the adoption of this pronouncement will haveadditional authoritative guidance on the Company’s consolidated financial statements.
F-15
| Fair market value of securities issued | $ | 527,067 | ||
| Fair market value of change of control bonuses and related taxes | 8,182 | |||
| Transaction costs not included in Solexa net tangible assets acquired | 8,138 | |||
| Fair market value of vested stock options, warrants and restricted stock assumed | 75,334 | |||
| Total purchase price | $ | 618,721 | ||
| Current assets | $ | 51,444 | ||
| Property, plant and equipment, net | 6,515 | |||
| Other assets | 786 | |||
| Deferred tax assets | 18,360 | |||
| Current liabilities | (13,463 | ) | ||
| Other long-term liabilities | (1,455 | ) | ||
| Net tangible assets acquired | 62,187 | |||
| Identifiable intangible assets (core technology and customer relationships) | 24,400 | |||
| In-process research and development | 303,400 | |||
| Goodwill | 228,734 | |||
| Total net assets acquired | $ | 618,721 | ||
F-16
F-17
| • | ||
| • | ||
| • | new criteria for |
F-17
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company believes that these primary factors supportadopted the amount of goodwill recognized asguidance on a result ofprospective basis in the purchase price paid for Solexa, in relation to other acquired tangible and intangible assets, including in-process research and development.
| Year Ended | Year Ended | |||||||
| December 30, | December 31, | |||||||
| 2007 | 2006 | |||||||
| Revenue | $ | 366,854 | $ | 187,103 | ||||
| Net income (loss) | $ | 17,388 | $ | (38,957 | ) | |||
| Net income (loss) per share, basic | $ | 0.32 | $ | (0.68 | ) | |||
| Net income (loss) per share, diluted | $ | 0.29 | $ | (0.68 | ) | |||
FASB Codification
In June 2009, the FASB issued authoritative guidance for the FASB Codification to become the source of authoritative, nongovernmental GAAP. The Codification did not change GAAP but reorganizes the literature. The Company adopted this guidance in the interim period ended September 27, 2009 without material impact on the Company’s consolidated financial statements.
Revenue Recognition
In September 2009, the FASB ratified authoritative accounting guidance regarding revenue recognition for arrangements with multiple deliverables. The guidance affects the determination of separate units of accounting in arrangements with multiple deliverables and the allocation of transaction consideration to each of the identified units of accounting. Previously, a delivered item was considered a separate unit of accounting when it had value to the customer on a stand-alone basis and there was objective and reliable evidence of the fair value of the undelivered items. The new guidance eliminates the requirement for objective and reliable evidence of fair value to exist for the undelivered items in order for a delivered item to be treated as a separate unit of accounting. The guidance also requires arrangement consideration to be allocated at the inception of the arrangement to all deliverables using the relative-selling-price method and eliminates the use of the residual method of allocation. Under the relative-selling-price method, the selling price for each deliverable is determined using VSOE of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists for a deliverable, the guidance requires an entity to determine the best estimate of the selling price.
The Company adopted the guidance on a prospective basis in the interim period ended September 27, 2009. Prospective application required the Company to apply the guidance to all revenue arrangements entered into a definitive securities purchase agreement with Solexa in whichor materially modified since the beginning of fiscal 2009. This prospective application had no impact on the Company’s consolidated financial statements for the interim periods ended March 29, 2009 and June 28, 2009. During the third and fourth quarter of 2009, the Company invested approximately $50recorded additional revenue of $2.3 million and $5.7 million respectively, which would have been deferred under previous accounting guidance. In future interim and fiscal year periods, the adoption of this guidance may have a material impact on the Company’s financial results to the extent the Company enters into arrangements with multiple deliverables and does not have VSOE or third party evidence of selling price for material undelivered elements. Refer to theSummary of Significant Accounting Principlesin Solexa in exchangeNote 1 for 5,154,639 newly issued sharesfurther information on the Company’s revenue recognition policies.
In September 2009, the FASB also ratified authoritative accounting guidance requiring the sales of Solexa common stock in conjunction withall tangible products containing both software and non-software components that function together to deliver the mergerproduct’s essential functionality to be excluded from the scope of the two companies. This investment was valued at $67.8 million assoftware revenue guidance. The Company adopted the guidance on a prospective basis during the three months ended September 27, 2009 effective for all periods in 2009. Prior to the adoption of December 31, 2006, which represented a market value of $13.15 per share of Solexa common stock. This investment was eliminated as part ofthis guidance, the Company assessed all software items included in the Company’s purchase accounting uponproduct offerings to be incidental to the closing of the merger on January 26, 2007.product itself and, therefore,
F-18
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
excluded all sales from the scope of the related software revenue guidance. As a result, the adoption of this guidance had no impact on the Company’s consolidated financial statements.
Definition of a Business
During 2009, the FASB revised guidance related to business combinations, which changed the definition of a business. Previously, a business was defined as having three elements: (i) inputs, (ii) processes applied to those inputs, and (iii) outputs. The new guidance broadens the definition and no longer requires the third element to be present for a set of activities and assets to be considered a business. The Company has adopted this guidance for the interim period ending January 3, 2010. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Fair Value of Liabilities
In August 2009, the FASB issued authoritative guidance related to measuring liabilities at fair value when a quoted price in an active market is not available. This guidance is effective for reporting periods beginning after August 28, 2009. The Company has adopted this guidance in the interim period ending January 3, 2010. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
New Accounting Pronouncements
Variable Interest Entities
In June 2009, the FASB issued authoritative guidance that amends the evaluation criteria to identify the primary beneficiary of a variable interest entity and requires a quarterly reassessment of the treatment of such entities. The guidance also requires additional disclosures about an enterprise’s involvement in a variable interest entity. The Company will adopt this guidance in the first interim period of fiscal 2010 and is currently evaluating the impact of the pending adoption on the consolidated financial statements.
| Balance Sheet Account Details |
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
| U.S. Treasury securities and obligations of U.S. government agencies | $ | 42,648 | $ | 108 | $ | — | $ | 42,756 | ||||||||
| Debt securities issued by the states of the United States and political subdivisions of the states | 14,675 | — | — | 14,675 | ||||||||||||
| Corporate debt securities | 153,547 | 252 | (89 | ) | 153,710 | |||||||||||
| Total | $ | 210,870 | $ | 360 | $ | (89 | ) | $ | 211,141 | |||||||
| Estimated | ||||
| Fair Value | ||||
| Due within one year | $ | 14,675 | ||
| After one but within five years | 196,466 | |||
| Total | $ | 211,141 | ||
Accounts receivable consist of the following (in thousands):
| December 30, | December 31, | January 3, | December 28, | |||||||||||||
| 2007 | 2006 | 2010 | 2008 | |||||||||||||
| Accounts receivable from product and service sales | $ | 82,144 | $ | 39,627 | $ | 157,536 | $ | 132,564 | ||||||||
| Notes receivable from product sales | — | 112 | ||||||||||||||
| Accounts receivable from government grants | 15 | 167 | ||||||||||||||
| Other receivables | 1,500 | 416 | 1,613 | 1,840 | ||||||||||||
| 83,659 | 40,322 | 159,149 | 134,404 | |||||||||||||
| Allowance for doubtful accounts | (540 | ) | (338 | ) | (1,398 | ) | (1,138 | ) | ||||||||
| Total | $ | 83,119 | $ | 39,984 | $ | 157,751 | $ | 133,266 | ||||||||
F-19
Inventory, net, consists of the following (in thousands):
| December 30, | December 31, | January 3, | December 28, | |||||||||||||
| 2007 | 2006 | 2010 | 2008 | |||||||||||||
| Raw materials | $ | 27,098 | $ | 8,365 | $ | 39,144 | $ | 32,501 | ||||||||
| Work in process | 20,321 | 8,907 | 51,670 | 34,063 | ||||||||||||
| Finished goods | 6,561 | 2,897 | 1,962 | 6,867 | ||||||||||||
| Total | $ | 53,980 | $ | 20,169 | ||||||||||||
| Total inventory, net | $ | 92,776 | $ | 73,431 | ||||||||||||
F-19
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property and equipment consist of the following (in thousands):
| December 30, | December 31, | January 3, | December 28, | |||||||||||||
| 2007 | 2006 | 2010 | 2008 | |||||||||||||
| Leasehold improvements | $ | 4,531 | $ | 1,760 | $ | 55,322 | $ | 26,637 | ||||||||
| Manufacturing and laboratory equipment | 50,384 | 30,523 | 92,956 | 83,317 | ||||||||||||
| Computer equipment and software | 18,772 | 10,383 | 37,071 | 27,490 | ||||||||||||
| Furniture and fixtures | 3,691 | 3,114 | 5,993 | 4,167 | ||||||||||||
| 77,378 | 45,780 | 191,342 | 141,611 | |||||||||||||
| Accumulated depreciation and amortization | (31,104 | ) | (20,146 | ) | (74,154 | ) | (52,175 | ) | ||||||||
| Total | $ | 46,274 | $ | 25,634 | $ | 117,188 | $ | 89,436 | ||||||||
Depreciation expense was $11.5$24.5 million, $6.0$17.3 million and $3.8$11.5 million for the years ended January 3, 2010, December 28, 2008 and December 30, 2007, December 31, 2006 and January 1, 2006, respectively.
| December 30, 2007 | December 31, 2006 | |||||||||||||||
| Gross Carrying | Accumulated | Gross Carrying | Accumulated | |||||||||||||
| Amount | Amortization | Amount | Amortization | |||||||||||||
| Acquired intangible assets: | ||||||||||||||||
| Core technology | $ | 23,500 | $ | (2,154 | ) | $ | — | $ | — | |||||||
| Customer relationships | 900 | (275 | ) | — | — | |||||||||||
| Total acquired intangible assets | 24,400 | (2,429 | ) | — | — | |||||||||||
| Other intangible assets: | ||||||||||||||||
| License agreements | 1,029 | (884 | ) | 944 | (836 | ) | ||||||||||
| Licensed technology | 36,000 | — | — | — | ||||||||||||
| Total intangible assets | $ | 61,429 | $ | (3,313 | ) | $ | 944 | $ | (836 | ) | ||||||
| January 3, | December 28, | |||||||
| 2010 | 2008 | |||||||
| Compensation | $ | 32,487 | $ | 30,330 | ||||
| Short-term deferred revenue | 27,445 | 15,862 | ||||||
| Taxes | 12,109 | 9,456 | ||||||
| Reserve for product warranties | 10,215 | 8,203 | ||||||
| Customer deposits | 6,121 | 6,583 | ||||||
| Accrued royalties | 2,552 | 2,695 | ||||||
| Legal and other professional fees | 1,818 | 1,708 | ||||||
| Other | 5,506 | 5,518 | ||||||
| Total | $ | 98,253 | $ | 80,355 | ||||
F-20
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 3. | Short-term investments |
The following is a summary of short-term investments (in thousands):
| January 3, 2010 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
Available-for-sale securities: | ||||||||||||||||
| Debt securities in government sponsored entities | $ | 289,101 | $ | 702 | $ | (102 | ) | $ | 289,701 | |||||||
| Corporate debt securities | 190,949 | 2,039 | (166 | ) | 192,822 | |||||||||||
| U.S. treasury securities | 11,487 | 12 | (28 | ) | 11,471 | |||||||||||
Totalavailable-for-sale securities | 491,537 | 2,753 | (296 | ) | 493,994 | |||||||||||
| Trading securities: | ||||||||||||||||
| Auction rate securities | 54,900 | — | (6,129 | ) | 48,771 | |||||||||||
| Put option | — | 6,129 | — | 6,129 | ||||||||||||
| Total trading securities | 54,900 | 6,129 | (6,129 | ) | 54,900 | |||||||||||
| Total short-term investments | $ | 546,437 | $ | 8,882 | $ | (6,425 | ) | $ | 548,894 | |||||||
| December 28, 2008 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
Available-for-sale securities: | ||||||||||||||||
| Debt securities in government sponsored entities | $ | 218,964 | $ | 1,544 | $ | — | $ | 220,508 | ||||||||
| Corporate debt securities | 92,301 | 547 | (305 | ) | 92,543 | |||||||||||
| Total | $ | 311,265 | $ | 2,091 | $ | (305 | ) | $ | 313,051 | |||||||
Available-For-Sale Securities
As of January 3, 2010, the Company had 38available-for-sale securities in a gross unrealized loss position, all of which had been in such position for less than twelve months. All impairments are not considered other than temporary as it is likely the Company will not have to sell any securities before the recovery of their cost basis and it is not the Company’s intent to do so. The following table shows the fair values and the gross unrealized losses of the Company’savailable-for-sale securities that were in an unrealized loss position at January 3, 2010 and December 28, 2008 aggregated by investment category (in thousands):
| January 3, 2010 | December 28, 2008 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | |||||||||||||||
| Fair Value | Losses | Fair Value | Losses | |||||||||||||
| Government sponsored entities | $ | 73,783 | $ | (102 | ) | $ | — | $ | — | |||||||
| Corporate debt securities | 26,488 | (166 | ) | 19,240 | (305 | ) | ||||||||||
| U.S. treasury securities | 4,471 | (28 | ) | — | — | |||||||||||
| Total | $ | 104,742 | $ | (296 | ) | $ | 19,240 | $ | (305 | ) | ||||||
F-21
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Realized gains and losses are determined based on the specific identification method and are reported in other income (expense), net in the consolidated statements of operations. Gross realized losses on sales ofavailable-for-sale securities were immaterial for the years ended January 3, 2010, December 28, 2008 and December 30, 2007. Gross realized gains on sales ofavailable-for-sale securities totaled $1.0 million and $0.6 million for the years ended January 3, 2010 and December 28, 2008 respectively, and were immaterial for the year ended December 30, 2007.
Contractual maturities ofavailable-for-sale securities at January 3, 2010 were as follows (in thousands):
| Estimated | ||||
| Fair Value | ||||
| Due within one year | $ | 169,671 | ||
| After one but within five years | 324,323 | |||
| Total | $ | 493,994 | ||
Trading Securities
At January 3, 2010, the Company’s trading securities consisted of $54.9 million (at cost) in auction rate securities issued primarily by municipalities and universities. The auction rate securities are held in a brokerage account with UBS Financial Services, Inc., a subsidiary of UBS. These securities are debt instruments with a long-term maturity and with an interest rate that is reset in short intervals through auctions.
The markets for auction rate securities effectively ceased when the vast majority of auctions failed in February 2008, preventing investors from selling these securities. As of January 3, 2010, the securities continued to fail auction and remained illiquid. Changes in the fair value of the Company’s auction rate securities from December 28, 2008 through January 3, 2010 are as follows (in thousands):
| Fair value as of December 28, 2008 | $ | 47,235 | ||
| Redeemed by issuer | (1,000 | ) | ||
| Unrealized Gain(1) | 2,536 | |||
| Fair value as of January 3, 2010 | $ | 48,771 | ||
| (1) | Unrealized gains and losses associated with the Company’s auction rate securities are classified as other income (expense), net in the consolidated statements of operations for the year ended January 3, 2010. |
In determining the fair value of the Company’s auction rate securities, the Company considered trades in the secondary market. However, due to the auction failures of the auction rate securities in the marketplace and the lack of trading in the secondary market of these instruments, there was insufficient observable auction rate security market information available to directly determine the fair value of the Company’s investments. As a result, the value of these securities and resulting unrealized gain was determined using Level 3 hierarchical inputs. These inputs include management’s assumptions of pricing by market participants, including assumptions about risk. The Company used the concepts of fair value based on estimated discounted future cash flows of interest income over a projected 17 year period, which is reflective of the weighted average life of the student loans in the underlying trust. In preparing this model, the Company used historical data of the rates upon which a majority of the auction rate securities’ contractual rates were based, such as the LIBOR and average trailing twelve-month90-day treasury interest rate spreads, to estimate future interest rates. The Company also considered the discount factors, taking into account the credit ratings of the auction rate securities, using a range of discount rates from 5.9% to 7.2%. The Company obtained information from multiple sources, including UBS, to determine a reasonable range of assumptions to use in valuing the auction rate securities. The Company’s model was corroborated by a separate comparable cash flow analysis prepared by UBS. To understand the sensitivity of the Company’s valuation, the liquidity factor and estimated
F-22
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
remaining life was varied. Variations in those results were evaluated and it was determined the factors and valuation method chosen were reasonable and representative of the Company’s auction rate security portfolio.
As a result of the auction rate failures, various regulatory agencies initiated investigations into the sales and marketing practices of several banks and broker-dealers, including UBS, which sold auction rate securities, alleging violations of federal and state laws. Along with several other broker-dealers, UBS subsequently reached a settlement with the federal and state regulators that required them to repurchase auction rate securities from certain investors at par at some future date. In November 2008, the Company signed a settlement agreement granting the Company an option to sell its auction rate securities at par value to UBS during the period of June 30, 2010 through July 2, 2012 (the Settlement). In accepting the Settlement, the Company released UBS from any claims relating to the marketing and sale of auction rate securities. Although the Company expects to sell its auction rate securities under the Settlement, if the Settlement is not exercised before July 2, 2012, it will expire and UBS will have no further rights or obligation to buy the Company’s auction rate securities. In lieu of the acceptance of the Settlement, the auction rate securities will continue to accrue interest as determined by the auction process or the terms outlined in the prospectus of the auction rate securities if the auction process fails. In addition to offering to repurchase the Company’s auction rate securities, as part of the Settlement, UBS has agreed to provide the Company with a “no net cost” loan up to 75% of the par value of the auction rate securities until June 30, 2010. According to the terms of the Settlement, the interest rate on the loan will approximate the weighted average interest or dividend rate payable to the Company by the issuer of any auction rate securities pledged as collateral.
UBS’s obligations under the Settlement are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Settlement. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Settlement.
To account for the Settlement, the Company recorded a separate freestanding asset (put option) of $8.7 million and recognized a corresponding gain in earnings during the fourth quarter of 2008. Changes in the fair value of the Company’s put option from December 28, 2008 through January 3, 2010 are as follows (in thousands):
| Fair value as of December 28, 2008 | $ | 8,665 | ||
| Unrealized loss(1) | (2,536 | ) | ||
| Fair value as of January 3, 2010 | $ | 6,129 | ||
| (1) | Unrealized gains and losses associated with the Company’s put option are classified as other income (expense), net in the consolidated statements of operations for the year ended January 3, 2010. |
Since the put option does not meet the definition of a derivative instrument, the Company elected to measure it at fair value in accordance with authoritative guidance related to the fair value option for financial assets and financial liabilities. The Company valued the put option using a discounted cash flow approach including estimates of interest rates, timing and amount of cash flow, with consideration given to UBS’s financial ability to repurchase the auction rate securities beginning June 30, 2010. These assumptions are volatile and subject to change as the underlying sources of these assumptions and market conditions change.
The Company will continue to recognize gains and losses in earnings approximating the changes in the fair value of the auction rate securities at each balance sheet date. These gains and losses are expected to be approximately offset by changes in the fair value of the put option.
The fair value of the auction rate securities and the put option total $54.9 million and $55.9 million at January 3, 2010 and December 28, 2008, respectively. At January 3, 2010, the auction rate securities were classified as short-term investments as the Company intends to exercise the right to sell the securities back to UBS within the next year. At December 28, 2008, the Company classified these securities as long-term assets
F-23
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
since the Company believed it would not able to liquidate its investments without significant loss during the year ended January 3, 2010.
| 4. | Intangible Assets |
The Company’s intangible assets are comprised primarily of licensed technology from the Affymetrix settlement entered into on January 9, 2008 and acquired core technology and customer relationships from the acquisition of Solexa. As a result of the Affymetrix settlement, the Company agreed, without admitting liability, to make a one-time payment to Affymetrix of $90.0 million. In return, Affymetrix agreed to dismiss with prejudice all lawsuits it had brought against the Company, and the Company agreed to dismiss with prejudice its counterclaims in the relevant lawsuits. Affymetrix also agreed not to sue the Company or its affiliates or customers for making, using or selling any of the Company’s current products, evolutions of those products or services related to those products. In addition, Affymetrix agreed that, for four years, it will not sue the Company for making, using or selling the Company’s products or services that are based on future technology developments. The covenant not to sue covers all fields other than photolithography, the process by which Affymetrix manufactures its arrays and a field in which the Company does not operate.
Of the total $90.0 million payment made on January 25, 2008, $36.0 million was recorded as licensed technology and classified as an intangible asset. The remaining $54.0 million was charged to expense during the fourth quarter of 2007. This allocation was determined based on the fair value of past and estimated future revenue streams related to the products covered by the patents previously under dispute. The value of the licensed technology is the benefit derived, calculated using estimated discounted cash flows and future revenue projections, from the perpetual covenant not to sue for damages related to the sale of the Company’s current products. The effective life of the licensed technology extends through 2015, the final expiry date of all patents considered in valuing the intangible asset. The related amortization is based on the higher of the percentage of usage or the straight-line method. The percentage of usage was determined using actual and projected revenues generated from products covered by the patents previously under dispute.
Acquired core technology and customer relationships are being amortized on a straight-line basis over their effective useful lives of ten and three years, respectively. The amortization of the Company’s intangible assets is excluded from cost of product revenue and is separately classified as amortization of intangible assets on the Company’s consolidated statements of operations.
The following is a summary of the Company’s amortizable intangible assets as of the respective balance sheet dates (in thousands):
| January 3, 2010 | December 28, 2008 | |||||||||||||||||||||||
| Gross Carrying | Accumulated | Intangibles, | Gross Carrying | Accumulated | Intangibles, | |||||||||||||||||||
| Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
| Licensed technology | $ | 36,000 | $ | (11,820 | ) | $ | 24,180 | $ | 36,000 | $ | (7,788 | ) | $ | 28,212 | ||||||||||
| Core technology | 23,500 | (6,854 | ) | 16,646 | 23,500 | (4,504 | ) | 18,996 | ||||||||||||||||
| Customer relationships | 900 | (875 | ) | 25 | 900 | (575 | ) | 325 | ||||||||||||||||
| License agreements | 4,456 | (1,519 | ) | 2,937 | 1,154 | (932 | ) | 222 | ||||||||||||||||
| Total intangible assets, net | $ | 64,856 | $ | (21,068 | ) | $ | 43,788 | $ | 61,554 | $ | (13,799 | ) | $ | 47,755 | ||||||||||
Amortization expense associated with the acquired intangible assets was $2.4$6.7 million for the year ended December 30, 2007. There was no amortization of acquired intangiblesand $10.4 million for the years ended January 3, 2010 and December 31, 2006 and January 1, 2006,28, 2008, respectively.
F-20F-24
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The estimated annual amortization of intangible assets for the next five years is shown in the following table (in thousands). Actual amortization expense to be reported in future periods could differ from these estimates as a result of acquisitions, divestitures, asset impairments and other factors.
| 2008 | $ | 7,194 | ||
| 2009 | 7,193 | |||
| 2010 | 6,905 | |||
| 2011 | 6,870 | |||
| 2012 | 6,858 | |||
| 2013 and thereafter | 23,096 | |||
| Total | $ | 58,116 | ||
| December 30, | December 31, | |||||||
| 2007 | 2006 | |||||||
| Compensation | $ | 17,410 | $ | 8,239 | ||||
| Taxes | 8,298 | 1,804 | ||||||
| Short-term deferred revenue | 7,541 | 3,382 | ||||||
| Customer deposits | 5,266 | 3,703 | ||||||
| Legal and other professional fees | 4,276 | 3,831 | ||||||
| Reserve for product warranties | 3,716 | 996 | ||||||
| Short-term deferred rent | 1,251 | — | ||||||
| Short-term deferred gain on sale of building | 171 | 375 | ||||||
| Other | 2,923 | 1,530 | ||||||
| Total | $ | 50,852 | $ | 23,860 | ||||
| 2010 | $ | 6,816 | ||
| 2011 | 6,781 | |||
| 2012 | 6,770 | |||
| 2013 | 6,755 | |||
| 2014 | 6,736 | |||
| Thereafter | 9,930 | |||
| Total | $ | 43,788 | ||
| Impairment of Manufacturing Equipment |
During fiscal 2008, the Company implemented next-generation imaging and decoding systems to be used in manufacturing. These systems were developed to increase existing capacity and allow the Company to transition to the Infinium High-Density (HD) product line. As a result of this transition, the demand for products manufactured on the previous infrastructure was reduced and certain systems were no longer being utilized. A non-cash impairment charge of $4.1 million was recorded in the second quarter of fiscal 2008 for the excess machinery. This charge is included as a separate line item in the Company’s consolidated statement of operations. There was no change to useful lives and related depreciation expense of the remaining assets as the Company believes these estimates are currently reflective of the period the assets will be used in operations.
| 6. | Warranties |
The Company generally provides a one-year warranty on genotyping, and gene expression and sequencing systems. Additionally, the Company provides a warranty on its consumable sales through the expiry date, which generally ranges from six to twelve months after the manufacture date. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with system sales.based on historical experience as well as anticipated product performance. This expense is recorded as a component of cost of product revenue. Estimated warranty expenses associated with extended maintenance contracts for systems are recorded as a cost of service and other revenue ratably over the term of the maintenance contract.
F-21
Changes in the Company’s reserve for product warranties during the three years ended December 30,from January 1, 2007 through January 3, 2010 are as follows (in thousands):
| Balance as of January 2, 2005 | $ | 387 | ||||||
| Additions charged to cost of revenue | 1,094 | |||||||
| Repairs and replacements | (730 | ) | ||||||
| Balance as of January 1, 2006 | 751 | |||||||
| Additions charged to cost of revenue | 1,379 | |||||||
| Repairs and replacements | (1,134 | ) | ||||||
| Balance as of December 31, 2006 | 996 | |||||||
| Balance as of January 1, 2007 | $ | 996 | ||||||
| Additions charged to cost of revenue | 4,939 | 4,939 | ||||||
| Repairs and replacements | (2,219 | ) | (2,219 | ) | ||||
| Balance as of December 30, 2007 | $ | 3,716 | 3,716 | |||||
| Additions charged to cost of revenue | 13,044 | |||||||
| Repairs and replacements | (8,557 | ) | ||||||
| Balance as of December 28, 2008 | 8,203 | |||||||
| Additions charged to cost of revenue | 14,613 | |||||||
| Repairs and replacements | (12,601 | ) | ||||||
| Balance as of January 3, 2010 | $ | 10,215 | ||||||
F-25
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Convertible Senior Notes |
On February 16, 2007, the Company issued $400.0 million principal amount of 0.625% Convertible Senior Notesconvertible senior notes due 2014 (the Notes), which included the exercise of the initial purchasers’ option to purchase up to an additional $50.0 million aggregate principal amount of Notes.2014. The net proceeds from the offering, after deducting the initial purchasers’ discount and offering expenses, were approximately $390.3 million. The Company will pay 0.625% interest per annum on the principal amount of the Notes,notes, payable semi-annually in arrears in cash on February 15 and August 15 of each year. The Company made an interest paymentpayments of approximately $1.2 million on February 15, 2009 and August 15, 2007.2009. The Notesnotes mature on February 15, 2014.
The Notesnotes will be convertible into cash and, if applicable, shares of the Company’s common stock, $0.01 par value per share, based on an initiala conversion rate, subject to adjustment, of 22.902945.8058 shares per $1,000 principal amount of Notesnotes (which represents an initiala conversion price of approximately $43.66$21.83 per share), only in the following circumstances and to the following extent: (1) during the fivebusiness-day period after any five consecutive tradingtrading-day period (the measurement period) in which the trading price per note for each day of such measurement period was less than 97% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; (2) during any calendar quarter, after the calendar quarter ending March 31, 2007, if the last reported sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (3) upon the occurrence of specified events; and (4) the notes will be convertible at any time on or after November 15, 2013 through the third scheduled trading day immediately preceding the maturity date.
The hedge transaction entered into convertible note hedge transactions (the hedge) with the initial purchasersand/or their affiliates (the hedge counterparties) entitlingentitles the Company to purchase up to 11,451,48018,322,320 shares of the Company’s common stock subject to adjustment, at an initiala strike price of $43.66approximately $21.83 per share, subject to adjustment. In addition, the Company sold to these hedge counterparties warrants to acquireexercisable, on a cashless basis, for up to 18,322,320 shares of the Company’s common stock (the warrants), subject to adjustment, at an initiala strike price of $62.87$31.435 per share, subject to adjustment. The cost of the hedge transaction that was not covered by the proceeds from the sale of the warrants was approximately $46.6 million and iswas reflected as a reduction of additional paid-in capital as of December 30, 2007.capital. The hedge transaction is expected to reduce the potential equity dilution upon conversion of the notes ifto the daily volume-weighted average price per share ofextent the Company’s common stock exceedsCompany exercises the strike price ofhedge to purchase shares from the hedge. Thehedge counterparties to deliver to converting noteholders. However, the warrants could have a dilutive effect on the Company’s earnings per share to the extent
F-22
that the price of the Company’s common stock during a given measurement period exceeds the strike price of the warrants.
Impact of the Adoption of Authoritative Guidance Related to Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
See Note 1 for a description of the Company’s adoption of authoritative guidance related to accounting for convertible debt instruments that may be settled in cash upon conversion. The following table summarizes
F-26
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the effects of this new guidance on the Company’s consolidated balance sheets as of January 3, 2010 and its consolidated statements of operations for the year ended January 3, 2010 (in thousands except per share data).
| January 3, 2010 | ||||
| Adjustments | ||||
| Assets: | ||||
| Prepaid expenses and other current assets | $ | (2,051 | ) | |
| Deferred tax assets, long-term portion | (38,135 | ) | ||
| Total assets | (40,186 | ) | ||
| Liabilities and Stockholders’ Equity: | ||||
| Current portion of long-term debt | (99,797 | ) | ||
| Conversion option subject to cash settlement | 99,797 | |||
| Stockholder’s equity | (40,186 | ) | ||
| Total liabilities and stockholders’ equity | (40,186 | ) | ||
| Year Ended | ||||
| January 3, 2010 | ||||
| Adjustments | ||||
| Income from operations | $ | — | ||
| Interest expense | (19,656 | )* | ||
| Other income (expense), net | 767 | |||
| Provision for income taxes | (7,691 | ) | ||
| Net income | (11,198 | ) | ||
| Net income per basic share | (0.09 | ) | ||
| Net income per diluted share | (0.08 | ) | ||
| * | These adjustments include only non-cash interest expense. Cash interest expense for the year ended January 3, 2010 totaled $2.4 million. |
In addition, we have included below reconciliations (in thousands, except per share data) between amounts reported in previous filings as of December 28, 2008 to the amounts reported in the current filing for the same period to reflect retroactive adjustments.
| December 28, 2008 | ||||||||||||
| Pre adoption | Adjustments | Post adoption | ||||||||||
| Assets: | ||||||||||||
| Prepaid expenses and other current assets | $ | 9,530 | $ | 4,624 | $ | 14,154 | ||||||
| Deferred tax assets, long-term portion | 93,603 | (47,361 | ) | 46,242 | ||||||||
| Other assets | 12,017 | (7,192 | ) | 4,825 | ||||||||
| Total assets | 1,377,100 | (49,929 | ) | 1,327,171 | ||||||||
| Liabilities and Stockholders’ Equity: | ||||||||||||
| Current portion of long-term debt | 399,999 | (123,110 | ) | 276,889 | ||||||||
| Conversion option subject to cash settlement | — | 123,110 | 123,110 | |||||||||
| Stockholder’s equity | 848,596 | (49,929 | ) | 798,667 | ||||||||
| Total liabilities and stockholders’ equity | 1,377,100 | (49,929 | ) | 1,327,171 | ||||||||
F-27
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Year Ended | ||||||||||||||||||||||||
| December 28, 2008 | December 30, 2007 | |||||||||||||||||||||||
| Pre adoption | Adjustments | Post adoption | Pre adoption | Adjustments | Post adoption | |||||||||||||||||||
| Income (loss) from operations | $ | 80,457 | $ | — | $ | 80,457 | $ | (301,201 | ) | $ | — | $ | (301,201 | ) | ||||||||||
| Interest expense | (3,991 | ) | (18,219 | )* | (22,210 | ) | (3,562 | ) | (14,735 | )* | (18,297 | ) | ||||||||||||
| Provision (benefit) for income taxes | 40,429 | (7,158 | ) | 33,271 | (10,426 | ) | (5,789 | ) | (16,215 | ) | ||||||||||||||
| Net income (loss) | 50,477 | (11,061 | ) | 39,416 | (278,359 | ) | (8,946 | ) | (287,305 | ) | ||||||||||||||
| Net income (loss) per basic share | 0.43 | (0.09 | ) | 0.34 | (2.57 | ) | (0.08 | ) | (2.65 | ) | ||||||||||||||
| Net income (loss) per diluted share | 0.38 | (0.08 | ) | 0.30 | (2.57 | ) | (0.08 | ) | (2.65 | ) | ||||||||||||||
| * | These adjustments include only non-cash interest expense. Cash interest expense for the year ended December 28, 2008 and December 30, 2007 totaled $2.6 million and $1.4 million, respectively. |
The new guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature. As the Company was unable to find any other comparable companies in industry and size with outstanding non-convertible public debt, the Company determined that senior, unsecured corporate bonds represent a similar liability to the convertible senior notes without the conversion option. To measure the fair value of the similar liability at February 16, 2007, the Company estimated an interest rate using assumptions that market participants would use in pricing the liability component, including market interest rates, credit standing, yield curves and volatilities, all of which are defined as Level 2 Observable Inputs. The estimated interest rate of 8.27% was applied to the convertible senior notes and coupon interest using a present value technique to arrive at the fair value of the liability component. The difference between the cash proceeds associated with the convertible debt and this estimated fair value of the liability component is recorded as an equity component. We classified a portion of the equity component as temporary equity measured as the excess of a) the amount of cash that would be required to be paid upon conversion over b) the current carrying amount of the liability-classified component. This amount is reflected within conversion option subject to cash settlement in the consolidated balance sheets.
As of December 28, 2008, the principal amount of the convertible senior notes was $400.0 million and the unamortized discount was $123.1 million resulting in a net carrying amount of the liability component of $276.9 million. As of January 3, 2010, the principal amount of the liability component was $390.0 million due to the conversion of $10.0 million of the notes during the first quarter of 2009. Upon conversion, the Company recorded a gain of $0.8 million in the first quarter of 2009, calculated as the difference between the carrying amount of the converted notes and their estimated fair value as of the settlement date. To measure the fair value of the converted notes as of the settlement date, the Company calculated an interest rate of 11.3% using Level 2 Observable Inputs. This rate was applied to the converted notes and coupon interest rate using the same present value technique used in the issuance date valuation. The unamortized discount on the remaining convertible senior notes as of January 3, 2010 was $99.8 million, resulting in a net carrying amount of $290.2 million. The remaining period over which the discount on the liability component will be amortized is 4.12 years.
F-28
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Commitments |
Operating Leases
The Company leases office and manufacturing facilities under various noncancellable operating lease agreements. Facilities leases generally provide for periodic rent increases, and many contain escalation clauses and renewal options. Certain leases require the Company to pay property taxes and routine maintenance. The Company is headquartered in San Diego, California and leases facilities in Hayward, California, Wallingford, Connecticut, the United Kingdom, theThe Netherlands, Japan, Singapore, Australia and Singapore.China.
Annual future minimum payments under these operating leases as of December 30, 2007January 3, 2010 were as follows (in thousands):
| 2008 | $ | 10,329 | ||||||
| 2009 | 7,550 | |||||||
| 2010 | 7,486 | $ | 11,668 | |||||
| 2011 | 7,669 | 12,393 | ||||||
| 2012 | 7,743 | 12,477 | ||||||
| 2013 and thereafter | 79,658 | |||||||
| 2013 | 11,907 | |||||||
| 2014 | 10,403 | |||||||
| Thereafter | 89,567 | |||||||
| Total | $ | 120,435 | $ | 148,415 | ||||
Rent expense, net of amortization of the deferred gain on sale of property, was $7.7$13.6 million, $4.7$10.7 million and $4.7$7.7 million for the years ended January 3, 2010, December 28, 2008 and December 30, 2007, December 31, 2006 and January 1, 2006, respectively.
| Stockholders’ Equity |
Common Stock
On August 12, 2008, a total of 8,050,000 shares were sold to employeesthe public at a public offering price of $43.75 per share, raising net proceeds to the Company of $342.7 million, after deducting underwriting discounts and consultants subject to restricted stock agreements. The restricted common shares vest in accordance withcommissions and offering expenses.
On January 3, 2010, the provisions of the agreements, generally over five years. As of December 30, 2007, 10,417Company had 119,475,815 shares of common stock were subject to repurchase. In addition, during 2005, the Company also issued 12,000 shares for a restricted stock award to an employee under the Company’s 2005 Stock and Incentive Plan based on service performance. These shares vest monthly over a three-year period. As part of the Solexa acquisition, the Company assumed 53,664 shares of restricted stock issued to an employee under the 2005 Solexa Equity Incentive Plan. These shares vest and become exercisable at the rate of 25% on the first anniversary of the date of grant and ratably on a quarterly basis over a period of 36 months thereafter.
F-23
Stock Options
Stock options granted at the time of hire primarily vest over a four or five-year period, with 20% or 25% of options vesting on the first anniversary of the grant date and the remaining options vesting monthly over the remaining vesting period. Stock options granted subsequent to hiring primarily vest monthly over a four or five-year period. Each grant of options has a maximum term of ten years, measured from the applicable grant date, subject to earlier termination if the optionee’s service with us ceases. Vesting in all cases is subject to
F-29
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the individual’s continued service to us through the vesting date. The Company satisfies option exercises through the issuance of new shares.
The Company’s stock option activity under all stock option plans from January 2, 20051, 2007 through December 30, 2007January 3, 2010 is as follows:
| Weighted- | Weighted- | |||||||||||||||
| Average | Average | |||||||||||||||
| Options | Exercise Price | Options | Exercise Price | |||||||||||||
| Outstanding at January 2, 2005 | 6,205,020 | $ | 6.99 | |||||||||||||
| Granted | 2,992,300 | $ | 10.02 | |||||||||||||
| Exercised | (869,925 | ) | $ | 4.66 | ||||||||||||
| Cancelled | (1,001,964 | ) | $ | 11.00 | ||||||||||||
| Outstanding at January 1, 2006 | 7,325,431 | $ | 7.96 | |||||||||||||
| Granted | 2,621,050 | $ | 27.24 | |||||||||||||
| Exercised | (1,273,119 | ) | $ | 7.28 | ||||||||||||
| Cancelled | (314,242 | ) | $ | 12.44 | ||||||||||||
| Outstanding at December 31, 2006 | 8,359,120 | $ | 13.94 | |||||||||||||
| Outstanding at January 1, 2007 | 16,718,240 | $ | 6.97 | |||||||||||||
| Options assumed through business combination | 1,424,332 | $ | 21.37 | 2,848,664 | $ | 10.69 | ||||||||||
| Granted | 3,784,508 | $ | 40.64 | 7,569,016 | $ | 20.32 | ||||||||||
| Exercised | (2,179,286 | ) | $ | 12.06 | (4,358,572 | ) | $ | 6.03 | ||||||||
| Cancelled | (964,740 | ) | $ | 22.38 | (1,929,480 | ) | $ | 11.19 | ||||||||
| Outstanding at December 30, 2007 | 10,423,934 | $ | 24.26 | 20,847,868 | $ | 12.13 | ||||||||||
| Granted | 3,091,108 | $ | 34.23 | |||||||||||||
| Exercised | (4,571,855 | ) | $ | 8.52 | ||||||||||||
| Cancelled | (1,232,917 | ) | $ | 19.93 | ||||||||||||
| Outstanding at December 28, 2008 | 18,134,204 | $ | 16.26 | |||||||||||||
| Granted | 1,560,024 | $ | 28.86 | |||||||||||||
| Exercised | (2,965,606 | ) | $ | 10.56 | ||||||||||||
| Cancelled | (639,184 | ) | $ | 14.88 | ||||||||||||
| Outstanding at January 3, 2010 | 16,089,438 | $ | 18.59 | |||||||||||||
F-24
| Weighted | ||||||||||||||||||||
| Weighted | Average | |||||||||||||||||||
| Average | Weighted | Exercise Price | ||||||||||||||||||
| Range of | Options | Remaining Life | Average | Options | of Options | |||||||||||||||
Exercise Prices | Outstanding | in Years | Exercise Price | Exercisable | Exercisable | |||||||||||||||
| $0.03-5.99 | 1,243,927 | 4.89 | $ | 4.48 | 788,144 | $ | 3.84 | |||||||||||||
| $6.00-8.52 | 1,213,703 | 6.30 | $ | 7.87 | 643,821 | $ | 7.65 | |||||||||||||
| $8.60-12.28 | 1,052,123 | 6.46 | $ | 9.49 | 597,737 | $ | 9.43 | |||||||||||||
| $12.30-20.97 | 1,714,245 | 7.62 | $ | 17.90 | 712,249 | $ | 17.51 | |||||||||||||
| $21.31-30.54 | 1,094,170 | 8.28 | $ | 26.89 | 353,553 | $ | 26.28 | |||||||||||||
| $30.55-35.68 | 1,070,526 | 9.02 | $ | 34.24 | 121,149 | $ | 34.93 | |||||||||||||
| $35.82-39.22 | 907,327 | 8.75 | $ | 38.95 | 140,801 | $ | 39.09 | |||||||||||||
| $39.42-40.08 | 1,267,250 | 9.08 | $ | 40.07 | 212,128 | $ | 40.08 | |||||||||||||
| $40.23-640.99(1) | 860,049 | 9.60 | $ | 49.93 | 15,576 | $ | 81.16 | |||||||||||||
| $3,123.55(1) | 614 | 2.15 | $ | 3,123.55 | 614 | $ | 3,123.55 | |||||||||||||
| $0.03-3,123.55 | 10,423,934 | 7.68 | $ | 24.26 | 3,585,772 | $ | 15.83 | |||||||||||||
| Weighted | ||||||||||||||||||||
| Weighted | Average | |||||||||||||||||||
| Average | Weighted | Exercise Price | ||||||||||||||||||
| Range of | Options | Remaining Life | Average | Options | of Options | |||||||||||||||
Exercise Prices | Outstanding | in Years | Exercise Price | Exercisable | Exercisable | |||||||||||||||
| $0.20-4.26 | 1,969,183 | 3.25 | $ | 3.36 | 1,602,420 | $ | 3.15 | |||||||||||||
| $4.30-6.85 | 1,676,898 | 4.99 | $ | 5.41 | 1,449,009 | $ | 5.31 | |||||||||||||
| $6.87-13.30 | 1,803,330 | 5.66 | $ | 10.75 | 1,312,461 | $ | 10.71 | |||||||||||||
| $13.43-17.58 | 1,624,453 | 6.90 | $ | 15.62 | 869,862 | $ | 15.58 | |||||||||||||
| $17.60-19.61 | 1,371,403 | 6.87 | $ | 18.74 | 718,826 | $ | 18.74 | |||||||||||||
| $19.71-20.04 | 1,888,561 | 6.96 | $ | 20.03 | 934,462 | $ | 20.04 | |||||||||||||
| $20.12-27.97 | 1,673,797 | 8.09 | $ | 24.38 | 496,340 | $ | 23.76 | |||||||||||||
| $28.03-32.49 | 2,197,532 | 8.20 | $ | 29.97 | 727,353 | $ | 30.49 | |||||||||||||
| $32.58-41.37 | 1,624,281 | 8.29 | $ | 35.05 | 650,680 | $ | 35.46 | |||||||||||||
| $42.02-44.38 | 260,000 | 8.58 | $ | 44.11 | 87,291 | $ | 44.09 | |||||||||||||
| $0.20-44.38 | 16,089,438 | 6.59 | $ | 18.59 | 8,848,704 | $ | 15.08 | |||||||||||||
The weighted average remaining life in years of options exercisable is 6.576.14 years as of December 30, 2007.January 3, 2010.
The aggregate intrinsic value of options outstanding and options exercisable as of December 30, 2007January 3, 2010 was $376.0$194.5 million and $161.2$107.0 million, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price per share on the last trading day of the fiscal period, which was $60.09$30.68 as
F-30
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of December 28, 2007,31, 2009, and the exercise price multiplied by the number of options outstanding. Total intrinsic value of options exercised was $72.1$73.4 million, $136.6 million and $34.0$72.1 million for the years ended January 3, 2010, December 28, 2008 and December 30, 2007, and December 31, 2006, respectively.
In February 2000, the board of directors and stockholders adopted the 2000 Employee Stock Purchase Plan (the Purchase Plan).ESPP. A total of 6,233,71315,467,426 shares of the Company’s common stock have been reserved for issuance under the Purchase Plan.ESPP. The Purchase PlanESPP permits eligible employees to purchase common stock at a discount, but only through payroll deductions, during defined offering periods.
The price at which stock is purchased under the Purchase PlanESPP is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. The initial offering period commenced in July 2000. In addition, beginning with fiscal 2001, the Purchase PlanESPP provides for annual increases of shares available for issuance by the lesser of 3% of the number of outstanding shares of the Company’s common stock on the last day of the immediately preceding fiscal year, 1,500,0003,000,000 shares or such lesser amount as determined by the Company’s board of directors. 133,481, 266,394Shares totaling 359,713, 276,198 and 717,164 shares266,962 were issued under the Purchase PlanESPP during fiscal 2007, 20062009, 2008 and 2005,2007, respectively. As of December 30, 2007,January 3, 2010, there were 4,035,18013,434,449 shares available for issuance under the Purchase Plan.
F-25
Restricted Stock Units
In 2007 the Company began granting restricted stock units pursuant to its 2005 Stock and Incentive Plan as part of its regular annualperiodic employee equity compensation review program. Restricted stock units are share awards that, upon vesting, will deliver to the holder shares of the Company’s common stock. Generally, restrictedRestricted stock units granted in the year ended December 30,during 2007 vest over four years as follows: 15% vest on the first and second anniversaries of the shares willgrant date, 30% vest one year fromon the datethird anniversary of the grant 15% will vest two years from the date of grant, 30% will vest three years from the date of grant, and 40% will vest four years fromon the fourth anniversary of the grant date. Effective January 2008, the Company changed the vesting schedule for grants of new restricted stock units. Currently, restricted stock units vest 15% on the first anniversary of the grant date, 20% on the second anniversary of grant.the grant date, 30% on the third anniversary of the grant date and 35% on the fourth anniversary of the grant date. The Company satisfies restricted stock units vesting through the issuance of new shares.
A summary of the Company’s restricted stock unit activity and related information in the fiscal year ended December 30,from January 1, 2007 through January 3, 2010 is as follows:
| Restricted Stock | ||||
| Outstanding at December | ||||
| Awarded | ||||
| Vested | ) | |||
| Cancelled | ( | ) | ||
| Outstanding at December | ||||
| Awarded | 1,292,473 | |||
| Vested | (246,055 | ) | ||
| Cancelled | (116,986 | ) | ||
| Outstanding at January 3, 2010 | 2,508,708 | |||
| (1) | Each stock unit represents the fair market value of one share of common stock. |
F-31
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted average grant-date fair value per share for the restricted stock units was $51.37$32.32 and $34.53 for the yearyears ended January 3, 2010 and December 28, 2008, respectively. No restricted stock units were outstanding as of December 30, 2007.
Based on the closing price per share of the Company’s common stock of $60.09$30.68 on December 28, 2007,31, 2009, the total pretax intrinsic value of all outstanding restricted stock units on that date was $11,852,752.
Warrants
In conjunction with its acquisition of Solexa, Inc. on January 26, 2007, the Company assumed 2,244,8434,489,686 warrants issued by Solexa prior to the acquisition. During the year ended December 30, 2007,January 3, 2010, there were 399,315954,376 warrants exercised, resulting in cash proceeds to the Company of approximately $6.1$7.6 million. As of December 30, 2007, 126,082January 3, 2010, 252,164 of the assumed warrants had expired.
A summary of all warrants outstanding as of December 30, 2007January 3, 2010 is as follows:
Number of Shares | Exercise Price | Expiration Date | ||||||
| 31,989 | $ | 57.62 | 9/24/2008 | |||||
| 119,255 | $ | 14.54 | 4/25/2010 | |||||
| 526,619 | $ | 14.54 | 7/12/2010 | |||||
| 404,623 | $ | 21.81 | 11/23/2010 | |||||
| 636,960 | $ | 21.81 | 1/19/2011 | |||||
| 18,322,320(1) | $ | 62.87 | 2/15/2014 | |||||
| 20,041,766 | ||||||||
Number of Shares | Exercise Price | Expiration Date | ||||||
| 16,380 | $ | 7.27 | 4/25/2010 | |||||
| 307,132 | $ | 7.27 | 7/12/2010 | |||||
| 732,230 | $ | 10.91 | 11/23/2010 | |||||
| 1,027,412 | $ | 10.91 | 1/19/2011 | |||||
| 18,322,320(1) | $ | 31.44 | 2/15/2014 | |||||
| 20,405,474 | ||||||||
| (1) | Represents warrants sold in connection with the offering of the Company’s |
F-26
Treasury Stock
In conjunction with its issuanceOctober 2008, the board of $400directors authorized a $120.0 million principal amount of 0.625% Convertible Senior Notes due 2014 on February 16, 2007,stock repurchase program. In fiscal 2008, the Company repurchased 5.83.1 million shares for $70.8 million under the program.
In July 2009, the board of its outstanding commondirectors authorized a $75.0 million stock repurchase program and concurrently terminated the $120.0 million stock repurchase program authorized in October 2008. In November 2009, upon the completion of the repurchase program authorized in July 2009, our board of directors authorized an additional $100.0 million stock repurchase program. In fiscal 2009, the Company repurchased a total of 6.1 million shares for approximately $201.6$175.1 million under both programs in open-market transactions or through privately negotiated transactions concurrentlyin compliance with the offering.
Stockholder Rights Plan
On May 3, 2001, the Boardboard of Directorsdirectors of the Company declared a dividend of one preferred share purchase right (a Right) for each outstanding share of common stock of the Company. The dividend was payable on May 14, 2001 (the Record Date) to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one unit consisting of one-thousandth of a share of its Series A Junior Participating Preferred Stock at a price of $100 per unit. The Rights will be exercisable if a person or group hereafter acquires beneficial ownership of 15% or more of the outstanding common stock of the Company or announces an offer for 15% or more of the outstanding common stock. If a person or group acquires 15% or more of the outstanding common stock of the Company, each Right will entitle its holder to purchase, at the exercise price of the right,Right, a number of shares of common stock having a market value of
F-32
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
two times the exercise price of the right.Right. If the Company is acquired in a merger or other business combination transaction after a person acquires 15% or more of the Company’s common stock, each Right will entitle its holder to purchase, at the Right’s then-current exercise price, a number of common shares of the acquiring company which at the time of such transaction have a market value of two times the exercise price of the right.Right. The Boardboard of Directorsdirectors will be entitled to redeem the Rights at a price of $0.01 per Right at any time before any such person acquires beneficial ownership of 15% or more of the outstanding common stock. The rightsRights expire on May 14, 2011 unless such date is extended or the rightsRights are earlier redeemed or exchanged by the Company.
F-27
F-28
F-29
| 11. | Income Taxes |
The income (loss) before income taxes summarized by region is as follows (in thousands):
| Year Ended | ||||||||||||
| January 3, | December 28, | December 30, | ||||||||||
| 2010 | 2008 | 2007 | ||||||||||
| United States | $ | 65,081 | $ | 46,205 | $ | 43,710 | ||||||
| Foreign | 49,044 | 26,482 | (347,230 | ) | ||||||||
| Total income (loss) before income taxes | $ | 114,125 | $ | 72,687 | $ | (303,520 | ) | |||||
The provision (benefit) for income taxes consists of the following (in thousands):
| Year Ended | Year Ended | Year Ended | Year Ended | |||||||||||||||||||||
| December 30, | December 31, | January 1, | January 3, | December 28, | December 30, | |||||||||||||||||||
| 2007 | 2006 | 2006 | 2010 | 2008 | 2007 | |||||||||||||||||||
| Current: | ||||||||||||||||||||||||
| Federal | $ | 18,564 | $ | 1,125 | $ | — | $ | 43,565 | $ | 13,868 | $ | 18,564 | ||||||||||||
| State | 4,801 | 1,177 | — | 2,511 | 2,134 | 4,801 | ||||||||||||||||||
| Foreign | (2,172 | ) | 903 | 105 | 6,204 | 5,042 | (2,172 | ) | ||||||||||||||||
| Total current provision | 21,193 | 3,205 | 105 | 52,280 | 21,044 | 21,193 | ||||||||||||||||||
| Deferred: | ||||||||||||||||||||||||
| Federal | (20,254 | ) | — | — | (14,607 | ) | 11,700 | (25,071 | ) | |||||||||||||||
| State | (11,622 | ) | — | — | 5,184 | 901 | (12,594 | ) | ||||||||||||||||
| Foreign | 257 | (553 | ) | 58 | (1,013 | ) | (374 | ) | 257 | |||||||||||||||
| Total deferred provision | (31,619 | ) | (553 | ) | 58 | (10,436 | ) | 12,227 | (37,408 | ) | ||||||||||||||
| Total tax provision (benefit) | $ | (10,426 | ) | $ | 2,652 | $ | 163 | $ | 41,844 | $ | 33,271 | $ | (16,215 | ) | ||||||||||
F-30F-33
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provision (benefit) for income taxes reconciles to the amount computed by applying the federal statutory rate to income (loss) before taxes as follows (in thousands):
| Year Ended | Year Ended | Year Ended | Year Ended | |||||||||||||||||||||
| December 30, | December 31, | January 1, | January 3, | December 28, | December 30, | |||||||||||||||||||
| 2007 | 2006 | 2006 | 2010 | 2008 | 2007 | |||||||||||||||||||
| Tax at federal statutory rate | $ | (101,075 | ) | $ | 14,945 | $ | (7,043 | ) | $ | 39,944 | $ | 25,440 | $ | (106,232 | ) | |||||||||
| State, net of federal benefit | (174 | ) | 767 | 633 | 4,275 | 3,461 | (10,304 | ) | ||||||||||||||||
| Alternative minimum tax | — | 1,125 | — | |||||||||||||||||||||
| Research and other credits | (4,981 | ) | (1,900 | ) | (1,239 | ) | (4,050 | ) | (4,060 | ) | (3,118 | ) | ||||||||||||
| Acquired in-process research & development | 106,190 | — | 5,372 | 4,386 | 9,508 | 116,916 | ||||||||||||||||||
| Adjustments to deferred tax balances | (690 | ) | (3,509 | ) | 2,952 | |||||||||||||||||||
| Change in valuation allowance | (17,125 | ) | (10,038 | ) | (1,138 | ) | (1,967 | ) | (6,892 | ) | (17,125 | ) | ||||||||||||
| Permanent differences | 1,229 | 818 | (226 | ) | 2,093 | 1,449 | 653 | |||||||||||||||||
| Foreign rate adjustments | 6,426 | 3 | (28 | ) | (5,400 | ) | 4,124 | 3,160 | ||||||||||||||||
| Other | (226 | ) | 441 | 880 | 2,563 | 241 | (165 | ) | ||||||||||||||||
| Total tax provision (benefit) | $ | (10,426 | ) | $ | 2,652 | $ | 163 | $ | 41,844 | $ | 33,271 | $ | (16,215 | ) | ||||||||||
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 30, | December 31, | January 1, | ||||||||||
| 2007 | 2006 | 2006 | ||||||||||
| United States | $ | 58,445 | $ | 42,612 | $ | (21,365 | ) | |||||
| Foreign | (347,230 | ) | 8 | 654 | ||||||||
| Total income (loss) before income taxes | $ | (288,785 | ) | $ | 42,620 | $ | (20,711 | ) | ||||
F-31
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
| December 30, | December 31, | January 3, | December 28, | |||||||||||||
| 2007 | 2006 | 2010 | 2008 | |||||||||||||
| Deferred tax assets: | ||||||||||||||||
| Net operating losses | $ | 34,277 | $ | 13,728 | $ | 15,869 | $ | 33,839 | ||||||||
| Tax credits | 11,465 | 10,831 | 18,681 | 19,139 | ||||||||||||
| Deferred revenue | 2,236 | 2,859 | ||||||||||||||
| Capitalized research and development costs | 2,018 | 1,290 | ||||||||||||||
| Accrued litigation settlements | 21,427 | — | ||||||||||||||
| Other accruals and reserves | 6,326 | 2,491 | 17,813 | 11,341 | ||||||||||||
| Stock compensation | 8,166 | 4,736 | 25,442 | 15,962 | ||||||||||||
| Convertible debt | 49,137 | — | ||||||||||||||
| Other, net | 8,068 | 2,592 | ||||||||||||||
| Inventory capitalization | 4,172 | 3,555 | ||||||||||||||
| Other amortization | 4,216 | 3,101 | ||||||||||||||
| Other | 10,808 | 6,612 | ||||||||||||||
| Total deferred tax assets | 143,120 | 38,527 | 97,001 | 93,549 | ||||||||||||
| Valuation allowance on deferred tax assets | (28,343 | ) | (36,458 | ) | (14,852 | ) | (15,200 | ) | ||||||||
| Net deferred tax assets | 114,777 | 2,069 | 82,149 | 78,349 | ||||||||||||
| Deferred tax liabilities: | ||||||||||||||||
| Property and equipment | (408 | ) | (1,516 | ) | ||||||||||||
| Net unrealized gain on investments | (106 | ) | (6,987 | ) | ||||||||||||
| Purchased intangible amortization | (7,084 | ) | — | (5,043 | ) | (5,985 | ) | |||||||||
| Accrued litigation settlements | (3,810 | ) | (11,084 | ) | ||||||||||||
| Convertible debt | (3,901 | ) | (4,905 | ) | ||||||||||||
| Other | (2,810 | ) | (1,498 | ) | ||||||||||||
| Total deferred tax liabilities | (7,598 | ) | (8,503 | ) | (15,564 | ) | (23,472 | ) | ||||||||
| Net deferred tax assets (liabilities) | $ | 107,179 | $ | (6,434 | ) | |||||||||||
| Net deferred tax assets | $ | 66,585 | $ | 54,877 | ||||||||||||
A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction by jurisdictionjurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. As of December 30, 2007, the Company has concluded that it is more likely than not that a significant portion of its deferred tax assets will be realized and, accordingly the Company released a portion of its valuation allowance, approximately $17.1 million of which was recorded as a reduction to the tax provision. Based uponon the available evidence as of December 30, 2007,January 3, 2010, the Company iswas not able to conclude it is more likely than not certain U.S. and foreign deferred tax assets will be realized. Therefore, the Company has
F-34
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recorded a valuation allowance of approximately $2.9$2.8 million and $25.4$12.1 million against certain U.S. and foreign net deferred tax assets, respectively.
As of December 30, 2007,January 3, 2010, the Company had net operating loss carryforwards for federal and state tax purposes of approximately $28.7$25.4 million and $99.1$132.1 million, respectively, which begin to expire in 20252012 and 20152013, respectively, unless previously utilized. In addition, the Company also had U.S. federal and state research and development tax credit carryforwards of approximately $9.2$16.0 million and $9.3$16.2 million, respectively, which begin to expire in 2018 and 2019, respectively, unless previously utilized.
As of December 30, 2007,January 3, 2010, the valuation allowance includes approximately $20.2$12.3 million of pre-acquisition foreign deferred tax assets of Solexa. ToIn accordance with the adoption of Topic 805 to the extent any of these assets are recognized in the future the adjustment will be applied first to reduce to zero any goodwill related to the acquisition, and thenrecorded as a reduction to the tax provision. During 2007, the Company recorded approximately $2.1 million as a
F-32
Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of the Company’s net operating lossesloss and credits may be subject to annual limitations in the event of any significant future changes in its ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization. PreviousThe deferred tax assets as of January 3, 2010 are net of any previous limitations due to Section 382 and 383 have been reflected in the deferred tax assets as of December 30, 2007.383.
Due to the adoption of SFAS No. 123R, the Company recognizes excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, the Company follows thewith-and-without approach excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to the Company. During 2007,2009, the Company realized approximately $20.1$39.3 million of such excess tax benefits, and accordingly recorded a corresponding credit to additional paid in capital. As of December 30, 2007,January 3, 2010, the Company has approximately $11.2$17.1 million of unrealized excess tax benefits associated with share-based compensation. These tax benefits will be accounted for as a credit to additional paid-in capital, if and when realized, rather than a reduction of the provision for income taxes.
The Company’s manufacturing operations in Singapore operate under various tax provision.holidays and incentives that begin to expire in 2018. For the year ended January 3, 2010, these tax holidays and incentives resulted in an approximate $2.3 million decrease to the provision for income taxes and an increase to net income per diluted share of $0.02.
Residual United StatesU.S. income taxes have not been provided on approximately $1.7$38.6 million of undistributed earnings of foreign subsidiaries as of December 30, 2007,January 3, 2010, since the earnings are considered to be permanentlyindefinitely invested in the operations of such subsidiaries.
The following table summarizes the gross amount of the Company’s uncertain tax positions (in thousands):
| Balance at January 1, 2007 | $ | 5,381 | ||
| Increases related to current year tax positions | 1,619 | |||
| Increase of uncertain tax positions resulting from Solexa acquisition | 14,376 | |||
| Balance at December 30, 2007 | $ | 21,376 | ||
| January 3, | December 28, | December 30, | ||||||||||
| 2010 | 2008 | 2007 | ||||||||||
| Balance at beginning of year | $ | 9,402 | $ | 7,000 | $ | 5,381 | ||||||
| Increases related to current year tax positions | 2,358 | 2,402 | 1,619 | |||||||||
| Balance at end of year | $ | 11,760 | $ | 9,402 | $ | 7,000 | ||||||
During 2009 the Company determined that $14.4 million of previously reported uncertain tax positions, which related to pre-acquistion net operating loss carryforwards of Solexa, were not uncertain as of the Solexa acquisition in January 2007. Accordingly, the uncertain tax position balances that were previously reported have been reduced by $14.4 million to correctly present the uncertain tax position balances.
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ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 30, 2007, approximately $5.8January 3, 2010, $9.6 million of the Company’s uncertain tax positions would reduce the Company’s annual effective tax rate, if recognized.
The Company does not expect its uncertain tax positions to change significantly over the next 12 months. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense. As of December 30, 2007,January 3, 2010, no interest or penalties have been accrued related to the Company’s uncertain tax positions. Tax years 19981995 to 20072009 remain subject to future examination by the major tax jurisdictions in which the Company is subject to tax.
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| 12. |
Retirement Plan
The Company has a 401(k) savings plan covering substantially all of its employees. Company contributions to the plan are discretionary. During the years ended January 3, 2010, December 28, 2008 and December 30, 2007, December 31, 2006, and January 1, 2006, the Company made matching contributions of $3.3 million, $2.6 million and $1.4 million, $0.4 million,respectively.
Executive Deferred Compensation Plan
For the Company’s executives and $0, respectively.members of the board of directors, the Company adopted the Illumina, Inc. Deferred Compensation Plan (the Plan) that became effective January 1, 2008. Eligible participants can contribute up to 80% of their base salary and 100% of all other forms of compensation into the Plan, including bonus, commission and director fees. The Company has agreed to credit the participants’ contributions with earnings that reflect the performance of certain independent investment funds. On a discretionary basis, the Company may also make employer contributions to participant accounts in any amount determined by the Company. The vesting schedules of employer contributions are at the sole discretion of the Compensation Committee. However, all employer contributions shall become 100% vested upon the occurrence of the participant’s disability, death or retirement or a change in control of the Company. The benefits under this plan are unsecured. Participants are generally eligible to receive payment of their vested benefit at the end of their elected deferral period or after termination of their employment with the Company for any reason or at a later date to comply with the restrictions of Section 409A. As of January 3, 2010, no employer contributions were made to the Plan.
In January 2008, the Company also established a rabbi trust for the benefit of its directors and executives under the Plan. In accordance with authoritative guidance related to consolidation of variable interest entities and accounting for deferred compensation arrangements where amounts earned are held in a rabbi trust and invested, the Company has included the assets of the rabbi trust in its consolidated balance sheet since the trust’s inception. As of January 3, 2010, the assets of the trust and liabilities of the Company were $4.0 million. The assets and liabilities are classified as other assets and accrued liabilities, respectively, on the Company’s balance sheet as of January 3, 2010. Changes in the values of the assets held by the rabbi trust accrue to the Company.
| 13. | Segment Information, Geographic Data and Significant Customers |
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ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accordance with SFAS No. 131,Disclosuresauthoritative guidance for disclosures about Segmentssegments of an Enterpriseenterprise and Related Information,related information, the Company operated in one reportable segment for the fiscal year ended December 30, 2007. Beginning January 2008, the Company will have two reportable segments including the Life Sciences Business Unit and the Diagnostics Business Unit.3, 2010.
The Company had revenue in the following regions for the years ended January 3, 2010, December 28, 2008 and December 30, 2007 December 31, 2006 and January 1, 2006 (in thousands):
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 30, | December 31, | January 1, | ||||||||||
| 2007 | 2006 | 2006 | ||||||||||
| United States | $ | 207,692 | $ | 103,043 | $ | 45,480 | ||||||
| Europe | 109,556 | 55,440 | 17,551 | |||||||||
| Asia | 35,155 | 15,070 | 6,850 | |||||||||
| Other | 14,396 | 11,033 | 3,620 | |||||||||
| Total | $ | 366,799 | $ | 184,586 | $ | 73,501 | ||||||
| Year Ended | ||||||||||||
| January 3, | December 28, | December 30, | ||||||||||
| 2010 | 2008 | 2007 | ||||||||||
| United States | $ | 347,195 | $ | 280,064 | $ | 207,692 | ||||||
| United Kingdom | 55,854 | 67,973 | 34,196 | |||||||||
| Other European countries | 140,931 | 127,397 | 75,360 | |||||||||
| Asia-Pacific | 96,396 | 72,740 | 35,155 | |||||||||
| Other markets | 25,948 | 25,051 | 14,396 | |||||||||
| Total | $ | 666,324 | $ | 573,225 | $ | 366,799 | ||||||
Net revenues are attributable to geographic areas based on the region of destination.
The majority of our product sales consist of consumables and instruments. For the years ended January 3, 2010, December 28, 2008 and December 30, 2007, consumable sales represented 59%, 58% and 53%, respectively, of total revenues and instrument sales comprised 34%, 32%, and 33%, respectively, of total revenues. Our customers include leading genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations and biotechnology companies. The Company had no customers that provided more than 10% of total revenue in the years ended January 3, 2010, December 28, 2008 and December 30, 2007, December 31, 2006 and January 1, 2006.2007.
| Year Ended | Year Ended | |||||||
| December 30, | December 31, | |||||||
| 2007 | 2006 | |||||||
| United States | $ | 311,686 | $ | 27,505 | ||||
| Europe | 21,175 | 133 | ||||||
| Asia | 263 | 229 | ||||||
| Other | — | — | ||||||
| Total | $ | 333,124 | $ | 27,867 | ||||
| January 3, | December 28, | |||||||
| 2010 | 2008 | |||||||
| United States | $ | 75,095 | $ | 65,630 | ||||
| United Kingdom | 27,862 | 9,849 | ||||||
| Other European countries | 864 | 1,055 | ||||||
| Singapore | 12,599 | 12,586 | ||||||
| Other Asia-Pacific countries | 768 | 316 | ||||||
| Total | $ | 117,188 | $ | 89,436 | ||||
F-34F-37
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 14. | Quarterly Financial Information (unaudited) |
The following financial information reflects all normal recurring adjustments, except as noted below, which are, in the opinion of management, necessary for a fair statement of the results and cash flows of interim periods. All quarters for 2008 and 2009 were 13 weeks except for the fourth quarter 2009, which was 14 weeks. Summarized quarterly data for fiscal 20072009 and 20062008 are as follows (in thousands except per share data):
| First Quarter(1) | Second Quarter | Third Quarter | Fourth Quarter(2),(3) | |||||||||||||
| 2007: | ||||||||||||||||
| Total revenue | $ | 72,150 | $ | 84,535 | $ | 97,510 | $ | 112,604 | ||||||||
| Total cost of revenue | 25,120 | 30,141 | 37,078 | 40,097 | ||||||||||||
| Net income (loss) | (298,076 | ) | 9,264 | 14,503 | (4,050 | ) | ||||||||||
| Net income (loss) per share, basic | (5.58 | ) | 0.17 | 0.27 | (0.07 | ) | ||||||||||
| Net income (loss) per share, diluted | (5.58 | ) | 0.16 | 0.24 | (0.07 | ) | ||||||||||
| 2006: | ||||||||||||||||
| Total revenue | $ | 29,102 | $ | 41,577 | $ | 53,472 | $ | 60,435 | ||||||||
| Total cost of revenue | 9,293 | 13,576 | 16,356 | 20,119 | ||||||||||||
| Net income (loss) | (104 | ) | 6,768 | 16,162 | 17,142 | |||||||||||
| Net income (loss) per share, basic | (0.00 | ) | 0.16 | 0.35 | 0.37 | |||||||||||
| Net income (loss) per share, diluted | (0.00 | ) | 0.14 | 0.32 | 0.34 | |||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| 2009: | ||||||||||||||||
| Total revenue | $ | 165,757 | $ | 161,643 | $ | 158,360 | $ | 180,564 | ||||||||
| Total cost of revenue (excluding impairment of manufacturing equipment and amortization of intangible assets) | 54,022 | 48,815 | 49,564 | 53,368 | ||||||||||||
| Net income | 18,811 | 24,688 | 17,077 | 11,705 | ||||||||||||
| Net income per share, basic | 0.15 | 0.20 | 0.14 | 0.10 | ||||||||||||
| Net income per share, diluted | 0.14 | 0.18 | 0.12 | 0.09 | ||||||||||||
| 2008: | ||||||||||||||||
| Total revenue | $ | 121,861 | $ | 140,177 | $ | 150,260 | $ | 160,927 | ||||||||
| Total cost of revenue (excluding amortization of intangible assets) | 46,081 | 50,459 | 54,430 | 54,654 | ||||||||||||
| Net income (loss)(1) | 10,743 | 12,659 | (10,078 | ) | 26,092 | |||||||||||
| Net income (loss) per share, basic(1) | 0.10 | 0.11 | (0.08 | ) | 0.21 | |||||||||||
| Net income (loss) per share, diluted(1) | 0.08 | 0.09 | (0.08 | ) | 0.20 | |||||||||||
| (1) | ||
F-35F-38
F-36
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 30, 2007
| Allowance | ||||||||
| for Doubtful | Reserve for | |||||||
| Accounts | Inventory | |||||||
| (In thousands) | ||||||||
| Balance as of January 2, 2005 | $ | 146 | $ | 1,038 | ||||
| Charged to expense | 167 | 304 | ||||||
| Utilizations | — | (247 | ) | |||||
| Balance as of January 1, 2006 | 313 | 1,095 | ||||||
| Charged to expense | 179 | 127 | ||||||
| Utilizations | (154 | ) | (372 | ) | ||||
| Balance as of December 31, 2006 | 338 | 850 | ||||||
| Acquired through business acquisition | — | 439 | ||||||
| Charged to expense | 237 | 1,863 | ||||||
| Utilizations | (35 | ) | (1,063 | ) | ||||
| Balance as of December 30, 2007 | $ | 540 | $ | 2,089 | ||||
| Balance at | Additions Charged | |||||||||||||||
| Beginning of | to Expense/ | Balance at End of | ||||||||||||||
| Period | Revenue(1) | Deductions(2) | Period | |||||||||||||
| (In thousands) | ||||||||||||||||
| Year ended January 3, 2010 | ||||||||||||||||
| Allowance for doubtful accounts | $ | 1,138 | 828 | (568 | ) | $ | 1,398 | |||||||||
| Reserve for inventory | 6,431 | 8,403 | (4,237 | ) | 10,597 | |||||||||||
| Year ended December 28, 2008 | ||||||||||||||||
| Allowance for doubtful accounts | $ | 540 | 893 | (295 | ) | $ | 1,138 | |||||||||
| Reserve for inventory | 2,089 | 7,154 | (2,812 | ) | 6,431 | |||||||||||
| Year ended December 30, 2007 | ||||||||||||||||
| Allowance for doubtful accounts | $ | 338 | 237 | (35 | ) | $ | 540 | |||||||||
| Reserve for inventory | 850 | 2,302 | (1,063 | ) | 2,089 | |||||||||||
| (1) | Additions to the allowance for doubtful accounts and reserve for inventory are charged to selling, general and administrative expense and cost of product revenue respectively. | |
| (2) | Deductions for allowance for doubtful accounts and reserve for inventory are for accounts receivable written off and disposal of obsolete inventory. |
F-37F-39