UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | For the fiscal year ended December 28, 2008January 2, 2011 |
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)
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Delaware | | 33-0804655 |
(State or other Jurisdiction of
Incorporation or Organization) | | (I.R.S. Employer
Identification No.) |
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9885 Towne Centre Drive, | | |
San Diego, California
| | 92121
(zip code) |
(Address of Principal Executive Offices) | | (zip code) |
Registrant’s telephone number, including area code:
(858) 202-4500
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | | Name of Exchange on Which Registered |
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Common stock,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:
None
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 þ 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” in Rule12b-2 of the Exchange Act. (Check one):
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| 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 2, 2009,4, 2011, there were 121,077,875127,626,004 shares (excluding 17,927,98324,868,929 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 27, 2008July 4, 2010 (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 $4,849,118,890.$3,554,527,753. This amount excludes an aggregate of 2,556,09841,715,009 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 8, 200910, 2011 are incorporated by reference into Items 10 through 14 of Part III of this Report.
ILLUMINA, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2008
JANUARY 2, 2011
TABLE OF CONTENTS
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PART ISpecial Note Regarding Forward-Looking Statements
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:
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| • | statements concerning our expectations as to our future financial performance, results of operations, or other operational results or metrics; |
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| • | statements concerning the benefits that we expect will result from our business activities and certain transactions we have completed, such as product introductions, increased revenue, decreased expenses, and avoided expenses and expenditures; and |
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| • | 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 of 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:
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| • | our ability to develop and commercialize further our sequencing, BeadArraytm, VeraCode®, Ecotm, and reagents technologies and to deploy new sequencing, genotyping, gene expression, and diagnostics products and applications for our technology platforms; |
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| • | our ability to manufacture robust instrumentation and consumables; |
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| • | 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 |
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| • | 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.
Illumina®, Array of Arraystm, BeadArraytm, BeadXpress®, CSPro®, DASL®, GoldenGate®, Genome Studiotm, 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.
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 reasonably practicable after filing with, or furnishing to, the Securities and Exchange Commission (SEC).SEC. The SEC also maintains an Internet site atwww.sec.govthat contains reports, proxy and information statements, and other information regarding issuers
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that electronically file with the SEC. Copies of our annual report onForm 10-Kwill be made available, free of charge, upon written request.
Illumina®, Ampligase®, Array of Arraystm, BeadArraytm, BeadXpress®, CSPro®, DASL®, DuraScribe®, DuraScript®, Ecotm, EPICENTRE®, Genetic Energytm, GoldenGate®, GoldenGate Indexingtm, GenomeStudio®, illuminaDxtm, HiScantm, HiSeqtm, Infinium®, IntelliHyb®, iSelect®, Making Sense Out of Life®, MiSeqtm, Oligator®, Sentrix®, Solexa®, TruSeqtm, and VeraCode® are certain of 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
Overview
We are a leading developer, manufacturer, and marketer of life science tools and 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 genetic analysis solutions, with products and services that currently serve thea broad range of highly interconnected markets, including sequencing, genotyping, and gene expression, markets. In the future, we expect to enter the market forand molecular diagnostics. Our customers include leading genomic research centers, pharmaceutical companies, academic institutions, government laboratories, and clinical research organizations, as well as pharmaceutical, biotechnology, agrigenomics, and biotechnologyconsumer genomics companies.
Our broad portfolio of systems, consumables, and analysis tools provide researchers around the world with the performance, throughput, cost effectivenessare designed to simplify genetic analysis. This portfolio addresses a range of genomic complexity, price points, and flexibility necessary to perform the billions of genetic tests needed to extract valuable medical information from advances in genomics and proteomics. We believe this information will enablethroughputs, enabling 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 drugsselect the best solution for individual patients.
On January 26,their scientific challenge. In 2007, we completed thethrough our acquisition of Solexa, Inc. (Solexa) for 26.2 million shares, we acquired our proprietary sequencing by synthesis (SBS) technology that is at the heart of our common stock. As a result of that acquisition, we develop and commercializeleading-edge sequencing technologiesinstruments. These systems can be used to
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efficiently perform a range of nucleic acid (DNA, RNA) analyses including whole genome re-sequencing,on large numbers of samples. For more focused studies, our array-based solutions provide ideal tools to perform genome-wide association studies (GWAS) involving single-nucleotide polymorphism (SNP) genotyping and copy number variation (CNV) analyses, as well as gene expression profiling, and other DNA, RNA, and protein studies. To further enhance our genetic analysis workflows, in January 2011 we acquired Epicentre Technologies Corporation, a leading provider of nucleic acid sample preparation reagents and small RNA analysis. We believe we are the only company with genome-scale technologyspecialty enzymes for sequencing genotyping and gene expression,microarray applications. In 2010, through our acquisition of Helixis, Inc., we expanded our portfolio to include real-time polymerase chain reaction (PCR), one of the three cornerstones of modern genetic analysis.most widely used technologies in life sciences. Our new Eco Real-Time PCR System provides researchers with an affordable, full-featured system to perform targeted validation studies.
During the first quarter of 2008, we reorganized ourOur operating structure is divided into two newly created business segments, the Life Sciences Business Unit and Diagnostics.the Diagnostics Business Unit. During 2008, the2010, our Diagnostics Business Unit had limited business activity and, accordingly, operating results werefor both units are reported on an aggregate basis as one operating segment. In the future, atAt each reporting period end, we will reassess our reportable operating segments, particularly as we entercontinue to develop our molecular diagnostics business.
Industry Background
Genetics Primer
The instruction set for all living cells is encoded in deoxyribonucleic acid, or DNA, with the complete set of DNA for any organism referred to as its genome. DNA contains small regions called genes, which comprise a string of nucleotide bases labeled A, C, G, and T, representing adenine, cytosine, guanine, and thymine, respectively. These nucleotide bases are present in a precise order known as the DNA sequence. When a gene is “expressed,” a partial copy of its DNA sequence — called messenger RNA (mRNA) — is used as a template
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to direct the synthesis of a protein. Proteins in turn, direct all cellular function. The illustration below is a simplified gene expression schematic.
Variations among organisms are due in large part to differences in their DNA sequences. Changes caused by insertions, deletions, inversions, or duplications of nucleotide bases may result in certain genes becoming over-expressed (excessive protein production), under-expressed (reduced protein production), or silenced altogether, sometimes triggering changes in cellular function. These changes can be the result of heredity, but most often occur at random. The most common form of variation in humans is called a single-nucleotide polymorphism (SNP), which is a variation in a single position of a nucleotide base in a DNA sequence. Copy number variations (CNVs) occur when there are fewer or more copies of certain genes.
In humans, genetic variation accounts for many of the physical differences we see (height, hair, eye color, etc.). More importantly, these genetic variations can have medical consequences affecting disease susceptibility, including predisposition to complex genetic diseases such as cancer, diabetes, cardiovascular disease, and Alzheimer’s disease. They can also impact an individual’s response to certain drug treatments, causing them to respond well, not respond at all, or experience adverse side effects — an area of study known as pharmacogenomics.
Scientists are studying these variations and their consequences in humans, as well as a broad range of animals, plants, and microorganisms. Researchers investigating human, viral, and bacterial genetic variation are helping us to better understand the mechanisms of disease and develop more effective therapeutics and diagnostics. Greater insight into genetic variation in plants (e.g., food and biofuel crops) and animals (e.g., livestock and domestic animals) is enabling scientists to improve crop yields and animal breeding programs.
The methods for studying genetic variation and biological function include sequencing, SNP genotyping, CNV analysis, gene expression profiling, and gene regulation analysis, each of which is addressed by our breadth of products and services.
Life Sciences Research Primer
Life science research encompasses the study of all living things, from humans, animals, and plants, to viruses and bacteria. It is being performed in government, university, pharmaceutical, biotechnology, and agrigenomics laboratories around the world, where scientists are seeking to expand our knowledge of the biological functions essential for life. Beginning at the genetic level, where our tools are used to elucidate the correlation between gene sequence and biological processes, life science research expands to include the study of the cells, tissues, organs, systems, and other components that make up living organisms. This research
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supports development of new, more effective clinical diagnostics and medicines to improve human health, as well as advances in agriculture and animal husbandry to meet the world’s growing needs for food and energy.
Molecular Diagnostics Primer
Molecular diagnostic assays (or tests) are designed to identify the biological indicators linked with disease and drug metabolism, providing physicians with information to more effectively diagnose, treat, and monitor both acute and chronic disease conditions. They are an integral part of personalized healthcare, where the unique makeup of each individual will be taken into account in diagnosing disease and managing treatment through the use of more tailored therapies. Biological indicators that can be measured by these assays include protein or gene expression, methylation levels, copy number variations, and the presence or absence of a specific gene or group of genes.
There are molecular diagnostic assays on the market for infectious disease, cancer, and heart disease, as well as molecular-based drug metabolism assays to help physicians select the most effective therapy with the fewest side effects. Our innovative technologies and products are contributing to the development of a wide-range of potential molecular diagnostic assays. Our own efforts in this area are currently focused on the identification of certain genetic markers with potential diagnostic and therapeutic utility.
Growing news coverage about the clinical relevance of newly discovered genetic markers has prompted consumers’ interest in having their personal genomes analyzed, sparking the development of the consumer genomics market. We believe there are distinct medical benefits, especially for people with family histories of certain diseases, of knowing your disease predisposition. Several companies, including Illumina, now offer personal sequencing or genotyping services, working with physician groups and genetic counselors to interpret the results for consumers.
We believe the growth in consumer genomics and the use of molecular diagnostic assays will trigger a fundamental shift in the practice of medicine and the economics of the pharmaceutical industry by facilitating an increased emphasis on preventative and predictive molecular medicine, ushering in the era of personalized medicine.
Our Principal Markets
From the company’s 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 advance disease research, drug development, and the creation of molecular tests. In addition to developing sequencing- and array-based solutions for life science, applied, and consumer genomics markets, we are making inroads into the emerging market of molecular diagnostics.
On August 1, 2008, we completed the acquisition of Avantome, Inc. (Avantome). As consideration for the acquisition, we paid $25.8 million in cash and may pay up to an additional $35.0 million in contingent cash consideration based on the achievement of certain milestones. Avantome is a development stage company working on developing low-cost, long read sequencing technology. We expect this technology, if and when available as a product, to have applicability to both the research and diagnostic markets.
Our StrategyLife Sciences Research Market
Our goal is to makeThe life sciences research market consists of laboratories generally associated with universities, medical research centers, government institutions, as well as biotechnology and pharmaceutical companies. Researchers at these institutions are using our Genome Analyzer, BeadArray and BeadXpress platforms the industry standards for products and services addressing the genetic analysis markets. We plan to achieve this by:
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Our Markets
Our current technologies serve three primary markets:in a broad spectrum of scientific activities, such as: next-generation sequencing,mid-to-high-complexity microarrays for genotyping and gene expression (for whole-genome discovery and the “applied markets,” the majority of which are comprised of agricultural research. Next-generationprofiling), and low complexity genotyping and gene expression (for high-throughput targeted screening). DNA sequencing is growing the most rapidly growing ofamong these three markets.areas due to the creation of next-generation sequencing technologies, such as SBS. 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 basedsequencing-based technologies. We believe our DNA sequencing systems, coupled with complementary technologies from strategic investments, including the acquisition of Avantome and our collaborative alliance with Oxford Nanopore Technologies will enable us to address numerous market segments with innovative solutions.
In 2009,Applied Markets
We provide products and services for various other markets, which we expectrefer to enteras “applied markets.” The largest among these is the “Agbio” market, where government and corporate researchers use our sequencing- and array-based tools to accelerate and enhance agricultural research. For example, we currently offer
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microarrays that contain SNPs for molecular diagnostics. The molecular diagnosticcustom and focused genotyping of seeds and crops (such as maize) and livestock (such as cattle, horses, pigs, and sheep). Customers use them to perform selective breeding, accelerating and enhancing the process over traditional methods such as cross-breeding.
Molecular Diagnostics Market
Molecular diagnostics makes up the fastest growing segment in the clinical diagnostics market, is currently estimated at nearly $3 billion with the potential to grow to over $5 billion by 2012. This market assessment covers regulated assays and reagents, and does not factor in laboratory-developed tests, which account for a significant portion of the total market. The primary growth drivers in the molecular diagnostics market arebeing the continued discovery of genetic markers with proven clinical utility, the increasing adoption of genetic basedgenetic-based diagnostic tests, and the expansion of reimbursement programs to include a greater number of approved molecular diagnostic tests. We believe our VeracodeBeadXpress instrument platform, using our VeraCode technology, platform is ideally suited to provide a cost-effective, high-throughput, mid- to low-multiplex solution to the molecular diagnostic market. We are planning to submitIn April 2010, we obtained 510(K) approval for the BeadXpress platform for review byfrom the U.S. Food and Drug Administration (FDA). We have initiated development of a variety of clinical diagnostic testing panels for this platform and are continuing research into the potential development of cancer diagnostic panels, initially focusing on ovarian, gastric, and colorectal cancers. During the fourth quarter of 2009, we made an FDA pre-IDE (investigational device exemption) submission for a cytogenetics test intended to be used on our iScan instrument platform as an aid in 2009.
Industry Backgroundthe postnatal diagnosis of chromosomal abnormalities known to be associated with developmental delay and mental retardation. Following completion of the required clinical trial, we intend to seek FDA clearance for the iScan instrument platform and related consumables.
Genetic Variation and Biological FunctionConsumer Genomics Markets
Every person inherits two copiesNew sequencing and genotyping technologies, such as those developed by Illumina, are driving down the cost of each gene,performing analyses which are increasingly valuable in diagnosing disease and evaluating disease risk. Consumer genomics is a nascent market, but one from each parent. The two copieswe believe has the potential for high growth as the cost per analysis continues to drop. In June 2009, we launched our Individual Genome Sequencing Service, the first physician-intermediated personal genome sequencing service for consumers. Built around physician-patient consultation, the service requires a physician’s order to initiate the process, with genome sequencing performed using our CLIA-certified, CAP-accredited laboratory. We have established collaborations with partners to perform the secondary data analysis of each gene may be identical, or they may be different. These differencesa personal genome (such as calculation of disease risk, ancestry, and information on traits of interest). Some of our partners, as well as other companies in thedirect-to-consumer market, use our genotyping technology and products to perform personal genotyping services.
Our Principal Technologies
Our unique technology platforms enable the scale of experimentation necessary for genome-wide discovery, target selection, and validation studies (see Figure 1 below). More than 2,500 customer-authored scientific publications have been published to date using these technologies, representing the efforts of a large and dynamic Illumina user community. Through rapid innovation, we believe we are referred to as genetic variation. Examples ofchanging the physical consequenceseconomics of genetic variation include differences in eye and hair color. Genetic variation can also have important medical consequences. Genetic variation affects disease susceptibility, including predispositionresearch, enabling projects once considered unapproachable to now be within reach of more investigators.
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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 in a DNA sequence. It is estimated that the human genome contains over ten million SNPs.Figure 1: Illumina Platform Overview:
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 common 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, 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).
Sequencing
DNA sequencing is the process of determining the order of bases (A, C, G or T) in a DNA sample, which can be further divided intode novosequencing, re-sequencing and tag sequencing. Inde novosequencing, 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 samples from a given species is determined and compared to a standard or reference sequence 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 study), 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 which 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.
SNP Genotyping
SNP genotyping is the process of determining which 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 association 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 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
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SNPs requires the analysis of millions of SNP genotypes and the testing of large populations for each disease. For example, a single large study could involve genotyping more than 1,000,000 SNPs per patient in more than 1,000 patients, thus requiring 1 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 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 characteristics. These markets will require billions of SNP genotyping assays annually.
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 Technologies
Sequencing Technology
DNA sequencing is the process of determining the order of nucleotide bases (A, C, G, or T) in a DNA sample. Our HiSeq 2000, HiSeq 1000, Genome Analyzer IIx, and HiScanSQ systems represent a family of systems that we believe are setting the standard for productivity, cost-effectiveness, and accuracy among next-generation sequencing technologies. They are used by customers to perform whole-genome, de novo, and targeted re-sequencing of genomes, and to analyze specific gene regions and genes. In January 2011, we announced the MiSeq Personal Sequencing System, which will expand our family of sequencing systems to include a low-cost personal sequencing system that will provide individual researchers a sequencing platform that can go from purified DNA to analyzed data in as few as eight hours or can generate in excess of 1 gigabase (Gb) per run in slightly over a day.
Whole-genome sequencing determines an organism’s complete DNA sequence. In de novo sequencing, the goal is to sequence a representative sample from a species never before sequenced. In targeted re-sequencing, a sequence of nucleotide bases is compared to a standard or reference sequence from a previously sequenced species to identify changes that reflect genetic variation. Understanding the similarities and differences in DNA sequence between and within species furthers our understanding of the function of the structures encoded in the DNA.
Our DNA sequencing technology acquired as part of the Solexa merger in the first quarter of 2007, is based on the use of oursequencing-by-synthesis proprietary reversible terminator-based sequencing chemistry, referred to as sequencing by synthesis (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 whichthat 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 whichthat is added includes a fluorescent label whichthat is specific to the particular base. Thus followingbase (A, C, G, or T). Following incorporation, the fluorescenceemitted light can be imaged to determine its color determined, and thus determine the base itself can be inferred.base. Once this is done, an additional step removes both the fluorescence and the blocking group that had prevented further extension of the second
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strand. This allows another base to be added, and the cycle can then be repeated. Our technology is capable of generating severalover 600 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 which we manufacture. They are not well incorporated by naturally occurring polymerases, so we have also developed proprietary polymerase enzymes for this purpose. BothKey aspects of the nucleotides and enzymesSBS chemistry are the subject of significant intellectual property owned by us.
In our DNA sequencing systems, we apply the SBS biochemistry on microscopic islandsclusters of DNA, referred to as DNA clusters.DNA. 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 500 toapproximately 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, tenshundreds of millions of clusters can be independently formed inside a single flow cell. This
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large number of clusters can then be sequenced simultaneously by alternate cycles of SBS biochemistry and fluorescent imaging. Sequence reads are analyzed using specially developed data analysis software.
With the ability to generate over 600 Gb of DNA sequence per run, our SBS sequencing technology provides researchers with the broadest range of applications and the opportunity to sequence even large mammalian genomes in days rather than weeks or years. Since the launch of our first Genome Analyzer in 2007, our systems have reduced the cost of sequencing by more than a factor of 100.
BeadArray Technology
Our BeadArray technology combines microscopic beads and a substrate in a simple proprietary manufacturing process to produce arrays that can perform many assays simultaneously, enabling large-scale analysis of genetic variation and biological function in a unique high-throughput, cost effective, and flexible manner. We achieve high-throughput with a high density of test sites per array and we are able to formatThe arrays either in a pattern arranged to match the wells of standard microtiter plates or in various configurations in the format of standard microscope slides. We seek to maximize cost effectiveness by reducing consumption of expensive reagents and valuable samples, and through the low manufacturing costs associated with our technologies. Our ability to vary the size, shape and format of the well patterns and to create specific bead pools, or sensors, for different applications provides the flexibility to address multiple markets and market segments. We believe that these features have enabled ourmanufactured using BeadArray technology to becomeare imaged by our iScan and HiScanSQ systems for a leading platform for the high-growth marketbroad range of DNA and RNA analysis applications including SNP discovery, SNP genotyping, and have allowed us to be a key player in theCNV analysis, gene expression market.analysis, and methylation analysis.
Our proprietary BeadArray technology consists of preparedmicroscopic silica beads, each bead covered with hundreds of thousands of copies of oligonucleotides, or oligos, that self-assemble into microwells etched into an array substrate.act as the capture sequences in one of our assays. We have deployeddeploy our BeadArray technology in two different array formats,on BeadChips; silicon wafers the Array Matrix and the BeadChip. Our first bead based product was the Array Matrix which incorporates fiber optic bundles. Each bundle is comprisedsize of approximately 50,000 individual fibers and 96 of these bundles are placed into an aluminum plate to form an Array Matrix. BeadChips area microscope slide-size silicon wafersslide, with varying numbers of sample sites per slide. Both formatsBeadChips are chemically etched to create tens of thousands to tens of millions of wells for each sample site.
In a separate process, weWe create unique bead pools, or sensors, for different DNA and RNA analysis applications by affixing thousands to millions 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 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 a short segment of synthetically manufactured DNA called an oligonucleotide (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 beads in the wells comprise our individual arrays. Because the beads assemble randomly into the wells, we perform a final procedure called “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, and introducing it to the array. The molecules in the sample bind to their matching molecules on the coated beads. The molecules in either the sample or on the bead are labeled with fluorescent dye either before or after the binding. The iScan or 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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Using our BeadArray technology, we achieve high-throughput analysis with a high density of test sites per array, and are able to format arrays in various configurations. We seek to maximize cost effectiveness by reducing consumption of expensive consumables and valuable samples and through the low manufacturing costs associated with our technologies. Our ability to vary the size, shape, and format of the well patterns and to create specific bead pools for different applications provides the flexibility to address multiple markets and market segments. These features enable our BeadArray technology to be applied to high-growth markets of SNP genotyping and CNV analysis, and have allowed us to be a key player in the gene expression market.
VeraCode Technology
Our proprietary VeraCode technology is a detection method for multiplex assays that require high precision, accuracy, and speed. When deployed on our BeadXpress Reader System, VeraCode technology provides a high-throughput solution for biomarker research and validation, pharmaceutical development, industrial and agriculture testing, clinical research, forensics, and molecular diagnostic assay development.
The VeraCode technology platform leverages the power of digital holographic codes to provide a robust detection method for multiplex assays requiring high precision, accuracy and speed.
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Commercially launched in March of 2007 for the research market,assays. VeraCode enables low-cost multiplexing from 1 to 384-plex in a single well. At the heart of theThe VeraCode technology areconsists of cylindrical glass beads measuring(measuring 240 microns in length by 28 microns in diameter. Each VeraCode bead type isdiameter) inscribed with a unique digital holographic code to designate and track the specific analyte or genotype of interest throughout the multiplex reaction. We believeWhen excited by a laser, each VeraCode bead emits a unique code image, allowing for quick and specific detection by the upBeadXpress Reader System.
Depending on the desired multiplex levels, assays are created by pooling microbeads with code diversities from one to 24 bits of information inscribed in each code allows for an unprecedented level of error checking, improves the robustness of the optical readout process and provides a level of reliability that sets a new standard in multiplex testing.several hundred. Unlike traditional microarrays, the VeraCode microbeads are used in solution, which takes advantage of solution-phase kinetics for more rapid hybridization times, dramatically reducing the time to achieve results. This technology enables us to serve a number of markets including research, agriculture, forensics, pharmaceuticals and molecular diagnostics.
In December 2009, we began offering VeraCode Universal Capture and Carboxyl Beads as General Purpose Reagents (GPRs). These royalty-free VeraCode GPR Beads provide customers with a flexible, high-quality, cost-effective multiplexing platform to develop their own custom multiplex assays for genotyping, CNV, gene expression, methylation, and protein analysis studies.
Eco Real-Time PCR Technology
In April 2010, we purchased Helixis, Inc. and its novel real-time PCR technology, and in July 2010 introduced the Eco Real-Time PCR System to the market. Real-Time PCR (also known as quantitative PCR or qPCR) is used to amplify and simultaneously quantify a targeted DNA molecule, with applications in gene expression, viral quantification, array data validation, pathogen detection, and genotyping. The procedure follows the same steps as PCR, whereby thermal cycling (alternately heating and cooling the DNA sample from 20 to 40 times) causes the DNA to self-replicate, resulting in the doubling of DNA product with each cycle. Real-time PCR uses various fluorescent detection chemistries to enable the monitoring of the PCR reaction as it progresses. Data are collected at each cycle rather than at the end of the reaction, providing higher precision, increased sensitivity, increased dynamic range, and higher resolution.
The Eco System combines a proprietary thermal system, four-color multiplex capabilities, and a fine-tuned optical system to deliver accurate qPCR results. Its unique design provides superior thermal uniformity, supporting high-quality PCR performance for demanding applications such as high resolution melt (HRM) curve analysis used for SNP genotyping, DNA fingerprinting, species identification, HLA compatibility typing, allelic prevalence, and DNA methylation analysis. Measuring just over one cubic foot in size, we believe the Eco System’s overall performance rivals larger, more expensive systems and provides us with a highly differentiated entry into this market.
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Our Products
Using our proprietary technologies, our products give our customers the ability to analyze the genome at any level of complexity, from whole genomewhole-genome sequencing to low multiplex assays. This enableslow-multiplex assays, and enable us to serve a number of markets, including research, agriculture, forensics, pharmaceuticals, and molecular diagnostics.
The majority of our product sales consist of instruments and consumables (which include reagents, flow cells, and BeadChips) based on these various technologies.our proprietary technologies (see Figure 2 below). For the fiscal years ended January 2, 2011, January 3, 2010, and December 28, 2008, December 30, 2007 and December 31, 2006, instrument sales comprised 32%36%, 33%34%, and 23%32%, respectively, of total revenues, and consumable sales represented 58%56%, 53%59%, and 54%58%, respectively, of total revenues.
Our major products includeFigure 2: Illumina Product Introduction Timeline:
Based on our proprietary SBS technology, our next-generation sequencing platforms are designed to meet the following:workflow, output, and accuracy demands of a full range of sequencing applications. Designed for high-throughput (up to 600 Gb per run and up to 80 Gb per day) sequencing, the HiSeq 2000 is fast, easy-to-use, and cost-effective, generating the sequence of two human genomes per run at 30× coverage for less than $5,000 (USD) in consumable cost per genome. Offering the same cost per data output and user experience, the HiSeq 1000 accommodates lower throughput needs, with an easy upgrade path to the HiSeq 2000. The Genome Analyzer IIx offers the simplest and fastest workflow for medium to high-throughput applications, generating up to 95 Gb per run. Introduced in January 2011, with first customer shipments expected mid-2011, our MiSeq Personal Sequencing System delivers the fastest time to an answer (as little as eight hours) and offers a breadth of sequencing applications in a compact and economical instrument to meet the needs of individual researchers.
InstrumentationSequencing/Array Combination Platforms
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Product | | | Product Description | | | Applications | | | Launch Date |
Genome Analyzer II | | | Instrument for high-throughput (14 — 18Gb per run) sequencing using Illumina sequencing by synthesis technology. | | | Whole-genome sequencing, targeted sequencing, gene expression discovery and profiling and epigenomics analysis. | | | Q1 2008 |
iScan System | | | High-resolution imaging instrument to rapidly scan our BeadArray based assays. | | | Array based whole-genome genotyping, gene expression and DNA methylation 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. | | | Low-multiplex genotyping, gene expression and protein analysis. | | | Q1 2007 |
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The HiScanSQ combines our SBS sequencing technology and iScan microarray analysis instrumentation into one system, with a modular design that can evolve with changing research needs. This flexible system allows researchers to use our sequencing and array technologies interactively to bring increased power to their experiments.
Array Platforms
The iScan System is our dedicated array scanner that supports the rapid, sensitive, and accurate imaging of our array-based genetic analysis products. It incorporates high-performance lasers, optics, and detection systems, deliveringsub-micron resolution and unmatched throughput rates. The iScan supports our Infinium, GoldenGate, DASL, gene expression, and methylation assays. Our BeadXpress Reader is designed for both small and high-throughput laboratories conducting molecular testing with multiplexed-based assays deployed on our VeraCode bead technology. It supports a wide range of applications, including DNA, RNA, and protein-based assays, and is FDA cleared for in vitro diagnostics with specific VeraCode FDA-cleared tests.
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Consumables
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Product | | | Product Description | | | Applications | | | Launch Date |
Standard Sequencing Kit | | | Reagents used for sequencing by synthesis chemistry on the Genome Analyzer. | | | Whole-genome sequencing, targeted sequencing, gene expression discovery and profiling and epigenomics analysis. | | | Q1 2007 |
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 |
InfiniumHD Whole-Genome BeadChips | | | Multi-sample DNA Analysis microarrays that interrogate up to 1.2 million markers per sample. Product line includes Human1M-Duo, Human610-Quad, Human660W-Quad and HumanCytoSNP-12. | | | Array based whole-genome genotyping. | | | Q1 — Q4 2008 |
iSelect Custom Genotyping BeadChips | | | Customer designable SNP genotyping arrays for 6,000 to 200,000 markers for use with any species. | | | Array based custom genotyping. | | | Q2 2006 |
Whole-Genome Gene Expression BeadChips | | | Multi-sample expression profiling arrays with up-to-date content for human, mouse and rat. | | | Gene expression profiling and expression Quantitative Trait Loci (QTL) analysis. | | | FY05 — FY08 |
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Our InfiniumHD Whole-Genome BeadChips represent our most technologically advanced multi-sample DNA analysis microarrays, enabling the interrogation of up to 2.5 million markers per sample, depending on the BeadChip. The most recent additions to the Omni family, the HumanOmni2.5 and HumanOmni1S BeadChips, provide comprehensive coverage of common and rare variants identified by the 1000 Genomes Project for performing rich GWAS projects. This product line also includes agriculturally relevant genome panels such as the BovineHD and MaizeSNP50 BeadChips.
For researchers who want to study focused genomic regions of interest, or are interested in organisms for which there are no standard products, we offer iSelect Custom Genotyping BeadChips. Easily developed to fit any experimental design, these SNP genotyping arrays can be used to investigate from 3,000 to 1,000,000 markers targeting any species.
Our GoldenGate Universal-32 Sample BeadChip provides a flexible customized solution for mid-plex genotyping assays performed on the iScan System or HiScan, while the VeraCode GoldenGate genotyping arrays are well-suited for low-plex genotyping on the BeadXpress Reader.
We have developed a variety of sample preparation and sequencing kits to simplify workflows and accelerate analysis. Some provide all the necessary consumables needed for analyses, such as our Standard Sequencing Kit (SBS chemistry on our sequencing platforms) and Infinium Assay Kit (array-based genotyping on the iScan System). Others support more discrete analyses, such as our Paired-End Genomic DNA Sample Prep Kit for streamlining library preparation for the generation of 200 — 500 kb insert paired-end reads for sequencing, gene expression, and epigenetic analysis. Our new TruSeq SBS Sequencing Kit enhances sequencing studies with our HiSeq 2000, HiSeq 1000, Genome Analyzer IIx and MiSeq systems, by enabling researchers to extend the read lengths, achieve higher Gb of mappable data, and deliver the highest yield of perfect reads to maximize the ability to accurately characterize the genome. Through our recent acquisition of Epicentre Technologies Corporation, we acquired the proprietary Nextera technology for next-generation sequencing library preparation. This technology will enable us to offer sequencing library preparation kits with lower sample input requirements that greatly simplify genetic analysis workflows (from 12 hours and 9 steps, to 2 hours and 4 steps) and significantly reduce the time from sample preparation to answer.
Real-time PCR Platforms
The Eco Real-Time PCR System provides fast, accurate qPCR results. Its icon-driven user interface simplifies experimental design and setup, while a straightforward workflow streamlines operation, enabling the system to perform qPCR on 48 samples in less than 40 minutes. As our first entry into the qPCR market, we believe the smaller, lower-cost, full-featured Eco System will enable more scientists to use real-time PCR technology in their research.
Our Services
In addition to the products we supply to customers, we also provide sequencing and genotyping services through our CLIA-certified, CAP accredited laboratory.
SequencingFastTrack Services
We have been offeringOne of the ways in which we compete and extend the reach of our systems in the genetic analysis market is to deliver FastTrack Services that leverage our proprietary technologies and the expertise of our scientists to perform genotyping and sequencing services onfor our Genome Analyzers since 2007. Ourcustomers. We began offering genotyping services range from small sets of samples requiring as little as one run to finish, to large-scale projects, like whole-genome sequencing, necessitating multiple instruments runningacademic institutions, biotechnology, and pharmaceutical customers in parallel for extended periods of time.2002. The breadth of applications offered includes novel custom products as well as all released products. These applications include but are not limited to re-sequencing, de novo sequencing, small RNA discovery and profiling, gene expression using tag based or using random primed RNA sampling technology, ChIP SEQ and methylome interrogation.
Array
We have been offeringin-house molecular geneticists that make up our FastTrack Genotyping Services since 2002. Our FastTrack Genotyping Services offers allteam help customers perform GWAS projects, linkage analysis, and fine mapping studies to meet their deadlines, employing a range of our genotyping products, including standard and custom GoldenGate, standard Infinium and Infinium HD, as well asand iSelect Infinium. OurInfinium assays. These projects range in size from a few hundred samples to over 10,000 samples. Our current capacity peak is 450 million genotypes per day. Our customer base includes academic institutions,
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After five years of building an infrastructure to support genotyping services, we expanded to deliver sequencing services in 2007. We continue to combine the power of our proprietary SBS technology with the consultative and biotechanalytical capabilities of our FastTrack Sequencing team to execute high-value projects such as whole-genome sequencing, targeted resequencing, digital expression profiling, and pharmaceutical companies.small RNA discovery. Projects range from small sample sets requiring as little as one run, to large-scale projects such as de novo whole-genome sequencing that demand multiple instruments running in parallel for extended periods of time.
Service Partnership Programs
To complement our own service capabilities, we have developed partnered programs such as our Certified Service Providers (CSPro) and Illumina Genome Network (IGN) to create a world-wide network of Illumina technology-enabled service offerings that broaden our market reach. Illumina CSPro is a collaborative service partnership established between Illumina and leading genome centers and research laboratories to ensure the delivery of high-quality genetic analysis services. It provides a competitive advantage for service providers, while also ensuring that customers will receive Illumina data quality and service. To become a CSPro provider, participating laboratories must complete an Illumina certification process and undergo recertification on an annual basis. There are over 50 Illumina CSPro-certified organizations worldwide providing sequencing, genotyping, and gene expression services using our technologies and products.
Introduced in July 2010, the IGN links researchers interested in conducting large whole genome sequencing projects with leading institutes worldwide that possess our next-generation sequencing technology. IGN provides a cost-effective and dependable way to complete large sequencing projects. The genome sequencing service network comprises CSPro-certified academic and commercial organizations possessing 10 or more HiSeq 2000 or Genome Analyzer systems and committed to providing industry-leading turnaround times of as few as 12 weeks for 50 samples. Current members include the National Center for Genome Resources (NCGR) in Santa Fe, New Mexico and the Macrogen Genomic Medicine Institute in Seoul, Korea.
Individual Genome Sequencing
Introduced in June 2009, Illumina’s Individual Genome Sequencing Service provides personal genome sequencing for consumers. It is performed in our CLIA-certified, CAP-accredited laboratory using our next-generation sequencing technology. The service is built around physician-patient consultation, with a physician’s order required to initiate the process. The offering includes sequencing of an individual’s DNA to 30-times depth, providing information on SNP variation and other structural characteristics of the genome such as insertions, deletions, and rearrangements. We are collaborating with a number of partners to provide secondary data analysis such as calculation of disease risk, ancestry, and information on traits of interest. The service requires individuals to follow our physician-mediated process, which involves pre-service consultation, patient consent, and aseven-day “cooling off” period during which the patient may withdraw consent. The final genome data is returned to the physician, who in turn delivers it to the consumer.
Intellectual Property
We have an extensive patentintellectual property portfolio, including, as of February 1, 2009,2011, ownership of, or exclusive licenses to, 135214 issued U.S. patents and 168197 pending U.S. patent applications, including fourseven allowed applications that have not yet issued as patents, some of which derive from a common parent application.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 20102011 and 2026.2029. We are seeking
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continue 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.
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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 20102011 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 engineersscientists and scientistsengineers 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 tasks required to optimize our Sequencing,sequencing, BeadArray, VeraCode, and Oligatoroligo synthesis technologies and to support commercialization of the products and services derived from these technologies. As of December 28, 2008, we had a total of 406 employees engaged in research and development activities.
Our research and development expenses for 2008, 2007,2010, 2009, and 20062008 (inclusive of charges relating to stock-basedshare-based compensation of $14.1$25.4 million, $10.0$20.0 million, and $3.9$14.1 million, respectively) were $100.0$177.9 million, $73.9$140.6 million, and $33.4$100.0 million, respectively. We expect research and development expense to increase during 20092011 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 involved in many areas of biologic research, including basic human disease research, pharmaceutical drug discovery and development, pharmacogenomics, toxicogenomics, and animal and agricultural research. Our potential customers include pharmaceutical, biotechnology, agrichemical, diagnosticsleading genomic research centers, academic institutions, government laboratories, and consumer products companies,clinical research organizations, as well as academic or private research centers.pharmaceutical, biotechnology, agrigenomics, and consumer genomics companies. 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:
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| | • | 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; |
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| | • | 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 |
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| | • | 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, Europe, Latin America, and Asia-Pacific.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 within Europe, the Asia-Pacific region, Latin America, the Middle East, and Asia-Pacific,
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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 20092011 and beyond as we launch a number of new products and expand the number of customers that can use our products.
Manufacturing
We manufacture our sequencing and array platforms, reagent kits, scanning equipment, and oligos. Our manufacturing capacity for consumables and instruments has grown during 2010 to support our increased
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customer demand during 2008. In the third quarter of 2008, we began shipping BeadChips from our new Singapore facility.demand. We are also focused on continuing to enhance the quality and manufacturing yield of our Array Matrices, BeadChips and FlowCells.flow cells, in particular. 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. 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.
Raw Materials
Our manufacturing operations require a wide variety of raw materials, electronic and mechanical components, chemical and biochemical materials, and other supplies. While weWe have multiple commercial sources for many of our components and supplies,supplies; however, there are some raw materials and components that we obtain from single source suppliers. If we are unable to secure a sufficient supply of those or other product components, our business could be temporarily interrupted. To mitigate this risk,potential risks arising from single source suppliers, we believe that we can redesign our products for alternative components or use alternative reagents.reagents if required. In addition, while we generally attempt to keep our inventory at minimal levels, we do purchase incremental inventory as circumstances warrant to protect our supply chain.
Competition
Although we expectbelieve that our products and services will provide significant advantages over products and services currently available from other sources, we expect to continue to encounter intense competition from other companies that offer products and services for the sequencing, SNP genotyping, and gene expression, and molecular diagnostics markets. These include companies such as Affymetrix, Inc.; Agilent Technologies, Inc.; Beckman Coulter, Inc.; Complete Genomics, Fluidigm, GE Corp.,Inc.; Helicos BioSciences Corporation; General Electric Company; Life Technologies Corporation; Luminex Corporation; Pacific Biosciences of California, Inc.; QIAGEN N.V.; Roche Diagnostics Corp.; and Sequenom.Sequenom, Inc., among others. 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 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 order to effectively compete with these companies, we will need to demonstrate that our products have superior throughput, cost, and accuracy advantages over 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
During the first quarter of 2008, we reorganized our operating structure into a newly createdWe are organized in two business segments, Life Sciences and Diagnostics. Our Life Sciences Business Unit which includes all products and services related to the research market, namely the Sequencing,product lines based on our sequencing, BeadArray, VeraCode, and BeadXpress product lines. We also created areal-time PCR technologies. Our Diagnostics Business Unit to focusfocuses on the emerging opportunity in molecular diagnostics. During 2008, we had limited activity related to theall periods presented, our Diagnostics Business Unit andhad limited activity. Accordingly, our operating results werefor both units are reported on an aggregate basis to our chiefas one operating decision maker,segment. We will begin reporting in two segments once revenues, operating profit or loss, or assets of the chief executive officer. Accordingly, we operated in one reportable segment during 2008.Diagnostics Business Unit exceed 10% of the consolidated amounts.
We currently sell our products to a number of customers outside the United States, including customers in other areas of North America, Europe, and Asia-Pacific.the Asia-Pacific region. Shipments to customers outside the United States totaled $293.2$403.8 million, or 51%45% of our total revenue, during 2008,2010, compared to $159.1$319.1 million, or 43%48%, and
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$81.5 $293.2 million, or 44%51%, in 20072009 and 2006,2008, respectively. Sales to territoriescustomers outside of the United States were generally denominated in U.S. dollars. In 2008, we reorganized our international structure to establish more efficient channels betweenamong product development, product manufacturing, and sales. The reorganization increased our foreign subsidiaries’ anticipated dependence on the U.S. entity for management decisions, financial support, production assets, and inventory thereby making the foreign subsidiaries more of a direct and integral component of the U.S. entity’s operations. As a result, we reassessed the primary economic environment of our foreign subsidiaries and determined the subsidiaries are more U.S. dollar based, resulting in a U.S. dollar functional currency determination. We expect that sales to international customers will continue to be an important and growing source of revenue. See Note 14note “13. Segment Information,
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Geographic Data, and Significant Customers” in Part II, Item 8, of the Notes to Consolidated Financial StatementsthisForm 10-K for further information concerning our foreign and domestic operations.
Backlog
Our backlog was $299.0 million and $227.6 million at January 2, 2011 and January 3, 2010, 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 expect an estimated 90% of the backlog as of January 2, 2011 to be shipped within the fiscal year ending January 1, 2012. Although we generally recognize revenue upon the transfer of title to a customer, we may be required to defer the recognition of revenue even after title transfer depending on the specific arrangement with a customer and the applicable accounting treatment. A material portion of our backlog at January 2, 2011 is associated with a large order we received from one customer at the end of 2009 for which we are using operating lease accounting that requires 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 on September 30 of each year.
Environmental Matters
We are committed 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 with current applicable laws and regulations; however, we could be held liable for damages and fines should contamination 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.
Government Regulation
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, such as molecular diagnostic products, regulation by governmental authorities in the United States and other countries will be 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.
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 ensure 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
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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 28, 2008,January 2, 2011, we had a total of 1,536approximately 2,100 employees. None of our employees areis represented by a labor union. We consider our employee relations to be positive. Our success will depend in large part upon our ability to attract and retain employees. In addition, we employ a number of temporary and contract employees. We face competition in this regard from other companies, research and academic institutions, government entities, and other organizations.
Executive Officers
Our executive officers and their ages as of February 1, 2009, are as follows:
Jay Flatley, age 56, is President and Chief Executive Officer of Illumina. Prior to his appointment in 1999, Mr. Flatley was the President and Chief Executive Officer of Molecular Dynamics, later acquired by Amersham Pharmacia Biotech in 1998 and now a part of GE Healthcare. Mr. Flatley, who was a founder and member of the board of directors for Molecular Dynamics, lead the company to its initial public offering (IPO) in 1993, in addition to helping the company develop and launch over 15 major instrumentation systems, including the world’s first capillary based DNA sequencer. Prior to joining Molecular Dynamics, Mr. Flatley was Vice President of Engineering and Strategic Planning for Plexus Computers, a manufacturer of high-performance Unix super-microcomputers. Before his career at Plexus, Mr. Flatley was Executive Vice President for Manning Technologies and held various manufacturing positions while working for the Autolab division of Spectra Physics.
Christian Henry, age 40,is Senior Vice President and Chief Financial Officer. Mr. Henry joined Illumina in June 2005 and is responsible for worldwide financial operations, controllership functions and facilities management. In addition, throughout 2008, Mr. Henry was Acting General Manager of Illumina’s DNA Sequencing business. Mr. Henry served previously as the Chief Financial Officer for Tickets.com, a publicly traded, online ticket provider that was acquired by Major League Baseball Advanced Media, LP. Prior to that,
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Mr. Henry was Vice President, Finance and Corporate Controller of Affymetrix, Inc., a publicly traded life sciences company, where he oversaw accounting, planning, SEC and management reporting, treasury and risk management. He previously held a similar position at Nektar Therapeutics (formerly Inhale Therapeutic Systems, Inc.).
Christian Cabou, age 60,is Senior Vice President, General Counsel and Secretary of Illumina. Mr. Cabou joined Illumina in May 2006 and has worldwide responsibility for all legal and intellectual property matters. Mr. Cabou is also Illumina’s Code of Ethics Compliance Officer. Before joining Illumina, Mr. Cabou spent five years as General Counsel for GE Global Research and, before that, was Senior Counsel of Global Intellectual Property for GE Medical Systems. Prior to his position at GE, Mr. Cabou spent seven years with the law firm Foley & Lardner where he was a partner. He had twenty years of experience in engineering design and management prior to his career in law and intellectual property.
Greg Heath, age 51, is Senior Vice President & General Manager, Diagnostics Business Unit of Illumina. Dr. Heath joined Illumina in March 2008 and is responsible for managing Illumina’s emerging diagnostics business, specifically overseeing the development of diagnostic content for the BeadXpress system, and ultimately for Illumina’s sequencing platform. Dr. Heath joined Illumina from Roche Molecular Systems where he held a number of senior executive positions, including head of clinical genomics, senior vice president of global product marketing, senior vice president of global marketing and business development, and most recently, senior vice president of global business. From 2000 — 2003, Dr. Heath was head of business development and licensing for the diagnostics division of F. Hoffman La Roche in Basel. Prior to this, Dr. Heath held numerous roles in marketing and business development with Roche Diagnostics’ U.S. affiliate.
Joel McComb, age 44, is Senior Vice President & General Manager, Life Sciences Business Unit of Illumina. Mr. McComb joined Illumina in March 2008 and is responsible for managing all products and services related to the research market, namely the Sequencing, BeadArray and VeraCode product lines. Mr. McComb joined Illumina from GE Healthcare where he held a number of executive positions, including president of the interventional medicine business and president of life sciences discovery systems. From 2001 — 2004, Mr. McComb was president, chief executive officer and board member of Innovadyne Technologies. Prior to Innovadyne, Mr. McComb held various positions at Beckman Coulter, including roles as general manager of the primary care diagnostic division and director of corporate business development.
Tristan Orpin, age 42, is Senior Vice President, Commercial Operations of Illumina. Mr. Orpin joined Illumina in December 2002 in the role of Vice President of Worldwide Sales, and in January of 2007 was promoted to the position of Senior Vice President of Commercial Operations. Before joining Illumina, Mr. Orpin was Director of Sales and Marketing for Sequenom from September 1999 to August 2001. Later, Mr. Orpin was elected Vice President of Sales and Marketing and held this position from August 2001 to November 2002. Prior to 2001, Mr. Orpin served in several senior sales and marketing positions at Bio-Rad Laboratories.
Mostafa Ronaghi, Ph.D., age 40, is Senior Vice President and Chief Technology Officer of Illumina. Dr. Ronaghi joined Illumina in August 2008 and is responsible for leading internal research programs and evaluating new technologies for the Company. In 2007, Dr. Ronaghi co-founded Avantome, a privately held sequencing company. Before this, he co-founded NextBio, a search engine for life science data. In 2001, Dr. Ronaghi co-founded ParAllele Bioscience, which was eventually acquired by Affymetrix, Inc., and was involved in the development and commercialization of highly multiplexed technology for genetic testing. In 1997, he co-founded Pyrosequencing AB, which was renamed Biotage in 2003. In June 2000, the company completed a successful initial public offering on the Stockholm Stock Exchange. Dr. Ronaghi was a principal investigator at Stanford University from 2002 — 2008 where he focused on the development of novel tools for molecular diagnostic applications.
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| ITEM 1A. | Risk Factors.Factors |
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, 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 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, Life Technologies (previously referred to as 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 enhancementsor 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 our technology and rapidly deploy new product offerings, our business, financial condition and results of operations will suffer.genetic information that may be incorporated into their diagnostic tests.
Negative conditions in global creditOur success depends upon the continued emergence and growth of markets may result in delayed payments from our customersfor analysis of genetic variation and may negatively impact our smaller suppliers.biological function.
We design our products primarily for applications in the life sciences, agricultural, and pharmaceutical industries. The recent economic conditions and market turbulence may impact the operations of certainusefulness of our customerstechnologies depends in part upon the availability of genetic data and suppliers. Certainits usefulness in identifying or treating disease. We are focusing on markets for analysis of our customersgenetic variation and
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biological function, namely sequencing, genotyping, and gene expression profiling. These markets are new and emerging, and they may face challenges gaining timely access to sufficient credit, which could result in an impairment ofnot develop as quickly as we anticipate, or reach 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. In addition, due to discontinuing parts, suppliers may also extend lead times, limit supplies or increase prices due to capacity constraints or other factors.
In addition, our business depends on the overall demand forfull potential. Other methods of analysis of genetic variation and biological function. We rely in large part onfunction may emerge and displace the methods we are developing. Also, researchers may not be able to successfully analyze raw genetic data or be able to convert raw genetic data into medically valuable information. 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 customers, which is often discretionary,products does not meet our customers’ expectations, then our reputation could suffer and ultimately our sales and operating earnings could be negatively impacted.
In the recent economic downturn has caused many companiescourse 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 consumables are highly complex, the occurrence of defects may increase as we continue to reduce their researchintroduce new products and development budgets. If the current worldwide economic downturn continues, our customers may delay or reduce their purchases ofservices and as we rapidly scale up manufacturing to meet increased demand for our products and services. A reductionAlthough 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 and third-party components, 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 demand will reduceconnection with, for example, shipment holds, product recalls, and warranty or other service obligations. In addition, quality issues can impair our revenuesrelationships with new or existing customers and harmadversely affect our profitability.brand image, and our reputation as a producer of high quality products could suffer, which could adversely affect our business, financial condition, or results of operations.
Due to our increasing foreign operations, fluctuations in foreign currency exchange rates could negatively impact our results of operations.Our continued growth is dependent on continuously developing and commercializing new products.
WeOur target markets are focusedcharacterized 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 expandingcontinuously developing and commercializing new products and services, including improving our international operationsexisting products and services, in key markets. We have sales offices located internationally throughout Europeorder to address evolving market requirements on a timely basis. If we fail to innovate or adequately invest in new technologies, our products and the Asia Pacific region, as well as manufacturing facilitiesservices will become dated, and we could lose our competitive position in the United Kingdommarkets that we serve as customers purchase new products offered by our competitors. We believe that successfully introducing new products and Singapore. During 2008,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 majority of our salesextent that we fail to international customersintroduce new and purchases of raw materials from international suppliers were denominatedinnovative products, or such products are not accepted in the U.S. dollar. Changesmarket 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 valuefuture, delays in the development and introduction of new products. We cannot ensure 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,
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relevant currencies may affectachieve market acceptance, or compete successfully with competing technologies. Some of the costfactors affecting market acceptance of certain items required in our operations. Changes in currency exchange ratesnew products and services include:
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| • | availability, quality, and price relative to competing products and services; |
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| • | the functionality and performance of new and existing products and services; |
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| • | the timing of introduction of the new product or service relative to competing products and services; |
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| • | scientists’ and customers’ opinions of the utility of the new product or service; |
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| • | citation of the new product or service in published research; |
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| • | regulatory trends and approvals; and |
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| • | general trends in life sciences research and applied markets. |
We may also affecthave to write off excess or obsolete inventory if sales of our products are not consistent with our expectations or the relative prices at which we are able sellmarket requirements for our products change due to technical innovations in the same market.
Our revenues from international customers may be negatively impacted as increases in the U.S. dollar relative to our international customers local currency could make our products more expensive, impacting our ability to compete. Our costs of materials from international suppliers may increase if in order to continue doing business with us they may raise their prices as the value of the U.S. dollar decreases relative to their local currency.
Foreign policies and actions regarding currency valuation could result in actions by the United States and other countries to offset the effects of such fluctuations. The recent global financial downturn has led to a high level of volatility in foreign currency exchange rates and that level of volatility may continue and thus adversely impact our business or financial conditions.marketplace.
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 unablenot able to finddeliver 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, we may 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 existing 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 products could adversely affect our business, financial condition, or results of operations.
Reduction or delay in research and development budgets and government funding may adversely affect our revenue.
A substantial portion of our revenue is derived from genomic research centers, academic institutions, government laboratories, and clinical research organizations, as well as pharmaceutical, biotechnology, agrigenomics, and consumer genomics companies, and their capital spending budgets can have a significant effect on the demand for our products and services. These budgets are based on a wide variety of factors, including the allocation of available resources to make purchases, funding from government sources, the spending priorities among various types of research equipment, and policies regarding capital expenditures during recessionary periods. Any decrease in capital spending or change in spending priorities of our customers could significantly reduce our revenue. Moreover, we have no control over the timing and amount of purchases by our customers, and as a result, revenue from these sources may vary significantly due to factors that can be difficult to forecast. Any delay or reduction in purchases by our customers or our inability to forecast fluctuations in demand could harm our future operating results.
We depend on third-party manufacturers to manufactureand suppliers for components ofand 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 supportship our products in a timely manner, or at all.
The complex nature of our products requires customized, precision-manufactured, components and materials that currently are available from a limited number of sources. For example,sources, and, in the case of some components
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and materials, from only a single source. If deliveries from these vendors are delayed or interrupted for any reason, or if we currently use multiple components in our products that are single-sourced. If we areotherwise unable to secure a sufficient supply, of thosewe may not be able to obtain these components or other product components, we will be unablematerials 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 youensure that we will be able to do this on a timely basis, forin sufficient quantities, or on commercially reasonable terms. In addition, the lead time needed to establish a relationship with a new supplier can be lengthy, and we may experience delays in meeting demand in the event we must switch to a new supplier. The time and effort required to qualify a new supplier could result in additional costs, diversion of resources, or reduced manufacturing yields, any of which would negatively impact our operating results. Accordingly, we may not be able to establish or maintain reliable, high-volume manufacturing at commercially reasonable costs.costs or at all. 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.
If we lose our key personnel or are unable to attractincrease our manufacturing capacity and retain additional personnel,develop and maintain operation of our manufacturing capability, we may not be able to launch or support our products in a timely manner, or at all.
We continue to rapidly increase our manufacturing 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 for 2011, 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 of certain products. Due to the intricate nature of manufacturing complex instruments, consumables, and 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 to produce them 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 achievemanufacture our goals.products, provide our services, or develop new products.
WeAlso, many of our manufacturing processes are highly dependent onautomated and are controlled by our managementcustom-designed Laboratory Information Management System (LIMS). Additionally, the decoding process in our array manufacturing requires significant network and scientific personnel, including Jay Flatley,storage infrastructure. If either our president and chief executive officer. The lossLIMS system or our networks or storage infrastructure were to fail for an extended period of their services couldtime, it may adversely impact our ability to achievemanufacture our business objectives. We will need to hire additional qualified personnel with expertise in molecular biology, chemistry, biological information processing, sales, marketingproducts on a timely basis 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 wouldcould prevent us from pursuing collaborations or developingachieving our products or technologies.
Our planned activities will require additional expertiseexpected shipments in specific industries and areas applicable to the products developed through our technologies, including the life sciences and healthcare industries. Thus, we will need to add new personnel, including management, and develop the expertise of existing management. The failure to do so could impair the growth of our business.any given period.
We may encounter difficulties in managing our growth. These difficulties could impair our profitability.
We have experienced and expect to continue to experience rapid and substantial growth in order to achieve our operating plans, which will place a strain on our human and capital resources. If we are unable to manage this growth effectively, our profitability could suffer. Our ability to manage our operations and growth effectively requiresacquisitions expose 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. 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. Failure to attract and retain sufficient numbers of talented employees will further strain our human resources and could impede our growth.
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A significant portion of our sales is to international customers.
Shipments to customers outside the United States comprised 51%, 43% and 44% of our revenue for the years ended December 28, 2008, December 30, 2007 and December 31, 2006, respectively. We intend to continue to expand our international presence by selling to customers located outside of the U.S. and we expect the total amount ofnon-U.S. sales to continue to grow. Export sales entail a variety of risks including:
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| • | longer payment cycles and difficulties in collecting accounts receivable outside of the United States; |
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| • | currency exchange fluctuations; |
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| • | challenges in staffing and managing foreign operations; |
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| • | tariffs and other trade barriers; |
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| • | unexpected changes in legislative or regulatory requirements of foreign countries into which we import our products; |
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| • | difficulties in obtaining export licenses or in overcoming other trade barriers and restrictions resulting in delivery delays; and |
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| • | significant taxes or other burdens of complying with a variety of foreign laws. |
In addition, we are also subject to general geopolitical risks, such as political, social and economic instability and changes in diplomatic and trade relations. One or more of these factors could have a material adverse effect on our business, financial condition and operating results.
We may encounter difficulties in integrating acquisitions that could adversely affect our business, specificallyand we may not achieve the effective launch and customer acceptanceanticipated benefits of new technology platforms.acquisitions of businesses or technologies.
WeAs part of our strategy to develop and identify new products, services, and technologies, we have made, and may in the futurecontinue to make, acquisitions of technologies, products, or significant investments in businesses with complementary products, services or technologies.businesses. Acquisitions involve
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numerous risks and operational, financial, and managerial challenges, including but not limited to:the following, any of which could adversely affect our business, financial condition, or results of operations:
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| | • | difficulties in integrating thenew operations, technologies, products, and personnel of acquired companies;personnel; |
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| | • | lack of synergies or the inability to realize expected synergies and cost-savings; |
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| | • | difficulties in managing geographically dispersed operations; |
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| | • | revenueunderperformance of any acquired technology, product, or business relative to our expectations and expense levels of acquired entities differing from those anticipated at the time of the acquisitions;price we paid; |
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| | • | negative near-term impacts on financial results after an acquisition;acquisition, including acquisition-related earnings charges; |
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| | • | the potential loss of key employees, customers, and strategic partners of acquired companies; |
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| | • | claims by terminated employees and shareholders of acquired companies or other third parties related to the transaction; |
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| | • | the issuance of dilutive securities, assumption or incurrence of additional debt obligations or expenses, or use of substantial portions of our cash; |
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| | • | diversion of management’s attention and company resources from normal dailyexisting operations of the business; |
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| | • | inconsistencies in standards, controls, procedures, and policies; and |
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| | • | the impairment of intangible assets as a result of technological advancements, orworse-than-expected performance of acquired companies; and |
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| • | assumption of, or exposure to, unknown contingent liabilities or liabilities that are difficult to identify or accurately quantify. |
AcquisitionsIn addition, the successful integration of acquired businesses requires significant efforts and other transactions are inherently riskyexpense across all operational areas, including sales and our previousmarketing, research and development, manufacturing, finance, legal, and information technologies. We cannot ensure that any of the acquisitions we make will be successful or future transactionswill be, or will remain, profitable. Our failure to successfully address the above risks may not be successful. prevent us from achieving the anticipated benefits from any acquisition in a reasonable time frame, or at all.
The inability to effectively managetiming and extent of funding provided by the risks associated with these transactionsAmerican Recovery and Reinvestment Act of 2009 (the Recovery Act) could materially and 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 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. 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 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
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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:
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| • | 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; |
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| • | losses from our investment portfolio or to a counterparty’s inability to fulfill its payment obligations; |
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| • | inability to refinance existing debt at competitive rates, reasonable terms, or sufficient amounts; and |
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| • | 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.
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 $902.7 million for the year ended January 2, 2011 and with the number of employees increasing from approximately 375 to approximately 2,100 during the same period. We expect to continue to experience rapid and substantial growth in order to achieve our operating plans. The rapid expansion of our business and addition of new personnel may place a strain on our management and operational systems. Our ability to effectively manage our operations and growth 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 on a global basis. If we are unable toscale-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. Our future operating results will depend on the ability of our management to continue to implement and improve 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 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. In 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
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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 units 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.
Any inability to effectively protect effectively 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, certain patent applications in the United States may be maintained in secrecy until the 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 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, and we have taken security measures to protect this 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 protect effectivelywill 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 and may in the future assert that we are employing their proprietary technology without authorization. As we enter new markets, we expect that competitors will likely claim 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 or services, and could result in the
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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.products or services. 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 or services could materiallyadversely affect our ability to grow andor maintain profitability.
Doing business internationally creates operational and financial risks for our business.
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 are focused on expanding our international operations in key markets. We have sales offices located internationally throughout Europe, the Asia-Pacific region, and Brazil as well as manufacturing facilities in the United Kingdom and Singapore. During 2010, the majority of our sales to international customers and purchases of raw materials from international suppliers were denominated in U.S. dollars. Shipments to customers outside the United States comprised 45%, 48%, and 51% of our total revenue for the years ended January 2, 2011, January 3, 2010, and December 28, 2008, respectively. We intend to continue to expand our international presence by selling to customers located outside of the United States and we expect the total amount ofnon-U.S. sales to continue to grow.
International sales entail a variety of risks, including:
| | |
| • | longer payment cycles and difficulties in collecting accounts receivable outside of the United States; |
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| • | longer sales cycles due to the volume of transactions taking place through public tenders; |
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| • | currency exchange fluctuations; |
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| • | challenges in staffing and managing foreign operations; |
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| • | tariffs and other trade barriers; |
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| • | unexpected changes in legislative or regulatory requirements of foreign countries into which we sell our products; |
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| • | difficulties in obtaining export licenses or in overcoming other trade barriers and restrictions resulting in delivery delays; and |
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| • | significant taxes or other burdens of complying with a variety of foreign laws. |
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Changes in the value of the relevant currencies may affect the cost of certain items required in our effective incomeoperations. Changes in currency exchange rates may also affect the relative prices at which we are able sell products in the same market. Our revenues from international customers may be negatively impacted as increases in the U.S. dollar relative to our international customers local currency could make our products more expensive, impacting our ability to compete. Our costs of materials from international suppliers may increase if in order to continue doing business with us they raise their prices as the value of the U.S. dollar decreases relative to their local currency. Foreign policies and actions regarding currency valuation could result in actions by the United States and other countries to offset the effects of such fluctuations. The recent global financial downturn has led to a high level of volatility in foreign currency exchange rates and that level of volatility may continue, which could adversely affect our business, financial condition, or results of operations.
We are subject to risks related to taxation in multiple jurisdictions and the possible loss of the tax rate could impactdeduction on our profitability.outstanding convertible notes.
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 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, 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. Although we believe our tax estimates are reasonable, if the IRS or other taxing authority disagrees with the positions taken by the Company on its tax returns, we could have additional tax liability, including interest and penalties. If material, payment of such additional amounts upon final adjudication of any disputes could have a material impact on our results of operations and financial position.
In addition, we could lose some or all of the tax deduction for interest expense associated with our $390 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.
Our products, if used for the diagnosis of disease, could be subject to government regulation, and the regulatory approval and maintenance process for such products may be expensive, time-consuming, and uncertain both in timing and in outcome.
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 are unablefail to increase our manufacturing capacity andobtain, or experience significant delays in obtaining, regulatory approvals for molecular diagnostic products that we develop, and maintain operation of our manufacturing capability, we may not be able to launch or support oursuccessfully commercialize such products in a timely manner, or at all.
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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.
We continueOur operating results may vary significantly from period to ramp up 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 for 2009, there are uncertainties inherent in expanding our manufacturing capabilitiesperiod, and we may not be able to 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. 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 that have temporarily reduced production yields. 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 to produce them 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 or floods. If a natural disaster were to significantly damage one of our facilities 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 would prevent us from achieving our expected shipments in any given period.
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We expect that our results of operations will fluctuate. This fluctuation could cause our stock price to decline.sustain operating 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 is 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 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 share-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.
Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment and fair value determinations, inventories, business combinations and intangible asset valuations, and litigation, are highly complex and involve many subjective assumptions, estimates, and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition.
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Ethical, legal, and social concerns related to the use of genetic information could reduce demand for our products or services.
Our products may be used to provide genetic information about humans, agricultural crops, and other living organisms. The information obtained from our products could be used in a variety of applications, which may have underlying ethical, legal, and social concerns regarding privacy and the appropriate uses of the resulting information, including the genetic engineering or modification of agricultural products or testing genetic predisposition for certain medical conditions. Governmental authorities could, for social or other purposes, call for limits on or 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 technology for certain applications or reduce the potential markets for our technology, either of which could have an adverse effect on our business, financial condition, or results of operations.
The relocation of our corporate headquarters, which is expected to begin in late 2011, could adversely affect our business, financial condition, or results of operations.
During the fourth quarter of 2010, we entered into a lease agreement for a new corporate headquarters to meet our current and long-term expansion needs. We expect to begin relocating most of our San Diego-based operations to this new facility in late 2011. In addition to incurring a one-time non-cash charge of approximately $30 million related to the remaining lease obligations for our current corporate headquarters, we expect to incur additional expenses associated with the relocation itself. Although we expect to sublease our current corporate headquarters, we will continue to be subject to rent and lease obligations for our current facility through October 2023. Additional risks associated with the relocation, including, in particular, the relocation of oligo manufacturing that currently takes place at our corporate headquarters, may include delays in receiving necessary permits and approvals and business disruption as complex manufacturing equipment is moved.
Our success depends upon the continued emergence and growth of markets for analysis of genetic variation and biological function.strategic equity investments may result in losses.
We designperiodically make strategic equity investments in various public and private companies with businesses or technologies that may complement our products primarily for applicationsbusiness. The market values of these strategic equity investments may fluctuate due to market conditions and other conditions over which we have no control.Other-than-temporary declines in the life sciencesmarket price and pharmaceutical industries. The usefulnessvaluations of the securities that we hold in other companies would require us to record losses in proportion to our technology dependsownership interest. This could result in part upon the availability of genetic data and its usefulness in identifyingfuture charges to our earnings. It is uncertain whether or treating disease. We are focusing on markets for analysis of genetic variation and biological function, namely sequencing, SNP 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. 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.will realize any long-term benefits associated with these strategic investments.
LossConversion of the tax deduction on our outstanding convertible notes.notes may result in losses.
We could lose some or allAs of the tax deduction for interest expense associated with our $400.0January 2, 2011, we had $390.0 million aggregate principal amount of convertible notes due in 2014 if the foregoingoutstanding. The notes are not subjectconvertible into cash, and if applicable, shares of our common stock under certain circumstances, including trading price conditions related to our common stock. If the special Treasury Regulations governing integrationtrading price of certain debt instruments,our common stock remains significantly above the conversion price of $21.83 per share, we expect that noteholders will elect to convert the notes. Upon conversion, we are required to record a gain or loss for the difference between the fair value of the notes to be extinguished and their corresponding net carrying value. The fair value of the notes to be extinguished depends on our current incremental borrowing rate. The net carrying value of our notes has an implicit interest rate of 8.27%. If our incremental borrowing rate at the time of conversion is lower than the implied interest rate of the notes, we will record a loss in our consolidated statement of income during the period in which the notes are converted, or we invest in non-taxable investments.
We may not be able to sustain operating profitability.
Prior to 2006, we had incurred net losses each year since our inception, and in 2007 we reported a net loss of $278.4 million, reflecting significant charges associated with our acquisition of Solexa in January 2007 and the settlement of our litigation with Affymetrix. As of December 28, 2008, our accumulated deficit was $332.5 million. 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. 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. We expect to continue incurring significant expenses related to research and development, sales and marketing efforts to commercialize our products and the continued development of our manufacturing capabilities. In addition, 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. Although we have regained profitability, we may not be able to sustain profitability on a quarterly basis.
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Negative conditions in the global credit markets may impair the liquidity of a portion of our investment portfolio.
Our investment securities consist of marketable debt securities, including treasury bills and commercial paper with strong credit ratings, corporate bonds and short maturity mutual funds providing similar financial returns. Additionally, as of December 28, 2008, we had $55.9 million of auction rate securities issued primarily by municipalities and universities. These securities are debt instruments with a long-term maturity and with an interest rate that is reset in short intervals through auctions. Our entire auction rate portfolio is held in a brokerage account with UBS Financial Services, Inc., a subsidiary of UBS AG (UBS) and is currently rated AAA or AA by a rating agency. Beginning in February 2008, these auction rate securities became illiquid because their scheduled auctions failed to settle. An auction failure occurs when the parties wishing to sell securities at auction cannot. As of December 28, 2008, the securities continued to fail auction and remained illiquid.
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, we signed a settlement agreement to sell our auction rate securities at par value to UBS during the period of June 30, 2010 through July 2, 2012.
The settlement agreement with UBS and the associated put option mitigates the risk of loss on our auction rate security portfolio. However, given the negative conditions in the global credit markets there is still risk that UBS may not be able to fulfill its obligation.converted.
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| Item 1B. | Unresolved Staff Comments. |
None.
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The following chart indicatessummarizes the facilities we lease as of December 28, 2008,January 2, 2011, including the location and size of each suchprincipal facility, and their designated use. During 2008, 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.
| | | | | | | | | | | |
| | | Approximate
| | | | | Lease
| |
Location | | Square Feet | | | Operation | | Expiration Dates | |
| |
| San Diego, CA | | | 289,300 | | | R&D, Manufacturing, Storage, | | | 2008 – 2023 | |
| | | | | | | Distribution and Administrative | | | | |
| Hayward, CA | | | 148,000 | | | R&D, Manufacturing and Administrative | | | 2008 – 2013 | |
| Singapore | | | 36,100 | | | Manufacturing and Administrative | | | 2010 – 2013 | |
| Little Chesterford, United Kingdom | | | 28,500 | | | R&D, Manufacturing and Administrative | | | 2009 | |
| Tokyo, Japan | | | 9,800 | | | Sales and Administrative | | | 2009 – 2014 | |
| Netherlands | | | 9,300 | | | Distribution and Administrative | | | 2011 | |
| Melbourne, Australia | | | 3,900 | | | Sales and Administrative | | | 2013 | |
| | | | | | | | | | | |
| | | Approximate
| | | | | Lease
| |
| Location | | Square Feet | | | Operation | | Expiration Dates | |
| |
| San Diego, CA | | | 314,000 | | | R&D, Manufacturing, Storage, | | | 2011 – 2023 | |
| | | | | | | Distribution and Administrative | | | | |
| Hayward, CA | | | 109,000 | | | R&D, Manufacturing and Administrative | | | 2013 – 2014 | |
| Singapore | | | 61,000 | | | Manufacturing and Administrative | | | 2013 – 2015 | |
| Eindhoven, the Netherlands | | | 54,000 | | | Distribution and Administrative | | | 2011 – 2015 | |
| Little Chesterford, United Kingdom | | | 41,500 | | | R&D, Manufacturing and Administrative | | | 2024 | |
| Other | | | 34,000 | | | R&D, Manufacturing, Sales and Administrative | | | 2011 – 2014 | |
In February 2008,December 2010, we agreed to lease an additionala facility in Little Chesterford, United KingdomSan Diego, California that is in the process of being constructedwill serve as our new corporate headquarters, which includes facilities for research and development manufacturing and administrative purposes. Thismanufacturing. The lease covers existing buildings with approximately 346,600 rentable square feet and an additional building with approximately 123,400 rentable square feet to be built in the future. The lease has an initial term of 20 years. We excluded this lease from the table above as the lease will not commence until the second half of 2011. We plan to relocate from our present corporate headquarters to the new facility covers approximately 41,500 square feet. Weand expect the transition to occupy this new building bybegin during the endfourth quarter of 2009.2011.
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| Item 3. | Legal Proceedings. |
In the recent past, we incurred substantial costs in defending ourselves against patent infringement and patent ownership claims and expect, going forward, to devote substantial financial and managerial resources to protect our intellectual property and to defend against any future claims asserted against us. From time to time, we may also be partiesare party to litigation and other litigationlegal proceedings in the ordinary course, and incidental to the conduct, of our business. While the results of any litigation or other legal proceedings are uncertain, management does not believe the ultimate resolution of itsany pending legal matters will result inis likely to have a material adverse impact to us.
Applied Biosystems Litigation
On December 26, 2006, the Applied Biosystems Groupeffect on our financial position or results of Applera Corporation (Applied Biosystems) filed suit in California Superior Court, Santa Clara County against Solexa (which we acquired on January 26, 2007). This State Court action related to the ownership of several patents assigned in 1995 to Solexa’s predecessor company (Lynx Therapeutics) by a former employee (Dr. Stephen Macevicz), who is the inventor of these patents and is named as a co-defendant in the suit. The Macevicz patents are directed to methods for sequencing DNA (US Pat. Nos. 5,750,341 and 6,306,597) using successive rounds of oligonucleotide probe ligation(sequencing-by-ligation), and to a probe (5,969,119) used in connection with these sequencing methods. Lynx was originally a unit of Applied Biosystems but was spun out in 1992. On May 31, 2007, Applied Biosystems filed a second suit, this time against us, in the U.S. District Court for the Northern District of California. This second suit sought a declaratory judgment of non-infringement of the Macevicz patents that were the subject of the State Court action mentioned above. Both suits were later consolidated in the U.S. District Court for the Northern District of California, San Francisco Division. By these consolidated actions, Applied Biosytems was seeking ownership of the three Macevicz patents, unspecified costs and damages, and a declaration of non-infringement and invalidity of these patents. Applied Biosystems was not asserting any claim for patent infringement against us.
On January 5, 2009, the case went to trial in two phases. The first phase addressed the determination of ownership of thepatents-in-suit, and the second phase addressed whether these patents were valid and infringed by Applied Biosystems. On January 14, 2009, at the end of the first phase, a federal jury determined that Solexa was the rightful owner of all three Macevicz patents. On January 27, 2009, the same jury found that Applied Biosystems did not infringe the ’119 probe patent and that the ’119 patent was valid. In August 2008, the court had ruled that Applied Biosystems’ two-base system did not infringe the ’341 and ’597 patents. Prior to the jury finding of non-infringement of the ’119 patent, Applied Biosystems conceded its one-base system infringed claim 1 of the ’597 patent and Solexa conceded invalidity of that same claim under the court’s construction of that claim. Both parties reserved the right to appeal the court’s construction of claim 1 of the ’597 patent, among other things.
Our Genome Analyzer products use a different technology, calledSequencing-by-Synthesis (SBS), which is not covered by any of the Macevicz patents. In addition, we have no plans to use any of theSequencing-by-Ligation technologies covered by these patents.operations.
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| Item 4. | Submission of Matters to a Vote of Security Holders.Reserved. |
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2008.
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PART II
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| 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 fiscal periods indicated, the quarterly high and low sales prices per share of our common stock as reported on The NASDAQ Global Select Market and has been adjusted to reflect thetwo-for-one split of our common stock that was effected in the form of a 100% stock dividend on September 22, 2008.Market.
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| | | 2008 | | 2007 | | | 2010 | | 2009 | |
| | | High | | Low | | High | | Low | | | High | | Low | | High | | Low | |
| |
| First Quarter | | $ | 38.30 | | | $ | 27.89 | | | $ | 21.10 | | | $ | 14.06 | | | $ | 40.90 | | | $ | 29.76 | | | $ | 38.95 | | | $ | 23.29 | |
| Second Quarter | | | 43.50 | | | | 34.90 | | | | 21.04 | | | | 14.47 | | | | 45.72 | | | | 36.70 | | | | 39.92 | | | | 33.17 | |
| Third Quarter | | | 47.88 | | | | 36.97 | | | | 26.94 | | | | 20.02 | | | | 50.93 | | | | 41.15 | | | | 41.56 | | | | 30.73 | |
| Fourth Quarter | | | 42.32 | | | | 18.82 | | | | 31.69 | | | | 25.17 | | | | 66.59 | | | | 47.70 | | | | 44.07 | | | | 25.59 | |
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 26, 2003January 1, 2006 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 stockholder returns.
Holders
As of February 2, 20094, 2011 we had 476348 record holders and 56,709 beneficial holders of our common stock.
Dividends
Our present policy is to retain earnings, if any, to finance future growth. We have never paid cash dividends and have no present intention to pay cash dividends in the foreseeable future. In addition, the
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indenture for our convertible senior notes due 2014, which notes are convertible into
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cash 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.
Purchases of Equity Securities by the Issuer
On October 23, 2008,In July 2010, our board of directors authorized a $120.0$200 million stock repurchase program, which was announced October 24, 2008.with $100 million allocated to repurchasing our common stock under a 10b5-1 plan over a 12 month period and $100 million allocated to repurchasing our common stock at management’s discretion during open trading windows. The following table summarizes shares repurchased pursuant to this program during the quarter ended December 28, 2008:January 2, 2011:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | 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 29 – October 26, 2008 | | | 92,969 | | | $ | 23.67 | | | | 92,969 | | | $ | 117,797,090 | |
| October 27 – November 23, 2008 | | | 2,915,514 | | | | 22.80 | | | | 2,915,514 | | | | 51,260,959 | |
| November 24 – December 28, 2008 | | | 100,400 | | | | 20.35 | | | | 100,400 | | | | 49,215,398 | |
| | | | | | | | | | | | | | | | | |
| Total | | | 3,108,883 | | | $ | 22.75 | | | | 3,108,883 | | | $ | 49,215,398 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | 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) | |
| |
| October 4 – October 31, 2010 | | | 160,517 | | | $ | 49.84 | | | | 160,517 | | | $ | 176,002,121 | |
| November 1 – November 28, 2010 | | | 139,738 | | | | 57.25 | | | | 139,738 | | | | 168,002,146 | |
| November 29, 2010 – January 2, 2011 | | | 188,747 | | | | 63.58 | | | | 188,747 | | | | 156,002,505 | |
| | | | | | | | | | | | | | | | | |
| Total | | | 489,002 | | | $ | 57.86 | | | | 489,002 | | | $ | 156,002,505 | |
| | | | | | | | | | | | | | | | | |
| | |
| (1) | | All shares purchased during the quarter ended January 2, 2011 were in connection with the Company’s $120.0 millionour stock repurchase program announced October 24, 2008 andprograms authorized by our board of directors in July 2010. All stock repurchases were made in open-market transactions or through privately negotiated transactions in compliance withRule 10b-18under the Securities Exchange Act of 1934.10b5-1 trading program. |
Sales of Unregistered Securities
None during the fourth quarter of fiscal 2008.2010.
| |
| 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 28, 2008.January 2, 2011.
Statement of Operations Data
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | Year Ended
| | Year Ended
| | Year Ended
| | | Years Ended | |
| | | December 28,
| | December 30,
| | December 31
| | January 1,
| | January 2,
| | | January 2,
| | January 3,
| | December 28,
| | December 30,
| | December 31,
| |
| | | 2008
| | 2007
| | 2006
| | 2006
| | 2005
| | | 2011
| | 2010
| | 2008
| | 2007
| | 2006
| |
| | | (52 weeks) | | (52 weeks) | | (52 weeks) | | (52 weeks) | | (53 weeks) | | | (52 weeks) | | (53 weeks) | | (52 weeks) | | (52 weeks) | | (52 weeks) | |
| | | (In thousands, except per share data) | | | | | (In thousands, except per share data) | | | |
| |
| Total revenue | | $ | 573,225 | | | $ | 366,799 | | | $ | 184,586 | | | $ | 73,501 | | | $ | 50,583 | | | $ | 902,741 | | | $ | 666,324 | | | $ | 573,225 | | | $ | 366,799 | | | $ | 184,586 | |
| Income (loss) from operations(1),(2),(3) | | | 80,457 | | | | (301,201 | ) | | | 37,812 | | | | (21,447 | ) | | | (5,513 | ) | |
| Income (loss) from operations(1),(2) | | | | 211,654 | | | | 125,597 | | | | 80,457 | | | | (301,201 | ) | | | 37,812 | |
| Net income (loss) | | | 50,477 | | | | (278,359 | ) | | | 39,968 | | | | (20,874 | ) | | | (6,225 | ) | | | 124,891 | | | | 72,281 | | | | 39,416 | | | | (287,305 | ) | | | 39,968 | |
| Net income (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 0.43 | | | | (2.57 | ) | | | 0.45 | | | | (0.26 | ) | | | (0.09 | ) | | $ | 1.01 | | | $ | 0.59 | | | $ | 0.34 | | | $ | (2.65 | ) | | $ | 0.45 | |
| Diluted | | | 0.38 | | | | (2.57 | ) | | | 0.41 | | | | (0.26 | ) | | | (0.09 | ) | | $ | 0.87 | | | $ | 0.53 | | | $ | 0.30 | | | $ | (2.65 | ) | | $ | 0.41 | |
| Shares used in calculating net income (loss) per share(4): | | | | | | | | | | | | | | | | | | | | | |
| Shares used in calculating net income (loss) per share: | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 116,855 | | | | 108,308 | | | | 89,002 | | | | 80,294 | | | | 71,690 | | | | 123,581 | | | | 123,154 | | | | 116,855 | | | | 108,308 | | | | 89,002 | |
| Diluted | | | 133,607 | | | | 108,308 | | | | 97,508 | | | | 80,294 | | | | 71,690 | | | | 143,433 | | | | 137,096 | | | | 133,607 | | | | 108,308 | | | | 97,508 | |
2230
Balance Sheet Data
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 28,
| | December 30,
| | December 31,
| | January 1,
| | January 2,
| | | January 2,
| | January 3,
| | December 28,
| | December 30,
| | December 31,
|
| | | 2008 | | 2007 | | 2006 | | 2006 | | 2005 | | | 2011 | | 2010 | | 2008 | | 2007 | | 2006 |
| | | | | (In thousands) | | | | | | | (In thousands) |
| |
| Cash, cash equivalents and short-term investments(3),(5),(6),(7) | | $ | 640,075 | | | $ | 386,082 | | | $ | 130,804 | | | $ | 50,822 | | | $ | 66,994 | | |
| Cash, cash equivalents and short-term investments(2),(3),(4),(5) | | | $ | 894,289 | | | $ | 693,527 | | | $ | 640,075 | | | $ | 386,082 | | | $ | 130,804 | |
| Working capital | | | 355,379 | | | | 397,040 | | | | 159,950 | | | | 57,992 | | | | 64,643 | | | | 723,881 | | | | 540,354 | | | | 483,113 | | | | 397,040 | | | | 159,950 | |
| Total assets | | | 1,377,100 | | | | 987,732 | | | | 300,584 | | | | 100,610 | | | | 94,907 | | | | 1,839,113 | | | | 1,429,937 | | | | 1,327,171 | | | | 929,981 | | | | 300,584 | |
| Current portion of long-term debt(7) | | | 399,999 | | | | — | | | | — | | | | — | | | | — | | |
| Long-term debt, current portion(5) | | | | 311,609 | | | | 290,202 | | | | 276,889 | | | | 16 | | | | — | |
Long-term debt, less current portion(7)(5) | | | — | | | | 400,000 | | | | — | | | | 54 | | | | — | | | | — | | | | — | | | | — | | | | 258,007 | | | | — | |
| Total stockholders’ equity(1),(5),(6) | | | 848,596 | | | | 411,678 | | | | 247,342 | | | | 72,497 | | | | 72,262 | | |
| Total stockholders’ equity(1),(2),(3),(4) | | | | 1,197,675 | | | | 864,248 | | | | 798,667 | | | | 353,927 | | | | 247,342 | |
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) | | The consolidated financial statements include results of operations of acquired companies commencing on their respective acquisition dates. In August 2008, weAs a result of prior acquisitions completed, our acquisition of Avantome. As consideration, we paid $25.8 million in cash and may pay up to an additional $35.0 million in contingent cash consideration based on the achievement of certain milestones. In January 2007, we completed our acquisition of Solexa in a stock for stock merger transaction for a total purchase price of $618.7 million. In April 2005, we completed our acquisition of Cyvera Corporation for a total purchase price of $17.8 million. As part of the accounting for the acquisitions, we recorded charges to write-off acquired in-process research and development, or IPR&D, of $1.3 million, $11.3 million, $24.7 million, $303.4 million and $15.8$303.4 million during the fiscal years ended January 2, 2011, January 3, 2010, December 28, 2008, and December 30, 2007, and January 1, 2006, respectively. See Note 2 of Notes to Consolidated Financial Statements for further information regarding our Avantome and Solexa acquisitions. |
|
(2) | | We adopted Statement of Financial Accounting Standards (SFAS) 123(R),“Share-Based Payment,”on January 2, 2006 using the modified prospective transition method. Because we elected to use the modified prospective transition method, results for prior periods have not been restated to include share-based compensation expense. See Note 1 and Note 10 ofnote “3. Acquisitions” in Part II, Item 8, Notes to Consolidated Financial Statements for further information. |
| |
(3)(2) | | For the year ended December 30, 2007, we recorded a $54.0 million charge for the settlement of our litigation with Affymetrix. In January 2008, we paid $90.0 million related to the Affymetrix settlement. See Note 5 of Notes to Consolidated Financial Statements. |
| |
(4) | | Adjusted to reflect atwo-for-one stock split effective September 22, 2008. For an explanation of the determination of the number of shares used to compute basic and diluted net income (loss) per share, see Note 1 of Notes to Consolidated Financial Statements. |
|
(5)(3) | | 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 $342.6$342.7 million. See Note 10 ofnote “9. Stockholders’ Equity” in Part II, Item 8, Notes to Consolidated Financial Statements. |
| |
(6)(4) | | For the years ended January 2, 2011, January 3, 2010, December 28, 2008 and December 30, 2007, we repurchased 0.8 million, 6.1 million, 3.1 million and 14.8 million shares, respectively, of common stock for $44.0 million, $175.1 million, $70.8 million and $251.6 million, respectively. See Note 10 ofnote “9. Stockholders’ Equity” in Part II, Item 8, Notes to Consolidated Financial Statements. |
| |
(7)(5) | | In February 2007, we issued $400.0 million principal amount of 0.625% Convertible Senior Notes due 2014. As of December 28, 2008,Due to the convertibility feature, we classify the principal amount of these Notes is classifiedthe notes as current liabilities since the conditions to convertibility were satisfied during the third calendar quarter of 2008.in our consolidated balance sheet. See Notenote “7. Convertible Senior Notes” in Part II, Item 8, of Notes to Consolidated Financial Statements.Statements for further information. |
23
| |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The purposeCertain statements set forth below constitute forward-looking statements. See “Special Note Regarding Forward-Looking Statements” for additional factors relating to such statements, and see “Risk Factors” in Item 1A of the followingthis report for a discussion and analysis isof certain risk factors applicable to provide an overview of theour business, to help facilitate an understanding of significant factors influencing our historical operating results, financial condition, and cash flows and also to convey our expectationsresults of the potential impact of known trends, events, or uncertainties that may impact our future results. The following discussion and analysis should be read in conjunction with “Item 6. Selected Financial Data” and our consolidated financial statements and notes thereto included elsewhere in this Annual Report onForm 10-K. The 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, strategies, objectives, expectations, intentions and adequacy of resources. 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 our acquired technologies with our existing technology, the commercial launch of new products and the duration which our existing cash and other resources is expected to fund our operating activities.
Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward looking statements. Factors that could cause or contribute to these differences include those discussed in “Item 1A. Risk Factors” as well as those discussed elsewhere. The risk factors and other cautionary statements made in this Annual Report onForm 10-K should be read as applying to all related forward-looking statements wherever they appear in this Annual Report onForm 10-K.operations.
Business Overview
We are a leading developer, manufacturer, and marketer of life science tools and integrated systems for the large scale analysis of genetic variation and biological function. Using our proprietary technologies, we provide a comprehensive line of genetic analysis solutions, with products and services that currently serve thea broad range of highly interconnected markets, including sequencing, genotyping, and gene expression, markets. In the future, we expect to enter the market forand molecular diagnostics. Our customers include
31
leading genomic research centers, pharmaceutical companies, academic institutions, government laboratories, and clinical research organizations, as well as pharmaceutical, biotechnology, agrigenomics, and biotechnologyconsumer genomics companies.
Our broad portfolio of systems, consumables, and analysis tools provide researchers aroundare designed to simplify genetic analysis. This portfolio addresses the world with the performance, throughput, cost effectivenessrange of genomic complexity, price points, and flexibility necessary to perform the billions of genetic tests needed to extract valuable medical information from advances in genomics and proteomics. We believe this information will enablethroughputs, enabling 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 drugsselect the best solution for individual patients.
On January 26,their scientific challenge. In 2007, we completed thethrough our acquisition of Solexa, for 26.2 million sharesInc., we acquired our proprietary sequencing by synthesis (SBS) technology that is at the heart of our common stock. As a result of that acquisition, we develop and commercialize genetic analysis technologiesleading-edge sequencing instruments. These systems can be used to efficiently perform a range of nucleic acid (DNA, RNA) analyses including whole genome re-sequencing,on large numbers of samples. For more focused studies, our array-based solutions provide ideal tools to perform genome-wide association studies (GWAS) involving single-nucleotide polymorphism (SNP) genotyping and copy number variation (CNV) analyses, as well as gene expression profiling and other DNA, RNA, and protein studies. To further enhance our genetic analysis workflows, in January 2011 we acquired Epicentre Technologies Corporation, a leading provider of nucleic acid sample preparation reagents and small RNA analysis. We believe we are the only company with genome-scale technologyspecialty enzymes for sequencing genotyping and gene expression,microarray applications. In 2010, through our acquisition of Helixis, Inc., we expanded our portfolio to include real-time polymerase chain reaction (PCR), one of the three cornerstones of modern genetic analysis.most widely used technologies in life sciences. Our new Eco Real-Time PCR System provides researchers with an affordable, full-featured system to perform targeted validation studies.
During the first quarter of 2008, we reorganized our operating structure intoWe are organized in two newly created business segments, the Life Sciences Business Unit and Diagnostics.the Diagnostics Business Unit. During 2008, the2010, our Diagnostics Business Unit had limited business activity and, accordingly, operating results wereare reported on an aggregate basis as one operating segment. In the future, atAt each reporting period end, we will reassess our reportable operating segments, particularly as we enter the market forcontinue to develop our molecular diagnostics.diagnostics business.
On August 1, 2008,Our analysis presented below is organized to provide the information we completedbelieve will be useful for understanding the acquisitionrelevant trends going forward. However, this discussion should be read in conjunction with our consolidated financial statements and the notes thereto in Item 8 of Avantome.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. 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.
Next-Generation Sequencing
Growth in the sequencing market and enhancements in our product portfolio continue to drive both sequencing instrument and consumable sales. In Q1 2010, we began customer shipments of the HiSeq 2000, our newest high-throughput next-generation sequencing instrument. The HiSeq 2000 was developed over a three-year period and is designed to provide ultra-high sequencing throughput that will significantly lower the cost of sequencing. As considerationa result of the launch, a substantial number of our customers who previously purchased the Genome Analyzer sequencing system ordered the HiSeq 2000 to replace their existing sequencer with this new system. As a result of strong demand, both from customers who desired to trade-in their existing Genome Analyzers and new customers who ordered the HiSeq 2000, our manufacturing capacity was constrained throughout all of 2010. During the year we significantly increased our manufacturing capacity for the acquisition,HiSeq 2000 to meet growing demand. We now believe that we paid $25.8 millionhave increased our capacity to the point where we can begin reducing our backlog and fulfilling new orders in cash and may pay upa more timely manner. Additionally, in the first half of 2011, we expect to an additional $35.0 millionfurther enhance the performance of the HiSeq 2000. We believe that these enhancements will enable customers to sequence whole human genomes for less than $5,000 in contingent cash consideration based onconsumable costs. As we continue to make improvements that reduce the achievementcost of certain milestones. Avantomesequencing we believe that more customers will use the HiSeq 2000, which generates more revenue per instrument time than the Genome Analyzer. We believe that this will increase our consumable pull-through, which is a development stage company working on developing low-cost, long read sequencing technology. We expect this technology, if and when available as a product, to have applicability to bothmeasure of the research and diagnostic markets.annual consumable revenue generated from each instrument in the installed base.
2432
Our revenueIn Q4 2011, we expect to begin volume customer shipments of our recently announced MiSeq, a low-cost personal sequencing system that we believe will provide individual researchers a platform with rapid turnaround time, high accuracy, and streamlined workflow. We believe the launch of the MiSeq will expand our presence in the lower throughput sequencing market.
Microarrays
As a complement to advances in sequencing technology, we believe microarrays offer a cheaper, faster, and more accurate technology for use when genetic content is subjectknown. The information content of microarrays is fixed and reproducible. As such, microarrays provide repeatable, standardized assays for certain subsets of nucleotide bases within the overall genome. During 2010, microarray product sales increased as compared to fluctuations2009, led by:
| | |
| • | the launch of the Omni 2.5, a four sample BeadChip enabling interrogation of approximately 2.5 million markers per sample; |
|
| • | growth in sales of focused content arrays primarily from use for genetic screening in applied markets such as agriculture and fine mapping for follow up to GWAS projects; and |
|
| • | the launch of the HiScanSQ, our instrument that integrates next-generation sequencing with genotyping and gene expression arrays. |
As additional new rare variant content becomes available from the 1000 Genomes Project, an international research effort launched in 2008 to establish the most detailed catalog of human genetic variation, we plan to launch a microarray that will feature approximately five million markers per sample. We expect to begin customer shipments of this product in mid-2011. However, the launch of this product will depend on the timing of the release of new content from the 1000 Genomes Project. We believe new product introductions as new content becomes available will continue to drive growth in the sales of our microarray products.
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 $10.0 billion in funding was provided to the National Institutes of Health (NIH) to support the advancement of scientific research. While it is not possible to precisely quantify the net impact of orders resulting from the Recovery Act due to the timinguncertainty surrounding orders that would have been received in absence of stimulus, we believe approximately $70.4 million in orders during 2010 were directly related to Recovery Act grants. We believe Recovery Act funds will continue to be spent by our customers through 2012.
Gross Margin
Our gross profit as a percentage of revenue (gross margin) decreased during 2010 as compared to 2009 due to the effects of discounts provided to customers on the sales of high-valueHiSeq 2000s associated with promotional programs, including the Genome Analyzer trade-in program, and lower margins on our newer products, such as the HiSeq 2000. Over the course of 2011, we expect our gross margin to improve as the Genome Analyzer trade-in program is completed and sales of consumables, which generally carry a higher gross margin than instruments, increase as a percentage of total revenue. We also expect improved manufacturing efficiency for the HiSeq 2000 to improve gross margin in 2011.
Operating Expense
We expect to incur additional operating costs to support the expected growth in our business. We believe a substantial investment in research and development is essential to remain competitive and expand into additional markets. Accordingly, we expect our research and development expenses to increase in absolute dollars as we continue to expand our product base. Selling, general and administrative expenses are also
33
expected to increase in absolute dollars as we invest in staff and infrastructure to support top line growth and global expansion.
Income Taxes
The provision for income taxes is dependent on the mix of earnings in tax jurisdictions with different statutory tax rates and the other factors discussed in the risk factor “We are subject to risks related to taxation in multiple jurisdictions and the possible loss of the tax deduction on our outstanding convertible notes” in Item 1A of thisForm 10-K. For 2011 and beyond, we anticipate increased earnings in higher tax jurisdictions, which may adversely impact the provision for income taxes.
Due to the expected utilization of the majority of our net operating loss carryforwards and U.S. federal research and development tax credit carryforwards, we anticipate significant income tax payments in 2011 and beyond.
Results of Operations
To enhance comparability, the following table sets forth audited consolidated statement of operations data for the years ended January 2, 2011, January 3, 2010 and December 28, 2008 stated as a percentage of total revenue.
| | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| |
| Revenue: | | | | | | | | | | | | |
| Product revenue | | | 93 | % | | | 94 | % | | | 93 | % |
| Service and other revenue | | | 7 | | | | 6 | | | | 7 | |
| | | | | | | | | | | | | |
| Total revenue | | | 100 | | | | 100 | | | | 100 | |
| | | | | | | | | | | | | |
| Cost of revenue: | | | | | | | | | | | | |
| Cost of product revenue | | | 30 | | | | 29 | | | | 34 | |
| Cost of service and other revenue | | | 2 | | | | 2 | | | | 2 | |
| Amortization of intangible assets | | | 1 | | | | 1 | | | | 2 | |
| Impairment of manufacturing equipment | | | — | | | | — | | | | 1 | |
| | | | | | | | | | | | | |
| Total cost of revenue | | | 33 | | | | 32 | | | | 39 | |
| | | | | | | | | | | | | |
| Gross profit | | | 67 | | | | 68 | | | | 61 | |
| | | | | | | | | | | | | |
| Operating expense: | | | | | | | | | | | | |
| Research and development | | | 20 | | | | 21 | | | | 17 | |
| Selling, general and administrative | | | 24 | | | | 26 | | | | 26 | |
| Acquisition related (gain) expense, net | | | (1 | ) | | | 2 | | | | 4 | |
| | | | | | | | | | | | | |
| Total operating expense | | | 43 | | | | 49 | | | | 47 | |
| | | | | | | | | | | | | |
| Income from operations | | | 24 | | | | 19 | | | | 14 | |
| Other income (expense): | | | | | | | | | | | | |
| Interest income | | | 1 | | | | 2 | | | | 2 | |
| Interest expense | | | (3 | ) | | | (4 | ) | | | (4 | ) |
| Other (expense) income, net | | | (1 | ) | | | — | | | | 1 | |
| | | | | | | | | | | | | |
| Total other expense, net | | | (3 | ) | | | (2 | ) | | | (1 | ) |
| | | | | | | | | | | | | |
| Income before income taxes | | | 21 | | | | 17 | | | | 13 | |
| Provision for income taxes | | | 7 | | | | 6 | | | | 6 | |
| | | | | | | | | | | | | |
| Net income | | | 14 | % | | | 11 | % | | | 7 | % |
| | | | | | | | | | | | | |
34
Comparison of 2010 and 2009
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, September 30, and December 31. The year ended January 2, 2011 was 52 weeks and the year ended January 3, 2010 was 53 weeks.
Revenue
| | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | Change | | | % Change | |
| | | (In thousands) | | | | | | | |
| |
| Product revenue | | $ | 842,510 | | | $ | 627,240 | | | $ | 215,270 | | | | 34 | % |
| Service and other revenue | | | 60,231 | | | | 39,084 | | | | 21,147 | | | | 54 | |
| | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 902,741 | | | $ | 666,324 | | | $ | 236,417 | | | | 35 | % |
| | | | | | | | | | | | | | | | | |
| Total gross profit | | $ | 601,540 | | | $ | 453,875 | | | $ | 147,665 | | | | 33 | % |
| Total gross margin | | | 66.6 | % | | | 68.1 | % | | | | | | | | |
Revenue
Product revenue consists primarily of revenue from the sale of consumables and instruments.
Consumable revenue increased $113.7 million, or 29%, to $505.0 million for 2010 compared to $391.3 million for 2009. Microarray consumable revenue, which constituted more than half of our total consumable revenue, increased $28.3 million primarily attributable to growth in sales of our Infinium BeadChips, which constituted a majority of our microarray consumable sales. Sales volume of our Infinium BeadChip products increased on a per sample basis during 2010 compared to 2009. The average selling price per sample, however, declined due to a change in product mix primarily attributable to growth in sales of our focused content arrays and a number of large sample volume purchase orders that incurred higher discounts. Revenue from sequencing consumables increased $85.4 million due to growth in the installed base of our sequencing systems.
Revenue from the sale of instruments increased $98.9 million, or 44%, to $324.6 million for 2010 compared to $225.7 million for 2009. Sequencing instrument revenue increased $85.7 million. We experienced increases in both the number of units sold and average selling prices per unit for our sequencing systems during 2010 compared to 2009. Unit growth was due to increased demand for next-generation sequencing systems. The increase in average selling prices was primarily attributable to the launch of the HiSeq 2000 in Q1 2010. Microarray instrument revenue increased $13.2 million primarily attributable to strong demand for our HiScanSQ instrument launched in 2010. The launch of this system resulted in increases in both the number of units sold and average selling prices per unit for our microarray instruments during 2010 compared to 2009.
The increase in service projects,and other revenue, which includes extended warranty contracts and genotyping and sequencing services, was primarily attributable to an increase in extended warranty contracts for our growing installed base of sequencing systems.
Gross Margin
The decrease in gross margin was primarily attributable to the effect of discounts provided to customers on the sales of HiSeq 2000 associated with promotional programs, including the Genome Analyzer trade-in program, and lower margins on our newer products, such as the HiSeq 2000. See “Revenue Recognition” in note “1. Organization and Summary of Significant Accounting Policies” in Part II, Item 8, of thisForm 10-K for additional information on the Genome Analyzer trade-in program. The impact of seasonal spending patterns, the timingpromotional programs was partially offset by improved margins on sequencing consumables primarily attributable to improved overhead absorption from increased volumes and sizethe benefit of decreased costs associated with chemistry improvements.
35
Operating Expense
| | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | Change | | | % Change | |
| | | (In thousands) | | | | | | | |
| |
| Research and development | | $ | 177,947 | | | $ | 140,616 | | | $ | 37,331 | | | | 27 | % |
| Selling, general and administrative | | | 220,990 | | | | 176,337 | | | | 44,653 | | | | 25 | |
| Acquisition related (gain) expense, net | | | (9,051 | ) | | | 11,325 | | | | (20,376 | ) | | | (180 | ) |
| | | | | | | | | | | | | | | | | |
| Total operating expense | | $ | 389,886 | | | $ | 328,278 | | | $ | 61,608 | | | | 19 | % |
| | | | | | | | | | | | | | | | | |
The increase in research and development expenses was primarily attributable to a $25.9 million increase in personnel expenses, including salaries, non-cash share-based compensation, and benefits, and an increase in other non-personnel expenses of $13.3 million comprised mostly of lab and production supplies expenses. These increases were primarily attributable to investments in new product development and commercialization along with projects our customers perform, changes in overall spending levels in the life science industryto sustain 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 inoptimize our existing product lines, or impacts fromportfolio.
The increase in selling, general and administrative expenses was primarily attributable to a $31.8 million increase in personnel expenses, including salaries, non-cash share-based compensation, and benefits, associated with 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 indicationbusiness, and an increase in outside service expenses of our future performance.$9.7 million comprised mostly of legal and marketing expenses.
AsDuring 2010, acquisition related (gain) expense, net, includes a gain of December 28, 2008, our accumulated deficit was $332.5$10.4 million and total stockholders’ equity was $848.6 million. Our losses have principally occurred asfrom a resultchange in the fair value of contingent consideration related to an acquisition, partially offset by an acquired in-process research and development (IPR&D)charge of $1.3 million related to a milestone payment made to the former shareholders of a company we acquired in 2008. During 2009, acquisition related (gain) expense, net, included acquired in-process research and development charges of $24.7$11.3 million related to milestone payments made to the former shareholders of the company we acquired in 2008.
Other Expense, Net
| | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | Change | | | % Change | |
| | | (In thousands) | | | | | | | |
| |
| Interest income | | $ | 8,378 | | | $ | 11,029 | | | $ | (2,651 | ) | | | (24 | )% |
| Interest expense | | | (24,598 | ) | | | (23,718 | ) | | | (880 | ) | | | 4 | |
| Other (expense) income, net | | | (10,055 | ) | | | 1,217 | | | | (11,272 | ) | | | (926 | ) |
| | | | | | | | | | | | | | | | | |
| Total other expense, net | | $ | (26,275 | ) | | $ | (11,472 | ) | | $ | (14,803 | ) | | | 129 | % |
| | | | | | | | | | | | | | | | | |
Interest income decreased despite an increase in our average cash and investment balance due to an overall decline in interest rates during 2010 compared to 2009. The increase in interest expense was due to the amortization of the discount on our convertible senior notes. The change in other (expense) income, net, was primarily attributable to a $13.2 million impairment charge recorded in Q4 2010 related to the impairment of a cost-method investment and a related note receivable (see note “5. Impairment” in Part II, Item 8 of thisForm 10-K for additional information on this impairment) partially offset by a $2.9 million gain recognized in Q2 2010 on the acquisition of Helixis, Inc., which represented the difference between the carrying value of our cost-method investment in Helixis, Inc. prior to acquisition and the fair value of that investment at the time of acquisition.
Provision for Income Taxes
| | | | | | | | | | | | | | | | | |
| | | 2010 | | 2009 | | Change | | % Change |
| | | (In thousands) | | | | |
| |
| Income before income taxes | | $ | 185,379 | | | $ | 114,125 | | | $ | 71,254 | | | | 62 | % |
| Provision for income taxes | | $ | 60,488 | | | $ | 41,844 | | | $ | 18,644 | | | | 45 | % |
| Effective tax rate | | | 32.6 | % | | | 36.7 | % | | | | | | | | |
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The decrease in the effective tax rate was primarily attributable to the gain recorded on the change in the fair value of contingent consideration related to our acquisition of AvantomeHelixis, Inc. that is excluded from taxable income and a decrease in nondeductible acquired IPR&D recognized for financial reporting purposes in 2010 as compared to 2009.
Comparison of 2009 and 2008
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, September 30, and December 31. The year ended January 3, 2010 was 53 weeks and the year ended December 28, 2008 was 52 weeks.
Revenue
| | | | | | | | | | | | | | | | | |
| | | 2009 | | | 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 | % |
| | | | | | | | | | | | | | | | | |
| Total gross profit | | $ | 453,875 | | | $ | 353,094 | | | $ | 100,781 | | | | 29 | % |
| Total gross margin | | | 68.1 | % | | | 61.6 | % | | | | | | | | |
Revenue
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 2009 compared to $333.7 million for 2008. Microarray consumable revenue, which constituted more than half of our consumable revenue, declined $11.4 million 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 constituted 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.
Revenue from sequencing consumables increased $68.9 million 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 2009 compared to $185.7 million for 2008 primarily due to a $56.4 million increase in sales of our sequencing systems. During 2009 as compared to 2008 units sold and average selling prices increased for our Genome Analyzer systems, which constituted a majority of sequencing instrument revenue. The increase in units sold was driven by increased demand for next-generation sequencing systems. 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 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.
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Gross Margin
The increase in gross margin was primarily attributable to lower costs for our sequencing consumables and instrumentation, a $4.1 million impairment charge recorded in 2008 and $303.4 million related to our acquisition of Solexafor which there was no similar charge recognized in 2007, the substantial resources required for the research, development and manufacturingscale-up effort required to commercialize our products and services2009, and a charge$3.8 million decrease in amortization expense. The gross margin on sequencing consumables increased primarily due to improved overhead absorption from increased volumes of $54.5sequencing consumables 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 gross margin on sequencing instruments increased primarily due to production efficiencies and reduced material costs coupled with higher average selling prices.
Operating Expense
| | | | | | | | | | | | | | | | | |
| | | 2009 | | | 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 | |
| Acquisition related (gain) expense, net | | | 11,325 | | | | 24,660 | | | | (13,335 | ) | | | (54 | ) |
| | | | | | | | | | | | | | | | | |
| Total operating expense | | $ | 328,278 | | | $ | 272,637 | | | $ | 55,641 | | | | 20 | % |
| | | | | | | | | | | | | | | | | |
The increase in research and development was primarily attributable to a $22.9 million increase in 2007personnel-related expenses, including salaries, non-cash share-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 were primarily related to settlement ofthe growth in our litigation with Affymetrix. We expectefforts to continue to incur substantial costs for researchoptimize and development over the next several years. We will also need tocommercialize our sequencing and BeadArray technologies.
The increase ourin selling, general and administrative costs as we build upexpenses was primarily attributable to an increase of $26.6 million in personnel-related expenses associated with the growth of our salesbusiness, including salaries, non-cash share-based compensation, and marketing infrastructure to expand and support the sale of systems, other products and services.benefits.
During 2009 acquisition related (gain) expense, net, includes IPR&D charges of $11.3 million related to milestone payments made to the former shareholders of a company we acquired in 2008. During 2008 acquisition related (gain) expense, net, includes IPR&D charges of $24.7 million as a result of the same acquisition.
Other Expense, Net
| | | | | | | | | | | | | | | | | |
| | | 2009 | | | 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 (expense), net | | | 1,217 | | | | 1,921 | | | | (704 | ) | | | (37 | ) |
| | | | | | | | | | | | | | | | | |
| Total other expense, net | | $ | (11,472 | ) | | $ | (7,770 | ) | | $ | (3,702 | ) | | | 48 | % |
| | | | | | | | | | | | | | | | | |
Interest income decreased despite an increase in our average cash and investment balance due to an overall decline in interest rates during 2009 compared to 2008. Interest expense increased due to the amortization of the discount on our convertible senior notes. Other income (expense), 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.
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Provision for Income Taxes
| | | | | | | | | | | | | | | | | |
| | | 2009 | | 2008 | | Change | | % Change |
| | | (In thousands) | | | | |
| |
| Income before income taxes | | $ | 114,125 | | | $ | 72,687 | | | $ | 41,438 | | | | 57 | % |
| Provision for income taxes | | $ | 41,844 | | | $ | 33,271 | | | $ | 8,573 | | | | 26 | % |
| Effective tax rate | | | 36.7 | % | | | 45.8 | % | | | | | | | | |
The decrease in the effective tax rate was primarily attributable to a decrease in nondeductible acquired IPR&D recognized for financial reporting purposes in 2009 compared to 2008. 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.
Liquidity and Capital Resources
Cash flow summary
| | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | (In thousands) | |
| |
| Net cash provided by operating activities | | $ | 272,573 | | | $ | 172,191 | | | $ | 87,882 | |
| Net cash used in investing activities | | | (285,053 | ) | | | (256,569 | ) | | | (277,249 | ) |
| Net cash provided by (used in) financing activities | | | 116,474 | | | | (98,862 | ) | | | 337,672 | |
| Effect of exchange rate changes on cash and cash equivalents | | | 320 | | | | 849 | | | | 3,778 | |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | $ | 104,314 | | | $ | (182,391 | ) | | $ | 152,083 | |
| | | | | | | | | | | | | |
Operating Activities
Cash provided by operating activities in 2010 consists of net income of $124.9 million plus net non-cash adjustments of $149.8 million and a $2.1 million decrease in net operating assets. The primary non-cash expenses added back to net income included share based compensation of $71.6 million, depreciation and amortization expenses related to property and equipment and intangible assets of $42.0 million, and the amortization of the debt discount on our convertible notes totaling $21.4 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 provided by operating activities in 2009 consists of net income of $72.3 million plus net non-cash adjustments of $115.7 million and an $15.8 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.
Investing Activities
Cash used in investing activities totaled $285.0 million in 2010. During the year we:
| | |
| • | purchased and soldavailable-for-sale securities totaling $846.2 million and $688.6 million, respectively; |
|
| • | paid net cash of $98.2 million for acquisitions; |
|
| • | sold trading securities totaling $54.9 million; |
|
| • | used $49.8 million for capital expenditures primarily associated with the purchase of manufacturing equipment and infrastructure for additional production capacity and rental and loaner instruments; and |
|
| • | made strategic investments totaling $27.7 million. |
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Cash used in investing activities totaled $256.6 million in 2009. We purchased and soldavailable-for-sale securities totaling $694.5 million and $514.2 million, respectively. We incurred $52.7 million in capital expenditures primarily associated with the expansion of our facilities and infrastructure at our San Diego, Hayward and UK locations.
Financing Activities
Cash provided by financing activities totaled $116.5 million in 2010. We received $118.0 million in proceeds from the issuance of our common stock through the exercise of stock options and warrants and under our Employee Stock Purchase Plan. We also received $42.4 million in incremental tax benefit related to stock options exercised. These increases were partially offset by common stock repurchases of $44.0 million.
Cash used in financing activities totaled $98.9 million in 2009. 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 issuance of common stock through the exercise of stock options and under our Employee Stock Purchase Plan. We also received $39.3 million in incremental tax benefit related to stock options exercised.
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.
At January 2, 2011, we had approximately $894.3 million in cash and short-term investments. Our short-term investments include marketable securities consisting of debt securities in government sponsored entities, corporate debt securities, and U.S. treasury notes.
On February 16, 2007, we issued $400.0 million in principal of convertible senior notes that mature February 15, 2014. We pay 0.625% interest per annum on the principal amount of the notes, payable semi-annually in arrears in cash on February 15 and August 15 of each year. The notes are convertible into cash and, if applicable, shares of our common stock under certain circumstances as described in note “7. Convertible Senior Notes” in Part II, Item 8 of thisForm 10-K. As of January 2, 2011, the principal amount of the notes was $390.0 million due to the conversion of $10.0 million of the notes during the first quarter of 2009. During the period from January 3, 2011 to February 28, 2011, certain noteholders notified us of their election to convert an aggregate of $251.1 million principal amount of the notes. See note “15. Subsequent Events” in Part II, Item 8, of thisForm 10-K for additional information on these conversions.
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; |
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| • | the repurchase of our outstanding common stock; |
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| • | the continued advancement of research and development efforts; |
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| • | the acquisition of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities; and |
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| • | 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 for at least the next 12 months, barring unforeseen circumstances. Operating needs
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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; |
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| • | scientific progress in our research and development programs and the magnitude of those programs; |
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| • | competing technological and market developments; and |
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| • | 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 2, 2011, we were not involved in any “off-balance sheet arrangements” within the meaning of the rules of the SEC.
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 2, 2011, 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) | | $ | 398,530 | | | $ | 2,437 | | | $ | 4,875 | | | $ | 391,218 | | | $ | — | |
| Operating leases | | | 499,261 | | | | 13,965 | | | | 37,737 | | | | 40,985 | | | | 406,574 | |
| Amounts due under executive deferred compensation plan | | | 5,272 | | | | 5,272 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 903,063 | | | $ | 21,674 | | | $ | 42,612 | | | $ | 432,203 | | | $ | 406,574 | |
| | | | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | The table excludes $22.7 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. Income Taxes” in Part II, Item 8 of thisForm 10-K for further discussion of our uncertain tax positions. The table also excludes $35.0 million in contingent consideration related to acquisitions. We have not included this amount in the table because we cannot make a reasonably reliable estimate regarding whether the milestones required for these payments will be achieved. See note “3. Acquisitions” in Part II, Item 8 of thisForm 10-K for further discussion of our contingent consideration. |
|
| (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 principal amount of the notes as current in our consolidated balance sheet due to the convertibility feature. In addition, during the period from January 3, 2011 to February 28, 2011, certain noteholders notified us of their election to convert an aggregate of $251.1 million principal amount of the notes in exchange for the repayment of the principal amount and a certain number of shares of the Company’s common stock. See note “7. Convertible Senior Notes” and note 15 “Subsequent Events” in Part II, Item 8 of thisForm 10-K for further discussion of the terms of the convertible senior notes and the conversion notices in the subsequent period. |
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Critical Accounting Policies and Estimates
General
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, actual resultsthe 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 different frommaterially 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 estimates. Ourfollowing critical accounting policies are those that affectand 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 and involve difficult, subjective or complex judgments by management. Management hasdifferent from those presented. Members of our senior management have discussed the development and selection of theseour critical accounting policies and estimates, and our disclosure regarding them, with the audit committee of our board of directors, and the audit committee has reviewed the disclosure.directors. Our accounting policies are more fully described in Note 1note “1. Organization and Significant Accounting Policies” in Part II, Item 8 of the Consolidated Financial Statements.thisForm 10-K.
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, instrumentation, oligonucleotides (oligos)instruments and associated freight charges.consumables used in genetic analysis. Service and other revenue primarily 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 in accordance with the guidelines established by SEC Staff Accounting Bulletin (SAB) No. 104,Revenue Recognition. Under SAB No. 104, revenue cannot be recorded until all of the following criteria have been met:when persuasive evidence of an arrangement exists;exists, delivery has occurred or services have been rendered;rendered, the seller’s price to the buyer is fixed or determinable;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 that 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 or sequencing analysis data is deliveredmade available to the customer.customer or agreed upon milestones are reached.
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In order to assess whether the price is fixed andor determinable, we ensureevaluate whether refund rights exist. If there are no refund rights. Ifrights or payment terms are based on future performance, or a right of return exists, we defer revenue recognition until the price becomes fixed andor 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. Changes in judgments and estimates regarding application of SAB No. 104 might result in a change in the timing or amount of revenue recognized.
SalesWe regularly enter into contracts where revenue is derived from multiple deliverables including any mix of instrumentation generally include a standard one-year warranty. We also sell separately priced maintenance (extended warranty) contracts, whichproducts or services. These products or services are generally for one or two years, upon the expirationdelivered within a short time frame, approximately three to six months, of the initial warranty.contract execution date. Revenue recognition for extended warranty salescontracts with multiple deliverables is recognized ratably overbased on 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 our warrantied products were greater than our estimates, gross margins could be adversely affected.
While the majority of our sales agreements contain standard terms and conditions, we do enter into agreements that contain multiple elements or non-standard terms and conditions. Emerging Issues Task Force (EITF)No. 00-21,Revenue Arrangements with Multiple Deliverables,provides guidance on accounting for arrangements that involve the delivery or performance of multiple products, services, or rights to use assets within contractually binding arrangements. Significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separateindividual 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.
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For transactions entered into in 2009 and 2010, consideration is allocated at the inception of the contract to all deliverables based on their relative selling price. The relative selling price for revenue recognition purposes,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.
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 if so, howreliable evidence of fair value existed for all units of accounting in an arrangement. The fair value of an item was generally the price shouldcharged 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 allocated amongdetermined for any remaining undelivered elements.
In order to establish VSOE of selling price, we must regularly sell the deliverable elements, whenproduct 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 are 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 recognize revenueestablish 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 our best estimate of selling price using average selling prices over a rolling12-month period coupled with an assessment of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, we rely upon prices set by our pricing committee adjusted for each element, and the period over which revenue should be recognized.applicable discounts. We recognize revenue for delivered elements only when we determine that the fair values of undelivered elements are known and there are no uncertainties regarding customer acceptance.
In the first quarter of 2010, we offered an incentive with the launch of the HiSeq 2000 that enabled existing Genome Analyzer customers to trade in their Genome Analyzer and receive a discount on the purchase of a HiSeq 2000. The incentive was limited to customers who had purchased a Genome Analyzer as of the date of the announcement and was the first significant trade-in program we have offered. We will account for HiSeq 2000 discounts related to the Genome Analyzer trade-in program in the period in which the HiSeq 2000 revenue is recognized.
Investments
Effective January 1, 2008, we adopted Statement of Financial Accounting Standards (SFAS) No. 157,Fair Value Measurement. In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP)No. SFAS 157-2,Effective Date of FASB Statement No. 157, which provides a one-year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. In October 2008, the FASB issued FASB FSPSFAS 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB Statement No. 157,Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determiningWe determine the fair value of a financial asset when the market for that financial asset is not active.
We determine fair value of our financial assets and liabilities in accordance with SFAS No. 157 and157-3. Fair value is defined under SFAS No. 157 asbased 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 under SFAS No. 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describesWe use a fair value hierarchy based onwith three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used 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. |
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In using this fair value hierarchy, and the framework established by SFAS No. 157, 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 and we cannot guarantee thatmay need to increase our reserves will continue to be adequate.if the financial conditions of our customers deteriorate.
Inventory ValuationResults of Operations
We record adjustments to inventoryTo enhance comparability, the following table sets forth audited consolidated statement of operations data for potentially excess, obsolete or impaired goods in order to state inventory at net realizable value. We must make assumptions about future demand, market conditionsthe years ended January 2, 2011, January 3, 2010 and the releaseDecember 28, 2008 stated as a percentage 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.total revenue.
| | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| |
| Revenue: | | | | | | | | | | | | |
| Product revenue | | | 93 | % | | | 94 | % | | | 93 | % |
| Service and other revenue | | | 7 | | | | 6 | | | | 7 | |
| | | | | | | | | | | | | |
| Total revenue | | | 100 | | | | 100 | | | | 100 | |
| | | | | | | | | | | | | |
| Cost of revenue: | | | | | | | | | | | | |
| Cost of product revenue | | | 30 | | | | 29 | | | | 34 | |
| Cost of service and other revenue | | | 2 | | | | 2 | | | | 2 | |
| Amortization of intangible assets | | | 1 | | | | 1 | | | | 2 | |
| Impairment of manufacturing equipment | | | — | | | | — | | | | 1 | |
| | | | | | | | | | | | | |
| Total cost of revenue | | | 33 | | | | 32 | | | | 39 | |
| | | | | | | | | | | | | |
| Gross profit | | | 67 | | | | 68 | | | | 61 | |
| | | | | | | | | | | | | |
| Operating expense: | | | | | | | | | | | | |
| Research and development | | | 20 | | | | 21 | | | | 17 | |
| Selling, general and administrative | | | 24 | | | | 26 | | | | 26 | |
| Acquisition related (gain) expense, net | | | (1 | ) | | | 2 | | | | 4 | |
| | | | | | | | | | | | | |
| Total operating expense | | | 43 | | | | 49 | | | | 47 | |
| | | | | | | | | | | | | |
| Income from operations | | | 24 | | | | 19 | | | | 14 | |
| Other income (expense): | | | | | | | | | | | | |
| Interest income | | | 1 | | | | 2 | | | | 2 | |
| Interest expense | | | (3 | ) | | | (4 | ) | | | (4 | ) |
| Other (expense) income, net | | | (1 | ) | | | — | | | | 1 | |
| | | | | | | | | | | | | |
| Total other expense, net | | | (3 | ) | | | (2 | ) | | | (1 | ) |
| | | | | | | | | | | | | |
| Income before income taxes | | | 21 | | | | 17 | | | | 13 | |
| Provision for income taxes | | | 7 | | | | 6 | | | | 6 | |
| | | | | | | | | | | | | |
| Net income | | | 14 | % | | | 11 | % | | | 7 | % |
| | | | | | | | | | | | | |
Contingencies
We are subject to legal proceedings primarily related to intellectual property matters. Based on the information available at the balance sheet dates and through consultation with our legal counsel, we assess the likelihood of any adverse judgments or outcomes of these matters, as well as the potential ranges of probable losses. If losses are probable and reasonably estimable, we will record a liability and an expense for the estimated loss.
Goodwill and Intangible Asset Valuation
We make significant judgments in relation to the valuation of goodwill and intangible assets resulting from acquisitions and litigation settlements.
In determining the carrying amounts of our goodwill and intangible assets arising from acquisitions, we use the purchase method of accounting. The purchase method of accounting requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired, including IPR&D. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to at least annual impairment tests. The amounts and useful lives assigned to other acquired intangible assets impact future amortization, and the amount assigned to IPR&D is expensed immediately.
Determining the fair values and useful lives of intangible assets acquired as part of litigation settlements also requires the exercise of judgment. While there are a number of different generally accepted valuation methods to estimate the value of intangible assets, one method used by management is the discounted cash flow method. This method requires significant management judgment to forecast the future operating results used in this type of analysis. In addition, other significant estimates are required such as 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. These judgments can significantly affect our net operating results. Our judgments can also change with respect to the estimated life of intangible assets which could increase or decrease related amortization expense.
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SFAS No. 142,GoodwillComparison of 2010 and 2009
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, September 30, and December 31. The year ended January 2, 2011 was 52 weeks and the year ended January 3, 2010 was 53 weeks.
Revenue
| | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | Change | | | % Change | |
| | | (In thousands) | | | | | | | |
| |
| Product revenue | | $ | 842,510 | | | $ | 627,240 | | | $ | 215,270 | | | | 34 | % |
| Service and other revenue | | | 60,231 | | | | 39,084 | | | | 21,147 | | | | 54 | |
| | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 902,741 | | | $ | 666,324 | | | $ | 236,417 | | | | 35 | % |
| | | | | | | | | | | | | | | | | |
| Total gross profit | | $ | 601,540 | | | $ | 453,875 | | | $ | 147,665 | | | | 33 | % |
| Total gross margin | | | 66.6 | % | | | 68.1 | % | | | | | | | | |
Revenue
Product revenue consists primarily of revenue from the sale of consumables and instruments.
Consumable revenue increased $113.7 million, or 29%, to $505.0 million for 2010 compared to $391.3 million for 2009. Microarray consumable revenue, which constituted more than half of our total consumable revenue, increased $28.3 million primarily attributable to growth in sales of our Infinium BeadChips, which constituted a majority of our microarray consumable sales. Sales volume of our Infinium BeadChip products increased on a per sample basis during 2010 compared to 2009. The average selling price per sample, however, declined due to a change in product mix primarily attributable to growth in sales of our focused content arrays and a number of large sample volume purchase orders that incurred higher discounts. Revenue from sequencing consumables increased $85.4 million due to growth in the installed base of our sequencing systems.
Revenue from the sale of instruments increased $98.9 million, or 44%, to $324.6 million for 2010 compared to $225.7 million for 2009. Sequencing instrument revenue increased $85.7 million. We experienced increases in both the number of units sold and average selling prices per unit for our sequencing systems during 2010 compared to 2009. Unit growth was due to increased demand for next-generation sequencing systems. The increase in average selling prices was primarily attributable to the launch of the HiSeq 2000 in Q1 2010. Microarray instrument revenue increased $13.2 million primarily attributable to strong demand for our HiScanSQ instrument launched in 2010. The launch of this system resulted in increases in both the number of units sold and average selling prices per unit for our microarray instruments during 2010 compared to 2009.
The increase in service and other revenue, which includes extended warranty contracts and genotyping and sequencing services, was primarily attributable to an increase in extended warranty contracts for our growing installed base of sequencing systems.
Gross Margin
The decrease in gross margin was primarily attributable to the effect of discounts provided to customers on the sales of HiSeq 2000 associated with promotional programs, including the Genome Analyzer trade-in program, and lower margins on our newer products, such as the HiSeq 2000. See “Revenue Recognition” in note “1. Organization and Summary of Significant Accounting Policies” in Part II, Item 8, of thisForm 10-K for additional information on the Genome Analyzer trade-in program. The impact of the promotional programs was partially offset by improved margins on sequencing consumables primarily attributable to improved overhead absorption from increased volumes and the benefit of decreased costs associated with chemistry improvements.
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Operating Expense
| | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | Change | | | % Change | |
| | | (In thousands) | | | | | | | |
| |
| Research and development | | $ | 177,947 | | | $ | 140,616 | | | $ | 37,331 | | | | 27 | % |
| Selling, general and administrative | | | 220,990 | | | | 176,337 | | | | 44,653 | | | | 25 | |
| Acquisition related (gain) expense, net | | | (9,051 | ) | | | 11,325 | | | | (20,376 | ) | | | (180 | ) |
| | | | | | | | | | | | | | | | | |
| Total operating expense | | $ | 389,886 | | | $ | 328,278 | | | $ | 61,608 | | | | 19 | % |
| | | | | | | | | | | | | | | | | |
The increase in research and development expenses was primarily attributable to a $25.9 million increase in personnel expenses, including salaries, non-cash share-based compensation, and benefits, and an increase in other non-personnel expenses of $13.3 million comprised mostly of lab and production supplies expenses. These increases were primarily attributable to investments in new product development and commercialization along with projects to sustain and optimize our existing product portfolio.
The increase in selling, general and administrative expenses was primarily attributable to a $31.8 million increase in personnel expenses, including salaries, non-cash share-based compensation, and benefits, associated with the growth of our business, and an increase in outside service expenses of $9.7 million comprised mostly of legal and marketing expenses.
During 2010, acquisition related (gain) expense, net, includes a gain of $10.4 million from a change in the fair value of contingent consideration related to an acquisition, partially offset by an acquired in-process research and development charge of $1.3 million related to a milestone payment made to the former shareholders of a company we acquired in 2008. During 2009, acquisition related (gain) expense, net, included acquired in-process research and development charges of $11.3 million related to milestone payments made to the former shareholders of the company we acquired in 2008.
Other Intangible Assets,Expense, Netrequires
| | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | Change | | | % Change | |
| | | (In thousands) | | | | | | | |
| |
| Interest income | | $ | 8,378 | | | $ | 11,029 | | | $ | (2,651 | ) | | | (24 | )% |
| Interest expense | | | (24,598 | ) | | | (23,718 | ) | | | (880 | ) | | | 4 | |
| Other (expense) income, net | | | (10,055 | ) | | | 1,217 | | | | (11,272 | ) | | | (926 | ) |
| | | | | | | | | | | | | | | | | |
| Total other expense, net | | $ | (26,275 | ) | | $ | (11,472 | ) | | $ | (14,803 | ) | | | 129 | % |
| | | | | | | | | | | | | | | | | |
Interest income decreased despite an increase in our average cash and investment balance due to an overall decline in interest rates during 2010 compared to 2009. The increase in interest expense was due to the amortization of the discount on our convertible senior notes. The change in other (expense) income, net, was primarily attributable to a $13.2 million impairment charge recorded in Q4 2010 related to the impairment of a cost-method investment and a related note receivable (see note “5. Impairment” in Part II, Item 8 of thisForm 10-K for additional information on this impairment) partially offset by a $2.9 million gain recognized in Q2 2010 on the acquisition of Helixis, Inc., which represented the difference between the carrying value of our cost-method investment in Helixis, Inc. prior to acquisition and the fair value of that goodwillinvestment at the time of acquisition.
Provision for Income Taxes
| | | | | | | | | | | | | | | | | |
| | | 2010 | | 2009 | | Change | | % Change |
| | | (In thousands) | | | | |
| |
| Income before income taxes | | $ | 185,379 | | | $ | 114,125 | | | $ | 71,254 | | | | 62 | % |
| Provision for income taxes | | $ | 60,488 | | | $ | 41,844 | | | $ | 18,644 | | | | 45 | % |
| Effective tax rate | | | 32.6 | % | | | 36.7 | % | | | | | | | | |
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The decrease in the effective tax rate was primarily attributable to the gain recorded on the change in the fair value of contingent consideration related to our acquisition of Helixis, Inc. that is excluded from taxable income and certaina decrease in nondeductible acquired IPR&D recognized for financial reporting purposes in 2010 as compared to 2009.
Comparison of 2009 and 2008
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, September 30, and December 31. The year ended January 3, 2010 was 53 weeks and the year ended December 28, 2008 was 52 weeks.
Revenue
| | | | | | | | | | | | | | | | | |
| | | 2009 | | | 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 | % |
| | | | | | | | | | | | | | | | | |
| Total gross profit | | $ | 453,875 | | | $ | 353,094 | | | $ | 100,781 | | | | 29 | % |
| Total gross margin | | | 68.1 | % | | | 61.6 | % | | | | | | | | |
Revenue
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 2009 compared to $333.7 million for 2008. Microarray consumable revenue, which constituted more than half of our consumable revenue, declined $11.4 million 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 constituted 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.
Revenue from sequencing consumables increased $68.9 million 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 2009 compared to $185.7 million for 2008 primarily due to a $56.4 million increase in sales of our sequencing systems. During 2009 as compared to 2008 units sold and average selling prices increased for our Genome Analyzer systems, which constituted a majority of sequencing instrument revenue. The increase in units sold was driven by increased demand for next-generation sequencing systems. 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 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.
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Gross Margin
The increase in gross margin was primarily attributable to lower costs for our sequencing consumables and instrumentation, a $4.1 million impairment charge recorded in 2008 for which there was no similar charge recognized in 2009, and a $3.8 million decrease in amortization expense. The gross margin on sequencing consumables increased primarily due to improved overhead absorption from increased volumes of sequencing consumables 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 gross margin on sequencing instruments increased primarily due to production efficiencies and reduced material costs coupled with higher average selling prices.
Operating Expense
| | | | | | | | | | | | | | | | | |
| | | 2009 | | | 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 | |
| Acquisition related (gain) expense, net | | | 11,325 | | | | 24,660 | | | | (13,335 | ) | | | (54 | ) |
| | | | | | | | | | | | | | | | | |
| Total operating expense | | $ | 328,278 | | | $ | 272,637 | | | $ | 55,641 | | | | 20 | % |
| | | | | | | | | | | | | | | | | |
The increase in research and development was primarily attributable to a $22.9 million increase in personnel-related expenses, including salaries, non-cash share-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 were 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 primarily attributable to an increase of $26.6 million in personnel-related expenses associated with the growth of our business, including salaries, non-cash share-based compensation, and benefits.
During 2009 acquisition related (gain) expense, net, includes IPR&D charges of $11.3 million related to milestone payments made to the former shareholders of a company we acquired in 2008. During 2008 acquisition related (gain) expense, net, includes IPR&D charges of $24.7 million as a result of the same acquisition.
Other Expense, Net
| | | | | | | | | | | | | | | | | |
| | | 2009 | | | 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 (expense), net | | | 1,217 | | | | 1,921 | | | | (704 | ) | | | (37 | ) |
| | | | | | | | | | | | | | | | | |
| Total other expense, net | | $ | (11,472 | ) | | $ | (7,770 | ) | | $ | (3,702 | ) | | | 48 | % |
| | | | | | | | | | | | | | | | | |
Interest income decreased despite an increase in our average cash and investment balance due to an overall decline in interest rates during 2009 compared to 2008. Interest expense increased due to the amortization of the discount on our convertible senior notes. Other income (expense), 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.
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Provision for Income Taxes
| | | | | | | | | | | | | | | | | |
| | | 2009 | | 2008 | | Change | | % Change |
| | | (In thousands) | | | | |
| |
| Income before income taxes | | $ | 114,125 | | | $ | 72,687 | | | $ | 41,438 | | | | 57 | % |
| Provision for income taxes | | $ | 41,844 | | | $ | 33,271 | | | $ | 8,573 | | | | 26 | % |
| Effective tax rate | | | 36.7 | % | | | 45.8 | % | | | | | | | | |
The decrease in the effective tax rate was primarily attributable to a decrease in nondeductible acquired IPR&D recognized for financial reporting purposes in 2009 compared to 2008. 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.
Liquidity and Capital Resources
Cash flow summary
| | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | (In thousands) | |
| |
| Net cash provided by operating activities | | $ | 272,573 | | | $ | 172,191 | | | $ | 87,882 | |
| Net cash used in investing activities | | | (285,053 | ) | | | (256,569 | ) | | | (277,249 | ) |
| Net cash provided by (used in) financing activities | | | 116,474 | | | | (98,862 | ) | | | 337,672 | |
| Effect of exchange rate changes on cash and cash equivalents | | | 320 | | | | 849 | | | | 3,778 | |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | $ | 104,314 | | | $ | (182,391 | ) | | $ | 152,083 | |
| | | | | | | | | | | | | |
Operating Activities
Cash provided by operating activities in 2010 consists of net income of $124.9 million plus net non-cash adjustments of $149.8 million and a $2.1 million decrease in net operating assets. The primary non-cash expenses added back to net income included share based compensation of $71.6 million, depreciation and amortization expenses related to property and equipment and intangible assets be assessedof $42.0 million, and the amortization of the debt discount on our convertible notes totaling $21.4 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 provided by operating activities in 2009 consists of net income of $72.3 million plus net non-cash adjustments of $115.7 million and an $15.8 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.
Investing Activities
Cash used in investing activities totaled $285.0 million in 2010. During the year we:
| | |
| • | purchased and soldavailable-for-sale securities totaling $846.2 million and $688.6 million, respectively; |
|
| • | paid net cash of $98.2 million for acquisitions; |
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| • | sold trading securities totaling $54.9 million; |
|
| • | used $49.8 million for capital expenditures primarily associated with the purchase of manufacturing equipment and infrastructure for additional production capacity and rental and loaner instruments; and |
|
| • | made strategic investments totaling $27.7 million. |
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Cash used in investing activities totaled $256.6 million in 2009. We purchased and soldavailable-for-sale securities totaling $694.5 million and $514.2 million, respectively. We incurred $52.7 million in capital expenditures primarily associated with the expansion of our facilities and infrastructure at our San Diego, Hayward and UK locations.
Financing Activities
Cash provided by financing activities totaled $116.5 million in 2010. We received $118.0 million in proceeds from the issuance of our common stock through the exercise of stock options and warrants and under our Employee Stock Purchase Plan. We also received $42.4 million in incremental tax benefit related to stock options exercised. These increases were partially offset by common stock repurchases of $44.0 million.
Cash used in financing activities totaled $98.9 million in 2009. During the year we repurchased approximately 6.1 million shares of our common stock for impairment using fair value measurement techniques. If$175.1 million, which was partially offset by $39.4 million in proceeds received from issuance of common stock through the carryingexercise of stock options and under our Employee Stock Purchase Plan. We also received $39.3 million in incremental tax benefit related to stock options exercised.
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.
At January 2, 2011, we had approximately $894.3 million in cash and short-term investments. Our short-term investments include marketable securities consisting of debt securities in government sponsored entities, corporate debt securities, and U.S. treasury notes.
On February 16, 2007, we issued $400.0 million in principal of convertible senior notes that mature February 15, 2014. We pay 0.625% interest per annum on the principal amount of the notes, payable semi-annually in arrears in cash on February 15 and August 15 of each year. The notes are convertible into cash and, if applicable, shares of our common stock under certain circumstances as described in note “7. Convertible Senior Notes” in Part II, Item 8 of thisForm 10-K. As of January 2, 2011, the principal amount of the notes was $390.0 million due to the conversion of $10.0 million of the notes during the first quarter of 2009. During the period from January 3, 2011 to February 28, 2011, certain noteholders notified us of their election to convert an aggregate of $251.1 million principal amount of the notes. See note “15. Subsequent Events” in Part II, Item 8, of thisForm 10-K for additional information on these conversions.
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; |
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| • | the repurchase of our outstanding common stock; |
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| • | the continued advancement of research and development efforts; |
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| • | the acquisition of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities; and |
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| • | 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 for at least the next 12 months, barring unforeseen circumstances. Operating needs
40
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 2, 2011, we were not involved in any “off-balance sheet arrangements” within the meaning of the rules of the SEC.
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 2, 2011, 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) | | $ | 398,530 | | | $ | 2,437 | | | $ | 4,875 | | | $ | 391,218 | | | $ | — | |
| Operating leases | | | 499,261 | | | | 13,965 | | | | 37,737 | | | | 40,985 | | | | 406,574 | |
| Amounts due under executive deferred compensation plan | | | 5,272 | | | | 5,272 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 903,063 | | | $ | 21,674 | | | $ | 42,612 | | | $ | 432,203 | | | $ | 406,574 | |
| | | | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | The table excludes $22.7 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. Income Taxes” in Part II, Item 8 of thisForm 10-K for further discussion of our uncertain tax positions. The table also excludes $35.0 million in contingent consideration related to acquisitions. We have not included this amount in the table because we cannot make a reasonably reliable estimate regarding whether the milestones required for these payments will be achieved. See note “3. Acquisitions” in Part II, Item 8 of thisForm 10-K for further discussion of our contingent consideration. |
|
| (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 principal amount of the notes as current in our consolidated balance sheet due to the convertibility feature. In addition, during the period from January 3, 2011 to February 28, 2011, certain noteholders notified us of their election to convert an aggregate of $251.1 million principal amount of the notes in exchange for the repayment of the principal amount and a certain number of shares of the Company’s common stock. See note “7. Convertible Senior Notes” and note 15 “Subsequent Events” in Part II, Item 8 of thisForm 10-K for further discussion of the terms of the convertible senior notes and the conversion notices in the subsequent period. |
41
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 reporting unit exceeds its fair value, thenmaterial effect on our consolidated financial statements.
We believe that the following critical accounting policies and estimates have a goodwill impairment testhigher 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. Organization and Significant Accounting Policies” in Part II, Item 8 of thisForm 10-K.
Revenue Recognition
Our revenue is performed to measuregenerated primarily from the sale of products and services. Product revenue primarily consists of sales of instruments and consumables used in genetic analysis. Service and other revenue primarily 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 impairment loss,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 transfer of title to the customer, provided that 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 made available to the customer or agreed upon milestones are reached.
In order to assess whether the price is fixed or determinable, we evaluate whether refund rights exist. If there are refund rights or payment terms 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 receipt of payment.
We regularly enter into contracts where revenue is derived from multiple deliverables including any mix of products or services. These products 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.
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For transactions entered into in 2009 and 2010, 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 any.VSOE does not exist. If neither VSOE nor third-party evidence exists, we use best estimate of the selling price for the deliverable.
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 goodwill impairment test comparesfair value of an item was generally the impliedprice 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 reporting unit’s goodwill with the carrying amount of that goodwill. The impliedundelivered items. When we were unable to establish stand-alone value for delivered items or when fair value of goodwillundelivered 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 product 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 are 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 our best estimate of selling price using average selling prices over a rolling12-month period coupled with an assessment of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, 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.
In the first quarter of 2010, we offered an incentive with the launch of the HiSeq 2000 that enabled existing Genome Analyzer customers to trade in their Genome Analyzer and receive a discount on the purchase of a HiSeq 2000. The incentive was limited to customers who had purchased a Genome Analyzer as of the date of the announcement and was the first significant trade-in program we have offered. We will account for HiSeq 2000 discounts related to the Genome Analyzer trade-in program in the same manner asperiod in a business combination. Determiningwhich the HiSeq 2000 revenue is recognized.
Investments
We determine the fair value of our assets and liabilities based on the implied goodwill is judgmentalexchange price that would be received for an asset or paid to transfer a liability (an exit price) in nature and often involvesthe 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 significant estimatesobservable inputs and assumptions. These estimates and assumptions could haveminimize the use of unobservable inputs. We use a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. Estimates of fair value hierarchy with three levels of inputs, of which the first two are primarily determined using discounted cash flowsconsidered observable and market comparisons. These approaches use significant estimates and assumptions, including projection and timing of future cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, determination of appropriate market comparables, and determination of whether a premium or discount should be appliedlast unobservable, to comparables. It is reasonably possible that the plans and estimates used to value these assets may be incorrect. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges. We have performed our annual test of goodwill as of May 30, 2008 noting no impairment. No indicators have arisen since management’s assessment on May 30, 2008 that would require further assessment.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. |
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Impairment of Long-Lived Assets
In accordance with SFAS No. 144,Accounting for the Impairment or Disposalusing this fair value hierarchy, management may be required to make assumptions of Long-Lived Assets,if indicators of impairment exist, we assess the recoverability of the affected long-lived assetspricing by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, we measure the future discounted cash flows associated with the use of the asset and adjust the value of the asset accordingly. Certain estimatesmarket participants and assumptions are used in determining theabout risk, specifically when using unobservable inputs to determine fair value of long-lived assets.value. These estimates and assumptions are judgmental in nature and could have a significant impact on the determinationmay significantly affect our results of the recognition of an impairment charge and the magnitude of any such change. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.operations.
Stock-Based CompensationAllowance for Doubtful Accounts
We accountmaintain an allowance for stock-based compensation in accordance with SFAS No. 123R,Share-Based Payment. Underdoubtful accounts for estimated losses resulting from the provisionsinability of SFAS No. 123R, stock-based compensation cost is estimated atour customers to make required payments. We evaluate the grant datecollectibility of our accounts receivable based on a combination of factors. We regularly analyze customer accounts, review the award’s fair-value as calculated by the Black-Scholes-Merton (BSM) option-pricing model and is recognized as expense over the requisite service period. The BSM model requires various highly judgmental assumptions including volatility, forfeiturelength of time receivables are outstanding, review historical loss rates and expected option life. If anyassess current economic trends that may impact the level of these assumptions usedcredit losses in the BSM model change significantly, stock-based compensation expense may differ materiallyfuture. 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 future from that recorded infinancial stability of our customers and we may need to increase our reserves if the current period.financial conditions of our customers deteriorate.
Income Taxes
In accordance with SFAS No. 109,Accounting for Income Taxes, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and credit carryforwards. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. 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 ajurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. Factors reviewed include projections of pre-tax book income over the foreseeable future, determination of cumulative pre-tax book income after
28
permanent differences, history of earnings, and reliability of forecasting. As of December 28, 2008, we have maintained a valuation allowance only against certain U.S. and foreign deferred tax assets that we concluded have not met the “more likely than not” threshold required under SFAS No. 109.
Due to the adoption of SFAS No. 123R, we recognize 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, we follow 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 us.
Effective January 1, 2007, we 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 that 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. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense.
Results of Operations
To enhance comparability, the following table sets forth audited consolidated statement of operations data for the years ended January 2, 2011, January 3, 2010 and December 28, 2008 December 30, 2007 and December 31, 2006 stated as a percentage of total revenue.
| | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | Year Ended
| | |
| | | December 28,
| | December 30,
| | December 31,
| | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 | |
| |
| Revenue: | | | | | | | | | | | | | | | | | | | | | | | | |
| Product revenue | | | 93 | % | | | 89 | % | | | 84 | % | | | 93 | % | | | 94 | % | | | 93 | % |
| Service and other revenue | | | 7 | | | | 11 | | | | 16 | | | | 7 | | | | 6 | | | | 7 | |
| | | | | | | | | | | | | | | |
| Total revenue | | | 100 | | | | 100 | | | | 100 | | | | 100 | | | | 100 | | | | 100 | |
| | | | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | | |
| Cost of revenue: | | | | | | | | | | | | | |
| Cost of product revenue | | | 34 | | | | 33 | | | | 28 | | | | 30 | | | | 29 | | | | 34 | |
| Cost of service and other revenue | | | 2 | | | | 3 | | | | 5 | | | | 2 | | | | 2 | | | | 2 | |
| Amortization of intangible assets | | | | 1 | | | | 1 | | | | 2 | |
| Impairment of manufacturing equipment | | | | — | | | | — | | | | 1 | |
| | | | | | | | | |
| Total cost of revenue | | | | 33 | | | | 32 | | | | 39 | |
| | | | | | | | | |
| Gross profit | | | | 67 | | | | 68 | | | | 61 | |
| | | | | | | | | |
| Operating expense: | | | | | | | | | | | | | |
| Research and development | | | 17 | | | | 20 | | | | 18 | | | | 20 | | | | 21 | | | | 17 | |
| Selling, general and administrative | | | 26 | | | | 27 | | | | 29 | | | | 24 | | | | 26 | | | | 26 | |
| Impairment of manufacturing equipment | | | 1 | | | | — | | | | — | | |
| Amortization of intangible assets | | | 2 | | | | 1 | | | | — | | |
| Acquired in-process research and development | | | 4 | | | | 83 | | | | — | | |
| Litigation settlements | | | — | | | | 15 | | | | — | | |
| Acquisition related (gain) expense, net | | | | (1 | ) | | | 2 | | | | 4 | |
| | | | | | | | | | | | | | | |
| Total costs and expenses | | | 86 | | | | 182 | | | | 80 | | |
| Total operating expense | | | | 43 | | | | 49 | | | | 47 | |
| | | | | | | | | | | | | | | |
| Income (loss) from operations | | | 14 | | | | (82 | ) | | | 20 | | |
| Income from operations | | | | 24 | | | | 19 | | | | 14 | |
| Other income (expense): | | | | | | | | | | | | | |
| Interest income | | | 2 | | | | 4 | | | | 3 | | | | 1 | | | | 2 | | | | 2 | |
| Interest and other expense, net | | | — | | | | (1 | ) | | | — | | |
| Interest expense | | | | (3 | ) | | | (4 | ) | | | (4 | ) |
| Other (expense) income, net | | | | (1 | ) | | | — | | | | 1 | |
| | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | 16 | | | | (79 | ) | | | 23 | | |
| Provision (benefit) for income taxes | | | 7 | | | | (3 | ) | | | 1 | | |
| Total other expense, net | | | | (3 | ) | | | (2 | ) | | | (1 | ) |
| | | | | | | | | | | | | | | |
| Net income (loss) | | | 9 | % | | | (76 | )% | | | 22 | % | |
| Income before income taxes | | | | 21 | | | | 17 | | | | 13 | |
| Provision for income taxes | | | | 7 | | | | 6 | | | | 6 | |
| | | | | | | | | | | | | | | |
| Net income | | | | 14 | % | | | 11 | % | | | 7 | % |
| | | | | | | | | |
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Comparison of Years Ended December 28, 20082010 and December 30, 20072009
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 years ended December 28, 200830, and December 30, 2007 were both31. The year ended January 2, 2011 was 52 weeks and the year ended January 3, 2010 was 53 weeks.
Revenue
| | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | | | |
| | | December 28,
| | December 30,
| | Percentage
| | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | Change | | | 2010 | | 2009 | | Change | | % Change | |
| | | (In thousands) | | | | | (In thousands) | | | | | |
| |
| Product revenue | | $ | 532,390 | | | $ | 326,699 | | | | 63 | % | | $ | 842,510 | | | $ | 627,240 | | | $ | 215,270 | | | | 34 | % |
| Service and other revenue | | | 40,835 | | | | 40,100 | | | | 2 | | | | 60,231 | | | | 39,084 | | | | 21,147 | | | | 54 | |
| | | | | | | | | | | | | |
| Total revenue | | $ | 573,225 | | | $ | 366,799 | | | | 56 | % | | $ | 902,741 | | | $ | 666,324 | | | $ | 236,417 | | | | 35 | % |
| | | | | | | | | | | | | |
| Total gross profit | | | $ | 601,540 | | | $ | 453,875 | | | $ | 147,665 | | | | 33 | % |
| Total gross margin | | | | 66.6 | % | | | 68.1 | % | | | | | | | | |
Revenue
Product revenue consists primarily of revenue from the sale of consumables instruments, oligos and associated freight charges. The increaseinstruments.
Consumable revenue increased $113.7 million, or 29%, to $505.0 million for 2010 compared to $391.3 million for 2009. Microarray consumable revenue, which constituted more than half of our total consumable revenue, increased $28.3 million primarily attributable to growth in product revenue was driven primarily by sales of our Infinium BeadChips, sequencing systems and sequencing consumables. Consumables and instrumentswhich constituted 63% and 35%a majority of product revenue for the year ended December 28, 2008, respectively,our microarray consumable sales. Sales volume of our Infinium BeadChip products increased on a per sample basis during 2010 compared to 59%2009. The average selling price per sample, however, declined due to a change in product mix primarily attributable to growth in sales of our focused content arrays and 37% fora number of large sample volume purchase orders that incurred higher discounts. Revenue from sequencing consumables increased $85.4 million due to growth in the year ended December 30, 2007, respectively.installed base of our sequencing systems.
ConsumableRevenue from the sale of instruments increased $98.9 million, or 44%, to $324.6 million for 2010 compared to $225.7 million for 2009. Sequencing instrument revenue increased by $140.2$85.7 million. We experienced increases in both the number of units sold and average selling prices per unit for our sequencing systems during 2010 compared to 2009. Unit growth was due to increased demand for next-generation sequencing systems. The increase in average selling prices was primarily attributable to the launch of the HiSeq 2000 in Q1 2010. Microarray instrument revenue increased $13.2 million over prior year. Growth in consumable revenue was primarily attributable to strong demand for our InfiniumHiScanSQ instrument launched in 2010. The launch of this system resulted in increases in both the number of units sold 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 can be mainly attributed 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% is due to new product introductions with higher average selling prices while the remaining 21% can be attributedper unit for our microarray instruments during 2010 compared to increased volume. The increase in sequencing consumables is primarily attributable to the growth in our installed base of instruments and the progression of customer labs ramping to production scale.2009.
Instrument revenue increased by $64.8 million over prior year, of which $63.0 million was due to increased sales of our sequencing systems. This increase in revenue can be primarily attributed to shipments of our second generation Genome Analyzer, the Genome Analyzer II (GAII). 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.
We expect to see continued growth in product revenue, which can be mainly attributed to the anticipated launch of several new products, sales of existing products and the growth of our installed base of instruments.
Service and other revenue includes revenue generated from genotyping and sequencing service contracts, extended warranty contracts, and research revenue. The increase in service and other revenue, iswhich includes extended warranty contracts and genotyping and sequencing services, was primarily dueattributable to an increase of $3.1 million in extended warranty contracts for our growing installed base of sequencing systems.
Gross Margin
The decrease in gross margin was primarily attributable to the effect of discounts provided to customers on the sales coupledof HiSeq 2000 associated with an increasepromotional programs, including the Genome Analyzer trade-in program, and lower margins on our newer products, such as the HiSeq 2000. See “Revenue Recognition” in note “1. Organization and Summary of $2.0 millionSignificant Accounting Policies” in sequencing service contracts. This increasePart II, Item 8, of thisForm 10-K for additional information on the Genome Analyzer trade-in program. The impact of the promotional programs was substantiallypartially offset by a decline of $4.7 million in our Fast Track genotyping service contracts as we shift more towards CSPro certified customers. CSPro is a collaborative program through which we certify third party service partners using our productsimproved margins on sequencing consumables primarily attributable to ensure delivery of performance and data quality equivalent to that availableimproved overhead absorption from our internal service offering. The decline in service revenue as a result of the shift to CSPro certified customers has been offset by the resulting increase in our consumable sales to these third party service providers. If product sales increase, we expect to see continued increases in the sale of our extended warranty contracts. We also expect sales from SNP genotyping and sequencing service contracts to fluctuate on a yearly and quarterly basis, depending on the mix, the number of contracts completedincreased volumes and the successbenefit of our certified service providers. The timing ofdecreased costs associated with chemistry improvements.
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completion of SNP genotyping and sequencing service contracts is highly dependent on the customers’ schedules for delivering the SNPs and samples to us.
Cost of Product and Service and Other RevenueOperating Expense
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 28,
| | | December 30,
| | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | |
| | | (In thousands) | | | | |
| |
| Cost of product revenue | | $ | 192,868 | | | $ | 119,991 | | | | 61 | % |
| Cost of service and other revenue | | | 12,756 | | | | 12,445 | | | | 2 | |
| | | | | | | | | | | | | |
| Total cost of product and service and other revenue | | $ | 205,624 | | | $ | 132,436 | | | | 55 | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | Change | | | % Change | |
| | | (In thousands) | | | | | | | |
| |
| Research and development | | $ | 177,947 | | | $ | 140,616 | | | $ | 37,331 | | | | 27 | % |
| Selling, general and administrative | | | 220,990 | | | | 176,337 | | | | 44,653 | | | | 25 | |
| Acquisition related (gain) expense, net | | | (9,051 | ) | | | 11,325 | | | | (20,376 | ) | | | (180 | ) |
| | | | | | | | | | | | | | | | | |
| Total operating expense | | $ | 389,886 | | | $ | 328,278 | | | $ | 61,608 | | | | 19 | % |
| | | | | | | | | | | | | | | | | |
Cost of revenue, which excludes impairment of manufacturing equipment and amortization of intangible assets, represents manufacturing costs incurred in 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.
The increase in cost of product revenue was primarily driven by 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 is 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 is 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.
Cost of service and other revenue increased over the prior year primarily due to higher extended warranty contract revenue. Cost of service and other revenue as a percentage of related revenue stayed consistent at 31%.
Research and Development Expenses
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 28,
| | | December 30,
| | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | |
| | | (In thousands) | | | | |
| |
| Research and development | | $ | 99,963 | | | $ | 73,943 | | | | 35 | % |
Our research and development expenses consistwas primarily attributable to a $25.9 million increase in personnel expenses, including salaries, non-cash share-based compensation, and benefits, and an increase in other non-personnel expenses of salaries$13.3 million comprised mostly of lab and other personnel-related expenses, laboratoryproduction supplies expenses. These increases were primarily attributable to investments in new product development and other expenses relatedcommercialization along with projects to the design, development, testingsustain and enhancement ofoptimize our products. We expense our research and development expenses as they are incurred.existing product portfolio.
Research and development expenses as a percentage of revenue decreased to 17% for the year ended December 28, 2008 compared to 20% for the year ended December 30, 2007. However, there was an overallThe increase in research and development expenditures compared to the prior year. Costs to support our BeadArray technology research activities increased $10.4 million for the year ended December 28, 2008 compared to the year ended December 30, 2007, primarily due to an overall increase in personnel-related expenses, increased lab and material expenses associated with the establishment of our manufacturing facility in Singapore and the development of new products. The continued development of our Sequencing technology resulted in increased research and development expenditures of $9.1 million for the year ended December 28, 2008 compared to the year ended December 30, 2007. In addition, non-cash stock-based compensation expense increased by $4.1 million compared to the year ended December 30, 2007. Accrued compensation expense of $1.5 million
31
associated with contingent consideration for the Avantome acquisition completed on August 1, 2008 and expenses related to the development of our newly created Diagnostics Business Unit of $0.9 million also contributed to the increase in research and development expense for the year ended December 28, 2008.
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
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 28,
| | | December 30,
| | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | |
| | | (In thousands) | | | | |
| |
| Selling, general and administrative | | $ | 148,014 | | | $ | 101,256 | | | | 46 | % |
Our selling, general and administrative expenses consistwas primarily of personnel costs for sales and marketing, finance, human resources, business development, legal and general management, as well as professional fees, such as expenses for legal and accounting services. Selling, general and administrative expenses as a percentage of revenue were 26% for the year ended December 28, 2008 compared to 28% for the year ended December 30, 2007. Selling, general and administrative expenses for the year ended December 28, 2008 and December 30, 2007 included stock-based compensation expenses totaling $28.5 million and $19.4 million, respectively.
Sales and marketing expenses increased $34.1 million for the year ended December 28, 2008 compared to the year ended December 30, 2007. The increase is primarily due to increases of $29.3 million attributable to personnel-relateda $31.8 million increase in personnel expenses, including salaries, benefitsnon-cash share-based compensation, and commissions, to support the growth of our business. Included as part of these personnel- related expenses is an increase in employee travel expenses of $4.5 million due to increased headcount and continued international expansion. The remaining $4.8 million variance is comprised of increases to non-personnel-related costs of $2.9 million, consisting mainly of sales and marketing activities for our existing and new products and an increase of $1.9 million of non-cash stock-based compensation expense.
General and administrative expense increased $12.7 million during the year ended December 28, 2008 compared to the year ended December 30, 2007 due to increases of $10.4 million in personnel-related expensesbenefits, associated with the growth of our business, $7.2 million of non-cash stock-based compensation expense and $0.9 millionan increase in outside consulting servicesservice expenses of $9.7 million comprised mostly of legal and marketing expenses.
During 2010, acquisition related (gain) expense, net, includes a gain of $10.4 million from a change in the fair value of contingent consideration related to an acquisition, partially offset by an acquired in-process research and development charge of $1.3 million related to a milestone payment made to the former shareholders of a company we acquired in 2008. During 2009, acquisition related (gain) expense, net, included acquired in-process research and development charges of $11.3 million related to milestone payments made to the former shareholders of the company we acquired in 2008.
Other Expense, Net
| | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | Change | | | % Change | |
| | | (In thousands) | | | | | | | |
| |
| Interest income | | $ | 8,378 | | | $ | 11,029 | | | $ | (2,651 | ) | | | (24 | )% |
| Interest expense | | | (24,598 | ) | | | (23,718 | ) | | | (880 | ) | | | 4 | |
| Other (expense) income, net | | | (10,055 | ) | | | 1,217 | | | | (11,272 | ) | | | (926 | ) |
| | | | | | | | | | | | | | | | | |
| Total other expense, net | | $ | (26,275 | ) | | $ | (11,472 | ) | | $ | (14,803 | ) | | | 129 | % |
| | | | | | | | | | | | | | | | | |
Interest income decreased despite an increase in our average cash and investment balance due to an overall decline in interest rates during 2010 compared to 2009. The increase in interest expense was due to the amortization of the discount on our convertible senior notes. The change in other (expense) income, net, was primarily attributable to a $13.2 million impairment charge recorded in Q4 2010 related to the impairment of a cost-method investment and a related note receivable (see note “5. Impairment” in Part II, Item 8 of thisForm 10-K for additional information on this impairment) partially offset by a decrease$2.9 million gain recognized in Q2 2010 on the acquisition of $5.8 millionHelixis, Inc., which represented the difference between the carrying value of our cost-method investment in legal costs primarily relatedHelixis, Inc. prior to acquisition and the settlementfair value of that investment at the Affymetrix litigation during the first quartertime of 2008.
We expect our selling, general and administrative expenses to increase in absolute dollars as we expand our staff, add sales and marketing infrastructure and incur additional costs to support the expected growth in our business.acquisition.
Impairment of Manufacturing EquipmentProvision for Income Taxes
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 28,
| | | December 30,
| | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | |
| | | (In thousands) | | | | |
| |
| Impairment of manufacturing equipment | | $ | 4,069 | | | $ | — | | | | N/A | |
| | | | | | | | | | | | | | | | | |
| | | 2010 | | 2009 | | Change | | % Change |
| | | (In thousands) | | | | |
| |
| Income before income taxes | | $ | 185,379 | | | $ | 114,125 | | | $ | 71,254 | | | | 62 | % |
| Provision for income taxes | | $ | 60,488 | | | $ | 41,844 | | | $ | 18,644 | | | | 45 | % |
| Effective tax rate | | | 32.6 | % | | | 36.7 | % | | | | | | | | |
The impairment of manufacturing equipment resulted from our assessment of recoverability on a portion of our imaging and decoding systems that were no longer being utilized due to the development of our next-generation system and our transition to the Infinium HD product line.
3236
Amortization of Intangible Assets
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 28,
| | | December 30,
| | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | |
| | | (In thousands) | | | | |
| |
| Amortization of intangible assets | | $ | 10,438 | | | $ | 2,429 | | | | 330 | % |
Amortization of intangible assets as a percentage of revenueThe decrease in the effective tax rate was 2% and 1%, respectively, for the year ended December 28, 2008 and year ended December 30, 2007. The increase in amortization expense is primarily dueattributable to the settlement of our lawsuit with Affymetrixgain recorded on January 9, 2008, resultingthe change in the recordingfair value of an intangible assetcontingent consideration related to our acquisition of $36.0 million. See Note 5 of Notes to Consolidated Financial StatementsHelixis, Inc. that is excluded from taxable income and a decrease in nondeductible acquired IPR&D recognized for further information regarding this settlement.
We began amortizing this asset during the first quarter of 2008, causing an increasefinancial reporting purposes in amortization of intangible assets of $7.8 million for the year ended December 28, 2008. The additional increase of $0.2 million during the year ended December 28, 20082010 as compared to the year ended December 30, 2007 represents an additional month of amortization associated with the assets acquired from Solexa that we began amortizing in February 2007.
Acquired In-Process Research and Development
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 28,
| | | December 30,
| | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | |
| | | (In thousands) | | | | |
| |
| Acquired in-process research and development | | $ | 24,660 | | | $ | 303,400 | | | | (92 | %) |
As a result of the Avantome acquisition in August 2008 and the Solexa acquisition in January 2007, we recorded acquired IPR&D charges of $24.7 million and $303.4 million, respectively. See Note 2 of Notes to Consolidated Financial Statements for further information regarding these acquisitions.
Litigation Settlements
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 28,
| | | December 30,
| | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | |
| | | (In thousands) | | | | |
| |
| Litigation settlements | | $ | — | | | $ | 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 5 of Notes to Consolidated Financial Statements for further information regarding the Affymetrix settlement.
Interest Income
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 28,
| | | December 30,
| | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | |
| | | (In thousands) | | | | |
| |
| Interest income | | $ | 12,519 | | | $ | 16,026 | | | | (22 | %) |
Interest income on our cash and cash equivalents and investments decreased $3.5 million during the year ended December 28, 2008 compared to the year ended December 30, 2007. The decrease was primarily driven by the overall decline in interest rates due to current market conditions coupled with a change in our cash and investment portfolio to a mix of shorter duration maturities and an increased number of agency-rated investments.
33
Interest and Other Expense, Net
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 28,
| | | December 30,
| | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | |
| | | (In thousands) | | | | |
| |
| Interest and other expense, net | | $ | (2,070 | ) | | $ | (3,610 | ) | | | (43 | %) |
Interest and other expense, net, consists of interest expense and other income and expenses primarily related to net foreign currency exchange transaction gains and losses. Interest and other expense, net, increased $1.5 million for the year ended December 28, 2008 compared to the year ended December 30, 2007.
Interest expense related to our convertible debt issued in February 2007 was $4.0 million and $3.6 million, respectively, for the year ended December 28, 2008 and the year ended December 30, 2007. The increase represents 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.
In addition, we recorded $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. The gains resulting from our net foreign currency transactions for the year ended December 28, 2008 are due to fluctuations in foreign currency exchange rates coupled with a change in our foreign entity functional currency designation from the local currency to the U.S. dollar beginning the third quarter of 2008. As a result of this change, in the third quarter we began re-measuring our foreign subsidiaries’ nonmonetary assets and liabilities and related income and expense accounts to the U.S. dollar and recording the resulting net gain as income. Previously, under local functional currency designation, the effects of translation were recorded within stockholders’ equity as other comprehensive income (loss).
Provision (benefit) for Income Taxes
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 28,
| | | December 30,
| | | Percentage
| |
| | | 2008 | | | 2007 | | | Change | |
| | | (In thousands) | | | | |
| |
| Provision (benefit) for income taxes | | $ | 40,429 | | | $ | (10,426 | ) | | | (488 | %) |
The provision consists of federal, state and foreign income tax expense for the years ended December 28, 2008 and December 30, 2007, respectively. In addition for the year ended December 30, 2007, the provision 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.
As of December 28, 2008, we had net operating loss carryforwards for federal and state tax purposes of $87.7 million and $148.3 million, respectively, which begin to expire in 2025 and 2013, respectively, unless previously utilized. In addition, we also had U.S. federal and state research and development tax credit carryforwards of $12.6 million and $13.9 million, respectively, which begin to expire in 2018 and 2019, respectively, unless previously utilized.
Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of our net operating losses and credits may be subject to annual limitations in the event of any significant future changes in our ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization. Previous limitations due to Section 382 and 383 have been reflected in the deferred tax assets as of December 28, 2008.
Based on the available evidence as of December 28, 2008, we were not able to conclude it was more likely than not certain U.S. and foreign deferred tax assets will be realized. Therefore, we have recorded a valuation allowance of $2.8 million and $12.4 million against certain U.S. and foreign deferred tax assets, respectively. At December 30, 2007, we concluded that it was more likely than not that a significant portion of our deferred tax assets will be realized and, accordingly, we released a portion of our valuation allowance, $17.1 million, of which was recorded as a reduction to the tax provision.
34
As of December 28, 2008, no material changes have been made to our uncertain tax positions recorded in accordance with FIN No. 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.2009.
Comparison of Years Ended December 30, 20072009 and December 31, 20062008
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, September 30, and September 30.December 31. The yearsyear ended January 3, 2010 was 53 weeks and the year ended December 30, 2007 and December 31, 2006 were both28, 2008 was 52 weeks.
Revenue
| | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | | | |
| | | December 30,
| | December 31,
| | Percentage
| | | | | | | | | | | | | | | | | |
| | | 2007 | | 2006 | | Change | | | 2009 | | 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 | % |
| | | | | | | | | | | | | | | |
| Total gross profit | | | $ | 453,875 | | | $ | 353,094 | | | $ | 100,781 | | | | 29 | % |
| Total gross margin | | | | 68.1 | % | | | 61.6 | % | | | | | | | | |
Revenue
Product revenue consists primarily of revenue from the sale of consumables instruments, oligos and associated freight charges. Consumables and instruments constituted 59% and 37% of product revenue for the year ended December 30, 2007, respectively, compared to 64% and 28% for the year ended December 31, 2006, respectively. The change in sales associated with our product mix is due to increased sales in instruments primarily attributable to the Genome Analyzer, which was introduced during the first quarter of 2007. Growth in consumable revenue was primarily attributable to strong demand for our Infinium products.instruments.
Consumable revenue increased by $93.6$57.6 million, over prior year,or 17%, to $391.3 million for 2009 compared to $333.7 million for 2008. Microarray consumable revenue, which constituted more than half of which $81.1our consumable revenue, declined $11.4 million primarily represents increasedattributable 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 constituted a majority of our Infinium products.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.
Revenue from sequencing consumables increased $68.9 million 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 2009 compared to $185.7 million for 2008 primarily due to a $56.4 million increase in sales of our sequencing systems. During 2009 as compared to 2008 units sold and average selling prices increased for our Genome Analyzer systems, which constituted a majority of sequencing instrument revenue. The increase in units sold was driven by increased demand for next-generation sequencing systems. 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 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.
37
Gross Margin
The increase in gross margin was primarily attributable to lower costs for our sequencing consumables and instrumentation, a $4.1 million impairment charge recorded in 2008 for which there was no similar charge recognized in 2009, and a $3.8 million decrease in amortization expense. The gross margin on sequencing consumables increased primarily due to improved overhead absorption from increased volumes of sequencing consumables and the benefit of decreased costs associated with the reformulation of our Infinium products can be mainly attributed to our HumanHap familysequencing kits launched at the end of BeadChips, the Human 1M DNA Analysis BeadChip and our iSelect Infinium BeadChips for more focused content applications. Of the overall increase in Infinium BeadChip sales, approximately 82% isthird quarter of 2008. The gross margin on sequencing instruments increased primarily due to a higher volume of shipments, while the remaining 18% can be attributed to new product introductionsproduction efficiencies and slightlyreduced material costs coupled with higher average selling prices.
Instrument revenue increased by $77.6 million over prior year, of which $68.7 million was due to increased sales of our sequencing systems, particularly the Genome Analyzer and cluster stations.
Service and other revenue includes revenue generated from genotyping and sequencing service contracts, extended warranty contracts and research revenue. Service and other revenue increased $11.3 million over prior year primarily due to the completion of several significant Infinium and iSelect custom SNP genotyping service contracts and sequencing services contracts. This increase in services represented $9.9 million of the variance, while the remainder of the difference was generated by an increase in extended warranty contracts of $2.2 million offset by a decrease in grant revenue of $0.8 million. We expect sales from SNP genotyping and sequencing services contracts to fluctuate on a yearly and quarterly basis, depending on the mix and number of contracts that are completed. The timing of completion of SNP genotyping and sequencing services contracts are highly dependent on the customers’ schedules for delivering the SNPs and samples to us.
Cost of Product and Service and Other RevenueOperating Expense
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 30,
| | | December 30,
| | | Percentage
| |
| | | 2007 | | | 2006 | | | Change | |
| | | (In thousands) | | | | |
| |
| Cost of product revenue | | $ | 119,991 | | | $ | 51,271 | | | | 134 | % |
| Cost of service and other revenue | | | 12,445 | | | | 8,073 | | | | 54 | |
| | | | | | | | | | | | | |
| Total cost of product and service and other revenue | | $ | 132,436 | | | $ | 59,344 | | | | 123 | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | 2009 | | | 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 | |
| Acquisition related (gain) expense, net | | | 11,325 | | | | 24,660 | | | | (13,335 | ) | | | (54 | ) |
| | | | | | | | | | | | | | | | | |
| Total operating expense | | $ | 328,278 | | | $ | 272,637 | | | $ | 55,641 | | | | 20 | % |
| | | | | | | | | | | | | | | | | |
35
Cost of revenue, which excludes amortization of intangible assets, represents manufacturing costs incurred in 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.
The increase in cost of product revenue was primarily driven by higher instrument and consumable sales. Cost of product revenue as a percentage of related revenue was 37% for the year ended December 30, 2007 compared to 33% for the year ended December 31, 2006. The increase is primarily due to the shift in product mix towards instruments mainly attributable to sales of our sequencing systems, which were introduced during the first quarter of 2007. In addition, cost of product revenue as a percentage of related revenue was adversely impacted by the increase in non-cash stock-based compensation expense as well as $0.7 million associated with the amortization of inventory revaluation costs related to our acquisition of Solexa in January 2007. Non-cash stock-based compensation expense was $4.0 million and $1.3 million for the periods ended December 30, 2007 and December 31, 2006, respectively.
Cost of service revenue increased over the prior year primarily due to higher sequencing and genotyping services revenue. Cost of service revenue as a percentage of related revenue was 31% for the year ended December 30, 2007 compared to 28% for the year ended December 31, 2006. The increase in cost of service revenue as a percentage of related revenue was primarily related to unfavorable product mix driven by higher sales of our sequencing services, which were introduced during 2007.
Research and Development Expenses
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 30,
| | | December 31,
| | | Percentage
| |
| | | 2007 | | | 2006 | | | Change | |
| | | (In thousands) | | | | |
| |
| Research and development | | $ | 73,943 | | | $ | 33,373 | | | | 122 | % |
Our research and development expenses consistwas primarily of salaries and other personnel-related expenses, laboratory supplies and other expenses relatedattributable to the design, development, testing and enhancement of our products. We expense our research and development expenses as they are incurred.
Research and development expenses increased to $73.9a $22.9 million for the year ended December 30, 2007 compared to $33.4 million for the year ended December 31, 2006. Research and development expenses as a percentage of total revenue were 20% for the year ended December 30, 2007 compared to 18% for the year ended December 31, 2006. Of the increase for the year ended December 30, 2007, $27.0 million was due to higher research and development expenses associated with our acquisition of Solexa in January 2007. Costs to support our BeadArray technology research activities increased $8.5 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, including salaries, non-cash share-based compensation and increased labbenefits, a $10.4 million increase to non-personnel related expenses, and material expenses. Several new Infinium chip products, including the Human 1M DNA Analysis BeadChip, HumanCNV370-Duo BeadChip and HumanHap550-Duo BeadChip, have been introducedan increase in outside services of $3.2 million attributable to the market in 2007. In addition, non-cash stock-based compensation expense increased $6.1 million compared to the year ended December 31, 2006.consulting fees. These increases were partially offset by a $1.0 million decrease in research and development expensesprimarily 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.
Selling, General and Administrative Expenses
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 30,
| | | December 31,
| | | Percentage
| |
| | | 2007 | | | 2006 | | | Change | |
| | | (In thousands) | | | | |
| |
| Selling, general and administrative | | $ | 101,256 | | | $ | 54,057 | | | | 87 | % |
36
OurThe increase in selling, general and administrative expenses consistwas primarily of personnel costs for sales and marketing, finance, human resources, business development, legal and general management, as well as professional fees, such as expenses for legal and accounting services. Selling, general and administrative expenses increased to $101.3 million for the year ended December 30, 2007 compared to $54.1 million for the year December 31, 2006.
Sales and marketing expense increased $24.5 million during the year ended December 30, 2007 compared to the year ended December 31, 2006. The increase is primarily due to increases of $18.6 million attributable to personnel-related expenses to support the growthan increase of our business, $3.3 million of non-cash stock-based compensation expense and $2.6 million attributable to othernon-personnel-related expenses consisting mainly of sales and marketing activities for our existing and new products.
General and administrative expense increased $22.7 million during the year ended December 30, 2007 compared to the year ended December 30, 2006 due to increases of $8.7$26.6 million in personnel-related expenses associated with the growth of our business, $7.2including salaries, non-cash share-based compensation, and benefits.
During 2009 acquisition related (gain) expense, net, includes IPR&D charges of $11.3 million related to milestone payments made to the former shareholders of non-cash stock-based compensationa company we acquired in 2008. During 2008 acquisition related (gain) expense, $3.4net, includes IPR&D charges of $24.7 million in outside legal fees and $3.3 million in other outside service expenses, primarily due to increases in consulting fees and increased tax, audit, and other public company costs.as a result of the same acquisition.
Amortization of Intangible Assets
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 30,
| | | December 31,
| | | Percentage
| |
| | | 2007 | | | 2006 | | | Change | |
| | | (In thousands) | | | | |
| |
| Amortization of intangible assets | | $ | 2,429 | | | $ | — | | | | N/A | |
Amortization of intangible assets totaled $2.4 million for the year ended December 30, 2007. There was no amortization of acquired intangibles for the year ended December 31, 2006. The amount amortized in 2007 represents the amortization of our intangible assets acquired from Solexa in January 2007.
Acquired In-Process Research and Development
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 30,
| | | December 30,
| | | Percentage
| |
| | | 2007 | | | 2006 | | | Change | |
| | | (In thousands) | | | | |
| |
| Acquired in-process research and development | | $ | 303,400 | | | $ | — | | | | N/A | |
During the year ended December 30, 2007, we recorded $303.4 million of acquired IPR&D resulting from the Solexa acquisition. At the 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.
Litigation Settlements
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 30,
| | | December 31,
| | | Percentage
| |
| | | 2007 | | | 2006 | | | Change | |
| | | (In thousands) | | | | |
| |
| Litigation settlements | | $ | 54,536 | | | $ | — | | | | N/A | |
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During the year ended December 30, 2007, we recorded a charge of $54.5 million associated with two settlement agreements entered into subsequent to year-end. 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 5 of Notes to Consolidated Financial Statements for further information regarding this settlement.
Interest Income
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 30,
| | | December 31,
| | | Percentage
| |
| | | 2007 | | | 2006 | | | Change | |
| | | (In thousands) | | | | |
| |
| Interest income | | $ | 16,026 | | | $ | 5,368 | | | | 199 | % |
Interest income on our cash and cash equivalents and investments was $16.0 million and $5.4 million for the years ended December 30, 2007 and December 31, 2006, respectively. The increase in interest income over the prior year was primarily driven by higher cash balances from the proceeds of our February 2007 convertible debt offering, cash acquired as part of the Solexa acquisition, and improved operating cash flow. In addition, we experienced higher effective interest rates on our cash equivalents and short-term investments.
Interest and Other Expense, Net
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 30,
| | | December 31,
| | | Percentage
| |
| | | 2007 | | | 2006 | | | Change | |
| | | (In thousands) | | | | |
| |
| Interest and other expense, net | | $ | (3,610 | ) | | $ | (560 | ) | | | 545 | % |
| | | | | | | | | | | | | | | | | |
| | | 2009 | | | 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 (expense), net | | | 1,217 | | | | 1,921 | | | | (704 | ) | | | (37 | ) |
| | | | | | | | | | | | | | | | | |
| Total other expense, net | | $ | (11,472 | ) | | $ | (7,770 | ) | | $ | (3,702 | ) | | | 48 | % |
| | | | | | | | | | | | | | | | | |
Interest income decreased despite an increase in our average cash and otherinvestment balance due to an overall decline in interest rates during 2009 compared to 2008. Interest expense increased due to the amortization of the discount on our convertible senior notes. Other income (expense), net, consistsdecreased due to a decrease of interest expense and other income and expenses related to$1.5 million in gains on net foreign currency exchange transaction gains and losses. Interest and other expense, net, increased to $3.6 million for the year ended December 30, 2007, compared to $0.6 million for the year ended December 31, 2006.
Interest expensetransactions, which was $3.6 million for the year ended December 30, 2007, compared to an immaterial amount for the year ended December 31, 2006. The increase is primarily related to our convertible debt offering in February 2007. For the years ended December 30, 2007 and December 31, 2006, we recorded $0.5 million and $0.4 million, respectively, in net foreign currency transaction losses, respectively. In 2007, these foreign currency exchange losses werepartially offset by $0.5a gain of $0.8 million on the conversion of foreign currency exchange gains associated with the sale of our secured convertible debentures with Genizon BioSciences, Inc. in the fourth quarter of 2007.
Provision (benefit) for Income Taxes
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | | |
| | | December 30,
| | | December 31,
| | | Percentage
| |
| | | 2007 | | | 2006 | | | Change | |
| | | (In thousands) | | | | |
| |
| Provision (benefit) for income taxes | | $ | (10,426 | ) | | $ | 2,652 | | | | (493 | %) |
The provision (benefit) for income taxes was ($10.4) million and $2.7 million for the years ended December 30, 2007 and December 31, 2006, respectively. The provision consists of federal, state, and foreign income tax expense offset in 2007 by the release of the valuation allowance against a significant portion of our U.S. deferred tax assets.
Duringdebt during the year ended December 30, 2007, we utilized $72.9 million and $10.8 millionfirst quarter of our federal and state net operating loss carryforwards, respectively, to reduce our federal and state income taxes. As of December 30, 2007, we had net operating loss carryforwards for federal and state tax purposes of $28.7 million and $99.1 million, respectively, which begin to expire in 2025 and 2015, respectively, unless previously utilized. In addition, we also had U.S. federal and state research and development tax credit2009.
38
carryforwards of $9.2 million and $9.3 million respectively, which begin to expire in 2018 and 2019 respectively, unless previously utilized.Provision for Income Taxes
| | | | | | | | | | | | | | | | | |
| | | 2009 | | 2008 | | Change | | % Change |
| | | (In thousands) | | | | |
| |
| Income before income taxes | | $ | 114,125 | | | $ | 72,687 | | | $ | 41,438 | | | | 57 | % |
| Provision for income taxes | | $ | 41,844 | | | $ | 33,271 | | | $ | 8,573 | | | | 26 | % |
| Effective tax rate | | | 36.7 | % | | | 45.8 | % | | | | | | | | |
Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of our net operating losses and credits may be subject to annual limitationsThe decrease in the eventeffective tax rate was primarily attributable to a decrease in nondeductible acquired IPR&D recognized for financial reporting purposes in 2009 compared to 2008. Additionally, the percentage of any significant future changesconsolidated income before income taxes earned in our ownership structure. These annual limitations may resultforeign jurisdictions, which primarily have lower statutory tax rates than the U.S. statutory tax rate, increased from 36% in the expiration of net operating losses and credits prior2008 to utilization. Previous limitations due to Section 382 and 383 have been reflected43% in the deferred tax assets as of December 30, 2007.2009.
As of December 30, 2007, we concluded that it is more likely than not that a significant portion of our deferred tax assets will be realized and, accordingly we released a portion of our valuation allowance, $17.1 million of which was recorded as a reduction to the tax provision. In addition, we established current and long term deferred tax assets on the consolidated balance sheets of $26.8 million and $80.1 million, respectively, and decreased the goodwill balances recorded in conjunction with the CyVera and Solexa acquisitions by $2.1 million and $18.4 million, respectively. Based upon the available evidence as of December 30, 2007, we are not able to conclude it is more likely than not certain U.S. and foreign deferred tax assets will be realized. Therefore, we have recorded a valuation allowance of $2.9 million and $25.4 million against certain U.S. and foreign deferred tax assets, respectively.
Liquidity and Capital Resources
CashflowCash flow summary
| | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | Year Ended
| | |
| | | December 28,
| | December 30,
| | December 31,
| | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 | |
| | | (In thousands) | | | (In thousands) | |
| |
| Net cash provided by operating activities | | $ | 87,882 | | | $ | 56,294 | | | $ | 39,000 | | | $ | 272,573 | | | $ | 172,191 | | | $ | 87,882 | |
| Net cash used in investing activities | | | (277,249 | ) | | | (67,686 | ) | | | (160,735 | ) | | | (285,053 | ) | | | (256,569 | ) | | | (277,249 | ) |
| Net cash provided by financing activities | | | 337,672 | | | | 148,292 | | | | 109,296 | | |
| Effect of foreign currency translation | | | 3,778 | | | | (345 | ) | | | 3 | | |
| Net cash provided by (used in) financing activities | | | | 116,474 | | | | (98,862 | ) | | | 337,672 | |
| Effect of exchange rate changes on cash and cash equivalents | | | | 320 | | | | 849 | | | | 3,778 | |
| | | | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | $ | 152,083 | | | $ | 136,555 | | | $ | (12,436 | ) | | $ | 104,314 | | | $ | (182,391 | ) | | $ | 152,083 | |
| | | | | | | | | | | | | | | |
Historically,Operating Activities
Cash provided by operating activities in 2010 consists of net income of $124.9 million plus net non-cash adjustments of $149.8 million and a $2.1 million decrease in net operating assets. The primary non-cash expenses added back to net income included share based compensation of $71.6 million, depreciation and amortization expenses related to property and equipment and intangible assets of $42.0 million, and the amortization of the debt discount on our sourcesconvertible notes totaling $21.4 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 cash have included:our business.
Cash provided by operating activities in 2009 consists of net income of $72.3 million plus net non-cash adjustments of $115.7 million and an $15.8 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.
Investing Activities
Cash used in investing activities totaled $285.0 million in 2010. During the year we:
| | |
| | • | issuance of equitypurchased and debtsoldavailable-for-sale securities including cash generated from the issuance of our convertible notes in February 2007, our public offering of common stock in August 2008totaling $846.2 million and the exercise of stock options and participation in our Employee Stock Purchase Plan (ESPP);$688.6 million, respectively; |
| |
| | • | paid net cash generated from operations;of $98.2 million for acquisitions; |
|
| • | sold trading securities totaling $54.9 million; |
|
| • | used $49.8 million for capital expenditures primarily associated with the purchase of manufacturing equipment and infrastructure for additional production capacity and rental and loaner instruments; and |
| |
| | • | interest income. |
Our historical cash outflows have primarily been associated with:
| | |
| • | cash used for operating activities such as the purchase and growth of inventory, expansion of our sales and marketing and research and development infrastructure and other working capital needs; |
|
| • | cash paid for litigation settlements; |
|
| • | cash used for our stock repurchases; |
|
| • | expenditures related to increasing our manufacturing capacity and improving our manufacturing efficiency; |
|
| • | cash paid for acquisitions; and |
|
| • | interest payments on our debt obligations.made strategic investments totaling $27.7 million. |
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Other factors that impact our cash inflowCash used in investing activities totaled $256.6 million in 2009. We purchased and outflow include:
| | |
| • | significant increases in our product and services revenue. As our product sales have increased significantly since 2001, operating income has increased significantly as well, providing us with an increased source of cash to finance the expansion of our operations; and |
|
| • | fluctuations in our working capital. |
We currently invest our funds in treasury notes, commercial paper, auction rate securities, corporate bonds and U.S. dollar-based short maturity mutual funds. We do not hold securities backed by mortgages.
As of December 28, 2008, we had cash, cash equivalents and investments of $696.0 million compared to $386.1 million as of December 30, 2007. Included in the investment balance as of December 28, 2008 were auction rate securities of $55.9 million 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 December 28, 2008, the securities continued to fail auction and remained illiquid. As a result, we have recorded an unrealized loss of $8.7 million for the year ended December 28, 2008, resulting in a reduction to the fair value of our auction rate securities to $47.2 million as of December 28, 2008. This value was determined in accordance with SFAS No. 157. We used Level 3 hierarchical inputs, due to the lack of actively traded market data, including management’s assumptions of pricing by market participants and assumptions about risk. We based our fair value determination on estimated discounted future cash flows of interest income over a projected period reflective of the length of time we anticipate it will take the securities to become liquid. Additionally, we classified these securities as long-term investments as of December 28, 2008 as we believe we may not be able to liquidate our investments within the next year. As of December 30, 2007, these securities were classified as short-term as the failures of these auctions did not occur until February 2008.
In November 2008, we signed a settlement agreement allowing us to sell our auction rate securities at par value to UBS at our discretion during the period of June 30, 2010 through July 2, 2012. To account for this settlement agreement, we recorded a put option of $8.7 million and recognized a corresponding gain in earnings during the fourth quarter of 2008. The fair value of the put option was determined 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. The fair value of the put option approximates the difference between the par value and fair value of the auction rate securities. The auction rate securities were previously classified asavailable-for-sale, and unrealized gains and losses were recognized in other comprehensive income. By signing the settlement agreement, we no longer have the intent of holding the auction rate securities until recovery as we will now recover any unrealized loss through the settlement agreement. Accordingly, we elected a one-time transfer of the auction rate securities fromavailable-for-sale to trading and reclassified previously recorded unrealized losses from other comprehensive income to earnings. We will continue to recognize gains and losses in earnings approximately equal to changes in the fair value of the auction rate securities at each balance sheet date. These gains and losses will likely be offset by changes in the fair value of the put option as we elect the fair value option subject to our assessment of the counterparties ability to perform. See Part I Item 1A: “Risk Factors — Negative conditions in the global credit markets may impair the liquidity of a portion of our investment portfolio.”
The primary inflow of cash during the year ended December 28, 2008 was from the sale of 8,050,000 shares of our common stock to the public in August 2008 at a public offering price of $43.75 per share, raising net proceeds to us of $342.6 million, after deducting underwriting discounts and commissions and offering expenses. Additional cash inflows during this year resulted from the sale and maturity of our investments insoldavailable-for-sale securities of $411.8totaling $694.5 million and $44.3$514.2 million, from the exercise of our stock options.
The primary cash outflows during the year ended December 28, 2008 were attributable to the purchase ofavailable-for-sale securities for $568.7 million, the one-time payment of $90.0 million made to Affymetrix in accordance with the settlement agreement, the repurchase of an aggregate of 3.1 million shares of our
40
common stock for $70.8 million and $59.7respectively. We incurred $52.7 million in capital expenditures primarily forconstruction-in-progress associated with the expansion of our facilities and infrastructure at our San Diego, facilities, additionsHayward and UK locations.
Financing Activities
Cash provided by financing activities totaled $116.5 million in 2010. We received $118.0 million in proceeds from the issuance of our common stock through the exercise of stock options and warrants and under our Employee Stock Purchase Plan. We also received $42.4 million in incremental tax benefit related to manufacturing equipment as wellstock options exercised. These increases were partially offset by common stock repurchases of $44.0 million.
Cash used in financing activities totaled $98.9 million in 2009. 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 issuance of common stock through the exercise of stock options and under our Employee Stock Purchase Plan. We also received $39.3 million in incremental tax benefit related to stock options exercised.
Liquidity
We manage our business to maximize operating cash flows as the developmentprimary source of our manufacturing facility in Singapore. Additionally, on August 1, 2008,liquidity. Our ability to generate cash from operations provides us with the financial flexibility we completedneed to meet operating, investing, and financing needs. Historically, we have issued debt and equity securities to finance our acquisition of Avantome, Inc. As consideration forrequirements to the acquisition,extent that cash provided by operating activities was not sufficient to fund our needs.
At January 2, 2011, we paid $25.8had approximately $894.3 million in cash including transaction costs, and may pay up to an additional $35.0short-term investments. Our short-term investments include marketable securities consisting of debt securities in government sponsored entities, corporate debt securities, and U.S. treasury notes.
On February 16, 2007, we issued $400.0 million in contingent cash consideration basedprincipal of convertible senior notes that mature February 15, 2014. We pay 0.625% interest per annum on the achievementprincipal amount of the notes, payable semi-annually in arrears in cash on February 15 and August 15 of each year. The notes are convertible into cash and, if applicable, shares of our common stock under certain milestones.circumstances as described in note “7. Convertible Senior Notes” in Part II, Item 8 of thisForm 10-K. As of January 2, 2011, the principal amount of the notes was $390.0 million due to the conversion of $10.0 million of the notes during the first quarter of 2009. During the period from January 3, 2011 to February 28, 2011, certain noteholders notified us of their election to convert an aggregate of $251.1 million principal amount of the notes. See note “15. Subsequent Events” in Part II, Item 8, of thisForm 10-K for additional information on these conversions.
Our primary short-term needs for capital, which are subject to change, include expenditures related to:
| | |
| | • | our facilities expansion needs, including costs of leasing additional facilities; |
|
| • | the acquisition of equipmentpotential strategic acquisitions and other fixed assets for use in our current and future manufacturing and research and development facilities;investments; |
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| | • | 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; |
| |
| | • | potential strategic acquisitions and investments;the repurchase of our outstanding common stock; |
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| | • | the continued advancement of research and development efforts; |
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| • | the acquisition of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities; and |
| |
| | • | improvements inthe expansion needs of our manufacturing capacity and efficiency.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.
Our outstanding convertible notes became convertible into cash and, if applicable, shares of our common stock as of April 1, 2008. The notes continued to be convertible through December 31, 2008. Subsequent to year end, on December 29, 2008, a noteholder converted notes in an aggregate principal amount of $10.0 million. Generally, upon conversion of a note, we must pay the conversion value of the note in cash, up to the principal amount of the note. Any excess of the conversion value over the principal amount is payable in shares of our common stock. To reduce the potential equity dilution upon conversion of the notes, we entered into a hedge transaction. See Note 8 of Notes to Consolidated Financial Statements for further discussion of the terms of the Convertible Senior Notes. Beginning January 1, 2009 the notes ceased to be convertible since the trigger for convertibility was not met during the last calendar quarter of 2008. Fluctuations in our stock price could cause the conversion feature to trigger in future quarters, resulting in an impact on our working capital.
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 twelve12 months, barring unforeseen circumstances. Operating needs
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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 other than development of our additional facility in Little Chesterford, United Kingdom. The development of this facility is estimated to cost $14.5 million during 2009 although actual costs may vary significantly from our current estimate.expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors, including:
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| | • | our ability to successfully evolvecommercialize and further develop our sequencing and Veracode technologies and to expandcreate innovative products in our sequencing and SNP genotyping product lines;markets; |
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| | • | scientific progress in our research and development programs and the magnitude of those programs; |
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| | • | competing technological and market developments; and |
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| | • | the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings. |
As a result of the factors listed above, we may require additional funding in the future. Our failure to raise capital on acceptable terms, when needed, could have a material adverse effect on our business.
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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 28, 2008,January 2, 2011, we were not involved in any “off balance“off-balance sheet arrangements” within the meaning of the rules of the Securities and Exchange Commission.SEC.
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 December 28, 2008,January 2, 2011, aggregated by type (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period (1),(2) | | | 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(3) | | $ | 413,750 | | | $ | 2,500 | | | $ | 5,000 | | | $ | 5,000 | | | $ | 401,250 | | |
| Debt obligations(2) | | | $ | 398,530 | | | $ | 2,437 | | | $ | 4,875 | | | $ | 391,218 | | | $ | — | |
| Operating leases | | | 158,240 | | | | 11,032 | | | | 22,945 | | | | 23,378 | | | | 100,885 | | | | 499,261 | | | | 13,965 | | | | 37,737 | | | | 40,985 | | | | 406,574 | |
| Amounts due under executive deferred compensation plan | | | 1,348 | | | | — | | | | — | | | | — | | | | — | | | | 5,272 | | | | 5,272 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 573,338 | | | $ | 13,532 | | | $ | 27,945 | | | $ | 28,378 | | | $ | 502,135 | | | $ | 903,063 | | | $ | 21,674 | | | $ | 42,612 | | | $ | 432,203 | | | $ | 406,574 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | Excludes $35.0The table excludes $22.7 million of contingent cash consideration we may be required to pay pursuant to our purchase agreement with Avantome based on the achievement of certain milestones.uncertain tax benefits. We have not included this amount in the table above because the commitment does not have a fixed funding date and is subject to certain conditions. See Note 2 of Notes to the Consolidated Financial Statements for further discussion of our acquisition of Avantome. |
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(2) | | Excludes $23.8 million of uncertain tax benefits under FIN 48. We have not included this amount in the table above because we cannot make a reasonably reliable estimate regarding the timing of settlements with taxing authorities, if any. See Note 12note “11. Income Taxes” in Part II, Item 8 of Notes to the Consolidated Financial StatementsthisForm 10-K for further discussion of our uncertain tax positions. The table also excludes $35.0 million in contingent consideration related to acquisitions. We have not included this amount in the table because we cannot make a reasonably reliable estimate regarding whether the milestones required for these payments will be achieved. See note “3. Acquisitions” in Part II, Item 8 of thisForm 10-K for further discussion of our contingent consideration. |
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(3)(2) | | The “long-term debt obligations” in the above tableDebt obligations include the principal amount of our Convertible Senior Notesconvertible senior notes and interest payments totaling 0.625% per annum. Although these notes mature in 2014, we classify the principal amount of the notes as current in our consolidated balance sheet due to the convertibility feature. In addition, during the period from January 3, 2011 to February 28, 2011, certain noteholders notified us of their election to convert an aggregate of $251.1 million principal amount of the notes in exchange for the repayment of the principal amount and a certain number of shares of the Company’s common stock. See Notenote “7. Convertible Senior Notes” and note 15 “Subsequent Events” in Part II, Item 8 of Notes to Consolidated Financial StatementsthisForm 10-K for further discussion of the terms of the Convertible Senior Notes.convertible senior notes and the conversion notices in the subsequent period. |
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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. Organization and Significant Accounting Policies” in Part II, Item 8 of thisForm 10-K.
Recent Accounting PronouncementsRevenue Recognition
InformationOur revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of instruments and consumables used in genetic analysis. Service and other revenue primarily 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 transfer of title to the customer, provided that 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 made available to the customer or agreed upon milestones are reached.
In order to assess whether the price is fixed or determinable, we evaluate whether refund rights exist. If there are refund rights or payment terms 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 receipt of payment.
We regularly enter into contracts where revenue is derived from multiple deliverables including any mix of products or services. These products 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.
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For transactions entered into in 2009 and 2010, 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.
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 product 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 are 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 our best estimate of selling price using average selling prices over a rolling12-month period coupled with an assessment of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, 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.
In the first quarter of 2010, we offered an incentive with the launch of the HiSeq 2000 that enabled existing Genome Analyzer customers to trade in their Genome Analyzer and receive a discount on the purchase of a HiSeq 2000. The incentive was limited to customers who had purchased a Genome Analyzer as of the date of the announcement and was the first significant trade-in program we have offered. We will account for HiSeq 2000 discounts related to the Genome Analyzer trade-in program in the period in which the HiSeq 2000 revenue is recognized.
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 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 identical assets or liabilities. |
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| • | 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. |
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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 and we may need to increase our reserves if the financial conditions of our customers deteriorate.
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 cycles, quality issues, historical experience, and usage forecasts. 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
Under the acquisition method of accounting, we allocate the fair value of the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. We record the excess consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, as goodwill. These valuations require us to make significant estimates and assumptions, especially with respect to intangible assets.
In connection with certain of our acquisitions, additional contingent consideration is earned by the sellers upon completion of certain future performance milestones. Prior to fiscal year 2009, the Company recognized contingent consideration as an additional element of the cost of the acquisition, generally goodwill, when the contingency was resolved beyond a reasonable doubt and the additional consideration was issued or became issuable. Due to changes in the accounting standards regarding business combinations, for all acquisitions consummated on or after December 29, 2008, a liability is recorded on the acquisition date for an estimate of the acquisition date fair value of the contingent consideration by applying the income approach utilizing
44
variable factors such as anticipated future cash flows, risk-free adjusted discount rates and nonperformance risk. Any change in the fair value of the contingent consideration subsequent to the acquisition date is recognized in acquisition related (gain) expense, net, a component of operating expenses, in the consolidated statements of income. This method requires significant management judgment, including the probability of achieving certain future milestones and discount rates. Future changes in our estimates could result in expenses or gains.
Management uses a discounted cash flow method to value our acquired 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.
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.
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, the time value of money, and other factors that a willing market participant would consider. 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 $129.9 million in net property and equipment and $70.0 million in net intangible assets on our balance sheet at January 2, 2011.
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. Impairment charges could materially decrease our future net income and result in lower asset values on our balance sheet.
Share-Based Compensation
We are required to measure and recognize compensation expense for all share-based payments 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 share-based awards using the BSM model requires the use of certain estimates and highly judgmental assumptions that affect the amount of share-based compensation expense recognized in our consolidated statements of income. These include estimates of the expected volatility of our stock price, expected life of an award, 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 accounting pronouncementsperiod is includedgenerally commensurate with the estimated expected life of our stock awards, adjusted for the impact of unusual fluctuations not reasonably
45
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 life of an award is based on historical forfeiture experience, exercise activity, and on the terms and conditions of the stock awards. 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. We amortize the fair value of share-based compensation on a straight-line basis over the requisite service periods of the awards. If any of the assumptions used in Note 1the BSM model change significantly, share-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 Notesestimated future taxes to Consolidated Financial Statements.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 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 2, 2011, 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 $1.9 million and $3.1 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.
Warranties
We generally provide a one-year warranty on instruments. Additionally, we provide a warranty on consumables through the expiry date, which generally ranges from six to twelve months after the manufacture date. We establish an accrual for estimated warranty expenses based on historical experience as well as anticipated product performance. We periodically review the adequacy of our warranty reserve, and adjust, if necessary, the warranty percentage and accrual based on actual experience and estimated costs to be incurred. If our estimates of warranty obligation change or if actual product performance is below our expectations we may incur additional warranty expense.
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| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
Interest Rate Sensitivity
Our exposureinvestment portfolio is exposed to market risk for changes in interest rates relates primarily to our investment portfolio.rates. 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
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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
42
materially affect the fair value of our interest sensitive financial instruments. For example,In addition, if a 100 basis point change in overall interest rates were to occur in 2009,2011, our interest income would change by approximately $6.4$8.9 million in relation to amounts we would expect to earn, based on our cash, cash equivalents, and short-term investments as of December 28, 2008.January 2, 2011.
Changes in interest rates may also impact gains or losses from the conversion of our outstanding convertible senior notes. As of January 2, 2011, we had $390.0 million aggregate principal amount of convertible notes outstanding. The notes are convertible into cash, and if applicable, shares of our common stock under certain circumstances, including trading price conditions related to our common stock. If the trading price of our common stock remains significantly above the conversion price of $21.83 per share, we expect that noteholders will elect to convert the notes. Upon conversion, we are required to record a gain or loss for the difference between the fair value of the debt to be extinguished and its corresponding net carrying value. The fair value of the debt to be extinguished depends on our current incremental borrowing rate. The net carrying value of the notes has an implicit interest rate of 8.27%. If our incremental borrowing rate at the time of conversion is higher or lower than the implied interest rate of the notes, we will record a gain or loss in our consolidated statement of income during the period in which the notes are converted. An incremental borrowing rate that is a hypothetical 100 basis points lower than the implicit interest rate upon conversion of $100 million aggregate principal amount of the notes would result in a loss of approximately $3.5 million.
Market Price Sensitive Instruments
In order to potentially reduce potential equity dilution, in connection with the issuance (and potential conversion) of our convertible notes, we entered into convertible note hedge transactions, entitling us to purchase up to 18,322,320 shares of our common stock at a strike price of $21.83 per share, subject to adjustment. 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 common 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 common stock exceeds the strike price of the warrants on the exercise dates of the warrants, which occur during 2014, assuming the warrants are exercised.
Foreign Currency Exchange Risk
We have operations in the Americas, Europe and Asia-Pacific. As a result, our financial position, results of operations and cash flows can be affected by fluctuations in foreign currency exchange rates. The functional currency for each of our subsidiaries is the U.S. dollar. Accordingly, we remeasure the monetary assets and liabilities of our foreign subsidiaries to the U.S. dollar at month-end exchange rates and remeasure the nonmonetary assets and liabilities to the U.S. dollar at historical rates. Income and expense amounts related to monetary assets and liabilities are remeasured to the U.S. dollar at the weighted average exchange rates in effect during the relevant period, and income and expense accounts related to nonmonetary assets and liabilities are remeasured to the U.S. dollar at historical exchange rates. Remeasurement gains and losses are recognized as income, or expense, in the period of occurrence.
In addition, many of our reporting entities conduct a portion of theirour business in currencies other than the entity’s U.S. dollar functional currency. These transactions give rise to receivablesmonetary assets and payablesliabilities that are denominated in currencies other than the entity’s functional currency. The value of these receivablesmonetary assets and payables isliabilities are subject to changes in currency exchange rates because they may become worth more or less than they were worth atfrom the time we entered into the transaction due to changestransactions are originated until settlement in exchange rates.cash. Our foreign currency exposures are primarily concentrated in the Euro, Yen, British pound sterling, Australian dollar, and Singapore dollar. Both realized and unrealized gains or losses on the value of these receivablesmonetary assets and payablesliabilities are included in the determination of net income. TheWe recorded a net currency exchange gain recognized on business transactions, was $1.9net of hedging transactions, of $1.0 million for each of the yearyears ended December 28, 2008January 2, 2011 and isJanuary 3, 2010, which are included in other (expense) income, and expensenet, in the consolidated statements of operations.income.
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We use forward exchange contracts to manage a portion of the foreign currency 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 instruments to reduce foreign currency exchange rate risks; we do not hold any derivative financial instruments for trading or speculative purposes. We primarily use forward exchange contracts to hedge foreign currency exposures, and they generally have terms of one month or less. Realized and unrealized gains or losses on the value of financial contracts entered into to hedge the exchange rate exposure of these monetary assets and liabilities are also included in the determination of net income, as they have not been designated for hedge accounting. These contracts, which settle monthly, effectively fix the 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 the value of the underlying monetary assets and liabilities. At January 2, 2011, we had $20.0 million of foreign currency forward contracts outstanding to hedge foreign currency risk.
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| 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.
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Item 9. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
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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
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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 28, 2008. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of December 28, 2008, 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 2008 and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The evaluation did not identify any such change.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVERINDEX TO CONSOLIDATED FINANCIAL REPORTINGSTATEMENTS
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 28, 2008. The effectiveness of our internal control over financial reporting as of December 28, 2008 has been audited by Ernst & Young LLP, an independent registered accounting firm, as stated in their report which is included herein.
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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 28, 2008, 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 28, 2008, 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 28, 2008 and December 30, 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 28, 2008 of Illumina, Inc. and our report dated February 24, 2009 expressed an unqualified opinion thereon.
San Diego, California
February 24, 2009
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Item 9B. | Other Information. |
None.
PART III
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Item 10. | Directors, Executive Officers and Corporate Governance. |
(a) Identification of Directors. Information concerning our directors is incorporated by reference from the section entitled “Proposal One: Election of Directors” to be contained in our definitive Proxy Statement with respect to our 2009 Annual Meeting of Stockholders to be filed with the SEC no later than April 27, 2009.
(b) Identification of Executive Officers. Information concerning our executive officers is set forth under “Executive Officers” in Part I of this Annual Report onForm 10-K and is incorporated herein by reference.
(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 2009 Annual Meeting of Stockholders to be filed with the SEC no later than April 27, 2009.
(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 our definitive Proxy Statement with respect to our 2009 Annual Meeting of Stockholders to be filed with the SEC no later than April 27, 2009.
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 Investor Information section under “Corporate.” The information on, or that can be accessed from, our website is not incorporated by reference into this report.
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Item 11. | Executive Compensation. |
Information concerning executive compensation is incorporated by reference from the sections entitled “Executive Compensation and Other Information” to be contained in our definitive Proxy Statement with respect to our 2009 Annual Meeting of Stockholders to be filed with the SEC no later than April 27, 2009.
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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 sections entitled “Ownership of Securities” and “Equity Compensation Plan Information” to be contained in our definitive Proxy Statement with respect to our 2009 Annual Meeting of Stockholders to be filed with the SEC no later than April 27, 2009.
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Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Information concerning certain relationships and related transactions, and director independence is incorporated by reference from the sections entitled “Proposal One: Election of Directors,” “Executive Compensation and Other Information” and “Certain Transactions” to be contained in our definitive Proxy Statement with respect to our 2009 Annual Meeting of Stockholders to be filed with the SEC no later than April 27, 2009.
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Item 14. | Principal Accountant Fees and Services. |
Information concerning principal accountant fees and services is incorporated by reference from the sections entitled “Proposal Two: Ratification of Independent Registered Public Accounting Firm” to be contained in our definitive Proxy Statement with respect to our 2009 Annual Meeting of Stockholders to be filed with the SEC no later than April 27, 2009.
PART IV
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Item 15. | Exhibits, Financial Statement Schedules. |
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements:
| | | | | |
| | | Page |
| |
| | | F-1 | |
| | | F-250 | |
| | | F-351 | |
| | | F-452 | |
| | | F-553 | |
| | | F-654 | |
| | | F-7 | |
| | | | |
| | | F-36 | |
| | | 55 | |
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Exhibit
| | |
Number | | Description of Document |
| |
| | 3 | .1(2) | | Amended and Restated Certificate of Incorporation. |
| | 3 | .2 | | Amended Bylaws. |
| | 3 | .3(5) | | Certificate of Designation for Series A Junior Participating Preferred Stock (included as an exhibit to exhibit 4.3). |
| | 4 | .1(1) | | Specimen Common Stock Certificate. |
| | 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(10) | | 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. |
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| | | | | |
Exhibit
| | |
Number | | Description of Document |
| |
| | 10 | .8(12) | | Eastgate Pointe Lease, dated July 6, 2000, between Diversified Eastgate Venture and Registrant. |
| | 10 | .9(19) | | 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 | | Amended Solexa 2005 Equity Incentive Plan |
| | 10 | .26 | | Amended 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 Corporation 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 | | Amended and Restated Change in Control Severance Agreement between the Registrant and Jay T Flatly. |
| | 10 | .34 | | Form of Change in Control Severance Agreement between the Registrant and its executive officers. |
| | 10 | .35 | | Form of Restricted Stock Unit Agreement for Non-Employee Directors under 2005 Stock and Incentive Plan. |
| | 10 | .36 | | [Reserved] |
| | 10 | .37 | | [Reserved] |
| | 10 | .38 | | [Reserved] |
| | 10 | .39(34) | | Securities Purchase Agreement, dated as of November 12, 2006, between Solexa, Inc. and the Registrant. |
| | 10 | .40(50) | | Lease between The Irvine Company LLC and the Registrant, dated September 29, 2006. |
| | 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 | .42(37) | | Lease between BMR-9885 Towne Centre Drive LLC and the Registrant for the 9865 Towne Centre Drive property, dated January 26, 2007. |
48
| | | | | |
Exhibit
| | |
Number | | Description of Document |
| |
| | 10 | .43 | | Amended and Restated 2005 Stock and Incentive Plan. |
| | 10 | .44(9) | | Settlement and Release Agreement between Affymetrix, Inc. and the Registrant, dated January 9, 2008. |
| | 10 | .45(44) | | Confirmation of Convertible Bond Hedge Transaction, dated February 12, 2007, by and between the Registrant and Goldman, Sachs & Co. |
| | 10 | .46(45) | | Confirmation of Convertible Bond Hedge Transaction, dated February 12, 2007, by and between the Registrant and Deutsche Bank AG London. |
| | 10 | .47(46) | | Confirmation Issuer Warrant Transaction, dated February 12, 2007, by and between the Registrant and Goldman, Sachs & Co. |
| | 10 | .48(47) | | Confirmation Issuer Warrant Transaction, dated February 12, 2007, by and between the Registrant and Deutsche Bank AG London. |
| | 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 | .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 | .51(11) | | New Hire Stock and Incentive Plan. |
| | 10 | .52(11) | | Executive Transition Agreement between the Registrant and John R. Stuelpnagel, dated March 21, 2008. |
| | 10 | .53 | | [Reserved] |
| | 10 | .54 | | [Reserved] |
| | 10 | .55(3) | | Indemnification Agreement between the Registrant and Gregory F. Heath. |
| | 10 | .56(3) | | Indemnification Agreement between the Registrant and Joel McComb. |
| | 14 | | | Code of Ethics. |
| | 21 | .1 | | Subsidiaries of the Registrant. |
| | 23 | .1 | | Consent of Independent Registered Public Accounting Firm. |
| | 24 | .1 | | Power of Attorney (included on the signature page). |
| | 31 | .1 | | Certification of Jay T. Flatley pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | 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. |
| | |
+ | | Management contract or corporate plan or arrangement |
|
(1) | | Incorporated by reference to the same numbered exhibit filed with our Registration Statement onForm S-1 (FileNo. 333-33922) filed April 3, 2000, as amended. |
|
(2) | | Incorporated by reference to exhibit 3.1 filed with ourForm 8-K (FileNo. 000-30361) filed on September 23, 2008. |
|
(3) | | Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended June 29, 2008 filed July 25, 2008. |
|
(4) | | Incorporated by reference to exhibit 10.13 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 31, 2001 filed May 8, 2001. |
|
(5) | | Incorporated by reference to the same numbered exhibit filed with our Registration Statement onForm 8-A (FileNo. 000-30361) filed May 14, 2001. |
|
(6) | | Incorporated by reference to exhibit 10.15 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended June 30, 2001 filed August 13, 2001. |
|
(7) | | Incorporated by reference to exhibit 10.3 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended October 1, 2006 filed October 30, 2006. |
|
(8) | | Incorporated by reference to exhibit 10.18 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 31, 2002 filed May 13, 2002. |
|
(9) | | Incorporated by reference to exhibit 10.44 filed with ourForm 10-K (FileNo. 000-30361) for the fiscal year ended December 30, 2007 filed February 26, 2008. |
49
| | |
(10) | | Incorporated by reference to exhibit 10.9 filed with our Registration Statement onForm S-1/A (FileNo. 333-33922) filed July 3, 2000. |
|
(11) | | Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 30, 2008 filed April 28, 2008. |
|
(12) | | Incorporated by reference to exhibit 10.11 filed with our Registration Statement onForm S-1/A (FileNo. 333-33922) filed July 19, 2000. |
|
(13) | | Incorporated by reference to exhibit 10.16 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended September 30, 2001 filed November 14, 2001. |
|
(14) | | Incorporated by reference to exhibit 10.17 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended September 30, 2001 filed November 14, 2001. |
|
(15) | | Incorporated by reference to exhibit 10.18 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended September 30, 2001 filed November 14, 2001. |
|
(16) | | Incorporated by reference to exhibit 2.1 filed with ourForm 8-K (FileNo. 000-30361) filed November 13, 2006. |
|
(17) | | Incorporated by reference to exhibit 10.19 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 31, 2002 filed May 13, 2002. |
|
(18) | | Incorporated by reference to the exhibit 10.20 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 31, 2002 filed May 13, 2002. |
|
(19) | | Incorporated by reference to exhibit 10.12 filed with our Registration Statement onForm S-1 (FileNo. 333-33922) filed July 19, 2000. |
|
(20) | | Incorporated by reference to the exhibit 10.22 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 31, 2002 filed May 13, 2002. |
|
(21) | | Incorporated by reference to exhibit 10.24 filed with Amendment No. 1 to our Registration Statement onForm S-3 (FileNo. 333-111496) filed March 2, 2004. |
|
(22) | | Incorporated by reference to exhibit 10.23 filed with our Amendment No. 1 to our Registration Statement onForm S-3 (FileNo. 333-111496) filed March 2, 2004. |
|
(23) | | Incorporated by reference to exhibit 10.25 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended June 27, 2004 filed August 6, 2004. |
|
(24) | | Incorporated by reference to exhibit 10.26 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended October 3, 2004 filed November 12, 2004. |
|
(25) | | Incorporated by reference to exhibit 10.27 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended October 3, 2004 filed November 12, 2004. |
|
(26) | | Incorporated by reference to exhibit 10.28 filed with ourForm 10-K (FileNo. 000-30361) for the year ended January 2, 2005 filed March 8, 2005. |
|
(27) | | Incorporated by reference to exhibit 10.33 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended July 3, 2005 filed August 8, 2005. |
|
(28) | | Incorporated by reference to exhibit 10.29 filed with ourForm 10-K (FileNo. 000-30361) for the year ended January 2, 2005 filed March 8, 2005. |
|
(29) | | Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended April 2, 2006 filed May 8, 2006. |
|
(30) | | Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended July 2, 2006 filed August 2, 2006. |
|
(31) | | [Reserved] |
|
(32) | | [Reserved] |
|
(33) | | [Reserved] |
|
(34) | | Incorporated by reference to exhibit 10.1 filed with ourForm 8-K (FileNo. 000-30361) filed November 13, 2006. |
50
| | |
(35) | | Incorporated by reference to exhibit 4.1 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007. |
|
(36) | | Incorporated by reference to exhibit 4.2 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007. |
|
(37) | | Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended April 1, 2007 filed May 3, 2007. |
|
(38) | | [Reserved] |
|
(39) | | [Reserved] |
|
(40) | | [Reserved] |
|
(41) | | Incorporated by reference to exhibit 99.3 filed with ourForm 8-K (FileNo. 000-30361) filed November 26, 2007. |
|
(42) | | Incorporated by reference to exhibit 99.4 filed with ourForm 8-K (FileNo. 000-30361) filed November 26, 2007. |
|
(43) | | Incorporated by reference to exhibit 99.5 filed with ourForm 8-K (FileNo. 000-30361) filed November 26, 2007. |
|
(44) | | Incorporated by reference to exhibit 10.1 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007. |
|
(45) | | Incorporated by reference to exhibit 10.2 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007. |
|
(46) | | Incorporated by reference to exhibit 10.3 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007. |
|
(47) | | Incorporated by reference to exhibit 10.4 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007. |
|
(48) | | Incorporated by reference to exhibit 10.5 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007. |
|
(49) | | Incorporated by reference to exhibit 10.6 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007. |
|
(50) | | Incorporated by reference to the same numbered exhibit filed with our Annual Report onForm 10-K (FileNo. 000-30361) for the year ended December 31, 2006 filed February 28, 2007. |
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.
51
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 25, 2009.
Illumina, Inc.
Jay T. Flatley
President and Chief Executive Officer
February 25, 2009
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
Jay T. Flatley | | President, Chief Executive Officer and Director (Principal Executive Officer) | | February 25, 2009 |
| | | | |
/s/ Christian O. Henry
Christian O. Henry | | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | | February 25, 2009 |
| | | | |
/s/ William H. Rastetter
William H. Rastetter | | Chairman of the Board of Directors | | February 25, 2009 |
| | | | |
/s/ A. Blaine Bowman
A. Blaine Bowman | | Director | | February 25, 2009 |
| | | | |
/s/ Daniel M. Bradbury
Daniel M. Bradbury | | Director | | February 25, 2009 |
| | | | |
/s/ Karin Eastham
Karin Eastham | | Director | | February 25, 2009 |
52
| | | | | | |
/s/ Jack Goldstein
Jack Goldstein | | Director | | February 25, 2009 |
| | | | |
| | Director | | February 25, 2009 |
| | | | |
/s/ David R. Walt
David R. Walt | | Director | | February 25, 2009 |
53
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
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 28, 2008January 2, 2011 and December 30, 2007,January 3, 2010, and the related consolidated statements of operations,income, stockholders’ equity, and cash flows for each of the three years in the period ended December 28, 2008.January 2, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2).15. 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 28, 2008January 2, 2011 and December 30, 2007,January 3, 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 28, 2008,January 2, 2011, 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, Illumina, Inc. changed its method of accounting for business combinations 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 28, 2008,January 2, 2011, 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 24, 200928, 2011 expressed an unqualified opinion thereon.
San Diego, California
February 24, 200928, 2011
F-250
ILLUMINA, INC.
ILLUMINA, INC.CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | | | | |
| | | December 28,
| | December 30,
| | | January 2,
| | January 3,
| |
| | | 2008 | | 2007 | | | 2011 | | 2010 | |
| | | (In thousands) | | | (In thousands) | |
| |
ASSETS | ASSETS | ASSETS |
| Current assets: | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 327,024 | | | $ | 174,941 | | | $ | 248,947 | | | $ | 144,633 | |
| Short-term investments | | | 313,051 | | | | 211,141 | | | | 645,342 | | | | 548,894 | |
| Accounts receivable, net | | | 133,266 | | | | 83,119 | | | | 165,598 | | | | 157,751 | |
| Inventory, net | | | 73,431 | | | | 53,980 | | | | 142,211 | | | | 92,776 | |
| Deferred tax assets — current portion | | | 8,635 | | | | 26,934 | | |
| Deferred tax assets, current portion | | | | 19,378 | | | | 20,021 | |
| Prepaid expenses and other current assets | | | 9,530 | | | | 12,640 | | | | 36,922 | | | | 17,515 | |
| | | | | | | | | | | |
| Total current assets | | | 864,937 | | | | 562,755 | | | | 1,258,398 | | | | 981,590 | |
| Property and equipment, net | | | 89,436 | | | | 46,274 | | | | 129,874 | | | | 117,188 | |
| Long-term investments | | | 55,900 | | | | — | | |
| Goodwill | | | 228,734 | | | | 228,734 | | | | 278,206 | | | | 213,452 | |
| Intangible assets, net | | | 47,755 | | | | 58,116 | | | | 70,024 | | | | 43,788 | |
| Deferred tax assets — long term portion | | | 78,321 | | | | 80,245 | | |
| Other assets, net | | | 12,017 | | | | 11,608 | | |
| Deferred tax assets, long-term portion | | | | 39,497 | | | | 47,371 | |
| Other assets | | | | 63,114 | | | | 26,548 | |
| | | | | | | | | | | |
| Total assets | | $ | 1,377,100 | | | $ | 987,732 | | | $ | 1,839,113 | | | $ | 1,429,937 | |
| | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Current liabilities: | | | | | | | | | | | | | | | | |
| Accounts payable | | $ | 29,204 | | | $ | 24,311 | | | $ | 66,744 | | | $ | 52,781 | |
| Litigation settlements payable | | | — | | | | 90,536 | | |
| Accrued liabilities | | | 80,355 | | | | 50,852 | | | | 156,164 | | | | 98,253 | |
| Current portion of long-term debt | | | 399,999 | | | | 16 | | |
| Long-term debt, current portion | | | | 311,609 | | | | 290,202 | |
| | | | | | | | | | | |
| Total current liabilities | | | 509,558 | | | | 165,715 | | | | 534,517 | | | | 441,236 | |
| Long-term debt, less current portion | | | — | | | | 400,000 | | |
| Deferred gain on sale of land and building | | | 2,314 | | | | 2,485 | | |
| Other long-term liabilities | | | 16,632 | | | | 7,854 | | | | 28,531 | | | | 24,656 | |
| Commitments and contingencies | | | | | | | | | | | | | | | | |
| Conversion option subject to cash settlement | | | | 78,390 | | | | 99,797 | |
| Stockholders’ equity: | | | | | | | | | | | | | | | | |
| Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding at December 28, 2008 and December 30, 2007 | | | — | | | | — | | |
| Common stock, $0.01 par value, 320,000,000 shares authorized, 138,936,582 shares issued and outstanding at December 28, 2008, 125,607,354 shares issued and outstanding at December 30, 2007 | | | 1,389 | | | | 1,256 | | |
| Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued at January 2, 2011 and January 3, 2010 | | | | — | | | | — | |
| Common stock, $0.01 par value, 320,000,000 shares authorized, 151,512,837 shares issued at January 2, 2011, 143,544,265 shares issued at January 3, 2010 | | | | 1,516 | | | | 1,436 | |
| Additional paid-in capital | | | 1,499,708 | | | | 1,043,674 | | | | 1,891,288 | | | | 1,637,751 | |
| Accumulated other comprehensive income | | | 2,406 | | | | 1,347 | | | | 1,765 | | | | 2,830 | |
| Accumulated deficit | | | (332,500 | ) | | | (382,977 | ) | | | (155,335 | ) | | | (280,226 | ) |
| Treasury stock, at cost (17,927,983 shares at December 28, 2008 and 14,819,090 shares at December 30, 2007) | | | (322,407 | ) | | | (251,622 | ) | |
| Treasury stock, at cost (24,904,564 shares at January 2, 2011 and 24,068,450 shares at January 3, 2010) | | | | (541,559 | ) | | | (497,543 | ) |
| | | | | | | | | | | |
| Total stockholders’ equity | | | 848,596 | | | | 411,678 | | | | 1,197,675 | | | | 864,248 | |
| | | | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 1,377,100 | | | $ | 987,732 | | | $ | 1,839,113 | | | $ | 1,429,937 | |
| | | | | | | | | | | |
See accompanying notes to consolidated financial statements
F-351
ILLUMINA, INC.
| | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| | | Year Ended
| |
| | | December 28,
| | | December 30,
| | | December 31,
| |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (In thousands, except per share amounts) | |
| |
| Revenue | | | | | | | | | | | | |
| Product revenue | | $ | 532,390 | | | $ | 326,699 | | | $ | 155,811 | |
| Service and other revenue | | | 40,835 | | | | 40,100 | | | | 28,775 | |
| | | | | | | | | | | | | |
| Total revenue | | | 573,225 | | | | 366,799 | | | | 184,586 | |
| | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | |
| Cost of product revenue (excluding impairment of manufacturing equipment and amortization of intangible assets) | | | 192,868 | | | | 119,991 | | | | 51,271 | |
| Cost of service and other revenue | | | 12,756 | | | | 12,445 | | | | 8,073 | |
| Research and development | | | 99,963 | | | | 73,943 | | | | 33,373 | |
| Selling, general and administrative | | | 148,014 | | | | 101,256 | | | | 54,057 | |
| Impairment of manufacturing equipment | | | 4,069 | | | | — | | | | — | |
| Amortization of intangible assets | | | 10,438 | | | | 2,429 | | | | — | |
| Acquired in-process research and development | | | 24,660 | | | | 303,400 | | | | — | |
| Litigation settlements | | | — | | | | 54,536 | | | | — | |
| | | | | | | | | | | | | |
| Total costs and expenses | | | 492,768 | | | | 668,000 | | | | 146,774 | |
| | | | | | | | | | | | | |
| Income (loss) from operations | | | 80,457 | | | | (301,201 | ) | | | 37,812 | |
| Interest income | | | 12,519 | | | | 16,026 | | | | 5,368 | |
| Interest and other expense, net | | | (2,070 | ) | | | (3,610 | ) | | | (560 | ) |
| | | | | | | | | | | | | |
| Income (loss) before income taxes | | | 90,906 | | | | (288,785 | ) | | | 42,620 | |
| Provision (benefit) for income taxes | | | 40,429 | | | | (10,426 | ) | | | 2,652 | |
| | | | | | | | | | | | | |
| Net income (loss) | | $ | 50,477 | | | $ | (278,359 | ) | | $ | 39,968 | |
| | | | | | | | | | | | | |
| Net income (loss) per basic share | | $ | 0.43 | | | $ | (2.57 | ) | | $ | 0.45 | |
| | | | | | | | | | | | | |
| Net income (loss) per diluted share | | $ | 0.38 | | | $ | (2.57 | ) | | $ | 0.41 | |
| | | | | | | | | | | | | |
| Shares used in calculating basic net income (loss) per share | | | 116,855 | | | | 108,308 | | | | 89,002 | |
| | | | | | | | | | | | | |
| Shares used in calculating diluted net income (loss) per share | | | 133,607 | | | | 108,308 | | | | 97,508 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Years Ended_ | |
| | | January 2,
| | | January 3,
| | | December 28,
| |
| | | 2011 | | | 2010 | | | 2008 | |
| | | (In thousands, except per share amounts) | |
| |
| Revenue: | | | | | | | | | | | | |
| Product revenue | | $ | 842,510 | | | $ | 627,240 | | | $ | 532,390 | |
| Service and other revenue | | | 60,231 | | | | 39,084 | | | | 40,835 | |
| | | | | | | | | | | | | |
| Total revenue | | | 902,741 | | | | 666,324 | | | | 573,225 | |
| Cost of revenue: | | | | | | | | | | | | |
| Cost of product revenue | | | 271,997 | | | | 190,714 | | | | 192,868 | |
| Cost of service and other revenue | | | 21,399 | | | | 15,055 | | | | 12,756 | |
| Amortization of intangible assets | | | 7,805 | | | | 6,680 | | | | 10,438 | |
| Impairment of manufacturing equipment | | | — | | | | — | | | | 4,069 | |
| | | | | | | | | | | | | |
| Total cost of revenue | | | 301,201 | | | | 212,449 | | | | 220,131 | |
| | | | | | | | | | | | | |
| Gross profit | | | 601,540 | | | | 453,875 | | | | 353,094 | |
| | | | | | | | | | | | | |
| Operating expense: | | | | | | | | | | | | |
| Research and development | | | 177,947 | | | | 140,616 | | | | 99,963 | |
| Selling, general and administrative | | | 220,990 | | | | 176,337 | | | | 148,014 | |
| Acquisition related (gain) expense, net | | | (9,051 | ) | | | 11,325 | | | | 24,660 | |
| | | | | | | | | | | | | |
| Total operating expense | | | 389,886 | | | | 328,278 | | | | 272,637 | |
| | | | | | | | | | | | | |
| Income from operations | | | 211,654 | | | | 125,597 | | | | 80,457 | |
| Other income (expense): | | | | | | | | | | | | |
| Interest income | | | 8,378 | | | | 11,029 | | | | 12,519 | |
| Interest expense | | | (24,598 | ) | | | (23,718 | ) | | | (22,210 | ) |
| Other (expense) income, net | | | (10,055 | ) | | | 1,217 | | | | 1,921 | |
| | | | | | | | | | | | | |
| Total other expense, net | | | (26,275 | ) | | | (11,472 | ) | | | (7,770 | ) |
| | | | | | | | | | | | | |
| Income before income taxes | | | 185,379 | | | | 114,125 | | | | 72,687 | |
| Provision for income taxes | | | 60,488 | | | | 41,844 | | | | 33,271 | |
| | | | | | | | | | | | | |
| Net income | | $ | 124,891 | | | $ | 72,281 | | | $ | 39,416 | |
| | | | | | | | | | | | | |
| Net income per basic share | | $ | 1.01 | | | $ | 0.59 | | | $ | 0.34 | |
| | | | | | | | | | | | | |
| Net income per diluted share | | $ | 0.87 | | | $ | 0.53 | | | $ | 0.30 | |
| | | | | | | | | | | | | |
| Shares used in calculating basic net income per share | | | 123,581 | | | | 123,154 | | | | 116,855 | |
| | | | | | | | | | | | | |
| Shares used in calculating diluted net income per share | | | 143,433 | | | | 137,096 | | | | 133,607 | |
| | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
F-452
ILLUMINA, INC.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated
| | | | | | | | | | | | | | | | | Accumulated
| | | | | | | | | |
| | | | | | | Additional
| | | | Other
| | | | | | | | Total
| | | | | | | Additional
| | Other
| | | | | | | | Total
| |
| | | Common Stock | | Paid-In
| | Deferred
| | Comprehensive
| | Accumulated
| | Treasury Stock | | Stockholders’
| | | Common Stock | | Paid-In
| | Comprehensive
| | Accumulated
| | Treasury Stock | | Stockholders’
| |
| | | Shares | | Amount | | Capital | | Compensation | | Income | | Deficit | | Shares | | Amount | | Equity | | | Shares | | Amount | | Capital | | Income | | Deficit | | Shares | | Amount | | Equity | |
| | | (In thousands) | | | (In thousands) | |
| |
| Balance as of January 1, 2006 | | | 82,588 | | | $ | 826 | | | $ | 216,353 | | | $ | (354 | ) | | $ | 258 | | | $ | (144,586 | ) | | | — | | | $ | — | | | $ | 72,497 | | |
| Issuance of common stock | | | 11,126 | | | | 112 | | | | 114,384 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 114,496 | | |
| May 2006 offering costs | | | — | | | | — | | | | (6,530 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6,530 | ) | |
| Stock-based compensation | | | — | | | | — | | | | 14,082 | | | | 354 | | | | — | | | | — | | | | — | | | | — | | | | 14,436 | | |
| Incremental tax benefit related to stock options exercised | | | — | | | | — | | | | 1,439 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,439 | | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 30, 2007 | | | | 125,608 | | | $ | 1,256 | | | $ | 994,869 | | | $ | 1,347 | | | $ | (391,923 | ) | | | (14,819 | ) | | $ | (251,622 | ) | | $ | 353,927 | |
| Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | — | | | | — | | | | — | | | | — | | | | 39,416 | | | | — | | | | — | | | | 39,416 | |
| Unrealized gain on available-for-sale securities, net of deferred tax | | | — | | | | — | | | | — | | | | — | | | | 10,693 | | | | — | | | | — | | | | — | | | | 10,693 | | | | — | | | | — | | | | — | | | | 920 | | | | — | | | | — | | | | — | | | | 920 | |
| Unrealized loss on hedging contracts | | | — | | | | — | | | | — | | | | — | | | | (10 | ) | | | — | | | | — | | | | — | | | | (10 | ) | |
| Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | 353 | | | | — | | | | — | | | | — | | | | 353 | | | | — | | | | — | | | | (16 | ) | | | 155 | | | | — | | | | — | | | | — | | | | 139 | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 39,968 | | | | — | | | | — | | | | 39,968 | | |
| | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 51,004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 40,475 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2006 | | | 93,714 | | | $ | 938 | | | $ | 339,728 | | | $ | — | | | $ | 11,294 | | | $ | (104,618 | ) | | | — | | | $ | — | | | $ | 247,342 | | |
| 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 | ) | |
| Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized loss on available-for-sale securities, net of deferred tax | | | — | | | | — | | | | — | | | | — | | | | (10,529 | ) | | | — | | | | — | | | | — | | | | (10,529 | ) | |
| Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | 582 | | | | — | | | | — | | | | — | | | | 582 | | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (278,359 | ) | | | — | | | | — | | | | (278,359 | ) | |
| | | | | |
| Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (288,306 | ) | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 30, 2007 | | | 125,608 | | | $ | 1,256 | | | $ | 1,043,674 | | | $ | — | | | $ | 1,347 | | | $ | (382,977 | ) | | | (14,819 | ) | | $ | (251,622 | ) | | $ | 411,678 | | |
| Issuance of common stock in conjunction with secondary offering, net of issuance costs | | | 8,050 | | | | 80 | | | | 342,570 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 342,650 | | | | 8,050 | | | | 80 | | | | 342,570 | | | | — | | | | — | | | | — | | | | — | | | | 342,650 | |
| Issuance of common stock under employee stock plans | | | 4,923 | | | | 49 | | | | 44,281 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 44,330 | | | | 4,923 | | | | 49 | | | | 44,281 | | | | — | | | | — | | | | — | | | | — | | | | 44,330 | |
| Warrants exercised | | | 356 | | | | 4 | | | | 2,987 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,991 | | | | 356 | | | | 4 | | | | 2,987 | | | | — | | | | — | | | | — | | | | — | | | | 2,991 | |
| Stock-based compensation | | | — | | | | — | | | | 47,695 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 47,695 | | |
| Share-based compensation | | | | — | | | | — | | | | 47,695 | | | | — | | | | — | | | | — | | | | — | | | | 47,695 | |
| Incremental tax benefit related to stock options exercised | | | — | | | | — | | | | 18,501 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 18,501 | | | | — | | | | — | | | | 18,501 | | | | — | | | | — | | | | — | | | | — | | | | 18,501 | |
| Repurchases of common stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3,109 | ) | | | (70,785 | ) | | | (70,785 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3,109 | ) | | | (70,785 | ) | | | (70,785 | ) |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Remeasurement of convertible debt | | | | — | | | | — | | | | 18,883 | | | | — | | | | — | | | | — | | | | — | | | | 18,883 | |
| | | | | | | | | | | | | | | | | | | |
| Balance as of December 28, 2008 | | | | 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 on available-for-sale securities, net of deferred tax | | | — | | | | — | | | | — | | | | — | | | | 920 | | | | — | | | | — | | | | — | | | | 920 | | | | — | | | | — | | | | — | | | | 408 | | | | — | | | | — | | | | — | | | | 408 | |
| Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | 139 | | | | — | | | | — | | | | — | | | | 139 | | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 50,477 | | | | — | | | | — | | | | 50,477 | | |
| | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 51,552 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 72,689 | |
| Issuance of common stock | | | | 3,569 | | | | 36 | | | | 39,343 | | | | — | | | | — | | | | — | | | | — | | | | 39,379 | |
| Warrants exercised | | | | 954 | | | | 10 | | | | 7,566 | | | | — | | | | — | | | | — | | | | — | | | | 7,576 | |
| Share-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 | ) |
| Remeasurement of convertible debt | | | | 84 | | | | 1 | | | | 20,940 | | | | — | | | | — | | | | — | | | | — | | | | 20,941 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 28, 2008 | | | 138,937 | | | $ | 1,389 | | | $ | 1,499,708 | | | $ | — | | | $ | 2,406 | | | $ | (332,500 | ) | | | (17,928 | ) | | $ | (322,407 | ) | | $ | 848,596 | | |
| Balance as of January 3, 2010 | | | | 143,544 | | | | 1,436 | | | | 1,637,751 | | | | 2,830 | | | | (280,226 | ) | | | (24,068 | ) | | | (497,543 | ) | | | 864,248 | |
| Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | — | | | | — | | | | — | | | | — | | | | 124,891 | | | | — | | | | — | | | | 124,891 | |
Unrealized loss onavailable-for-sale securities, net of deferred tax | | | | — | | | | — | | | | — | | | | (1,065 | ) | | | — | | | | — | | | | — | | | | (1,065 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 123,826 | |
| Issuance of common stock | | | | 6,391 | | | | 64 | | | | 101,952 | | | | — | | | | — | | | | — | | | | — | | | | 102,016 | |
| Warrants exercised | | | | 1,578 | | | | 16 | | | | 16,013 | | | | — | | | | — | | | | — | | | | — | | | | 16,029 | |
| Share-based compensation | | | | — | | | | — | | | | 71,725 | | | | — | | | | — | | | | — | | | | — | | | | 71,725 | |
| Incremental tax benefit related to stock options exercised | | | | — | | | | — | | | | 42,445 | | | | — | | | | — | | | | — | | | | — | | | | 42,445 | |
| Repurchases of common stock | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (836 | ) | | | (44,016 | ) | | | (44,016 | ) |
| Remeasurement of convertible debt | | | | — | | | | — | | | | 21,402 | | | | — | | | | — | | | | — | | | | — | | | | 21,402 | |
| | | | | | | | | | | | | | | | | | | |
| Balance as of January 2, 2011 | | | | 151,513 | | | $ | 1,516 | | | $ | 1,891,288 | | | $ | 1,765 | | | $ | (155,335 | ) | | | (24,904 | ) | | $ | (541,559 | ) | | $ | 1,197,675 | |
| | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
F-553
ILLUMINA, INC.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | Year Ended
| | | Years Ended | |
| | | December 28,
| | December 30,
| | December 31,
| | | January 2,
| | January 3,
| | December 28,
| |
| | | 2008 | | 2007 | | 2006 | | | 2011 | | 2010 | | 2008 | |
| | | (In thousands) | | | | | (In thousands) | | | |
| |
| Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 50,477 | | | $ | (278,359 | ) | | $ | 39,968 | | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | | |
| Net income | | | $ | 124,891 | | | $ | 72,281 | | | $ | 39,416 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | |
| Acquired in-process research and development | | | 24,660 | | | | 303,400 | | | | — | | | | 1,325 | | | | 11,325 | | | | 24,660 | |
| Amortization of increase in inventory valuation | | | — | | | | 942 | | | | — | | |
| Amortization of intangible assets | | | 10,438 | | | | 2,429 | | | | — | | | | 7,805 | | | | 6,680 | | | | 10,438 | |
| Amortization of debt issuance costs | | | 1,374 | | | | 1,176 | | | | — | | |
| Amortization of debt discount | | | | 21,407 | | | | 20,286 | | | | 18,883 | |
| Change in fair value of contingent consideration | | | | (10,376 | ) | | | — | | | | — | |
| Impairment of cost-method investment | | | | 13,223 | | | | — | | | | — | |
| Gain on acquisition | | | | (2,914 | ) | | | — | | | | — | |
| Depreciation expense | | | 17,285 | | | | 11,464 | | | | 6,032 | | | | 34,204 | | | | 24,504 | | | | 17,285 | |
| Loss on disposal of property and equipment | | | 262 | | | | 15 | | | | 116 | | |
| Share-based compensation expense | | | | 71,645 | | | | 60,811 | | | | 47,688 | |
| Incremental tax benefit related to stock options exercised | | | | (42,445 | ) | | | (39,319 | ) | | | (18,501 | ) |
| Deferred income taxes | | | | 48,696 | | | | 29,704 | | | | 31,533 | |
| Impairment of manufacturing equipment | | | 4,069 | | | | — | | | | — | | | | — | | | | — | | | | 4,069 | |
| Stock-based compensation expense | | | 47,688 | | | | 33,746 | | | | 14,304 | | |
| Incremental tax benefit related to stock options exercised | | | (18,501 | ) | | | (20,086 | ) | | | (1,439 | ) | |
| Amortization of gain on sale of land and building | | | (170 | ) | | | (187 | ) | | | (375 | ) | |
| Other non-cash adjustments | | | | 7,239 | | | | 1,721 | | | | 803 | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts receivable | | | (57,672 | ) | | | (37,060 | ) | | | (21,733 | ) | | | (7,844 | ) | | | (18,578 | ) | | | (57,672 | ) |
| Inventory | | | (19,560 | ) | | | (27,130 | ) | | | (9,728 | ) | | | (48,583 | ) | | | (20,557 | ) | | | (19,560 | ) |
| Prepaid expenses and other current assets | | | 2,322 | | | | (6,127 | ) | | | (1,591 | ) | | | 2,554 | | | | (3,429 | ) | | | 2,322 | |
| Deferred income taxes | | | 38,692 | | | | (11,408 | ) | | | (548 | ) | |
| Other assets | | | (1,815 | ) | | | 2,612 | | | | (5,212 | ) | | | (3,566 | ) | | | (2,670 | ) | | | (1,815 | ) |
| Accounts payable | | | 4,840 | | | | 12,262 | | | | 2,438 | | | | 23,150 | | | | 11,778 | | | | 4,840 | |
| Litigation settlements payable | | | (54,536 | ) | | | 54,536 | | | | — | | |
| Accrued income taxes | | | 2,377 | | | | 1,586 | | | | 1,809 | | |
| Accrued liabilities | | | 29,339 | | | | 15,901 | | | | 9,066 | | | | 32,028 | | | | 19,997 | | | | 31,716 | |
| Other long-term liabilities | | | 6,313 | | | | (3,418 | ) | | | 5,893 | | | | (113 | ) | | | 814 | | | | 6,313 | |
| Litigation settlements payable | | | | — | | | | — | | | | (54,536 | ) |
| Unrealized gain (loss) on foreign exchange | | | | 247 | | | | (3,157 | ) | | | — | |
| | | | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 87,882 | | | | 56,294 | | | | 39,000 | | | | 272,573 | | | | 172,191 | | | | 87,882 | |
| | | | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash (paid for) obtained in acquisition, including cash paid for transaction costs | | | (24,666 | ) | | | 72,075 | | | | — | | |
| Investment in secured convertible debentures | | | — | | | | — | | | | (3,036 | ) | |
| Sale of secured convertible debentures | | | — | | | | 3,593 | | | | — | | |
| Investment in Solexa | | | — | | | | — | | | | (50,000 | ) | |
| Purchases of available-for-sale securities | | | (568,707 | ) | | | (598,383 | ) | | | (236,331 | ) | | | (846,208 | ) | | | (694,487 | ) | | | (568,707 | ) |
| Sales and maturities of available-for-sale securities | | | 411,817 | | | | 479,415 | | | | 143,846 | | | | 688,611 | | | | 514,216 | | | | 411,817 | |
| Purchase of property and equipment | | | (59,693 | ) | | | (24,301 | ) | | | (15,114 | ) | |
| Sales and maturities of trading securities | | | | 54,900 | | | | 1,000 | | | | — | |
| Net cash paid for acquisitions | | | | (98,211 | ) | | | (1,325 | ) | | | (24,666 | ) |
| Purchases of investments | | | | (27,677 | ) | | | (19,900 | ) | | | — | |
| Purchases of property and equipment | | | | (49,818 | ) | | | (52,673 | ) | | | (59,693 | ) |
| Cash paid for intangible assets | | | (36,000 | ) | | | (85 | ) | | | (100 | ) | | | (6,650 | ) | | | (3,400 | ) | | | (36,000 | ) |
| | | | | | | | | | | | | | | |
| Net cash used in investing activities | | | (277,249 | ) | | | (67,686 | ) | | | (160,735 | ) | | | (285,053 | ) | | | (256,569 | ) | | | (277,249 | ) |
| | | | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments on long-term debt | | | (15 | ) | | | (95 | ) | | | (109 | ) | |
| Proceeds from issuance of convertible debt, net of issuance costs | | | — | | | | 390,269 | | | | — | | |
| Purchase of convertible note hedges | | | — | | | | (139,040 | ) | | | — | | |
| Proceeds from warrant exercises | | | 2,991 | | | | 98,515 | | | | — | | |
| Payments on current portion of long-term debt | | | | — | | | | (10,000 | ) | | | (15 | ) |
| Incremental tax benefit related to stock options exercised | | | | 42,445 | | | | 39,319 | | | | 18,501 | |
| Common stock repurchases | | | (70,785 | ) | | | (251,622 | ) | | | — | | | | (44,016 | ) | | | (175,136 | ) | | | (70,785 | ) |
| Proceeds from secondary offering, net of issuance cost | | | 342,650 | | | | — | | | | — | | | | — | | | | — | | | | 342,650 | |
| Proceeds from the exercise of warrants | | | | 16,029 | | | | 7,576 | | | | 2,991 | |
| Proceeds from issuance of common stock | | | 44,330 | | | | 30,179 | | | | 107,966 | | | | 102,016 | | | | 39,379 | | | | 44,330 | |
| Incremental tax benefit related to stock options exercised | | | 18,501 | | | | 20,086 | | | | 1,439 | | |
| | | | | | | | | | | | | | | |
| Net cash provided by financing activities | | | 337,672 | | | | 148,292 | | | | 109,296 | | |
| | | | | | | | | |
| Effect of foreign currency translation on cash and cash equivalents | | | 3,778 | | | | (345 | ) | | | 3 | | |
| Net cash provided by (used in) financing activities | | | | 116,474 | | | | (98,862 | ) | | | 337,672 | |
| Effect of exchange rate changes on cash and cash equivalents | | | | 320 | | | | 849 | | | | 3,778 | |
| | | | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 152,083 | | | | 136,555 | | | | (12,436 | ) | | | 104,314 | | | | (182,391 | ) | | | 152,083 | |
| Cash and cash equivalents at beginning of the year | | | 174,941 | | | | 38,386 | | | | 50,822 | | |
| Cash and cash equivalents at beginning of period | | | | 144,633 | | | | 327,024 | | | | 174,941 | |
| | | | | | | | | | | | | | | |
| Cash and cash equivalents at end of the year | | $ | 327,024 | | | $ | 174,941 | | | $ | 38,386 | | |
| Cash and cash equivalents at end of period | | | $ | 248,947 | | | $ | 144,633 | | | $ | 327,024 | |
| | | | | | | | | | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash paid for interest | | $ | 2,553 | | | $ | 1,378 | | | $ | 11 | | | $ | 2,437 | | | $ | 2,437 | | | $ | 2,553 | |
| | | | | | | | | | | | | | | |
| Cash (refunded) paid for income taxes | | $ | (1,653 | ) | | $ | 2,581 | | | $ | 1,392 | | |
| Cash paid (refunded) for income taxes | | | $ | 31,566 | | | $ | 10,361 | | | $ | (1,653 | ) |
| | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
F-654
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 life science tools and 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 genetic analysis solutions, with products and services that currently serve thea broad range of highly interconnected markets, including sequencing, genotyping, and gene expression, markets. The Company also expects to enter the market forand molecular diagnostics. The Company’s customers include leading genomic research centers, pharmaceutical companies, academic institutions, government laboratories, and clinical research organizations, as well as pharmaceutical, biotechnology, agrigenomics, and biotechnologyconsumer genomics companies. 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 and clinical research, allow diseases to be detected earlier and permit better choices of drugs for individual patients.
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, September 30, and September 30.December 31. The yearsyear ended January 2, 2011 was 52 weeks; the year ended January 3, 2010 was 53 weeks; the year ended December 28, 2008 December 30, 2007 and December 31, 2006 were allwas 52 weeks.
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, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
Segment Information
The Company is organized in two business segments, the Life Sciences Business Unit and Diagnostics Business Unit. The Life Sciences Business Unit includes all products and services that are primarily related to the research market, namely the product lines based on the Company’s sequencing, BeadArray, VeraCode, and real-time polymerase chain reaction (PCR) technologies, and the Diagnostics Business Unit focuses on the emerging opportunity in molecular diagnostics. During all periods presented, the Company had limited activity related to the Diagnostics Business Unit. Accordingly, the Company’s operating results for both units are reported on an aggregate basis as one reportable segment during these periods. 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.
Acquisitions
Effective December 29, 2008, the Company adopted the FASB’s revised authoritative guidance for business combinations. This revised guidance requires an acquiring company to measure all assets acquired and liabilities assumed, including contingent considerations and all contractual contingencies, at fair value as of the acquisition date. In addition, an acquiring company is required to capitalize in-process research and development (IPR&D) and either amortize it over the life of the product upon commercialization, or write it
55
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
off if the project is abandoned or impaired. Previously, post-acquisition adjustments related to business combination deferred tax asset valuation allowances and liabilities for uncertain tax positions were generally required to be recorded as an increase or decrease to Goodwill. The revised guidance does not permit this accounting and, generally, requires any such changes to be recorded in current period income tax expense. Thus, all changes to valuation allowances and liabilities for uncertain tax positions established in acquisition accounting, regardless of the guidance used to initially account for the business combination, will be recognized in current period income tax expense. Additionally, this guidance requires that contingent purchase consideration be remeasured to estimated fair value at each reporting period with the change in fair value recorded in the results of operations. The impact of the adoption of this guidance did not have an impact on the consolidated financial statements for the year ended January 3, 2010. As a result of acquisitions completed in the year ended January 2, 2011, the Company capitalized $21.4 million of IPR&D that would have been expensed under the previous guidance. In addition the Company recorded $14.1 million of contingent consideration liability at fair value at the acquisition date which was remeasured with a net consolidated statement of income impact of $10.4 million recorded in acquisition related (gain) expense, net, a component of operating expenses.
For an acquisition consummated prior to December 29, 2008, the Company recognizes additional contingent consideration as an additional element of the cost of the acquisition when the contingency is resolved beyond a reasonable doubt and the additional consideration is issued or becomes issuable, in accordance with the accounting guidance effective at the acquisition date. This results in additional IPR&D charges in periods subsequent to the acquisition recorded in acquisition related (gain) expense, net.
Cash Equivalents and Short-Term Investments
Cash equivalents are comprised of short-term, highly liquid investments with maturities of 90 days or less fromat the date of purchase.
Short-term investments consist of U.S. Treasury and U.S. government agency securities, municipal notes, corporate notes and bonds, and commercial paper. AllManagement classifies short-term investments have been designated asavailable-for-sale securities recorded at estimated fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders’ equity. The Company accounts for investments in debt and equity instruments in accordance with SFAS, No. 115,Accounting for Certain Investments in Debt and Equity Securitiesand FASB Staff Position, or FSP,No. 115-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, orFSP 115-1. Management determines the appropriate classification of such securities at the time of purchase and reevaluates such classification as of each balance sheet date. All short-term investments are recorded at estimated fair value. Unrealized gains and losses foravailable-for-sale securities are included in accumulated other comprehensive income, a component of stockholders’ equity. The Company follows the guidance provided byFSP 115-1,evaluates its investments to assess whether investmentsthose with unrealized loss positions are other than temporarily impaired. Impairments are considered to be other than temporary if they are related to deterioration in credit risk or if it is likely that the Company will sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in Interest and other expense,(expense) income, net in the consolidated statements of operations.
F-7
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Long-term investments are comprised of the Company’s auction rate securities and a put option related to the Company’s settlement agreement with UBS that gives the Company the right to sell its auction rate securities to UBS at par value at a future date. Both the auction rate securities and the put option are recorded at estimated fair value and unrealized gains and losses, if any, are recognized in Interest income on the consolidated statements of operations. Historically, the Company’s auction rate securities were classified as available-for-sale securities, however, during the fourth quarter of fiscal 2008, the Company reclassified the auction rate securities from available-for-sale to trading securities. See Note 4 for further detailed discussion.income.
Fair Value of Financial InstrumentsMeasurements
The carrying amounts of financial instruments such as cash equivalents, foreignand cash accounts,equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued expenses and other current liabilities, excluding acquisition related contingent consideration liability noted below, 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 approximate fair value of the Company’s convertible notes at December 28, 2008 and December 30, 2007 are $473.0was $390.0 million and $596.3$1,142.5 million, respectively.respectively, at January 2, 2011, and $390.0 million and $553.2 million, respectively, at January 3, 2010.
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
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ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 and liability measured at fair value on a recurring basis as of January 2, 2011 and January 3, 2010, respectively (in thousands):
| | | | | | | | | | | | | | | | | |
| | | January 2, 2011 | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| |
| Assets: | | | | | | | | | | | | | | | | |
| Money market funds (cash equivalent) | | $ | 148,822 | | | $ | — | | | $ | — | | | $ | 148,822 | |
| Debt securities in government sponsored entities | | | — | | | | 261,697 | | | | — | | | | 261,697 | |
| Corporate debt securities | | | — | | | | 330,758 | | | | — | | | | 330,758 | |
| U.S. Treasury securities | | | 52,887 | | | | — | | | | — | | | | 52,887 | |
| | | | | | | | | | | | | | | | | |
| Total assets measured at fair value | | $ | 201,709 | | | $ | 592,455 | | | $ | — | | | $ | 794,164 | |
| | | | | | | | | | | | | | | | | |
| Liability: | | | | | | | | | | | | | | | | |
| Acquisition related contingent consideration liability | | $ | — | | | $ | — | | | $ | 3,738 | | | $ | 3,738 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | January 3, 2010 | |
| | | Level 1 | | | Level 2 _ | | | Level 3 | | | Total | |
| |
| Assets: | | | | | | | | | | | | | | | | |
| Money market funds (cash equivalent) | | $ | 81,153 | | | $ | — | | | $ | — | | | $ | 81,153 | |
| 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 | | $ | 92,625 | | | $ | 482,522 | | | $ | 54,900 | | | $ | 630,047 | |
| | | | | | | | | | | | | | | | | |
The Company measures the fair value of debt securities in government sponsored entities and corporate debt securities on a recurring basis primarily using quoted prices for similar assets in active markets.
Included in the total consideration transferred for the Company’s acquisition of Helixis, Inc. (Helixis), was contingent consideration payments that could range from $0 to $35 million based on the achievement of certain revenue-based milestones by December 31, 2010 and by December 31, 2011. On the acquisition date, a liability of $14.1 million was recorded at the estimated fair value of the contingent consideration. The December 31, 2010 milestone was not achieved and the likelihood of paying the remaining contingent consideration of up to $30 million declined. Accordingly, the Company reassessed the fair value of the
57
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
contingent consideration at $3.7 million and recorded the change in fair value of $10.4 million in acquisition related (gain) expense, net, in the consolidated statements of income in the fourth quarter of 2010.
This fair value measurement is a Level 3 measurement as it is based on unobservable inputs that are supported by little or no market activity. Significant assumptions used in the measurement include probabilities of achieving the remaining milestone and the discount rates used in the income approach of valuation, which ranged from 27% to 52% depending on the likelihood assessed. Future changes in the fair value of the contingent consideration as a result of changes in these significant inputs could have a significant effect on the consolidated statements of income and the financial position in the period of the change.
The following table includes a summary of the changes in estimated fair value of the contingent consideration liability (in thousands) during the year ended January 2, 2011:
| | | | | |
| | | Contingent
| |
| | | Consideration
| |
| | | Liability
| |
| | | (Level 3 Measurement) | |
| |
| Balance at January 3, 2010 | | $ | — | |
| Acquisition of Helixis | | | 14,114 | |
| Gain recorded in acquisition related (gain) expense, net | | | (10,376 | ) |
| | | | | |
| Balance at January 2, 2011 | | $ | 3,738 | |
| | | | | |
Accounts Receivable
Trade accounts receivable are recorded at the net invoice value and are 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 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 operates in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products or services with new capabilities, and other factors could negatively impact the Company’s operating results.
The Company is also subject to risks related to its financial instruments including its cash and cash equivalents, investments, and accounts receivable. Most of the Company’s cash and cash equivalents as of December 28, 2008January 2, 2011 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 industry sector, as defined by Bloomberg classifications, to 25% of the 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.SU.S. treasury obligations, U.S. government agencies, and money market funds. The Company performs a regular review of customer activity and associated credit risks and do not require collateral or enter into netting arrangements. 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.
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.
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ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Shipments to customers outside the United States comprised 51%45%, 43%48%, and 44%51% of the Company’s revenue for the years ended January 2, 2011, January 3, 2010, and December 28, 2008, December 30, 2007 and December 31, 2006, respectively. Customers outside the United States represented 61%59% and 46% of the Company’s netgross trade accounts receivable balance as of December 28, 2008January 2, 2011 and December 30, 2007,January 3, 2010, respectively. Sales to territories outside of the United States are generally denominated in U.S. dollars. International sales entail a variety of risks, including
F-8
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
InventoriesInventory
Inventories areInventory is stated at the lower of 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 or expired. Provisions for slow moving, excess, and obsolete inventories are providedestimated based on product life cycle and development plans, product expiration andcycles, quality issues, historical experience, and inventory levels.usage forecasts.
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 cost over fair value of net assets acquired. The change in the carrying value of goodwill during the year ended January 2, 2011 was due to goodwill recorded in connection with acquisitions consummated in the year. 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.years.
The Company regularly performs reviews to determine if the carrying values of the long-lived assets are impaired. In accordance with SFAS 142,Goodwill and Other Intangible Assets,goodwill and other intangible assets that have indefinite useful lives, such as IPR&D, are reviewed for impairment at least annually during the second fiscal quarter, or more frequently if an event occurs indicating the potential for impairment. The performance of the goodwill impairment test is a two-step process. The first step of the impairment test involves comparing the estimated fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to determine the amount of loss, which involves comparing the implied fair value of the goodwill with the carrying value of the goodwill. The Company performed its annual impairment test of goodwill asin May of May 30, 2008, utilizing a test that begins with an estimate of the fair value of the reporting unit or intangible asset,2010, noting no impairment and has determined there hashave been no impairment indicators for goodwill through December 28, 2008.January 2, 2011. A review of intangible assets that have finite useful lives and other long-lived assets is performed when an event occurs indicating the potential for impairment in accordance with SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets.impairment. If indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying valueamount of such assets can be recovered throughexceeds the undiscounted expected future operating cash flows. If impairment is indicated, the Company measurescompares the future discounted cash flows associated withcarrying amount to the useestimated fair value of the asset and adjusts the value of the asset accordingly. Factors that would necessitate an impairment assessment include a significant decline in the Company’s stock price
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ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and market capitalization compared to its net book value, significant changes in the ability of a particular asset to generate positive cash flows, and significant changes in the Company’s strategic business objectives and utilization of the asset.
F-9
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reserve for Product Warranties
The Company generally provides a one-year warranty on instrumentation. Atinstruments. Additionally, the time revenue is recognized,Company provides a warranty on its consumables through the expiry date, which generally ranges from six to twelve months after the manufacture date. The Company establishes an accrual for estimated warranty expenses associated with system sales. Thisbased on historical experience as well as anticipated product performance. The Company periodically reviews the adequacy of its warranty reserve, and adjusts, if necessary, the warranty percentage and accrual based on actual experience and estimated costs to be incurred. Warranty expense is recorded as a component of cost of product revenue. Warranty expenses associated with extended maintenance contracts for systems are recorded as cost of service and other revenue as incurred. See note “6. Warranties” for further detailed discussion.
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 oligonucleotides (oligos) and associated freight charges.consumables used in genetic analysis. Service and other revenue primarily 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 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 that 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 or 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 ensuresevaluates whether refund rights exist. If there are no refund rights. Ifrights or 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)regularly enters into contracts whichwhere revenue is derived from multiple deliverables including any mix of products or services. These products or services are generally for one or two years, upon the expirationdelivered within a short time frame, approximately three to six months, of the initial warranty.contract execution date. Revenue recognition 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 were greater than its estimates, gross margins could be adversely affected.
While the majority of its sales agreements contain standard terms and conditions, the Company does enter into agreements that contain multiple elements or non-standard terms and conditions. Emerging Issues Task Force (EITF)No. 00-21,Revenue Arrangements with Multiple Deliverables,provides guidance on accounting for arrangements that involve the delivery or performance of multiple products, services, or rights to use assets within contractually binding arrangements. For arrangementscontracts with multiple elements, revenue recognitiondeliverables is based on the individual units of accounting determined to exist in the arrangement.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 and there is objective and reliable evidence of the fair value of the undelivered items.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 and 2010, 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
60
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
price if VSOE does not exist. If neither VSOE nor third-party evidence exists, the Company uses its best estimate of the selling price for the deliverable.
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 iswas generally the price charged for the product, if the item iswas regularly sold on a stand-alone basis. When objective and reliable evidence of fair value exists for all units of accounting in an arrangement, the arrangement consideration is generally allocated to each unit
F-10
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of accounting based upon its relative fair value. In those instances when objective and reliable evidence of fair value existsexisted 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 product 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 are 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 rolling12-month period coupled with an assessment of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, 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.
In the first quarter of 2010, the Company offered an incentive with the launch of the HiSeq 2000 that enabled existing Genome Analyzer customers to trade in their Genome Analyzer and receive a discount on the purchase of a HiSeq 2000. The incentive was limited to customers who had purchased a Genome Analyzer as of the date of the announcement and was the first significant trade-in program offered by the Company. The Company accounts for HiSeq 2000 discounts related to the Genome Analyzer trade-in program in the period in which the HiSeq 2000 revenue is recognized.
Shipping and Handling Expenses
Shipping and handling expenses are included in cost of product revenue and totaled $3.7 million, $2.2 million and $1.8 million for the years ended December 28, 2008, December 30, 2007 and December 31, 2006, respectively.revenue.
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,personnel expenses, contractor fees, facilities costs, utilities and allocations of benefits.utilities. Expenditures relating to research and development are expensed in the period incurred.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were $3.4$6.9 million, $2.8$4.2 million, and $1.9$3.4 million for the years ended January 2, 2011, January 3, 2010, and December 28, 2008, December 30, 2007respectively.
61
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Leases
Leases are reviewed and December 31, 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
In accordance with SFAS No. 109,Accounting for Income Taxes, theThe provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and credit carryforwards. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date.
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 ajurisdiction-by-jurisdiction basis, and includes a review ofability to recover deferred tax assets within the jurisdiction which they arise the Company considers all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, history of earnings and reliable forecasting, projections of pre-tax book income over the foreseeable future, determinationand the impact of cumulative pre-tax book income after permanent differences, history of earnings,any feasible and reliability of forecasting. As of December 28, 2008, the Company maintained a valuation allowance only against certain U.S. and foreign deferredprudent tax assets that the Company concluded did not meet the “more likely than not” threshold required under SFAS No. 109.planning strategies.
Due to the adoption of SFAS No. 123R, theThe 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.
F-11
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Effective January 1, 2007, theThe 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.
Functional Currency
Historically,Prior to the third quarter of 2008, the Company identified the local currency as the functional currency in each of its foreign subsidiaries, and the effects ofwith all translation wereadjustments recorded as part of other comprehensive income (loss). Duringincome. Beginning in the third quarter of 2008, the Company reorganized its international structure to execute a more efficient relationship betweenamong product development, product manufacturing, and sales. TheThis reorganization increased the foreign subsidiaries’ anticipated dependence on the U.S. entity for management decisions, financial support, production assets, and inventory, thereby making the foreign subsidiaries more of 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, and determined the subsidiaries are more U.S. dollar based, resulting in a U.S. dollar functional currency determination. As a result of this change, beginningBeginning in the third quarter of 2008, the Company remeasures its foreign subsidiaries’ assets and liabilities and incomerevenue and expense accounts related to nonmonetarymonetary assets and liabilities to the U.S. dollar and records the net gains or losses resulting from remeasurement in itsother (expense) income, net in the consolidated statements of operations within interest
62
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
income. Gains or (losses) resulting from remeasurement were $0.6 million, $(2.3) million, and other expense, net.$3.8 million for the years ended January 2, 2011, January 3, 2010 and December 28, 2008, respectively.
Stock-BasedDerivatives
The Company is exposed to foreign exchange rate risks in the normal course of business. To manage a portion of the accounting 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 currencies other than the U.S. dollar. 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 value of the derivative are recognized in other (expense) income, net, in the consolidated statements of income for the current period, along with an offsetting gain or loss on the underlying assets or liabilities.
Share-Based Compensation
The Company accounts for share-based compensation using the fair value recognition provisions of SFAS 123(R),Share-Based Paymentusinguses the Black-Scholes-Merton option-pricing model to estimate the fair value of stock options granted and stock purchases under the Employee Stock Purchase Plan (ESPP). This model incorporates various assumptions including expected volatility, expected life of an award, 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,awards, 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 awardsawards. The fair value of restricted stock units granted to employees.
F-12
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)is based on the market price of our common stock on the date of grant. The Company amortizes the fair value of share-based compensation on a straight-line basis over the requisite service periods of the awards.
The assumptions used for the specified reporting periods and the resulting estimates of weighted-average fair value per share of options granted and for stock purchases under the ESPP during those periods are as follows:
| | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | Year Ended
| | Years Ended |
| | | December 28,
| | December 30,
| | December 31,
| | January 2,
| | January 3,
| | December 28,
|
| | | 2008 | | 2007 | | 2006 | | 2011 | | 2010 | | 2008 |
| |
| Interest rate — stock options | | 2.31 - 3.52% | | 3.68 - 4.90% | | 4.73% | | 2.05 - 2.73% | | 1.69 - 1.97% | | 2.31 -3.52% |
| Interest rate — stock purchases | | 1.88 - 4.71% | | 4.71 - 4.86% | | 4.08 -4.85% | | 0.17 - 0.48% | | 0.28 - 2.90% | | 1.88 -4.71% |
| Volatility — stock options | | 51 - 65% | | 55 - 70% | | 76% | | 46 - 48% | | 55 - 58% | | 51 - 65% |
| Volatility — stock purchases | | 53 - 69% | | 69 - 76% | | 76 - 90% | | 46 - 48% | | 48 - 58% | | 53 - 69% |
| Expected life — stock options | | 5 - 6 years | | 6 years | | 6 years | | 6 years | | 5 years | | 5 - 6 years |
| Expected life — stock purchases | | 6 - 12 months | | 6 - 12 months | | 6 - 12 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 | | $18.31 | | $12.86 | | $9.44 | | $18.82 | | $14.79 | | $18.31 |
| Weighted average fair value per share of employee stock purchases | | $11.45 | | $7.33 | | $2.38 | | $11.10 | | $9.24 | | $11.45 |
The fair value of restricted stock units granted during the years ended December 28, 2008 and December 30, 2007 was based on the market price of our common stock on the date of grant. No restricted stock units were granted during the year ended December 31, 2006.
As of December 28, 2008, $152.8January 2, 2011, approximately $151.8 million of total unrecognized compensation cost related to stock options, restricted stock units, and ESPP shares issued to date is expected to be recognized over a weighted-average period of approximately 1.92.47 years.
63
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Total share-based compensation expense for employeeall stock options and stock purchasesawards consists of the following (in thousands, except per share data)thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | Year Ended
| | | Years Ended | |
| | | December 28,
| | December 30,
| | December 31,
| | | January 2,
| | January 3,
| | December 28,
| |
| | | 2008 | | 2007 | | 2006 | | | 2011 | | 2010 | | 2008 | |
| |
| Cost of product revenue | | $ | 4,710 | | | $ | 4,045 | | | $ | 1,289 | | | $ | 5,378 | | | $ | 4,776 | | | $ | 4,710 | |
| Cost of service and other revenue | | | 400 | | | | 279 | | | | 235 | | | | 470 | | | | 514 | | | | 400 | |
| Research and development | | | 14,086 | | | | 10,016 | | | | 3,891 | | | | 25,428 | | | | 19,960 | | | | 14,086 | |
| Selling, general and administrative | | | 28,492 | | | | 19,406 | | | | 8,889 | | | | 40,369 | | | | 35,561 | | | | 28,492 | |
| | | | | | | | | | | | | | | |
| Share-based compensation expense before taxes | | | 47,688 | | | | 33,746 | | | | 14,304 | | | | 71,645 | | | | 60,811 | | | | 47,688 | |
| Related income tax benefits | | | (15,844 | ) | | | (11,005 | ) | | | — | | | | (25,231 | ) | | | (20,121 | ) | | | (15,844 | ) |
| | | | | | | | | | | | | | | |
| Share-based compensation expense, net of taxes | | $ | 31,844 | | | $ | 22,741 | | | $ | 14,304 | | | $ | 46,414 | | | $ | 40,690 | | | $ | 31,844 | |
| | | | | | | | | | | | | | | |
| Net share-based compensation expense per share of common stock: | | | | | | | | | | | | | |
| Basic | | $ | 0.27 | | | $ | 0.21 | | | $ | 0.16 | | |
| | | | | | | | | |
| Diluted | | $ | 0.24 | | | $ | 0.21 | | | $ | 0.15 | | |
| | | | | | | | | |
F-13
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
Basic and diluted net income (loss) per share of common stock 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 held in treasury and shares subject to repurchase.reporting period. Diluted net income (loss) per share is 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 the Company’s Convertible Senior Notes, equity awards, warrants sold in connection with the Convertible Senior Notes and warrants assumed in the acquisition of Solexa, Inc. (Solexa) 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 average 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 estimated 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.
64
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the calculation of weighted-averageweighted average shares used to calculate basic and diluted net income (loss) per share (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | Year Ended
| | | Years Ended | |
| | | December 28,
| | December 30,
| | December 31,
| | | January 2,
| | January 3,
| | December 28,
| |
| | | 2008 | | 2007 | | 2006 | | | 2011 | | 2010 | | 2008 | |
| |
| Weighted-average shares outstanding | | | 116,855 | | | | 108,328 | | | | 89,074 | | |
| Less: Weighted-average shares of common stock subject to repurchase | | | — | | | | (20 | ) | | | (72 | ) | |
| | | | | | | | | |
| Weighted-average shares used in calculating basic net income (loss) per share | | | 116,855 | | | | 108,308 | | | | 89,002 | | |
| Weighted average shares outstanding | | | | 123,581 | | | | 123,154 | | | | 116,855 | |
| Plus: Effect of dilutive Convertible Senior Notes | | | 6,653 | | | | — | | | | — | | | | 9,058 | | | | 6,497 | | | | 6,653 | |
| Plus: Effect of dilutive equity awards | | | 5,373 | | | | — | | | | 8,506 | | | | 4,674 | | | | 4,335 | | | | 5,373 | |
| Plus: Effect of dilutive warrants sold in connection with the Convertible Senior Notes | | | 2,487 | | | | — | | | | — | | | | 5,317 | | | | 1,566 | | | | 2,487 | |
| Plus: Effect of dilutive warrants assumed in the acquisition of Solexa | | | 2,239 | | | | — | | | | — | | | | 803 | | | | 1,544 | | | | 2,239 | |
| | | | | | | | | | | | | | | |
| Weighted-average shares used in calculating diluted net income (loss) per share | | | 133,607 | | | | 108,308 | | | | 97,508 | | |
| Weighted-average shares used in calculating diluted net income per share | | | | 143,433 | | | | 137,096 | | | | 133,607 | |
| | | | | | | | | | | | | | | |
| Weighted average shares excluded from calculation due to anti-dilutive effect | | | 370 | | | | 42,882 | | | | 401 | | | | 1,934 | | | | 924 | | | | 370 | |
| | | | | | | | | |
Accumulated Other 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’s available-for-sale securities and foreign currency translation adjustments.income. The Company has disclosed comprehensive income as a component of stockholders’ equity. Accumulative other comprehensive income on the consolidated balance sheets at January 2, 2011 and January 3, 2010 includes accumulated foreign currency translation adjustments and unrealized gains and losses on the Company’savailable-for-sale securities.
The components of accumulated other comprehensive income are as follows (in thousands):
| | | | | | | | | |
| | | December 28,
| | | December 30,
| |
| | | 2008 | | | 2007 | |
| |
| Foreign currency translation adjustments | | $ | 2,103 | | | $ | 1,183 | |
| Unrealized gain on available-for-sale securities, net of deferred tax | | | 303 | | | | 164 | |
| | | | | | | | | |
| Total other comprehensive income | | $ | 2,406 | | | $ | 1,347 | |
| | | | | | | | | |
| | | | | | | | | |
| | | January 2,
| | | January 3,
| |
| | | 2011 | | | 2010 | |
| |
| Foreign currency translation adjustments | | $ | 1,338 | | | $ | 1,338 | |
Unrealized gain onavailable-for-sale securities, net of deferred tax | | | 427 | | | | 1,492 | |
| | | | | | | | | |
| Total accumulated other comprehensive income | | $ | 1,765 | | | $ | 2,830 | |
| | | | | | | | | |
F-14
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recent Accounting Pronouncements
Adopted Accounting Pronouncements
During fiscal 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”. In February 2008, the FASB issued Staff PositionNo. FSP 157-2, “Effective Date of FASB Statement No. 157”(FSP 157-2), which provides a one year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities only. The adoption of this statement did not have a material impact on the Company’s consolidated statements of operations or financial condition. On October 10, 2008, the FASB issued FSPNo. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active”(FSP 157-3) that clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial assets is not active.FSP 157-3 is effective for all periods presented in accordance with SFAS No. 157. The Company considered the additional guidance with respect to the valuation of its financial assets and liabilities and their corresponding designation within the fair value hierarchy. All short-term investments were valued using quoted prices in active markets or Level 1 hierarchical inputs. Long-term investments were valued using Level 3 hierarchical inputs due to the lack of trading in the secondary market of these instruments. Refer to Notes 3 and 4.
During fiscal 2008, the Company adopted SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on acontract-by-contract basis. The objective of the guidance is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The adoption of SFAS No. 159 impacted the accounting for the put option recorded as a result of the signed settlement agreement with UBS AG (UBS) in November 2008. Refer to Note 4.
New Accounting Pronouncements
SFAS No. 141(R),Business Combinations, was issued in December of 2007. SFAS No. 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. SFAS No. 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and sets forth what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact the adoption of this pronouncement will have on the Company’s consolidated financial statements.
SFAS No. 160,Interests in Consolidated Financial Statements — an amendment of ARB No. 51,which impacts the accounting for minority interest in the consolidated financial statements of filers, was also issued in December 2007. The statement requires the reclassification of minority interest to the equity section of the balance sheet and the results from operations attributed to minority interest to be included in net income. The related minority interest impact on earnings would then be disclosed in the summary of other comprehensive income. The statement is applicable for all fiscal years beginning on or after December 15, 2008 and earlier adoption is prohibited. The adoption of this standard will require prospective treatment. The Company is currently evaluating the impact, if any, the adoption of this pronouncement will have on the Company’s consolidated financial statements.
F-15
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In December 2007 the Financial Accounting Standards Board (FASB) ratified EITF Issue07-1,Accounting for Collaborative Arrangements. EITF Issue07-1 focuses on defining a collaborative arrangement as well as the accounting for transactions between participants in a collaborative arrangement and between the participants in the arrangement and third parties. The EITF concluded that both types of transactions should be reported in each participant’s respective income statement. EITF Issue07-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and should be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The Company is currently evaluating the impact, if any, the adoption of this pronouncement will have on the Company’s consolidated financial statements.
In May 2008, the FASB issued FASB Staff Position (FSP) Accounting Principles Board Opinions (APB)14-1,Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement)(FSP APB14-1 or the FSP) that significantly impacts the accounting for convertible debt. The FSP requires issuers of convertible debt that may be settled fully or partially in cash upon conversion to account separately for the liability and equity components of the convertible debt. The liability component is measured so 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. This FSP applies to our Convertible Senior Notes and will be effective for us beginning on December 29, 2009. This FSP will be applied retrospectively to all periods that will be presented in our consolidated financial statements beginning after December 29, 2009. Upon adoption, we will retrospectively record a decrease in the book value of our 0.625% Convertible Senior Notes of approximately $150.0 million as of December 28, 2008, an increase in additional paid-in capital and a cumulative effect of a change in accounting principles in our consolidated financial statements, and we will begin recording an additional non-cash interest expense ranging from approximately $20.0 million to 30.0 million per year. The additional interest expense, net of taxes, will reduce net income by a range of approximately $13.0 million to $20.0 million per year. We will continue to record this additional interest expense over the expected life of the debt. These amounts represent management’s best estimates of the effects the adoption of this pronouncement will have on the Company’s consolidated financial statements, however actual amounts may vary significantly from our current estimate.
In October 2008, the FASB issued FASB FSPSFAS 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB Statement No. 157,Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP is effective upon issuance, including for prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application should be accounted for as a change in accounting estimate following the guidance in FASB Statement No. 154,Accounting Changes and Error Corrections. However, the disclosure provisions in Statement 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. The Company believes the impact of this pronouncement on the Company’s consolidated financial statements to be immaterial.
| |
| 2. | AcquisitionsBalance Sheet Account Details |
Avantome, Inc.Investments
On August 1, 2008, the Company completed its acquisition of Avantome, Inc. (Avantome), a privately-held Delaware corporation. As consideration for the acquisition, the Company paid $25.8 million in cash, including transaction costs, and may pay up to an additional $35.0 million in contingent cash consideration based on the achievement of certain milestones. The Company assumed $1.1 million in net assets, and recorded a charge of $24.7 million for purchased in-process research and development (IPR&D) primarily associated with the development of Avantome’s low-cost, long read-length sequencing technology. The amount
F-16
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
allocated to IPR&D was expensed upon acquisition as it was determined that the underlying project had not reached technological feasibility and had no alternative future use. The Company has assessed the contingent consideration payable in accordance with the provisions of SFAS No. 141,Business Combinations, andEITF 95-8,Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination.Contingent consideration of $11.0 million will be recorded as compensation expense over a three-year period as this consideration is earned by the former primary shareholders of Avantome contingent upon their employment with the Company for three years. The remaining contingent consideration of $24.0 million will be recorded as additional purchase price if and when certain milestones are achieved or the amount due is determinable beyond a reasonable doubt.
The results of Avantome’s operations have been included in the Company’s consolidated financial statements since the acquisition date of August 1, 2008. Pro forma results of operations have not been presented because the effects of the acquisition were not material.
Solexa, Inc.
On January 26, 2007, the Company completed its acquisition of Solexa, a Delaware corporation, in a stock-for-stock merger transaction. The Company issued 26.2 million shares of its common stock as consideration for this merger.
The purchase price of the acquisition is as follows (in thousands):
| | | | | |
| 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 | |
| | | | | |
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 $228.7 million was allocated to goodwill.
The results of Solexa’s operations have been included in the Company’s consolidated financial statements since the acquisition date of January 26, 2007. The following unaudited pro forma information shows the results of the Company’s operations for the specified reporting periods as though the acquisition had occurred as of the beginning of that period (in thousands, except per share data):
| | | | | | | | | |
| | | 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 | | $ | 0.16 | | | $ | (0.34 | ) |
| Net income (loss) per share, diluted | | $ | 0.15 | | | $ | (0.34 | ) |
The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisition taken place as of the beginning of the period presented, or the results that may occur in the future. The pro forma results exclude the $303.4 million non-cash acquired IPR&D charge recorded upon the closing of the acquisition during the first quarter of 2007.
F-17
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
3. | Balance Sheet Account Details |
The following is a summary of short-term investments (in thousands):
| | | | | | | | | | | | | | | | | |
| | | | | | December 28, 2008 | | | | |
| | | | | | Gross
| | | Gross
| | | | |
| | | Amortized
| | | Unrealized
| | | Unrealized
| | | Estimated
| |
| | | Cost | | | Gains | | | Losses | | | Fair Value | |
| |
| U.S. Treasury securities and obligations of U.S. government agencies | | $ | 218,964 | | | $ | 1,544 | | | $ | — | | | $ | 220,508 | |
| Corporate debt securities | | | 92,301 | | | | 547 | | | | (305 | ) | | | 92,543 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 311,265 | | | $ | 2,091 | | | $ | (305 | ) | | $ | 313,051 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | January 2, 2011 | |
| | | | | | Gross
| | | Gross
| | | | |
| | | Amortized
| | | Unrealized
| | | Unrealized
| | | Estimated
| |
| | | Cost | | | Gains | | | Losses | | | Fair Value | |
| |
Available-for-sale securities: | | | | | | | | | | | | | | | | |
| Debt securities in government sponsored entities | | $ | 261,890 | | | $ | 106 | | | $ | (299 | ) | | $ | 261,697 | |
| Corporate debt securities | | | 329,823 | | | | 1,170 | | | | (235 | ) | | | 330,758 | |
| U.S. treasury securities | | | 52,938 | | | | 70 | | | | (121 | ) | | | 52,887 | |
| | | | | | | | | | | | | | | | | |
Totalavailable-for-sale securities | | $ | 644,651 | | | $ | 1,346 | | | $ | (655 | ) | | $ | 645,342 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | December 30, 2007 | | | | |
| | | | | | 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 | |
| | | | | | | | | | | | | | | | | |
65
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | | | | | | | | |
Gross realized losses on sales of available-for-sale securities were immaterial for the years ended December 28, 2008, December 30, 2007 and December 31, 2006. Gross realized gains on sales of available-for-sale securities totaled $0.6 million for the year ended December 28, 2008 and were immaterial for the years ended December 30, 2007 and December 31, 2006. Available-For-Sale Securities
As of December 28, 2008, all ofJanuary 2, 2011 the Company’s investmentsCompany had 83available-for-sale securities in a gross unrealized loss position, all of which had been in such position for less than twelve months. Impairments areThere were no unrealized losses due to credit issues for the periods presented. There were no impairments consideredother-than-temporary as it is more likely than not considered other than temporary as the Company haswill hold the intentsecurities until maturity or a recovery of the cost basis. The following table shows the fair values and ability to hold these investments until maturity.the gross unrealized losses of the Company’s available-for- sale securities that were in an unrealized loss position as of January 2, 2011 and January 3, 2010 aggregated by investment category (in thousands):
| | | | | | | | | | | | | | | | | |
| | | January 2, 2011 | | | January 3, 2010 | |
| | | | | | Gross
| | | | | | Gross
| |
| | | | | | Unrealized
| | | | | | Unrealized
| |
| | | Fair Value | | | Losses | | | Fair Value | | | Losses | |
| |
| Debt securities in government sponsored entities | | $ | 127,756 | | | $ | (299 | ) | | $ | 73,783 | | | $ | (102 | ) |
| Corporate debt securities | | | 92,199 | | | | (235 | ) | | | 26,488 | | | | (166 | ) |
| U.S. treasury securities | | | 13,490 | | | | (121 | ) | | | 4,471 | | | | (28 | ) |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 233,445 | | | $ | (655 | ) | | $ | 104,742 | | | $ | (296 | ) |
| | | | | | | | | | | | | | | | | |
Realized gains and losses are determined based on the specific identification method and are reported in interest income in the consolidated statements of income. Gross realized gains on sales of available-for sale securities for the year ended January 2, 2011 were $1.7 million and gross realized losses were immaterial. Gross realized gains and losses on sales ofavailable-for-sale securities were immaterial for each of the years ended January 3, 2010 and December 28, 2008.
66
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Contractual maturities of short-term investments at December 28, 2008available-for-sale securities as of January 2, 2011 were as follows (in thousands):
| | | | | | | | | |
| | | Estimated
| | | Estimated
| |
| | | Fair Value | | | Fair Value | |
| |
| Due within one year | | $ | 204,774 | | | $ | 230,421 | |
| After one but within five years | | | 108,277 | | | | 414,921 | |
| | | | | | | |
| Total | | $ | 313,051 | | | $ | 645,342 | |
| | | | | | | |
Accounts receivable consist of the following (in thousands):
| | | | | | | | | |
| | | December 28,
| | | December 30,
| |
| | | 2008 | | | 2007 | |
| |
| Accounts receivable from product and service sales | | $ | 132,564 | | | $ | 82,144 | |
| Other receivables | | | 1,840 | | | | 1,515 | |
| | | | | | | | | |
| | | | 134,404 | | | | 83,659 | |
| Allowance for doubtful accounts | | | (1,138 | ) | | | (540 | ) |
| | | | | | | | | |
| Total | | $ | 133,266 | | | $ | 83,119 | |
| | | | | | | | | |
F-18
ILLUMINA, INC.Trading Securities
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventory, net, consistsAs of January 3, 2010, the following (in thousands):
| | | | | | | | | |
| | | December 28,
| | | December 30,
| |
| | | 2008 | | | 2007 | |
| |
| Raw materials | | $ | 32,501 | | | $ | 27,098 | |
| Work in process | | | 34,063 | | | | 20,321 | |
| Finished goods | | | 6,867 | | | | 6,561 | |
| | | | | | | | | |
| Total | | $ | 73,431 | | | $ | 53,980 | |
| | | | | | | | | |
Property and equipment consist of the following (in thousands):
| | | | | | | | | |
| | | December 28,
| | | December 30,
| |
| | | 2008 | | | 2007 | |
| |
| Leasehold improvements | | $ | 26,637 | | | $ | 4,531 | |
| Manufacturing and laboratory equipment | | | 83,317 | | | | 50,384 | |
| Computer equipment and software | | | 27,490 | | | | 18,772 | |
| Furniture and fixtures | | | 4,167 | | | | 3,691 | |
| | | | | | | | | |
| | | | 141,611 | | | | 77,378 | |
| Accumulated depreciation and amortization | | | (52,175 | ) | | | (31,104 | ) |
| | | | | | | | | |
| Total | | $ | 89,436 | | | $ | 46,274 | |
| | | | | | | | | |
Depreciation expense was $17.3 million, $11.5 million and $6.0 million for the years ended December 28, 2008, December 30, 2007 and December 31, 2006, respectively.
Accrued liabilities consist of the following (in thousands):
| | | | | | | | | |
| | | December 28,
| | | December 30,
| |
| | | 2008 | | | 2007 | |
| |
| Compensation | | $ | 30,330 | | | $ | 17,410 | |
| Short-term deferred revenue | | | 15,862 | | | | 7,541 | |
| Taxes | | | 9,456 | | | | 8,298 | |
| Reserve for product warranties | | | 8,203 | | | | 3,716 | |
| Customer deposits | | | 6,583 | | | | 5,266 | |
| Accrued royalties | | | 2,695 | | | | 1,867 | |
| Legal and other professional fees | | | 1,708 | | | | 4,276 | |
| Other | | | 5,518 | | | | 2,478 | |
| | | | | | | | | |
| Total | | $ | 80,355 | | | $ | 50,852 | |
| | | | | | | | | |
The Company has $55.9Company’s short-term investments included $54.9 million (at cost) inof auction rate securities issued primarily by municipalities and universities. The auction rate securities are held in a brokerage account with 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 Company’s entire auction rate portfolio is currently rated AAA or AA by a rating agency.
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 December 28, 2008, the securities continued to fail auction and remained illiquid. As a result, the Company recorded an unrealized loss of $8.7 million for the year ended December 28, 2008, resulting in a reduction to the fair value of the
F-19
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company’s auction rate securities to $47.2 million. This unrealized loss was determined in accordance with SFAS No. 157,Fair Value Measurements.
As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels including the following:
| | |
| • | 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 fair value hierarchy gives the highest priority to Level 1 and the lowest priority to Level 3. In determining the fair value of the Company’s auction rate securities, the Company considered trades in the secondary market. However, due to the recent 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 auction rate securities and resulting unrealized loss was determined using Level 3 hierarchical inputs. These inputs include management’s assumptions of pricing by market participants, including assumptions about risk. In accordance with SFAS No. 157, the Company used the concepts of fair value based on estimated discounted future cash flows of interest income over a projected five year period reflective of the length of time until the Company’s securities are expected to become liquid or potentially get repurchased. 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 discount rate of 5%. 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 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.
The Company classified these securities as long-term assets since the Company believes it may not be able to liquidate its investments without significant loss within the next year. As of December 30, 2007, these securities were classified as short-term since the failures of these auctions did not occur until February 2008.
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 settlementan agreement granting the Company an option to sell all of 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 rates 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
F-20
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. Per 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.
2012. To account for the Settlement,option, 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. The fair value of the put option is included in long-term investments on the balance sheet as of December 28, 2008 with the corresponding gain classified as interest income in the consolidated statement of operations for the year ended December 28, 2008. The put option does not meet the definition of a derivative instrument under SFAS No. 133, therefore,. On July 1, 2010, the Company electedexercised its option to measure the put option at fair value under SFAS No. 159. The Company valued the put option using a discounted cash flow approach including estimatessell all of interest rates, timing and amount of cash flow, with consideration given to UBS’s financial ability to repurchase theits remaining auction rate securities beginning June 30, 2010. These assumptions are volatile and subject to change asat par. From January 3, 2010 through July 1, 2010 the underlying sources of these assumptions and market conditions change.
Prior to accepting the UBS offer, the Company recorded its auction rate securities as available-for-sale investments, and therefore recorded resulting unrealized gains or losses in accumulated other comprehensive income in its statements of stockholders’ equity. By signing the settlement agreement, the Company no longer had the intent of holding the auction rate securities until recovery as management now has the intent to exercise its put option during the period June 30, 2010 to July 3, 2012. As a result, the Company elected a one-time transfer of the auction rate securities from available-for-sale to trading in accordance with SFAS No. 115. Prior to its agreement with UBS, management’s intent was to hold the auction rate securities until the earlier of anticipated recovery in market value or maturity. Upon transfer to trading securities, the Company immediately recognized a loss of $8.7 million, included in interest income for the amount of the unrealized loss not previously recognized in earnings. The Company will continue to recognize gains and losses in earnings approximating the changesincrease in the fair value of the auction rate securities at each balance sheet date. These gains and losses are expectedwas equal to be approximately offset by changesthe decrease in the fair value of the put option. As such, no gain or loss was recorded as a result of the exercise of the put option and the sale of the auction rate securities.
Changes in the fair value of the Company’s auction rate securities and put option from January 3, 2010 through January 2, 2011 are as follows (in thousands):
| | | | |
| Fair value of auction rate securities and put option as of January 3, 2010 | | | 54,900 | |
| Auction rate securities redeemed by issuer | | | (32,100 | ) |
| Auction rate securities sold upon the exercise of put option on July 1, 2010 | | | (22,800 | ) |
| | | | |
| Fair value as of January 2, 2011 | | $ | — | |
| | | | |
Cost-Method Investments
As of January 2, 2011 and January 3, 2010, the aggregate carrying amounts of the Company’s cost-method investments in non-publicly traded companies were $32.0 million and $19.9 million, respectively. The Company’s cost-method investments are assessed for impairment quarterly. The Company does not estimate the fair value of cost-method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments. See “Investments” in note “5. Impairment” for more information on the impairment of cost-method investments. The Company includes cost-method investments in other long term assets in the consolidated balance sheets.
Accounts Receivable
Accounts receivable consist of the following (in thousands):
| | | | | | | | | |
| | | January 2,
| | | January 3,
| |
| | | 2011 | | | 2010 | |
| |
| Accounts receivable from product and service sales | | $ | 165,117 | | | $ | 157,536 | |
| Other receivables | | | 2,167 | | | | 1,613 | |
| | | | | | | | | |
| Total accounts receivable, gross | | | 167,284 | | | | 159,149 | |
| Allowance for doubtful accounts | | | (1,686 | ) | | | (1,398 | ) |
| | | | | | | | | |
| Total accounts receivable, net | | $ | 165,598 | | | $ | 157,751 | |
| | | | | | | | | |
67
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventory
Inventory, net, consists of the following (in thousands):
| | | | | | | | | |
| | | January 2,
| | | January 3
| |
| | | 2011 | | | 2010 | |
| |
| Raw materials | | $ | 56,435 | | | $ | 39,839 | |
| Work in process | | | 73,759 | | | | 52,059 | |
| Finished goods | | | 24,290 | | | | 11,475 | |
| | | | | | | | | |
| Total inventory, gross | | | 154,484 | | | | 103,373 | |
| Reserve for inventory | | | (12,273 | ) | | | (10,597 | ) |
| | | | | | | | | |
| Total inventory, net | | $ | 142,211 | | | $ | 92,776 | |
| | | | | | | | | |
Property and Equipment
Property and equipment consist of the following (in thousands):
| | | | | | | | | |
| | | January 2,
| | | January 3,
| |
| | | 2011 | | | 2010 | |
| |
| Leasehold improvements | | $ | 55,681 | | | $ | 55,322 | |
| Manufacturing and laboratory equipment | | | 114,108 | | | | 92,956 | |
| Computer equipment and software | | | 41,500 | | | | 37,071 | |
| Furniture and fixtures | | | 6,732 | | | | 5,993 | |
| Leased equipment | | | 13,357 | | | | — | |
| | | | | | | | | |
| Total property and equipment, gross | | | 231,378 | | | | 191,342 | |
| Accumulated depreciation | | | (101,504 | ) | | | (74,154 | ) |
| | | | | | | | | |
| Total property and equipment, net | | $ | 129,874 | | | $ | 117,188 | |
| | | | | | | | | |
Depreciation expense was $34.2 million, $24.5 million and $17.3 million for the years ended January 2, 2011, January 3, 2010, and December 28, 2008, respectively.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
| | | | | | | | | |
| | | January 2,
| | | January 3,
| |
| | | 2011 | | | 2010 | |
| |
| Accrued compensation expenses | | $ | 49,368 | | | $ | 32,487 | |
| Deferred revenue, current portion | | | 45,863 | | | | 27,445 | |
| Reserve for product warranties | | | 16,761 | | | | 10,215 | |
| Customer deposits | | | 14,900 | | | | 6,121 | |
| Accrued taxes payable | | | 13,277 | | | | 12,109 | |
| Acquisition related contingent consideration liability | | | 3,738 | | | | — | |
| Accrued royalties | | | 2,781 | | | | 2,552 | |
| Other accrued expenses | | | 9,476 | | | | 7,324 | |
| | | | | | | | | |
| Total accrued liabilities | | $ | 156,164 | | | $ | 98,253 | |
| | | | | | | | | |
68
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On April 30, 2010, the Company completed the acquisition of Helixis, a company developing a high-performance, low-cost, real time PCR system used for nucleic acid analysis. Total consideration for the acquisition at the closing date was approximately $86.7 million, including $70.0 million in cash (net of $2.6 million of cash acquired) and $14.1 million for the fair value of contingent consideration payments that could range from $0 to $35 million based on the achievement of certain revenue-based milestones by December 31, 2011. Using information available at the close of the acquisition, the Company allocated approximately $2.3 million of the consideration to tangible assets, net of liabilities, and approximately $28.0 million to identified intangible assets that will be amortized over a useful life of 10 years. The Company also recorded a $10.7 million deferred tax liability to reflect the tax impact of the identified intangible assets that will not generate tax deductible amortization expense and an $8.7 million deferred tax asset which primarily relates to acquired net operating loss carryforwards. The Company recorded the excess consideration of approximately $58.4 million as goodwill, which is not deductible for income tax purposes.
Prior to the acquisition, the Company had an equity interest in Helixis with a cost basis of $2.0 million that was accounted for under the cost method of accounting. The Company recognized a gain of $2.9 million, which was included in other (expense) income, net, in its consolidated statement of income as a result of revaluing the Company’s equity interest in Helixis on the acquisition date.
On July 28, 2010, the Company completed an acquisition of another privately-held, development stage entity. Total consideration for the acquisition was $22.0 million. As a result of this transaction, the company recorded an in-process research and development (IPR&D) asset of $21.4 million in other assets (long-term). In determining the fair value of the IPR&D, various factors were considered, such as future revenue contributions, additional research and development costs to be incurred, and contributory asset charges. The fair value of the IPR&D was calculated using an income approach, and the rate used to discount net future cash flows to their present values was based on a risk-adjusted rate of return of approximately 28%. Significant factors considered in the calculation of the rate of return include the weighted average cost of capital, the weighted average return on assets, the internal rate of return, as well as the risks inherent in the development process for development-stage entities of similar sizes.
IPR&D will not be amortized until the development efforts are complete and until then, the Company will perform an annual impairment test of the asset, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test will involve a comparison of the fair value of the asset with its carrying amount. If its carrying amount exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. Upon completion of the related development efforts, the Company will start amortizing the IPR&D based on an estimated useful life. Through January 2, 2011, there was no indication of impairment of IPR&D and no impairment loss has been recorded.
In 2008, the Company completed an acquisition of another development-stage company. At the time of the acquisition, the Company paid $25.8 million in cash, including transaction costs. In accordance with the applicable accounting guidance effective at that time, the Company 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 the former shareholders of the entity up to an additional $35.0 million in contingent cash consideration based on the achievement of certain milestones. As contingent consideration payments are made,
69
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
they are recorded as IPR&D charges and compensation expenses. IPR&D and compensation expenses related to such contingent consideration recorded in the past three years are as follows (in thousands):
| | | | | | | | | | | | | |
| | | Years Ended |
| | | January 2,
| | January 3,
| | December 28,
|
| | | 2011 | | 2010 | | 2008 |
| |
| IPR&D(1) | | $ | 1,325 | | | $ | 11,325 | | | $ | 24,660 | |
| Compensation expense(2) | | | 3,675 | | | | 3,675 | | | | 1,531 | |
| | |
| (1) | | IPR&D expense is included in acquisition related (gain) expense, net in the consolidated statements of income. |
|
| (2) | | Compensation expense associated with the acquisition is included in research and development expenses in the consolidated statements of income. |
The Company’s intangible assets, excluding goodwill, are comprised primarily of licensed technology from the Affymetrix settlement entered into on January 9, 2008, acquired core technology and customer relationships from the acquisition of Solexa, and licensedacquired core technology from the Affymetrix settlement entered into on January 9, 2008.acquisition of Helixis. As a result of thisthe 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
F-21
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the fourth quarter of 2007. This allocation was determined in accordance with SFAS No. 5,Accounting for Contingencies, andEITF 00-21 using the concepts of fair value based on the 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 Company utilized an annual discount rate of 9.25% when preparing this model. The effective life of the licensed technology extends through 2015, the final expiry date of all patents considered in valuing the intangible asset. TheAmortization related amortizationto the Affymetrix licensed technology is basedrecorded on the higher of the percentage of usage or thea straight-line method. The percentage of usage was determined using actual and projected revenues generated from products covered by the patents previously under dispute.basis.
In connection with the acquisition of Helixis. in April 2010, the Company recorded an additional core technology of $28.0 million with a useful life of approximately 10 years. Acquired core technologytechnologies 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.lives.
The following is a summary of the Company’s amortizable intangible assets as of the respective balance sheet dates (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | January 2, 2011 | | January 3, 2010 | |
| | | December 28, 2008 | | December 30, 2007 | | | Weighted
| | Gross
| | | | | | Weighted
| | Gross
| | | | | |
| | | Gross Carrying
| | Accumulated
| | Intangibles,
| | Gross Carrying
| | Accumulated
| | Intangibles,
| | | Average
| | Carrying
| | Accumulated
| | Intangibles,
| | Average
| | Carrying
| | Accumulated
| | Intangibles,
| |
| | | Amount | | Amortization | | Net | | Amount | | Amortization | | Net | | | Useful Life | | Amount | | Amortization | | Net | | Useful Life | | Amount | | Amortization | | Net | |
| |
| Licensed technology | | $ | 36,000 | | | $ | (7,788 | ) | | $ | 28,212 | | | $ | 36,000 | | | $ | — | | | $ | 36,000 | | | | 8.0 | | | $ | 36,000 | | | $ | (15,849 | ) | | $ | 20,151 | | | | 8.0 | | | $ | 36,000 | | | $ | (11,820 | ) | | $ | 24,180 | |
| Core technology | | | 23,500 | | | | (4,504 | ) | | | 18,996 | | | | 23,500 | | | | (2,154 | ) | | | 21,346 | | | | 10.0 | | | | 51,500 | | | | (10,604 | ) | | | 40,896 | | | | 10.0 | | | | 23,500 | | | | (6,854 | ) | | | 16,646 | |
| Customer relationships | | | 900 | | | | (575 | ) | | | 325 | | | | 900 | | | | (275 | ) | | | 625 | | | | 3.0 | | | | 900 | | | | (900 | ) | | | — | | | | 3.0 | | | | 900 | | | | (875 | ) | | | 25 | |
| License agreements | | | 1,154 | | | | (932 | ) | | | 222 | | | | 1,029 | | | | (884 | ) | | | 145 | | | | 8.9 | | | | 10,654 | | | | (1,677 | ) | | | 8,977 | | | | 7.2 | | | | 4,456 | | | | (1,519 | ) | | | 2,937 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total intangible assets, net | | $ | 61,554 | | | $ | (13,799 | ) | | $ | 47,755 | | | $ | 61,429 | | | $ | (3,313 | ) | | $ | 58,116 | | | | | | | $ | 99,054 | | | $ | (29,030 | ) | | $ | 70,024 | | | | | | | $ | 64,856 | | | $ | (21,068 | ) | | $ | 43,788 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization expense associated with the intangible assets was $10.4$7.8 million, $6.7 million, and $2.4$10.4 million for the years ended January 2, 2011, January 3, 2010, and December 28, 2008, and December 30, 2007, respectively. There was no amortization of intangibles for the year ended January 1, 2006.
70
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.
| | | | | | | | | |
| 2009 | | $ | 6,749 | | |
| 2010 | | | 6,462 | | |
| 2011 | | | 6,425 | | | $ | 10,071 | |
| 2012 | | | 6,618 | | | | 10,285 | |
| 2013 | | | 6,518 | | | | 10,270 | |
| 2014 | | | | 10,251 | |
| 2015 | | | | 10,251 | |
| Thereafter | | | 14,983 | | | | 18,896 | |
| | | | | | | |
| Total | | $ | 47,755 | | | $ | 70,024 | |
| | | | | | | |
| |
6.5. | Impairment of Manufacturing Equipment |
Investments
During the fourth quarter of 2010, the Company determined that a $6.0 million cost-method investment and a related $6.8 million note receivable with interest receivable of $0.4 million were below carrying value and the impairment wasother-than-temporary. This determination was based upon continued shortfalls from revenue plans coupled with events in the fourth quarter of fiscal 2010 that created uncertainty regarding the entity’s ability to obtain additional funding in a required timeframe for the entity to continue operations. As a result, the Company recorded an impairment charge of $13.2 million in other (expense) income, net in the consolidated statements of income for the year ended January 2, 2011.
Manufacturing Equipment
During the year ended December 28, 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
F-22
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
utilized. In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, aA non-cash impairment charge of $4.1 million was recorded in the second quarter of fiscalyear ended December 28, 2008 for the excess machinery. This charge is included as a separate line item in the Company’s consolidated statement of operations.income. There was no change to useful lives and related depreciation expenseexpenses of the remaining assets as the Company believes these estimates are currently reflective of the period the assets will be used in operations.
The Company generally provides a one-year warranty on sequencing, genotyping and gene expression systems.instruments. Additionally, the Company provides a warranty on its consumables 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. Thisbased on historical experience as well as anticipated product performance. The Company periodically reviews the adequacy of our warranty reserve, and adjusts, if necessary, the warranty percentage and accrual based on actual experience and estimated costs to be incurred. Warranty 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.as incurred.
71
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in the Company’s reserve for product warranties from January 1, 20062008 through December 28, 2008January 2, 2011 are as follows (in thousands):
| | | | | |
| 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 | |
| Additions charged to cost of revenue | | | 4,939 | |
| Repairs and replacements | | | (2,219 | ) |
| | | | | |
| Balance as of December 30, 2007 | | | 3,716 | |
| Additions charged to cost of revenue | | | 13,044 | |
| Repairs and replacements | | | (8,557 | ) |
| | | | | |
| Balance as of December 28, 2008 | | $ | 8,203 | |
| | | | | |
| | | | |
| Balance as of January 1, 2008 | | $ | 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 | |
| Additions charged to cost of revenue | | | 25,146 | |
| Repairs and replacements | | | (18,600 | ) |
| | | | |
| Balance as of January 2, 2011 | | $ | 16,761 | |
| | | | |
| |
8.7. | 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 paypays 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 interest payments of $1.3 million and $1.2 million on February 15, 2008 and August 15, 2008, respectively. The Notesnotes mature on February 15, 2014.
The Notes will benotes are convertible into cash and, if applicable, shares of the Company’s common stock, $0.01 par value per share, based on a conversion rate, subject to adjustment, of 45.8058 shares per $1,000 principal amount of Notesnotes (which represents a conversion price of approximately $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 Notenote 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 30, 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
F-23
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 requirements of the second condition above were satisfied during each of the calendar quarters of 2010 and the first, second and third quarters of 2008.2009. Accordingly, the Company’s outstandingnotes were and continue to be convertible notes became convertible into cash and, if applicable, shares of common stock, during the period from, and including, April 1, 2009 through, and including, December 31, 2009 and again during the period April 1, 2010 through, and including, March 31, 2011. Additionally, these same requirements were satisfied during the third quarter of 2008, and, as a result, the notes were convertible during the period from, and including, October 1, 2008 through, and including, December 31, 2008. DuringOn December 29, 2008, a noteholder converted notes in an aggregate principal amount of $10.0 million. On February 4, 2009, the fourth quarter of 2008,settlement date, we paid the requirements of this same condition were no longer satisfied, accordingly, the Notes will no longer be convertible during the period from, and including January 1, 2009 through, and including March 31, 2009 unless another conversion condition is satisfied during this period. Generally, upon conversion of a Note, the Company will paynoteholder the conversion value of the Notenotes in cash, up to the principal amount of the Note. Anynotes. The excess of the conversion value over the principal amount, is payabletotaling $2.9 million, was paid in shares of the Company’s common stock. AsThis equity dilution upon conversion of December 28, 2008, the principal amountnotes was offset by the reacquisition of these Notes was classified as current liabilities as the Notes were stillshares under the convertible through December 31, 2008.
Innote hedge transactions entered into in connection with the offering of the Notes in February 2007, the Companynotes.
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 18,322,320 shares of the Company’s common stock at a strike price of approximately $21.83 per share, subject to adjustment. In addition, the Company sold to these hedge
72
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
counterparties warrants (the warrants) exercisable, on a cashless basis, for up to 18,322,320 shares of the Company’s common stock at a strike price of $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 was reflected as a reduction of additional paid-in capital. The hedge transaction is expected to reduce the potential equity dilution upon conversion of the Notesnotes to the extent the Company exercises the note hedgeshedge to purchase shares from the hedge counterparties to deliver to converting noteholders. However, the warrants could have a dilutive effect on the Company’s earnings per share to the extent that the price of the Company’s common stock exceeds the strike price of the warrantswarrants.
As of January 2, 2011, the principal amount of the convertible senior notes was $390.0 million due to conversion of $10.0 million of the notes during the first quarter of 2009. The unamortized discount was $78.4 million resulting in a net carrying amount of the liability component of $311.6 million. As of January 3, 2010, the principal amount of the notes was $390.0 million and the unamortized discount was $99.8 million, resulting in a net carrying amount of the liability of $290.2 million. Upon the 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 remaining period over which the discount on the exercise dates of the warrants, which occur during 2014, and the warrants are exercised.liability component will be amortized is 3.12 years.
Operating Leases
The Company leases office and manufacturing facilities under various noncancellable operating lease agreements. FacilitiesFacility 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 San Diego, California; Hayward, California,California; Carlsbad, California; Branford, Connecticut; the United Kingdom, The Netherlands, Japan, Singapore, AustraliaKingdom; the Netherlands; Japan; Singapore; Australia; and China.
Annual future minimum payments under these operating leases as of December 28, 2008January 2, 2011 were as follows (in thousands):
| | | | | | | | | |
| 2009 | | $ | 11,032 | | |
| 2010 | | | 11,122 | | |
| 2011 | | | 11,823 | | | $ | 13,965 | |
| 2012 | | | 11,920 | | | | 15,237 | |
| 2013 | | | 11,458 | | | | 22,500 | |
| 2014 | | | | 20,926 | |
| 2015 | | | | 20,059 | |
| Thereafter | | | 100,885 | | | | 406,574 | |
| | | | | | | |
| Total | | $ | 158,240 | | | $ | 499,261 | |
| | | | | | | |
F-24
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Rent expense, net of amortization of the deferred gain on sale of property, was $10.7$14.7 million, $7.7$13.6 million, and $4.7$10.7 million for the years ended January 2, 2011, January 3, 2010, and December 28, 2008, respectively.
On December 30, 20072010, the Company entered into a lease agreement for a new corporate headquarters facility located in San Diego, California. The lease has a target commencement date of November 1, 2011 and December 31, 2006, respectively.has an initial term of 20 years with four five-year options to extend. There is a one-time option to terminate the lease after 15 years in exchange for an early termination fee. The lease includes two existing office
73
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
buildings and a central plant building with approximately 346,600 square feet. The Company has also agreed to lease a third office building to be built at this facility containing approximately 123,400 rentable square feet. The Company has the right to further expand the premises and lease one or more of three additional office buildings that may be built at this facility. Included in the table above are future minimum lease payments during the initial term of the lease, which are expected to total approximately $355.9 million, excluding further expansion beyond the third building, and taking no consideration of tenant improvement allowances of approximately $21.9 million. The Company will capitalize the leasehold improvements and amortize them over the shorter of the lease term or their expected useful life. The leasehold improvement allowances will reduce rent expense over the initial lease term.
Lease commitments of $108.3 million related to the lease for the Company’s current headquarters are also included in the table above. The Company plans to cease the use of the facility near the end of 2011 and the Company is further obligated for certain ongoing operating costs prior to any sublease that may be obtained. Upon cease-use of the facility, the Company will record an estimated loss for the present value of the expected shortfall between the remaining lease payments obligation and estimated sublease rental during the remaining lease period, adjusted for deferred rents and leasehold improvements.
| |
10.9. | Stockholders’ Equity |
Common Stock
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.
On August 12, 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 the Company of $342.6$342.7 million, after deducting underwriting discounts and commissions and offering expenses.
On December 28, 2008,January 2, 2011, the Company had 121,008,599126,606,851 shares of common stock outstanding.outstanding, excluding treasury shares.
Stock Options
In June 2005, the stockholders ofOn January 2, 2011, the Company approvedhad three active stock plans: the 2005 Stock and Incentive Plan (the 2005 Stock Plan). Upon adoption of the 2005 Stock Plan, issuance of options under the Company’s existing 2000 Stock Plan ceased. Additionally, in connection with the acquisition of Solexa, the Company assumed stock options granted under, the 2005 Solexa Equity Incentive Plan (the 2005 Solexa Equity Plan). The 2005 Stock Plan, and the 2005 Solexa Equity Plan initially provided that an aggregate of up to 24,571,238 shares of the Company’s common stock be reservedNew Hire Stock and available to be issued. The 2005 Stock Plan provides for an automatic annual increase in the shares reserved for issuance by the lesser of 5% of the outstanding shares of the Company’s common stock on the last day of the immediately preceding fiscal year, 2,400,000 shares or such lesser amount as determined by the Company’s board of directors. Additionally, during the Company’s Annual Meeting of Stockholders held on May 16, 2008, the stockholders ratified an amendment to increase the maximum number of shares of common stock authorized for issuance under the 2005 Stock Plan by 2,400,000 shares.Incentive Plan. As of December 28, 2008,January 2, 2011, options to purchase 6,777,9037,535,584 shares remained available for future grant under the 2005 Stock Plan and 2005 Solexa Equity Plan.
On January 29, 2008, the Company’s board of directors approved the New Hire Stock and Incentive Plan, which provides for the issuance of options and shares of restricted stock to newly hired employees. There is no set number of shares reserved for issuance under thisthe New Hire Stock and Incentive Plan.
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 the individual’s continued service to us through the vesting date. The Company satisfies option exercises through the issuance of new shares.
F-2574
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s stock option activity under all stock option plans from January 1, 20062008 through December 28, 2008January 2, 2011 is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Weighted-
| | | | | | | Weighted
| |
| | | | | Average
| | | | | | | Average
| |
| | | Options | | Exercise Price | | | | | Weighted-
| | Grant-Date
| |
| | | | | Average
| | Fair Value
| |
| Outstanding at January 1, 2006 | | | 14,650,862 | | | $ | 3.98 | | |
| Granted | | | 5,242,100 | | | $ | 13.62 | | |
| Exercised | | | (2,546,238 | ) | | $ | 3.64 | | |
| Cancelled | | | (628,484 | ) | | $ | 6.22 | | |
| | | | | | Options | | Exercise Price | | per Share | |
| Outstanding at December 31, 2006 | | | 16,718,240 | | | $ | 6.97 | | |
| Options assumed through business combination | | | 2,848,664 | | | $ | 10.69 | | |
| Granted | | | 7,569,016 | | | $ | 20.32 | | |
| Exercised | | | (4,358,572 | ) | | $ | 6.03 | | |
| Cancelled | | | (1,929,480 | ) | | $ | 11.19 | | |
| | | | |
| Outstanding at December 30, 2007 | | | 20,847,868 | | | $ | 12.13 | | |
| Outstanding at January 1, 2008 | | | | 20,847,868 | | | $ | 12.13 | | | $ | 8.13 | |
| Granted | | | 3,091,108 | | | $ | 34.23 | | | | 3,091,108 | | | | 34.23 | | | | 18.01 | |
| Exercised | | | (4,571,855 | ) | | $ | 8.52 | | | | (4,571,855 | ) | | | 8.52 | | | | 6.02 | |
| Cancelled | | | (1,232,917 | ) | | $ | 19.93 | | | | (1,232,917 | ) | | | 19.93 | | | | 11.18 | |
| | | | | | | | | | | |
| Outstanding at December 28, 2008 | | | 18,134,204 | | | $ | 16.26 | | | | 18,134,204 | | | | 16.26 | | | | 10.08 | |
| Granted | | | | 1,560,024 | | | | 28.86 | | | | 14.74 | |
| Exercised | | | | (2,965,606 | ) | | | 10.56 | | | | 7.21 | |
| Cancelled | | | | (639,184 | ) | | | 14.88 | | | | 9.82 | |
| | | | | | | | | | | |
| Outstanding at January 3, 2010 | | | | 16,089,438 | | | | 18.59 | | | | 11.07 | |
| Granted | | | | 2,045,489 | | | | 39.11 | | | | 18.82 | |
| Exercised | | | | (5,541,276 | ) | | | 16.65 | | | | 10.08 | |
| Cancelled | | | | (711,350 | ) | | | 21.76 | | | | 11.78 | |
| | | | | | | | | |
| Outstanding at January 2, 2011 | | | | 11,882,301 | | | $ | 22.83 | | | $ | 12.82 | |
| | | | | | | | | |
The following isAt January 2, 2011, outstanding options to purchase 6,950,184 shares were exercisable with a further breakdownweighted average per share exercise price of the options outstanding as of December 28, 2008:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 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 | |
| |
| $0.05-3.95 | | | 2,195,626 | | | | 4.14 | | | $ | 2.94 | | | | 1,706,512 | | | $ | 2.91 | |
| $3.97-4.85 | | | 1,813,554 | | | | 5.38 | | | $ | 4.34 | | | | 1,023,641 | | | $ | 4.37 | |
| $4.94-10.49 | | | 2,907,761 | | | | 6.27 | | | $ | 8.44 | | | | 1,496,162 | | | $ | 8.28 | |
| $10.66-16.19 | | | 1,890,491 | | | | 7.35 | | | $ | 13.79 | | | | 787,957 | | | $ | 13.50 | |
| $16.27-19.61 | | | 2,619,364 | | | | 7.81 | | | $ | 18.24 | | | | 893,047 | | | $ | 18.24 | |
| $19.71-20.04 | | | 2,227,638 | | | | 7.22 | | | $ | 20.03 | | | | 701,138 | | | $ | 20.04 | |
| $20.12-29.78 | | | 1,819,970 | | | | 8.80 | | | $ | 24.51 | | | | 336,421 | | | $ | 24.62 | |
| $30.09-33.80 | | | 1,840,600 | | | | 9.12 | | | $ | 32.61 | | | | 218,044 | | | $ | 32.51 | |
| $34.43-42.02 | | | 589,200 | | | | 9.33 | | | $ | 38.51 | | | | 5,000 | | | $ | 41.75 | |
| $44.38 | | | 230,000 | | | | 9.60 | | | $ | 44.38 | | | | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | |
| $0.05-44.38 | | | 18,134,204 | | | | 7.06 | | | $ | 16.26 | | | | 7,167,922 | | | $ | 10.94 | |
| | | | | | | | | | | | | | | | | | | | | |
$17.70. The weighted average remaining life in years of options outstanding and exercisable is 6.376.51 years and 5.67 years, respectively, as of December 28, 2008.January 2, 2011.
The aggregate intrinsic value of options outstanding and options exercisable as of December 28, 2008January 2, 2011 and January 3, 2010 was $192.4$481.4 million and $105.4$317.2 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 $25.36$63.34 as of December 26, 2008,31, 2010, and the exercise price multiplied by the number of options outstanding. Total intrinsic value of options exercised was $136.6$156.9 million, $72.1$73.4 million, and $34.0$136.6 million for the years ended January 2, 2011, January 3, 2010, and December 28, 2008, December 30, 2007 and December 31, 2006, respectively.
F-26
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Employee Stock Purchase Plan
In February 2000, the board of directors and stockholders adopted the 2000 ESPP. A total of 15,467,426 shares of the Company’s common stock have been reserved for issuance under the ESPP. The ESPP 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 ESPP 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 ESPP 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, 3,000,000 shares or such lesser amount as determined by the Company’s board of directors. Shares totaling 276,198, 266,962372,544, 359,713, and 532,788276,198 were issued under the ESPP during fiscal 2008, 20072010, 2009, and 2006,2008, respectively. As of December 28, 2008,January 2, 2011 and January 3, 2010, there were 10,794,16216,061,905 shares and 13,434,499 shares available for issuance under the ESPP.ESPP, respectively.
75
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted Stock Units
In 2007 the Company began granting restricted stock units (RSUs), pursuant to its 2005 Stock and Incentive Plan as part of its periodic employee equity compensation review program. Restricted stock unitsRSUs are share awards that, upon vesting, will deliver to the holder shares of the Company’s common stock. Restricted stock units granted during 2007 vest over four years as follows: 15% vest on the first and second anniversaries of the grant date, 30% vest on the third anniversary of the grant date and 40% vest on 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 unitsRSUs generally vest 15% on the first anniversary of the grant date, 20% on the second anniversary of 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 RSU vesting through the issuance of new shares.
A summary of the Company’s restricted stock unitRSU activity and related information in the fiscal year ended December 28,from January 1, 2008 through January 2, 2011 is as follows:
| | | | |
| | Restricted Stock Units(1) | |
|
Outstanding at December 31, 2006 | | | — | |
Awarded | | | 395,500 | |
Vested | | | — | |
Cancelled | | | (1,000 | ) |
| | | | |
Outstanding at December 30, 2007 | | | 394,500 | |
Awarded | | | 1,287,504 | |
Vested | | | (55,638 | ) |
Cancelled | | | (47,090 | ) |
| | | | |
Outstanding at December 28, 2008 | | | 1,579,276 | |
| | | | |
| | | | | | | | | |
| | | | | | Weighted Average
| |
| | | Restricted
| | | Grant-Date Fair
| |
| | | Stock Units(1) | | | Value per Share | |
| |
| Outstanding at January 1, 2008 | | | 394,500 | | | $ | 25.68 | |
| Awarded | | | 1,287,504 | | | | 34.53 | |
| Vested | | | (55,638 | ) | | | 25.67 | |
| Cancelled | | | (47,090 | ) | | | 32.85 | |
| | | | | | | | | |
| Outstanding at December 28, 2008 | | | 1,579,276 | | | | 32.68 | |
| Awarded | | | 1,292,473 | | | | 32.25 | |
| Vested | | | (246,055 | ) | | | 32.33 | |
| Cancelled | | | (116,986 | ) | | | 33.19 | |
| | | | | | | | | |
| Outstanding at January 3, 2010 | | | 2,508,708 | | | | 32.45 | |
| Awarded | | | 1,353,583 | | | | 50.74 | |
| Vested | | | (510,113 | ) | | | 32.10 | |
| Cancelled | | | (242,946 | ) | | | 33.36 | |
| | | | | | | | | |
| Outstanding at January 2, 2011 | | | 3,109,232 | | | $ | 40.39 | |
| | | | | | | | | |
| | |
| (1) | | Each stock unitRSU represents the fair market value of one share of common stock. |
The weighted average grant-date fair value per share for the restricted stock units was $34.53 and $25.69 for the years ended December 28, 2008 and December 30, 2007, respectively. No restricted stock units were outstanding as of December 31, 2006.
Based on the closing price per share of the Company’s common stock of $25.36$63.34 and $30.68 on December 26, 2008,31, 2010 and December 31, 2009, respectively, the total pretax intrinsic value of all outstanding restricted stock units on that dateRSUs as of January 2, 2011 and January 3, 2010 was $40.0 million.
F-27
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)$125.6 million and $81.1 million, respectively.
Warrants
In conjunction with its acquisition of Solexa, Inc. on January 26, 2007, the Company assumed 4,489,686 warrants issued by Solexa prior to the acquisition. During the year ended December 28, 2008,January 2, 2011, there were 401,3621,577,712 warrants exercised, resulting in cash proceeds to the Company of $3.0approximately $16.0 million. As of December 28, 2008, 252,164 of the assumed warrants had expired.
A summary of all warrants outstanding as of December 28, 2008January 2, 2011 is as follows:
| | | | | | | | | |
Number of Shares | | Exercise Price | | | Expiration Date | |
| |
| 238,510 | | $ | 7.27 | | | | 4/25/2010 | |
| 864,040 | | $ | 7.27 | | | | 7/12/2010 | |
| 809,246 | | $ | 10.91 | | | | 11/23/2010 | |
| 1,125,734 | | $ | 10.91 | | | | 1/19/2011 | |
| 18,322,320(1) | | $ | 31.44 | | | | 2/15/2014 | |
| | | | | | | | | |
| 21,359,850 | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Number of Shares | | Exercise Price | | | Expiration Date | |
| |
| 505,442 | | $ | 10.91 | | | | 1/19/2011 | |
| 18,322,320(1) | | $ | 31.44 | | | | 2/15/2014 | |
| | | | | | | | | |
| 18,827,762 | | | | | | | | |
| | | | | | | | | |
76
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| (1) | | Represents warrants sold in connection with the offering of the Company’s convertible senior notes (See note “7. Convertible Senior Notes (See Note 8)Notes”). |
Treasury Stock
In connection with its issuance of $400.0 million principal amount of 0.625% Convertible Senior Notes due 2014 on February 16, 2007, the Company repurchased 11.6 million shares of its outstanding common stock for $201.6 million in privately negotiated transactions concurrently with the offering.
On February 20, 2007, the Company executed aRule 10b5-1 trading plan to repurchase up to $75.0 million of its outstanding common stock over a period of six months. The Company repurchased 3.2 million shares of its common stock under this plan for $50.0 million. As of December 30, 2007, this plan had expired.
On October 23, 2008, the board of directors authorized a $120.0 million stock repurchase program. As of December 28,In fiscal 2008, the Company had repurchased 3.1 million shares for $70.8 million under the planprogram.
In July 2009, the board of directors 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 $175.1 million, under both programs in open-market transactions or through privately negotiated transactions in compliance withRule 10b-18 under the Securities Exchange Act of 1934. AsThis program expired at the end of December 28, 2008, $49.22009.
In July 2010, the Company’s board of directors authorized a $200 million remains authorizedstock repurchase program, with $100 million allocated to repurchasing Company common stock under a 10b5-1 plan over a 12 month period and $100 million allocated to repurchasing Company common stock at management’s discretion during open trading windows. In fiscal 2010, the Company repurchased 0.8 million shares for future repurchases$44.0 million under the program.program authorized in July 2010.
Stockholder Rights Plan
On May 3, 2001, the board of directors 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 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
F-28
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
company which at the time of such transaction have a market value of two times the exercise price of the right.Right. The board of directors 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.
| |
11.10. | Litigation SettlementsLegal Proceedings |
In the recent past, the Company incurred substantial costs in defending against patent infringement claims and expects, going forward, to devote substantial financial and managerial resources to protect the Company’s intellectual property and to defend against any future claims asserted against the Company. From time to time, the Company may also be partiesis party to litigation and other litigationlegal proceedings in the ordinary course, and incidental to the conduct, of its business. While the results of any litigation or other legal proceedings are uncertain, managementthe Company does not believe the ultimate resolution of itsany pending legal matters will result inis likely to have a material adverse impact to the Company.
Applied Biosystems Litigation
On December 26, 2006, Applied Biosystems Inc. (Applied Biosystems), formerly known as Applera Corporation (currently known as Applied Biosystems LLC, a wholly owned subsidiaryeffect on its financial position or results of Life Technologies Corporation), filed suit in California Superior Court, Santa Clara County, against Solexa (which was acquired by the Company on January 26, 2007). This State Court action related to the ownership of several patents assigned in 1995 to Solexa’s predecessor company (Lynx Therapeutics) by a former employee (Dr. Stephen Macevicz), who is the inventor of these patents and is named as a co-defendant in the suit. The Macevicz patents are directed to methods for sequencing DNA (US Pat. Nos. 5,750,341 and 6,306,597) using successive rounds of oligonucleotide probe ligation(sequencing-by-ligation), and to a probe (5,969,119) used in connection with these sequencing methods. Lynx was originally a unit of Applied Biosystems but was spun out in 1992. On May 31, 2007, Applied Biosystems filed a second suit, this time against the Company, in the U.S. District Court for the Northern District of California. This second suit sought a declaratory judgment of non-infringement of the Macevicz patents that were the subject of the State Court action mentioned above. Both suits were later consolidated in the U.S. District Court for the Northern District of California, San Francisco Division. By these consolidated actions, Applied Biosystems was seeking ownership of the three Macevicz patents, unspecified costs and damages, and a declaration of non-infringement and invalidity of these patents. Applied Biosystems was not asserting any claim for patent infringement against the Company.
On January 5, 2009, the case went to trial in two phases. The first phase addressed the determination of ownership of thepatents-in-suit, and the second phase addressed whether these patents were infringed and valid. On January 14, 2009, at the end of the first phase, a federal jury determined that Solexa was the rightful owner of all three Macevicz patents. On January 27, 2009, the same jury found that Applied Biosystems did not infringe the ’119 probe patent, and that the ’119 patent was valid. In August 2008, the court had ruled that Applied Biosystems’ two-base system did not infringe the ’341 and ’597 patents. Prior to the jury finding of non-infringement of the ’119 patent, Applied Biosystems conceded that its one-base system infringed claim 1 of the ’597 patent and Solexa conceded invalidity of that same claim under the court’s construction of that claim. Both parties reserved the right to appeal the court’s construction of claim 1 of the ’597 patent, among other things.
The Company’s Genome Analyzer products use a different technology, calledSequencing-by-Synthesis (SBS), which is not covered by any of the Macevicz patents. In addition, the Company has no plans to use any of theSequencing-by-Ligation technologies covered by these patents.operations.
F-2977
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The income (loss) before income taxes summarized by region is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | Year Ended
| | | Years Ended | |
| | | December 28,
| | December 30,
| | December 31,
| | | January 2,
| | January 3,
| | December 28,
| |
| | | 2008 | | 2007 | | 2006 | | | 2011 | | 2010 | | 2008 | |
| |
| United States | | $ | 64,424 | | | $ | 58,445 | | | $ | 42,612 | | | $ | 109,068 | | | $ | 65,081 | | | $ | 46,205 | |
| Foreign | | | 26,482 | | | | (347,230 | ) | | | 8 | | | | 76,311 | | | | 49,044 | | | | 26,482 | |
| | | | | | | | | | | | | | | |
| Total income (loss) before income taxes | | $ | 90,906 | | | $ | (288,785 | ) | | $ | 42,620 | | |
| Total income before income taxes | | | $ | 185,379 | | | $ | 114,125 | | | $ | 72,687 | |
| | | | | | | | | | | | | | | |
The provision (benefit) for income taxes consists of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | Year Ended
| | | Years Ended | |
| | | December 28,
| | December 30,
| | December 31,
| | | January 2,
| | January 3,
| | December 28,
| |
| | | 2008 | | 2007 | | 2006 | | | 2011 | | 2010 | | 2008 | |
| |
| Current: | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal | | $ | 13,868 | | | $ | 18,564 | | | $ | 1,125 | | | $ | 39,476 | | | $ | 43,565 | | | $ | 13,868 | |
| State | | | 2,134 | | | | 4,801 | | | | 1,177 | | | | 8,607 | | | | 2,511 | | | | 2,134 | |
| Foreign | | | 5,042 | | | | (2,172 | ) | | | 903 | | | | 6,330 | | | | 6,204 | | | | 5,042 | |
| | | | | | | | | | | | | | | |
| Total current provision | | | 21,044 | | | | 21,193 | | | | 3,205 | | | | 54,413 | | | | 52,280 | | | | 21,044 | |
| Deferred: | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal | | | 17,656 | | | | (20,254 | ) | | | — | | | | 6,557 | | | | (14,607 | ) | | | 11,700 | |
| State | | | 2,103 | | | | (11,622 | ) | | | — | | | | (6,808 | ) | | | 5,184 | | | | 901 | |
| Foreign | | | (374 | ) | | | 257 | | | | (553 | ) | | | 6,326 | | | | (1,013 | ) | | | (374 | ) |
| | | | | | | | | | | | | | | |
| Total deferred provision | | | 19,385 | | | | (31,619 | ) | | | (553 | ) | |
| Total deferred provision (benefit) | | | | 6,075 | | | | (10,436 | ) | | | 12,227 | |
| | | | | | | | | | | | | | | |
| Total tax provision (benefit) | | $ | 40,429 | | | $ | (10,426 | ) | | $ | 2,652 | | |
| Total tax provision | | | $ | 60,488 | | | $ | 41,844 | | | $ | 33,271 | |
| | | | | | | | | | | | | | | |
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
| | | Years Ended | |
| | | December 28,
| | December 30,
| | December 31,
| | | January 2,
| | January 3,
| | December 28,
| |
| | | 2008 | | 2007 | | 2006 | | | 2011 | | 2010 | | 2008 | |
| |
| Tax at federal statutory rate | | $ | 31,817 | | | $ | (101,075 | ) | | $ | 14,945 | | | $ | 64,881 | | | $ | 39,944 | | | $ | 25,440 | |
| State, net of federal benefit | | | 4,242 | | | | (9,672 | ) | | | 1,963 | | | | 6,231 | | | | 4,275 | | | | 3,461 | |
| Alternative minimum tax | | | — | | | | — | | | | 1,125 | | |
| Research and other credits | | | (4,060 | ) | | | (3,118 | ) | | | (3,096 | ) | | | (5,859 | ) | | | (4,050 | ) | | | (4,060 | ) |
| Acquired in-process research & development | | | 9,508 | | | | 116,916 | | | | — | | | | 517 | | | | 4,386 | | | | 9,508 | |
| Adjustments to deferred tax balances | | | — | | | | — | | | | (3,258 | ) | |
| Change in valuation allowance | | | (149 | ) | | | (17,125 | ) | | | (10,038 | ) | | | (9,497 | ) | | | (1,967 | ) | | | (6,892 | ) |
| Permanent differences | | | 1,449 | | | | 653 | | | | 573 | | | | 1,397 | | | | 2,093 | | | | 1,449 | |
| Foreign rate adjustments | | | (2,619 | ) | | | 3,160 | | | | 430 | | |
| Change in fair value of contingent consideration | | | | (3,632 | ) | | | — | | | | — | |
| Impact of foreign operations | | | | 7,597 | | | | (5,400 | ) | | | 4,124 | |
| Other | | | 241 | | | | (165 | ) | | | 8 | | | | (1,147 | ) | | | 2,563 | | | | 241 | |
| | | | | | | | | | | | | | | |
| Total tax provision (benefit) | | $ | 40,429 | | | $ | (10,426 | ) | | $ | 2,652 | | |
| Total tax provision | | | $ | 60,488 | | | $ | 41,844 | | | $ | 33,271 | |
| | | | | | | | | | | | | | | |
F-3078
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 28,
| | December 30,
| | | January 2,
| | January 3,
| |
| | | 2008 | | 2007 | | | 2011 | | 2010 | |
| |
| Deferred tax assets: | | | | | | | | | | | | | | | | |
| Net operating losses | | $ | 18,557 | | | $ | 34,277 | | | $ | 11,898 | | | $ | 15,869 | |
| Tax credits | | | 19,139 | | | | 11,465 | | | | 18,329 | | | | 18,681 | |
| Accrued litigation settlements | | | — | | | | 21,427 | | |
| Other accruals and reserves | | | 11,341 | | | | 6,326 | | | | 22,134 | | | | 17,813 | |
| Stock compensation | | | 15,962 | | | | 8,166 | | | | 23,829 | | | | 25,442 | |
| Convertible debt | | | 42,456 | | | | 49,137 | | |
| Impairment of cost-method investment | | | | 5,058 | | | | — | |
| Other amortization | | | | 4,893 | | | | 4,216 | |
| Other | | | 13,268 | | | | 12,322 | | | | 4,643 | | | | 14,980 | |
| | | | | | | | | | | |
| Total deferred tax assets | | | 120,723 | | | | 143,120 | | | | 90,784 | | | | 97,001 | |
| Valuation allowance on deferred tax assets | | | (15,200 | ) | | | (28,343 | ) | | | (4,986 | ) | | | (14,852 | ) |
| | | | | | | | | | | |
| Net deferred tax assets | | | 105,523 | | | | 114,777 | | | | 85,798 | | | | 82,149 | |
| | | | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | | | | | | | | | |
| Purchased intangible amortization | | | (5,985 | ) | | | (7,084 | ) | | | (22,605 | ) | | | (5,043 | ) |
| Accrued litigation settlements | | | (11,084 | ) | | | — | | | | (3,276 | ) | | | (3,810 | ) |
| Convertible debt | | | | (3,191 | ) | | | (3,901 | ) |
| Other | | | (1,498 | ) | | | (514 | ) | | | (3,861 | ) | | | (2,810 | ) |
| | | | | | | | | | | |
| Total deferred tax liabilities | | | (18,567 | ) | | | (7,598 | ) | | | (32,933 | ) | | | (15,564 | ) |
| | | | | | | | | | | |
| Net deferred tax assets | | $ | 86,956 | | | $ | 107,179 | | | $ | 52,865 | | | $ | 66,585 | |
| | | | | | | | | | | |
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 ajurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. During 2010, the valuation allowance decreased by $9.9 million primarily due to increased profitability of certain foreign subsidiaries related to the corporate restructuring implemented during the fourth quarter. Based on the available evidence as of December 28, 2008,January 2, 2011, the Company was not able to conclude it is more likely than not certain U.S. and foreign deferred tax assets will be realized. Therefore, the Company recorded a valuation allowance of $2.8$1.9 million and $12.4$3.1 million against certain U.S. and foreign net deferred tax assets, respectively. At December 30, 2007, the Company had 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, $17.1 million of which was recorded as a reduction to the tax provision.
As of December 28, 2008,January 2, 2011, the Company had net operating loss carryforwards for federal and state tax purposes of $87.7$37.5 million and $148.3$161.7 million, respectively, which begin to expire in 20252020 and 2013,2017, respectively, unless previously utilized.utilized prior. In addition, the Company also had U.S. federal and state research and development tax credit carryforwards of $12.6$13.7 million and $13.9$28.7 million, respectively, which begin to expire in 20182027 and 2019, respectively, unless previously utilized.
As of December 28, 2008, the valuation allowance includes $14.0 million of pre-acquisition deferred tax assets of Solexa. Prior to the adoption of SFAS 141(R) to the extent any of these assets were recognized, the adjustment would have been applied first to reduce to zero any goodwill related to the acquisition, and then an a reduction to the tax provision.utilized prior.
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 2, 2011 are net of any previous limitations due to Section 382 and 383 have been reflected in the deferred tax assets as of December 28, 2008.
F-31
ILLUMINA, INC.383.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Due to the adoption of SFAS No. 123R, theThe 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
79
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 2008,2010, the Company realized $18.5$42.4 million of such excess tax benefits, and accordingly recorded a corresponding credit to additional paid in capital. As of December 28, 2008,January 2, 2011, the Company has $36.5$16.7 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 tax provision.provision for income taxes.
The Company’s manufacturing operations in Singapore operate under various tax holidays and incentives that begin to expire in 2018. For the year ended December 28, 2008,January 2, 2011, these tax holidays and incentives resulted in an approximate $1.9$2.3 million decrease to the tax provision for income taxes and an increase to net income per diluted share of $0.01.$0.02.
Residual U.S. income taxes have not been provided on $14.7$66.0 million of undistributed earnings of foreign subsidiaries as of December 28, 2008,January 2, 2011, since the earnings are considered to be indefinitely invested in the operations of such subsidiaries.
Effective January 1, 2007, the Company adopted 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 of 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. The adoption of FIN No. 48 did not result in an adjustment to the Company’s opening stockholders’ equity since there was no cumulative effect from the change in accounting principle.
The following table summarizes the gross amount of the Company’s uncertain tax positions (in thousands):
| | | | | |
| Balance at December 31, 2007 | | $ | 21,376 | |
| Increases related to current year tax positions | | | 2,402 | |
| | | | | |
| Balance at December 28, 2008 | | $ | 23,778 | |
| | | | | |
| | | | | | | | | | | | | |
| | | January 2,
| | | January 3,
| | | December 28,
| |
| | | 2011 | | | 2010 | | | 2008 | |
| |
| Balance at beginning of year | | $ | 11,760 | | | $ | 9,402 | | | $ | 7,000 | |
| Increases related to prior year tax positions | | | 5,066 | | | | — | | | | — | |
| Increases related to current year tax positions | | | 5,903 | | | | 2,358 | | | | 2,402 | |
| | | | | | | | | | | | | |
| Balance at end of year | | $ | 22,729 | | | $ | 11,760 | | | $ | 9,402 | |
| | | | | | | | | | | | | |
As of December 28, 2008, $7.7January 2, 2011, $18.3 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 28, 2008, noJanuary 2, 2011, minimal interest or penalties have beenwas accrued related to the Company’s uncertain tax positions. Tax years 19921995 to 20082010 remain subject to future examination by the major tax jurisdictions in which the Company is subject to tax.
| |
13.12. | Employee Benefit Plans |
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 2, 2011, January 3, 2010, and December 28, 2008, December 30, 2007 and December 31, 2006, the Company made matching contributions of $4.2 million, $3.3 million, and $2.6 million, $1.4 million and $0.4 million, respectively.
F-32
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Executive Deferred Compensation Plan
For the Company’s executives and members of the board of directors, theThe Company adopted the Illumina, Inc. Deferred Compensation Plan (the Plan) that became effective January 1, 2008. Eligible participants, which include the Company’s senior level employees and members of the board of directors, can contribute up to 80% of their base salary and 100% of all other forms of compensation into the Plan, including bonus, equity awards, commission and director fees. The Company has agreed to credit the participants’ contributions with earnings that reflect the performance of certain
80
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 December 28, 2008,January 2, 2011, 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 executivesthe participants under the Plan. In accordance with FASB Interpretation (FIN) No. 46,Consolidationauthoritative guidance related to consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,variable interest entities andEITF 97-14,Accounting accounting for Deferred Compensation Arrangements Where Amounts Earned Are Helddeferred compensation arrangements where amounts earned are held in a Rabbi Trustrabbi trust and Invested,invested, the Company has included the assets of the rabbi trust in its consolidated balance sheet since the trust’s inception. As of December 28, 2008,January 2, 2011 and January 3, 2010, the assets of the trust were $6.1 million and $4.0 million, respectively, and liabilities of the Company were $1.3 million.$5.3 million and $4.0 million, respectively. The assets and liabilities are classified as other assets and accrued liabilities, respectively, on the Company’s consolidated balance sheet as of December 28, 2008.sheets. Changes in the values of the assets held by the rabbi trust accrue toare recorded in other (expense) income, net in the Company.consolidated statement of income.
14. Segment Information, Geographic Data and Significant Customers
| |
| 13. | Segment Information, Geographic Data, and Significant Customers |
DuringThe Company is organized in two business segments, the first quarter of 2008, the Company reorganized its operating structure into a newly created Life Sciences Business Unit whichand Diagnostics Business Unit. The Life Sciences Business Unit includes all products and services that are primarily related to the research market, namely the product lines based on the Company’s sequencing, BeadArray, BeadXpressVeraCode, and Sequencing product lines.real-time PCR technologies. The Company also created a Diagnostics Business Unit to focusfocuses on the emerging opportunity in molecular diagnostics. For the year ended December 28, 2008,During all periods presented, the Company had limited activity related to the Diagnostics Business Unit, andUnit. Accordingly, the Company’s operating results for both units were reported on an aggregate basis to the chief operating decision maker of the Company, the chief executive officer. In accordance with SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information, the Company operated inas one reportable segment forduring these periods. The Company will begin reporting in two segments once revenues, operating profit or loss, or assets of the year ended December 28, 2008.Diagnostics Business Unit exceed 10% of the consolidated amounts.
The Company had revenue in the following regions for the years ended January 2, 2011, January 3, 2010, and December 28, 2008 December 30, 2007 and December 31, 2006 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | Year Ended
| | | Years Ended | |
| | | December 28,
| | December 30,
| | December 31,
| | | January 2,
| | January 3,
| | December 28,
| |
| | | 2008 | | 2007 | | 2006 | | | 2011 | | 2010 | | 2008 | |
| |
| United States | | $ | 280,064 | | | $ | 207,692 | | | $ | 103,043 | | | $ | 498,981 | | | $ | 347,195 | | | $ | 280,064 | |
| United Kingdom | | | 67,973 | | | | 34,196 | | | | 22,840 | | | | 60,521 | | | | 55,854 | | | | 67,973 | |
| Other European countries | | | 127,397 | | | | 75,360 | | | | 32,600 | | | | 163,062 | | | | 140,931 | | | | 127,397 | |
| Asia-Pacific | | | 72,740 | | | | 35,155 | | | | 15,070 | | | | 143,441 | | | | 96,396 | | | | 72,740 | |
| Other markets | | | 25,051 | | | | 14,396 | | | | 11,033 | | | | 36,736 | | | | 25,948 | | | | 25,051 | |
| | | | | | | | | | | | | | | |
| Total | | $ | 573,225 | | | $ | 366,799 | | | $ | 184,586 | | | $ | 902,741 | | | $ | 666,324 | | | $ | 573,225 | |
| | | | | | | | | | | | | | | |
Net revenues are attributable to geographic areas based on the region of destination.
F-33
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The majority of our product sales consist of consumables and instruments. For the years ended January 2, 2011, January 3, 2010, and December 28, 2008, December 30, 2007, and December 31, 2006, consumable sales represented 58%56%, 53%59%, and 54%58%, respectively, of total revenues and instrument sales comprised 32%36%, 33%34%, and 23%32%, respectively, of total revenues. OurThe Company’s customers include leading genomic research centers, pharmaceutical companies, academic institutions, government laboratories, and clinical research organizations, as well as pharmaceutical, biotechnology,
81
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
agrigenomics, and biotechnologyconsumer genomics companies. The Company had no customers that provided more than 10% of total revenue in the years ended January 2, 2011, January 3, 2010, and December 28, 2008, December 30, 2007 and December 31, 2006.2008.
Net long-lived assets exclude goodwill and other intangible assets since they are not allocated on a geographic basis. The Company had net long-lived assets consisting of property and equipment in the following regions as of December 28, 2008January 2, 2011 and December 30, 2007January 3, 2010 (in thousands):
| | | | | | | | | | |
| | | Year Ended
| | Year Ended
| | | | | | | | | |
| | | December 28,
| | December 30,
| | | January 2,
| | January 3,
| |
| | | 2008 | | 2007 | | | 2011 | | 2010 | |
| |
| United States | | $ | 65,630 | | | $ | 40,972 | | | $ | 75,206 | | | $ | 75,095 | |
| United Kingdom | | | 9,849 | | | | 4,809 | | | | 26,578 | | | | 27,862 | |
| Other European countries | | | 1,055 | | | | 230 | | | | 1,709 | | | | 864 | |
| Singapore | | | 12,586 | | | | — | | | | 14,739 | | | | 12,599 | |
| Other Asia-Pacific countries | | | 316 | | | | 263 | | | | 11,642 | | | | 768 | |
| | | | | | | | | | | |
| Total | | $ | 89,436 | | | $ | 46,274 | | | $ | 129,874 | | | $ | 117,188 | |
| | | | | | | | | | | |
F-34
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
15.14. | 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 fiscal years 2010 and 2009 ended January 2, 2011 and January 3, 2010, respectively were 13 weeks except for the fourth quarter of fiscal year 2009, which was 14 weeks. Summarized quarterly data for fiscal 2008years 2010 and 20072009 are as follows (in thousands except per share data):
| | | | | | | | | | | | | | | | | |
| | | First Quarter(1) | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | |
| |
| 2008: | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 121,861 | | | $ | 140,177 | | | $ | 150,260 | | | $ | 160,927 | |
| Total cost of revenue (excluding impairment of manufacturing equipment and amortization of intangible assets) | | | 46,081 | | | | 50,459 | | | | 54,430 | | | | 54,654 | |
| Net income (loss) | | | 13,428 | | | | 15,398 | | | | (7,288 | ) | | | 28,939 | |
| Net income (loss) per share, basic | | | 0.12 | | | | 0.14 | | | | (0.06 | ) | | | 0.24 | |
| Net income (loss) per share, diluted | | | 0.11 | | | | 0.12 | | | | (0.06 | ) | | | 0.22 | |
| Net cash (used in) provided by operating activities | | | (26,755 | ) | | | 37,222 | | | | 27,298 | | | | 50,117 | |
| Net cash used in investing activities | | | (44,123 | ) | | | (37,384 | ) | | | (164,520 | ) | | | (31,222 | ) |
| Net cash provided by (used in) financing activities | | | 15,979 | | | | 14,171 | | | | 356,936 | | | | (49,414 | ) |
| 2007: | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 72,150 | | | $ | 84,535 | | | $ | 97,510 | | | $ | 112,604 | |
| Total cost of revenue (excluding amortization of intangible assets) | | | 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 | | | (2.79 | ) | | | 0.09 | | | | 0.14 | | | | (0.04 | ) |
| Net income (loss) per share, diluted | | | (2.79 | ) | | | 0.08 | | | | 0.12 | | | | (0.04 | ) |
| Net cash provided by operating activities | | | 14,643 | | | | 24,482 | | | | 5,316 | | | | 11,853 | |
| Net cash used in investing activities | | | (34,410 | ) | | | (69,514 | ) | | | (32,143 | ) | | | 68,381 | |
| Net cash provided by financing activities | | | 104,950 | | | | 2,464 | | | | 10,433 | | | | 30,445 | |
| | | | | | | | | | | | | | | | | |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| |
| 2010: | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 192,131 | | | $ | 212,003 | | | $ | 237,309 | | | $ | 261,298 | |
| Gross profit | | | 132,178 | | | | 146,091 | | | | 157,145 | | | | 166,126 | |
| Net income | | | 21,208 | | | | 29,796 | | | | 35,447 | | | | 38,440 | |
| Net income per share, basic | | | 0.18 | | | | 0.24 | | | | 0.28 | | | | 0.31 | |
| Net income per share, diluted | | | 0.16 | | | | 0.21 | | | | 0.24 | | | | 0.25 | |
| 2009: | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 165,757 | | | $ | 161,643 | | | $ | 158,360 | | | $ | 180,564 | |
| Gross profit | | | 110,065 | | | | 111,158 | | | | 107,126 | | | | 125,526 | |
| 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 | |
On January 10, 2011, the Company acquired Epicentre Biotechnologies, Inc., a provider of nucleic acid sample preparation reagents and specialty enzymes used in sequencing and microarray applications. Total consideration exchanged for the acquisition includes $60 million in cash, $15 million in stock that is subject to forfeiture if certain non-revenue based milestones are not met, and up to $15 million in contingent consideration payments based on the achievement of certain revenue-based milestones by January 10, 2013. Due to the limited time since the acquisition date, the Company has not completed the initial purchase accounting for this acquisition, including the assessment of fair values of consideration exchanged, assets acquired, and liabilities assumed.
82
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the period from January 3, 2011 to February 28, 2011, certain noteholders notified the Company of their election to convert an aggregate of $251.1 million principal amount of our convertible senior notes in exchange for the repayment of the principal amount and a certain number of shares of the Company’s common stock representing the “in the money” amount of the notes. The number of shares of common stock to be delivered upon conversion is based on the Company’s volume weighted average price over atwenty-day observation period that begins following the date of the election to convert. In connection with the conversions, the Company expects to exercise its right under the convertible note hedge with its hedging counterparties to repurchase the same amount of shares as exchanged in the conversions. The majority of the notified conversions have not been executed as thetwenty-day observation period has not concluded as of February 28, 2011.
Upon conversion, the Company will record a gain or loss for the difference between the fair value of the notes to be extinguished and its corresponding carrying value, net of unamortized debt issuance costs. The fair value of the notes to be extinguished depends on the Company’s current incremental borrowing rate. The net carrying value of the notes has an implicit interest rate of 8.27%. As the interest rate applicable at the time of conversion is likely to be lower than the implied interest rate of the notes, the Company will likely record a loss in its consolidated statement of income during the first quarter of 2011.
83
| |
| 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 January 2, 2011. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of January 2, 2011, 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 2010 and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The 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 January 2, 2011. The effectiveness of our internal control over financial reporting as of January 2, 2011 has been audited by Ernst & Young LLP, an independent registered accounting firm, as stated in their report which is included herein.
84
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 January 2, 2011, 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 January 2, 2011, 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 January 2, 2011 and January 3, 2010, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended January 2, 2011 of Illumina, Inc. and our report dated February 28, 2011 expressed an unqualified opinion thereon.
San Diego, California
February 28, 2011
85
| |
| Item 9B. | Other Information. |
None.
PART III
| |
| Item 10. | Directors, Executive Officers, and Corporate Governance. |
(a) Identification of Directors. Information concerning our directors is incorporated by reference from the section entitled “Proposal One: Election of 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 2011 Annual Meeting of Stockholders to be filed with the SEC no later than April 9, 2011.
(b) Identification of Executive Officers. Information concerning our executive officers is incorporated by reference from the section entitled “Executive Officers” to be contained in our definitive Proxy Statement with respect to our 2011 Annual Meeting of Stockholders to be filed with the SEC no later than April 9, 2011.
(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 “Section 16(a) Beneficial Ownership Reporting Compliance” to be contained in our definitive Proxy Statement with respect to our 2011 Annual Meeting of Stockholders to be filed with the SEC no later than April 9, 2011.
(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 2011 Annual Meeting of Stockholders to be filed with the SEC no later than April 9, 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 Relations section under “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” to be contained in our definitive Proxy Statement with respect to our 2011 Annual Meeting of Stockholders to be filed with the SEC no later than April 9, 2011.
| |
| 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 sections entitled “Stock Ownership of Principal Stockholders and Management,” “Executive Compensation” and “Equity Compensation Plan Information” to be contained in our definitive
86
Proxy Statement with respect to our 2011 Annual Meeting of Stockholders to be filed with the SEC no later than April 9, 2011.
| |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
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 “Certain Relationships and Related Party Transactions” to be contained in our definitive Proxy Statement with respect to our 2011 Annual Meeting of Stockholders to be filed with the SEC no later than April 9, 2011.
| |
| Item 14. | Principal Accountant Fees and Services. |
Information concerning principal accountant fees and services is incorporated by reference from the sections entitled “Proposal Two: Ratification of Appointment of Independent Registered Public Accountants” and “Independent Registered Public Accountants” to be contained in our definitive Proxy Statement with respect to our 2011 Annual Meeting of Stockholders to be filed with the SEC no later than April 9, 2011.
PART IV
| |
| Item 15. | Exhibits, Financial Statement Schedules. |
1. Financial Statements: See “Index to Consolidated Financial Statements” in Part II, Item 8 of thisForm 10-K.
2. Financial Statement Schedule: See “Schedule II — Valuation and Qualifying Accounts and Reserves” in this section of thisForm 10-K.
3. Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of thisForm 10-K.
87
Schedule
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| | | | | | | | | | | | | | | | | |
| | | Balance at
| | Additions Charged
| | | | |
| | | Beginning of
| | to Expense/
| | | | Balance at End of
|
| | | Period | | Revenue(1) | | Deductions(2) | | Period |
| | | (In thousands) |
| |
| Year ended January 2, 2011 | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,398 | | | | 341 | | | | (53 | ) | | $ | 1,686 | |
| Reserve for inventory | | | 10,597 | | | | 9,559 | | | | (7,883 | ) | | | 12,273 | |
| 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 | |
| | |
| (1) | | The Company reclassified $36.0 million from cash provided by operating activitiesAdditions to cash used in investing activities in the first quarterallowance for doubtful accounts and reserve for inventory are charged to selling, general and administrative expense and cost of 2008product revenue respectively. |
|
| (2) | | Deductions for the portionallowance for doubtful accounts and reserve for inventory are for accounts receivable written off and disposal of the litigation payment relating to intangible assets.obsolete inventory. |
F-3588
INDEX TO EXHIBITS
| | | | | | | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
Exhibit
| | | | | | | | | | Filing
| | Filed
|
| Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Date | | Herewith |
| |
| | 3 | .1 | | Amended and Restated Certificate of Incorporation | | 8-K | | 000-30361 | | | 3 | .1 | | 09/23/08 | | |
| | 3 | .2 | | Amended and Restated Bylaws | | 8-K | | 000-30361 | | | 3 | .2 | | 04/27/10 | | |
| | 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 | | |
| | 4 | .1 | | Specimen Common Stock Certificate | | S-1/A | | 333-33922 | | | 4 | .1 | | 07/03/00 | | |
| | 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 | .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 | .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 | .2 | | 1998 Incentive Stock Plan | | S-1/A | | 333-33922 | | | 10 | .2 | | 07/03/00 | | |
| | +10 | .3 | | 2000 Employee Stock Purchase Plan, as amended and restated through October 28, 2009 | | 10-K | | 000-30361 | | | 10 | .3 | | 02/26/10 | | |
| | +10 | .4 | | 2000 Stock Plan, as amended and restated through March 21, 2002 | | 10-Q | | 000-30361 | | | 10 | .22 | | 05/13/02 | | |
| | +10 | .5 | | 2005 Stock and Incentive Plan, as amended and restated through October 28, 2009 | | 10-K | | 000-30361 | | | 10 | .5 | | 02/26/10 | | |
| | +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 | .7 | | New Hire Stock and Incentive Plan, as amended and restated through October 28, 2009 | | 10-K | | 000-30361 | | | 10 | .7 | | 02/26/10 | | |
| | 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 | .9 | | The Solexa Unapproved Company Share Option Plan | | 8-K | | 000-30361 | | | 99 | .3 | | 11/26/07 | | |
| | +10 | .10 | | The Solexa Share Option Plan for Consultants | | 8-K | | 000-30361 | | | 99 | .4 | | 11/26/07 | | |
| | +10 | .11 | | Solexa Limited Enterprise Management Incentive Plan | | 8-K | | 000-30361 | | | 99 | .5 | | 11/26/07 | | |
| | +10 | .12 | | Amended and Restated Solexa 2005 Equity Incentive Plan | | 10-K | | 000-30361 | | | 10 | .25 | | 02/26/09 | | |
| | +10 | .13 | | Amended and Restated Solexa 1992 Stock Option Plan | | 10-K | | 000-30361 | | | 10 | .26 | | 02/26/09 | | |
| | 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 | | |
| | 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 | | |
89
| | | | | | | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
Exhibit
| | | | | | | | | | Filing
| | Filed
|
| Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Date | | Herewith |
| |
| | 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 | | |
| | 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 | | |
| | 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 | | |
| | +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 | | |
90
| | | | | | | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
Exhibit
| | | | | | | | | | Filing
| | Filed
|
| Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Date | | Herewith |
| |
| | 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 between Illumina and Joel McComb | | 10-K | | 000-30361 | | | 10 | .34 | | 02/26/10 | | |
| | 10 | .35 | | Lease Agreement, dated December 30, 2010, between ARE-SD Region No. 32, LLC 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 |
| | 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 |
| | | | | | |
| 101 | .INS | | XBRL Instance Document | | X |
| 101 | .SCH | | XBRL Taxonomy Extension Schema | | X |
| 101 | .CAL | | XBRL Taxonomy Extension Calculation Linkbase | | X |
| 101 | .LAB | | XBRL Taxonomy Extension Label Linkbase | | X |
| 101 | .PRE | | XBRL Taxonomy Extension Presentation Linkbase | | X |
| 101 | .DEF | | XBRL Taxonomy Extension Definition Linkbase | | X |
| | |
| + | | Management contract or corporate plan or arrangement |
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.
91
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVESSIGNATURES
| | | | | | | | | |
| | | Allowance
| | | | |
| | | for Doubtful
| | | Reserve for
| |
| | | Accounts | | | Inventory | |
| | | (In thousands) | |
| |
| 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 | |
| Charged to expense | | | 893 | | | | 7,154 | |
| Utilizations | | | (295 | ) | | | (2,812 | ) |
| | | | | | | | | |
| Balance as of December 28, 2008 | | $ | 1,138 | | | $ | 6,431 | |
| | | | | | | | | |
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 28, 2011.
Illumina, Inc.
Jay T. Flatley
President and Chief Executive Officer
February 28, 2011
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
Jay T. Flatley | | President, Chief Executive Officer and Director (Principal Executive Officer) | | February 28, 2011 |
| | | | |
/s/ Christian O. Henry
Christian O. Henry | | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | | February 28, 2011 |
| | | | |
/s/ William H. Rastetter
William H. Rastetter | | Chairman of the Board of Directors | | February 28, 2011 |
| | | | |
/s/ A. Blaine Bowman
A. Blaine Bowman | | Director | | February 28, 2011 |
| | | | |
/s/ Daniel M. Bradbury
Daniel M. Bradbury | | Director | | February 28, 2011 |
| | | | |
/s/ Karin Eastham
Karin Eastham | | Director | | February 28, 2011 |
92
| | | | | | |
| | | | |
/s/ Paul Grint
Paul Grint | | Director | | February 28, 2011 |
| | | | |
Gerald Möller | | Director | | February 28, 2011 |
| | | | |
/s/ David R. Walt
David R. Walt | | Director | | February 28, 2011 |
| | | | |
/s/ Roy Whitfield
Roy Whitfield | | Director | | February 28, 2011 |
F-3693
