UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended January 1, 2012
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 Registrantregistrant as Specifiedspecified in Its Charter)charter)
| Delaware | 33-0804655 | |
(State or other incorporation or | ||
(I.R.S. Employer Identification No.) | ||
5200 Illumina Way San Diego, California | ||
| (Address of | ( | |
Registrant’s telephone number, including area code:
(858) 202-4500
Securities registered pursuant to Section 12(b) of the Act:
| Title of | Name of | |
| which registered | ||
| Common | 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 Registrantregistrant (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 Registrantregistrant 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 of Regulation 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’sregistrant’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):
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,January 31, 2012, there were 121,077,875 shares122,327,021shares (excluding 17,927,98344,674,339 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 3, 2011 (the last business day of the Registrant’sregistrant’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,July 1, 2011 (the last trading day before July 3, 2011), was $4,849,118,890.$9.3 billion. This amount excludes an aggregate of 2,556,098approximately 1.5 million shares of Common Stock held by officers and directors and each person known by the Registrantregistrant 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,registrant, or that the Registrantregistrant is controlled by or under common control with such person.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’sregistrant’s definitive proxy statement for the 2012 annual meeting of stockholders expected to be held on May 8, 2009 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, 2008JANUARY 1, 2012
TABLE OF CONTENTS
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Special Note Regarding Forward-Looking Statements
This Annual Reportannual report onForm 10-K may contain forward-looking statements contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934.1934, as amended. These statements relate todiscuss our current expectations concerning future results or events, orincluding our future financial performance. We have attempted to identifymake these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. These statements include, among others:
statements concerning our expectations as to our future financial performance, results of operations, or other operational results or metrics;
statements concerning the benefits that we expect will result from our business activities and certain transactions we have completed, such as product introductions, increased revenue, decreased expenses, and avoided expenses and expenditures; and
statements of our expectations, beliefs, future plans and strategies, anticipated developments (including new products), and other matters that are not historical facts.
These statements may be made expressly in this document or may be incorporated by terminology includingreference to other documents we have filed or will file with the Securities and Exchange Commission, or SEC. You can identify many of these statements by looking for words such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should”“should,” or “will” or the negative of these terms or other comparable terminology.terminology and similar references to future periods. These forward-looking statements are only predictionssubject to numerous assumptions, risks, and involve known and unknown risks, uncertainties and other factors, including the risks outlined under “Item 1A. Risk Factors” in this Annual Report, that may cause our actual results levels of activity, performance or achievementsevents to be materially different from any future results levels of activity, performance or achievementsevents expressed or implied by us in those statements. Many of the factors that will determine or affect 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 include:
our ability to maintain our revenue levels and profitability during periods of research funding reduction or uncertainty and adverse economic and business conditions, including as a result of slowing economic growth in the United States or worldwide;
our ability to further develop and commercialize our sequencing, array, PCR, and consumables technologies and to deploy new products and applications, and expand the markets, for our technology platforms;
our ability to manufacture robust instrumentation and consumables;
our expectations and beliefs regarding future prospects and growth of the business and the markets in which we operate;
the assumptions underlying our critical accounting policies and estimates, including our estimates regarding stock volatility and other assumptions used to estimate the fair value of share-based compensation; the future cash flows used to estimate the cease-use loss upon our exit of certain facilities; and expected future amortization of acquired intangible assets;
our belief that the investments we hold are reasonable,not other-than-temporarily impaired;
our assessments and estimates that determine our effective tax rate;
our belief that our cash and cash equivalents, investments, and cash generated from operations will be sufficient to meet our working capital, capital expenditures, and other liquidity requirements for at least the next 12 months;
our assessments and beliefs regarding the future outcome of pending legal proceedings and the liability, if any, that we cannot guarantee future results, levelsmay incur as a result of activity, performancethose proceedings; and
other factors detailed in our filings with the SEC, including the risks, uncertainties, and assumptions described in Item 1A “Risk Factors” below, or achievements. Accordingly, you should not unduly rely on thesein information disclosed in public conference calls, the date and time of which are released beforehand.
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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 uncertainties, we caution investors not to unduly rely on our forward-looking statements.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on our website, 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 SEC. The SEC also maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, to actual results, unless required by law. You should, however, review the factors and risks we describe in the reports weother information regarding issuers that electronically file from time to time with the SecuritiesSEC. Copies of our annual report on Form 10-K will be made available, free of charge, upon written request.
Illumina®, illuminaDx®, BaseSpace, BeadArray, BeadXpress®, cBot, CSPro®, DesignStudio, Eco, Epicentre®, GAIIx, Genetic Energy, Genome Analyzer, GenomeStudio®, GoldenGate®, HiScan®, HiSeq®, Infinium®, iSelect®, MiSeq®, Nextera®, Solexa®, TruSeq®, VeraCode®, the pumpkin orange color, and Exchange Commission.
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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,5200 Illumina Way, San Diego, California 92121.92122. 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 are designed to simplify genetic analysis. This portfolio addresses a range of genomic complexity, price points, and throughputs, enabling researchers to select the best solution for their scientific challenge. In 2007, through our acquisition of Solexa, Inc., we acquired our proprietary sequencing by synthesis (SBS) technology that is at the heart of our leading-edge sequencing instruments. These systems can be used to efficiently perform a range of nucleic acid (DNA, RNA) analyses 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 genotyping and copy number variation 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 specialty enzymes for sequencing and 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 most widely used technologies in life sciences. Our Eco Real-Time PCR System provides researchers around the worldwith an affordable, full-featured system to perform targeted validation studies.
Industry Background
Genetics Primer
The instruction set for all living cells is encoded in deoxyribonucleic acid, or DNA, with the performance, throughput, cost effectivenesscomplete 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 flexibility necessaryT, 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 to performdirect the billionssynthesis of a particular protein. Proteins, in turn, direct all cellular function. The illustration below is a simplified gene expression schematic.
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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 they 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, segments of a gene, or stretches of DNA.
In humans, genetic tests neededvariation accounts for many of the physical differences we see (e.g., height, hair, eye color, etc.). More importantly, these genetic variations can have medical consequences affecting disease susceptibility, including predisposition to extract valuable medical information from advancescomplex 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 genomicshumans, as well as a broad range of animals, plants, and proteomics. We believe this information will enable researchersmicroorganisms. Researchers investigating human, viral, and bacterial genetic variation are helping us to correlatebetter understand the mechanisms of disease, and thereby 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 and epigenetic analysis, each of which will enhance drug discoveryis addressed by our breadth of products and clinicalservices.
Life Sciences Research Primer
Life science research allow diseasesencompasses the study of all living things, from humans, animals, and plants, to be detected earlierviruses and permit better choicesbacteria. It is being performed in government, university, pharmaceutical, biotechnology, and agrigenomics laboratories around the world, where scientists are seeking to expand our knowledge of drugsthe biological functions essential for individual patients.
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, including assays 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 analyses, including whole genome re-sequencing, gene expression analysispotential molecular diagnostic assays. Our own efforts in this area are currently focused on the identification of certain genetic markers with potential diagnostic and small RNA analysis.therapeutic utility.
Growing news coverage about the clinical relevance of newly discovered genetic markers has prompted consumer interest in having 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.
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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 only companyemerging molecular diagnostics market.
Life Sciences Research Market
Our core business is in the life sciences research market, which consists of laboratories generally associated with genome-scale technology foruniversities, medical research centers, and government institutions, as well as biotechnology and pharmaceutical companies. Researchers at these institutions are using our products and services in a broad spectrum of scientific activities, such as: next-generation sequencing, mid-to-high-complexity genotyping and gene expression the three cornerstones of modern genetic analysis.
Applied Markets
We provide products and services for various other markets, which we refer to as “applied markets.” The largest among these is the “AgBio” market, where government and corporate researchers use our sequencing based technologies.and array-based tools to accelerate and enhance agricultural research. For example, we currently offer microarrays that contain SNPs for custom and focused genotyping of seeds and crops (such as maize, tomatoes, apples, and peaches), livestock (such as cattle, horses, pigs, and sheep), and companion animals (such as dogs). Customers use these tools to perform selective breeding through high-value trait screening methods, thereby accelerating and enhancing the process as compared to traditional methods such as cross-breeding. We believehave developed a high-growth recurring revenue business in both the livestock and agricultural segments, which represented approximately 12% of our DNA sequencing systems, coupled with complementary technologies from strategic investments, includingshipments on a dollar basis in 2011. Emerging opportunities in the acquisitionapplied markets include forensics and pet genomics.
Molecular Diagnostics Market
Molecular diagnostics is the fastest growing segment of Avantomethe diagnostics market. Genetics and our collaborative alliance with Oxford Nanopore Technologies will enable us to address numerous market segments with innovative solutions.
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In addition, as the molecular diagnostics market continues to evolve and emerge, we believe the translational and consumer genomic market will prove to be another opportunity for us. These markets include consumer based genetic solutions as well as clinical applications in which our technology can be used to offer comprehensive sequencing and genotyping service solutions to clinicians and consumers in laboratory settings.
Consumer Genomics Markets
New sequencing and genotyping technologies, such as those developed by Illumina, are millionsdriving down the cost of SNPs, itperforming these analyses, which we believe are increasingly valuable in diagnosing disease and evaluating disease risk.
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Consumer genomics is importanta nascent market, but one we believe has the potential for high growth as the cost per analysis continues to investigate many representative, well-chosen SNPs simultaneously indrop. 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 discover medically valuable information.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 personal genomes (such as calculation of disease risk, ancestry, and information on traits of interest). Some of our partners, as well as other companies in the direct-to-consumer market, use our genotyping technology and products to perform personal genotyping services.
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 8,000 customer-authored scientific publications have been published to diseasedate using these technologies, representing the efforts of a large and dysfunction isdynamic Illumina user community. Through rapid innovation, we believe we are changing the over- or under-expressioneconomics of genesgenetic research, enabling projects once considered unapproachable now to be within an organism’s cells. A very complex networkreach of genes interacts to maintain healthmore investigators.
Figure 1: Illumina Platform Overview:
* Commercially available 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 adventsecond half of microarray technology, thousands of genes can now be tested at the same time.2012.
DNA sequencing is the process of determining the order of nucleotide bases (A, C, G, or T) in a DNA sample, which can be further divided intosample. Our HiSeq 2500/2000, HiSeq 1500/1000, Genome Analyzer IIx, MiSeq, 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.
Whole-genome sequencing re-sequencing and tag sequencing.determines an organism's complete DNA sequence. Inde novosequencing, the goal is to determine the sequence of 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 manyand within species can helpfurthers our understanding of the function of the protein structures encoded in the DNA.
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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 fluorescence
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emitted 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 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 on our highest throughput sequencing instruments, the HiSeq 2500/2000, 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, HiScan, 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. In the course of six years, we have increased the content capacity on a single array from 100,000 markers to 20 million markers.
Our proprietary BeadArray technology consists of preparedmicroscopic silica beads, with 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.
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.
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
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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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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
Eco Real-Time PCR Technology
In 2010, we purchased Helixis, Inc. and its novel real-time PCR technology enables usand introduced the Eco Real-Time PCR System to servethe market. Real-Time PCR (also known as quantitative PCR or qPCR) is used to amplify and simultaneously quantify a numbertargeted 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 markets including research, agriculture, forensics, pharmaceuticalsDNA 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 molecular diagnostics.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.
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 variousour proprietary technologies. For the fiscal years ended December 28, 2008, December 30, 2007January 1, 2012, January 2, 2011, and December 31, 2006,January 3, 2010, instrument sales comprised 32%35%, 33%36%, and 23%34%, respectively, of total revenues, and consumable sales represented 58%56%, 53%56%, and 54%59%, respectively, of total revenues.
Sequencing Platforms
Based on our proprietary SBS technology, our next-generation sequencing platforms are designed to meet the workflow, output, and accuracy demands of a full range of sequencing applications. Designed for high-throughput (up to 600 Gb per run or 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 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. Launched in 2011, our MiSeq Personal Sequencing System delivers the fastest time to an answer (as little as 2-3 hours following mid-2012 performance enhancements) and offers a breadth of sequencing applications in a compact and economical instrument to meet the needs of individual researchers. In January 2012, we announced the HiSeq 2500 sequencing system, which will allow customers to sequence an entire human genome in approximately a day (up to 120 Gb in 27 hours or 600 Gb
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per run). Commercial shipments of the HiSeq 2500 are expected to commence in the second half of 2012.
Sequencing/Array Combination Platforms
The HiScanSQ combines our SBS sequencing technology and HiScan 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 HiScan and iScan Systems are dedicated array scanners that support the rapid, sensitive, and accurate imaging of our array-based genetic analysis products. They incorporate high-performance lasers, optics, and detection systems, delivering sub-micron resolution and unmatched throughput rates. The HiScan and iScan support our Infinium, GoldenGate, DASL, gene expression, and methylation assays. Our major products include the following: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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We have been offeringdeveloped a variety of sample preparation and sequencing serviceskits 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 Genome Analyzers since 2007. Our services range from small setssequencing platforms) and Infinium Assay Kit (array-based genotyping on our array platforms). Others support more discrete analyses, such as our Paired-End Genomic DNA Sample Prep Kit for streamlining library preparation for the generation of samples requiring as little as one run to finish, to large-scale projects, like whole-genome200-500 kb insert paired-end reads for sequencing, necessitating multiple instruments running in parallel for extended periods of time. 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 basedand epigenetic analysis. Our TruSeq SBS Sequencing Kit enhances sequencing studies with our HiSeq, 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 acquisition of Epicentre Technologies Corporation in 2011, we acquired the proprietary Nextera technology for next-generation sequencing library preparation. This technology has enabled us to offer sequencing library preparation kits with lower sample input requirements that greatly simplify genetic analysis workflows and significantly reduce the time from sample preparation to answer.
Our InfiniumHD Whole-Genome BeadChips represent our most technologically advanced multi-sample DNA analysis microarrays, enabling the interrogation of up to approximately 5 million markers per sample, depending on the BeadChip. The most recent additions to the Omni family, the HumanOmni5-Quad, the HumanOmni2.5, and the 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 using random primed RNA samplingare 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.
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 ChIP SEQin their research.
Our Services
In addition to the products we supply to customers, we also provide sequencing and methylome interrogation.genotyping services through our CLIA-certified, CAP-accredited laboratory.
One of the ways in which we compete and extend the reach of our systems in the genetic analysis market is to deliver services that leverage our proprietary technologies and the expertise of our scientists to perform genotyping and sequencing
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services for our customers. We have beenbegan offering genotyping services to academic institutions, biotechnology, and pharmaceutical customers in 2002. The in-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, and biotech and pharmaceutical companies.
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 analytical capabilities of our FastTrack Sequencing team to execute high-value projects such as whole-genome sequencing, targeted resequencing, digital expression profiling, and 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 a three-phased Illumina certification process. There are over 65 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. The IGN provides a cost-effective and dependable way to complete large sequencing projects. All IGN partners are experienced and well-published using Illumina technology, and each has completed Illumina's Certified Service Provider (CSPro) certification. Each IGN partner possesses ten or more Illumina sequencing systems (HiSeq 2000 systems and/or Genome Analyzers), providing the scalability to handle even the largest sequencing projects with rapid completion times. Current members include: British Columbia Cancer Agency's Genome Science Centre, University of Washington Department of Genome Sciences, National Center for Genome Resources, Macrogen/Genomic Medicine Institute, and Illumina's own FastTrack Services.
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 a seven-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, 2009,2012, ownership of, or exclusive licenses to, 135235 issued U.S. patents and 168173 pending U.S. patent applications, including four11 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 20102012 and 2026.2030. 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 20102012 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, BeadArray, VeraCode and Oligator technologies and to support commercialization of the products and services derived from theseour 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,fiscal 2011, 2010, and 2006 (inclusive of charges relating to stock-based compensation of $14.12009 were $196.9 million $10.0, $177.9 million, and $3.9$140.6 million respectively) were $100.0 million, $73.9 million and $33.4 million,, respectively. We expect research and development expense to increase during 20092012 as a result of the growth of our business and 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, agri-genomics, 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:
the ability of the research community to extract medically valuable information from genomics and to apply that knowledge to multiple areas of disease-related research and treatment;
the availability of sufficiently low cost, high-throughput research and analysis tools to enable the large amount of experimentation and analysis required to study genetic variation and biological function; and
the availability of government and private industry funding to perform the research required to extract medically relevant information from genomic analysis.
We market and distribute our products directly to customers in North America, 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 20092012 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 2011 to support our increased customer demand during 2008. In the third quarter of 2008, we began shipping BeadChips from our new Singapore facility. We are also focused on continuing to enhance the quality and manufacturing yield of our Array Matrices, BeadChips and FlowCells.demand. 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
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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 Beckman Coulter,Technologies, Inc.; Complete Genomics, Fluidigm, GEInc.; Helicos BioSciences Corporation; General Electric Company; Life Technologies Corporation; Luminex Corporation; Pacific Biosciences of California, Inc.; QIAGEN N.V.; and Roche Diagnostics Corp., Life Technologies, Luminex, Pacific Biosciences, Roche Diagnostics and Sequenom.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
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$526.8 million, or 51%50% of our total revenue, during 2008,fiscal 2011, compared to $159.1$403.8 million, or 43%45%, and
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Our backlog was $250.5 million and $299.0 million at January 1, 2012 and January 2, 2011, 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 1, 2012 to be shipped within the fiscal year ending December 30, 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.
Seasonality
Historically, customer purchasing patterns have not shown significant seasonal variation, although demand for our
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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 government’sU.S. government's fiscal year on September 30 of each year. During 2011, however, the U.S. government extended the timeframe over which the unused budget allocations could be utilized, which led to purchasing delays from some of our customers.
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.
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 be certain that any molecular diagnostic products that we develop will be subject to the shorter 510(k) clearance process, or will ultimately be approved at all, the regulatory approval process for such products may be significantly delayed and may be significantly more expensive than anticipated. If we fail to obtain, or experience significant delays in obtaining, regulatory approvals for molecular diagnostic products that we develop, we may not be able to launch or successfully commercialize such products in a timely manner, or at all.
Changes to the current regulatory framework, including the imposition of additional or new regulations, could arise at any time during the development or marketing of our products, which may negatively affect our ability to obtain or maintain FDA or comparable regulatory approval of our products, if required.
In addition, the regulatory approval or clearance process required to manufacture, market, and sell our existing and future products that are intended for, and marketed and labeled as, “Research Use Only,” or RUO, is uncertain if such products are used or could be used, even without our consent, for the diagnosis of disease. If the FDA or other regulatory authorities assert that any of our RUO products are subject to regulatory clearance or approval, our business, financial condition, or results of operations could be adversely affected.
Employees
As of December 28, 2008,January 1, 2012, we had a total of 1,536approximately 2,200 employees. None of our employees are 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.
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| ITEM 1A. | Risk |
Our business is subject to various risks, including those described below. In addition to the other information included in thisForm 10-K, the following issues could adversely affect our operating results or our stock price.
We expect intense competitionare subject to a takeover bid that may be disruptive to our business and threatens to adversely affect our business, financial condition, or results of operations.
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CKH Acquisition Corp. and Roche Holding Ltd. (together, “Roche”) have commenced an unsolicited hostile cash tender offer to purchase all of our outstanding common stock. The Roche tender offer is subject to numerous conditions, some of which are at the discretion of Roche. Roche also announced that it intends to oppose the re-election of four directors serving on our board of directors whose terms expire at the 2012 annual meeting of stockholders, including the Chairman of the Board and our Chief Executive Officer. In connection with the Roche tender offer, four stockholder class action lawsuits have been filed against us, and we anticipate that additional lawsuits may be filed. Responding to the Roche tender offer, the adverse proxy solicitation, and the lawsuits may be a major distraction for management and may require us to incur significant costs. Moreover, the hostile and unsolicited nature of the offer may disrupt our business by causing uncertainty among current and potential employees, producers, suppliers, customers, and other constituencies important to our success, which could negatively impact our financial results and business initiatives. We believe the future trading price of our common stock is likely to be volatile and could be subject to wide price fluctuations based on many factors, including uncertainty associated with the unsolicited offer by Roche.
Our Certificate of Incorporation and Bylaws include anti-takeover provisions that may make it difficult for another company to acquire control of us or limit the price investors might be willing to pay for our stock.
Certain provisions of our Certificate of Incorporation and Bylaws could delay the removal of incumbent directors and could make it more difficult to successfully complete a merger, tender offer, or proxy contest involving us. These provisions include our Preferred Shares Rights Agreement (“Rights Agreement”), commonly known as a “poison pill” and provisions in our target markets,Certificate of Incorporation that give our Board the ability to issue preferred stock and determine the rights and designations of the preferred stock at any time without stockholder approval. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding voting stock. In addition, the staggered terms of our board of directors could have the effect of delaying or deferring a change in control. One of the conditions of the Roche tender offer is the removal or amendment of our Rights Agreement such that Roche’s acquisition of our stock would not trigger the provisions of the Rights Agreement. To date, our board has not agreed to such removal or amendment.
In addition, certain provisions of the Delaware General Corporation Law (“DGCL”), including Section 203 of the DGCL, may have the effect of delaying or preventing changes in the control or management of Illumina. Section 203 of the DGCL provides, with certain exceptions, for waiting periods applicable to business combinations with stockholders owning at least 15% and less than 85% of the voting stock (exclusive of stock held by directors, officers, and employee plans) of a company.
The above factors may have the effect of deterring hostile takeovers or otherwise delaying or preventing changes in the control or management of Illumina, including transactions in which our stockholders might otherwise receive a premium over the fair market value of our common stock.
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.
The timing and amount of revenues from customers that rely on government and academic research funding may vary significantly due to factors that can be difficult to forecast, and there remains significant uncertainty concerning government and academic research funding worldwide as governments in the United States and Europe, in particular, focus on reducing fiscal deficits while at the same time confronting slowing economic growth. Research funding for life science research has increased more slowly during the past several years compared to previous years and has declined in some countries. Government funding of research and development is subject to the political process, which is inherently fluid and unpredictable. Other programs, such as defense, entitlement programs, or general efforts to reduce budget deficits could be viewed by governments as a higher priority. These budgetary pressures may result in reduced allocations to government
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agencies that fund research and development activities, such as the U.S. National Institute of Health, or NIH. Past proposals to reduce budget deficits have included reduced NIH and other research and development allocations. Any shift away from the funding of life sciences research and development or delays surrounding the approval of government budget proposals may cause our customers to delay or forego purchases of our products, which could adversely affect our business, financial condition, or results of operations.
We face intense competition, which could render our products obsolete, result insignificant price reductions, or substantially limit the volume of products that wesell. 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 enhancements toor supply new products, our technology and rapidly deploy new product offerings, our business, financial condition and results of operations willcompetitive position may suffer.
The recent economic conditionsmarket for molecular diagnostics products is currently limited and highly competitive, with several large companies already having significant market turbulence may impact the operationsshare, intellectual property portfolios, and regulatory expertise. Established diagnostic companies also have an installed base of certaininstruments in several markets, including clinical and reference laboratories, which could deter acceptance of our customers and suppliers. Certainproducts. In addition, some of our customers may face challenges gaining timelythese companies have formed alliances with genomics companies that provide them access to sufficient credit, which could result in an impairment of their ability to make timely payments to us. Ifgenetic information 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.
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If we lose our key personnel or are unable to attract and retain additionalpersonnel, we may be unable to achieve our goals.
We are highly dependent on our management and scientific personnel, including Jay Flatley, our presidentPresident and chief executive officer.Chief Executive Officer. The loss of their services could adversely impact our ability to achieve our business objectives. We will needThe hostile and unsolicited nature of the Roche offer coupled with Roche's efforts to oppose the re-election of Mr. Flatley to our board of directors at the 2012 annual meeting of stockholders may adversely affect our business by causing uncertainty among current and potential employees. In addition, the continued growth of our business depends on our ability to hire additional qualified personnel with expertise in molecular biology, chemistry, biological information processing, sales, marketing, and technical support. We compete for qualified management and scientific personnel with other life science companies, universities, and research institutions, particularly those focusing on genomics. Competition for these individuals, particularly in the San Diego and San Francisco area, is intense, and the turnover rate can be high. Failure to attract and retain management and scientific personnel would prevent us from pursuing collaborations or developing our products or technologies. 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.
Our planned activities will require additional expertisesuccess depends upon the continued emergence and growth of markets for analysisof genetic variation and biological function.
We design our products primarily for applications in specific industries and areas applicable to the products developed through our technologies, including the life sciences, diagnostic, agricultural, and healthcarepharmaceutical 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 growthusefulness of our business.
technologies depends in part upon the availability of genetic data and its usefulness in identifying or treating disease. We are focusing on markets for analysis of genetic variation and biological function, namely sequencing, genotyping, and gene expression profiling. These markets are new and emerging, and they may encounter difficulties in managing our growth. These difficulties could impair our profitability.
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disease susceptibility through genome wide association studies. In addition, we are also subject to general geopolitical risks,factors affecting research and development spending generally, such as political, socialchanges in the regulatory environment affecting life sciences and economic instabilitypharmaceutical companies, and changes in diplomaticgovernment programs that provide funding to companies and trade relations. Oneresearch institutions, could harm our business. If useful genetic data is not available or moreif our target markets do not develop in a timely manner, demand for our
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products may grow at a slower rate than we expect, and we may not be able to sustain profitability.
If the quality of our products does not meet our customers' expectations, then our reputation could suffer and ultimately oursales and operating earnings could be negativelyimpacted.
In the course of conducting our business, we must adequately address quality issues associated with our products and services, including defects in our engineering, design, and manufacturing processes, as well as defects in third-party components included in our products. Because our instruments and consumables are highly complex, the occurrence of defects may increase as we continue to introduce new products and services and as we scale up manufacturing to meet increased demand for our products and services. Although we have established internal procedures to minimize risks that may arise from product quality issues, there can be no assurance that we will be able to eliminate or mitigate occurrences of these factorsissues 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 have a material adverse effect onrecur. Finding solutions to quality issues can be expensive, and we may incur significant costs or lost revenue in connection with, for example, shipment holds, product recalls, and warranty or other service obligations. In addition, quality issues can impair our business, financial conditionrelationships with new or existing customers and operating results.
Our continued growth is dependent on continuously developing and commercializing newproducts.
Our target markets are characterized by rapid technological change, evolving industry standards, changes in customer needs, existing and emerging competition, strong price competition, and frequent new product introductions. Accordingly, our continued growth depends on continuously developing and commercializing new products and services, including improving our existing products and services, in order to address evolving market requirements on a timely basis. If we fail to innovate or adequately invest in new technologies, our products and services will become dated, and we could lose our competitive position in the markets that we serve as customers purchase new products offered by our competitors. We believe that successfully introducing new products and technologies in our target markets on a timely basis provides a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product and may be reluctant to switch once that selection is made.
To the extent that we fail to introduce new and innovative products, or such products are not accepted in the market or suffer significant delays in development, we may lose market share to our competitors, which will be difficult or impossible to regain. An inability, for technological or other reasons, to develop successfully and timely introduce new products could reduce our growth rate or otherwise have an adverse effect on our business. In the past, we have experienced, and are likely to experience in the future, delays in the development and introduction of new products. There can be no assurance that we will keep pace with the rapid rate of change in our markets or that our new products will adequately meet the requirements of the marketplace, achieve market acceptance, or compete successfully with competing technologies. Some of the factors affecting market acceptance of new products and services include:
availability, quality, and price relative to competing products and services;
the functionality and performance of new and existing products and services;
the timing of introduction of new products or services relative to competing products and services;
scientists' and customers' opinions of the utility of new products or services;
citation of new products or services in published research;
regulatory trends and approvals; and
general trends in life sciences research and applied markets.
We may also have to write off excess or obsolete inventory if sales of our products are not consistent with our expectations or the market requirements for our products change due to technical innovations in the marketplace.
If we do not successfully manage the development, manufacturing, and launch of new products orservices, including product transitions, our financial results could be adverselyaffected.
We face risks associated with launching new products and pre-announcing products and services when the products or services have not been fully developed or tested. If our products and services are not able to deliver the performance or results
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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 the 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.
We depend on third-party manufacturers and suppliers for components and materialsused in our products, and if shipments from these manufacturers or suppliers aredelayed or interrupted, or if the quality of the components or materials supplied donot meet our requirements, we may not be able to launch, manufacture, or ship ourproducts 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, and, in the case of some components and materials, from only a single source. If deliveries from these vendors are delayed or interrupted for any reason, or if we are otherwise unable to secure a sufficient supply, we may not be able to obtain these components or materials on a timely basis 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 there can be no assurance that we will be able to do this on a timely basis, in 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 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. Current or future social and environmental regulations or critical issues, such as those relating to the sourcing of conflict minerals from the Democratic Republic of the Congo or the need to eliminate environmentally sensitive materials from our products, could restrict the supply of components and materials used in production or increase our costs. 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 are unable to increase our manufacturing capacity and develop and maintainoperation of our manufacturing capability, we may not be able to launch or supportour 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 current business plans, 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 manufacture our products, provide our services, or develop new products.
Also, many of our manufacturing processes are automated and are controlled by our custom-designed laboratory information management system (LIMS). Additionally, the decoding process in our array manufacturing requires significant network and storage infrastructure. If either our LIMS system or our networks or storage infrastructure were to fail for an extended period of time, it may adversely impact our ability to manufacture our products on a timely basis and could prevent us
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from achieving our expected shipments in any given period.
Our acquisitions expose us to risks that could adversely affect our business, and wemay not achieve the anticipated benefits of acquisitions of businesses ortechnologies.
As part of our strategy to develop and identify new products, services, and technologies, we have made, and may continue to make, acquisitions of technologies, products, or businesses. Acquisitions involve numerous risks and operational, financial, and managerial challenges, including the following, any of which could adversely affect our business, financial condition, or results of operations:
difficulties in integrating new operations, technologies, products, and personnel;
lack of synergies or the inability to realize expected synergies and cost-savings;
difficulties in managing geographically dispersed operations;
underperformance of any acquired technology, product, or business relative to our expectations and the price we paid;
negative near-term impacts on financial results after an acquisition, including acquisition-related earnings charges;
the potential loss of key employees, customers, and strategic partners of acquired companies;
claims by terminated employees and shareholders of acquired companies or other third parties related to the transaction;
the issuance of dilutive securities, assumption or incurrence of additional debt obligations or expenses, or use of substantial portions of our cash;
diversion of management's attention and company resources from existing operations of the business;
inconsistencies in standards, controls, procedures, and policies;
the impairment of intangible assets as a result of technological advancements, or worse-than-expected performance of acquired companies; and
assumption of, or exposure to, unknown contingent liabilities or liabilities that are difficult to identify or accurately quantify.
In addition, the successful integration of acquired businesses requires significant efforts and expense across all operational areas, including sales and marketing, research and development, manufacturing, finance, legal, and information technologies. There can be no assurance that any of the acquisitions we make will be successful or will be, or will remain, profitable. Our failure to successfully address the above risks may prevent us from achieving the anticipated benefits from any acquisition in a reasonable time frame, or at all.
Any inability to effectively protect effectively our proprietary technologies could harm ourcompetitive 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 patentproprietary positions of companies developing tools for the life sciences, genomics, agricultural, and pharmaceutical industries, including our patentproprietary 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. 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
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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 also is risk that othersproducts and may independently develop similar or alternative technologies or design around our patented technologies. Also, our patents maytherefore 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. There is also the risk that others may independently develop similar or alternative technologies or design around our patented technologies. In that regard, 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 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.
Litigation, or other proceedings, or third party claims of intellectual propertyinfringement could require us to spend significant time and money and could preventus 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 or introduce new products, 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.competition. 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.
Our products, if used for the diagnosis of disease, could be subject to governmentregulation, and the regulatory approval and maintenance process for such products maybe 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
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regulatory approvals can be expensive and may involve considerable delay. If we fail to obtain, or experience significant delays in obtaining, regulatory approvals for molecular diagnostic products that we develop, we may not be able to launch or successfully commercialize such products in a timely manner, or at all.
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.
Doing business internationally creates operational and financial risks for ourbusiness.
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 2011, 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 50%, 45%, and 48% of our total revenue for the years ended January 1, 2012, January 2, 2011, and January 3, 2010, 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 of non-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;
longer sales cycles due to the volume of transactions taking place through public tenders;
currency exchange fluctuations;
challenges in staffing and managing foreign operations;
tariffs and other trade barriers;
unexpected changes in legislative or regulatory requirements of foreign countries into which we sell our products;
difficulties in obtaining export licenses or in overcoming other trade barriers and restrictions resulting in delivery delays; and
significant taxes or other burdens of complying with a variety of foreign laws.
Changes in the value of the 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 thepossible 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
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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 outstanding convertible notes 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.
An inability to manage our growth or the expansion of our operations could adverselyaffect 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 $1,055.5 million for the year ended January 1, 2012 and with the number of employees increasing from 375 to approximately 2,200 during the same period. We expect to continue to experience substantial growth in order to achieve our operating plans. The continued global 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 to increasescale up and implement improvements to our manufacturing capacityprocess and developcontrol systems in an efficient or timely manner, or if we encounter deficiencies in existing systems and maintain operation of our manufacturing capability,controls, then we maywill not be able to launch or supportmake available the products required to successfully commercialize our products in a timely manner, or at all.
Our operating results may vary significantly from period to period, and we may not beable 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.sustain operating profitability.
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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 timing and availability of our customers' funding, the impact of seasonal spending patterns, the timing and size of research projects our customers perform, 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.
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Changes in accounting standards and subjective assumptions, estimates, and judgmentsby management related to complex accounting matters could significantly affect ourfinancial 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.
Ethical, legal, and social concerns related to the use of genetic variation and biological function.
Our products may grow atbe used to provide genetic information about humans, agricultural crops, and other living organisms. The information obtained from our products could be used in a slower rate than we expect,variety of applications, which may have underlying ethical, legal, and we may not be able to sustain profitability.
Our strategic equity investments may result in losses.
We periodically make strategic equity investments in various public and private companies with businesses or technologies that may complement our business. 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 market price and valuations of the securities that we hold in other companies would require us to record losses in proportion to our ownership interest. This could result in future charges to our earnings. It is uncertain whether or not we will realize any long-term benefits associated with these strategic investments.
Conversion of our outstanding convertible notes.notes may result in losses.
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| Unresolved Staff Comments. |
None.
| Properties. |
The following chart indicatessummarizes the facilities we lease as of December 28, 2008,January 1, 2012, 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 | |||||||
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| Approximate | Lease | ||||||
| Location | Square Feet | Operation | Expiration Dates | ||||
| San Diego, CA | 670,000* | R&D, Manufacturing, Storage, | 2012 – 2031 | ||||
| Distribution, and Administrative | |||||||
| Hayward, CA | 109,000 | R&D, Manufacturing, and Administrative | 2013 – 2014 | ||||
| Singapore | 68,000 | Manufacturing and Administrative | 2013 – 2015 | ||||
| Eindhoven, the Netherlands | 42,000 | Distribution and Administrative | 2015 | ||||
| Little Chesterford, United Kingdom | 42,000 | R&D, Manufacturing, and Administrative | 2024 | ||||
| Madison, WI | 33,000 | R&D, Manufacturing, and Administrative | 2012 | ||||
| Other | 35,000 | R&D, Manufacturing, Sales, and Administrative | 2012 – 2015 | ||||
______________________
*In February 2008,December 2010, we agreed to lease an additionala facility in Little Chesterford, United Kingdom that isSan Diego, California to serve as our new corporate headquarters, and we began the relocation process in late 2011. Although we expect to sublease our former corporate headquarters, comprising approximately 200,000 square feet, we have included the square footage in the process of being constructedtable above as we will continue to be subject to rent and lease obligations for research and development, manufacturing and administrative purposes. Thisour former facility covers approximately 41,500 square feet. We expect to occupy this new building by the end of 2009.through October 2023.
| Legal Proceedings. |
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PART II
| 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.
| 2008 | 2007 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| First Quarter | $ | 38.30 | $ | 27.89 | $ | 21.10 | $ | 14.06 | ||||||||
| Second Quarter | 43.50 | 34.90 | 21.04 | 14.47 | ||||||||||||
| Third Quarter | 47.88 | 36.97 | 26.94 | 20.02 | ||||||||||||
| Fourth Quarter | 42.32 | 18.82 | 31.69 | 25.17 | ||||||||||||
| 2011 | 2010 | ||||||||||||||
| High | Low | High | Low | ||||||||||||
| First Quarter | $ | 74.12 | $ | 61.87 | $ | 40.90 | $ | 29.76 | |||||||
| Second Quarter | 76.81 | 65.41 | 45.72 | 36.70 | |||||||||||
| Third Quarter | 79.40 | 39.82 | 50.93 | 41.15 | |||||||||||
| Fourth Quarter | 40.53 | 25.57 | 66.59 | 47.70 | |||||||||||
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, 200331, 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, 2009January 31, 2012 we had 476231 record holders and 56,709 beneficial holders of our common stock.
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Dividends
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Purchases of Equity Securities by the Issuer
| 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 | ||||||||||
In addition, concurrently with the issuance of our convertible senior notes due 2016 in March 2011, 4,890,500 shares were repurchased for $314.3 million.
Sales of Unregistered Securities
None during the fourthfiscal quarter of fiscal 2008.ended January 1, 2012.
| 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 1, 2012.
Statement of Operations Data
| Year Ended | Year Ended | Year Ended | Year Ended | Year Ended | ||||||||||||||||
| December 28, | December 30, | December 31 | January 1, | January 2, | ||||||||||||||||
| 2008 | 2007 | 2006 | 2006 | 2005 | ||||||||||||||||
| (52 weeks) | (52 weeks) | (52 weeks) | (52 weeks) | (53 weeks) | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
| Total revenue | $ | 573,225 | $ | 366,799 | $ | 184,586 | $ | 73,501 | $ | 50,583 | ||||||||||
| Income (loss) from operations(1),(2),(3) | 80,457 | (301,201 | ) | 37,812 | (21,447 | ) | (5,513 | ) | ||||||||||||
| Net income (loss) | 50,477 | (278,359 | ) | 39,968 | (20,874 | ) | (6,225 | ) | ||||||||||||
| Net income (loss) per share: | ||||||||||||||||||||
| Basic | 0.43 | (2.57 | ) | 0.45 | (0.26 | ) | (0.09 | ) | ||||||||||||
| Diluted | 0.38 | (2.57 | ) | 0.41 | (0.26 | ) | (0.09 | ) | ||||||||||||
| Shares used in calculating net income (loss) per share(4): | ||||||||||||||||||||
| Basic | 116,855 | 108,308 | 89,002 | 80,294 | 71,690 | |||||||||||||||
| Diluted | 133,607 | 108,308 | 97,508 | 80,294 | 71,690 | |||||||||||||||
| Years Ended | |||||||||||||||||||
January 1, 2012 (52 weeks) | January 2, 2011 (52 weeks) | January 3, 2010 (53 weeks) | December 28, 2008 (52 weeks) | December 30, 2007 (52 weeks) | |||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||
| Total revenue | $ | 1,055,535 | $ | 902,741 | $ | 666,324 | $ | 573,225 | $ | 366,799 | |||||||||
| Income (loss) from operations(1),(2) | 199,461 | 211,654 | 125,597 | 80,457 | (301,201 | ) | |||||||||||||
| Net income (loss) | 86,628 | 124,891 | 72,281 | 39,416 | (287,305 | ) | |||||||||||||
| Net income (loss) per share: | |||||||||||||||||||
| Basic | $ | 0.70 | $ | 1.01 | $ | 0.59 | $ | 0.34 | $ | (2.65 | ) | ||||||||
| Diluted | $ | 0.62 | $ | 0.87 | $ | 0.53 | $ | 0.30 | $ | (2.65 | ) | ||||||||
| Shares used in calculating net income (loss) per share: | |||||||||||||||||||
| Basic | 123,399 | 123,581 | 123,154 | 116,855 | 108,308 | ||||||||||||||
| Diluted | 138,937 | 143,433 | 137,096 | 133,607 | 108,308 | ||||||||||||||
Balance Sheet Data
| December 28, | December 30, | December 31, | January 1, | January 2, | ||||||||||||||||
| 2008 | 2007 | 2006 | 2006 | 2005 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Cash, cash equivalents and short-term investments(3),(5),(6),(7) | $ | 640,075 | $ | 386,082 | $ | 130,804 | $ | 50,822 | $ | 66,994 | ||||||||||
| Working capital | 355,379 | 397,040 | 159,950 | 57,992 | 64,643 | |||||||||||||||
| Total assets | 1,377,100 | 987,732 | 300,584 | 100,610 | 94,907 | |||||||||||||||
| Current portion of long-term debt(7) | 399,999 | — | — | — | — | |||||||||||||||
| Long-term debt, less current portion(7) | — | 400,000 | — | 54 | — | |||||||||||||||
| Total stockholders’ equity(1),(5),(6) | 848,596 | 411,678 | 247,342 | 72,497 | 72,262 | |||||||||||||||
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| January 1, 2012 | January 2, 2011 | January 3, 2010 | December 28, 2008 | December 30, 2007 | |||||||||||||||
| (In thousands) | |||||||||||||||||||
| Cash, cash equivalents and short-term investments(2),(3),(4),(5) | $ | 1,189,568 | $ | 894,289 | $ | 693,527 | $ | 640,075 | $ | 386,082 | |||||||||
| Working capital | 1,307,039 | 723,881 | 540,354 | 483,113 | 397,040 | ||||||||||||||
| Total assets | 2,195,840 | 1,839,113 | 1,429,937 | 1,327,171 | 929,981 | ||||||||||||||
| Long-term debt, current portion(5) | — | 311,609 | 290,202 | 276,889 | 16 | ||||||||||||||
| Long-term debt, less current portion(5) | 807,369 | — | — | — | 258,007 | ||||||||||||||
| Total stockholders’ equity(1),(2),(3),(4) | 1,075,215 | 1,197,675 | 864,248 | 798,667 | 353,927 | ||||||||||||||
In addition to the following notes, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations,” and Item 8, “Financial Statements and Supplementary Data”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. | |
| (2) | For the fiscal year ended December 30, 2007, we recorded a $54.0 million charge for the settlement of |
| (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 |
For the fiscal years ended January 1, 2012, January 2, 2011, January 3, 2010, December 28, 2008, and December 30, 2007, we repurchased9.2 million, 0.8 million, 6.1 million, 3.1 million, and 14.8 million shares, respectively, of common stock for $570.3 million, $44.0 million, $175.1 million, $70.8 million, and $251.6 million, respectively. See |
During 2011, we issued $920.0 million principal amount of 0.25% Convertible Senior Notes due 2016, which was classified as long-term liability as of January 1, 2012. In February 2007, we issued $400.0 million principal amount of 0.625% Convertible Senior Notes due 2014. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Business Overview and Outlook. High level discussion of our operating results and significant known trends that affect our business.
Results of Operations. Detailed discussion of our revenues and expenses.
Liquidity and Capital Resources. Discussion of key aspects of our statements of cash flows, changes in our financial position, and our financial commitments.
Off-Balance Sheet Arrangements. We have no significant off-balance sheet arrangements.
Contractual Obligations. Tabular disclosure of known contractual obligations as of January 1, 2012.
Critical Accounting Policies and Estimates. Discussion of significant changes since our most recent Annual Report onForm 10-K. The discussion and analysis in this Annual Report onForm 10-K that we believe are important to understanding the assumptions and judgments underlying
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our financial statements.
This MD&A discussion contains forward-looking statements that involve risks and uncertainties,uncertainties. Please see “Special Note Regarding Forward-Looking Statements” for additional factors relating to such as statements, and see “Risk Factors” in Item 1A of this report for a discussion of certain risk factors applicable to our business, financial condition, and results of operations. Operating results are not necessarily indicative of results that may occur in future periods.
Business Overview and Outlook
This overview and outlook provides a high level discussion of our plans, strategies, objectives, expectations, intentionsoperating results 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 negativessignificant known trends that affect our business. We believe that an understanding of these words, may identify forward-looking statements, buttrends is important to understanding our financial results for 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.
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 theaddress a 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 instruments, consumables, and analysis tools provide researchers aroundare designed to simplify genetic analysis. This portfolio addresses the world with the performance, throughput, cost effectivenessfull 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.
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, this discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto in Item 1, Part I of this report, and the other transactions, events, and trends discussed in “Risk Factors” in Item 1A, Part I of this report.
Funding Environment
Many of our customers receive funding from government agencies to purchase our instruments, products, and services. There remains significant uncertainty concerning government and academic research funding worldwide as governments in the United States and Europe, in particular, focus on reducing fiscal deficits while at the same time confronting slowing economic growth. We estimate that approximately one-third of our total revenue is derived, directly or indirectly, from funding provided by the U.S. National Institute of Health (NIH). After growing steadily through 2010, the NIH budget experienced an approximate 1% reduction in fiscal 2011, which ended on September 30, 2011, compared to fiscal 2010. Based on the fiscal year 2012 Congressional budget, the adjusted fiscal 2012 NIH budget increased 1% as compared to fiscal 2011 levels. The significance and timing of any reductions to the NIH budget beyond fiscal 2012 will be significantly impacted by the sequestration provisions of the Budget Control Act of 2011, which was enacted on August 2, 2011, and by whether these provisions remain in effect. In addition, the U.S. Department of Health and Human Services (HHS), of which the NIH is a part, has the ability to reallocate funds within its budget to spare the NIH from the full effect of HHS budget reductions. We continue to believe that allocations within the NIH budget will continue to favor genetic analysis tools and, in particular, next-generation sequencing.
We believe the uncertainty surrounding the levels of government and academic research funding in the United States and Europe will continue in 2012, which could lead to purchasing delays and could negatively impact our business.
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Next-Generation Sequencing
Next-generation sequencing has become a core technology for modern life science research. Over the next several years, expansion of the sequencing market, including an increase in the number of samples available, and enhancements in our product portfolio will continue to drive demand for our next-generation sequencing technologies. In 2011, we launched new, higher-throughput sequencing consumable kits that enable our customers to sequence a greater number of samples in a single instrument run. We believe that this increased throughput created excess capacity that customers were unable to fully utilize due to a short-term lack of available samples, which resulted in lower consumable sales per instrument and negatively affected sequencing instrument sales in the second half of 2011. We believe that this excess capacity will diminish as customers scale and gain access to greater numbers of samples.
With respect to sequencing instruments, we began commercial shipments in the third quarter of 2011 of our previously 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 MiSeq will expand our presence in the lower throughput sequencing market. In January 2012, we announced the HiSeq 2500 sequencing system, which will allow customers to sequence an entire human genome in approximately a day (up to 120 Gb in 27 hours or 600 Gb per run). Full commercial shipments of the HiSeq 2500 are expected to commence in the second half of 2012.
With respect to sequencing consumables, we experienced an overall increase in sequencing consumable sales despite a decrease in the consumable revenue per instrument in 2011 compared to 2010. The increase in total sequencing consumable sales was driven by the growth of our sequencing installed base. We believe the decrease in consumable revenue per instrument was driven, in part, by funding uncertainty and the excess capacity created from the higher throughput of our new sequencing kits. As we continue to make improvements that reduce the cost of sequencing, we believe that more customers will use the HiSeq platform, which generates more revenue per instrument time than the Genome Analyzer, and that the increased capacity from our higher throughput sequencing kits will be more fully utilized as additional samples become increasingly available over the next few quarters. We believe that our sequencing consumable revenue will grow in future periods with the launch of MiSeq and the growth in our HiSeq installed base.
MicroArrays
As a complement to next-generation sequencing, we believe microarrays offer a less expensive, faster, and highly accurate technology for use when genetic content is already known. 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. We believe that focused studies will drive future microarray sales growth; however, as the per genome cost of sequencing continues to decrease, researchers will migrate certain whole genome array studies to sequencing at some point in the future. In mid-2011, we began shipments of the Omni5 BeadChip, a four-sample microarray featuring more than 4.3 million markers per sample with flexibility to include up to 500,000 custom markers. This product includes a majority of the rare variant content from the 1000 genomes project, an international research effort launched in 2008 to establish the most detailed catalog of human genetic variation. Although the order and revenue level of microarray products fluctuated during 2011, we received record microarray orders, driven by Infinium Exome array products, in the fourth quarter of 2011.
Financial Overview
Financial highlights for 2011 include the following:
Net revenue grew by 17% during 2011 compared to 2010. The increase in revenue was primarily driven by an increase in consumable sales as our installed base increased in 2011, the launch of MiSeq in the third quarter of 2011, and increased HiSeq instrument revenue.
Gross profit as a percentage of revenue (gross margin) was 67.2% in 2011, an increase from 66.6% in 2010. The increase primarily resulted from improvements in instrument and consumable gross margins. Instrument gross margin improved during the period due to higher average selling prices and consumable gross margin improved due to a shift in sales mix from microarray consumables to sequencing consumables, which have a higher gross margin than microarray consumables. We believe our gross margin in future periods will depend on several factors, including market conditions that may impact our pricing power, product mix changes between consumable and instrument sales, our cost structure for manufacturing operations, and our ability to create innovative and high premium products that meet or stimulate customer demand.
Income from operations decreased 6% in 2011 compared to 2010 primarily due to a 31% increase in total
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operating expenses, which was primarily driven by headquarter relocation expense and restructuring charges recorded in 2011.
In 2011, we relocated our headquarters to another facility in San Diego, California and incurred $41.8 million in headquarter relocation expense, which included a cease-use loss upon vacating our prior headquarters, accelerated depreciation of certain property and equipment, and double rent expense during the transition to the new facility. We expect to incur additional headquarter relocation expense during the first half of 2012.
On October 25, 2011, we announced restructuring plans to reduce our global workforce by approximately 200 employees, or approximately 8%, and to consolidate certain facilities. As a result of the restructuring effort, we recorded a restructuring charge of $8.1 million during the fourth quarter of 2011, comprised primarily of severance pay and other employee separation costs. We expect to incur additional restructuring charges related to this effort through the second quarter of 2012.
In addition, on January 27, 2012, CKH Acquisition Corp. and Roche Holding Ltd. (together, “Roche”) made an unsolicited tender offer to purchase all outstanding shares of our common stock.stock for $44.50 per share. Roche also announced that it intends to oppose the re-election of four directors serving on our board of directors whose terms expire at the 2012 annual meeting of stockholders, including the Chairman of the Board and our Chief Executive Officer. In connection with the Roche tender offer, four stockholder class action lawsuits have been filed against us, and we anticipate that additional lawsuits may be filed. As a result, we expect our selling, general and administrative expenses to increase during 2012, as we anticipate incurring significant legal, advisory, proxy solicitation, and other costs as a result of this tender offer.
Our effective tax rate was 34.9% in 2011, as compared to 32.6% in 2010. 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 this report. For 2012 and beyond, we anticipate the provision for income taxes to increase in absolute dollars but the effective tax rate to trend lower than the U.S. federal statutory rate as the portion of our earnings subject to lower statutory tax rates increases.
We ended 2011 with cash, cash equivalents, and short-term investments totaling $1.2 billion. In 2011, we generated $358.1 million in cash from operations, an $85.6 million, or 31.4%, increase from 2010. During 2011, we also generated $903.5 million in net proceeds from the issuance of our 0.25% Convertible Senior Notes due 2016 and used $314.3 million of such proceeds to repurchase shares of our common stock concurrently with the issuance and also used part of the net proceeds for the extinguishment upon conversion of $349.9 million principal amount of our existing 0.625% convertible senior notes due 2014.
Results of Operations
To enhance comparability, the following table sets forth audited consolidated statement of operations data for the years ended January 1, 2012, January 2, 2011, and January 3, 2010 stated as a percentage of total revenue.
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| 2011 | 2010 | 2009 | ||||||
| Revenue: | ||||||||
| Product revenue | 93.5 | % | 93.3 | % | 94.1 | % | ||
| Service and other revenue | 6.5 | 6.7 | 5.9 | |||||
| Total revenue | 100.0 | 100.0 | 100.0 | |||||
| Cost of revenue: | ||||||||
| Cost of product revenue | 29.2 | 30.1 | 28.6 | |||||
| Cost of service and other revenue | 2.5 | 2.4 | 2.3 | |||||
| Amortization of acquired intangible assets | 1.1 | 0.9 | 1.0 | |||||
| Total cost of revenue | 32.8 | 33.4 | 31.9 | |||||
| Gross profit | 67.2 | 66.6 | 68.1 | |||||
| Operating expense: | ||||||||
| Research and development | 18.7 | 19.7 | 21.1 | |||||
| Selling, general and administrative | 24.8 | 24.4 | 26.5 | |||||
| Headquarter relocation expense | 4.0 | — | — | |||||
| Restructuring charges | 0.8 | — | — | |||||
| Acquisition related expense (gain), net | 0.1 | (0.9 | ) | 1.7 | ||||
| Total operating expense | 48.4 | 43.2 | 49.3 | |||||
| Income from operations | 18.8 | 23.4 | 18.8 | |||||
| Other income (expense): | ||||||||
| Interest income | 0.7 | 0.9 | 1.7 | |||||
| Interest expense | (3.3 | ) | (2.7 | ) | (3.6 | ) | ||
| Other (expense) income, net | (3.7 | ) | (1.1 | ) | 0.2 | |||
| Total other expense, net | (6.3 | ) | (2.9 | ) | (1.7 | ) | ||
| Income before income taxes | 12.5 | 20.5 | 17.1 | |||||
| Provision for income taxes | 4.4 | 6.7 | 6.3 | |||||
| Net income | 8.1 | % | 13.8 | % | 10.8 | % | ||
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 years ended January 1, 2012, January 2, 2011, and January 3, 2010 were 52, 52, and 53 weeks, respectively.
Revenue
| 2011 - 2010 | 2010 - 2009 | ||||||||||||||||||||||||
| (Dollars in thousands) | 2011 | 2010 | Change | % Change | 2009 | Change | % Change | ||||||||||||||||||
| Product revenue | $ | 987,280 | $ | 842,510 | $ | 144,770 | 17 | % | $ | 627,240 | $ | 215,270 | 34 | % | |||||||||||
| Service and other revenue | 68,255 | 60,231 | 8,024 | 13 | 39,084 | 21,147 | 54 | ||||||||||||||||||
| Total revenue | $ | 1,055,535 | $ | 902,741 | $ | 152,794 | 17 | % | $ | 666,324 | $ | 236,417 | 35 | % | |||||||||||
Product revenue consists primarily of revenue from the sale of consumables and instruments.
2011 Compared to 2010
Consumables revenue increased $90.8 million, or 18%, to $595.8 million in 2011 compared to $505.0 million in 2010. The increase was primarily attributable to increased sales of sequencing consumables, which accounted for more than half of our consumables revenue in 2011, driven by growth in the installed base of our sequencing systems, partially offset by a decrease in the consumable revenue per sequencing instrument.
Instrument revenue increased $48.5 million, or 15%, to $373.1 million in 2011 compared to $324.6 million in 2010. The increase was primarily attributable to the launch of MiSeq in the third quarter of 2011 and higher HiSeq revenue primarily
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driven by increased average selling price following completion of the Genome Analyzer trade-in program during the first half of 2011. These increases in instrument revenue were partially offset by a decrease in sales of our Genome Analyzer from 2010 to 2011, as our Genome Analyzer customers upgraded to HiSeq 2000.
Revenue from HiSeq 2000 sales in 2011 and 2010 was impacted by discounts provided to customers under our Genome Analyzer trade-in program. The estimated incremental sales incentive provided under this trade-in program was approximately $11.1 million and $47.8 million in 2011 and 2010, respectively. See “Revenue Recognition” in note “1. Organization and Summary of Significant Accounting Policies” in Part II, Item 8, of this Form 10-K for additional information on the Genome Analyzer trade-in program.
The increase in service and other revenue in 2011 compared to 2010 was primarily driven by an increase in our instrument service contract revenue resulting from our expanded installed base and an increase in sequencing services.
2010 Compared to 2009
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 in 2010 and 2009, 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 sales 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 was primarily attributable to an increase in instrument service contract revenue for our growing installed base of sequencing systems.
Gross Margin
| 2011 - 2010 | 2010 - 2009 | ||||||||||||||||||||||||
| (Dollars in thousands) | 2011 | 2010 | Change | % Change | 2009 | Change | % Change | ||||||||||||||||||
| Total gross profit | $ | 709,098 | $ | 601,540 | $ | 107,558 | 18 | % | $ | 453,875 | $ | 147,665 | 33 | % | |||||||||||
| Total gross margin | 67.2 | % | 66.6 | % | 68.1 | % | |||||||||||||||||||
2011 Compared to 2010
Gross margin increased in 2011 compared to 2010. During the period, the gross margin of our instrument sales improved, primarily driven by an increase in average selling price per instrument as our Genome Analyzer trade-in program was substantially completed in the first half of 2011. The Genome Analyzer trade-in program negatively impacted our gross margin by approximately 1.1% and 5.3% in 2011 and 2010, respectively, based on the estimated amount of incremental sales incentive provided. The gross margin of our consumable sales also increased as we experienced a shift in sales mix from lower gross margin microarray consumables to higher gross margin sequencing consumables, primarily due to the expansion of our sequencing instrument installed base. The improvements in gross margins were partially offset by the negative impact from higher stock compensation expense and higher amortization expense of acquired intangible assets included in cost of revenue.
2010 Compared to 2009
The decrease in gross margin in 2010 compared to 2009 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,
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and lower margins on our newer products, such as the HiSeq 2000. Based on the estimated amount of incremental sales incentive provided, the Genome Analyzer trade-in program negatively impacted our gross margin by approximately 5.3% in 2010. See “Revenue Recognition” in note “1. Organization and Summary of Significant Accounting Policies” in Part II, Item 8, of this Form 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.
Operating Expense
| 2011 - 2010 | 2010 - 2009 | ||||||||||||||||||||||||
| (Dollars in thousands) | 2011 | 2010 | Change | % Change | 2009 | Change | % Change | ||||||||||||||||||
| Research and development | $ | 196,913 | $ | 177,947 | $ | 18,966 | 11 | % | $ | 140,616 | $ | 37,331 | 27 | % | |||||||||||
| Selling, general and administrative | 261,843 | 220,454 | 41,389 | 19 | 176,337 | 44,117 | 25 | ||||||||||||||||||
| Headquarter relocation expense | 41,826 | — | 41,826 | 100 | — | — | — | ||||||||||||||||||
| Restructuring charges | 8,136 | — | 8,136 | 100 | — | — | — | ||||||||||||||||||
| Acquisition related expense (gain), net | 919 | (8,515 | ) | 9,434 | (111 | ) | 11,325 | (19,840 | ) | (175 | ) | ||||||||||||||
| Total operating expense | $ | 509,637 | $ | 389,886 | $ | 119,751 | 31 | % | $ | 328,278 | $ | 61,608 | 19 | % | |||||||||||
2011 Compared to 2010
The increase in research and development expense in 2011 from 2010 was primarily attributable to an increase in personnel expenses of $17.5 million associated with increased average headcount during 2011 and an increase of $2.9 million in research and development supplies. Personnel expenses included salaries, share-based compensation, and benefits.
The increase in selling, general and administrative expense in 2011 from 2010 was primarily attributable to an increase in personnel expenses of $33.5 million associated with the growth of our business during the period. The remaining increase was primarily driven by a $4.0 million increase in bad debt expenses as a result of customer bankruptcies, and a $3.7 million increase in supplies, repairs, and maintenance expenses. These increases were partially offset by a legal settlement gain of $2.3 million, representing the payment we received to settle an outstanding commercial dispute.
In 2011, we relocated our headquarters to another facility in San Diego, California and incurred $41.8 million in headquarter relocation expense, which included a cease-use loss upon vacating our prior headquarters, accelerated depreciation of certain property and equipment, and double rent expense during the transition to the new facility.
In Q4 2011, we announced a restructuring plan to reduce our global workforce by approximately 200 employees, or approximately 8%, and to consolidate certain facilities. As a result of that acquisition,the restructuring effort, we develop and commercialize genetic analysis technologies used to performrecorded a rangerestructuring charge of analyses, including whole genome re-sequencing, gene expression analysis and small RNA analysis. We believe we are the only company with genome-scale technology for sequencing, genotyping and gene expression, the three cornerstones$8.1 million during Q4 2011, comprised primarily of modern genetic analysis.
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Acquisition related expense, net, in the commercial launch or any lack or delay of commercial acceptance of new products, unfavorable sales trends in our existing product lines, or impacts from the other factors mentioned above, could adversely affect our revenue growth or cause2011 included a sequential decline in quarterly revenue. Due to the possibility of fluctuations in our revenue and net income or loss, we believe quarterly comparisons of our operating results are not a good indication of our future performance.
2010 Compared to 2009
The increase in 2007, the substantial resources required for the research, development and manufacturingscale-up effort required to commercialize our products and services and a charge of $54.5 million in 2007 primarily related to settlement of our litigation with Affymetrix. We expect to continue to incur substantial costs for research and development over the next several years. We will also needexpenses 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 costs as we build upexpenses 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 salesbusiness, and an increase in outside service expenses of $9.7 million comprised mostly of legal and marketing expenses.
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During 2009, acquisition related expense (gain), 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 prior to 2009.
Other Expense, Net
| 2011 - 2010 | 2010 - 2009 | ||||||||||||||||||||||||
| (Dollars in thousands) | 2011 | 2010 | Change | % Change | 2009 | Change | % Change | ||||||||||||||||||
| Interest income | $ | 7,052 | $ | 8,378 | $ | (1,326 | ) | (16 | )% | $ | 11,029 | $ | (2,651 | ) | (24 | )% | |||||||||
| Interest expense | (34,790 | ) | (24,598 | ) | (10,192 | ) | 41 | (23,718 | ) | (880 | ) | 4 | |||||||||||||
| Other (expense) income, net | (38,678 | ) | (10,055 | ) | (28,623 | ) | 285 | 1,217 | (11,272 | ) | (926 | ) | |||||||||||||
| Total other expense, net | $ | (66,416 | ) | $ | (26,275 | ) | $ | (40,141 | ) | 153 | % | $ | (11,472 | ) | $ | (14,803 | ) | 129 | % | ||||||
2011 Compared to 2010
The decrease in interest income in 2011 compared to 2010 was primarily driven by lower interest rates, despite the increase in our cash, cash equivalents and short-term investment balance during the period. Interest expense increased during the period primarily due to the accretion of discount on our $920.0 million 0.25% convertible senior notes due 2016 issued in the first half of 2011, partially offset by the decrease in interest expense associated with the repayment of $349.9 million in principal for the 0.625% convertible senior notes due 2014 during 2011.
Other (expense) income, net, in 2011 primarily consisted of a loss of $37.6 million on the extinguishment of debt recorded on conversions of our 0.625% convertible senior notes due 2014 and a $1.1 million foreign exchange loss recorded during the period. Other (expense) income, net, in 2010 primarily consisted of a $13.2 million impairment charge related to a cost-method investment and a related note receivable, partially offset by a $2.9 million gain on acquisition recorded for the difference between the carrying value of a cost method investment prior to the acquisition and the fair value of that investment at the time of acquisition, and foreign exchange gains.
2010 Compared to 2009
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 accretion of discount on our 0.625% convertible senior notes due 2014. The change in other (expense) income, net, in 2009 primarily consisted of a gain of $0.8 million on the conversion of $10.0 million of our 0.625% convertible senior notes due 2014, and foreign exchange gains realized during the period.
Provision for Income Taxes
| 2011 - 2010 | 2010 - 2009 | ||||||||||||||||||||||||
| (Dollars in thousands) | 2011 | 2010 | Change | % Change | 2009 | Change | % Change | ||||||||||||||||||
| Income before income taxes | $ | 133,045 | $ | 185,379 | $ | (52,334 | ) | (28 | )% | $ | 114,125 | $ | 71,254 | 62 | % | ||||||||||
| Provision for income taxes | 46,417 | 60,488 | (14,071 | ) | (23 | ) | 41,844 | 18,644 | 45 | ||||||||||||||||
| Net income | $ | 86,628 | $ | 124,891 | $ | (38,263 | ) | (31 | )% | $ | 72,281 | $ | 52,610 | 73 | % | ||||||||||
| Effective tax rate | 34.9 | % | 32.6 | % | 36.7 | % | |||||||||||||||||||
2011 Compared to 2010
The effective tax rate in 2011 closely approximated the U.S. statutory rate because a significant portion of our earnings were subject to U.S. taxation. The increase in the effective tax rate in 2011 from 2010 was primarily attributable to lower non-taxable gains recorded on the changes in fair value of contingent consideration related to prior acquisitions and higher nondeductible acquired IPR&D charges recorded in 2011.
2010 Compared to 2009
The decrease in the effective tax rate in 2010 compared to 2009 was primarily attributable to the gain recorded on the change in the fair value of contingent consideration related to an acquisition 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.
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Liquidity and Capital Resources
Cash flow summary
| 2011 | 2010 | 2009 | |||||||||
| (In thousands) | |||||||||||
| Net cash provided by operating activities | $ | 358,140 | $ | 272,573 | $ | 172,191 | |||||
| Net cash used in investing activities | (400,999 | ) | (285,053 | ) | (256,569 | ) | |||||
| Net cash provided by (used in) financing activities | 97,016 | 116,474 | (98,862 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | (126 | ) | 320 | 849 | |||||||
| Net increase (decrease) in cash and cash equivalents | $ | 54,031 | $ | 104,314 | $ | (182,391 | ) | ||||
Operating Activities
Cash provided by operating activities in 2011 consisted of net income of $86.6 million plus net non-cash adjustments of $234.5 million and changes in net operating assets of $37.0 million. The primary non-cash expenses added back to net income included share-based compensation of $92.1 million, depreciation and amortization expenses related to property and equipment and acquired intangible assets of $68.3 million, debt extinguishment loss of $37.6 million, and the accretion of the debt discount of $32.2 million. These non-cash add-backs were partially offset by the $46.4 million incremental tax benefit related to stock options exercised. The main drivers in the change in net operating assets included increases in accrued liabilities, and decreases in inventory and accounts payable.
Cash provided by operating activities in 2010 consisted 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 accretion of the debt discount on our convertible notes totaling $21.4 million. These non-cash add-backs were partially offset by the $42.4 million incremental tax benefit related to stock options exercised. The main drivers in the change in net operating assets included increases in accounts receivable, inventory, accounts payable and accrued liabilities. These increases were primarily related to the growth of our business.
Investing Activities
Cash used in investing activities totaled $401.0 million in 2011. We purchased $1.3 billion of available-for-sale securities, and $1.1 billion of our available-for-sale securities matured or were sold during 2011. We used $58.3 million, net of cash acquired, in an acquisition and $13.8 million in the purchase of strategic investments. We also incurred $77.8 million in capital expenditures primarily associated with the purchase of manufacturing, R&D, and servicing equipment, leasehold improvements, and information technology equipment and systems.
Cash used in investing activities totaled $285.1 million in 2010. During the year we purchased $846.2 million of available-for-sale securities, and $688.6 million of our available-for-sale securities matured or were sold. We also 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.
Financing Activities
Cash provided by financing activities totaled $97.0 million in 2011. We received $903.5 million in proceeds from the issuance of $920.0 million of our 0.25% convertible senior notes due 2016, net of issuance discounts, of which $349.9 million was used to expandrepay the principal amount of our 0.625% convertible senior notes due 2014 upon conversions in 2011. Total cash of $570.4 million was used in repurchases of our common stock. We also received $67.5 million in proceeds from the issuance of our common stock through the exercise of stock options and supportwarrants and the sale of systems,shares under our employee stock purchase plan. In addition, we received $46.4 million in incremental tax benefit related to stock options exercised.
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 sales of shares 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.
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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 1, 2012, we had approximately $1.2 billion in cash, cash equivalents, 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. Cash and cash equivalents held by our foreign subsidiaries at January 1, 2012 were approximately $178.1 million. It is the Company's intention to indefinitely reinvest all current and future foreign earnings in foreign subsidiaries.
During the first half of 2011, we issued $920.0 million in principal amount of convertible senior notes that mature March 15, 2016. We pay 0.25% interest per annum on the principal amount of the notes, payable semi-annually in arrears in cash on March 15 and September 15 of each year. In 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. Additional information about the convertible notes, including their conversion features, is described in note “8. Convertible Senior Notes” in Part I, Item 1, of this Form 10-K. As of January 1, 2012, the principal amounts of our 0.25% convertible senior notes due 2016 and our 0.625% convertible senior notes due 2014 were $920.0 million and $40.1 million, respectively.
During 2011, we used part of the net proceeds from the issuance of our 0.25% convertible senior notes due 2016 for the extinguishment of $349.9 million principal amount of our existing 0.625% convertible senior notes due 2014 upon conversion. We will continue to use the net proceeds from the issuance of our 0.25% convertible senior notes due 2016 for future debt extinguishment. In addition, we used an additional $314.3 million of the net proceeds to purchase 4.9 million shares of our common stock in privately negotiated transactions concurrently with the issuance. We intend to use the remaining net proceeds for other general corporate purposes, which may include acquisitions and additional purchases of our common stock.
Our primary short-term needs for capital, which are subject to change, include expenditures related to:
potential strategic acquisitions and investments;
support of commercialization efforts related to our current and future products, including expansion of our direct sales force and services.field support resources both in the United States and abroad;
repurchases of our outstanding common stock;
the continued advancement of research and development efforts;
acquisitions of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities; and
the expansion needs of our facilities, including costs of leasing additional facilities.
We expect that our 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 cash provided by operating activities will be sufficient to fund our operating needs for at least the next 12 months, barring unforeseen circumstances. Operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. At the present time, we have no material commitments for capital expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors, including:
our ability to successfully commercialize and further develop our technologies and create innovative products in our markets;
scientific progress in our research and development programs and the magnitude of those programs;
competing technological and market developments; and
the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings.
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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, 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 1, 2012, 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 1, 2012, 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) | $ | 971,102 | $ | 2,551 | $ | 45,101 | $ | 923,450 | $ | — | ||||||||||
| Operating leases | 487,267 | 16,336 | 43,949 | 41,207 | 385,775 | |||||||||||||||
| Purchase obligations | 6,571 | 6,571 | — | — | — | |||||||||||||||
| Amounts due under executive deferred compensation plan | 8,970 | 8,970 | — | — | — | |||||||||||||||
| Total | $ | 1,467,346 | $ | 27,864 | $ | 89,050 | $ | 964,657 | $ | 385,775 | ||||||||||
| (1) | The table excludes $28.4 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 “13. Income Taxes” in Part II, Item 8 of this Form 10-K for further discussion of our uncertain tax positions. The table also excludes $15.0 million in potential contingent consideration payments 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 “4. Acquisitions” in Part II, Item 8 of this Form 10-K for further discussion of our contingent consideration. |
| (2) | Debt obligations include the principal amount of our convertible senior notes due 2016 and 2014, as well as interest payments to be made under the notes. Although these notes mature in 2016 and 2014 respectively, they can be converted into cash and shares of our common stock prior to maturity if certain conditions are met. Any conversion prior to maturity can result in repayments of the principal amounts sooner than the scheduled repayments as indicated in the table. See note “8. Convertible Senior Notes” in Part II, Item 8 of this Form 10-K for further discussion of the terms of the convertible senior notes. |
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, 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.this Form 10-K.
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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 warrantyinstrument service contract 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.
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
We regularly enter into contracts where revenue is derived from multiple deliverables including any mix of SAB No. 104 might result in a change in the timingproducts or amount of revenue recognized.
For transactions with multiple deliverables, consideration is allocated amongat the deliverable elements, wheninception of the contract to recognize revenueall deliverables based on their relative selling price. The relative selling price for each element,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.
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 rolling 12-month period over which revenue should be recognized.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 that the fair values of undelivered elements are known and there are no uncertainties regarding customer acceptance.
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recognition is deferred until acceptance is received from the distributor, and/or the end-user, if required by the applicable sales contract. The terms of sales transactions through distributors are consistent with the terms of direct sales to customers. These transactions are accounted for in accordance with the Company's revenue recognition policy described herein.
Investments
We invest in various types of securities, including debt securities in government sponsored entities, corporate debt securities, and U.S. treasury securities. As of January 1, 2008,2012, we adopted Statement of Financial Accounting Standards (SFAS) No. 157,have $886.6 million in short-term investments. In accordance with the accounting standard for fair value measurements, we classify our investments as Level 1, 2 or 3 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets that we have the ability to access. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset.
As noted in note "6. Fair Value Measurement. In February 2008,Measurements" in Part II, Item 8 of this Form 10-K, a majority of our security holdings have been classified as Level 2. These securities have been initially valued at the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP)No. SFAS 157-2,Effective Date of FASB Statement No. 157, which providestransaction price and subsequently valued utilizing a one-year deferral ofthird party service provider who assesses the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except thosefair value using inputs other than quoted prices that are recognizedobservable either directly or disclosed inindirectly, such as, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for 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 activeunderlying instruments or debt, broker and provides an exampledealer quotes, as well as other relevant economic measures. We perform certain procedures to illustrate key considerations in determiningcorroborate the fair value of a financial asset when the market for that financial asset is not active.
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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 gross trade accounts receivables totaled $177.9 million and the allowance for doubtful accounts was $4.0 million at January 1, 2012. Our allowance for doubtful accounts has generally been adequate to cover our actual credit losses. However, since we cannot reliably predict future changes in the financial stability of our customers, we cannot guarantee thatmay need to increase our reserves will continue to be adequate.if the financial conditions of our customers deteriorate.
Inventory Valuation
Inventories are stated at lower of cost or market. We record adjustments to inventory for potentially excess, obsolete, or impaired goods in order to state inventory at net realizable value. We must make assumptions about future demand, market conditions, and the release of new products that will supersede old ones. We regularly review inventory for excess and obsolete products and components, taking into account product life cycle and development plans, product expiration andcycles, quality issues, historical experience, and usage forecasts. Our gross inventory totaled $143.3 million and the cumulative adjustment for potentially excess and obsolete inventory was $14.5 million at January 1, 2012. Historically, our current inventory levels. Ifadjustment has been adequate to cover our losses. However, 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. Based on the information available at the balance sheet dates and through consultation with our legal counsel, weWe routinely assess the likelihood of any adverse judgments or outcomes ofto these matters, as well as the potential ranges of probable losses.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.
the exposure is considered material to our consolidated financial statements. Management considers many factors in making determinations of likely outcomes of litigation matters. These factors include, but are not limited to, past history, scientific and other evidence, and the specifics and status of each matter. We make significant judgmentsmay change our estimates if our assessment of the various factors changes, which may result in relation to the valuationrecording of goodwill and intangible assets resulting from acquisitionsan accrual or a change in a previously recorded accrual. Predicting the outcome of claims and litigation, settlements.and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from estimates and accruals.
Under the carrying amounts of our goodwill and intangible assets arising from acquisitions, we use the purchase method of accounting. The purchaseacquisition method of accounting, requires extensive use of accounting estimates and judgments towe allocate the purchase price to the fair value of the nettotal consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of
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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, acquired, including IPR&D. Goodwillnet of liabilities assumed, as goodwill. These valuations require us to make significant estimates and assumptions, especially with respect to intangible assets deemed to have indefinite lives are not amortized, but are subject to at least annual impairment tests. The amountsassets.
In connection with certain of our acquisitions, additional contingent consideration is earned by the sellers upon completion of certain future performance milestones. In these cases, 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 variable factors such as anticipated future cash flows, risk-free adjusted discount rates, and useful lives assigned to other acquired intangible assets impact future amortization, and the amount assigned to IPR&D is expensed immediately.
Management uses a discounted cash flow method.method to value our acquired intangible assets. 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 asand 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. These judgments can significantly affectIf 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 net operating results. Our judgments can alsoestimates of the economic lives change, with respectdepreciation or amortization expenses could be accelerated or slowed.
Intangible Assets and Other Long-Lived Assets — Impairment Assessments
We regularly perform reviews to determine if the estimated lifecarrying values of our long-lived assets are impaired. A review of intangible assets which could increase or decrease related amortization expense.
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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. These estimatesThe key assumptions that we use in our discounted cash flow model are the amount and assumptions are judgmental in naturetiming of estimated future cash flows to be generated by the asset over an extended period of time and could have a significant impact onrate of return that considers the determinationrelative risk of achieving the recognitioncash flows, the time value of an impairment chargemoney, 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 magnituderelative risk of any such change. If our actual results, or the plansachieving those cash flows.
Assumptions and estimates usedabout 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 analyses, arecharges for purchased intangible assets. Impairment charges could materially decrease our future net income and result in lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.asset values on our balance sheet.
We accountare required to measure and recognize compensation expense for stock-based compensation in accordance with SFAS No. 123R,Share-Based Payment. Under the provisions of SFAS No. 123R, stock-based compensation cost is estimated at the grant dateall share-based payments made to employees and directors based on estimated fair value. We estimate the award’s fair-value as calculated byfair 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 period is recognized as expensegenerally
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commensurate with the estimated expected life of our stock awards, adjusted for the impact of unusual fluctuations not reasonably expected to recur, and other relevant factors. Implied volatility is calculated from the implied market volatility of exchange-traded call options on our common stock. The expected 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 period. The BSM model requires various highly judgmental assumptions including volatility, forfeiture rates, and expected option life.periods of the awards. If any of thesethe assumptions used in the BSM model change significantly, stock-basedshare-based compensation expense may differ materially in the future from thatwhat we have recorded in the current period.
Warranties
We generally provide a one-year warranty on instruments. Additionally, we provide a warranty on consumables through the expiration 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.
Cease-Use Loss upon Exit of Facility
In 2011, we relocated our headquarters to a new facility in San Diego, California, and recorded headquarter relocation expense of $41.8 million, which included a cease-use loss of $23.6 million recorded upon vacating certain buildings of our prior headquarter facility. The lease on our prior headquarter facility expires in 2023. The cease-use loss is calculated as the present value of the remaining lease obligation offset by estimated sublease rental receipts during the remaining lease period, adjusted for deferred items and leasehold improvements. In calculating the cease-use loss, management is required to make significant judgments to estimate the present value of future cash flows from the assumed sublease. The key assumptions that we use in our discounted cash flow model include the amount and timing of estimated sublease rental receipts, and the risk-adjusted discount rate. These assumptions are subjective in nature and the actual future cash flows could differ from our estimates, resulting in significant adjustments to the cease-use loss recorded or to be recorded.
Income Taxes
Deferred tax assets are expectedregularly assessed to determine the likelihood they will be realized.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 thea deferred tax assetsasset will not be achieved. The evaluation ofIn evaluating our ability to recover deferred tax assets within the need for a valuation allowance is performed on ajurisdiction-by-jurisdiction basis, and includes a review ofjurisdiction 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 reliability of our forecasts, projections of pre-tax book income over the foreseeable future, determinationand the impact of cumulative pre-tax book income after
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| Year Ended | Year Ended | Year Ended | ||||||||||
| December 28, | December 30, | December 31, | ||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Revenue: | ||||||||||||
| Product revenue | 93 | % | 89 | % | 84 | % | ||||||
| Service and other revenue | 7 | 11 | 16 | |||||||||
| Total revenue | 100 | 100 | 100 | |||||||||
| Costs and expenses: | ||||||||||||
| Cost of product revenue | 34 | 33 | 28 | |||||||||
| Cost of service and other revenue | 2 | 3 | 5 | |||||||||
| Research and development | 17 | 20 | 18 | |||||||||
| Selling, general and administrative | 26 | 27 | 29 | |||||||||
| Impairment of manufacturing equipment | 1 | — | — | |||||||||
| Amortization of intangible assets | 2 | 1 | — | |||||||||
| Acquired in-process research and development | 4 | 83 | — | |||||||||
| Litigation settlements | — | 15 | — | |||||||||
| Total costs and expenses | 86 | 182 | 80 | |||||||||
| Income (loss) from operations | 14 | (82 | ) | 20 | ||||||||
| Interest income | 2 | 4 | 3 | |||||||||
| Interest and other expense, net | — | (1 | ) | — | ||||||||
| Income (loss) before income taxes | 16 | (79 | ) | 23 | ||||||||
| Provision (benefit) for income taxes | 7 | (3 | ) | 1 | ||||||||
| Net income (loss) | 9 | % | (76 | )% | 22 | % | ||||||
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| Year Ended | Year Ended | |||||||||||
| December 28, | December 30, | Percentage | ||||||||||
| 2008 | 2007 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Product revenue | $ | 532,390 | $ | 326,699 | 63 | % | ||||||
| Service and other revenue | 40,835 | 40,100 | 2 | |||||||||
| Total revenue | $ | 573,225 | $ | 366,799 | 56 | % | ||||||
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| 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 | % | ||||||
| Year Ended | Year Ended | |||||||||||
| December 28, | December 30, | Percentage | ||||||||||
| 2008 | 2007 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Research and development | $ | 99,963 | $ | 73,943 | 35 | % | ||||||
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| Year Ended | Year Ended | |||||||||||
| December 28, | December 30, | Percentage | ||||||||||
| 2008 | 2007 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Selling, general and administrative | $ | 148,014 | $ | 101,256 | 46 | % | ||||||
| Year Ended | Year Ended | |||||||||||
| December 28, | December 30, | Percentage | ||||||||||
| 2008 | 2007 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Impairment of manufacturing equipment | $ | 4,069 | $ | — | N/A | |||||||
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| Year Ended | Year Ended | |||||||||||
| December 28, | December 30, | Percentage | ||||||||||
| 2008 | 2007 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Amortization of intangible assets | $ | 10,438 | $ | 2,429 | 330 | % | ||||||
| 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 | %) | ||||||
| Year Ended | Year Ended | |||||||||||
| December 28, | December 30, | Percentage | ||||||||||
| 2008 | 2007 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Litigation settlements | $ | — | $ | 54,536 | (100 | %) | ||||||
| Year Ended | Year Ended | |||||||||||
| December 28, | December 30, | Percentage | ||||||||||
| 2008 | 2007 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Interest income | $ | 12,519 | $ | 16,026 | (22 | %) | ||||||
33
| Year Ended | Year Ended | |||||||||||
| December 28, | December 30, | Percentage | ||||||||||
| 2008 | 2007 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Interest and other expense, net | $ | (2,070 | ) | $ | (3,610 | ) | (43 | %) | ||||
| Year Ended | Year Ended | |||||||||||
| December 28, | December 30, | Percentage | ||||||||||
| 2008 | 2007 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Provision (benefit) for income taxes | $ | 40,429 | $ | (10,426 | ) | (488 | %) | |||||
34
| Year Ended | Year Ended | |||||||||||
| December 30, | December 31, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Product revenue | $ | 326,699 | $ | 155,811 | 110 | % | ||||||
| Service and other revenue | 40,100 | 28,775 | 39 | |||||||||
| Total revenue | $ | 366,799 | $ | 184,586 | 99 | % | ||||||
| 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 | % | ||||||
35
| Year Ended | Year Ended | |||||||||||
| December 30, | December 31, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Research and development | $ | 73,943 | $ | 33,373 | 122 | % | ||||||
| Year Ended | Year Ended | |||||||||||
| December 30, | December 31, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Selling, general and administrative | $ | 101,256 | $ | 54,057 | 87 | % | ||||||
36
| Year Ended | Year Ended | |||||||||||
| December 30, | December 31, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Amortization of intangible assets | $ | 2,429 | $ | — | N/A | |||||||
| Year Ended | Year Ended | |||||||||||
| December 30, | December 30, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Acquired in-process research and development | $ | 303,400 | $ | — | N/A | |||||||
| Year Ended | Year Ended | |||||||||||
| December 30, | December 31, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Litigation settlements | $ | 54,536 | $ | — | N/A | |||||||
37
| Year Ended | Year Ended | |||||||||||
| December 30, | December 31, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Interest income | $ | 16,026 | $ | 5,368 | 199 | % | ||||||
| Year Ended | Year Ended | |||||||||||
| December 30, | December 31, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Interest and other expense, net | $ | (3,610 | ) | $ | (560 | ) | 545 | % | ||||
| Year Ended | Year Ended | |||||||||||
| December 30, | December 31, | Percentage | ||||||||||
| 2007 | 2006 | Change | ||||||||||
| (In thousands) | ||||||||||||
| Provision (benefit) for income taxes | $ | (10,426 | ) | $ | 2,652 | (493 | %) | |||||
38
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 28, | December 30, | December 31, | ||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| (In thousands) | ||||||||||||
| Net cash provided by operating activities | $ | 87,882 | $ | 56,294 | $ | 39,000 | ||||||
| Net cash used in investing activities | (277,249 | ) | (67,686 | ) | (160,735 | ) | ||||||
| Net cash provided by financing activities | 337,672 | 148,292 | 109,296 | |||||||||
| Effect of foreign currency translation | 3,778 | (345 | ) | 3 | ||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 152,083 | $ | 136,555 | $ | (12,436 | ) | |||||
39
40
41
| Payments Due by Period (1),(2) | ||||||||||||||||||||
| Less Than | More Than | |||||||||||||||||||
Contractual Obligation | 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 | ||||||||||
| Operating leases | 158,240 | 11,032 | 22,945 | 23,378 | 100,885 | |||||||||||||||
| Amounts due under executive deferred compensation plan | 1,348 | — | — | — | — | |||||||||||||||
| Total | $ | 573,338 | $ | 13,532 | $ | 27,945 | $ | 28,378 | $ | 502,135 | ||||||||||
| Quantitative and Qualitative Disclosures about Market Risk. |
41
Interest Rate Sensitivity
Our exposureinvestment portfolio is exposed to market risk forfrom 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 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 2009,2012, our interest income would change by approximately $6.4$11.9 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.During 2011, we issued $920 million in aggregate principal amount of our 0.25% convertible senior notes due 2016. At our election, the notes are convertible into cash, shares of our common stock, or a combination of cash and shares of our common stock in each case under certain circumstances, including trading price conditions related to our common stock. If the trading price of our common stock reaches a price for a sustained period at 130% above the conversion price of $83.55, the notes will become convertible. 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 then-current incremental borrowing rate. 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. The implicit interest rate for the notes is 4.5%. 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 $4.0 million.
Market Price Sensitive Instruments
In order to potentially reduce potential equity dilution, in connection with the issuance (and potential conversion) of our 0.625% convertible senior notes due 2014, 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.
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 U.S. dollar. 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 1, 2012, we had $25.5 million of foreign currency forward contracts outstanding to hedge foreign currency risk.
42
| ITEM 8. | Financial Statements and Supplementary Data. |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |
43
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 January 1, 2012 and January 2, 2011, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended January 1, 2012. Our audits also included the financial statement schedule listed in the Index at Item 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 January 1, 2012 and January 2, 2011, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended January 1, 2012, 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.
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 January 1, 2012, 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 23, 2012 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
San Diego, California
February 23, 2012
44
ILLUMINA, INC.
CONSOLIDATED BALANCE SHEETS
| January 1, 2012 | January 2, 2011 | ||||||
| (In thousands) | |||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 302,978 | $ | 248,947 | |||
| Short-term investments | 886,590 | 645,342 | |||||
| Accounts receivable, net | 173,886 | 165,598 | |||||
| Inventory, net | 128,781 | 142,211 | |||||
| Deferred tax assets, current portion | 23,188 | 19,378 | |||||
| Prepaid expenses and other current assets | 29,196 | 36,922 | |||||
| Total current assets | 1,544,619 | 1,258,398 | |||||
| Property and equipment, net | 143,483 | 129,874 | |||||
| Goodwill | 321,853 | 278,206 | |||||
| Intangible assets, net | 106,475 | 91,462 | |||||
| Deferred tax assets, long-term portion | 19,675 | 39,497 | |||||
| Other assets | 59,735 | 41,676 | |||||
| Total assets | $ | 2,195,840 | $ | 1,839,113 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 49,806 | $ | 66,744 | |||
| Accrued liabilities | 187,774 | 156,164 | |||||
| Long-term debt, current portion | — | 311,609 | |||||
| Total current liabilities | 237,580 | 534,517 | |||||
| Long-term debt | 807,369 | — | |||||
| Other long-term liabilities | 69,954 | 28,531 | |||||
| Commitments and contingencies | |||||||
| Conversion option subject to cash settlement | 5,722 | 78,390 | |||||
| Stockholders’ equity: | |||||||
| Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued at January 1, 2012 and January 2, 2011 | — | — | |||||
| Common stock, $0.01 par value, 320,000,000 shares authorized, 166,707,208 shares issued at January 1, 2012, 151,512,837 shares issued at January 2, 2011 | 1,668 | 1,516 | |||||
| Additional paid-in capital | 2,249,900 | 1,891,288 | |||||
| Accumulated other comprehensive income | 2,117 | 1,765 | |||||
| Accumulated deficit | (68,707 | ) | (155,335 | ) | |||
| Treasury stock, at cost (44,664,972 shares at January 1, 2012 and 24,904,564 shares at January 2, 2011) | (1,109,763 | ) | (541,559 | ) | |||
| Total stockholders’ equity | 1,075,215 | 1,197,675 | |||||
| Total liabilities and stockholders’ equity | $ | 2,195,840 | $ | 1,839,113 | |||
See accompanying notes to consolidated financial statements
45
ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF INCOME
| Years Ended | |||||||||||
| January 1, 2012 | January 2, 2011 | January 3, 2010 | |||||||||
| (In thousands, except per share amounts) | |||||||||||
| Revenue: | |||||||||||
| Product revenue | $ | 987,280 | $ | 842,510 | $ | 627,240 | |||||
| Service and other revenue | 68,255 | 60,231 | 39,084 | ||||||||
| Total revenue | 1,055,535 | 902,741 | 666,324 | ||||||||
| Cost of revenue: | |||||||||||
| Cost of product revenue | 308,228 | 271,997 | 190,714 | ||||||||
| Cost of service and other revenue | 26,118 | 21,399 | 15,055 | ||||||||
| Amortization of acquired intangible assets | 12,091 | 7,805 | 6,680 | ||||||||
| Total cost of revenue | 346,437 | 301,201 | 212,449 | ||||||||
| Gross profit | 709,098 | 601,540 | 453,875 | ||||||||
| Operating expense: | |||||||||||
| Research and development | 196,913 | 177,947 | 140,616 | ||||||||
| Selling, general and administrative | 261,843 | 220,454 | 176,337 | ||||||||
| Headquarter relocation expense | 41,826 | — | — | ||||||||
| Restructuring charges | 8,136 | — | — | ||||||||
| Acquisition related expense (gain), net | 919 | (8,515 | ) | 11,325 | |||||||
| Total operating expense | 509,637 | 389,886 | 328,278 | ||||||||
| Income from operations | 199,461 | 211,654 | 125,597 | ||||||||
| Other income (expense): | |||||||||||
| Interest income | 7,052 | 8,378 | 11,029 | ||||||||
| Interest expense | (34,790 | ) | (24,598 | ) | (23,718 | ) | |||||
| Other (expense) income, net | (38,678 | ) | (10,055 | ) | 1,217 | ||||||
| Total other expense, net | (66,416 | ) | (26,275 | ) | (11,472 | ) | |||||
| Income before income taxes | 133,045 | 185,379 | 114,125 | ||||||||
| Provision for income taxes | 46,417 | 60,488 | 41,844 | ||||||||
| Net income | $ | 86,628 | $ | 124,891 | $ | 72,281 | |||||
| Net income per basic share | $ | 0.70 | $ | 1.01 | $ | 0.59 | |||||
| Net income per diluted share | $ | 0.62 | $ | 0.87 | $ | 0.53 | |||||
| Shares used in calculating basic net income per share | 123,399 | 123,581 | 123,154 | ||||||||
| Shares used in calculating diluted net income per share | 138,937 | 143,433 | 137,096 | ||||||||
See accompanying notes to consolidated financial statements
46
ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Additional | Accumulated Other | Total | |||||||||||||||||||||||||||
| Common Stock | Paid-In | Comprehensive | Accumulated | Treasury Stock | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Capital | Income | Deficit | Shares | Amount | Equity | ||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| 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 | — | — | — | 408 | — | — | — | 408 | |||||||||||||||||||||
| Comprehensive income | 72,689 | ||||||||||||||||||||||||||||
| Issuance of common stock, net of repurchases | 4,523 | 46 | 46,909 | — | — | (6,140 | ) | (175,136 | ) | (128,181 | ) | ||||||||||||||||||
| Share-based compensation | — | — | 60,813 | — | — | — | — | 60,813 | |||||||||||||||||||||
| Incremental tax benefit related to stock options exercised | — | — | 39,319 | — | — | — | — | 39,319 | |||||||||||||||||||||
| Remeasurement of convertible debt | 84 | 1 | 20,940 | — | — | — | — | 20,941 | |||||||||||||||||||||
| Balance as of January 3, 2010 | 143,544 | 1,436 | 1,637,751 | 2,830 | (280,226 | ) | (24,068 | ) | (497,543 | ) | 864,248 | ||||||||||||||||||
| Components of comprehensive income: | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | 124,891 | — | — | 124,891 | |||||||||||||||||||||
| Unrealized loss on available-for-sale securities, net of deferred tax | — | — | — | (1,065 | ) | — | — | — | (1,065 | ) | |||||||||||||||||||
| Comprehensive income | 123,826 | ||||||||||||||||||||||||||||
| Issuance of common stock, net of repurchases | 7,969 | 80 | 117,965 | — | — | (836 | ) | (44,016 | ) | 74,029 | |||||||||||||||||||
| Share-based compensation | — | — | 71,725 | — | — | — | — | 71,725 | |||||||||||||||||||||
| Incremental tax benefit related to stock options exercised | — | — | 42,445 | — | — | — | — | 42,445 | |||||||||||||||||||||
| Reclassification of conversion option subject to cash settlement | — | — | 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 | ||||||||||||||||||
| Components of comprehensive income: | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | 86,628 | — | — | 86,628 | |||||||||||||||||||||
| Unrealized gain on available-for-sale securities, net of deferred tax | — | — | — | 352 | — | — | — | 352 | |||||||||||||||||||||
| Comprehensive income | 86,980 | ||||||||||||||||||||||||||||
| Issuance of common stock, net of repurchases | 15,194 | 152 | 104,268 | — | — | (19,990 | ) | (572,207 | ) | (467,787 | ) | ||||||||||||||||||
| Convertible note, equity portion, net of tax and issuance costs | — | — | 155,366 | — | — | — | — | 155,366 | |||||||||||||||||||||
| Tax impact from the issuance of convertible debt | — | — | (59,427 | ) | — | — | — | — | (59,427 | ) | |||||||||||||||||||
| Tax benefit related to conversions of convertible debt | — | — | 11,409 | — | — | — | — | 11,409 | |||||||||||||||||||||
| Reclassification of conversion option subject to cash settlement | — | — | 7,667 | — | — | — | — | 7,667 | |||||||||||||||||||||
| Share-based compensation | — | — | 92,153 | — | — | — | — | 92,153 | |||||||||||||||||||||
| Net incremental tax benefit related to stock options exercised | — | — | 43,122 | — | — | — | — | 43,122 | |||||||||||||||||||||
| Equity based contingent compensation | — | — | 3,457 | — | — | — | — | 3,457 | |||||||||||||||||||||
| Issuance of treasury stock | — | — | 597 | — | — | 229 | 4,003 | 4,600 | |||||||||||||||||||||
| Balance as of January 1, 2012 | 166,707 | $ | 1,668 | $ | 2,249,900 | $ | 2,117 | $ | (68,707 | ) | (44,665 | ) | $ | (1,109,763 | ) | $ | 1,075,215 | ||||||||||||
See accompanying notes to consolidated financial statements
47
ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended | |||||||||||
| January 1, 2012 | January 2, 2011 | January 3, 2010 | |||||||||
| (In thousands) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 86,628 | $ | 124,891 | $ | 72,281 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation expense | 55,575 | 34,204 | 24,504 | ||||||||
| Amortization of acquired intangible assets | 12,689 | 7,805 | 6,680 | ||||||||
| Share-based compensation expense | 92,092 | 71,645 | 60,811 | ||||||||
| Accretion of debt discount | 32,173 | 21,407 | 20,286 | ||||||||
| Loss on extinguishment of debt | 37,611 | — | — | ||||||||
| Cease-use loss | 23,638 | — | — | ||||||||
| Contingent compensation expense | 3,457 | — | — | ||||||||
| Incremental tax benefit related to stock options exercised | (46,354 | ) | (42,445 | ) | (39,319 | ) | |||||
| Deferred income taxes | 19,227 | 48,696 | 29,704 | ||||||||
| Change in fair value of contingent consideration | (4,500 | ) | (10,376 | ) | — | ||||||
| Impairment of cost-method investment | — | 13,223 | — | ||||||||
| Acquired in-process research and development | — | 1,325 | 11,325 | ||||||||
| Other non-cash adjustments | 8,872 | 4,325 | 1,721 | ||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (7,011 | ) | (7,844 | ) | (18,578 | ) | |||||
| Inventory | 22,152 | (48,583 | ) | (20,557 | ) | ||||||
| Prepaid expenses and other current assets | (2,016 | ) | 2,554 | (3,429 | ) | ||||||
| Other assets | (4,004 | ) | (3,566 | ) | (2,670 | ) | |||||
| Accounts payable | (21,097 | ) | 23,150 | 11,778 | |||||||
| Accrued liabilities | 42,955 | 32,028 | 19,997 | ||||||||
| Other long-term liabilities | 8,058 | (113 | ) | 814 | |||||||
| Unrealized gain (loss) on foreign exchange | (2,005 | ) | 247 | (3,157 | ) | ||||||
| Net cash provided by operating activities | 358,140 | 272,573 | 172,191 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of available-for-sale securities | (1,310,269 | ) | (846,208 | ) | (694,487 | ) | |||||
| Sales of available-for-sale securities | 900,884 | 539,161 | 310,226 | ||||||||
| Maturities of available-for-sale securities | 160,007 | 149,450 | 203,990 | ||||||||
| Sales and maturities of trading securities | — | 54,900 | 1,000 | ||||||||
| Net cash paid for acquisitions | (58,302 | ) | (98,211 | ) | (1,325 | ) | |||||
| Purchases of strategic investments | (13,769 | ) | (27,677 | ) | (19,900 | ) | |||||
| Purchases of property and equipment | (77,800 | ) | (49,818 | ) | (52,673 | ) | |||||
| Cash paid for intangible assets | (1,750 | ) | (6,650 | ) | (3,400 | ) | |||||
| Net cash used in investing activities | (400,999 | ) | (285,053 | ) | (256,569 | ) | |||||
| Cash flows from financing activities: | |||||||||||
| Payments on current portion of long-term debt | (349,874 | ) | — | (10,000 | ) | ||||||
| Proceeds from issuance of convertible notes | 903,492 | — | — | ||||||||
| Incremental tax benefit related to stock options exercised | 46,354 | 42,445 | 39,319 | ||||||||
| Common stock repurchases | (570,406 | ) | (44,016 | ) | (175,136 | ) | |||||
| Proceeds from the exercise of warrants | 5,512 | 16,029 | 7,576 | ||||||||
| Proceeds from issuance of common stock | 61,938 | 102,016 | 39,379 | ||||||||
| Net cash provided by (used in) financing activities | 97,016 | 116,474 | (98,862 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | (126 | ) | 320 | 849 | |||||||
| Net increase (decrease) in cash and cash equivalents | 54,031 | 104,314 | (182,391 | ) | |||||||
| Cash and cash equivalents at beginning of year | 248,947 | 144,633 | 327,024 | ||||||||
| Cash and cash equivalents at end of year | $ | 302,978 | $ | 248,947 | $ | 144,633 | |||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid for interest | $ | 2,481 | $ | 2,437 | $ | 2,437 | |||||
| Cash paid for income taxes | $ | 9,806 | $ | 31,566 | $ | 10,361 | |||||
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See accompanying notes to consolidated financial statements
49
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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) is a leading developer, manufacturer, and marketer of life science tools and integrated systems for the analysis of genetic variation and biological function. Using the Company’s proprietary technologies, Illumina provides a comprehensive line of genetic analysis solutions, with products and services that serve a broad range of highly interconnected markets, including sequencing, genotyping, gene expression, and molecular diagnostics. The Company’s customers include leading genomic research centers, academic institutions, government laboratories, and clinical research organizations, as well as pharmaceutical, biotechnology, agrigenomics, and consumer genomics companies.
Basis of Presentation
The consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles 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 December 31. The years ended January 1, 2012, January 2, 2011, and January 3, 2010 were 52, 52 and 53 weeks, respectively.
Use of Estimates
The preparation of financial statements requires that management make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
Segment Information
The Company is organized in two operating segments for purposes of recording and reporting our financial results: Life Sciences and Diagnostics. The Life Sciences operating segment includes all products and services 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. The Diagnostics operating segment focuses on the emerging opportunity in molecular diagnostics. During all periods presented, the Diagnostics operating segment had limited activity. Accordingly, the Company’s operating results for both segments are reported on an aggregate basis as one reportable segment. The Company will begin reporting in two reportable segments once revenues, operating profit or loss, or assets of the Diagnostics operating segment exceeds 10% of the consolidated amounts.
Acquisitions
The Company measures all assets acquired and liabilities assumed, including contingent considerations and all contractual contingencies, at fair value as of the acquisition date. In addition, the Company capitalizes in-process research and development (IPR&D) and either amortizes it over the life of the product upon commercialization, or writes it off if the project is abandoned or impaired. Post-acquisition adjustments related to business combination deferred tax asset valuation allowances and liabilities for uncertain tax positions are recorded in current period income tax expense. Contingent purchase considerations are remeasured to estimated fair value at each reporting period with the change in fair value recorded in acquisition related (gain) expense, net, a component of operating expenses.
Cash Equivalents and Short-Term Investments
Cash equivalents are comprised of short-term, highly liquid investments with maturities of 90 days or less at the date of
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purchase.
Short-term investments consist of U.S. Treasury, U.S. government agency securities, and corporate debt securities. Management classifies short-term investments as available-for-sale 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 for available-for-sale securities are included in accumulated other comprehensive income, a component of stockholders’ equity. The Company evaluates its investments to assess whether those 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 other (expense) income, net in the consolidated statements of income.
Fair Value Measurements
The Company determines the fair value of its assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying amounts of financial instruments such as cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued liabilities, excluding acquisition related contingent consideration liabilities, approximate the related fair values due to the short-term maturities of these instruments.
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 accounts 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. A significant portion of the Company's customers consist of university and research institutions that management believes are, to some degree, directly or indirectly supported by the United States Government. A significant change in current research funding, particularly with respect to the National Institutes of Health, could have a material adverse impact on the Company’s future revenues and results of operations.
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 January 1, 2012 were deposited with financial institutions in the United States. 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 U.S. treasury obligations, U.S. government agency securities, and money market funds.
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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The Company performs a regular review of customer activity and associated credit risks and do not require collateral or enter into netting arrangements. Shipments to customers outside the United States comprised 50%, 45%, and 48% of the Company's revenue for the years ended January 1, 2012, January 2, 2011, and January 3, 2010, respectively. Customers outside the United States represented 52% and 59% of the Company's gross trade accounts receivable balance as of January 1, 2012 and January 2, 2011, respectively. Sales to territories outside of the United States may be denominated in U.S. dollars or in the local currency.
International sales entail a variety of risks, including currency exchange fluctuations, longer payment cycles, and greater difficulty in accounts receivable collection. The Company is also subject to general geopolitical risks, such as political, social and economic instability, and changes in diplomatic and trade relations. The risks of international sales are mitigated in part by the extent to which sales are geographically distributed. The Company has historically not experienced significant credit losses from investments and accounts receivable. Approximately 20% of the Company's revenue is derived from European countries other than the United Kingdom. As the credit and economic conditions in certain southern European countries continue to deteriorate, the Company regularly reviews its accounts receivable outstanding in these countries and assesses the allowance for doubtful accounts accordingly. As of January 1, 2012, non-current accounts receivables from these countries accounted for approximately 3% of the Company's accounts receivable balance, and the Company has not experienced significant difficulties in collecting on the accounts receivable outstanding in these countries.
Inventory
Inventory 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 estimated based on product life cycles, quality issues, historical experience, and 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 1, 2012 was due to goodwill recorded in connection with the Company's acquisition of Epicentre Technologies Corporation (Epicentre) in January 2011.
The Company's identifiable intangible assets are comprised primarily of IPR&D, licensed technology, acquired core technologies, customer relationships, trade names, and license agreements. Except IPR&D, the cost of all identifiable intangible assets is amortized on a straight-line basis over their respective useful lives. The Company regularly performs reviews to determine if the carrying values of its long-lived assets are impaired. 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. If indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying amount of such assets exceeds the undiscounted expected future cash flows associated with such assets. If impairment is indicated, the Company compares the carrying amount to the estimated fair value of the affected assets and adjusts the value of such assets accordingly. Factors that would indicate potential impairment include a significant decline in the Company's stock price 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 a particular asset. The Company performed quarterly reviews of its long-lived assets and noted no indications of impairment for the year ended January 1, 2012.
Goodwill and IPR&D, which have indefinite useful lives, 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
52
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 in the second fiscal quarter of 2011, noting no impairment. In its impairment test, the Company concluded that it has a single reporting unit and that its fair value exceeded its book value, using market capitalization as a reference for the Company's fair value. Therefore, the first step recoverability test was passed and the second step analysis was not required.
The IPR&D impairment test requires the Company to assess the fair value of the asset as compared to its carrying value, and if the carrying value exceeds the fair value, record an impairment charge. The Company performed its annual impairment test of its IPR&D in the second fiscal quarter of 2011, noting no impairment. In addition, in connection of our restructuring plan executed in the fourth quarter of 2011, the Company identified certain impairment indicators related to its IPR&D asset, and performed another impairment test as of January 1, 2012, noting no impairment. In its impairment test, the Company assessed the fair value of IPR&D using an income approach, taking into consideration various factors such as future revenue contributions, additional research and development costs to be incurred, and contributory asset charges. The rate used to discount net future cash flows to their present values was based on a risk-adjusted rate of return.
Reserve for Product Warranties
The Company generally provides a one-year warranty on instruments. Additionally, the Company provides a warranty on its consumables through the expiration date, which generally ranges from six to twelve months after the manufacture date. The Company establishes an accrual for estimated warranty expenses based 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.
Revenue Recognition
The Company’s revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of instrumentation and consumables used in genetic analysis. Service and other revenue primarily consists of revenue received for performing genotyping and sequencing services, instrument service contract 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 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, the Company evaluates whether refund rights exist. If there are refund rights or payment terms based on future performance, the Company defers revenue recognition until the price becomes fixed or 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 receipt of payment.
The Company regularly enters 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. 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, the Company uses its best estimate of the selling
53
price for the deliverable.
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 rolling 12-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 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 Genome Analyzer trade-in program was completed in 2011. The Company accounted for HiSeq 2000 discounts related to the Genome Analyzer trade-in program as reductions to revenue upon recognition of the HiSeq 2000 sales revenue, which is later than the date the trade-in program was launched.
In certain markets within Europe, the Asia-Pacific region, Latin America, the Middle East, and South Africa the Company sells products and provides services to customers through distributors that specialize in life science products. In most sales through distributors, the product is delivered directly to customers. In cases where the product is delivered to a distributor, revenue recognition is deferred until acceptance is received from the distributor, and/or the end-user, if required by the applicable sales contract. The terms of sales transactions through distributors are consistent with the terms of direct sales to customers. These transactions are accounted for in accordance with the Company's revenue recognition policy described herein.
Shipping and Handling Expenses
Shipping and handling expenses are included in cost of product 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 personnel expenses, contractor fees, facilities costs, and 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 $6.8 million, $6.9 million, and $4.2 million for the years ended January 1, 2012, January 2, 2011, and January 3, 2010, respectively.
Leases
Leases are reviewed and classified as capital or operating at their inception. For leases that contain rent escalations, the Company records rent expense on a straight-line basis over the term of the lease, which includes the construction build-out period and lease extension periods, if appropriate. The difference between rent payments and straight-line rent expense is recorded as deferred rent in accrued liabilities and other long-term liabilities. Landlord allowances are amortized on a straight-line basis over the lease term as a reduction to rent expense. The Company capitalizes leasehold improvements and amortizes them over the shorter of the lease term or their expected useful lives.
During the year ended January 1, 2012, the Company substantially moved its headquarters to another facility in San Diego, California, and recorded headquarter relocation expense of $41.8 million, which primarily consisted of accelerated depreciation expense, impairment of assets, additional rent expense during the transition period when both the new and former headquarter facilities are occupied, moving expenses, and a cease-use loss. The Company recorded accelerated depreciation expense for leasehold improvements at its former headquarter facility based on the reassessed useful lives of less than a year. The Company recorded the cease-use loss and a corresponding facility exit obligation upon vacating certain buildings of its
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former headquarters, calculated as the present value of the remaining lease obligation offset by estimated sublease rental receipts during the remaining lease period, adjusted for deferred items and estimated lease incentives. The key assumptions used in the calculation include the amount and timing of estimated sublease rental receipts, and the risk-adjusted discount rate. Over the course of the remaining lease term of the former facility, the Company will record additional headquarter relocation expenses due to additional cease-use loss to be recorded upon exit of additional buildings, the accretion on the facility exit obligation and adjustments that may arise from change in estimates for the sublease rental receipts.
Restructuring Charges
During the fourth quarter of the year ended January 1, 2012, the Company announced and executed a restructuring plan, to reduce the Company's workforce and to consolidate certain facilities. The Company measured and accrued the liabilities associated with employee separation costs at fair value as of the date the plan was announced and terminations are communicated to employees, which primarily included severance pay and other separation costs such as outplacement services and benefits. The Company will measure and accrue the facilities exit costs at fair value upon its exit. Facilities exit costs will primarily consist of cease-use losses to be recorded upon vacating the facilities, asset impairment, and accelerated depreciation expenses.
The fair value measurement of restructuring related liabilities requires certain assumptions and estimates to be made by the Company, such as the retention period of certain employees, the timing and amount of sublease income on properties to be vacated, and the operating costs to be paid until lease termination. It is the Company's policy to use the best estimates based on facts and circumstances available at the time of measurement, review the assumptions and estimates periodically, and adjust the liabilities when necessary.
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. 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 a deferred tax asset will not be achieved. In evaluating the ability 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, and the impact of any feasible and prudent tax planning strategies.
The Company recognizes excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, the Company follows the with-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.
The Company recognizes the impact of a tax position in the 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
The U.S. dollar has been determined to be the functional currency of the Company's international operations. The Company remeasures its foreign subsidiaries’ assets and liabilities and revenue and expense accounts related to monetary assets and liabilities to the U.S. dollar and records the net gains or losses resulting from remeasurement in other (expense) income, net in the consolidated statements of income. The remeasurement resulted in an immaterial loss in the year ended January 1, 2012, an immaterial gain in the year ended January 2, 2011, and a loss of $2.3 million for the year ended January 3, 2010,
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respectively.
Derivatives
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 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 remeasurement gain or loss on the underlying foreign currency denominated assets or liabilities.
As of January 1, 2012, the Company had foreign exchange forward contracts in place to hedge exposures in the euro, Japanese yen, and Australian dollar. As of January 1, 2012 and January 2, 2011, the total notional amount of outstanding forward contracts in place for foreign currency purchases was $25.5 million and $20.0 million, respectively. Gains and losses related to the non-designated foreign exchange forward contracts for the years ended January 1, 2012, January 2, 2011, and January 3, 2010 were immaterial.
Share-Based Compensation
The Company uses 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 term of an award, expected dividends, and the risk-free interest rates. The Company determines the expected volatility 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 term of the Company’s stock 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 term of an award is based on historical forfeiture experience, exercise activity, and on the terms and conditions of the stock awards. The fair value of restricted stock units granted is based on the market price of our common stock on the date of grant. The Company recognizes the fair value of share-based compensation on a straight-line basis over the requisite service periods of the awards.
Net Income per Share
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the reporting period increased to include dilutive potential common shares calculated using the treasury stock method. Diluted net income per share reflects the potential dilution from outstanding stock options, restricted stock units, ESPP, warrants, shares subject to forfeiture, and convertible senior notes. Under the treasury stock method, convertible senior notes will have a dilutive impact when the average market price of the Company's common stock is above the applicable conversion price of the respective notes. In addition, the following amounts are assumed to be used to repurchase shares: the amount that must be paid to exercise stock options and warrants and purchase shares under the ESPP; the amount of compensation expense for future services that the Company has not yet recognized for stock options, restricted stock units, ESPP, and shares subject to forfeiture; and the amount of tax benefits that will be recorded in additional paid-in capital when the expenses related to respective awards become deductible.
The following table presents the calculation of weighted average shares used to calculate basic and diluted net income per share (in thousands):
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| Years Ended | ||||||||
| January 1, 2012 | January 2, 2011 | January 3, 2010 | ||||||
| Weighted average shares outstanding | 123,399 | 123,581 | 123,154 | |||||
| Effect of dilutive Convertible Senior Notes | 3,783 | 9,058 | 6,497 | |||||
| Effect of dilutive equity awards | 4,703 | 4,674 | 4,335 | |||||
| Effect of dilutive warrants sold in connection with the Convertible Senior Notes | 7,052 | 5,317 | 1,566 | |||||
| Effect of dilutive warrants assumed in a prior acquisition | — | 803 | 1,544 | |||||
| Weighted-average shares used in calculating diluted net income per share | 138,937 | 143,433 | 137,096 | |||||
| Weighted average shares excluded from calculation due to anti-dilutive effect | 2,418 | 1,934 | 924 | |||||
Accumulated Other Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income. The Company has disclosed comprehensive income as a component of stockholders' equity. Accumulated other comprehensive income on the consolidated balance sheets at January 1, 2012 and January 2, 2011 includes accumulated foreign currency translation adjustments and unrealized gains and losses on the Company's available-for-sale securities.
The components of accumulated other comprehensive income are as follows (in thousands):
| January 1, 2012 | January 2, 2011 | ||||||
| Foreign currency translation adjustments | $ | 1,289 | $ | 1,338 | |||
| Unrealized gain on available-for-sale securities, net of deferred tax | 828 | 427 | |||||
| Total accumulated other comprehensive income | $ | 2,117 | $ | 1,765 | |||
Investments
The Reportfollowing is a summary of Independent Registered Public Accounting Firm, Financial Statementsshort-term investments (in thousands):
| January 1, 2012 | January 2, 2011 | ||||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||||||||||
| Debt securities in government sponsored entities | $ | 393,759 | $ | 428 | $ | (148 | ) | $ | 394,039 | $ | 261,890 | $ | 106 | $ | (299 | ) | $ | 261,697 | |||||||||||||
| Corporate debt securities | 432,550 | 1,293 | (461 | ) | 433,382 | 329,823 | 1,170 | (235 | ) | 330,758 | |||||||||||||||||||||
| U.S. treasury securities | 58,955 | 214 | — | 59,169 | 52,938 | 70 | (121 | ) | 52,887 | ||||||||||||||||||||||
| Total available-for-sale securities | $ | 885,264 | $ | 1,935 | $ | (609 | ) | $ | 886,590 | $ | 644,651 | $ | 1,346 | $ | (655 | ) | $ | 645,342 | |||||||||||||
Available-For-Sale Securities
As of January 1, 2012 the Company had 107 available-for-sale securities in a gross unrealized loss position, all of which had been in such position for less than twelve months. There were no impairments considered other-than-temporary as it is more likely than not the Company will hold the securities until maturity or a recovery of the cost basis. The following table shows the fair values and Notes to Financial Statements beginthe gross unrealized losses of the Company's available-for- sale securities that were in an unrealized loss position as of January 1, 2012 and January 2, 2011 aggregated by investment category (in thousands):
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| January 1, 2012 | January 2, 2011 | ||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||
| Debt securities in government sponsored entities | $ | 133,904 | $ | (148 | ) | $ | 127,756 | $ | (299 | ) | |||||
| Corporate debt securities | 138,326 | (461 | ) | 92,199 | (235 | ) | |||||||||
| U.S. treasury securities | — | — | 13,490 | (121 | ) | ||||||||||
| Total | $ | 272,230 | $ | (609 | ) | $ | 233,445 | $ | (655 | ) | |||||
Realized gains and losses are determined based onpage F-1 immediately following the signature pagespecific identification method and are incorporated herein by reference.reported in interest income in the consolidated statements of income. For the year ended January 1, 2012, gross realized gains on sales of available-for sale securities were $1.4 million and gross realized losses were immaterial. Gross realized gains and losses on sales of available-for-sale securities were immaterial for each of the years ended January 1, 2012 and January 3, 2010.
Contractual maturities of available-for-sale debt securities as of January 1, 2012 were as follows (in thousands):
| Estimated Fair Value | |||
| Due within one year | $ | 268,355 | |
| After one but within five years | 618,235 | ||
| Total | $ | 886,590 | |
Cost-Method Investments
As of January 1, 2012 and January 2, 2011, the aggregate carrying amounts of the Company’s cost-method investments in non-publicly traded companies were $45.3 million and $32.0 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. The Company includes cost-method investments in other long term assets in the consolidated balance sheets.
In 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 was other-than-temporary. This determination was based upon continued shortfalls from revenue plans coupled with events at the time of assessment 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.
Accounts Receivable
Accounts receivable consist of the following (in thousands):
| January 1, 2012 | January 2, 2011 | ||||||
| Accounts receivable from product and service sales | $ | 175,226 | $ | 165,117 | |||
| Other receivables | 2,657 | 2,167 | |||||
| Total accounts receivable, gross | 177,883 | 167,284 | |||||
| Allowance for doubtful accounts | (3,997 | ) | (1,686 | ) | |||
| Total accounts receivable, net | $ | 173,886 | $ | 165,598 | |||
Inventory
Inventory, net, consists of the following (in thousands):
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| January 1, 2012 | January 2, 2011 | ||||||
| Raw materials | $ | 58,340 | $ | 54,762 | |||
| Work in process | 53,412 | 64,862 | |||||
| Finished goods | 17,029 | 22,587 | |||||
| Total inventory, net | $ | 128,781 | $ | 142,211 | |||
Property and Equipment
Property and equipment, net consists of the following (in thousands):
| January 1, 2012 | January 2, 2011 | ||||||
| Leasehold improvements | $ | 63,406 | $ | 55,681 | |||
| Manufacturing and laboratory equipment | 137,805 | 114,108 | |||||
| Computer equipment and software | 54,826 | 41,500 | |||||
| Furniture and fixtures | 9,274 | 6,732 | |||||
| Leased equipment | 14,854 | 15,475 | |||||
| Total property and equipment, gross | 280,165 | 233,496 | |||||
| Accumulated depreciation | (136,682 | ) | (103,622 | ) | |||
| Total property and equipment, net | $ | 143,483 | $ | 129,874 | |||
Depreciation expense was $55.6 million, $34.2 million and $24.5 million for the years ended January 1, 2012, January 2, 2011, and January 3, 2010, respectively. Capital expenditures included accrued expenditures of $5.9 million, $1.8 million, and $2.3 million in the years ended January 1, 2012, January 2, 2011, and January 3, 2010, respectively. These amounts have been excluded from the Consolidated Statements of Cash Flows for the respective periods as they represent non-cash investing activities.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
| January 1, 2012 | January 2, 2011 | ||||||
| Deferred revenue, current portion | $ | 52,573 | $ | 45,863 | |||
| Accrued compensation expenses | 52,035 | 49,368 | |||||
| Accrued taxes payable | 19,339 | 13,277 | |||||
| Customer deposits | 17,958 | 14,900 | |||||
| Reserve for product warranties | 11,966 | 16,761 | |||||
| Deferred rent, current portion | 11,042 | — | |||||
| Accrued royalties | 5,682 | 2,781 | |||||
| Facility exit obligation, current portion | 4,408 | — | |||||
| Acquisition related contingent consideration liability | 2,335 | 3,738 | |||||
| Other accrued expenses | 10,436 | 9,476 | |||||
| Total accrued liabilities | $ | 187,774 | $ | 156,164 | |||
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involuntary termination.
In 2011, the Company recorded a pre-tax restructuring charge of $8.1 million, primarily related to severance pay and other employee separation costs. A summary of the pre-tax charge and estimated total costs associated with the initiative is as follows (in thousands):
| Employee Separation costs | Facilities Exit Costs | Other Costs | Total | ||||||||||||
| Expense recorded in the year ended January 1, 2012 | $ | 7,683 | $ | — | $ | 453 | $ | 8,136 | |||||||
| Cash paid during the year ended January 1, 2012 | 4,187 | — | 423 | 4,610 | |||||||||||
| Amount recorded in accrued liabilities as of January 1, 2012 | $ | 3,496 | $ | — | $ | 30 | $ | 3,526 | |||||||
| Estimated total restructuring costs to be incurred | $ | 10,932 | $ | 1,600 | $ | 1,303 | $ | 13,835 | |||||||
It is expected that the accrued employee related restructuring charges will be substantially paid and the restructuring project substantially completed by the end of second quarter of 2012.
| Acquisitions |
Epicentre
On January 10, 2011, the Company acquired Epicentre, a provider of nucleic acid sample preparation reagents and specialty enzymes used in sequencing and microarray applications. Total consideration for the acquisition was $71.4 million, which included $59.4 million in net cash payments made at closing, $4.6 million in the fair value of contingent consideration settled in stock that is subject to forfeiture if certain non-revenue based milestones are not met, and $7.4 million in the fair value of contingent cash consideration of up to $15 million based on the achievement of certain revenue based milestones by January 10, 2013.
The Company estimated the fair value of contingent stock consideration based on the closing price of its common stock as of the acquisition date. Approximately 229,000 shares of common stock were issued to Epicentre shareholders in connection with the acquisition, which are subject to forfeiture if certain non-revenue-based milestones are not met. One third of these shares issued with an assessed fair value of $4.6 million were determined to be part of the purchase price. The remaining shares with an assessed fair value of $10.1 million were determined to be compensation for post-acquisition service, the cost of which will be recognized as contingent compensation expense over a period of 2 years in research and development expense or selling, general and administrative expense.
The Company estimated the fair value of contingent cash consideration using a probability weighted discounted cash flow approach, a Level 3 measurement based on unobservable inputs that are supported by little or no market activity and reflect the Company's own assumptions in measuring fair value. The Company used a discount rate of 21% in the assessment of the acquisition date fair value for the contingent cash consideration. Future changes in significant inputs such as the discount rate and estimated probabilities of milestone achievements could have a significant effect on the fair value of the contingent consideration.
The Company allocated $0.9 million of the total consideration to tangible assets, net of liabilities, and $26.9 million to identified intangible assets, including additional developed technologies of $23.3 million, customer relationships of $1.1 million, and a trade name of $2.5 million, with weighted average useful lives of approximately nine, three, and ten years, respectively. The Company recorded the excess consideration of $43.6 million as goodwill.
Prior Acquisitions
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 net cash payments 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
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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.
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 intangible assets. 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.
In addition, the Company completed the acquisition of a development-stage company in 2008, and 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 product-related and employment-related milestones. In accordance with the applicable accounting guidance effective at that time, when the contingency is resolved beyond a reasonable doubt and the additional consideration is issued or becomes issuable, the additional considerations are accounted for as an additional element of the cost of acquisition, resulting in additional IPR&D charges in the periods presented. All employment-related contingent compensation expense is recorded in operating expense.
As of January 1, 2012, the Company's remaining gross milestone obligations related to these prior year acquisitions consisted of potential employment-related milestone payments of $1.4 million. Contingent compensation expenses and IPR&D charges as a result of acquisitions consist of the following (in thousands):
| Years Ended | |||||||||||
| January 1, 2012 | January 2, 2011 | January 3, 2010 | |||||||||
| Contingent compensation expense, included in research and development expense | $ | 4,799 | $ | 3,675 | $ | 3,675 | |||||
| Contingent compensation expense, included in selling, general and administrative expense | 1,258 | — | — | ||||||||
| Total contingent compensation expense | $ | 6,057 | $ | 3,675 | $ | 3,675 | |||||
| IPR&D, included in acquisition related (gain) expense, net | $ | 5,425 | $ | 1,325 | $ | 11,325 | |||||
| 5. | Intangible Assets |
The Company’s intangible assets, excluding goodwill, are comprised primarily of acquired core technology, licensed technology from a settlement, IPR&D, license agreements, trade name, and customer relationships. Amortization for the intangible assets that have finite useful lives is recorded on a straight-line basis over their useful lives.
The following is a summary of the Company’s identifiable intangible assets as of the respective balance sheet dates (in thousands):
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| January 1, 2012 | January 2, 2011 | ||||||||||||||||||||||||||||
Weighted Average Useful Life | Gross Carrying Amount | Accumulated Amortization | Intangibles, Net | Weighted Average Useful Life | Gross Carrying Amount | Accumulated Amortization | Intangibles, Net | ||||||||||||||||||||||
| Finite-lived Intangible assets: | |||||||||||||||||||||||||||||
| Licensed technology | 8.0 | $ | 36,000 | $ | (20,000 | ) | $ | 16,000 | 8.0 | $ | 36,000 | $ | (15,849 | ) | $ | 20,151 | |||||||||||||
| Core technology | 9.7 | 74,800 | (18,544 | ) | 56,256 | 10.0 | 51,500 | (10,604 | ) | 40,896 | |||||||||||||||||||
| Customer relationships | 3.0 | 1,980 | (1,253 | ) | 727 | 3.0 | 900 | (900 | ) | — | |||||||||||||||||||
| License agreements | 8.9 | 12,404 | (2,605 | ) | 9,799 | 8.9 | 10,654 | (1,677 | ) | 8,977 | |||||||||||||||||||
| Trade name | 10.0 | 2,500 | (245 | ) | 2,255 | — | — | — | — | ||||||||||||||||||||
| Infinite-lived Intangible Asset: | |||||||||||||||||||||||||||||
| In-process research & development | — | 21,438 | — | 21,438 | — | 21,438 | — | 21,438 | |||||||||||||||||||||
| Total intangible assets, net | $ | 149,122 | $ | (42,647 | ) | $ | 106,475 | $ | 120,492 | $ | (29,030 | ) | $ | 91,462 | |||||||||||||||
Additions to intangible assets in the current year are a result of the Epicentre acquisition. Amortization expense associated with intangible assets was $13.6 million for the year ended January 1, 2012, $12.7 million of which related to acquired intangible assets. Amortization expense associated with intangible assets was $7.8 million and $6.7 million for the years ended January 2, 2011 and January 3, 2010 respectively.
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.
| 2012 | $ | 14,247 | |
| 2013 | 14,332 | ||
| 2014 | 13,548 | ||
| 2015 | 13,102 | ||
| 2016 | 8,426 | ||
| Thereafter | 21,382 | ||
| Total | $ | 85,037 | |
| 6. | Fair Value Measurements |
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 1, 2012 and January 2, 2011 (in thousands):
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| January 1, 2012 | January 2, 2011 | ||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||
| Money market funds (cash equivalent) | $ | 166,898 | $ | — | $ | — | $ | 166,898 | $ | 148,822 | $ | — | $ | — | $ | 148,822 | |||||||||||||||
| Debt securities in government sponsored entities | — | 394,039 | — | 394,039 | — | 261,697 | — | 261,697 | |||||||||||||||||||||||
| Corporate debt securities | — | 433,382 | — | 433,382 | — | 330,758 | — | 330,758 | |||||||||||||||||||||||
| U.S. Treasury securities | 59,169 | — | — | 59,169 | 52,887 | — | — | 52,887 | |||||||||||||||||||||||
| Deferred compensation plan assets | — | 10,800 | — | 10,800 | — | 6,449 | — | 6,449 | |||||||||||||||||||||||
| Total assets measured at fair value | $ | 226,067 | $ | 838,221 | $ | — | $ | 1,064,288 | $ | 201,709 | $ | 598,904 | $ | — | $ | 800,613 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||
| Acquisition related contingent consideration liability | $ | — | $ | — | $ | 6,638 | $ | 6,638 | $ | — | $ | — | $ | 3,738 | $ | 3,738 | |||||||||||||||
| Deferred compensation liability | — | 8,970 | — | 8,970 | — | 5,272 | — | 5,272 | |||||||||||||||||||||||
| Total liabilities measured at fair value | $ | — | $ | 8,970 | $ | 6,638 | $ | 15,608 | $ | — | $ | 5,272 | $ | 3,738 | $ | 9,010 | |||||||||||||||
The Company holds available-for-sale securities that consist of highly liquid, investment grade debt securities. The Company determines the fair value of its debt security holdings based on pricing from a service provider. The service provider values the securities based on "consensus pricing," using market prices from a variety of industry-standard independent data providers. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs), such as, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. The Company performs certain procedures to corroborate the fair value of its holdings, including comparing prices obtained from the service provider to prices obtained from other reliable sources.
The Company's deferred compensation plan assets consist primarily of mutual funds. See footnote "14. Employee Benefit Plans" for additional information about our deferred compensation plan.
At January 1, 2012, the Company reassessed the fair value of the contingent consideration settled in cash related to acquisitions using the income approach. These fair value measurements are Level 3 measurements. Significant assumptions used in the measurement include probabilities of achieving the remaining milestones and the discount rates, which depends on the milestone risk profiles. Due to changes in the estimated probabilities to achieve the relevant milestones and a shorter discounting period, the fair value of the contingent consideration liabilities changed, resulting in a gain of $4.5 million recorded in acquisition related (gain) expense, net, in the consolidated statements of income during the year ended January 1, 2012, respectively.
Changes in estimated fair value of contingent consideration liabilities from January 3, 2010 through January 1, 2012 are as follows (in thousands):
Contingent Consideration Liability (Level 3 Measurement) | |||
| Balance as of January 3, 2010 | $ | — | |
| Acquisition of Helixis | 14,114 | ||
| Gain recorded in acquisition related (gain) expense, net | (10,376 | ) | |
| Balance as of January 2, 2011 | $ | 3,738 | |
| Acquisition of Epicentre | 7,400 | ||
| Gain recorded in acquisition related (gain) expense, net | (4,500 | ) | |
| Balance as of January 1, 2012 | $ | 6,638 | |
| 7. | Warranties |
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The Company generally provides a one-year warranty on instruments. Additionally, the Company provides a warranty on its consumables through the expiration 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 based 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 as incurred.
Changes in the Company’s reserve for product warranties from December 28, 2008 through January 1, 2012 are as follows (in thousands):
| 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 | ||
| Additions charged to cost of revenue | 17,913 | ||
| Repairs and replacements | (22,708 | ) | |
| Balance as of January 1, 2012 | $ | 11,966 | |
| 8. | Convertible Senior Notes |
0.25% Convertible Senior Notes due 2016
In March 2011, the Company issued $800 million aggregate principal amount of 0.25% convertible senior notes due 2016 (the 2016 Notes) in an offering conducted in accordance with Rule 144A under the Securities Act of 1933, as amended. The 2016 Notes were issued at 98.25% of par value. Debt issuance costs of approximately $0.4 million primarily comprised legal, accounting, and other professional fees, the majority of which were recorded in other noncurrent assets and are being amortized to interest expense over the five-year term of the 2016 Notes. The Company issued an additional $120 million aggregate principal amount of 2016 Notes in April 2011. The net proceeds from the initial issuance and subsequent issuance, after deducting the initial purchasers' discount and the estimated offering expenses payable by the Company, were $785.6 million and $117.9 million, respectively.
The 2016 Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at the Company's election, based on an initial conversion rate, subject to adjustment, of 11.9687 shares per $1,000 principal amount of the 2016 Notes (which represents an initial conversion price of approximately $83.55+ per share), only in the following circumstances and to the following extent: (1) during the five business-day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per 2016 Note for each day of such measurement period was less than 98% 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 (and only during that quarter) after the calendar quarter ending March 31, 2011, if the last reported sale price of the Company's common stock for 20 or more trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (3) upon the occurrence of specified events described in the indenture for the 2016 Notes; and (4) at any time on or after December 15, 2015 through the second scheduled trading day immediately preceding the maturity date.
As noted in the indenture for the 2016 Notes, it is the Company's intent and policy to settle conversions through combination settlement, which essentially involves repayment of an amount of cash equal to the “principal portion” and delivery of the “share amount” in excess of the conversion value over the principal portion in shares of common stock. In general, for each $1,000 in principal, the “principal portion” of cash upon settlement is defined as the lesser of $1,000, and the conversion value during the 20-day observation period as described in the indenture for the 2016 Notes. The conversion value
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is the sum of the daily conversion value which is the product of the effective conversion rate divided by 20 days and the daily volume weighted average price (“VWAP”) of the Company's common stock. The “share amount” is the cumulative “daily share amount” during the observation period, which is calculated by dividing the daily VWAP into the difference between the daily conversion value (i.e., conversion rate x daily VWAP) and $1,000.
The Company pays 0.25% interest per annum on the principal amount of the 2016 Notes, payable semiannually in arrears in cash on March 15 and September 15 of each year, which began on September 15, 2011. The Company made an interest payment of $1.1 million in September 2011. The 2016 Notes mature on March 15, 2016. If a designated event, as defined in the indenture for the 2016 Notes, such as acquisition, merger, or liquidation, occurs prior to the maturity date, subject to certain limitations, holders of the 2016 Notes may require the Company to repurchase all or a portion of their 2016 Notes for cash at a repurchase price equal to 100% of the principal amount of the 2016 Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the repurchase date.
The Company accounts separately for the liability and equity components of the 2016 Notes in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature. Because the Company has no outstanding non-convertible public debt, the Company determined that senior, unsecured corporate bonds traded on the market represent a similar liability to the convertible senior notes without the conversion option. Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry and with similar maturity, the Company estimated the implied interest rate of its 2016 Notes to be 4.5%, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The estimated implied interest rate was applied to the 2016 Notes, which resulted in a fair value of the liability component of $748.5 million upon issuance, calculated as the present value of implied future payments based on the $920.0 million aggregate principal amount. The $155.4 million difference between the cash proceeds of $903.9 million and the estimated fair value of the liability component was recorded in additional paid-in capital as the 2016 Notes are not considered currently redeemable at the balance sheet date.
If the 2016 Notes were converted as of January 1, 2012, the if-converted value would not exceed the principal amount. As a policy election under applicable guidance related to the calculation of diluted net income per share, the Company elected the combination settlement method as its stated settlement policy and applied the treasury stock method in the calculation of dilutive impact of the 2016 Notes, which was anti-dilutive for the year ended January 1, 2012.
The Company used $314.3 million of the net proceeds to purchase 4,890,500 shares of its common stock in privately negotiated transactions concurrently with the issuance. The Company also used part of the net proceeds for the extinguishment of $349.9 million principal amount of its outstanding 0.625% convertible senior notes due 2014 upon conversions during the year ended January 1, 2012.
0.625% Convertible Senior Notes due 2014
In February 2007, the Company issued $400.0 million principal amount of 0.625% convertible senior notes due 2014 (the 2014 Notes). The Company pays 0.625% interest per annum on the principal amount of the 2014 Notes, payable semi-annually in arrears in cash on February 15 and August 15 of each year. The Company made an interest payment of $1.2 million in February 2011. Interest payment in August 2011 was immaterial due to conversions prior to the payment date. The 2014 Notes mature on February 15, 2014.
The Company entered into hedge transactions concurrently with the issuance of the 2014 Notes under which the Company is entitled to purchase up to approximately 18,322,000 shares of the Company's common stock at a strike price of approximately $21.83 per share, subject to adjustment. The convertible note hedge transactions had the effect of reducing dilution to the Company's stockholders upon conversion of the 2014 Notes. Also concurrently with the issuance of the 2014 Notes, the Company sold to the hedge counterparties warrants exercisable, on a cashless basis, for up to approximately 18,322,000 shares of the Company's common stock at a strike price of $31.435 per share, subject to adjustment. The proceeds from these warrants partially offset the cost to the Company of the convertible note hedge transactions.
The 2014 Notes became convertible into cash and shares of the Company's common stock in various prior periods and were convertible through, and including, December 31, 2011. As of January 1, 2012, the conditions to permit conversion were no longer satisfied and, as a result, the 2014 Notes were classified in long-term liabilities. During the year ended January 1,
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2012, the principal amount of all 2014 Notes converted was repaid with cash and the excess of the conversion value over the principal amount was paid in shares of common stock. The equity dilution resulting from the issuance of common stock related to the conversion of the 2014 Notes was offset by repurchase of the same amount of shares under the convertible note hedge transactions, which were automatically exercised in accordance with their terms at the time of each such conversion. The balance of the convertible note hedge transactions with respect to approximately $40.1 million principal amount of the 2014 Notes (which are convertible into up to 1,837,958 shares of the Company's common stock) remained in place as of January 1, 2012. The warrants were not affected by the early conversions of the 2014 Notes and, as a result, warrants covering up to approximately 18,322,000 shares of common stock remained outstanding as of January 1, 2012.
As a result of the conversions during the year ended January 1, 2012, the Company recorded losses on extinguishment of debt calculated as the difference between the estimated fair value of the debt and the carrying value of the notes as of the settlement dates. To measure the fair value of the converted notes as of the settlement dates, the applicable interest rates were estimated using Level 2 observable inputs and applied to the converted notes using the same methodology as in the issuance date valuation. If the 2014 Notes were converted as of January 1, 2012, the if-converted value would exceed the principal amount by $15.9 million.
The following table summarizes information about the conversions of the 2014 Notes during the year ended January 1, 2012 (in thousands, except percentages):
| January 1, 2012 | ||||
| Cash paid for principal of notes converted | $ | 349,874 | ||
| Conversion value over principal amount paid in shares of common stock | $ | 727,618 | ||
| Number of shares of common stock issued upon conversion | 10,733 | |||
| Loss on extinguishment of debt | $ | 37,611 | ||
| Effective interest rates used to measure fair value of converted notes upon conversion | 3.5% - 4.3% | |||
The following table summarizes information about the equity and liability components of the 2014 and 2016 Notes (dollars in thousands). The fair values of the respective notes outstanding were measured based on quoted market prices.
| January 1, 2012 | January 2, 2011 | |||||||||||
0.25% Convertible Senior Notes due 2016 | 0.625% Convertible Senior Notes due 2014 | 0.625% Convertible Senior Notes due 2014 | ||||||||||
| Principal amount of convertible notes outstanding | $ | 920,000 | $ | 40,125 | $ | 389,999 | ||||||
| Unamortized discount of liability component | (147,034 | ) | (5,722 | ) | (78,390 | ) | ||||||
| Net carrying amount of liability component | 772,966 | 34,403 | 311,609 | |||||||||
| Less: current portion | — | — | (311,609 | ) | ||||||||
| Long-term debt | $ | 772,966 | $ | 34,403 | $ | — | ||||||
| Conversion option subject to cash settlement | $ | — | $ | 5,722 | $ | 78,390 | ||||||
| Carrying value of equity component, net of issuance costs | $ | 155,366 | $ | 114,035 | $ | 71,199 | ||||||
| Fair value of outstanding notes | $ | 725,632 | $ | 60,122 | $ | 1,157,450 | ||||||
| Remaining amortization period of discount on the liability component | 4.2 years | 2.1 years | 3.1 years | |||||||||
| Effective interest rate of liability component | 4.5 | % | 8.3 | % | 8.3 | % | ||||||
| Contractual coupon interest expense | $ | 1,871 | $ | 414 | $ | 2,390 | ||||||
| Accretion of discount on the liability component | $ | 24,502 | $ | 7,671 | $ | 21,407 | ||||||
| 9. | Commitments |
Operating Leases
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The Company leases office and manufacturing facilities under various noncancellable operating lease agreements. Facility 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; Branford, Connecticut; Madison, Wisconsin; the United Kingdom; the Netherlands; Japan; Singapore; Australia; Brazil; and China.
Annual future minimum payments under these operating leases as of January 1, 2012 were as follows (in thousands):
| 2012 | $ | 16,336 | |
| 2013 | 22,598 | ||
| 2014 | 21,351 | ||
| 2015 | 20,355 | ||
| 2016 | 20,852 | ||
| Thereafter | 385,775 | ||
| Total | $ | 487,267 | |
Rent expense was $17.4 million, $14.7 million, and $13.6 million for the years ended January 1, 2012, January 2, 2011, and January 3, 2010, respectively.
In 2010, the Company entered into the lease agreement for its current corporate headquarters facility located in San Diego, California. The lease commenced on November 1, 2011 and 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 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. Total minimum lease payments during the initial term of the lease is expected to be $355.9 million, excluding further expansion beyond the third building, and taking no consideration of tenant improvement allowances totaling $21.9 million. The Company capitalizes the leasehold improvements and amortizes them over the shorter of the lease term or their expected useful life. The leasehold improvement allowances reduce rent expense over the initial lease term.
Lease commitments of $100.0 million related to the lease for the Company’s former headquarters are also included in the table above. Upon vacating certain buildings of its former headquarters in late 2011, the Company recorded a cease-use loss of $23.6 million and a corresponding facility exit obligation of $25.0 million, as the Company is further obligated for certain ongoing operating costs prior to any sublease that may be obtained.
The facility exit obligation as of January 1, 2012 is as follows (in thousands):
| January 1, 2012 | |||
| Facility exit obligation, current portion | $ | 4,408 | |
| Facility exit obligation, non-current | 20,641 | ||
| Total facility exit obligation | $ | 25,049 | |
| 10. | Share-based Compensation Expense |
Total share-based compensation expense for all stock awards consists of the following (in thousands):
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| Years Ended | |||||||||||
| January 1, 2012 | January 2, 2011 | January 3, 2010 | |||||||||
| Cost of product revenue | $ | 6,951 | $ | 5,378 | $ | 4,776 | |||||
| Cost of service and other revenue | 695 | 470 | 514 | ||||||||
| Research and development | 32,105 | 25,428 | 19,960 | ||||||||
| Selling, general and administrative | 52,341 | 40,369 | 35,561 | ||||||||
| Share-based compensation expense before taxes | 92,092 | 71,645 | 60,811 | ||||||||
| Related income tax benefits | (32,168 | ) | (25,231 | ) | (20,121 | ) | |||||
| Share-based compensation expense, net of taxes | $ | 59,924 | $ | 46,414 | $ | 40,690 | |||||
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 purchased under the ESPP during those periods are as follows:
| Years Ended | ||||||||
| January 1, 2012 | January 2, 2011 | January 3, 2010 | ||||||
| Stock options granted: | ||||||||
| Risk-free interest rate | 0.85 - 2.23% | 2.05 - 2.73% | 1.69 - 1.97% | |||||
| Expected volatility | 41 - 53% | 46 - 48% | 55 - 58% | |||||
| Expected term | 4.7 - 5.5 years | 6.0 years | 5.2 years | |||||
| Expected dividends | — | — | — | |||||
| Stock purchased under the ESPP: | ||||||||
| Risk-free interest rate | 0.16 - 0.30% | 0.17 - 0.48% | 0.28 - 2.90% | |||||
| Expected volatility | 43 - 48% | 46 - 48% | 48 - 58% | |||||
| Expected term | 0.5 - 1.0 years | 0.5 - 1.0 years | 0.5 - 1.0 years | |||||
| Expected dividends | — | — | — | |||||
As of January 1, 2012, approximately $158.9 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 2.4 years.
| 11. | Stockholders’ Equity |
Common Stock
On January 1, 2012 and January 2, 2011, the Company had 122,041,000 and 126,607,000 shares of common stock outstanding, respectively, excluding treasury shares.
Stock Options
On January 1, 2012, the Company had three active stock plans: the 2005 Stock and Incentive Plan (the 2005 Stock Plan), the 2005 Solexa Equity Incentive Plan (the 2005 Solexa Equity Plan), and the New Hire Stock and Incentive Plan. As of January 1, 2012, options to purchase 5,220,000 shares remained available for future grant under the 2005 Stock Plan and 2005 Solexa Equity Plan. There is no set number of shares reserved for issuance under the 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.
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The Company's stock option activity under all stock option plans from December 28, 2008 through January 1, 2012 is as follows:
| Options (in thousands) | Weighted- Average Exercise Price | Weighted Average Grant-Date Fair Value per Share | ||||||||
| Outstanding at December 28, 2008 | 18,134 | $ | 16.26 | |||||||
| Granted | 1,560 | 28.86 | $ | 14.74 | ||||||
| Exercised | (2,966 | ) | 10.56 | |||||||
| Cancelled | (639 | ) | 14.88 | |||||||
| Outstanding at January 3, 2010 | 16,089 | 18.59 | ||||||||
| Granted | 2,045 | 39.11 | 18.82 | |||||||
| Exercised | (5,541 | ) | 16.65 | |||||||
| Cancelled | (711 | ) | 21.76 | |||||||
| Outstanding at January 2, 2011 | 11,882 | 22.83 | ||||||||
| Granted | 1,399 | 64.98 | $ | 27.47 | ||||||
| Exercised | (2,784 | ) | 17.98 | |||||||
| Cancelled | (119 | ) | 33.49 | |||||||
| Outstanding at January 1, 2012 | 10,378 | $ | 29.69 | |||||||
At January 1, 2012, outstanding options to purchase 7,126,000 shares were exercisable with a weighted average per share exercise price of $23.58. The weighted average remaining life of options outstanding and exercisable is 6.1 years and 5.4 years, respectively, as of January 1, 2012.
The aggregate intrinsic value of options outstanding and options exercisable as of January 1, 2012 was $78.3 million and $71.2 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 $30.48 as of December 30, 2011, and the exercise price multiplied by the number of options outstanding. Total intrinsic value of options exercised was $136.5 million, $156.9 million, and $73.4 million for the years ended January 1, 2012, January 2, 2011, and January 3, 2010, respectively. Total fair value of options vested was $49.5 million, $47.3 million, and $52.2 million for the years ended January 1, 2012, January 2, 2011, and January 3, 2010, respectively.
Employee Stock Purchase Plan
A total of 15,467,000 shares of the Company's common stock have been reserved for issuance under its 2000 Employee Stock Purchase Plan, or 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.
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 328,000, 373,000, and 360,000 were issued under the ESPP during the years ended January 1, 2012, January 2, 2011, and January 3, 2010, respectively. The weighted average subscription date fair values of shares under the ESPP during the same periods were $20.08, $11.10, and $9.24, respectively. As of January 1, 2012 and January 2, 2011, there were 15,734,000 shares and 16,062,000 shares available for issuance under the ESPP, respectively.
Restricted Stock Units
The Company grants restricted stock units (RSUs) pursuant to its 2005 Stock and Incentive Plan as part of its periodic employee equity compensation review program. RSUs are share awards that, upon vesting, will deliver to the holder shares of
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the Company's common stock. For grants to new hires prior to July 2011, RSUs 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. For grants to new hires subsequent to July 2011, RSUs generally vest over a four-year period with equal vesting on anniversaries of the grant date. For grants to existing employees, RSUs generally vest over a four-year period with 15% vesting on the first anniversary of the grant date, 20% vesting on the second anniversary of the grant date, 30% vesting on the third anniversary of the grant date, and 35% vesting 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 RSU activity and related information from December 28, 2008 through January 1, 2012 is as follows:
Restricted Stock Units (in thousands)(1) | Weighted Average Grant-Date Fair Value per Share | |||||
| Outstanding at December 28, 2008 | 1,579 | $ | 32.68 | |||
| Awarded | 1,293 | 32.25 | ||||
| Vested | (246 | ) | 32.33 | |||
| Cancelled | (117 | ) | 33.19 | |||
| Outstanding at January 3, 2010 | 2,509 | 32.45 | ||||
| Awarded | 1,353 | 50.74 | ||||
| Vested | (510 | ) | 32.10 | |||
| Cancelled | (243 | ) | 33.36 | |||
| Outstanding at January 2, 2011 | 3,109 | 40.39 | ||||
| Awarded | 1,550 | 42.02 | ||||
| Vested | (827 | ) | 36.47 | |||
| Cancelled | (356 | ) | 42.15 | |||
| Outstanding at January 1, 2012 | 3,476 | $ | 41.87 | |||
| (1) | Each RSU represents the fair market value of one share of common stock. |
Based on the closing price per share of the Company's common stock of $30.48 and $63.34 on December 30, 2011 and December 31, 2010, respectively, the total pretax intrinsic value of all outstanding RSUs as of January 1, 2012 and January 2, 2011 was $145.5 million and $125.6 million, respectively. Total fair value of RSUs vested was $30.2 million, $16.4 million, and $8.0 million for the years ended January 1, 2012, January 2, 2011, and January 3, 2010, respectively.
Warrants
During the year ended January 1, 2012, the remaining warrants assumed by the Company in a prior acquisition to purchase approximately 505,000 shares of the Company's common stock were exercised, resulting in cash proceeds to the Company of approximately $5.5 million. As of January 1, 2012, warrants exercisable, on a cashless basis, for up to approximately 18,322,000 shares of common stock were outstanding with an exercise price of $31.435. These warrants were sold to counterparties to the Company's convertible note hedge transactions in connection with the offering of the Company's 2014 Notes, with the proceeds of such warrants used by the Company to partially offset the cost of such hedging transactions. All outstanding warrants expire in equal installments during the 40 consecutive scheduled trading days beginning on May 16, 2014.
Share Repurchases
In August 2011, the Company's board of directors authorized a $100 million discretionary repurchase program. During the year ended January 1, 2012, the Company utilized the authorized amount in its entirety and repurchased approximately 1,894,000 shares under this program.
Concurrently with the issuance of the Company's 2016 Notes in March 2011, 4,890,500 shares were repurchased for
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$314.3 million.
In July 2010, the Company's board of directors authorized a $200 million stock 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. During the year ended January 1, 2012, the Company repurchased approximately 2,438,000 shares for $156.0 million. The authorized repurchase amount had been utilized completely as of January 1, 2012.
In November 2009, upon the completion of the $75.0 million repurchase program authorized by the Company's board of directors 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 with Rule 10b-18 under the Securities Exchange Act of 1934. This program expired at the end of 2009.
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 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, a number of shares of common stock having a market value of two times the exercise price of the Right. If the Company is acquired in a merger or other business combination transaction after a person acquires 15% or more of the Company’s common stock, each Right will entitle its holder to purchase, at the Right’s then-current exercise price, a number of common shares of the acquiring company which at the time of such transaction have a market value of two times the exercise price of the Right. 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 Rights expired on May 14, 2011.
On January 25, 2012, 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. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock of the Company, par value $0.01 per share (the Preferred Shares), at a price of $275.00 per one one thousandth of a Preferred Share, subject to adjustment. The Rights will not be exercisable until such time, if ever, that the board of directors determines to eliminate its deferral of the date on which separate Rights certificates are issued and the Rights trade separately from the Company's common stock (the Distribution Date). 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, a number of shares of common stock having a market value of two times the exercise price of the Right. If the Company is acquired in a merger or other business combination transaction after a person acquires 15% or more of the Company’s common stock, each Right will entitle its holder to purchase, at the Right’s then-current exercise price, a number of common shares of the acquiring company which at the time of such transaction have a market value of two times the exercise price of the Right. The board of directors will be entitled to redeem the Rights at a price of $0.001 per Right at any time before the Distribution Date. The board of directors will also be entitled to exchange the Rights at an exchange ratio per Right of one share of common stock after any person acquires beneficial ownership of 15% or more of the outstanding common stock of the Company, and prior to the acquisition of 50% or more of the outstanding common stock of the Company. The Rights will expire on January 26, 2017.
| 12. | Legal Proceedings |
The Company is involved in various lawsuits and claims arising in the ordinary course of business, including actions with respect to intellectual property, employment, and contractual matters. In connection with these matters, the Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its financial statements. An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. The Company regularly
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reviews contingencies to determine the adequacy of the accruals and related disclosures. The amount of ultimate loss may differ from these estimates. Because of the uncertainties related to the occurrence, amount, and range of loss on any pending litigation or claim, management is currently unable to predict their ultimate outcome, to determine whether a liability has been incurred, or to make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome. The Company believes, however, that the liability, if any, resulting from the aggregate amount of losses for any outstanding litigation or claim will not have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations.
| 13. | Income Taxes |
The income (loss) before income taxes summarized by region is as follows (in thousands):
| Years Ended | |||||||||||
| January 1, 2012 | January 2, 2011 | January 3, 2010 | |||||||||
| United States | $ | (7,100 | ) | $ | 109,068 | $ | 65,081 | ||||
| Foreign | 140,145 | 76,311 | 49,044 | ||||||||
| Total income before income taxes | $ | 133,045 | $ | 185,379 | $ | 114,125 | |||||
The provision for income taxes consists of the following (in thousands):
| Years Ended | |||||||||||
| January 1, 2012 | January 2, 2011 | January 3, 2010 | |||||||||
| Current: | |||||||||||
| Federal | $ | 43,161 | $ | 39,476 | $ | 43,565 | |||||
| State | 3,958 | 8,607 | 2,511 | ||||||||
| Foreign | 24,154 | 6,330 | 6,204 | ||||||||
| Total current provision | 71,273 | 54,413 | 52,280 | ||||||||
| Deferred: | |||||||||||
| Federal | (22,738 | ) | 6,557 | (14,607 | ) | ||||||
| State | (8,050 | ) | (6,808 | ) | 5,184 | ||||||
| Foreign | 5,932 | 6,326 | (1,013 | ) | |||||||
| Total deferred provision (benefit) | (24,856 | ) | 6,075 | (10,436 | ) | ||||||
| Total tax provision | $ | 46,417 | $ | 60,488 | $ | 41,844 | |||||
The provision for income taxes reconciles to the amount computed by applying the federal statutory rate to income before taxes as follows (in thousands):
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| Years Ended | |||||||||||
| January 1, 2012 | January 2, 2011 | January 3, 2010 | |||||||||
| Tax at federal statutory rate | $ | 46,566 | $ | 64,881 | $ | 39,944 | |||||
| State, net of federal benefit | (49 | ) | 6,231 | 4,275 | |||||||
| Research and other credits | (6,774 | ) | (5,859 | ) | (4,050 | ) | |||||
| Acquired in-process research & development | 1,989 | 517 | 4,386 | ||||||||
| Change in valuation allowance | (688 | ) | (9,497 | ) | (1,967 | ) | |||||
| Permanent differences | 1,668 | 1,397 | 2,093 | ||||||||
| Change in fair value of contingent consideration | (1,311 | ) | (3,632 | ) | — | ||||||
| Impact of foreign operations | 5,579 | 7,597 | (5,400 | ) | |||||||
| Other | (563 | ) | (1,147 | ) | 2,563 | ||||||
| Total tax provision | $ | 46,417 | $ | 60,488 | $ | 41,844 | |||||
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
| January 1, 2012 | January 2, 2011 | ||||||
| Deferred tax assets: | |||||||
| Net operating losses | $ | 4,981 | $ | 11,898 | |||
| Tax credits | 16,647 | 18,329 | |||||
| Other accruals and reserves | 22,411 | 17,616 | |||||
| Stock compensation | 33,811 | 23,829 | |||||
| Inventory adjustments | 16,469 | 5,573 | |||||
| Impairment of cost-method investment | 4,972 | 5,058 | |||||
| Other amortization | 4,521 | 4,893 | |||||
| Other | 8,861 | 3,588 | |||||
| Total gross deferred tax assets | 112,673 | 90,784 | |||||
| Valuation allowance on deferred tax assets | (1,799 | ) | (4,986 | ) | |||
| Total deferred tax assets | 110,874 | 85,798 | |||||
| Deferred tax liabilities: | |||||||
| Purchased intangible amortization | (19,760 | ) | (22,605 | ) | |||
| Convertible debt | (49,404 | ) | (3,191 | ) | |||
| Other | (12,322 | ) | (7,137 | ) | |||
| Total deferred tax liabilities | (81,486 | ) | (32,933 | ) | |||
| Net deferred tax assets | $ | 29,388 | $ | 52,865 | |||
A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. During the year ended January 1, 2012, the valuation allowance decreased by $3.2 million primarily due to the dissolution of a dormant foreign subsidiary that was finalized during the fourth quarter. Based on the available evidence as of January 1, 2012, 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 $1.8 million against certain U.S. deferred tax assets.
As of January 1, 2012, the Company had net operating loss carryforwards for federal and state tax purposes of $25.2 million and $162.0 million, respectively, which begin to expire in 2020 and 2013, respectively, unless utilized prior. In addition, the Company also had U.S. federal and state research and development tax credit carryforwards of $11.0 million and $34.3 million, respectively, which begin to expire in 2028 and 2019, respectively, unless utilized prior.
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Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of the Company’s net operating loss 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. The deferred tax assets as of January 1, 2012 are net of any previous limitations due to Section 382 and 383.
The Company recognizes excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, the Company follows the with-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 the year ended January 1, 2012, the Company realized $43.1 million of such excess tax benefits, and accordingly recorded a corresponding credit to additional paid in capital. As of January 1, 2012, the Company has $12.8 million of unrealized excess tax benefits associated with share-based compensation. These tax benefits will be accounted for as a credit to additional paid-in capital, if and when realized, rather than a reduction of the provision for income taxes.
The Company’s manufacturing operations in Singapore operate under various tax holidays and incentives that begin to expire in 2018. For the year ended January 1, 2012, these tax holidays and incentives resulted in an approximate $4.4 million decrease to the provision for income taxes and an increase to net income per diluted share of $0.03.
It is the Company's intention to indefinitely reinvest all current and future foreign earnings in order to ensure sufficient working capital and expand existing operations outside the United States. Accordingly, residual U.S. income taxes have not been provided on $102.8 million of undistributed earnings of foreign subsidiaries as of January 1, 2012. In the event the Company was required to repatriate funds from outside of the United States, such repatriation would be subject to local laws, customs, and tax consequences.
The following table summarizes the gross amount of the Company’s uncertain tax positions (in thousands):
| January 1, 2012 | January 2, 2011 | January 3, 2010 | |||||||||
| Balance at beginning of year | $ | 22,729 | $ | 11,760 | $ | 9,402 | |||||
| Increases related to prior year tax positions | 875 | 5,066 | — | ||||||||
| Decreases related to prior year tax positions | (382 | ) | — | — | |||||||
| Increases related to current year tax positions | 5,174 | 5,903 | 2,358 | ||||||||
| Balance at end of year | $ | 28,396 | $ | 22,729 | $ | 11,760 | |||||
Included in the balance of uncertain tax positions as of January 1, 2012, and January 2, 2011 are $23.4 million and $18.3 million, respectively, of net unrecognized tax benefits that, if recognized, would reduce the Company's effective income tax rate in future periods.
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 are reflected in income tax expense. During 2011, the Company recognized expenses of $1.1 million related to potential interest and penalties on uncertain tax positions. A minimal amount was recognized in 2010 for potential interest and penalties on uncertain tax positions. The Company recorded a liability for potential interest and penalties of $1.2 million as of January 1, 2012 and the liability was minimal as of January 2, 2011. Tax years 1997 to 2011 remain subject to future examination by the major tax jurisdictions in which the Company is subject to tax.
| 14. | 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 1, 2012, January 2, 2011, and January 3, 2010, the Company made matching contributions of $5.3 million, $4.2 million, and $3.3 million, respectively.
Deferred Compensation Plan
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The 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 independent investment funds. On a discretionary basis, the Company may also make employer contributions to participant accounts in any amount determined by the Company. The vesting schedules of employer contributions are at the sole discretion of the Compensation Committee. However, all employer contributions shall become 100% vested upon the occurrence of the participant’s disability, death or retirement or a change in control of the Company. The benefits under this plan are unsecured. Participants are generally eligible to receive payment of their vested benefit at the end of their elected deferral period or after termination of their employment with the Company for any reason or at a later date to comply with the restrictions of Section 409A. As of January 1, 2012, no employer contributions were made to the Plan.
In January 2008, the Company also established a rabbi trust for the benefit of the participants under the Plan. In accordance with authoritative guidance related to consolidation of variable interest entities and accounting for deferred compensation arrangements where amounts earned are held in a rabbi trust and invested, the Company has included the assets of the rabbi trust in its consolidated balance sheet since the trust’s inception. As of January 1, 2012 and January 2, 2011, the assets of the trust were $10.8 million and $6.4 million, respectively, and liabilities of the Company were $9.0 million and $5.3 million, respectively. The assets and liabilities are classified as other assets and accrued liabilities, respectively, on the Company’s consolidated balance sheets. Changes in the values of the assets held by the rabbi trust are recorded in other (expense) income, net in the consolidated statement of income, and changes in the values of the deferred compensation liabilities are recorded in selling, general and administrative expenses.
| 15. | Segment Information, Geographic Data, and Significant Customers |
The Company is organized in two operating segments: Life Sciences and Diagnostics. Life Sciences operating segment includes all products and services related to the research market, namely the product lines based on the Company’s sequencing, BeadArray, VeraCode, and real-time PCR technologies. The Diagnostics operating segment focuses on the emerging opportunity in molecular diagnostics. During all periods presented, the Diagnostics operating segment had limited activity. Accordingly, the Company’s operating results for both units were reported on an aggregate basis as one reportable segment. The Company will begin reporting in two segments once revenues, operating profit or loss, or assets of the Diagnostics operating segment exceeds 10% of the consolidated amounts.
The Company had revenue in the following regions for the years ended January 1, 2012, January 2, 2011, and January 3, 2010 (in thousands):
| Years Ended | |||||||||||
| January 1, 2012 | January 2, 2011 | January 3, 2010 | |||||||||
| United States | $ | 528,723 | $ | 498,981 | $ | 347,195 | |||||
| United Kingdom | 67,578 | 60,521 | 55,854 | ||||||||
| Other European countries | 210,393 | 163,062 | 140,931 | ||||||||
| Asia-Pacific | 197,005 | 143,441 | 96,396 | ||||||||
| Other markets | 51,836 | 36,736 | 25,948 | ||||||||
| Total | $ | 1,055,535 | $ | 902,741 | $ | 666,324 | |||||
Net revenues are attributable to geographic areas based on the region of destination.
The majority of our product sales consist of consumables and instruments. For the years ended January 1, 2012, January 2, 2011, and January 3, 2010, consumable sales represented 56%, 56%, and 59%, respectively, of total revenues and instrument sales comprised 35%, 36%, and 34%, respectively, of total revenues. The Company’s customers include leading genomic research centers, academic institutions, government laboratories, and clinical research organizations, as well as pharmaceutical, biotechnology, agrigenomics, and consumer genomics companies. The Company had no customers that provided more than 10% of total revenue in the years ended January 1, 2012, January 2, 2011, and January 3, 2010.
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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 January 1, 2012 and January 2, 2011 (in thousands):
| January 1, 2012 | January 2, 2011 | ||||||
| United States | $ | 94,624 | $ | 75,050 | |||
| United Kingdom | 22,642 | 26,578 | |||||
| Singapore | 14,673 | 14,739 | |||||
| Other countries | 11,544 | 13,507 | |||||
| Total | $ | 143,483 | $ | 129,874 | |||
| 16. | 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 2011 and 2010 ended January 1, 2012 and January 2, 2011, respectively were 13 weeks. Summarized quarterly data for fiscal years 2011 and 2010 are as follows (in thousands except per share data):
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| 2011: | |||||||||||||||
| Total revenue | $ | 282,515 | $ | 287,450 | $ | 235,499 | $ | 250,071 | |||||||
| Gross profit | 188,041 | 193,356 | 157,115 | 170,586 | |||||||||||
| Net income | 24,137 | 30,620 | 20,151 | 11,720 | |||||||||||
| Net income per share, basic | 0.19 | 0.25 | 0.17 | 0.10 | |||||||||||
| Net income per share, diluted | 0.16 | 0.22 | 0.15 | 0.09 | |||||||||||
| 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 | |||||||||||
| 17. | Subsequent Event |
On January 27, 2012, CKH Acquisition Corporation, a Delaware corporation and an indirect wholly-owned subsidiary of Roche Holding Ltd, a joint stock company organized under the laws of Switzerland (together, “Roche”), commenced an unsolicited tender offer (the "Offer") to purchase all outstanding shares of common stock of the Company for $44.50 per share. As more fully described in the Company's Solicitation/Recommendation on Schedule 14D-9 filed with the SEC on February 7, 2012 in response to the Offer, the Board of Directors unanimously recommended that the Company's stockholders reject the Roche offer and not tender their shares to Roche for purchase.
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.
76
Based on management’s evaluation under(under the supervision and with the participation of our management, including our principalchief executive officer (CEO) and principalchief financial officer (CFO)), as of the effectivenessend of the designperiod covered by this report, our CEO and
43
During the fourth quarter of 2011, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and evaluating our disclosure controls and procedures, our management recognized15d-15(f) of the Exchange Act) that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desiredmaterially affected or are reasonably likely to materially affect internal 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.over financial reporting.
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 20082011 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 December 28, 2008.January 1, 2012. The effectiveness of our internal control over financial reporting as of December 28, 2008January 1, 2012 has been audited by Ernst & Young LLP, an independent registered accounting firm, as stated in their report which is included herein.
44
77
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,January 1, 2012, 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,January 1, 2012, 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, 2008January 1, 2012 and December 30, 2007,January 2, 2011, and the related consolidated statements of operations,income, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended December 28, 2008January 1, 2012 of Illumina, Inc. and our report dated February 24, 200923, 2012 expressed an unqualified opinion thereon.
/s/ EErnstRNST & YoungYOUNG LLP
San Diego, California
February 24, 200923, 2012
45
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| Other Information. |
None.
PART III
| 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”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 20092012 Annual Meeting of Stockholders to be filed with the SEC no later than April 27, 2009.30, 2012.
(b) Identification of Executive Officers. Information concerning our executive officers is set forth underincorporated by reference from the section entitled “Executive Officers” to be contained in Part Iour definitive Proxy Statement with respect to our 2012 Annual Meeting of this Annual Report onForm 10-KStockholders to be filed with the SEC no later than April 30, 2012. 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“Section 16(a) of the Securities Exchange Act”Beneficial Ownership Reporting Compliance” to be contained in our definitive Proxy Statement with respect to our 20092012 Annual Meeting of Stockholders to be filed with the SEC no later than April 27, 2009.30, 2012.
(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 20092012 Annual Meeting of Stockholders to be filed with the SEC no later than April 27, 2009.30, 2012.
Code of Ethics
We have adopted a code of ethics for our directors, officers, and employees, which is available on our website at www.illumina.com in the Corporate Governance portal of the Investor InformationRelations section under “Corporate.“Company.” A copy of the Code of Ethics is available in print free of charge to any stockholder who requests a copy. Interested parties may address a written request for a printed copy of the Code of Ethics to: Corporate Secretary, Illumina, Inc., 5200 Illumina Way, San Diego, California 92122. 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.
| Executive Compensation. |
Information concerning executive compensation is incorporated by reference from the sections entitled “Compensation Discussion and Analysis,” “Director Compensation,” and “Executive Compensation and Other Information”Compensation” to be contained in our definitive Proxy Statement with respect to our 20092012 Annual Meeting of Stockholders to be filed with the SEC no later than April 27, 2009.30, 2012.
| 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“Stock Ownership of Securities”Principal Stockholders and Management,” “Executive Compensation,” and “Equity Compensation Plan Information” to be contained in our definitive Proxy Statement with respect to our 20092012 Annual Meeting of Stockholders to be filed with the SEC no later than April 27, 2009.30, 2012.
| 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 Other Information”“Certain Relationships and “CertainRelated Party Transactions” to be contained in our definitive Proxy Statement with respect to our 20092012 Annual Meeting of Stockholders to be filed with the SEC no later than April 27, 2009.30, 2012.
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79
| 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 Accounting Firm” and “Independent Registered Public Accountants” to be contained in our definitive Proxy Statement with respect to our 20092012 Annual Meeting of Stockholders to be filed with the SEC no later than April 27, 2009.30, 2012.
PART IV
| Exhibits, Financial Statement Schedules. |
2. Financial Statement Schedule: See “Schedule II — Valuation and Qualifying Accounts and Reserves” in this section of this Form 10-K.
3. Exhibits: The following documentsexhibits listed in the accompanying index to exhibits are filed or incorporated by reference as a part of this report:Form 10-K.
80
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Balance at Beginning of Period | Additions Charged to Expense/ Revenue(1) | Deductions(2) | Balance at End of Period | ||||||||||
| (In thousands) | |||||||||||||
| Year ended January 1, 2012 | |||||||||||||
| Allowance for doubtful accounts | $ | 1,686 | 4,201 | (1,890 | ) | $ | 3,997 | ||||||
| Reserve for inventory | 12,273 | 14,160 | (11,935 | ) | 14,498 | ||||||||
| 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 | ||||||||
| (1) | Additions to the allowance for doubtful accounts and reserve for inventory are charged to selling, general and administrative expense and cost of product revenue respectively. |
| (2) | ||||
| obsolete inventory. |
81
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 | 9/23/2008 | ||||||||
| 3.2 | Amended and Restated Bylaws | 8-K | 000-30361 | 3.2 | 4/27/2010 | ||||||||
| 3.3 | Certificate of Designations of Series A Junior Participating Preferred Stock, as filed with the Secretary of State of the State of Delaware on January 26, 2012 | 8-K | 000-30361 | 3.1 | 1/26/2012 | ||||||||
| 4.1 | Specimen Common Stock Certificate | S-1/A | 333-33922 | 4.1 | 7/3/2000 | ||||||||
| 4.2 | Rights Agreement, dated as of January 26, 2012, between Illumina, Inc. and Computershare Trust Company, N.A., as Rights Agent | 8-K | 000-30361 | 4.1 | 1/26/2012 | ||||||||
| 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 | 2/16/2007 | ||||||||
| 4.4 | Indenture related to the 0.25% Convertible Senior Notes due 2016, dated as of March 18, 2011, between Illumina and The Bank of New York Mellon Trust Company, N.A., as trustee | 10-Q | 000-30361 | 4.1 | 5/4/2011 | ||||||||
| +10.1 | Form of Indemnification Agreement between Illumina and each of its directors and executive officers | 10-Q | 000-30361 | 10.55 | 7/25/2008 | ||||||||
| +10.2 | Amended and Restated Change in Control Severance Agreement between Illumina and Jay T Flatley, dated October 22, 2008 | 10-K | 000-30361 | 10.33 | 2/26/2009 | ||||||||
| +10.3 | Form of Change in Control Severance Agreement between Illumina and each of its executive officers | 10-K | 000-30361 | 10.34 | 2/26/2009 | ||||||||
| +10.4 | 2000 Employee Stock Purchase Plan, as amended and restated through February 2, 2012 | X | |||||||||||
| +10.5 | 2005 Stock and Incentive Plan, as amended and restated through April 22, 2010 | S-8 | 333-168393 | 4.5 | 7/29/2010 | ||||||||
| +10.6 | Form of Restricted Stock Unit Agreement for Non-Employee Directors under 2005 Stock and Incentive Plan | X | |||||||||||
| +10.7 | Form of Stock Option Agreement for Non-Employee Directors under 2005 Stock and Incentive Plan | X | |||||||||||
| +10.8 | Form of Restricted Stock Unit Agreement for Employees under 2005 Stock and Incentive Plan | X | |||||||||||
| +10.9 | Form of Stock Option Agreement for Employees under 2005 Stock and Incentive Plan | X | |||||||||||
| +10.10 | New Hire Stock and Incentive Plan, as amended and restated through October 28, 2009 | 10-K | 000-30361 | 10.7 | 2/26/2010 | ||||||||
82
| 10.11 | License Agreement, effective as of May 6, 1998, between Tufts University and Illumina | 10-Q | 000-30361 | 10.5 | 5/3/2007 | ||||||||
| +10.12 | The Solexa Unapproved Company Share Option Plan | 8-K | 000-30361 | 99.3 | 11/26/2007 | ||||||||
| +10.13 | The Solexa Share Option Plan for Consultants | 8-K | 000-30361 | 99.4 | 11/26/2007 | ||||||||
| +10.14 | Solexa Limited Enterprise Management Incentive Plan | 8-K | 000-30361 | 99.5 | 11/26/2007 | ||||||||
| +10.15 | Amended and Restated Solexa 2005 Equity Incentive Plan | 10-K | 000-30361 | 10.25 | 2/26/2009 | ||||||||
| +10.16 | Amended and Restated Solexa 1992 Stock Option Plan | 10-K | 000-30361 | 10.26 | 2/26/2009 | ||||||||
| 10.17 | 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 | 3/2/2004 | ||||||||
| 10.18 | 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 | 3/2/2004 | ||||||||
| 10.19 | 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 | 5/3/2007 | ||||||||
| 10.20 | 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 | 11/12/2004 | ||||||||
| 10.21 | Collaboration Agreement, dated December 17, 2004, between Invitrogen Corporation and Illumina (with certain confidential portions omitted) | 10-K | 000-30361 | 10.28 | 3/8/2005 | ||||||||
| 10.22 | 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 | 8/2/2006 | ||||||||
| 10.23 | 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 | 5/3/2007 | ||||||||
| 10.24 | Settlement and Release Agreement between Affymetrix, Inc. and Illumina, dated January 9, 2008 | 10-K | 000-30361 | 10.44 | 2/26/2008 | ||||||||
| 10.25 | Confirmation of Convertible Bond Hedge Transaction, dated February 12, 2007, by and between Illumina and Goldman, Sachs & Co. | 8-K | 000-30361 | 10.1 | 2/16/2007 | ||||||||
| 10.26 | 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 | 2/16/2007 | ||||||||
| 10.27 | Confirmation Issuer Warrant Transaction, dated February 12, 2007, by and between Illumina and Goldman, Sachs & Co. | 8-K | 000-30361 | 10.3 | 2/16/2007 | ||||||||
| 10.28 | Confirmation Issuer Warrant Transaction, dated February 12, 2007, by and between Illumina and Deutsche Bank AG London | 8-K | 000-30361 | 10.4 | 2/16/2007 | ||||||||
| 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. | ||
47
83
| 10.29 | 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 | 2/16/2007 | ||||||||
| 10.30 | 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 | 2/16/2007 | ||||||||
| 10.31 | Lease Agreement, dated December 30, 2010, between ARE-SD Region No. 32, LLC and Illumina | 10-K | 000-30361 | 10.35 | 2/28/2011 | ||||||||
| +10.32 | Deferred Compensation Plan, effective December 1, 2007 | 14D-9 | 005-60457 | 99(e)(6) | 2/7/2012 | ||||||||
| 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 Marc A. Stapley 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 Marc A. Stapley 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 | |||||||||||
| 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 | |
49
50
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.
84
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, 2009.23, 2012.
ILLUMINA, INC. | ||
| By | /s/ JAY T. FLATLEY | |
Jay T. Flatley President and Chief Executive Officer | ||
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,Marc A. Stapley, 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.
85
/s/ J | President, Chief Executive Officer and Director (Principal Executive Officer) | February | ||||
| Jay T. Flatley | ||||||
/s/ | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | February | ||||
| Marc A. Stapley | ||||||
/s/ W | Chairman of the Board of Directors | February | ||||
| William H. Rastetter | ||||||
/s/ A. | Director | February | ||||
| A. Blaine Bowman | ||||||
/s/ D | Director | February | ||||
| Daniel M. Bradbury | ||||||
/s/ K | ||||||
52
| Director | February | |||||
| Karin Eastham | ||||||
/s/ P | Director | February | ||||
| Paul Grint | ||||||
| /s/ Gerald Möller | Director | February 23, 2012 | ||||
| Gerald Möller | ||||||
/s/ D | Director | February | ||||
53
F-2
| December 28, | December 30, | |||||||
| 2008 | 2007 | |||||||
| (In thousands) | ||||||||
ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 327,024 | $ | 174,941 | ||||
| Short-term investments | 313,051 | 211,141 | ||||||
| Accounts receivable, net | 133,266 | 83,119 | ||||||
| Inventory, net | 73,431 | 53,980 | ||||||
| Deferred tax assets — current portion | 8,635 | 26,934 | ||||||
| Prepaid expenses and other current assets | 9,530 | 12,640 | ||||||
| Total current assets | 864,937 | 562,755 | ||||||
| Property and equipment, net | 89,436 | 46,274 | ||||||
| Long-term investments | 55,900 | — | ||||||
| Goodwill | 228,734 | 228,734 | ||||||
| Intangible assets, net | 47,755 | 58,116 | ||||||
| Deferred tax assets — long term portion | 78,321 | 80,245 | ||||||
| Other assets, net | 12,017 | 11,608 | ||||||
| Total assets | $ | 1,377,100 | $ | 987,732 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 29,204 | $ | 24,311 | ||||
| Litigation settlements payable | — | 90,536 | ||||||
| Accrued liabilities | 80,355 | 50,852 | ||||||
| Current portion of long-term debt | 399,999 | 16 | ||||||
| Total current liabilities | 509,558 | 165,715 | ||||||
| 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 | ||||||
| Commitments and contingencies | ||||||||
| 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 | ||||||
| Additional paid-in capital | 1,499,708 | 1,043,674 | ||||||
| Accumulated other comprehensive income | 2,406 | 1,347 | ||||||
| Accumulated deficit | (332,500 | ) | (382,977 | ) | ||||
| 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 | ) | ||||
| Total stockholders’ equity | 848,596 | 411,678 | ||||||
| Total liabilities and stockholders’ equity | $ | 1,377,100 | $ | 987,732 | ||||
F-3
| 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 | |||||||||
F-4
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Deferred | Comprehensive | Accumulated | Treasury Stock | Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Compensation | Income | Deficit | Shares | Amount | Equity | ||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||
| Balance as of January 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: | ||||||||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale securities, net of deferred tax | — | — | — | — | 10,693 | — | — | — | 10,693 | |||||||||||||||||||||||||||
| Unrealized loss on hedging contracts | — | — | — | — | (10 | ) | — | — | — | (10 | ) | |||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | 353 | — | — | — | 353 | |||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 39,968 | — | — | 39,968 | |||||||||||||||||||||||||||
| Comprehensive income | 51,004 | |||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2006 | 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 | |||||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | 4,923 | 49 | 44,281 | — | — | — | — | — | 44,330 | |||||||||||||||||||||||||||
| Warrants exercised | 356 | 4 | 2,987 | — | — | — | — | — | 2,991 | |||||||||||||||||||||||||||
| Stock-based compensation | — | — | 47,695 | — | — | — | — | — | 47,695 | |||||||||||||||||||||||||||
| Incremental tax benefit related to stock options exercised | — | — | 18,501 | — | — | — | — | — | 18,501 | |||||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | — | (3,109 | ) | (70,785 | ) | (70,785 | ) | ||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale securities, net of deferred tax | — | — | — | — | 920 | — | — | — | 920 | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | 139 | — | — | — | 139 | |||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 50,477 | — | — | 50,477 | |||||||||||||||||||||||||||
| Comprehensive income | 51,552 | |||||||||||||||||||||||||||||||||||
| Balance as of December 28, 2008 | 138,937 | $ | 1,389 | $ | 1,499,708 | $ | — | $ | 2,406 | $ | (332,500 | ) | (17,928 | ) | $ | (322,407 | ) | $ | 848,596 | |||||||||||||||||
F-5
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 28, | December 30, | December 31, | ||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| (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: | ||||||||||||
| Acquired in-process research and development | 24,660 | 303,400 | — | |||||||||
| Amortization of increase in inventory valuation | — | 942 | — | |||||||||
| Amortization of intangible assets | 10,438 | 2,429 | — | |||||||||
| Amortization of debt issuance costs | 1,374 | 1,176 | — | |||||||||
| Depreciation expense | 17,285 | 11,464 | 6,032 | |||||||||
| Loss on disposal of property and equipment | 262 | 15 | 116 | |||||||||
| Impairment of manufacturing equipment | 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 | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | (57,672 | ) | (37,060 | ) | (21,733 | ) | ||||||
| Inventory | (19,560 | ) | (27,130 | ) | (9,728 | ) | ||||||
| Prepaid expenses and other current assets | 2,322 | (6,127 | ) | (1,591 | ) | |||||||
| Deferred income taxes | 38,692 | (11,408 | ) | (548 | ) | |||||||
| Other assets | (1,815 | ) | 2,612 | (5,212 | ) | |||||||
| Accounts payable | 4,840 | 12,262 | 2,438 | |||||||||
| Litigation settlements payable | (54,536 | ) | 54,536 | — | ||||||||
| Accrued income taxes | 2,377 | 1,586 | 1,809 | |||||||||
| Accrued liabilities | 29,339 | 15,901 | 9,066 | |||||||||
| Other long-term liabilities | 6,313 | (3,418 | ) | 5,893 | ||||||||
| Net cash provided by operating activities | 87,882 | 56,294 | 39,000 | |||||||||
| 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 | ) | ||||||
| Sales and maturities of available-for-sale securities | 411,817 | 479,415 | 143,846 | |||||||||
| Purchase of property and equipment | (59,693 | ) | (24,301 | ) | (15,114 | ) | ||||||
| Cash paid for intangible assets | (36,000 | ) | (85 | ) | (100 | ) | ||||||
| Net cash used in investing activities | (277,249 | ) | (67,686 | ) | (160,735 | ) | ||||||
| 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 | — | |||||||||
| Common stock repurchases | (70,785 | ) | (251,622 | ) | — | |||||||
| Proceeds from secondary offering, net of issuance cost | 342,650 | — | — | |||||||||
| Proceeds from issuance of common stock | 44,330 | 30,179 | 107,966 | |||||||||
| 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 increase (decrease) in cash and cash equivalents | 152,083 | 136,555 | (12,436 | ) | ||||||||
| Cash and cash equivalents at beginning of the year | 174,941 | 38,386 | 50,822 | |||||||||
| Cash and cash equivalents at end of the year | $ | 327,024 | $ | 174,941 | $ | 38,386 | ||||||
| Supplemental disclosures of cash flow information: | ||||||||||||
| Cash paid for interest | $ | 2,553 | $ | 1,378 | $ | 11 | ||||||
| Cash (refunded) paid for income taxes | $ | (1,653 | ) | $ | 2,581 | $ | 1,392 | |||||
F-6
F-7
F-8
F-9
F-10
F-11
F-12
| Year Ended | Year Ended | Year Ended | ||||
| December 28, | December 30, | December 31, | ||||
| 2008 | 2007 | 2006 | ||||
| Interest rate — stock options | 2.31 - 3.52% | 3.68 - 4.90% | 4.73% | |||
| Interest rate — stock purchases | 1.88 - 4.71% | 4.71 - 4.86% | 4.08 -4.85% | |||
| Volatility — stock options | 51 - 65% | 55 - 70% | 76% | |||
| Volatility — stock purchases | 53 - 69% | 69 - 76% | 76 - 90% | |||
| Expected life — stock options | 5 - 6 years | 6 years | 6 years | |||
| Expected life — stock purchases | 6 - 12 months | 6 - 12 months | 6 - 12 months | |||
| Expected dividend yield | 0% | 0% | 0% | |||
| Weighted average fair value per share of options granted | $18.31 | $12.86 | $9.44 | |||
| Weighted average fair value per share of employee stock purchases | $11.45 | $7.33 | $2.38 |
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 28, | December 30, | December 31, | ||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Cost of product revenue | $ | 4,710 | $ | 4,045 | $ | 1,289 | ||||||
| Cost of service and other revenue | 400 | 279 | 235 | |||||||||
| Research and development | 14,086 | 10,016 | 3,891 | |||||||||
| Selling, general and administrative | 28,492 | 19,406 | 8,889 | |||||||||
| Share-based compensation expense before taxes | 47,688 | 33,746 | 14,304 | |||||||||
| Related income tax benefits | (15,844 | ) | (11,005 | ) | — | |||||||
| Share-based compensation expense, net of taxes | $ | 31,844 | $ | 22,741 | $ | 14,304 | ||||||
| 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
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 28, | December 30, | December 31, | ||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| 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 | |||||||||
| Plus: Effect of dilutive Convertible Senior Notes | 6,653 | — | — | |||||||||
| Plus: Effect of dilutive equity awards | 5,373 | — | 8,506 | |||||||||
| Plus: Effect of dilutive warrants sold in connection with the Convertible Senior Notes | 2,487 | — | — | |||||||||
| Plus: Effect of dilutive warrants assumed in the acquisition of Solexa | 2,239 | — | — | |||||||||
| Weighted-average shares used in calculating diluted net income (loss) per share | 133,607 | 108,308 | 97,508 | |||||||||
| Weighted average shares excluded from calculation due to anti-dilutive effect | 370 | 42,882 | 401 | |||||||||
| 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 | ||||
F-14
F-15
F-16
| 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 | ||
| 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 | ) | |||
F-17
| 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 | |||||||
| 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 | |||||||
| Estimated | ||||
| Fair Value | ||||
| Due within one year | $ | 204,774 | ||
| After one but within five years | 108,277 | |||
| Total | $ | 313,051 | ||
| 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
| 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 | ||||
| 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 | ||||
| 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 | ||||
F-19
F-20
F-21
| December 28, 2008 | December 30, 2007 | |||||||||||||||||||||||
| Gross Carrying | Accumulated | Intangibles, | Gross Carrying | Accumulated | Intangibles, | |||||||||||||||||||
| Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
| Licensed technology | $ | 36,000 | $ | (7,788 | ) | $ | 28,212 | $ | 36,000 | $ | — | $ | 36,000 | |||||||||||
| Core technology | 23,500 | (4,504 | ) | 18,996 | 23,500 | (2,154 | ) | 21,346 | ||||||||||||||||
| Customer relationships | 900 | (575 | ) | 325 | 900 | (275 | ) | 625 | ||||||||||||||||
| License agreements | 1,154 | (932 | ) | 222 | 1,029 | (884 | ) | 145 | ||||||||||||||||
| Total intangible assets, net | $ | 61,554 | $ | (13,799 | ) | $ | 47,755 | $ | 61,429 | $ | (3,313 | ) | $ | 58,116 | ||||||||||
| 2009 | $ | 6,749 | ||
| 2010 | 6,462 | |||
| 2011 | 6,425 | |||
| 2012 | 6,618 | |||
| 2013 | 6,518 | |||
| Thereafter | 14,983 | |||
| Total | $ | 47,755 | ||
F-22
| 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 | ||
F-23
| 2009 | $ | 11,032 | ||
| 2010 | 11,122 | |||
| 2011 | 11,823 | |||
| 2012 | 11,920 | |||
| 2013 | 11,458 | |||
| Thereafter | 100,885 | |||
| Total | $ | 158,240 | ||
F-24
F-25
| Weighted- | ||||||||
| Average | ||||||||
| Options | Exercise Price | |||||||
| 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 | ||||
| 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 | |||||
| Granted | 3,091,108 | $ | 34.23 | |||||
| Exercised | (4,571,855 | ) | $ | 8.52 | ||||
| Cancelled | (1,232,917 | ) | $ | 19.93 | ||||
| Outstanding at December 28, 2008 | 18,134,204 | $ | 16.26 | |||||
| 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 | |||||||||||||
F-26
| David R. Walt | ||||
/s/ ROY WHITFIELD | ||||
| February 23, 2012 | ||||
| Roy Whitfield |
F-27
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 | ||||||||
F-28
F-29
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 28, | December 30, | December 31, | ||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| United States | $ | 64,424 | $ | 58,445 | $ | 42,612 | ||||||
| Foreign | 26,482 | (347,230 | ) | 8 | ||||||||
| Total income (loss) before income taxes | $ | 90,906 | $ | (288,785 | ) | $ | 42,620 | |||||
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 28, | December 30, | December 31, | ||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | 13,868 | $ | 18,564 | $ | 1,125 | ||||||
| State | 2,134 | 4,801 | 1,177 | |||||||||
| Foreign | 5,042 | (2,172 | ) | 903 | ||||||||
| Total current provision | 21,044 | 21,193 | 3,205 | |||||||||
| Deferred: | ||||||||||||
| Federal | 17,656 | (20,254 | ) | — | ||||||||
| State | 2,103 | (11,622 | ) | — | ||||||||
| Foreign | (374 | ) | 257 | (553 | ) | |||||||
| Total deferred provision | 19,385 | (31,619 | ) | (553 | ) | |||||||
| Total tax provision (benefit) | $ | 40,429 | $ | (10,426 | ) | $ | 2,652 | |||||
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 28, | December 30, | December 31, | ||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Tax at federal statutory rate | $ | 31,817 | $ | (101,075 | ) | $ | 14,945 | |||||
| State, net of federal benefit | 4,242 | (9,672 | ) | 1,963 | ||||||||
| Alternative minimum tax | — | — | 1,125 | |||||||||
| Research and other credits | (4,060 | ) | (3,118 | ) | (3,096 | ) | ||||||
| Acquired in-process research & development | 9,508 | 116,916 | — | |||||||||
| Adjustments to deferred tax balances | — | — | (3,258 | ) | ||||||||
| Change in valuation allowance | (149 | ) | (17,125 | ) | (10,038 | ) | ||||||
| Permanent differences | 1,449 | 653 | 573 | |||||||||
| Foreign rate adjustments | (2,619 | ) | 3,160 | 430 | ||||||||
| Other | 241 | (165 | ) | 8 | ||||||||
| Total tax provision (benefit) | $ | 40,429 | $ | (10,426 | ) | $ | 2,652 | |||||
F-30
| December 28, | December 30, | |||||||
| 2008 | 2007 | |||||||
| Deferred tax assets: | ||||||||
| Net operating losses | $ | 18,557 | $ | 34,277 | ||||
| Tax credits | 19,139 | 11,465 | ||||||
| Accrued litigation settlements | — | 21,427 | ||||||
| Other accruals and reserves | 11,341 | 6,326 | ||||||
| Stock compensation | 15,962 | 8,166 | ||||||
| Convertible debt | 42,456 | 49,137 | ||||||
| Other | 13,268 | 12,322 | ||||||
| Total deferred tax assets | 120,723 | 143,120 | ||||||
| Valuation allowance on deferred tax assets | (15,200 | ) | (28,343 | ) | ||||
| Net deferred tax assets | 105,523 | 114,777 | ||||||
| Deferred tax liabilities: | ||||||||
| Purchased intangible amortization | (5,985 | ) | (7,084 | ) | ||||
| Accrued litigation settlements | (11,084 | ) | — | |||||
| Other | (1,498 | ) | (514 | ) | ||||
| Total deferred tax liabilities | (18,567 | ) | (7,598 | ) | ||||
| Net deferred tax assets | $ | 86,956 | $ | 107,179 | ||||
F-31
| Balance at December 31, 2007 | $ | 21,376 | ||
| Increases related to current year tax positions | 2,402 | |||
| Balance at December 28, 2008 | $ | 23,778 | ||
F-32
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 28, | December 30, | December 31, | ||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| United States | $ | 280,064 | $ | 207,692 | $ | 103,043 | ||||||
| United Kingdom | 67,973 | 34,196 | 22,840 | |||||||||
| Other European countries | 127,397 | 75,360 | 32,600 | |||||||||
| Asia-Pacific | 72,740 | 35,155 | 15,070 | |||||||||
| Other markets | 25,051 | 14,396 | 11,033 | |||||||||
| Total | $ | 573,225 | $ | 366,799 | $ | 184,586 | ||||||
F-33
| Year Ended | Year Ended | |||||||
| December 28, | December 30, | |||||||
| 2008 | 2007 | |||||||
| United States | $ | 65,630 | $ | 40,972 | ||||
| United Kingdom | 9,849 | 4,809 | ||||||
| Other European countries | 1,055 | 230 | ||||||
| Singapore | 12,586 | — | ||||||
| Other Asia-Pacific countries | 316 | 263 | ||||||
| Total | $ | 89,436 | $ | 46,274 | ||||
F-34
| 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 | ||||||||||||
F-35
| 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 | ||||
F-36