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.
| |
ItemITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The purposeOur Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the following discussion and analysis is to provide an overview of the business to help facilitate an understanding of significant factors influencing our historical operating results, financial condition and cash flows and also to convey our expectations of the potential impact of known trends, events, or uncertainties that may impact our future results. The following discussion and analysis should be read in conjunction with “Item 6. Selected Financial Data” and ouraccompanying consolidated financial statements and notes thereto included elsewhereto assist readers in thisunderstanding our results of operations, financial condition, and cash flows. This MD&A is organized as follows:
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
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.
Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward looking statements. Factors that could cause or contribute to these differences include those discussed in “Item 1A. Risk Factors”periods being reported herein as well as those discussed elsewhere. The risk factorsour future financial performance. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and other cautionary statements madeanalysis provided elsewhere in this Annual Report onForm 10-K should be read as applying to all related forward-looking statements wherever they appear in this Annual Report onForm 10-K.
OverviewAbout Illumina
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.
On January 26,their scientific challenge. In 2007, we completed thethrough 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 (SNP) genotyping and copy number variation (CNV) analyses, as well as gene expression profiling and other DNA, RNA, and protein studies. To further enhance our genetic analysis workflows, in January 2011 we acquired Epicentre Technologies Corporation, a leading provider of nucleic acid sample preparation reagents and specialty enzymes for 26.2sequencing and microarray applications. In 2010, through our acquisition of Helixis, Inc., we expanded our instrument portfolio to include real-time polymerase chain reaction (PCR), one of the most widely used technologies in life sciences.
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.
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
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.
|
| | | | | | | | |
| 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
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| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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
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
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| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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,
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.
During the first quarter of 2008, we reorganized our operating structure into two newly created business segments, Life Sciences and Diagnostics. During 2008, the Diagnostics Business Unit had limited business activity and, accordingly, operating results were reported on an aggregate basis as one operating segment. In the future, at each reporting period end, we will reassess our reportable operating segments, particularly as we enter the market for molecular diagnostics.
On August 1, 2008, we completed the acquisition of Avantome. As consideration for the acquisition, we paid $25.8 million in cash and mayseverance pay up to an additional $35.0 million in contingent cash consideration based on the achievement of certain milestones. Avantome is a development stage company working on developing low-cost, long read sequencing technology. We expect this technology, if and when available as a product, to have applicability to both the research and diagnostic markets.
24
Our revenue is subject to fluctuations due to the timing of sales of high-value products and service projects, the impact of seasonal spending patterns, the timing and size of research projects our customers perform, changes in overall spending levels in the life science industry and other unpredictable factors that may affect our customer ordering patterns. Any significant delaysemployee separation costs.
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.
As of December 28, 2008, our accumulated deficit was $332.5$5.4 million and total stockholders’ equity was $848.6 million. Our losses have principally occurred as a resultcharge of acquired in-process research and development (IPR&D) chargesrelated to a milestone payment for a prior acquisition partially offset by $4.5 million gains related to changes in fair value of $24.7contingent consideration. Acquisition related gain, net, in 2010 included a gain of $10.4 million from a change in the fair value of contingent consideration related to an acquisition, partially offset by an acquired in-process research and development charge of $1.3 million related to our acquisition of Avantome in 2008 and $303.4 milliona milestone payment made related to our acquisition of Solexaa prior acquisition.
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.
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
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| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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.
Liquidity and Capital Resources
Cash flow summary
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| | | | | | | | | | | |
| 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.
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.
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):
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| | | | | | | | | | | | | | | | | | | | |
| | 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 |
|
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(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. |
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(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
General
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Management bases its estimates on historical experience, market and other conditions, and various other assumptions it believes to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, actual resultsthe estimation process is, by its nature, uncertain given that estimates depend on events over which we may not have control. If market and other conditions change from those that we anticipate, our consolidated financial statements may be different frommaterially affected. In addition, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material effect on our consolidated financial statements.
We believe that the estimates. Ourfollowing critical accounting policies are those that affectand estimates have a higher degree of inherent uncertainty and require our most significant judgments. In addition, had we used estimates different from any of these, our consolidated financial statements could have been materially and involve difficult, subjective or complex judgments by management. Management hasdifferent from those presented. Members of our senior management have discussed the development and selection of theseour critical accounting policies and estimates, and our disclosure regarding them, with the audit committee of our board of directors, and the audit committee has reviewed the disclosure.directors. Our accounting policies are more fully described in Note 1note “1. Organization and Significant Accounting Policies” in Part II, Item 8 of the Consolidated Financial Statements.this Form 10-K.
Revenue Recognition
Our revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of arrays, reagents, flow cells, instrumentation, oligonucleotides (oligos)instruments and associated freight charges.consumables used in genetic analysis. Service and other revenue primarily consists of revenue received for performing genotyping and sequencing services, extended 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.
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In order to assess whether the price is fixed andor determinable, we ensureevaluate whether refund rights exist. If there are no refund rights. Ifrights or payment terms are based on future performance, or a right of return exists, we defer revenue recognition until the price becomes fixed andor determinable. We assess collectibility based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If we determine that collection of a payment is not reasonably assured, revenue recognition is deferred until the time collection becomes reasonably assured, which is generally upon receipt of payment. Changes in judgments and estimates regarding application
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.
Sales of instrumentation generally include a standard one-year warranty. We also sell separately priced maintenance (extended warranty) contracts, whichservices. These products or services are generally for one or two years, upon the expirationdelivered within a short time frame, approximately three to six months, of the initial warranty.contract execution date. Revenue recognition for extended warranty salescontracts with multiple deliverables is recognized ratably overbased on the term of the extended warranty period. Reserves are provided for estimated product warranty expenses at the time the associated revenue is recognized. If we were to experience an increase in warranty claims or if costs of servicing our warrantied products were greater than our estimates, gross margins could be adversely affected.
While the majority of our sales agreements contain standard terms and conditions, we do enter into agreements that contain multiple elements or non-standard terms and conditions. Emerging Issues Task Force (EITF)No. 00-21,Revenue Arrangements with Multiple Deliverables,provides guidance on accounting for arrangements that involve the delivery or performance of multiple products, services, or rights to use assets within contractually binding arrangements. Significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separateindividual units of accounting for revenue recognition purposes, and if so, howdetermined to exist in the price should becontract. A delivered item is considered a separate unit of accounting when the delivered item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis.
For transactions 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.
InvestmentsIn the first quarter of 2010, we offered an incentive with the launch of the HiSeq 2000 that enabled existing Genome Analyzer customers to trade in their Genome Analyzer and receive a discount on the purchase of a HiSeq 2000. The incentive was limited to customers who had purchased a Genome Analyzer as of the date of the announcement and was the first significant trade-in program we have offered. The Genome Analyzer trade-in program was completed in 2011. We 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.
EffectiveIn 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.
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.
We determine fair value of our financial assetsthese holdings, and liabilities in accordance with SFAS No. 157 and157-3. Fair value is defined under SFAS No. 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of observable inputsprocess, we apply judgments and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable,estimates that may be used to measure fair value:
| | |
| • | Level 1 — Quoted prices in active markets for identical assets or liabilities. |
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| • | Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
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| • | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
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In using this fair value hierarchy and the framework established by SFAS No. 157, management may be required to make assumptions of pricing by market participants and assumptions about risk, specifically when using unobservable inputs to determine fair value. These assumptions are judgmental in nature and mayif changed, could significantly affect our results of operations.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We evaluate the collectibility of our accounts receivable based on a combination of factors. We regularly analyze customer accounts, review the length of time receivables are outstanding, review historical loss rates and assess current economic trends that may impact the level of credit losses in the future. Our 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.
Goodwill Disclosure for specific legal contingencies will be provided if the likelihood of occurrence is probable, or reasonably possible, and Intangible Asset Valuation
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.
In determiningBusiness Combinations
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
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.
Determiningnonperformance risk. Any change in the fair values and useful lives of intangible assets acquired as part of litigation settlements also requires the exercise of judgment. While there are a number of different generally accepted valuation methods to estimate the value of intangible assets, onethe contingent consideration subsequent to the acquisition date is recognized in acquisition related (gain) expense, net, a component of operating expenses, in our consolidated statements of income. This method used byrequires significant management isjudgment, including the probability of achieving certain future milestones and discount rates. Future changes in our estimates could result in expenses or gains.
Management uses a discounted cash flow method.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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SFAS No. 142,Goodwillthat have finite useful lives and Other Intangible Assets,requires that goodwill and certain intangibleother long-lived assets be assessed for impairment using fair value measurement techniques. If the carrying amount of a reporting unit exceeds its fair value, then a goodwill impairment test is performed to measurewhen an event occurs indicating the amount of the impairment loss, if any. The goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as in a business combination. Determining the fair value of the implied goodwill is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. Estimates of fair value are primarily determined using discounted cash flows and market comparisons. These approaches use significant estimates and assumptions, including projection and timing of future cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, determination of appropriate market comparables, and determination of whether a premium or discount should be applied to comparables. It is reasonably possible that the plans and estimates used to value these assets may be incorrect.potential for impairment. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges. We have performed our annual test of goodwill as of May 30, 2008 noting no impairment. No indicators have arisen since management’s assessment on May 30, 2008 that would require further assessment.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets,if indicators of impairment exist, we assess the recoverability of the affected long-lived assets by determining whether the carrying valueamount of such assets can be recovered throughexceeds the undiscounted expected future operating cash flows. If impairment is indicated, we measure the future discounted cash flows associated with the use of the asset and adjust the value of the asset accordingly. Certain estimates and assumptions are used in determiningsuch assets.
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.
Stock-BasedShare-Based Compensation
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
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
In accordance with SFAS No. 109,Accounting for Income Taxes, theOur provision for income taxes, is computed using the asset and liability method, under which deferred tax assets and liabilities, are recognizedand reserves for the expectedunrecognized tax benefits reflect our best assessment of estimated future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for the expected future tax benefittaxes to be derived frompaid. Significant judgments and estimates based on interpretations of existing tax losslaws or regulations in the United States and credit carryforwards. Deferredthe numerous foreign jurisdictions where we are subject to income tax are required in determining our provision for income taxes. Changes in tax laws, statutory tax rates, and estimates of the company’s future taxable income could impact the deferred tax assets and liabilities are determined usingprovided for in the enacted tax rates in effectconsolidated financial statements and would require an adjustment to the provision for the years in which thoseincome 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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permanent differences, historyany feasible and prudent tax planning strategies. Based on the available evidence as of earnings, and reliability of forecasting. As of December 28, 2008,January 1, 2012, we have maintainedwere not able to conclude it is more likely than not certain U.S. deferred tax assets will be realized. Therefore, we recorded a valuation allowance onlyof $1.8 million against certain U.S. and foreign deferred tax assets that we concluded have not met the “more likely than not” threshold required under SFAS No. 109.assets.
Due to the adoption of SFAS No. 123R, we recognize excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, we follow thewith-and-without approach, excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to us.
Effective January 1, 2007, we adopted FASB Interpretation (FIN) No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires that weWe recognize the impact of a tax position in our financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. AnyTax authorities regularly examine our returns in the jurisdictions in which we do business and we regularly assess the tax risk of the company’s return filing positions. Due to the complexity of some of the uncertainties, the ultimate resolution may result in payments that are materially different from our current estimate of the tax liability. These differences, as well as any interest and penalties, related to uncertain tax positions will be reflected in income tax expense.
Results of Operations
To enhance comparability, the following table sets forth audited consolidated statement of operations data for the years ended December 28, 2008, December 30, 2007 and December 31, 2006 stated as a percentage of total revenue.
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | Year Ended
| |
| | December 28,
| | | December 30,
| | | December 31,
| |
| | 2008 | | | 2007 | | | 2006 | |
|
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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Comparison of Years Ended December 28, 2008 and December 30, 2007
Our fiscal year is the 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The years ended December 28, 2008 and December 30, 2007 were both 52 weeks.
Revenue
| | | | | | | | | | | | |
| | 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 | % |
| | | | | | | | | | | | |
Product revenue consists of revenue from the sale of consumables, instruments, oligos and associated freight charges. The increase in product revenue was driven primarily by sales of our Infinium BeadChips, sequencing systems and sequencing consumables. Consumables and instruments constituted 63% and 35% of product revenue for the year ended December 28, 2008, respectively, compared to 59% and 37% for the year ended December 30, 2007, respectively.
Consumable revenue increased by $140.2 million over prior year. Growth in consumable revenue was primarily attributable to strong demand for our Infinium and sequencing products, which led to increased sales of $104.8 million and $35.4 million, respectively. The increase in revenue associated with our Infinium products can be mainly attributed to the strong demand for our Infinium High-Density BeadChips, particularly the Human610-Quad, which we began shipping during the first quarter of 2008. Of the overall increase in Infinium BeadChip sales, approximately 79% is due to new product introductions with higher average selling prices, while the remaining 21% can be attributed to increased volume. The increase in sequencing consumables is primarily attributable to the growth in our installed base of instruments and the progression of customer labs ramping to production scale.
Instrument revenue increased by $64.8 million over prior year, of which $63.0 million was due to increased sales of our sequencing systems. This increase in revenue can be primarily attributed to shipments of our second generation Genome Analyzer, the Genome Analyzer II (GAII). Additionally, during the second quarter of 2008, we launched the iScan System, our next-generation BeadChip scanner to replace the BeadArray Reader. Any increase in revenue resulting from shipments of this new system was offset by a reduction in sales of our BeadArray Reader as we stopped manufacturing this product upon the launch of our iScan System.
We expect to see continued growth in product revenue, which can be mainly attributed to the anticipated launch of several new products, sales of existing products and the growth of our installed base of instruments.
Service and other revenue includes revenue generated from genotyping and sequencing service contracts, extended warranty contracts, and research revenue. The increase in service and other revenue is primarily due to an increase of $3.1 million in extended warranty sales coupled with an increase of $2.0 million in sequencing service contracts. This increase was substantially offset by a decline of $4.7 million in our Fast Track genotyping service contracts as we shift more towards CSPro certified customers. CSPro is a collaborative program through which we certify third party service partners using our products to ensure delivery of performance and data quality equivalent to that available from our internal service offering. The decline in service revenue as a result of the shift to CSPro certified customers has been offset by the resulting increase in our consumable sales to these third party service providers. If product sales increase, we expect to see continued increases in the sale of our extended warranty contracts. We also expect sales from SNP genotyping and sequencing service contracts to fluctuate on a yearly and quarterly basis, depending on the mix, the number of contracts completed and the success of our certified service providers. The timing of
30
completion of SNP genotyping and sequencing service contracts is highly dependent on the customers’ schedules for delivering the SNPs and samples to us.
Cost of Product and Service and Other Revenue
| | | | | | | | | | | | |
| | 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 | % |
| | | | | | | | | | | | |
Cost of revenue, which excludes impairment of manufacturing equipment and amortization of intangible assets, represents manufacturing costs incurred in the production process, including component materials, assembly labor and overhead, installation, warranty, packaging and delivery costs, as well as costs associated with performing genotyping and sequencing services on behalf of our customers.
The increase in cost of product revenue was primarily driven by higher instrument and consumable sales. Cost of product revenue as a percentage of related revenue was 36% for the year ended December 28, 2008 compared to 37% for the year ended December 30, 2007. The decrease is primarily due to favorable product mix driven by increased sales of our new High-Density Infinium Beadchips, with higher average selling prices as compared to the Infinium Beadchips sold in the prior year. This was partially offset by increased provisions for inventory obsolescence of $7.2 million for the year ended December 28, 2008 compared to $1.9 million for the year ended December 30, 2007. The increase in the inventory reserve is primarily associated with product transitions. During the year, we recorded reserves for product obsolescence associated with the launch of our new Infinium Beadchips and the launch of a new sequencing kit. Instrument cost of sales as a percentage of related revenue increased slightly over the prior year due to lower average selling prices mainly associated with promotional campaigns as we launched our next generation Beadarray Reader, the iScan in the first half of 2008.
Cost of service and other revenue increased over the prior year primarily due to higher extended warranty contract revenue. Cost of service and other revenue as a percentage of related revenue stayed consistent at 31%.
Research and Development Expenses
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 28,
| | | December 30,
| | | Percentage
| |
| | 2008 | | | 2007 | | | Change | |
| | (In thousands) | | | | |
|
Research and development | | $ | 99,963 | | | $ | 73,943 | | | | 35 | % |
Our research and development expenses consist primarily of salaries and other personnel-related expenses, laboratory supplies and other expenses related to the design, development, testing and enhancement of our products. We expense our research and development expenses as they are incurred.
Research and development expenses as a percentage of revenue decreased to 17% for the year ended December 28, 2008 compared to 20% for the year ended December 30, 2007. However, there was an overall increase in research and development expenditures compared to the prior year. Costs to support our BeadArray technology research activities increased $10.4 million for the year ended December 28, 2008 compared to the year ended December 30, 2007, primarily due to an overall increase in personnel-related expenses, increased lab and material expenses associated with the establishment of our manufacturing facility in Singapore and the development of new products. The continued development of our Sequencing technology resulted in increased research and development expenditures of $9.1 million for the year ended December 28, 2008 compared to the year ended December 30, 2007. In addition, non-cash stock-based compensation expense increased by $4.1 million compared to the year ended December 30, 2007. Accrued compensation expense of $1.5 million
31
associated with contingent consideration for the Avantome acquisition completed on August 1, 2008 and expenses related to the development of our newly created Diagnostics Business Unit of $0.9 million also contributed to the increase in research and development expense for the year ended December 28, 2008.
We believe a substantial investment in research and development is essential to remaining competitive and expanding into additional markets. Accordingly, we expect our research and development expenses to increase in absolute dollars as we expand our product base.
Selling, General and Administrative Expenses
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 28,
| | | December 30,
| | | Percentage
| |
| | 2008 | | | 2007 | | | Change | |
| | (In thousands) | | | | |
|
Selling, general and administrative | | $ | 148,014 | | | $ | 101,256 | | | | 46 | % |
Our selling, general and administrative expenses consist primarily of personnel costs for sales and marketing, finance, human resources, business development, legal and general management, as well as professional fees, such as expenses for legal and accounting services. Selling, general and administrative expenses as a percentage of revenue were 26% for the year ended December 28, 2008 compared to 28% for the year ended December 30, 2007. Selling, general and administrative expenses for the year ended December 28, 2008 and December 30, 2007 included stock-based compensation expenses totaling $28.5 million and $19.4 million, respectively.
Sales and marketing expenses increased $34.1 million for the year ended December 28, 2008 compared to the year ended December 30, 2007. The increase is primarily due to increases of $29.3 million attributable to personnel-related expenses, including salaries, benefits and commissions, to support the growth of our business. Included as part of these personnel- related expenses is an increase in employee travel expenses of $4.5 million due to increased headcount and continued international expansion. The remaining $4.8 million variance is comprised of increases to non-personnel-related costs of $2.9 million, consisting mainly of sales and marketing activities for our existing and new products and an increase of $1.9 million of non-cash stock-based compensation expense.
General and administrative expense increased $12.7 million during the year ended December 28, 2008 compared to the year ended December 30, 2007 due to increases of $10.4 million in personnel-related expenses associated with the growth of our business, $7.2 million of non-cash stock-based compensation expense and $0.9 million in outside consulting services offset by a decrease of $5.8 million in legal costs primarily related to the settlement of the Affymetrix litigation during the first quarter of 2008.
We expect our selling, general and administrative expenses to increase in absolute dollars as we expand our staff, add sales and marketing infrastructure and incur additional costs to support the expected growth in our business.
Impairment of Manufacturing Equipment
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 28,
| | | December 30,
| | | Percentage
| |
| | 2008 | | | 2007 | | | Change | |
| | (In thousands) | | | | |
|
Impairment of manufacturing equipment | | $ | 4,069 | | | $ | — | | | | N/A | |
The impairment of manufacturing equipment resulted from our assessment of recoverability on a portion of our imaging and decoding systems that were no longer being utilized due to the development of our next-generation system and our transition to the Infinium HD product line.
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Amortization of Intangible Assets
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 28,
| | | December 30,
| | | Percentage
| |
| | 2008 | | | 2007 | | | Change | |
| | (In thousands) | | | | |
|
Amortization of intangible assets | | $ | 10,438 | | | $ | 2,429 | | | | 330 | % |
Amortization of intangible assets as a percentage of revenue was 2% and 1%, respectively, for the year ended December 28, 2008 and year ended December 30, 2007. The increase in amortization expense is primarily due to the settlement of our lawsuit with Affymetrix on January 9, 2008, resulting in the recording of an intangible asset of $36.0 million. See Note 5 of Notes to Consolidated Financial Statements for further information regarding this settlement.
We began amortizing this asset during the first quarter of 2008, causing an increase in amortization of intangible assets of $7.8 million for the year ended December 28, 2008. The additional increase of $0.2 million during the year ended December 28, 2008 as compared to the year ended December 30, 2007 represents an additional month of amortization associated with the assets acquired from Solexa that we began amortizing in February 2007.
Acquired In-Process Research and Development
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 28,
| | | December 30,
| | | Percentage
| |
| | 2008 | | | 2007 | | | Change | |
| | (In thousands) | | | | |
|
Acquired in-process research and development | | $ | 24,660 | | | $ | 303,400 | | | | (92 | %) |
As a result of the Avantome acquisition in August 2008 and the Solexa acquisition in January 2007, we recorded acquired IPR&D charges of $24.7 million and $303.4 million, respectively. See Note 2 of Notes to Consolidated Financial Statements for further information regarding these acquisitions.
Litigation Settlements
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 28,
| | | December 30,
| | | Percentage
| |
| | 2008 | | | 2007 | | | Change | |
| | (In thousands) | | | | |
|
Litigation settlements | | $ | — | | | $ | 54,536 | | | | (100 | %) |
During the year ended December 30, 2007, we recorded a charge of $54.5 million associated with two settlement agreements. The total charge is comprised primarily of $54.0 million related to a $90.0 million settlement with Affymetrix entered into on January 9, 2008 for certain patent litigation between the parties. See Note 5 of Notes to Consolidated Financial Statements for further information regarding the Affymetrix settlement.
Interest Income
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 28,
| | | December 30,
| | | Percentage
| |
| | 2008 | | | 2007 | | | Change | |
| | (In thousands) | | | | |
|
Interest income | | $ | 12,519 | | | $ | 16,026 | | | | (22 | %) |
Interest income on our cash and cash equivalents and investments decreased $3.5 million during the year ended December 28, 2008 compared to the year ended December 30, 2007. The decrease was primarily driven by the overall decline in interest rates due to current market conditions coupled with a change in our cash and investment portfolio to a mix of shorter duration maturities and an increased number of agency-rated investments.
33
Interest and Other Expense, Net
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 28,
| | | December 30,
| | | Percentage
| |
| | 2008 | | | 2007 | | | Change | |
| | (In thousands) | | | | |
|
Interest and other expense, net | | $ | (2,070 | ) | | $ | (3,610 | ) | | | (43 | %) |
Interest and other expense, net, consists of interest expense and other income and expenses primarily related to net foreign currency exchange transaction gains and losses. Interest and other expense, net, increased $1.5 million for the year ended December 28, 2008 compared to the year ended December 30, 2007.
Interest expense related to our convertible debt issued in February 2007 was $4.0 million and $3.6 million, respectively, for the year ended December 28, 2008 and the year ended December 30, 2007. The increase represents an additional month and a half of interest expense recorded in the year ended December 28, 2008 compared to the year ended December 30, 2007.
In addition, we recorded $1.9 million in net foreign currency transaction gains for the year ended December 28, 2008 compared to immaterial losses recorded in the year ended December 30, 2007. The gains resulting from our net foreign currency transactions for the year ended December 28, 2008 are due to fluctuations in foreign currency exchange rates coupled with a change in our foreign entity functional currency designation from the local currency to the U.S. dollar beginning the third quarter of 2008. As a result of this change, in the third quarter we began re-measuring our foreign subsidiaries’ nonmonetary assets and liabilities and related income and expense accounts to the U.S. dollar and recording the resulting net gain as income. Previously, under local functional currency designation, the effects of translation were recorded within stockholders’ equity as other comprehensive income (loss).
Provision (benefit) for Income Taxes
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 28,
| | | December 30,
| | | Percentage
| |
| | 2008 | | | 2007 | | | Change | |
| | (In thousands) | | | | |
|
Provision (benefit) for income taxes | | $ | 40,429 | | | $ | (10,426 | ) | | | (488 | %) |
The provision consists of federal, state and foreign income tax expense for the years ended December 28, 2008 and December 30, 2007, respectively. In addition for the year ended December 30, 2007, the provision was reduced by $17.1 million as a result of the release of the valuation allowance against a significant portion of our U.S. deferred tax assets.
As of December 28, 2008, we had net operating loss carryforwards for federal and state tax purposes of $87.7 million and $148.3 million, respectively, which begin to expire in 2025 and 2013, respectively, unless previously utilized. In addition, we also had U.S. federal and state research and development tax credit carryforwards of $12.6 million and $13.9 million, respectively, which begin to expire in 2018 and 2019, respectively, unless previously utilized.
Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of our net operating losses and credits may be subject to annual limitations in the event of any significant future changes in our ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization. Previous limitations due to Section 382 and 383 have been reflected in the deferred tax assets as of December 28, 2008.
Based on the available evidence as of December 28, 2008, we were not able to conclude it was more likely than not certain U.S. and foreign deferred tax assets will be realized. Therefore, we have recorded a valuation allowance of $2.8 million and $12.4 million against certain U.S. and foreign deferred tax assets, respectively. At December 30, 2007, we concluded that it was more likely than not that a significant portion of our deferred tax assets will be realized and, accordingly, we released a portion of our valuation allowance, $17.1 million, of which was recorded as a reduction to the tax provision.
34
As of December 28, 2008, no material changes have been made to our uncertain tax positions recorded in accordance with FIN No. 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.
Comparison of Years Ended December 30, 2007 and December 31, 2006
Our fiscal year is 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The years ended December 30, 2007 and December 31, 2006 were both 52 weeks.
Revenue
| | | | | | | | | | | | |
| | 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 | % |
| | | | | | | | | | | | |
Product revenue consists of revenue from the sale of consumables, instruments, oligos and associated freight charges. Consumables and instruments constituted 59% and 37% of product revenue for the year ended December 30, 2007, respectively, compared to 64% and 28% for the year ended December 31, 2006, respectively. The change in sales associated with our product mix is due to increased sales in instruments primarily attributable to the Genome Analyzer, which was introduced during the first quarter of 2007. Growth in consumable revenue was primarily attributable to strong demand for our Infinium products.
Consumable revenue increased by $93.6 million over prior year, of which $81.1 million primarily represents increased sales volume of our Infinium products. The increase in revenue associated with our Infinium products can be mainly attributed to our HumanHap family of BeadChips, the Human 1M DNA Analysis BeadChip and our iSelect Infinium BeadChips for more focused content applications. Of the overall increase in Infinium BeadChip sales, approximately 82% is due to a higher volume of shipments, while the remaining 18% can be attributed to new product introductions and slightly higher average selling prices.
Instrument revenue increased by $77.6 million over prior year, of which $68.7 million was due to increased sales of our sequencing systems, particularly the Genome Analyzer and cluster stations.
Service and other revenue includes revenue generated from genotyping and sequencing service contracts, extended warranty contracts and research revenue. Service and other revenue increased $11.3 million over prior year primarily due to the completion of several significant Infinium and iSelect custom SNP genotyping service contracts and sequencing services contracts. This increase in services represented $9.9 million of the variance, while the remainder of the difference was generated by an increase in extended warranty contracts of $2.2 million offset by a decrease in grant revenue of $0.8 million. We expect sales from SNP genotyping and sequencing services contracts to fluctuate on a yearly and quarterly basis, depending on the mix and number of contracts that are completed. The timing of completion of SNP genotyping and sequencing services contracts are highly dependent on the customers’ schedules for delivering the SNPs and samples to us.
Cost of Product and Service and Other Revenue
| | | | | | | | | | | | |
| | 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 | % |
| | | | | | | | | | | | |
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Cost of revenue, which excludes amortization of intangible assets, represents manufacturing costs incurred in the production process, including component materials, assembly labor and overhead, installation, warranty, packaging and delivery costs, as well as costs associated with performing genotyping and sequencing services on behalf of our customers.
The increase in cost of product revenue was primarily driven by higher instrument and consumable sales. Cost of product revenue as a percentage of related revenue was 37% for the year ended December 30, 2007 compared to 33% for the year ended December 31, 2006. The increase is primarily due to the shift in product mix towards instruments mainly attributable to sales of our sequencing systems, which were introduced during the first quarter of 2007. In addition, cost of product revenue as a percentage of related revenue was adversely impacted by the increase in non-cash stock-based compensation expense as well as $0.7 million associated with the amortization of inventory revaluation costs related to our acquisition of Solexa in January 2007. Non-cash stock-based compensation expense was $4.0 million and $1.3 million for the periods ended December 30, 2007 and December 31, 2006, respectively.
Cost of service revenue increased over the prior year primarily due to higher sequencing and genotyping services revenue. Cost of service revenue as a percentage of related revenue was 31% for the year ended December 30, 2007 compared to 28% for the year ended December 31, 2006. The increase in cost of service revenue as a percentage of related revenue was primarily related to unfavorable product mix driven by higher sales of our sequencing services, which were introduced during 2007.
Research and Development Expenses
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 30,
| | | December 31,
| | | Percentage
| |
| | 2007 | | | 2006 | | | Change | |
| | (In thousands) | | | | |
|
Research and development | | $ | 73,943 | | | $ | 33,373 | | | | 122 | % |
Our research and development expenses consist primarily of salaries and other personnel-related expenses, laboratory supplies and other expenses related to the design, development, testing and enhancement of our products. We expense our research and development expenses as they are incurred.
Research and development expenses increased to $73.9 million for the year ended December 30, 2007 compared to $33.4 million for the year ended December 31, 2006. Research and development expenses as a percentage of total revenue were 20% for the year ended December 30, 2007 compared to 18% for the year ended December 31, 2006. Of the increase for the year ended December 30, 2007, $27.0 million was due to higher research and development expenses associated with our acquisition of Solexa in January 2007. Costs to support our BeadArray technology research activities increased $8.5 million for the year ended December 30, 2007 compared to the year ended December 31, 2006, primarily due to an overall increase in personnel-related expenses and increased lab and material expenses. Several new Infinium chip products, including the Human 1M DNA Analysis BeadChip, HumanCNV370-Duo BeadChip and HumanHap550-Duo BeadChip, have been introduced to the market in 2007. In addition, non-cash stock-based compensation expense increased $6.1 million compared to the year ended December 31, 2006. These increases were partially offset by a $1.0 million decrease in research and development expenses related to the VeraCode technology compared to the year ended December 31, 2006. We began shipping our BeadXpress System, which is based on our VeraCode technology, during the first quarter of 2007. As a result of completing the development of this product, the related research and development expenses have decreased.
Selling, General and Administrative Expenses
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 30,
| | | December 31,
| | | Percentage
| |
| | 2007 | | | 2006 | | | Change | |
| | (In thousands) | | | | |
|
Selling, general and administrative | | $ | 101,256 | | | $ | 54,057 | | | | 87 | % |
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Our selling, general and administrative expenses consist primarily of personnel costs for sales and marketing, finance, human resources, business development, legal and general management, as well as professional fees, such as expenses for legal and accounting services. Selling, general and administrative expenses increased to $101.3 million for the year ended December 30, 2007 compared to $54.1 million for the year December 31, 2006.
Sales and marketing expense increased $24.5 million during the year ended December 30, 2007 compared to the year ended December 31, 2006. The increase is primarily due to increases of $18.6 million attributable to personnel-related expenses to support the growth of our business, $3.3 million of non-cash stock-based compensation expense and $2.6 million attributable to othernon-personnel-related expenses consisting mainly of sales and marketing activities for our existing and new products.
General and administrative expense increased $22.7 million during the year ended December 30, 2007 compared to the year ended December 30, 2006 due to increases of $8.7 million in personnel-related expenses associated with the growth of our business, $7.2 million of non-cash stock-based compensation expense, $3.4 million in outside legal fees and $3.3 million in other outside service expenses, primarily due to increases in consulting fees and increased tax, audit, and other public company costs.
Amortization of Intangible Assets
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 30,
| | | December 31,
| | | Percentage
| |
| | 2007 | | | 2006 | | | Change | |
| | (In thousands) | | | | |
|
Amortization of intangible assets | | $ | 2,429 | | | $ | — | | | | N/A | |
Amortization of intangible assets totaled $2.4 million for the year ended December 30, 2007. There was no amortization of acquired intangibles for the year ended December 31, 2006. The amount amortized in 2007 represents the amortization of our intangible assets acquired from Solexa in January 2007.
Acquired In-Process Research and Development
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 30,
| | | December 30,
| | | Percentage
| |
| | 2007 | | | 2006 | | | Change | |
| | (In thousands) | | | | |
|
Acquired in-process research and development | | $ | 303,400 | | | $ | — | | | | N/A | |
During the year ended December 30, 2007, we recorded $303.4 million of acquired IPR&D resulting from the Solexa acquisition. At the acquisition date, Solexa’s ongoing research and development initiatives were primarily involved with the development of its genetic analysis platform for sequencing and expression profiling. These in-process research and development projects are comprised of Solexa’s reversible terminating nucleotide biochemistry platform, referred to assequencing-by-synthesis (SBS) biochemistry, as well as Solexa’s reagent, analyzer and sequencing services related technologies, which were valued at $237.2 million, $44.2 million, $19.1 million and $2.9 million, respectively, at the acquisition date. Although these projects were approximately 95% complete at the acquisition date, they had not reached technological feasibility and had no alternative future use. Accordingly, the amounts allocated to those projects were written off in the first quarter of 2007, the period the acquisition was consummated. Acquisitions of businesses, products or technologies by us in the future may result in substantial charges for acquired IPR&D that may cause fluctuations in our interim or annual operating results. There were no charges resulting from any acquisitions during the same period in fiscal 2006.
Litigation Settlements
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 30,
| | | December 31,
| | | Percentage
| |
| | 2007 | | | 2006 | | | Change | |
| | (In thousands) | | | | |
|
Litigation settlements | | $ | 54,536 | | | $ | — | | | | N/A | |
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During the year ended December 30, 2007, we recorded a charge of $54.5 million associated with two settlement agreements entered into subsequent to year-end. The total charge is comprised primarily of $54.0 million related to a $90.0 million settlement with Affymetrix entered into on January 9, 2008 for certain patent litigation between the parties. See Note 5 of Notes to Consolidated Financial Statements for further information regarding this settlement.
Interest Income
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 30,
| | | December 31,
| | | Percentage
| |
| | 2007 | | | 2006 | | | Change | |
| | (In thousands) | | | | |
|
Interest income | | $ | 16,026 | | | $ | 5,368 | | | | 199 | % |
Interest income on our cash and cash equivalents and investments was $16.0 million and $5.4 million for the years ended December 30, 2007 and December 31, 2006, respectively. The increase in interest income over the prior year was primarily driven by higher cash balances from the proceeds of our February 2007 convertible debt offering, cash acquired as part of the Solexa acquisition, and improved operating cash flow. In addition, we experienced higher effective interest rates on our cash equivalents and short-term investments.
Interest and Other Expense, Net
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 30,
| | | December 31,
| | | Percentage
| |
| | 2007 | | | 2006 | | | Change | |
| | (In thousands) | | | | |
|
Interest and other expense, net | | $ | (3,610 | ) | | $ | (560 | ) | | | 545 | % |
Interest and other expense, net, consists of interest expense and other income and expenses related to net foreign currency exchange transaction gains and losses. Interest and other expense, net, increased to $3.6 million for the year ended December 30, 2007, compared to $0.6 million for the year ended December 31, 2006.
Interest expense was $3.6 million for the year ended December 30, 2007, compared to an immaterial amount for the year ended December 31, 2006. The increase is primarily related to our convertible debt offering in February 2007. For the years ended December 30, 2007 and December 31, 2006, we recorded $0.5 million and $0.4 million, respectively, in net foreign currency transaction losses, respectively. In 2007, these foreign currency exchange losses were offset by $0.5 million of foreign currency exchange gains associated with the sale of our secured convertible debentures with Genizon BioSciences, Inc. in the fourth quarter of 2007.
Provision (benefit) for Income Taxes
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | | |
| | December 30,
| | | December 31,
| | | Percentage
| |
| | 2007 | | | 2006 | | | Change | |
| | (In thousands) | | | | |
|
Provision (benefit) for income taxes | | $ | (10,426 | ) | | $ | 2,652 | | | | (493 | %) |
The provision (benefit) for income taxes was ($10.4) million and $2.7 million for the years ended December 30, 2007 and December 31, 2006, respectively. The provision consists of federal, state, and foreign income tax expense offset in 2007 by the release of the valuation allowance against a significant portion of our U.S. deferred tax assets.
During the year ended December 30, 2007, we utilized $72.9 million and $10.8 million of our federal and state net operating loss carryforwards, respectively, to reduce our federal and state income taxes. As of December 30, 2007, we had net operating loss carryforwards for federal and state tax purposes of $28.7 million and $99.1 million, respectively, which begin to expire in 2025 and 2015, respectively, unless previously utilized. In addition, we also had U.S. federal and state research and development tax credit
38
carryforwards of $9.2 million and $9.3 million respectively, which begin to expire in 2018 and 2019 respectively, unless previously utilized.
Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of our net operating losses and credits may be subject to annual limitations in the event of any significant future changesperiod in our ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization. Previous limitations due to Section 382 and 383 have been reflected in the deferred tax assets as of December 30, 2007.which they are determined.
As of December 30, 2007, we concluded that it is more likely than not that a significant portion of our deferred tax assets will be realized and, accordingly we released a portion of our valuation allowance, $17.1 million of which was recorded as a reduction to the tax provision. In addition, we established current and long term deferred tax assets on the consolidated balance sheets of $26.8 million and $80.1 million, respectively, and decreased the goodwill balances recorded in conjunction with the CyVera and Solexa acquisitions by $2.1 million and $18.4 million, respectively. Based upon the available evidence as of December 30, 2007, we are not able to conclude it is more likely than not certain U.S. and foreign deferred tax assets will be realized. Therefore, we have recorded a valuation allowance of $2.9 million and $25.4 million against certain U.S. and foreign deferred tax assets, respectively.
Liquidity and Capital Resources
Cashflow
| | | | | | | | | | | | |
| | 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 | ) |
| | | | | | | | | | | | |
Historically, our sources of cash have included:
| | |
| • | issuance of equity and debt securities, including cash generated from the issuance of our convertible notes in February 2007, our public offering of common stock in August 2008 and the exercise of stock options and participation in our Employee Stock Purchase Plan (ESPP); |
|
| • | cash generated from operations; and |
|
| • | interest income. |
Our historical cash outflows have primarily been associated with:
| | |
| • | cash used for operating activities such as the purchase and growth of inventory, expansion of our sales and marketing and research and development infrastructure and other working capital needs; |
|
| • | cash paid for litigation settlements; |
|
| • | cash used for our stock repurchases; |
|
| • | expenditures related to increasing our manufacturing capacity and improving our manufacturing efficiency; |
|
| • | cash paid for acquisitions; and |
|
| • | interest payments on our debt obligations. |
39
Other factors that impact our cash inflow and outflow include:
| | |
| • | significant increases in our product and services revenue. As our product sales have increased significantly since 2001, operating income has increased significantly as well, providing us with an increased source of cash to finance the expansion of our operations; and |
|
| • | fluctuations in our working capital. |
We currently invest our funds in treasury notes, commercial paper, auction rate securities, corporate bonds and U.S. dollar-based short maturity mutual funds. We do not hold securities backed by mortgages.
As of December 28, 2008, we had cash, cash equivalents and investments of $696.0 million compared to $386.1 million as of December 30, 2007. Included in the investment balance as of December 28, 2008 were auction rate securities of $55.9 million issued primarily by municipalities and universities. The markets for auction rate securities effectively ceased when the vast majority of auctions failed in February 2008, preventing investors from selling their auction rate securities. As of December 28, 2008, the securities continued to fail auction and remained illiquid. As a result, we have recorded an unrealized loss of $8.7 million for the year ended December 28, 2008, resulting in a reduction to the fair value of our auction rate securities to $47.2 million as of December 28, 2008. This value was determined in accordance with SFAS No. 157. We used Level 3 hierarchical inputs, due to the lack of actively traded market data, including management’s assumptions of pricing by market participants and assumptions about risk. We based our fair value determination on estimated discounted future cash flows of interest income over a projected period reflective of the length of time we anticipate it will take the securities to become liquid. Additionally, we classified these securities as long-term investments as of December 28, 2008 as we believe we may not be able to liquidate our investments within the next year. As of December 30, 2007, these securities were classified as short-term as the failures of these auctions did not occur until February 2008.
In November 2008, we signed a settlement agreement allowing us to sell our auction rate securities at par value to UBS at our discretion during the period of June 30, 2010 through July 2, 2012. To account for this settlement agreement, we recorded a put option of $8.7 million and recognized a corresponding gain in earnings during the fourth quarter of 2008. The fair value of the put option was determined using a discounted cash flow approach including estimates of interest rates, timing and amount of cash flow, with consideration given to UBS’s financial ability to repurchase the auction rate securities beginning June 30, 2010. The fair value of the put option approximates the difference between the par value and fair value of the auction rate securities. The auction rate securities were previously classified asavailable-for-sale, and unrealized gains and losses were recognized in other comprehensive income. By signing the settlement agreement, we no longer have the intent of holding the auction rate securities until recovery as we will now recover any unrealized loss through the settlement agreement. Accordingly, we elected a one-time transfer of the auction rate securities fromavailable-for-sale to trading and reclassified previously recorded unrealized losses from other comprehensive income to earnings. We will continue to recognize gains and losses in earnings approximately equal to changes in the fair value of the auction rate securities at each balance sheet date. These gains and losses will likely be offset by changes in the fair value of the put option as we elect the fair value option subject to our assessment of the counterparties ability to perform. See Part I Item 1A: “Risk Factors — Negative conditions in the global credit markets may impair the liquidity of a portion of our investment portfolio.”
The primary inflow of cash during the year ended December 28, 2008 was from the sale of 8,050,000 shares of our common stock to the public in August 2008 at a public offering price of $43.75 per share, raising net proceeds to us of $342.6 million, after deducting underwriting discounts and commissions and offering expenses. Additional cash inflows during this year resulted from the sale and maturity of our investments inavailable-for-sale securities of $411.8 million and $44.3 million from the exercise of our stock options.
The primary cash outflows during the year ended December 28, 2008 were attributable to the purchase ofavailable-for-sale securities for $568.7 million, the one-time payment of $90.0 million made to Affymetrix in accordance with the settlement agreement, the repurchase of an aggregate of 3.1 million shares of our
40
common stock for $70.8 million and $59.7 million in capital expenditures primarily forconstruction-in-progress associated with the expansion of our San Diego facilities, additions to manufacturing equipment as well as the development of our manufacturing facility in Singapore. Additionally, on August 1, 2008, we completed our acquisition of Avantome, Inc. As consideration for the acquisition, we paid $25.8 million in cash, including transaction costs, and may pay up to an additional $35.0 million in contingent cash consideration based on the achievement of certain milestones.
Our primary short-term needs for capital, which are subject to change, include expenditures related to:
| | |
| • | our facilities expansion needs, including costs of leasing additional facilities; |
|
| • | the acquisition of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities; |
|
| • | support of our commercialization efforts related to our current and future products, including expansion of our direct sales force and field support resources both in the United States and abroad; |
|
| • | potential strategic acquisitions and investments; |
|
| • | the continued advancement of research and development efforts; and |
|
| • | improvements in our manufacturing capacity and efficiency. |
We expect that our product revenue and the resulting operating income, as well as the status of each of our new product development programs, will significantly impact our cash management decisions.
Our outstanding convertible notes became convertible into cash and, if applicable, shares of our common stock as of April 1, 2008. The notes continued to be convertible through December 31, 2008. Subsequent to year end, on December 29, 2008, a noteholder converted notes in an aggregate principal amount of $10.0 million. Generally, upon conversion of a note, we must pay the conversion value of the note in cash, up to the principal amount of the note. Any excess of the conversion value over the principal amount is payable in shares of our common stock. To reduce the potential equity dilution upon conversion of the notes, we entered into a hedge transaction. See Note 8 of Notes to Consolidated Financial Statements for further discussion of the terms of the Convertible Senior Notes. Beginning January 1, 2009 the notes ceased to be convertible since the trigger for convertibility was not met during the last calendar quarter of 2008. Fluctuations in our stock price could cause the conversion feature to trigger in future quarters, resulting in an impact on our working capital.
We anticipate that our current cash and cash equivalents and income from operations will be sufficient to fund our operating needs for at least the next twelve 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 other than development of our additional facility in Little Chesterford, United Kingdom. The development of this facility is estimated to cost $14.5 million during 2009 although actual costs may vary significantly from our current estimate. Our future capital requirements and the adequacy of our available funds will depend on many factors, including:
| | |
| • | our ability to successfully evolve our sequencing and Veracode technologies and to expand our sequencing and SNP genotyping product lines; |
|
| • | 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. |
As a result of the factors listed above, we may require additional funding in the future. Our failure to raise capital on acceptable terms, when needed, could have a material adverse effect on our business.
41
Off-Balance Sheet Arrangements
We do not participate in any transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (SPEs), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. During the fiscal year ended December 28, 2008, we were not involved in any “off balance sheet arrangements” within the meaning of the rules of the Securities and Exchange Commission.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude orders for goods and services entered into in the normal course of business that are not enforceable or legally binding. The following table represents our contractual obligations as of December 28, 2008, aggregated by type (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | | | | | |
| | |
(1) | | Excludes $35.0 million of contingent cash consideration we may be required to pay pursuant to our purchase agreement with Avantome based on the achievement of certain milestones. We have not included this amount in the table above because the commitment does not have a fixed funding date and is subject to certain conditions. See Note 2 of Notes to the Consolidated Financial Statements for further discussion of our acquisition of Avantome. |
|
(2) | | Excludes $23.8 million of uncertain tax benefits under FIN 48. We have not included this amount in the table above because we cannot make a reasonably reliable estimate regarding the timing of settlements with taxing authorities, if any. See Note 12 of Notes to the Consolidated Financial Statements for further discussion of our uncertain tax positions. |
|
(3) | | The “long-term debt obligations” in the above table include the principal amount of our Convertible Senior Notes and interest payments totaling 0.625% per annum. See Note 8 of Notes to Consolidated Financial Statements for further discussion of the terms of the Convertible Senior Notes. |
Recent Accounting Pronouncements
Information with respect to recent accounting pronouncements is included in Note 1 of Notes to Consolidated Financial Statements.
| |
ItemITEM 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
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.
In addition, many of our reporting entities conduct a portion of theirour business in currencies other than the entity’scompany's U.S. dollar functional currency. These transactions give rise to receivablesmonetary assets and payablesliabilities that are denominated in currencies other than the entity’s functional currency.U.S. dollar. The value of these receivablesmonetary assets and payables isliabilities are subject to changes in currency exchange rates because they may become worth more or less than they were worth atfrom the time we entered into the transaction due to changestransactions are originated until settlement in exchange rates.cash. Our foreign currency exposures are primarily concentrated in the Euro, Yen, British pound sterling, Australian dollar, and Singapore dollar. Both realized and unrealized gains or losses on the value of these receivablesmonetary assets and payablesliabilities are included in the determination of net income. TheWe recorded an immaterial net currency exchange loss for the fiscal year ended January 1, 2012, and a gain recognizedof $1.0 million for the fiscal year ended January 2, 2011 on business transactions, was $1.9 million for the year ended December 28, 2008 and isnet of hedging transactions, which are included in other (expense) income, net, in our consolidated statements of income.
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.
| |
ITEM 8. | Financial Statements and Supplementary Data. |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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
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
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
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
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 |
|
See accompanying notes to consolidated financial statements
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
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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,
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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):
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | | |
| 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 |
|
| |
Item 8.2. | Financial Statements and Supplementary Data.Balance Sheet Account Details |
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):
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | | | | | | | | | |
| 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):
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | |
| 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 |
|
| |
Item 9.3. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.Restructuring Activities |
None.During the fourth quarter of 2011 the Company implemented a cost reduction initiative that included workforce reductions and the consolidation of certain facilities. In total, the Company notified approximately 200 employees of their
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
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
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 |
|
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):
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
..
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
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,
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 |
|
Operating Leases
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):
|
| | | | | | | | | | | |
| 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.
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.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$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.
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
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.
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):
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | | | | | |
| 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.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
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.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 |
|
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.
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
operation of CFO concluded that our disclosure controls and procedures (as defined inRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended or the Securities(the Exchange Act)), as of December 28, 2008. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of December 28, 2008, our disclosure controls and procedures wereare effective to ensureprovide reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’sSEC rules and forms, and (b) such information is accumulated and communicated to our management, including our principal executive officer and principal financial officers, or persons performing similar functions,officer, as appropriate, to allow timely decisions regarding required disclosure. In designing
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
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
| |
ItemITEM 9B. | Other Information. |
None.
PART III
| |
ItemITEM 10. | Directors, Executive Officers, and Corporate Governance. |
(a) Identification of Directors. Information concerning our directors is incorporated by reference from the section entitled “Proposal One: Election of Directors”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.
| |
ItemITEM 11. | Executive Compensation. |
Information concerning executive compensation is incorporated by reference from the sections entitled “Compensation Discussion and Analysis,” “Director Compensation,” and “Executive Compensation and Other Information”Compensation” to be contained in our definitive Proxy Statement with respect to our 20092012 Annual Meeting of Stockholders to be filed with the SEC no later than April 27, 2009.30, 2012.
| |
ItemITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Information concerning the security ownership of certain beneficial owners and management and information covering securities authorized for issuance under equity compensation plans is incorporated by reference from the sections entitled “Ownership“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.
| |
ItemITEM 13. | Certain Relationships and Related Transactions, and Director Independence. |
Information concerning certain relationships and related transactions, and director independence is incorporated by reference from the sections entitled “Proposal One: Election of Directors,” “Information About Directors,” “Director Compensation,” “Executive Compensation,” and 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.
46
| |
ItemITEM 14. | Principal Accountant Fees and Services. |
Information concerning principal accountant fees and services is incorporated by reference from the sections entitled “Proposal Two: Ratification of Appointment of Independent Registered Public 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
| |
ItemITEM 15. | Exhibits, Financial Statement Schedules. |
(a)1. Financial Statements: See “Index to Consolidated Financial Statements” in Part II, Item 8 of this Form 10-K.
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.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(1) Consolidated Financial Statements: |
| | | | | | | | | | | | | |
| 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. |
| Page |
|
(2) | | | F-1 | |
| | | F-2 | |
| | | F-3 | |
| | | F-4 | |
| | | F-5 | |
| | | F-6 | |
| | | F-7 | |
| | | | |
| | | F-36 | |
| | | | obsolete inventory. |
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 | | |
|
| | | | | | | | | | | | | |
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
|
| | | | | | | | | | | | | |
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 |
|
(1) | | Incorporated by reference to the same numbered exhibit filed with our Registration Statement onForm S-1 (FileNo. 333-33922) filed April 3, 2000, as amended. |
|
(2) | | Incorporated by reference to exhibit 3.1 filed with ourForm 8-K (FileNo. 000-30361) filed on September 23, 2008. |
|
(3) | | Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended June 29, 2008 filed July 25, 2008. |
|
(4) | | Incorporated by reference to exhibit 10.13 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 31, 2001 filed May 8, 2001. |
|
(5) | | Incorporated by reference to the same numbered exhibit filed with our Registration Statement onForm 8-A (FileNo. 000-30361) filed May 14, 2001. |
|
(6) | | Incorporated by reference to exhibit 10.15 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended June 30, 2001 filed August 13, 2001. |
|
(7) | | Incorporated by reference to exhibit 10.3 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended October 1, 2006 filed October 30, 2006. |
|
(8) | | Incorporated by reference to exhibit 10.18 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 31, 2002 filed May 13, 2002. |
|
(9) | | Incorporated by reference to exhibit 10.44 filed with ourForm 10-K (FileNo. 000-30361) for the fiscal year ended December 30, 2007 filed February 26, 2008. |
49
| | |
(10) | | Incorporated by reference to exhibit 10.9 filed with our Registration Statement onForm S-1/A (FileNo. 333-33922) filed July 3, 2000. |
|
(11) | | Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 30, 2008 filed April 28, 2008. |
|
(12) | | Incorporated by reference to exhibit 10.11 filed with our Registration Statement onForm S-1/A (FileNo. 333-33922) filed July 19, 2000. |
|
(13) | | Incorporated by reference to exhibit 10.16 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended September 30, 2001 filed November 14, 2001. |
|
(14) | | Incorporated by reference to exhibit 10.17 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended September 30, 2001 filed November 14, 2001. |
|
(15) | | Incorporated by reference to exhibit 10.18 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended September 30, 2001 filed November 14, 2001. |
|
(16) | | Incorporated by reference to exhibit 2.1 filed with ourForm 8-K (FileNo. 000-30361) filed November 13, 2006. |
|
(17) | | Incorporated by reference to exhibit 10.19 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 31, 2002 filed May 13, 2002. |
|
(18) | | Incorporated by reference to the exhibit 10.20 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 31, 2002 filed May 13, 2002. |
|
(19) | | Incorporated by reference to exhibit 10.12 filed with our Registration Statement onForm S-1 (FileNo. 333-33922) filed July 19, 2000. |
|
(20) | | Incorporated by reference to the exhibit 10.22 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 31, 2002 filed May 13, 2002. |
|
(21) | | Incorporated by reference to exhibit 10.24 filed with Amendment No. 1 to our Registration Statement onForm S-3 (FileNo. 333-111496) filed March 2, 2004. |
|
(22) | | Incorporated by reference to exhibit 10.23 filed with our Amendment No. 1 to our Registration Statement onForm S-3 (FileNo. 333-111496) filed March 2, 2004. |
|
(23) | | Incorporated by reference to exhibit 10.25 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended June 27, 2004 filed August 6, 2004. |
|
(24) | | Incorporated by reference to exhibit 10.26 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended October 3, 2004 filed November 12, 2004. |
|
(25) | | Incorporated by reference to exhibit 10.27 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended October 3, 2004 filed November 12, 2004. |
|
(26) | | Incorporated by reference to exhibit 10.28 filed with ourForm 10-K (FileNo. 000-30361) for the year ended January 2, 2005 filed March 8, 2005. |
|
(27) | | Incorporated by reference to exhibit 10.33 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended July 3, 2005 filed August 8, 2005. |
|
(28) | | Incorporated by reference to exhibit 10.29 filed with ourForm 10-K (FileNo. 000-30361) for the year ended January 2, 2005 filed March 8, 2005. |
|
(29) | | Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended April 2, 2006 filed May 8, 2006. |
|
(30) | | Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended July 2, 2006 filed August 2, 2006. |
|
(31) | | [Reserved] |
|
(32) | | [Reserved] |
|
(33) | | [Reserved] |
|
(34) | | Incorporated by reference to exhibit 10.1 filed with ourForm 8-K (FileNo. 000-30361) filed November 13, 2006. |
50
| | |
(35) | | Incorporated by reference to exhibit 4.1 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007. |
|
(36) | | Incorporated by reference to exhibit 4.2 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007. |
|
(37) | | Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended April 1, 2007 filed May 3, 2007. |
|
(38) | | [Reserved] |
|
(39) | | [Reserved] |
|
(40) | | [Reserved] |
|
(41) | | Incorporated by reference to exhibit 99.3 filed with ourForm 8-K (FileNo. 000-30361) filed November 26, 2007. |
|
(42) | | Incorporated by reference to exhibit 99.4 filed with ourForm 8-K (FileNo. 000-30361) filed November 26, 2007. |
|
(43) | | Incorporated by reference to exhibit 99.5 filed with ourForm 8-K (FileNo. 000-30361) filed November 26, 2007. |
|
(44) | | Incorporated by reference to exhibit 10.1 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007. |
|
(45) | | Incorporated by reference to exhibit 10.2 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007. |
|
(46) | | Incorporated by reference to exhibit 10.3 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007. |
|
(47) | | Incorporated by reference to exhibit 10.4 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007. |
|
(48) | | Incorporated by reference to exhibit 10.5 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007. |
|
(49) | | Incorporated by reference to exhibit 10.6 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007. |
|
(50) | | Incorporated by reference to the same numbered exhibit filed with our Annual Report onForm 10-K (FileNo. 000-30361) for the year ended December 31, 2006 filed February 28, 2007. |
Supplemental Information
No Annual Report to stockholders or proxy materials has been sent to stockholders as of the date of this report. The Annual Report to stockholders and proxy material will be furnished to our stockholders subsequent to the filing of this Annual Report onForm 10-K and we will furnish such material to the SEC at that time.
51
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 25, 2009.23, 2012.
|
| | |
| ILLUMINA, INC. |
| | |
| By | /s/ JAY T. FLATLEY |
| | Jay T. Flatley President and Chief Executive Officer |
Jay T. Flatley
President and Chief Executive OfficerFebruary 23, 2012
February 25, 2009
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Jay T. Flatley and Christian O. Henry,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.
|
| | | | | | |
/s/ JJayAY T. FlatleyFLATLEY
Jay T. Flatley | | President, Chief Executive Officer and Director (Principal Executive Officer) | | February 25, 200923, 2012 |
Jay T. Flatley | | | | |
| | | | |
/s/ Christian O. Henry
Christian O. HenryMarc A. Stapley | | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | | February 25, 200923, 2012 |
Marc A. Stapley | | | | |
| | | | |
/s/ WWilliam ILLIAM H. RastetterRASTETTER
William H. Rastetter | | Chairman of the Board of Directors | | February 25, 200923, 2012 |
William H. Rastetter | | | | |
| | | | |
/s/ A. Blaine BowmanBLAINE BOWMAN
A. Blaine Bowman | | Director | | February 25, 200923, 2012 |
A. Blaine Bowman | | | | |
| | | | |
/s/ DDanielANIEL M. BradburyBRADBURY
Daniel M. Bradbury | | Director | | February 25, 200923, 2012 |
Daniel M. Bradbury | | | | |
| | | | |
/s/ KKarin EasthamARIN
Karin Eastham | | Director | | February 25, 2009 |
52
| | | | | | |
/s/ Jack Goldstein E
Jack GoldsteinASTHAM | | Director | | February 25, 200923, 2012 |
Karin Eastham | | | | |
| | | | |
/s/ PPaul GrintAUL Paul Grint GRINT | | Director | | February 25, 200923, 2012 |
Paul Grint | | | | |
| | | | |
/s/ Gerald Möller | | Director | | February 23, 2012 |
Gerald Möller | | | | |
| | | | |
/s/ DDavidAVID R. WaltW David R. WaltALT | | Director | | February 25, 2009 |
53
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | 23, 2012 |
| | | F-2 | |
| | | F-3 | |
| | | F-4 | |
| | | F-5 | |
| | | F-6 | |
| | | F-7 | |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Illumina, Inc.
We have audited the accompanying consolidated balance sheets of Illumina, Inc. as of December 28, 2008 and December 30, 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 28, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Illumina, Inc., at December 28, 2008 and December 30, 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 28, 2008, 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 December 28, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2009 expressed an unqualified opinion thereon.
San Diego, California
February 24, 2009
F-2
ILLUMINA, INC.
CONSOLIDATED BALANCE SHEETS
| | | | | | | | |
| | 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 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements
F-3
ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
F-4
ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Accumulated
| | | | | | | | | | | | | |
| | | | | | | | Additional
| | | | | | Other
| | | | | | | | | | | | Total
| |
| | Common Stock | | | Paid-In
| | | Deferred
| | | Comprehensive
| | | Accumulated
| | | Treasury Stock | | | Stockholders’
| |
| | Shares | | | Amount | | | Capital | | | Compensation | | | Income | | | Deficit | | | Shares | | | Amount | | | Equity | |
| | (In thousands) | |
|
Balance as of January 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
F-5
ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
F-6
ILLUMINA, INC.
| |
1. | Organization and Summary of Significant Accounting Policies |
Organization and Business
Illumina, Inc. (the Company) was incorporated on April 28, 1998. The Company is a leading developer, manufacturer and marketer of integrated systems for the large-scale analysis of genetic variation and biological function. Using the Company’s proprietary technologies, the Company provides a comprehensive line of products and services that currently serve the sequencing, genotyping and gene expression markets. The Company also expects to enter the market for molecular diagnostics. The Company’s customers include leading genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations and biotechnology companies. The Company’s tools provide researchers around the world with the performance, throughput, cost effectiveness and flexibility necessary to perform the billions of genetic tests needed to extract valuable medical information from advances in genomics and proteomics. The Company believes this information will enable researchers to correlate genetic variation and biological function, which will enhance drug discovery and clinical research, allow diseases to be detected earlier and permit better choices of drugs for individual patients.
Basis of Presentation
The consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Fiscal Year
The Company’s fiscal year is 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The years ended December 28, 2008, December 30, 2007 and December 31, 2006 were all 52 weeks.
Use of Estimates
The preparation of financial statements requires that management make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
Cash Equivalents and Investments
Cash equivalents are comprised of short-term, highly liquid investments with maturities of 90 days or less from the date of purchase.
Short-term investments consist of U.S. Treasury and U.S. government agency securities, municipal notes, corporate notes and bonds and commercial paper. All short-term investments have been designated as available-for-sale securities recorded at estimated fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders’ equity. The Company accounts for investments in debt and equity instruments in accordance with SFAS, No. 115,Accounting for Certain Investments in Debt and Equity Securitiesand FASB Staff Position, or FSP,No. 115-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, orFSP 115-1. Management determines the appropriate classification of such securities at the time of purchase and reevaluates such classification as of each balance sheet date. The Company follows the guidance provided byFSP 115-1, to assess whether investments with unrealized loss positions are other than temporarily impaired. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in Interest and other expense, net in the consolidated statements of operations.
F-7
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Long-term investments are comprised of the Company’s auction rate securities and a put option related to the Company’s settlement agreement with UBS that gives the Company the right to sell its auction rate securities to UBS at par value at a future date. Both the auction rate securities and the put option are recorded at estimated fair value and unrealized gains and losses, if any, are recognized in Interest income on the consolidated statements of operations. Historically, the Company’s auction rate securities were classified as available-for-sale securities, however, during the fourth quarter of fiscal 2008, the Company reclassified the auction rate securities from available-for-sale to trading securities. See Note 4 for further detailed discussion.
Fair Value of Financial Instruments
The carrying amounts of financial instruments such as cash equivalents, foreign cash accounts, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate the related fair values due to the short-term maturities of these instruments. The estimated fair value of the convertible senior notes is determined by using available market information as of the latest trading date prior to the Company’s fiscal year-end provided by a third party financial institution. The fair value of the Company’s convertible notes at December 28, 2008 and December 30, 2007 are $473.0 million and $596.3 million, respectively.
Accounts Receivable
Trade accounts receivable are recorded at the net invoice value and are not interest bearing. The Company considers receivables past due based on the contractual payment terms. The Company reviews its exposure to amounts receivable and reserves specific amounts if collectibility is no longer reasonably assured. The Company also reserves a percentage of its trade receivable balance based on collection history and current economic trends that might impact the level of future credit losses. The Company re-evaluates such reserves on a regular basis and adjusts its reserves as needed.
Concentrations of Risk
The Company operates in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products or services with new capabilities and other factors could negatively impact the Company’s operating results.
The Company is also subject to risks related to its financial instruments including its cash and cash equivalents, investments and accounts receivable. Most of the Company’s cash and cash equivalents as of December 28, 2008 were deposited with financial institutions in the United States and the Company’s investment policy restricts the amount of credit exposure to any one issuer to 5% of the portfolio at the time of purchase and to any one industry sector, as defined by Bloomberg classifications, to 25% of the portfolio at the time of purchase. There is no limit to the percentage of the portfolio that may be maintained in securities issued by the U.S government and money market funds. The Company has historically not experienced significant credit losses from investments and accounts receivable. The Company performs a regular review of customer activity and associated credit risks.
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.
Shipments to customers outside the United States comprised 51%, 43% and 44% of the Company’s revenue for the years ended December 28, 2008, December 30, 2007 and December 31, 2006, respectively. Customers outside the United States represented 61% and 46% of the Company’s net accounts receivable balance as of December 28, 2008 and December 30, 2007, respectively. Sales to territories outside of the United States are generally denominated in U.S. dollars. International sales entail a variety of risks, including
F-8
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
currency exchange fluctuations, longer payment cycles and greater difficulty in accounts receivable collection. The Company is also subject to general geopolitical risks, such as political, social and economic instability and changes in diplomatic and trade relations. The risks of international sales are mitigated in part by the extent to which sales are geographically distributed.
Inventories
Inventories are 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 provided based on product life cycle and development plans, product expiration and quality issues, historical experience and inventory levels.
Property and Equipment
Property and equipment are stated at cost, subject to review of impairment, and depreciated over the estimated useful lives of the assets (generally three to seven years) using the straight-line method. Amortization of leasehold improvements is computed over the shorter of the lease term or the estimated useful life of the related assets. Maintenance and repairs are charged to operations as incurred. When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operating expense.
Goodwill, Intangible Assets and Other Long-Lived Assets
Goodwill represents the excess of cost over fair value of net assets acquired. Intangible assets include acquired technology, customer relationships, other license agreements and licensed technology (capitalized as part of the Affymetrix litigation). The cost of identified intangible assets is amortized on a straight-line basis over periods ranging from three to ten years unless the expected benefit pattern is declining, in which case an accelerated method is used.
The Company regularly performs reviews to determine if the carrying values of the long-lived assets are impaired. In accordance with SFAS 142,Goodwill and Other Intangible Assets,goodwill and other intangible assets that 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 Company performed its annual impairment test of goodwill as of May 30, 2008, utilizing a test that begins with an estimate of the fair value of the reporting unit or intangible asset, noting no impairment and has determined there has been no impairment indicators for goodwill through December 28, 2008. A review of intangible assets that have finite useful lives and other long-lived assets is performed when an event occurs indicating the potential for impairment in accordance with SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets. If indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, the Company measures the future discounted cash flows associated with the use of the asset and adjusts the value of the asset accordingly. Factors that would necessitate an impairment assessment include a significant decline in the Company’s stock price and market capitalization compared to its net book value, significant changes in the ability of a particular asset to generate positive cash flows and significant changes in the Company’s strategic business objectives and utilization of the asset.
F-9
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reserve for Product Warranties
The Company generally provides a one-year warranty on instrumentation. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with system sales. This expense is recorded as a component of cost of revenue.
Revenue Recognition
The Company’s revenue is generated primarily from the sale of products and services. Product revenue consists of sales of arrays, reagents, flow cells, instrumentation, oligonucleotides (oligos) and associated freight charges. Service and other revenue consists of revenue received for performing genotyping and sequencing services, extended warranty sales and amounts earned under research agreements with government grants, which are recognized in the period during which the related costs are incurred.
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectibility is reasonably assured. In instances where final acceptance of the product or system is required, revenue is deferred until all the acceptance criteria have been met. All revenue is recorded net of any applicable allowances for returns or discounts.
Revenue for product sales is recognized generally upon shipment and transfer of title to the customer, provided no significant obligations remain and collection of the receivables 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 delivered to the customer.
In order to assess whether the price is fixed and determinable, the Company ensures there are no refund rights. If payment terms are based on future performance, the Company defers revenue recognition until the price becomes fixed and determinable. The Company assesses collectibility based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If the Company determines that collection of a payment is not reasonably assured, revenue recognition is deferred until the time collection becomes reasonably assured, which is generally upon receipt of payment.
Sales of instrumentation generally include a standard one-year warranty. The Company also sells separately priced maintenance (extended warranty) contracts, which are generally for one or two years, upon the expiration of the initial warranty. Revenue for extended warranty sales is recognized ratably over the term of the extended warranty period. Reserves are provided for estimated product warranty expenses at the time the associated revenue is recognized. If the Company were to experience an increase in warranty claims or if costs of servicing its warrantied products were greater than its estimates, gross margins could be adversely affected.
While the majority of its sales agreements contain standard terms and conditions, the Company does enter into agreements that contain multiple elements or non-standard terms and conditions. Emerging Issues Task Force (EITF)No. 00-21,Revenue Arrangements with Multiple Deliverables,provides guidance on accounting for arrangements that involve the delivery or performance of multiple products, services, or rights to use assets within contractually binding arrangements. For arrangements with multiple elements, revenue recognition is based on the individual units of accounting determined to exist in the arrangement. A delivered item is considered a separate unit of accounting when the delivered item has value to the customer on a stand-alone basis and there is objective and reliable evidence of the fair value of the undelivered items. 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. The fair value of an item is generally the price charged for the product, if the item is regularly sold on a stand-alone basis. When objective and reliable evidence of fair value exists for all units of accounting in an arrangement, the arrangement consideration is generally allocated to each unit
F-10
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of accounting based upon its relative fair value. In those instances when objective and reliable evidence of fair value exists for the undelivered items but not for the delivered items, the residual method is used to allocate the arrangement consideration. Under the residual method, the amount of arrangement consideration allocated to the delivered items equals the total arrangement consideration less the aggregate fair value of the undelivered items. When the Company is unable to establish stand-alone value for delivered items or when fair value of undelivered items has not been established, revenue is deferred until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. The Company recognizes revenue for delivered elements only when it determines that the fair values of undelivered elements are known and there are no uncertainties regarding customer acceptance.
Shipping and Handling Expenses
Shipping and handling expenses are included in cost of product revenue and totaled $3.7 million, $2.2 million and $1.8 million for the years ended December 28, 2008, December 30, 2007 and December 31, 2006, respectively.
Research and Development
Research and development expenses consist of costs incurred for internal and grant-sponsored research and development. Research and development expenses include salaries, contractor fees, facilities costs, utilities and allocations of benefits. Expenditures relating to research and development are expensed in the period incurred.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were $3.4 million, $2.8 million and $1.9 million for the years ended December 28, 2008, December 30, 2007 and December 31, 2006, respectively.
Income Taxes
In accordance with SFAS No. 109,Accounting for Income Taxes, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and credit carryforwards. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on ajurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. Factors reviewed include projections of pre-tax book income over the foreseeable future, determination of cumulative pre-tax book income after permanent differences, history of earnings, and reliability of forecasting. As of December 28, 2008, the Company maintained a valuation allowance only against certain U.S. and foreign deferred tax assets that the Company concluded did not meet the “more likely than not” threshold required under SFAS No. 109.
Due to the adoption of SFAS No. 123R, the Company recognizes excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, the Company follows thewith-and-without approach excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to the Company.
F-11
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Effective January 1, 2007, the Company adopted FASB Interpretation (FIN) No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires recognition of the impact of a tax position in the Company’s financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense.
Functional Currency
Historically, the Company identified the local currency as the functional currency in each of its foreign subsidiaries, and the effects of translation were recorded as other comprehensive income (loss). During the third quarter of 2008, the Company reorganized its international structure to execute a more efficient relationship between product development, product manufacturing and sales. The reorganization increased the foreign subsidiaries’ anticipated dependence on the U.S. entity for management decisions, financial support, production assets and inventory, thereby making the foreign subsidiaries more of a direct and integral component of the U.S. entity’s operations. As a result, the Company reassessed the primary economic environment of its foreign subsidiaries and determined the subsidiaries are more U.S. dollar based, resulting in a U.S. dollar functional currency determination. As a result of this change, beginning in the third quarter of 2008, the Company remeasures its foreign subsidiaries’ assets and liabilities and income and expense accounts related to nonmonetary assets and liabilities to the U.S. dollar and records the net gains or losses resulting from remeasurement in its consolidated statements of operations within interest and other expense, net.
Stock-Based Compensation
The Company accounts for share-based compensation using the fair value recognition provisions of SFAS 123(R),Share-Based Paymentusing 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 volatility, expected life, and interest rates. Historically, the Company used an expected stock-price volatility assumption that was primarily based on historical realized volatility of the underlying stock during a period of time. Beginning the third quarter of 2007, volatility was determined by equally weighing the historical and implied volatility of the Company’s common stock. The historical volatility of the Company’s common stock over the most recent period is generally commensurate with the estimated expected life of the Company’s stock options, adjusted for the impact of unusual fluctuations not reasonably expected to recur and other relevant factors. The implied volatility is calculated from the implied market volatility of exchange-traded call options on the Company’s common stock. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees.
F-12
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The assumptions used for the specified reporting periods and the resulting estimates of weighted-average fair value per share of options granted and for stock purchases under the ESPP during those periods are as follows:
| | | | | | |
| | 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 |
The fair value of restricted stock units granted during the years ended December 28, 2008 and December 30, 2007 was based on the market price of our common stock on the date of grant. No restricted stock units were granted during the year ended December 31, 2006.
As of December 28, 2008, $152.8 million of total unrecognized compensation cost related to stock options, restricted stock and ESPP shares issued to date is expected to be recognized over a weighted-average period of approximately 1.9 years.
Total share-based compensation expense for employee stock options and stock purchases consists of the following (in thousands, except per share data):
| | | | | | | | | | | | |
| | Year Ended
| | | 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
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net Income ( Loss) per Share
On July 22, 2008, the Company announced a two-for-one stock split in the form of a 100% stock dividend with a record date of September 10, 2008 and a distribution date of September 22, 2008. Share and per share amounts have been restated to reflect the stock split for all periods presented.
Basic and diluted net income (loss) per share of common stock is presented in conformity with SFAS No. 128,Earnings per Share,for all periods presented. In accordance with SFAS No. 128, basic net income (loss) per share is computed using the weighted-average number of shares of common stock outstanding during the period, less shares held in treasury and shares subject to repurchase. Diluted net income (loss) per share is computed using the weighted average number of common and dilutive common equivalent shares from the Company’s Convertible Senior Notes, equity awards, warrants sold in connection with the Convertible Senior Notes and warrants assumed in the acquisition of Solexa, Inc. (Solexa) using the treasury stock method. The following table presents the calculation of weighted-average shares used to calculate basic and diluted net income (loss) per share (in thousands):
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | Year Ended
| |
| | 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 | |
Comprehensive Income
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on the Company’s available-for-sale securities and foreign currency translation adjustments. The Company has disclosed comprehensive income as a component of stockholders’ equity.
The components of accumulated other comprehensive income are as follows (in thousands):
| | | | | | | | |
| | December 28,
| | | December 30,
| |
| | 2008 | | | 2007 | |
|
Foreign currency translation adjustments | | $ | 2,103 | | | $ | 1,183 | |
Unrealized gain on available-for-sale securities, net of deferred tax | | | 303 | | | | 164 | |
| | | | | | | | |
Total other comprehensive income | | $ | 2,406 | | | $ | 1,347 | |
| | | | | | | | |
F-14
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recent Accounting Pronouncements
Adopted Accounting Pronouncements
During fiscal 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”. In February 2008, the FASB issued Staff PositionNo. FSP 157-2, “Effective Date of FASB Statement No. 157”(FSP 157-2), which provides a one year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities only. The adoption of this statement did not have a material impact on the Company’s consolidated statements of operations or financial condition. On October 10, 2008, the FASB issued FSPNo. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active”(FSP 157-3) that clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial assets is not active.FSP 157-3 is effective for all periods presented in accordance with SFAS No. 157. The Company considered the additional guidance with respect to the valuation of its financial assets and liabilities and their corresponding designation within the fair value hierarchy. All short-term investments were valued using quoted prices in active markets or Level 1 hierarchical inputs. Long-term investments were valued using Level 3 hierarchical inputs due to the lack of trading in the secondary market of these instruments. Refer to Notes 3 and 4.
During fiscal 2008, the Company adopted SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on acontract-by-contract basis. The objective of the guidance is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The adoption of SFAS No. 159 impacted the accounting for the put option recorded as a result of the signed settlement agreement with UBS AG (UBS) in November 2008. Refer to Note 4.
New Accounting Pronouncements
SFAS No. 141(R),Business Combinations, was issued in December of 2007. SFAS No. 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. SFAS No. 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and sets forth what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact the adoption of this pronouncement will have on the Company’s consolidated financial statements.
SFAS No. 160,Interests in Consolidated Financial Statements — an amendment of ARB No. 51,which impacts the accounting for minority interest in the consolidated financial statements of filers, was also issued in December 2007. The statement requires the reclassification of minority interest to the equity section of the balance sheet and the results from operations attributed to minority interest to be included in net income. The related minority interest impact on earnings would then be disclosed in the summary of other comprehensive income. The statement is applicable for all fiscal years beginning on or after December 15, 2008 and earlier adoption is prohibited. The adoption of this standard will require prospective treatment. The Company is currently evaluating the impact, if any, the adoption of this pronouncement will have on the Company’s consolidated financial statements.
F-15
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In December 2007 the Financial Accounting Standards Board (FASB) ratified EITF Issue07-1,Accounting for Collaborative Arrangements. EITF Issue07-1 focuses on defining a collaborative arrangement as well as the accounting for transactions between participants in a collaborative arrangement and between the participants in the arrangement and third parties. The EITF concluded that both types of transactions should be reported in each participant’s respective income statement. EITF Issue07-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and should be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The Company is currently evaluating the impact, if any, the adoption of this pronouncement will have on the Company’s consolidated financial statements.
In May 2008, the FASB issued FASB Staff Position (FSP) Accounting Principles Board Opinions (APB)14-1,Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement)(FSP APB14-1 or the FSP) that significantly impacts the accounting for convertible debt. The FSP requires issuers of convertible debt that may be settled fully or partially in cash upon conversion to account separately for the liability and equity components of the convertible debt. The liability component is measured so that the effective interest expense associated with the convertible debt reflects the issuer’s borrowing rate at the date of issuance for similar debt instruments without the conversion feature. This FSP applies to our Convertible Senior Notes and will be effective for us beginning on December 29, 2009. This FSP will be applied retrospectively to all periods that will be presented in our consolidated financial statements beginning after December 29, 2009. Upon adoption, we will retrospectively record a decrease in the book value of our 0.625% Convertible Senior Notes of approximately $150.0 million as of December 28, 2008, an increase in additional paid-in capital and a cumulative effect of a change in accounting principles in our consolidated financial statements, and we will begin recording an additional non-cash interest expense ranging from approximately $20.0 million to 30.0 million per year. The additional interest expense, net of taxes, will reduce net income by a range of approximately $13.0 million to $20.0 million per year. We will continue to record this additional interest expense over the expected life of the debt. These amounts represent management’s best estimates of the effects the adoption of this pronouncement will have on the Company’s consolidated financial statements, however actual amounts may vary significantly from our current estimate.
In October 2008, the FASB issued FASB FSPSFAS 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB Statement No. 157,Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP is effective upon issuance, including for prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application should be accounted for as a change in accounting estimate following the guidance in FASB Statement No. 154,Accounting Changes and Error Corrections. However, the disclosure provisions in Statement 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. The Company believes the impact of this pronouncement on the Company’s consolidated financial statements to be immaterial.
Avantome, Inc.
On August 1, 2008, the Company completed its acquisition of Avantome, Inc. (Avantome), a privately-held Delaware corporation. As consideration for the acquisition, the Company paid $25.8 million in cash, including transaction costs, and may pay up to an additional $35.0 million in contingent cash consideration based on the achievement of certain milestones. The Company assumed $1.1 million in net assets, and recorded a charge of $24.7 million for purchased in-process research and development (IPR&D) primarily associated with the development of Avantome’s low-cost, long read-length sequencing technology. The amount
F-16
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
allocated to IPR&D was expensed upon acquisition as it was determined that the underlying project had not reached technological feasibility and had no alternative future use. The Company has assessed the contingent consideration payable in accordance with the provisions of SFAS No. 141,Business Combinations, andEITF 95-8,Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination.Contingent consideration of $11.0 million will be recorded as compensation expense over a three-year period as this consideration is earned by the former primary shareholders of Avantome contingent upon their employment with the Company for three years. The remaining contingent consideration of $24.0 million will be recorded as additional purchase price if and when certain milestones are achieved or the amount due is determinable beyond a reasonable doubt.
The results of Avantome’s operations have been included in the Company’s consolidated financial statements since the acquisition date of August 1, 2008. Pro forma results of operations have not been presented because the effects of the acquisition were not material.
Solexa, Inc.
On January 26, 2007, the Company completed its acquisition of Solexa, a Delaware corporation, in a stock-for-stock merger transaction. The Company issued 26.2 million shares of its common stock as consideration for this merger.
The purchase price of the acquisition is as follows (in thousands):
| | | | |
Fair market value of securities issued | | $ | 527,067 | |
Fair market value of change of control bonuses and related taxes | | | 8,182 | |
Transaction costs not included in Solexa net tangible assets acquired | | | 8,138 | |
Fair market value of vested stock options, warrants and restricted stock assumed | | | 75,334 | |
| | | | |
Total purchase price | | $ | 618,721 | |
| | | | |
Based on the estimated fair values at the acquisition date, the Company allocated $303.4 million to IPR&D, $62.2 million to tangible assets acquired and liabilities assumed and $24.4 million to intangible assets. The remaining excess of the purchase price over the fair value of net assets acquired of $228.7 million was allocated to goodwill.
The results of Solexa’s operations have been included in the Company’s consolidated financial statements since the acquisition date of January 26, 2007. The following unaudited pro forma information shows the results of the Company’s operations for the specified reporting periods as though the acquisition had occurred as of the beginning of that period (in thousands, except per share data):
| | | | | | | | |
| | Year Ended
| | | Year Ended
| |
| | December 30,
| | | December 31,
| |
| | 2007 | | | 2006 | |
|
Revenue | | $ | 366,854 | | | $ | 187,103 | |
Net income (loss) | | $ | 17,388 | | | $ | (38,957 | ) |
Net income (loss) per share, basic | | $ | 0.16 | | | $ | (0.34 | ) |
Net income (loss) per share, diluted | | $ | 0.15 | | | $ | (0.34 | ) |
The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisition taken place as of the beginning of the period presented, or the results that may occur in the future. The pro forma results exclude the $303.4 million non-cash acquired IPR&D charge recorded upon the closing of the acquisition during the first quarter of 2007.
F-17
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
3. | Balance Sheet Account Details |
The following is a summary of short-term investments (in thousands):
| | | | | | | | | | | | | | | | |
| | | | | December 28, 2008 | | | | |
| | | | | Gross
| | | Gross
| | | | |
| | Amortized
| | | Unrealized
| | | Unrealized
| | | Estimated
| |
| | Cost | | | Gains | | | Losses | | | Fair Value | |
|
U.S. Treasury securities and obligations of U.S. government agencies | | $ | 218,964 | | | $ | 1,544 | | | $ | — | | | $ | 220,508 | |
Corporate debt securities | | | 92,301 | | | | 547 | | | | (305 | ) | | | 92,543 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 311,265 | | | $ | 2,091 | | | $ | (305 | ) | | $ | 313,051 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | 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 | |
| | | | | | | | | | | | | | | | |
Gross realized losses on sales of available-for-sale securities were immaterial for the years ended December 28, 2008, December 30, 2007 and December 31, 2006. Gross realized gains on sales of available-for-sale securities totaled $0.6 million for the year ended December 28, 2008 and were immaterial for the years ended December 30, 2007 and December 31, 2006. As of December 28, 2008, all of the Company’s investments in a gross unrealized loss position had been in such position for less than twelve months. Impairments are not considered other than temporary as the Company has the intent and ability to hold these investments until maturity.
Contractual maturities of short-term investments at December 28, 2008 were as follows (in thousands):
| | | | |
| | Estimated
| |
| | Fair Value | |
|
Due within one year | | $ | 204,774 | |
After one but within five years | | | 108,277 | |
| | | | |
Total | | $ | 313,051 | |
| | | | |
Accounts receivable consist of the following (in thousands):
| | | | | | | | |
| | December 28,
| | | December 30,
| |
| | 2008 | | | 2007 | |
|
Accounts receivable from product and service sales | | $ | 132,564 | | | $ | 82,144 | |
Other receivables | | | 1,840 | | | | 1,515 | |
| | | | | | | | |
| | | 134,404 | | | | 83,659 | |
Allowance for doubtful accounts | | | (1,138 | ) | | | (540 | ) |
| | | | | | | | |
Total | | $ | 133,266 | | | $ | 83,119 | |
| | | | | | | | |
F-18
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventory, net, consists of the following (in thousands):
| | | | | | | | |
| | December 28,
| | | December 30,
| |
| | 2008 | | | 2007 | |
|
Raw materials | | $ | 32,501 | | | $ | 27,098 | |
Work in process | | | 34,063 | | | | 20,321 | |
Finished goods | | | 6,867 | | | | 6,561 | |
| | | | | | | | |
Total | | $ | 73,431 | | | $ | 53,980 | |
| | | | | | | | |
Property and equipment consist of the following (in thousands):
| | | | | | | | |
| | December 28,
| | | December 30,
| |
| | 2008 | | | 2007 | |
|
Leasehold improvements | | $ | 26,637 | | | $ | 4,531 | |
Manufacturing and laboratory equipment | | | 83,317 | | | | 50,384 | |
Computer equipment and software | | | 27,490 | | | | 18,772 | |
Furniture and fixtures | | | 4,167 | | | | 3,691 | |
| | | | | | | | |
| | | 141,611 | | | | 77,378 | |
Accumulated depreciation and amortization | | | (52,175 | ) | | | (31,104 | ) |
| | | | | | | | |
Total | | $ | 89,436 | | | $ | 46,274 | |
| | | | | | | | |
Depreciation expense was $17.3 million, $11.5 million and $6.0 million for the years ended December 28, 2008, December 30, 2007 and December 31, 2006, respectively.
Accrued liabilities consist of the following (in thousands):
| | | | | | | | |
| | December 28,
| | | December 30,
| |
| | 2008 | | | 2007 | |
|
Compensation | | $ | 30,330 | | | $ | 17,410 | |
Short-term deferred revenue | | | 15,862 | | | | 7,541 | |
Taxes | | | 9,456 | | | | 8,298 | |
Reserve for product warranties | | | 8,203 | | | | 3,716 | |
Customer deposits | | | 6,583 | | | | 5,266 | |
Accrued royalties | | | 2,695 | | | | 1,867 | |
Legal and other professional fees | | | 1,708 | | | | 4,276 | |
Other | | | 5,518 | | | | 2,478 | |
| | | | | | | | |
Total | | $ | 80,355 | | | $ | 50,852 | |
| | | | | | | | |
The Company has $55.9 million (at cost) in auction rate securities issued primarily by municipalities and universities. The auction rate securities are held in a brokerage account with UBS. These securities are debt instruments with a long-term maturity and with an interest rate that is reset in short intervals through auctions. The Company’s entire auction rate portfolio is currently rated AAA or AA by a rating agency.
The markets for auction rate securities effectively ceased when the vast majority of auctions failed in February 2008, preventing investors from selling their auction rate securities. As of December 28, 2008, the securities continued to fail auction and remained illiquid. As a result, the Company recorded an unrealized loss of $8.7 million for the year ended December 28, 2008, resulting in a reduction to the fair value of the
F-19
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company’s auction rate securities to $47.2 million. This unrealized loss was determined in accordance with SFAS No. 157,Fair Value Measurements.
As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels including the following:
| | |
| • | Level 1 — Quoted prices in active markets for identical assets or liabilities. |
|
| • | Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
|
| • | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The fair value hierarchy gives the highest priority to Level 1 and the lowest priority to Level 3. In determining the fair value of the Company’s auction rate securities, the Company considered trades in the secondary market. However, due to the recent auction failures of the auction rate securities in the marketplace and the lack of trading in the secondary market of these instruments, there was insufficient observable auction rate security market information available to directly determine the fair value of the Company’s investments. As a result, the value of these auction rate securities and resulting unrealized loss was determined using Level 3 hierarchical inputs. These inputs include management’s assumptions of pricing by market participants, including assumptions about risk. In accordance with SFAS No. 157, the Company used the concepts of fair value based on estimated discounted future cash flows of interest income over a projected five year period reflective of the length of time until the Company’s securities are expected to become liquid or potentially get repurchased. In preparing this model, the Company used historical data of the rates upon which a majority of the auction rate securities’ contractual rates were based, such as the LIBOR and average trailing twelve-month90-day Treasury interest rate spreads, to estimate future interest rates. The Company also considered the discount factors, taking into account the credit ratings of the auction rate securities, using a discount rate of 5%. The Company obtained information from multiple sources, including UBS, to determine a reasonable range of assumptions to use in valuing the auction rate securities. The Company’s model was corroborated by a separate comparable cash flow analysis prepared by UBS. To understand the sensitivity of the Company’s valuation, the liquidity factor and estimated remaining life was varied. Variations in those results were evaluated and it was determined the factors and valuation method chosen were reasonable and representative of the Company’s auction rate security portfolio.
The Company classified these securities as long-term assets since the Company believes it may not be able to liquidate its investments without significant loss within the next year. As of December 30, 2007, these securities were classified as short-term since the failures of these auctions did not occur until February 2008.
As a result of the auction rate failures, various regulatory agencies initiated investigations into the sales and marketing practices of several banks and broker-dealers, including UBS, which sold auction rate securities, alleging violations of federal and state laws. Along with several other broker-dealers, UBS subsequently reached a settlement with the federal and state regulators that required them to repurchase auction rate securities from certain investors at par at some future date. In November 2008 the Company signed a settlement agreement to sell its auction rate securities at par value to UBS during the period of June 30, 2010 through July 2, 2012 (the Settlement). In accepting the Settlement, the Company released UBS from any claims relating to the marketing and sale of auction rate securities. Although the Company expects to sell its auction rates securities under the Settlement, if the Settlement is not exercised before July 2, 2012, it will expire and UBS will have no further rights or obligation to buy the Company’s auction rate securities. In lieu of the acceptance of the Settlement, the auction rate securities will continue to accrue interest as
F-20
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
determined by the auction process or the terms outlined in the prospectus of the auction rate securities if the auction process fails. In addition to offering to repurchase the Company’s auction rate securities, as part of the Settlement, UBS has agreed to provide the Company with a “no net cost” loan up to 75% of the par value of the auction rate securities until June 30, 2010. Per the terms of the Settlement, the interest rate on the loan will approximate the weighted average interest or dividend rate payable to the Company by the issuer of any auction rate securities pledged as collateral.
UBS’s obligations under the Settlement are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Settlement. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Settlement.
To account for the Settlement, the Company recorded a separate freestanding asset (put option) of $8.7 million and recognized a corresponding gain in earnings during the fourth quarter of 2008. The fair value of the put option is included in long-term investments on the balance sheet as of December 28, 2008 with the corresponding gain classified as interest income in the consolidated statement of operations for the year ended December 28, 2008. The put option does not meet the definition of a derivative instrument under SFAS No. 133, therefore, the Company elected to measure the put option at fair value under SFAS No. 159. The Company valued the put option using a discounted cash flow approach including estimates of interest rates, timing and amount of cash flow, with consideration given to UBS’s financial ability to repurchase the auction rate securities beginning June 30, 2010. These assumptions are volatile and subject to change as the underlying sources of these assumptions and market conditions change.
Prior to accepting the UBS offer, the Company recorded its auction rate securities as available-for-sale investments, and therefore recorded resulting unrealized gains or losses in accumulated other comprehensive income in its statements of stockholders’ equity. By signing the settlement agreement, the Company no longer had the intent of holding the auction rate securities until recovery as management now has the intent to exercise its put option during the period June 30, 2010 to July 3, 2012. As a result, the Company elected a one-time transfer of the auction rate securities from available-for-sale to trading in accordance with SFAS No. 115. Prior to its agreement with UBS, management’s intent was to hold the auction rate securities until the earlier of anticipated recovery in market value or maturity. Upon transfer to trading securities, the Company immediately recognized a loss of $8.7 million, included in interest income for the amount of the unrealized loss not previously recognized in earnings. The Company will continue to recognize gains and losses in earnings approximating the changes in the fair value of the auction rate securities at each balance sheet date. These gains and losses are expected to be approximately offset by changes in the fair value of the put option.
The Company’s intangible assets are comprised primarily of acquired core technology and customer relationships from the acquisition of Solexa and licensed technology from the Affymetrix settlement entered into on January 9, 2008. As a result of this settlement, the Company agreed, without admitting liability, to make a one-time payment to Affymetrix of $90.0 million. In return, Affymetrix agreed to dismiss with prejudice all lawsuits it had brought against the Company, and the Company agreed to dismiss with prejudice its counterclaims in the relevant lawsuits. Affymetrix also agreed not to sue the Company or its affiliates or customers for making, using or selling any of the Company’s current products, evolutions of those products or services related to those products. In addition, Affymetrix agreed that, for four years, it will not sue the Company for making, using or selling the Company’s products or services that are based on future technology developments. The covenant not to sue covers all fields other than photolithography, the process by which Affymetrix manufactures its arrays and a field in which the Company does not operate.
Of the total $90.0 million payment made on January 25, 2008, $36.0 million was recorded as licensed technology and classified as an intangible asset. The remaining $54.0 million was charged to expense during
F-21
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the fourth quarter of 2007. This allocation was determined in accordance with SFAS No. 5,Accounting for Contingencies, andEITF 00-21 using the concepts of fair value based on the past and estimated future revenue streams related to the products covered by the patents previously under dispute. The value of the licensed technology is the benefit derived, calculated using estimated discounted cash flows and future revenue projections, from the perpetual covenant not to sue for damages related to the sale of the Company’s current products. The Company utilized an annual discount rate of 9.25% when preparing this model. The effective life of the licensed technology extends through 2015, the final expiry date of all patents considered in valuing the intangible asset. The related amortization is based on the higher of the percentage of usage or the straight-line method. The percentage of usage was determined using actual and projected revenues generated from products covered by the patents previously under dispute.
Acquired core technology and customer relationships are being amortized on a straight-line basis over their effective useful lives of ten and three years, respectively. The amortization of the Company’s intangible assets is excluded from cost of product revenue and is separately classified as amortization of intangible assets on the Company’s consolidated statements of operations.
The following is a summary of the Company’s amortizable intangible assets as of the respective balance sheet dates (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Amortization expense associated with the intangible assets was $10.4 million and $2.4 million for the years ended December 28, 2008 and December 30, 2007, respectively. There was no amortization of intangibles for the year ended January 1, 2006.
The estimated annual amortization of intangible assets for the next five years is shown in the following table (in thousands). Actual amortization expense to be reported in future periods could differ from these estimates as a result of acquisitions, divestitures, asset impairments and other factors.
| | | | |
2009 | | $ | 6,749 | |
2010 | | | 6,462 | |
2011 | | | 6,425 | |
2012 | | | 6,618 | |
2013 | | | 6,518 | |
Thereafter | | | 14,983 | |
| | | | |
Total | | $ | 47,755 | |
| | | | |
| |
6. | Impairment of Manufacturing Equipment |
During fiscal 2008, the Company implemented next-generation imaging and decoding systems to be used in manufacturing. These systems were developed to increase existing capacity and allow the Company to transition to the Infinium High-Density (HD) product line. As a result of this transition, the demand for products manufactured on the previous infrastructure was reduced and certain systems were no longer being
F-22
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
utilized. In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, a non-cash impairment charge of $4.1 million was recorded in the second quarter of fiscal 2008 for the excess machinery. This charge is included as a separate line item in the Company’s consolidated statement of operations. There was no change to useful lives and related depreciation expense of the remaining assets as the Company believes these estimates are currently reflective of the period the assets will be used in operations.
The Company generally provides a one-year warranty on sequencing, genotyping and gene expression systems. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with system sales. This expense is recorded as a component of cost of product revenue. Estimated warranty expenses associated with extended maintenance contracts are recorded as cost of revenue ratably over the term of the maintenance contract.
Changes in the Company’s reserve for product warranties from January 1, 2006 through December 28, 2008 are as follows (in thousands):
| | | | |
Balance as of January 1, 2006 | | $ | 751 | |
Additions charged to cost of revenue | | | 1,379 | |
Repairs and replacements | | | (1,134 | ) |
| | | | |
Balance as of December 31, 2006 | | | 996 | |
Additions charged to cost of revenue | | | 4,939 | |
Repairs and replacements | | | (2,219 | ) |
| | | | |
Balance as of December 30, 2007 | | | 3,716 | |
Additions charged to cost of revenue | | | 13,044 | |
Repairs and replacements | | | (8,557 | ) |
| | | | |
Balance as of December 28, 2008 | | $ | 8,203 | |
| | | | |
| |
8. | Convertible Senior Notes |
On February 16, 2007, the Company issued $400.0 million principal amount of 0.625% Convertible Senior Notes due 2014 (the Notes), which included the exercise of the initial purchasers’ option to purchase up to an additional $50.0 million aggregate principal amount of Notes. The net proceeds from the offering, after deducting the initial purchasers’ discount and offering expenses, were $390.3 million. The Company will pay 0.625% interest per annum on the principal amount of the Notes, payable semi-annually in arrears in cash on February 15 and August 15 of each year. The Company made interest payments of $1.3 million and $1.2 million on February 15, 2008 and August 15, 2008, respectively. The Notes mature on February 15, 2014.
The Notes will be convertible into cash and, if applicable, shares of the Company’s common stock, $0.01 par value per share, based on a conversion rate, subject to adjustment, of 45.8058 shares per $1,000 principal amount of Notes (which represents a conversion price of $21.83 per share), only in the following circumstances and to the following extent: (1) during the fivebusiness-day period after any five consecutive trading period (the measurement period) in which the trading price per Note for each day of such measurement period was less than 97% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; (2) during any calendar quarter after the calendar quarter ending March 30, 2007, if the last reported sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately
F-23
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (3) upon the occurrence of specified events; and (4) the Notes will be convertible at any time on or after November 15, 2013 through the third scheduled trading day immediately preceding the maturity date. The requirements of the second condition above were satisfied during the first, second and third quarters of 2008. Accordingly, the Company’s outstanding convertible notes became convertible into cash and, if applicable, shares of common stock, during the period from, and including April 1, 2008 through, and including, December 31, 2008. During the fourth quarter of 2008, the requirements of this same condition were no longer satisfied, accordingly, the Notes will no longer be convertible during the period from, and including January 1, 2009 through, and including March 31, 2009 unless another conversion condition is satisfied during this period. Generally, upon conversion of a Note, the Company will pay the conversion value of the Note in cash, up to the principal amount of the Note. Any excess of the conversion value over the principal amount is payable in shares of the Company’s common stock. As of December 28, 2008, the principal amount of these Notes was classified as current liabilities as the Notes were still convertible through December 31, 2008.
In connection with the offering of the Notes in February 2007, the Company entered into convertible note hedge transactions (the hedge) with the initial purchasersand/or their affiliates (the counterparties) entitling the Company to purchase up to 18,322,320 shares of the Company’s common stock at a strike price of $21.83 per share, subject to adjustment. In addition, the Company sold to these counterparties warrants (the warrants) exercisable, on a cashless basis, for up to 18,322,320 shares of the Company’s common stock at a strike price of $31.435 per share, subject to adjustment. The cost of the hedge that was not covered by the proceeds from the sale of the warrants was $46.6 million and was reflected as a reduction of additional paid-in capital. The hedge is expected to reduce the potential equity dilution upon conversion of the Notes to the extent the Company exercises the note hedges to purchase shares from the counterparties to deliver to converting noteholders. However, the warrants could have a dilutive effect on the Company’s earnings per share to the extent that the price of the Company’s common stock exceeds the strike price of the warrants on the exercise dates of the warrants, which occur during 2014, and the warrants are exercised.
Operating Leases
The Company leases office and manufacturing facilities under various noncancellable operating lease agreements. Facilities leases generally provide for periodic rent increases, and many contain escalation clauses and renewal options. Certain leases require the Company to pay property taxes and routine maintenance. The Company is headquartered in San Diego, California and leases facilities in Hayward, California, the United Kingdom, The Netherlands, Japan, Singapore, Australia and China.
Annual future minimum payments under these operating leases as of December 28, 2008 were as follows (in thousands):
| | | | |
2009 | | $ | 11,032 | |
2010 | | | 11,122 | |
2011 | | | 11,823 | |
2012 | | | 11,920 | |
2013 | | | 11,458 | |
Thereafter | | | 100,885 | |
| | | | |
Total | | $ | 158,240 | |
| | | | |
F-24
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Rent expense, net of amortization of the deferred gain on sale of property, was $10.7 million, $7.7 million and $4.7 million for the years ended December 28, 2008, December 30, 2007 and December 31, 2006, respectively.
Common Stock
On July 22, 2008, the Company announced a two-for-one stock split in the form of a 100% stock dividend with a record date of September 10, 2008 and a distribution date of September 22, 2008. Share and per share amounts have been restated to reflect the stock split for all periods presented.
On August 12, 2008, a total of 8,050,000 shares were sold to the public at a public offering price of $43.75 per share, raising net proceeds to the Company of $342.6 million, after deducting underwriting discounts and commissions and offering expenses.
On December 28, 2008, the Company had 121,008,599 shares of common stock outstanding.
Stock Options
In June 2005, the stockholders of the Company approved the 2005 Stock and Incentive Plan (the 2005 Stock Plan). Upon adoption of the 2005 Stock Plan, issuance of options under the Company’s existing 2000 Stock Plan ceased. Additionally, in connection with the acquisition of Solexa, the Company assumed stock options granted under the 2005 Solexa Equity Incentive Plan (the 2005 Solexa Equity Plan). The 2005 Stock Plan and the 2005 Solexa Equity Plan initially provided that an aggregate of up to 24,571,238 shares of the Company’s common stock be reserved and available to be issued. The 2005 Stock Plan provides for an automatic annual increase in the shares reserved for issuance by the lesser of 5% of the outstanding shares of the Company’s common stock on the last day of the immediately preceding fiscal year, 2,400,000 shares or such lesser amount as determined by the Company’s board of directors. Additionally, during the Company’s Annual Meeting of Stockholders held on May 16, 2008, the stockholders ratified an amendment to increase the maximum number of shares of common stock authorized for issuance under the 2005 Stock Plan by 2,400,000 shares. As of December 28, 2008, options to purchase 6,777,903 shares remained available for future grant under the 2005 Stock Plan and 2005 Solexa Equity Plan.
On January 29, 2008, the Company’s board of directors approved the New Hire Stock and Incentive Plan, which provides for the issuance of options and shares of restricted stock to newly hired employees. There is no set number of shares reserved for issuance under this Plan.
F-25
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s stock option activity under all stock option plans from January 1, 2006 through December 28, 2008 is as follows:
| | | | | | | | |
| | | | | 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 | |
| | | | | | | | |
The following is a further breakdown of the options outstanding as of December 28, 2008:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Weighted
| |
| | | | | Weighted
| | | | | | | | | Average
| |
| | | | | Average
| | | Weighted
| | | | | | Exercise Price
| |
Range of
| | Options
| | | Remaining Life
| | | Average
| | | Options
| | | of Options
| |
Exercise Prices | | Outstanding | | | in Years | | | Exercise Price | | | Exercisable | | | Exercisable | |
|
$0.05-3.95 | | | 2,195,626 | | | | 4.14 | | | $ | 2.94 | | | | 1,706,512 | | | $ | 2.91 | |
$3.97-4.85 | | | 1,813,554 | | | | 5.38 | | | $ | 4.34 | | | | 1,023,641 | | | $ | 4.37 | |
$4.94-10.49 | | | 2,907,761 | | | | 6.27 | | | $ | 8.44 | | | | 1,496,162 | | | $ | 8.28 | |
$10.66-16.19 | | | 1,890,491 | | | | 7.35 | | | $ | 13.79 | | | | 787,957 | | | $ | 13.50 | |
$16.27-19.61 | | | 2,619,364 | | | | 7.81 | | | $ | 18.24 | | | | 893,047 | | | $ | 18.24 | |
$19.71-20.04 | | | 2,227,638 | | | | 7.22 | | | $ | 20.03 | | | | 701,138 | | | $ | 20.04 | |
$20.12-29.78 | | | 1,819,970 | | | | 8.80 | | | $ | 24.51 | | | | 336,421 | | | $ | 24.62 | |
$30.09-33.80 | | | 1,840,600 | | | | 9.12 | | | $ | 32.61 | | | | 218,044 | | | $ | 32.51 | |
$34.43-42.02 | | | 589,200 | | | | 9.33 | | | $ | 38.51 | | | | 5,000 | | | $ | 41.75 | |
$44.38 | | | 230,000 | | | | 9.60 | | | $ | 44.38 | | | | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
$0.05-44.38 | | | 18,134,204 | | | | 7.06 | | | $ | 16.26 | | | | 7,167,922 | | | $ | 10.94 | |
| | | | | | | | | | | | | | | | | | | | |
The weighted average remaining life in years of options exercisable is 6.37 years as of December 28, 2008.
The aggregate intrinsic value of options outstanding and options exercisable as of December 28, 2008 was $192.4 million and $105.4 million, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price per share on the last trading day of the fiscal period, which was $25.36 as of December 26, 2008, and the exercise price multiplied by the number of options outstanding. Total intrinsic value of options exercised was $136.6 million, $72.1 million and $34.0 million for the years ended December 28, 2008, December 30, 2007 and December 31, 2006, respectively.
F-26
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Employee Stock Purchase Plan
In February 2000, the board of directors and stockholders adopted the 2000 ESPP. A total of 15,467,426 shares of the Company’s common stock have been reserved for issuance under the ESPP. The ESPP permits eligible employees to purchase common stock at a discount, but only through payroll deductions, during defined offering periods.
The price at which stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. The initial offering period commenced in July 2000. In addition, beginning with fiscal 2001, the ESPP provides for annual increases of shares available for issuance by the lesser of 3% of the number of outstanding shares of the Company’s common stock on the last day of the immediately preceding fiscal year, 3,000,000 shares or such lesser amount as determined by the Company’s board of directors. Shares totaling 276,198, 266,962 and 532,788 were issued under the ESPP during fiscal 2008, 2007 and 2006, respectively. As of December 28, 2008, there were 10,794,162 shares available for issuance under the ESPP.
Restricted Stock Units
In 2007 the Company began granting restricted stock units pursuant to its 2005 Stock and Incentive Plan as part of its periodic employee equity compensation review program. Restricted stock units are share awards that, upon vesting, will deliver to the holder shares of the Company’s common stock. Restricted stock units granted during 2007 vest over four years as follows: 15% vest on the first and second anniversaries of the grant date, 30% vest on the third anniversary of the grant date and 40% vest on the fourth anniversary of the grant date. Effective January 2008, the Company changed the vesting schedule for grants of new restricted stock units. Currently, restricted stock units 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.
A summary of the Company’s restricted stock unit activity and related information in the fiscal year ended December 28, 2008 is as follows:
David R. Walt | | | | |
| | Restricted Stock Units(1) | |
|
Outstanding at December 31, 2006 | | | — | |
Awarded | | | 395,500 | |
Vested | | | — | |
Cancelled | | | (1,000 | ) |
| | | | |
Outstanding at December 30, 2007/s/ ROY WHITFIELD | | | 394,500 | |
AwardedDirector | | | 1,287,504 | February 23, 2012 |
Vested | | | (55,638 | ) |
Cancelled | | | (47,090 | ) |
| | | | |
Outstanding at December 28, 2008 | | | 1,579,276 | |
Roy Whitfield | | | | |
| | |
(1) | | Each stock unit represents the fair market value of one share of common stock. |
The weighted average grant-date fair value per share for the restricted stock units was $34.53 and $25.69 for the years ended December 28, 2008 and December 30, 2007, respectively. No restricted stock units were outstanding as of December 31, 2006.
Based on the closing price per share of the Company’s common stock of $25.36 on December 26, 2008, the total pretax intrinsic value of all outstanding restricted stock units on that date was $40.0 million.
F-27
ILLUMINA, INC.86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Warrants
In conjunction with its acquisition of Solexa, Inc. on January 26, 2007, the Company assumed 4,489,686 warrants issued by Solexa prior to the acquisition. During the year ended December 28, 2008, there were 401,362 warrants exercised, resulting in cash proceeds to the Company of $3.0 million. As of December 28, 2008, 252,164 of the assumed warrants had expired.
A summary of all warrants outstanding as of December 28, 2008 is as follows:
| | | | | | | | |
Number of Shares | | Exercise Price | | | Expiration Date | |
|
238,510 | | $ | 7.27 | | | | 4/25/2010 | |
864,040 | | $ | 7.27 | | | | 7/12/2010 | |
809,246 | | $ | 10.91 | | | | 11/23/2010 | |
1,125,734 | | $ | 10.91 | | | | 1/19/2011 | |
18,322,320(1) | | $ | 31.44 | | | | 2/15/2014 | |
| | | | | | | | |
21,359,850 | | | | | | | | |
| | | | | | | | |
| | |
(1) | | Represents warrants sold in connection with the offering of the Company’s Convertible Senior Notes (See Note 8). |
Treasury Stock
In connection with its issuance of $400.0 million principal amount of 0.625% Convertible Senior Notes due 2014 on February 16, 2007, the Company repurchased 11.6 million shares of its outstanding common stock for $201.6 million in privately negotiated transactions concurrently with the offering.
On February 20, 2007, the Company executed aRule 10b5-1 trading plan to repurchase up to $75.0 million of its outstanding common stock over a period of six months. The Company repurchased 3.2 million shares of its common stock under this plan for $50.0 million. As of December 30, 2007, this plan had expired.
On October 23, 2008, the board of directors authorized a $120.0 million stock repurchase program. As of December 28, 2008 the Company had repurchased 3.1 million shares for $70.8 million under the plan in open-market transactions or through privately negotiated transactions in compliance withRule 10b-18 under the Securities Exchange Act of 1934. As of December 28, 2008, $49.2 million remains authorized for future repurchases under the program.
Stockholder Rights Plan
On May 3, 2001, the board of directors of the Company declared a dividend of one preferred share purchase right (a Right) for each outstanding share of common stock of the Company. The dividend was payable on May 14, 2001 (the Record Date) to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one unit consisting of one-thousandth of a share of its Series A Junior Participating Preferred Stock at a price of $100 per unit. The Rights will be exercisable if a person or group hereafter acquires beneficial ownership of 15% or more of the outstanding common stock of the Company or announces an offer for 15% or more of the outstanding common stock. If a person or group acquires 15% or more of the outstanding common stock of the Company, each Right will entitle its holder to purchase, at the exercise price of the right, 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
F-28
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
company which at the time of such transaction have a market value of two times the exercise price of the right. 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 expire on May 14, 2011 unless such date is extended or the rights are earlier redeemed or exchanged by the Company.
| |
11. | Litigation Settlements |
In the recent past, the Company incurred substantial costs in defending against patent infringement claims and expects, going forward, to devote substantial financial and managerial resources to protect the Company’s intellectual property and to defend against any future claims asserted against the Company. From time to time, the Company may also be parties to other litigation in the ordinary course of business. While the results of any litigation are uncertain, management does not believe the ultimate resolution of its legal matters will result in a material adverse impact to the Company.
Applied Biosystems Litigation
On December 26, 2006, Applied Biosystems Inc. (Applied Biosystems), formerly known as Applera Corporation (currently known as Applied Biosystems LLC, a wholly owned subsidiary of Life Technologies Corporation), filed suit in California Superior Court, Santa Clara County, against Solexa (which was acquired by the Company on January 26, 2007). This State Court action related to the ownership of several patents assigned in 1995 to Solexa’s predecessor company (Lynx Therapeutics) by a former employee (Dr. Stephen Macevicz), who is the inventor of these patents and is named as a co-defendant in the suit. The Macevicz patents are directed to methods for sequencing DNA (US Pat. Nos. 5,750,341 and 6,306,597) using successive rounds of oligonucleotide probe ligation(sequencing-by-ligation), and to a probe (5,969,119) used in connection with these sequencing methods. Lynx was originally a unit of Applied Biosystems but was spun out in 1992. On May 31, 2007, Applied Biosystems filed a second suit, this time against the Company, in the U.S. District Court for the Northern District of California. This second suit sought a declaratory judgment of non-infringement of the Macevicz patents that were the subject of the State Court action mentioned above. Both suits were later consolidated in the U.S. District Court for the Northern District of California, San Francisco Division. By these consolidated actions, Applied Biosystems was seeking ownership of the three Macevicz patents, unspecified costs and damages, and a declaration of non-infringement and invalidity of these patents. Applied Biosystems was not asserting any claim for patent infringement against the Company.
On January 5, 2009, the case went to trial in two phases. The first phase addressed the determination of ownership of thepatents-in-suit, and the second phase addressed whether these patents were infringed and valid. On January 14, 2009, at the end of the first phase, a federal jury determined that Solexa was the rightful owner of all three Macevicz patents. On January 27, 2009, the same jury found that Applied Biosystems did not infringe the ’119 probe patent, and that the ’119 patent was valid. In August 2008, the court had ruled that Applied Biosystems’ two-base system did not infringe the ’341 and ’597 patents. Prior to the jury finding of non-infringement of the ’119 patent, Applied Biosystems conceded that its one-base system infringed claim 1 of the ’597 patent and Solexa conceded invalidity of that same claim under the court’s construction of that claim. Both parties reserved the right to appeal the court’s construction of claim 1 of the ’597 patent, among other things.
The Company’s Genome Analyzer products use a different technology, calledSequencing-by-Synthesis (SBS), which is not covered by any of the Macevicz patents. In addition, the Company has no plans to use any of theSequencing-by-Ligation technologies covered by these patents.
F-29
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The income (loss) before income taxes summarized by region is as follows (in thousands):
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | Year Ended
| |
| | 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 | |
| | | | | | | | | | | | |
The provision (benefit) for income taxes consists of the following (in thousands):
| | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | |
The provision (benefit) for income taxes reconciles to the amount computed by applying the federal statutory rate to income (loss) before taxes as follows (in thousands):
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | Year Ended
| |
| | 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
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
| | | | | | | | |
| | December 28,
| | | December 30,
| |
| | 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 | |
| | | | | | | | |
A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on ajurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. Based on the available evidence as of December 28, 2008, the Company was not able to conclude it is more likely than not certain U.S. and foreign deferred tax assets will be realized. Therefore, the Company recorded a valuation allowance of $2.8 million and $12.4 million against certain U.S. and foreign deferred tax assets, respectively. At December 30, 2007, the Company had concluded that it is more likely than not that a significant portion of its deferred tax assets will be realized and, accordingly the Company released a portion of its valuation allowance, $17.1 million of which was recorded as a reduction to the tax provision.
As of December 28, 2008, the Company had net operating loss carryforwards for federal and state tax purposes of $87.7 million and $148.3 million, respectively, which begin to expire in 2025 and 2013, respectively, unless previously utilized. In addition, the Company also had U.S. federal and state research and development tax credit carryforwards of $12.6 million and $13.9 million, respectively, which begin to expire in 2018 and 2019, respectively, unless previously utilized.
As of December 28, 2008, the valuation allowance includes $14.0 million of pre-acquisition deferred tax assets of Solexa. Prior to the adoption of SFAS 141(R) to the extent any of these assets were recognized, the adjustment would have been applied first to reduce to zero any goodwill related to the acquisition, and then an a reduction to the tax provision.
Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of the Company’s net operating losses 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. Previous limitations due to Section 382 and 383 have been reflected in the deferred tax assets as of December 28, 2008.
F-31
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Due to the adoption of SFAS No. 123R, the Company recognizes excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, the Company follows thewith-and-without approach excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to the Company. During 2008, the Company realized $18.5 million of such excess tax benefits, and accordingly recorded a corresponding credit to additional paid in capital. As of December 28, 2008, the Company has $36.5 million of unrealized excess tax benefits associated with share-based compensation. These tax benefits will be accounted for as a credit to additional paid-in capital, if and when realized, rather than a reduction of the tax provision.
The Company’s manufacturing operations in Singapore operate under various tax holidays and incentives that begin to expire in 2018. For the year ended December 28, 2008, these tax holidays and incentives resulted in an approximate $1.9 million decrease to the tax provision and an increase to net income per diluted share of $0.01.
Residual U.S. income taxes have not been provided on $14.7 million of undistributed earnings of foreign subsidiaries as of December 28, 2008, since the earnings are considered to be indefinitely invested in the operations of such subsidiaries.
Effective January 1, 2007, the Company adopted FIN No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires recognition of the impact of a tax position in the Company’s financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. The adoption of FIN No. 48 did not result in an adjustment to the Company’s opening stockholders’ equity since there was no cumulative effect from the change in accounting principle.
The following table summarizes the gross amount of the Company’s uncertain tax positions (in thousands):
| | | | |
Balance at December 31, 2007 | | $ | 21,376 | |
Increases related to current year tax positions | | | 2,402 | |
| | | | |
Balance at December 28, 2008 | | $ | 23,778 | |
| | | | |
As of December 28, 2008, $7.7 million of the Company’s uncertain tax positions would reduce the Company’s annual effective tax rate, if recognized.
The Company does not expect its uncertain tax positions to change significantly over the next 12 months. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense. As of December 28, 2008, no interest or penalties have been accrued related to the Company’s uncertain tax positions. Tax years 1992 to 2008 remain subject to future examination by the major tax jurisdictions in which the Company is subject to tax.
| |
13. | 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 December 28, 2008, December 30, 2007 and December 31, 2006, the Company made matching contributions of $2.6 million, $1.4 million and $0.4 million, respectively.
F-32
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Executive Deferred Compensation Plan
For the Company’s executives and members of the board of directors, the Company adopted the Illumina, Inc. Deferred Compensation Plan (the Plan) that became effective January 1, 2008. Eligible participants can contribute up to 80% of their base salary and 100% of all other forms of compensation into the Plan, including bonus, commission and director fees. The Company has agreed to credit the participants’ contributions with earnings that reflect the performance of certain independent investment funds. On a discretionary basis, the Company may also make employer contributions to participant accounts in any amount determined by the Company. The vesting schedules of employer contributions are at the sole discretion of the Compensation Committee. However, all employer contributions shall become 100% vested upon the occurrence of the participant’s disability, death or retirement or a change in control of the Company. The benefits under this plan are unsecured. Participants are generally eligible to receive payment of their vested benefit at the end of their elected deferral period or after termination of their employment with the Company for any reason or at a later date to comply with the restrictions of Section 409A. As of December 28, 2008, no employer contributions were made to the Plan.
In January 2008, the Company also established a rabbi trust for the benefit of its directors and executives under the Plan. In accordance with FASB Interpretation (FIN) No. 46,Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, andEITF 97-14,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 December 28, 2008, the assets of the trust and liabilities of the Company were $1.3 million. The assets and liabilities are classified as other assets and accrued liabilities, respectively, on the Company’s balance sheet as of December 28, 2008. Changes in the values of the assets held by the rabbi trust accrue to the Company.
14. Segment Information, Geographic Data and Significant Customers
During the first quarter of 2008, the Company reorganized its operating structure into a newly created Life Sciences Business Unit, which includes all products and services related to the research market, namely the BeadArray, BeadXpress and Sequencing product lines. The Company also created a Diagnostics Business Unit to focus on the emerging opportunity in molecular diagnostics. For the year ended December 28, 2008, the Company had limited activity related to the Diagnostics Business Unit, and operating results were reported on an aggregate basis to the chief operating decision maker of the Company, the chief executive officer. In accordance with SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information, the Company operated in one reportable segment for the year ended December 28, 2008.
The Company had revenue in the following regions for the years ended December 28, 2008, December 30, 2007 and December 31, 2006 (in thousands):
| | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | |
Net revenues are attributable to geographic areas based on the region of destination.
F-33
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The majority of our product sales consist of consumables and instruments. For the years ended December 28, 2008, December 30, 2007, and December 31, 2006, consumable sales represented 58%, 53% and 54%, respectively, of total revenues and instrument sales comprised 32%, 33% and 23%, respectively, of total revenues. Our customers include leading genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations and biotechnology companies. The Company had no customers that provided more than 10% of total revenue in the years ended December 28, 2008, December 30, 2007 and December 31, 2006.
Net long-lived assets exclude goodwill and other intangible assets since they are not allocated on a geographic basis. The Company had net long-lived assets consisting of property and equipment in the following regions as of December 28, 2008 and December 30, 2007 (in thousands):
| | | | | | | | |
| | 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
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
15. | 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. Summarized quarterly data for fiscal 2008 and 2007 are as follows (in thousands except per share data):
| | | | | | | | | | | | | | | | |
| | First Quarter(1) | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | |
|
2008: | | | | | | | | | | | | | | | | |
Total revenue | | $ | 121,861 | | | $ | 140,177 | | | $ | 150,260 | | | $ | 160,927 | |
Total cost of revenue (excluding impairment of manufacturing equipment and amortization of intangible assets) | | | 46,081 | | | | 50,459 | | | | 54,430 | | | | 54,654 | |
Net income (loss) | | | 13,428 | | | | 15,398 | | | | (7,288 | ) | | | 28,939 | |
Net income (loss) per share, basic | | | 0.12 | | | | 0.14 | | | | (0.06 | ) | | | 0.24 | |
Net income (loss) per share, diluted | | | 0.11 | | | | 0.12 | | | | (0.06 | ) | | | 0.22 | |
Net cash (used in) provided by operating activities | | | (26,755 | ) | | | 37,222 | | | | 27,298 | | | | 50,117 | |
Net cash used in investing activities | | | (44,123 | ) | | | (37,384 | ) | | | (164,520 | ) | | | (31,222 | ) |
Net cash provided by (used in) financing activities | | | 15,979 | | | | 14,171 | | | | 356,936 | | | | (49,414 | ) |
2007: | | | | | | | | | | | | | | | | |
Total revenue | | $ | 72,150 | | | $ | 84,535 | | | $ | 97,510 | | | $ | 112,604 | |
Total cost of revenue (excluding amortization of intangible assets) | | | 25,120 | | | | 30,141 | | | | 37,078 | | | | 40,097 | |
Net income (loss) | | | (298,076 | ) | | | 9,264 | | | | 14,503 | | | | (4,050 | ) |
Net income (loss) per share, basic | | | (2.79 | ) | | | 0.09 | | | | 0.14 | | | | (0.04 | ) |
Net income (loss) per share, diluted | | | (2.79 | ) | | | 0.08 | | | | 0.12 | | | | (0.04 | ) |
Net cash provided by operating activities | | | 14,643 | | | | 24,482 | | | | 5,316 | | | | 11,853 | |
Net cash used in investing activities | | | (34,410 | ) | | | (69,514 | ) | | | (32,143 | ) | | | 68,381 | |
Net cash provided by financing activities | | | 104,950 | | | | 2,464 | | | | 10,433 | | | | 30,445 | |
| | |
(1) | | The Company reclassified $36.0 million from cash provided by operating activities to cash used in investing activities in the first quarter of 2008 for the portion of the litigation payment relating to intangible assets. |
F-35
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| | | | | | | | |
| | 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