Product revenue consists primarily of revenue from the sale of consumables and instruments. Services and other revenue consists primarily of instrument service contract revenue as well as sequencing and genotyping service revenue.
The decreaseeffective tax rate in 2011 closely approximated the U.S. statutory rate because a significant portion of our earnings was subject to U.S. taxation. The increase in the effective tax rate in 2011 from 2010 was primarily attributable to the gainlower 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.
Liquidity and Capital Resources
At December 30, 2012, we had approximately $434.0 million in cash and cash equivalents, a $131.0 million increase from last year, due to the factors described in the “Cash Flow Summary” below. Our primary source of liquidity has been cash flows from operations. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing, and financing needs. Cash and cash equivalents held by our foreign subsidiaries at December 30, 2012 were approximately $265.5 million. It is our intention to indefinitely reinvest all current and future foreign earnings in foreign subsidiaries.
Historically, we have liquidated our short-term investments and/or issued debt and equity securities to finance our business needs as a supplement to cash provided by operating activities. At December 30, 2012, we have $916.2 million in
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.
In 2011, we issued $920.0 million in principal amount of convertible senior notes that mature on March 15, 2016 (2016 notes). We pay 0.25% interest per annum on the principal amount of the 2016 notes 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 on February 15, 2014 (2014 notes). We pay 0.625% interest per annum on the principal amount of the 2014 notes 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 “7. Convertible Senior Notes” in Part II, Item 8, of this Form 10-K. As of December 30, 2012, the principal amounts of our 2016 notes and 2014 notes were $920.0 million and $40.1 million, respectively. Our commitment of interest payment on these outstanding notes is $8.4 million on an annual basis.
Our primary short-term needs for capital, which are subject to change, include expenditures related to:
support of 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;
acquisitions of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities;
repurchases of our outstanding common stock;
the continued advancement of research and development efforts;
potential strategic acquisitions and investments; and
the expansion needs of our facilities, including costs of leasing additional facilities.
In 2012, we acquired BlueGnome for total cash and other consideration of $95.5 million, which included $7.5 million in fair value of contingent cash consideration. In 2011, we acquired Epicentre for total cash and other consideration of $71.4 million, which included $4.6 million in the fair value of contingent consideration relatedsettled in stock and $7.4 million in the fair value of contingent cash consideration.
Our Board of Directors has authorized several common stock repurchase programs. In 2012, we used $82.5 million to repurchase our outstanding shares under these programs. As of December 30, 2012, we had authorization from our Board of Directors to repurchase to an additional $167.5 million of our common stock.
During 2011, we used $314.3 million of the net proceeds from the issuance of our 2016 notes to purchase 4.9 million shares of our common stock in privately negotiated transactions concurrently with the issuance. We also used part of the net proceeds for the extinguishment of $349.9 million principal amount of our 2014 notes upon conversion. We used the remaining net proceeds for other general corporate purposes, which included acquisitions and purchases of our common stock.
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, cash equivalents and short-term investments, together with cash provided by operating activities will be sufficient to fund our near term capital and operating needs for at least the next 12 months, including the pending acquisition of Helixis, Inc. that is excluded from taxable incomeVerinata. Operating needs include the planned costs to operate our business, including amounts required to fund working capital and a decrease in nondeductible acquired IPR&D recognized for financial reporting purposes in 2010 as compared to 2009.
Comparison of 2009 and 2008
capital expenditures. Our fiscal year is 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, September 30, and December 31. The year ended January 3, 2010 was 53 weeksfuture capital requirements and the year ended December 28, 2008 was 52 weeks.
Revenue
| | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | | | Change | | | % Change | |
| | (In thousands) | | | | | | | |
|
Product revenue | | $ | 627,240 | | | $ | 532,390 | | | $ | 94,850 | | | | 18 | % |
Service and other revenue | | | 39,084 | | | | 40,835 | | | | (1,751 | ) | | | (4 | ) |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 666,324 | | | $ | 573,225 | | | $ | 93,099 | | | | 16 | % |
| | | | | | | | | | | | | | | | |
Total gross profit | | $ | 453,875 | | | $ | 353,094 | | | $ | 100,781 | | | | 29 | % |
Total gross margin | | | 68.1 | % | | | 61.6 | % | | | | | | | | |
Revenue
Product revenue consists primarily of revenue from the sale of consumables and instruments.
Consumable revenue increased $57.6 million, or 17%, to $391.3 million for 2009 compared to $333.7 million for 2008. Microarray consumable revenue, which constituted more than halfadequacy of our consumable revenue, declined $11.4available 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.
Cash flow Summary
|
| | | | | | | | | | | |
(In thousands) | 2012 | | 2011 | | 2010 |
Net cash provided by operating activities | $ | 291,873 |
| | $ | 358,140 |
| | $ | 272,573 |
|
Net cash used in investing activities | (150,012 | ) | | (400,999 | ) | | (285,053 | ) |
Net cash (used in) provided by financing activities | (10,755 | ) | | 97,016 |
| | 116,474 |
|
Effect of exchange rate changes on cash and cash equivalents | (103 | ) | | (126 | ) | | 320 |
|
Net increase in cash and cash equivalents | $ | 131,003 |
| | $ | 54,031 |
| | $ | 104,314 |
|
Operating Activities
Cash provided by operating activities in 2012 consisted of net income of $151.3 million primarily attributable plus net adjustments to lower salesnet income of whole-genome genotyping arrays partially$158.6 million, offset by growth in focused content arrays. The decline was driven by customers delaying the start of new GWAS in anticipation of new and rare variant content from the 1000 Genome Project, order delays directly related to stimulus funding under the Recovery Act, and the impact of reduced foundation funding at a few key customers. Sales volume for our Infinium BeadChip product lines, which constituted a majority of our microarray consumable sales, was relatively flat on a sample basis during 2009 compared to 2008. The average selling price per sample, however, declined due to a change in product mix attributablenet operating assets of $18.0 million. The primary non-cash expenses added back to growthnet income included share-based compensation of $94.3 million, depreciation and amortization expenses related to property and equipment and acquired intangible assets of $63.8 million, impairment of IPR&D of $21.4 million, and the accretion of the debt discount of $35.0 million. The adjustments to net income also included $20.8 million in incremental tax benefit related to share-based compensation, $45.9 million in net cost-method investment related gain, and $6.0 million in recovery of a previously impaired note receivable. The main drivers in the saleschange in net operating assets included increases in accounts receivable, inventory, accounts payable, and accrued liabilities.
Cash provided by operating activities in 2011 consisted of our focused content arrays coupled with lower salesnet income of whole-genome genotyping arrays.
Revenue from sequencing consumables increased $68.9$86.6 million driven by growthplus net adjustments to net income of $236.5 million and changes in net operating assets of $35.0 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. The adjustments to net income also included $46.4 million in incremental tax benefit related to share-based compensation. The main drivers in the installed base of our Genome Analyzer systemschange in net operating assets included increases in accrued liabilities, and the progression of customer labs ramping to production scale. The increase was partially offset by a loss of sales related to a quality issue affecting our paired-end cluster kits that arosedecreases in September 2009 when some of our larger sequencing customers began experiencing higher than average error rates on the second read of their paired-end analysis. During the fourth quarter, we began shipping reformulated paired-end cluster kits at full capacityinventory and cleared the related shipping backlog.accounts payable.
Revenue from the sale of instruments increased $40.0 million, or 22%, to $225.7 million for 2009 compared to $185.7 million for 2008 primarily due to a $56.4 million increase in sales of our sequencing systems. During 2009 as compared to 2008 units sold and average selling prices increased for our Genome Analyzer systems, which constituted a majority of sequencing instrument revenue. The increase in units sold was driven by increased demand for next-generation sequencing systems. The increase in average selling prices was attributable to the product transition from the Genome Analyzer I to the Genome Analyzer II in the second quarter of 2008 and technological improvements leading to the launch of the Genome Analyzer IIx in the second quarter of 2009. The increase in sequencing instrument revenue was partially offset by a $16.4 million decrease in the sales of our microarray systems, which declined primarily due to customers delaying the start of new GWAS in anticipation of new and rare variant content from the 1000 Genomes Project, order delays directly related to stimulus funding under the Recovery Act, and the impact of reduced foundation funding at a few key customers.
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include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. At the present time, we have no material commitments for capital expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors, including:
| | |
| • | our ability to successfully commercialize and further develop our technologies and create innovative products in our markets; |
|
| • | scientific progress in our research and development programs and the magnitude of those programs; |
|
| • | competing technological and market developments; and |
|
| • | the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings. |
Off-Balance Sheet Arrangements
We do not participate in any transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. During the fiscal year ended January 2, 2011,December 30, 2012, we were not involved in any “off-balance sheet arrangements” within the meaning of the rules of the SEC.Securities and Exchange Commission.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude orders for goods and services entered into in the normal course of business that are not enforceable or legally binding. The following table represents our contractual obligations as of January 2, 2011,December 30, 2012, aggregated by type (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period(1) | |
| | | | | Less Than
| | | | | | | | | More Than
| |
Contractual Obligation | | Total | | | 1 Year | | | 1 – 3 Years | | | 3 – 5 Years | | | 5 Years | |
|
Debt obligations(2) | | $ | 398,530 | | | $ | 2,437 | | | $ | 4,875 | | | $ | 391,218 | | | $ | — | |
Operating leases | | | 499,261 | | | | 13,965 | | | | 37,737 | | | | 40,985 | | | | 406,574 | |
Amounts due under executive deferred compensation plan | | | 5,272 | | | | 5,272 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 903,063 | | | $ | 21,674 | | | $ | 42,612 | | | $ | 432,203 | | | $ | 406,574 | |
| | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | 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) | | $ | 968,551 |
| | $ | 2,551 |
| | $ | 44,850 |
| | $ | 921,150 |
| | $ | — |
|
Operating leases | | 515,207 |
| | 27,676 |
| | 47,167 |
| | 47,276 |
| | 393,088 |
|
Purchase obligations | | 12,276 |
| | 8,908 |
| | 3,368 |
| | — |
| | — |
|
Amounts due under executive deferred compensation plan | | 12,071 |
| | 12,071 |
| | — |
| | — |
| | — |
|
Total | | $ | 1,508,105 |
| | $ | 51,206 |
| | $ | 95,385 |
| | $ | 968,426 |
| | $ | 393,088 |
|
| | |
(1) | | The table excludes $22.7$37.6 million of uncertain tax benefits. We have not included this amount in the table because we cannot make a reasonably reliable estimate regarding the timing of settlements with taxing authorities, if any. See note “11.“13. Income Taxes” in Part II, Item 8 of thisForm 10-K for further discussion of our uncertain tax positions. The table also excludes $35.0$35.0 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 “3.“4. Acquisitions” in Part II, Item 8 of thisForm 10-K for further discussion of our contingent consideration. |
| |
(2) | | Debt obligations include the principal amount of our convertible senior notes due 2016 and 2014, as well as interest payments totaling 0.625% per annum.to be made under the notes. Although these notes mature in 2016 and 2014 we classify the principal amount of the notes as current in our consolidated balance sheet due to the convertibility feature. In addition, during the period from January 3, 2011 to February 28, 2011, certain noteholders notified us of their election to convert an aggregate of $251.1 million principal amount of the notes in exchange for the repayment of the principal amountrespectively, they can be converted into cash and a certain number of shares of the Company’sour common stock. See note “7. Convertible Senior Notes” and note 15 “Subsequent Events” in Part II, Item 8 of thisForm 10-K for further discussion of the terms of the convertible senior notes and thestock prior to maturity if certain conditions are met. Any conversion notices in the subsequent period.prior to |
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maturity can result in repayments of the principal amounts sooner than the scheduled repayments as indicated in the table. See note “7. Convertible Senior Notes” in Part II, Item 8 of this Form 10-K for further discussion of the terms of the convertible senior notes.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Management bases its estimates on historical experience, market and other conditions, and various other assumptions it believes to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, the estimation process is, by its nature, uncertain given that estimates depend on events over which we may not have control. If market and other conditions change from those that we anticipate, our consolidated financial statements may be materially affected. In addition, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material effect on our consolidated financial statements.
We believe that the following critical accounting policies and estimates have a higher degree of inherent uncertainty and require our most significant judgments. In addition, had we used estimates different from any of these, our consolidated financial statements could have been materially different from those presented. Members of our senior management have discussed the development and selection of our critical accounting policies and estimates, and our disclosure regarding them, with the audit committee of our board of directors. Our accounting policies are more fully described in note “1. Organization and Significant Accounting Policies” in Part II, Item 8 of thisForm 10-K.
Revenue Recognition
Our revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of instruments and consumables used in genetic analysis. Service and other revenue primarily consists of revenue received for performingfrom instrument service contract sales, genotyping and sequencing services, extended warranty sales, and amounts earned under research agreements with government grants, which are recognized in the period during which the related costs are incurred. The timing of revenue recognition and the amount of revenue actually recognized in each case depends upon a variety of factors, including the specific terms of each arrangement and the nature of our deliverables and obligations. Determination of the appropriate amount of revenue recognized involves significant judgments and estimates and actual results may differ from our estimates.
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectibility is reasonably assured. In instances where final acceptance of the product or system is required, revenue is deferred until all the acceptance criteria have been met. All revenue is recorded net of any discounts.
Revenue for product sales is recognized generally upon transfer of title to the customer, provided that no significant obligations remain and collection of the receivable is reasonably assured. Revenue forfrom instrument service contracts is recognized as the services are rendered, typically evenly over the contract term. Revenue from genotyping and sequencing services is recognized when earned, which is generally at the time the genotyping or sequencing analysis data is made available to the customer or agreed upon milestones are reached.
In order to assess whether the price is fixed or determinable, we evaluate whether refund rights exist. If there are refund rights or payment terms based on future performance, we defer revenue recognition until the price becomes fixed or determinable. We assess collectibility based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If we determine that collection of a payment is not reasonably assured, revenue recognition is deferred until receipt of payment.
We regularly enter into contracts where revenue is derived from multiple deliverables including any mix of products or services. These products or services are generally delivered within a short time frame, approximately three to six months, of the contract execution date. Revenue recognition for contracts with multiple deliverables is based on the individual units of accounting determined to exist in the contract. A delivered item is considered a separate unit of accounting when the delivered item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis.
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For transactions entered into in 2009 and 2010,with multiple deliverables, consideration is allocated at the inception of the contract to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective
evidence (VSOE) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence exists, we use best estimate of the selling price for the deliverable.
For transactions entered into prior to 2009, consideration was generally allocated to each unit of accounting based upon its relative fair value when objective and reliable evidence of fair value existed for all units of accounting in an arrangement. The fair value of an item was generally the price charged for the product, if the item was regularly sold on a stand-alone basis. In those instances when objective and reliable evidence of fair value existed for the undelivered items but not for the delivered items, the residual method was used to allocate the arrangement consideration. Under the residual method, the amount of arrangement consideration allocated to the delivered items equaled the total arrangement consideration less the aggregate fair value of the undelivered items. When we were unable to establish stand-alone value for delivered items or when fair value of undelivered items had not been established, revenue was deferred until all elements were delivered and services had been performed, or until fair value could objectively be determined for any remaining undelivered elements.
In order to establish VSOE of selling price, we must regularly sell the product or service on a standalone basis with a substantial majority priced within a relatively narrow range. VSOE of selling price is usually the midpoint of that range. If there are not a sufficient number of standalone sales and VSOE of selling price cannot be determined, then we consider whether third party evidence can be used to establish selling price. Due to the lack of similar products and services sold by other companies within the industry, we have rarely established selling price using third-party evidence. If neither VSOE nor third party evidence of selling price exists, we determine our best estimate of selling price using average selling prices over a rolling12-month period coupled with an assessment of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, we rely upon prices set by our pricing committee adjusted for applicable discounts. We recognize revenue for delivered elements only when we determine there are no uncertainties regarding customer acceptance.
In the first quarter of 2010, we offered an incentive with the launch of the HiSeq 2000 that enabled existing Genome Analyzer customers to trade in their Genome Analyzer and receive a discount on the purchase of a HiSeq 2000. The incentive was limited to customers who had purchased a Genome Analyzer as of the date of the announcement and was the first significant trade-in program we have offered. The Genome Analyzer trade-in program was completed in 2011. We will accountaccounted for HiSeq 2000 discounts related to the Genome Analyzer trade-in program in the period in whichas reductions to revenue upon recognition of the HiSeq 2000 sales revenue, which is recognized.later than the date the trade-in program was launched.
InvestmentsIn certain markets, 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 determineinvest in various types of securities, including debt securities in government-sponsored entities, corporate debt securities, and U.S. treasury securities. As of December 30, 2012, we have $916.2 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 discussed in note “6. Fair Value 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 transaction price and subsequently valued utilizing a third party service provider who assesses the fair value using inputs other than quoted prices that are observable either directly or indirectly, 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. We perform certain procedures to corroborate the fair value of our assetsthese holdings, 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 inputsprocess, we apply judgments and minimize the use of unobservable inputs. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:
| | |
| • | Level 1 — Quoted prices in active markets for identical assets or liabilities. |
|
| • | 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, 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 mayestimates that if 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 $219.3 million and the allowance for doubtful accounts was $4.3 million at December 30, 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, and we may need to increase our reserves 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 cycles, quality issues, historical experience, and usage forecasts. IfOur gross inventory totaled $178.6 million and the cumulative adjustment for potentially excess and obsolete inventory was $19.9 million at December 30, 2012. Historically, our inventory adjustment 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 relatedinvolved in various lawsuits and claims arising in the ordinary course of business, including actions with respect to intellectual property, employment, and contractual matters. We routinely assess the likelihood of adverse judgments or outcomes toIn connection with these matters, as well as rangeswe assess, on a regular basis, the probability and range of possible loss based on the developments in these matters. A liability is recorded in the financial statements if it is believed to be probable losses, tothat a loss has been incurred and the extent losses areamount of the loss can be reasonably estimable. If losses are probableestimated. Because litigation is inherently unpredictable and reasonably estimable, we will record a liability and an expense for the estimated loss. Disclosure for specific legalunfavorable resolutions could occur, assessing contingencies is provided ifhighly subjective and requires judgments about future events. We regularly review outstanding legal matters to determine the likelihoodadequacy of occurrence is probablethe liabilities accrued and the exposure is considered material to the consolidated financial statements. In making determinationsrelated disclosures in consideration of likely outcomes of litigation matters, management considers many factors. These factors, which include, but are not limited to, past history, scientific and other evidence, and the specifics and status of each matter. We may change our estimates if our assessment of the various factors changes whichand the amount of ultimate loss may result in the recording of an accrual or a changediffer from our estimates, resulting in a previously recorded accrual. Predicting the outcomematerial effect on our business, financial condition, results of claims and litigation, and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from estimates and accruals.operations, and/or cash flows.
Business Combinations
Under the acquisition method of accounting, we allocate the fair value of the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. We record the excess consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, as goodwill. These valuations require us to make significant estimates and assumptions, especially with respect to intangible assets.
In connection with certain of our acquisitions, additional contingent consideration is earned by the sellers upon completion of certain future performance milestones. Prior to fiscal year 2009, the Company recognized contingent consideration as an additional element of the cost of the acquisition, generally goodwill, when the contingency was resolved beyond a reasonable doubt and the additional consideration was issued or became issuable. Due to changes in the accounting standards regarding business combinations, for all acquisitions consummated on or after December 29, 2008,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
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variable factorsinputs such as anticipated future cash flows, risk-free adjusted discount rates, and nonperformance risk. Any change in the fair value of the contingent consideration subsequent to the acquisition date is recognized in acquisition related expense (gain) expense,, net, a component of operating expenses, in theour consolidated statements of income. This method requires significant management judgment, including the probability of achieving certain future milestones and discount rates. Future changes in our estimates could result in expenses or gains.
Management typically uses athe discounted cash flow method to value our acquired intangible assets. This method requires significant management judgment to forecast future operating results and establish residual growth rates and discount factors. The estimates we use to value and amortize intangible assets are consistent with the plans and estimates that we use to manage our business and are based on available historical information and industry estimates and averages. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.
Intangible Assets and Other Long-Lived Assets — Impairment Assessments
We estimateregularly perform reviews to determine if the fair valuecarrying values of our long-lived assets are impaired. A review of identifiable intangible assets and other long-lived assets that have finite useful lives wheneveris performed when an event or change in circumstances indicates thatoccurs indicating the carrying valuepotential for impairment. If indicators of impairment exist, we assess the recoverability of the asset may not be recovered through undiscounted future operating cash flows.affected long-lived assets and compare their fair values to the respective carrying amounts.
In order to estimate the fair value of purchasedidentifiable intangible assets and other long-lived assets, that have finite useful lives, we estimate the present value of future cash flows from those assets. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows, the time value of money, and other factors that a willing market participant would consider. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. We had a total of $129.9 million in net property and equipment and $70.0 million in net intangible assets on our balance sheet at January 2, 2011.
Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units, we may be required to record future impairment charges for purchased intangible assets. Impairment charges could materially decrease our future net income and result in lower asset values on our balance sheet.
Share-Based Compensation
We are required to measure and recognize compensation expense for all share-based payments made to employees and directors based on estimated fair value. We estimate the fair value of stock options granted and stock purchases under our employee stock purchase plan using the Black-Scholes-Merton (BSM) option-pricing model. The fair value of our restricted stock units is based on the market price of our common stock on the date of grant.
The determination of fair value of share-based awards using the BSM model requires the use of certain estimates and highly judgmental assumptions that affect the amount of share-based compensation expense recognized in our consolidated statements of income. These include estimates of the expected volatility of our stock price, expected life of an award, expected dividends, and the risk-free interest rate. We determine the volatility of our stock price by equally weighing the historical and implied volatility of our common stock. The historical volatility of our common stock over the most recent period is generally commensurate with the estimated expected life of our stock awards, adjusted for the impact of unusual fluctuations not reasonably
45
expected to recur, and other relevant factors. Implied volatility is calculated from the implied market volatility of exchange-traded call options on our common stock. The expected life of an award is based on historical forfeiture experience, exercise activity, and on the terms and conditions of the stock awards. We determined expected dividend yield to be 0% given we have never declared or paid any cash dividends on our common stock and we currently do not anticipate paying such cash dividends. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards. We amortize the fair value of share-based compensation on a straight-line basis over the requisite service periods of the awards. If any of the assumptions used in the BSM model change significantly, share-based compensation expense may differ materially from what 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 2012, we completed the relocation of our headquarters to a new facility in San Diego, California, and recorded headquarter relocation expense of $26.3 million, the majority of which was attributable to a cease-use loss recorded upon vacating 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.
Income Taxes
Our provision for income taxes, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid. Significant judgments and estimates based on interpretations of existing tax laws or regulations in the U.S.United States and the numerous foreign jurisdictions where we are subject to income tax are required in determining our provision for income taxes. Changes in tax laws, statutory tax rates, and estimates of the company’s future taxable income could impact the deferred tax assets and liabilities provided for in the consolidated financial statements and would require an adjustment to the provision for income taxes.
Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when we believe it is more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating our ability to recover deferred tax assets within the jurisdiction which they arise, we consider all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, our history of earnings and reliable forecasting,reliability of our forecasts, projections of pre-tax book income over the foreseeable future, and the impact of any feasible and prudent tax planning strategies. Based on the available evidence as of January 2, 2011,December 30, 2012, we were not able to conclude it is more likely than not certain U.S. and foreign deferred tax assets will be realized. Therefore, we recorded a valuation allowance of $1.9$1.8 million and $3.1 million against certain U.S. and foreign deferred tax assets, respectively.assets.
We recognize the impact of a tax position in our financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Tax authorities regularly examine our returns in the jurisdictions in which we do business and we regularly assess the tax risk of the company’s return filing positions. Due to the complexity of some of the uncertainties, the ultimate resolution may result in payments that are materially different from our current estimate of the tax liability. These differences, as well as any interest and penalties, will be reflected in the provision for income taxes in the period in which they are determined.
Warranties
We generally provide a one-year warranty on instruments. Additionally, we provide a warranty on consumables through the expiry date, which generally ranges from six to twelve months after the manufacture date. We establish an accrual for estimated warranty expenses based on historical experience as well as anticipated product performance. We periodically review the adequacy of our warranty reserve, and adjust, if necessary, the warranty percentage and accrual based on actual experience and estimated costs to be incurred. If our estimates of warranty obligation change or if actual product performance is below our expectations we may incur additional warranty expense.
| |
ItemITEM 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
Interest Rate Sensitivity
Our investment portfolio is exposed to market risk forfrom changes in interest 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
46
not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk, and reinvestment risk. We mitigate default risk by investing in investment grade securities. We have historically maintained a relatively short average maturity for our investment portfolio, and we believe a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive financial instruments. In addition, if a 100 basis point change in overall interest rates were to occur in 2011,2013, our interest income would change by approximately $8.9$13.5 million in relation to amounts we would expect to earn, based on our cash, cash equivalents, and short-term investments as of January 2, 2011.December 30, 2012.
Changes in interest rates may also impact gains or losses from the conversion of our outstanding convertible senior notes. As of January 2,During 2011, we had $390.0issued $920 million in aggregate principal amount of our 0.25% convertible senior notes outstanding. Thedue 2016. At our election, the notes are convertible into cash, and if applicable, 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 remains significantlyreaches a price for a sustained period at 130% above the conversion price of $21.83 per share, we expect that noteholders$83.55, the notes will elect to convert the notes.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 currentthen-current incremental borrowing rate. The net carrying value of the notes has an implicit interest rate of 8.27%. If our incremental borrowing rate at the time of conversion is higher or lower than the implied interest rate of the notes, we will record a gain or loss in our consolidated statement of income during the period in which the notes are converted. 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 $3.5 million.$3.0 million.
Market Price Sensitive Instruments
In order to 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 18,322,32018,322,000 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 18,322,32018,322,000 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 conduct a portion of our business in currencies other than the entity’scompany’s U.S. dollar functional currency. These transactions give rise to monetary assets and liabilities that are denominated in currencies other than the entity’s functional currency.U.S. dollar. The value of these monetary assets and liabilities are subject to changes in currency exchange rates from the time the transactions are originated until settlement in 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 monetary assets and liabilities are included in the determination of net income. We recorded a $3.7 millionnet currency exchange gainloss for the fiscal year ended December 30, 2012 on business transactions, net of hedging transactions, of $1.0 million for each of the years ended January 2, 2011 and January 3, 2010, which are included in other (expense) income, net, in theour consolidated statements of income.
47
We use forward exchange contracts to manage a portion of the foreign currency exposure risk for foreign subsidiaries with monetary assets and liabilities denominated in currencies other than the entity’s functional currency.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 2, 2011, we had $20.0 millionAs ofDecember 30, 2012, the total notional amount of outstanding forward contracts in place for foreign currency forward contracts outstanding to hedge foreign currency risk.purchases was approximately $51.2 million.
48
| |
ItemITEM 8. | Financial Statements and Supplementary Data. |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Illumina, Inc.
We have audited the accompanying consolidated balance sheets of Illumina, Inc. as of December 30, 2012 and January 2, 2011 and January 3, 2010,1, 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended January 2, 2011.December 30, 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 December 30, 2012 and January 2, 2011 and January 3, 2010,1, 2012, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended January 2, 2011,December 30, 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.
As discussed in Note 1 to the consolidated financial statements, Illumina, Inc. changed its method of accounting for business combinations effective December 29, 2008.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Illumina, Inc.’s internal control over financial reporting as of January 2, 2011,December 30, 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 28, 201115, 2013 expressed an unqualified opinion thereon.
/s/ EErnstRNST & YoungYOUNG LLP
San Diego, California
February 28, 201115, 2013
50
ILLUMINA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
| | | | | | | | |
| | January 2,
| | | January 3,
| |
| | 2011 | | | 2010 | |
| | (In thousands) | |
|
ASSETS |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 248,947 | | | $ | 144,633 | |
Short-term investments | | | 645,342 | | | | 548,894 | |
Accounts receivable, net | | | 165,598 | | | | 157,751 | |
Inventory, net | | | 142,211 | | | | 92,776 | |
Deferred tax assets, current portion | | | 19,378 | | | | 20,021 | |
Prepaid expenses and other current assets | | | 36,922 | | | | 17,515 | |
| | | | | | | | |
Total current assets | | | 1,258,398 | | | | 981,590 | |
Property and equipment, net | | | 129,874 | | | | 117,188 | |
Goodwill | | | 278,206 | | | | 213,452 | |
Intangible assets, net | | | 70,024 | | | | 43,788 | |
Deferred tax assets, long-term portion | | | 39,497 | | | | 47,371 | |
Other assets | | | 63,114 | | | | 26,548 | |
| | | | | | | | |
Total assets | | $ | 1,839,113 | | | $ | 1,429,937 | |
| | | | | | | | |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 66,744 | | | $ | 52,781 | |
Accrued liabilities | | | 156,164 | | | | 98,253 | |
Long-term debt, current portion | | | 311,609 | | | | 290,202 | |
| | | | | | | | |
Total current liabilities | | | 534,517 | | | | 441,236 | |
Other long-term liabilities | | | 28,531 | | | | 24,656 | |
Commitments and contingencies | | | | | | | | |
Conversion option subject to cash settlement | | | 78,390 | | | | 99,797 | |
Stockholders’ equity: | | | | | | | | |
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued at January 2, 2011 and January 3, 2010 | | | — | | | | — | |
Common stock, $0.01 par value, 320,000,000 shares authorized, 151,512,837 shares issued at January 2, 2011, 143,544,265 shares issued at January 3, 2010 | | | 1,516 | | | | 1,436 | |
Additional paid-in capital | | | 1,891,288 | | | | 1,637,751 | |
Accumulated other comprehensive income | | | 1,765 | | | | 2,830 | |
Accumulated deficit | | | (155,335 | ) | | | (280,226 | ) |
Treasury stock, at cost (24,904,564 shares at January 2, 2011 and 24,068,450 shares at January 3, 2010) | | | (541,559 | ) | | | (497,543 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 1,197,675 | | | | 864,248 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 1,839,113 | | | $ | 1,429,937 | |
| | | | | | | | |
|
| | | | | | | |
| December 30, 2012 | | January 1, 2012 |
ASSETS |
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 433,981 |
| | $ | 302,978 |
|
Short-term investments | 916,223 |
| | 886,590 |
|
Accounts receivable, net | 214,975 |
| | 173,886 |
|
Inventory | 158,718 |
| | 128,781 |
|
Deferred tax assets, current portion | 30,451 |
| | 23,188 |
|
Prepaid expenses and other current assets | 32,700 |
| | 29,196 |
|
Total current assets | 1,787,048 |
| | 1,544,619 |
|
Property and equipment, net | 166,167 |
| | 143,483 |
|
Goodwill | 369,327 |
| | 321,853 |
|
Intangible assets, net | 130,196 |
| | 106,475 |
|
Deferred tax assets, long-term portion | 40,183 |
| | 19,675 |
|
Other assets | 73,164 |
| | 59,735 |
|
Total assets | $ | 2,566,085 |
| | $ | 2,195,840 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities: | |
| | |
|
Accounts payable | $ | 65,727 |
| | $ | 49,806 |
|
Accrued liabilities | 201,877 |
| | 177,115 |
|
Long-term debt, current portion | 36,967 |
| | — |
|
Total current liabilities | 304,571 |
| | 226,921 |
|
Long-term debt | 805,406 |
| | 807,369 |
|
Other long-term liabilities | 134,369 |
| | 80,613 |
|
Commitments and contingencies |
|
| |
|
|
Conversion option subject to cash settlement | 3,158 |
| | 5,722 |
|
Stockholders’ equity: | |
| | |
Preferred stock, $0.01 par value, 10,000 shares authorized, no shares issued and outstanding at December 30, 2012 and January 1, 2012 | — |
| | — |
|
Common stock, $0.01 par value: 320,000 shares authorized; 170,171 shares issued and 123,943 outstanding at December 30, 2012; 166,707 shares issued and 122,041 outstanding at January 1, 2012 | 1,703 |
| | 1,668 |
|
Additional paid-in capital | 2,419,831 |
| | 2,249,900 |
|
Accumulated other comprehensive income | 2,123 |
| | 2,117 |
|
Retained earnings (accumulated deficit) | 82,547 |
| | (68,707 | ) |
Treasury stock, 46,228 shares and 44,665 shares at cost at December 30, 2012 and January 1, 2012, respectively | (1,187,623 | ) | | (1,109,763 | ) |
Total stockholders’ equity | 1,318,581 |
| | 1,075,215 |
|
Total liabilities and stockholders’ equity | $ | 2,566,085 |
| | $ | 2,195,840 |
|
See accompanying notes to consolidated financial statements
51
ILLUMINA, INC.
(In thousands, except per share amounts)
| | | | | | | | | | | | |
| | Years Ended_ | |
| | January 2,
| | | January 3,
| | | December 28,
| |
| | 2011 | | | 2010 | | | 2008 | |
| | (In thousands, except per share amounts) | |
|
Revenue: | | | | | | | | | | | | |
Product revenue | | $ | 842,510 | | | $ | 627,240 | | | $ | 532,390 | |
Service and other revenue | | | 60,231 | | | | 39,084 | | | | 40,835 | |
| | | | | | | | | | | | |
Total revenue | | | 902,741 | | | | 666,324 | | | | 573,225 | |
Cost of revenue: | | | | | | | | | | | | |
Cost of product revenue | | | 271,997 | | | | 190,714 | | | | 192,868 | |
Cost of service and other revenue | | | 21,399 | | | | 15,055 | | | | 12,756 | |
Amortization of intangible assets | | | 7,805 | | | | 6,680 | | | | 10,438 | |
Impairment of manufacturing equipment | | | — | | | | — | | | | 4,069 | |
| | | | | | | | | | | | |
Total cost of revenue | | | 301,201 | | | | 212,449 | | | | 220,131 | |
| | | | | | | | | | | | |
Gross profit | | | 601,540 | | | | 453,875 | | | | 353,094 | |
| | | | | | | | | | | | |
Operating expense: | | | | | | | | | | | | |
Research and development | | | 177,947 | | | | 140,616 | | | | 99,963 | |
Selling, general and administrative | | | 220,990 | | | | 176,337 | | | | 148,014 | |
Acquisition related (gain) expense, net | | | (9,051 | ) | | | 11,325 | | | | 24,660 | |
| | | | | | | | | | | | |
Total operating expense | | | 389,886 | | | | 328,278 | | | | 272,637 | |
| | | | | | | | | | | | |
Income from operations | | | 211,654 | | | | 125,597 | | | | 80,457 | |
Other income (expense): | | | | | | | | | | | | |
Interest income | | | 8,378 | | | | 11,029 | | | | 12,519 | |
Interest expense | | | (24,598 | ) | | | (23,718 | ) | | | (22,210 | ) |
Other (expense) income, net | | | (10,055 | ) | | | 1,217 | | | | 1,921 | |
| | | | | | | | | | | | |
Total other expense, net | | | (26,275 | ) | | | (11,472 | ) | | | (7,770 | ) |
| | | | | | | | | | | | |
Income before income taxes | | | 185,379 | | | | 114,125 | | | | 72,687 | |
Provision for income taxes | | | 60,488 | | | | 41,844 | | | | 33,271 | |
| | | | | | | | | | | | |
Net income | | $ | 124,891 | | | $ | 72,281 | | | $ | 39,416 | |
| | | | | | | | | | | | |
Net income per basic share | | $ | 1.01 | | | $ | 0.59 | | | $ | 0.34 | |
| | | | | | | | | | | | |
Net income per diluted share | | $ | 0.87 | | | $ | 0.53 | | | $ | 0.30 | |
| | | | | | | | | | | | |
Shares used in calculating basic net income per share | | | 123,581 | | | | 123,154 | | | | 116,855 | |
| | | | | | | | | | | | |
Shares used in calculating diluted net income per share | | | 143,433 | | | | 137,096 | | | | 133,607 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| Years Ended |
| December 30, 2012 | | January 1, 2012 | | January 2, 2011 |
Revenue: | |
| | |
| | |
|
Product revenue | $ | 1,055,826 |
| | $ | 987,280 |
| | $ | 842,510 |
|
Service and other revenue | 92,690 |
| | 68,255 |
| | 60,231 |
|
Total revenue | 1,148,516 |
| | 1,055,535 |
| | 902,741 |
|
Cost of revenue: | |
| | |
| | |
|
Cost of product revenue | 317,283 |
| | 308,228 |
| | 271,997 |
|
Cost of service and other revenue | 43,552 |
| | 26,118 |
| | 21,399 |
|
Amortization of acquired intangible assets | 14,153 |
| | 12,091 |
| | 7,805 |
|
Total cost of revenue | 374,988 |
| | 346,437 |
| | 301,201 |
|
Gross profit | 773,528 |
| | 709,098 |
| | 601,540 |
|
Operating expense: | |
| | |
| | |
|
Research and development | 231,025 |
| | 196,913 |
| | 177,947 |
|
Selling, general and administrative | 285,991 |
| | 261,843 |
| | 220,454 |
|
Headquarter relocation expense | 26,328 |
| | 41,826 |
| | — |
|
Unsolicited tender offer related expense | 23,136 |
| | — |
| | — |
|
Restructuring charges | 3,522 |
| | 8,136 |
| | — |
|
Acquisition related expense (gain), net | 2,774 |
| | 919 |
| | (8,515 | ) |
Total operating expense | 572,776 |
| | 509,637 |
| | 389,886 |
|
Income from operations | 200,752 |
| | 199,461 |
| | 211,654 |
|
Other income (expense): | |
| | |
| | |
|
Cost-method investment related gain (loss), net | 45,911 |
| | — |
| | (10,309 | ) |
Interest income | 16,208 |
| | 7,052 |
| | 8,378 |
|
Interest expense | (37,779 | ) | | (34,790 | ) | | (24,598 | ) |
Other (expense) income, net | (2,484 | ) | | (38,678 | ) | | 254 |
|
Total other income (expense), net | 21,856 |
| | (66,416 | ) | | (26,275 | ) |
Income before income taxes | 222,608 |
| | 133,045 |
| | 185,379 |
|
Provision for income taxes | 71,354 |
| | 46,417 |
| | 60,488 |
|
Net income | $ | 151,254 |
| | $ | 86,628 |
| | $ | 124,891 |
|
Net income per basic share | $ | 1.23 |
| | $ | 0.70 |
| | $ | 1.01 |
|
Net income per diluted share | $ | 1.13 |
| | $ | 0.62 |
| | $ | 0.87 |
|
Shares used in calculating basic net income per share | 122,999 |
| | 123,399 |
| | 123,581 |
|
Shares used in calculating diluted net income per share | 133,693 |
| | 138,937 |
| | 143,433 |
|
See accompanying notes to consolidated financial statements
52
ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
| | | | | | | | | | | | |
| | Years Ended |
| | December 30, 2012 | | January 1, 2012 | | January 2, 2011 |
Net income | | $ | 151,254 |
| | $ | 86,628 |
| | $ | 124,891 |
|
Unrealized gain (loss) on available-for-sale securities, net of deferred tax | | 6 |
| | 352 |
| | (1,065 | ) |
Total comprehensive income | | $ | 151,260 |
| | $ | 86,980 |
| | $ | 123,826 |
|
See accompanying notes to the consolidated financial statements.
ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated
| | | | | | | | | | | | | |
| | | | | | | | Additional
| | | Other
| | | | | | | | | | | | Total
| |
| | Common Stock | | | Paid-In
| | | Comprehensive
| | | Accumulated
| | | Treasury Stock | | | Stockholders’
| |
| | Shares | | | Amount | | | Capital | | | Income | | | Deficit | | | Shares | | | Amount | | | Equity | |
| | (In thousands) | |
|
Balance as of December 30, 2007 | | | 125,608 | | | $ | 1,256 | | | $ | 994,869 | | | $ | 1,347 | | | $ | (391,923 | ) | | | (14,819 | ) | | $ | (251,622 | ) | | $ | 353,927 | |
Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | — | | | | — | | | | 39,416 | | | | — | | | | — | | | | 39,416 | |
Unrealized gain onavailable-for-sale securities, net of deferred tax | | | — | | | | — | | | | — | | | | 920 | | | | — | | | | — | | | | — | | | | 920 | |
Foreign currency translation adjustment | | | — | | | | — | | | | (16 | ) | | | 155 | | | | — | | | | — | | | | — | | | | 139 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 40,475 | |
Issuance of common stock in conjunction with secondary offering, net of issuance costs | | | 8,050 | | | | 80 | | | | 342,570 | | | | — | | | | — | | | | — | | | | — | | | | 342,650 | |
Issuance of common stock under employee stock plans | | | 4,923 | | | | 49 | | | | 44,281 | | | | — | | | | — | | | | — | | | | — | | | | 44,330 | |
Warrants exercised | | | 356 | | | | 4 | | | | 2,987 | | | | — | | | | — | | | | — | | | | — | | | | 2,991 | |
Share-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 | ) |
Remeasurement of convertible debt | | | — | | | | — | | | | 18,883 | | | | — | | | | — | | | | — | | | | — | | | | 18,883 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 28, 2008 | | | 138,937 | | | | 1,389 | | | | 1,469,770 | | | | 2,422 | | | | (352,507 | ) | | | (17,928 | ) | | | (322,407 | ) | | | 798,667 | |
Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | — | | | | — | | | | 72,281 | | | | — | | | | — | | | | 72,281 | |
Unrealized gain onavailable-for-sale securities, net of deferred tax | | | — | | | | — | | | | — | | | | 408 | | | | — | | | | — | | | | — | | | | 408 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 72,689 | |
Issuance of common stock | | | 3,569 | | | | 36 | | | | 39,343 | | | | — | | | | — | | | | — | | | | — | | | | 39,379 | |
Warrants exercised | | | 954 | | | | 10 | | | | 7,566 | | | | — | | | | — | | | | — | | | | — | | | | 7,576 | |
Share-based compensation | | | — | | | | — | | | | 60,813 | | | | — | | | | — | | | | — | | | | — | | | | 60,813 | |
Incremental tax benefit related to stock options exercised | | | — | | | | — | | | | 39,319 | | | | — | | | | — | | | | — | | | | — | | | | 39,319 | |
Repurchases of common stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6,140 | ) | | | (175,136 | ) | | | (175,136 | ) |
Remeasurement of convertible debt | | | 84 | | | | 1 | | | | 20,940 | | | | — | | | | — | | | | — | | | | — | | | | 20,941 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of January 3, 2010 | | | 143,544 | | | | 1,436 | | | | 1,637,751 | | | | 2,830 | | | | (280,226 | ) | | | (24,068 | ) | | | (497,543 | ) | | | 864,248 | |
Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | — | | | | — | | | | 124,891 | | | | — | | | | — | | | | 124,891 | |
Unrealized loss onavailable-for-sale securities, net of deferred tax | | | — | | | | — | | | | — | | | | (1,065 | ) | | | — | | | | — | | | | — | | | | (1,065 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 123,826 | |
Issuance of common stock | | | 6,391 | | | | 64 | | | | 101,952 | | | | — | | | | — | | | | — | | | | — | | | | 102,016 | |
Warrants exercised | | | 1,578 | | | | 16 | | | | 16,013 | | | | — | | | | — | | | | — | | | | — | | | | 16,029 | |
Share-based compensation | | | — | | | | — | | | | 71,725 | | | | — | | | | — | | | | — | | | | — | | | | 71,725 | |
Incremental tax benefit related to stock options exercised | | | — | | | | — | | | | 42,445 | | | | — | | | | — | | | | — | | | | — | | | | 42,445 | |
Repurchases of common stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | (836 | ) | | | (44,016 | ) | | | (44,016 | ) |
Remeasurement of convertible debt | | | — | | | | — | | | | 21,402 | | | | — | | | | — | | | | — | | | | — | | | | 21,402 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of January 2, 2011 | | | 151,513 | | | $ | 1,516 | | | $ | 1,891,288 | | | $ | 1,765 | | | $ | (155,335 | ) | | | (24,904 | ) | | $ | (541,559 | ) | | $ | 1,197,675 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Additional | | Accumulated Other | | Retained Earnings | | | | | | Total |
| Common Stock | | Paid-In | | Comprehensive | | (Accumulated | | Treasury Stock | | Stockholders’ |
| Shares | | Amount | | Capital | | Income | | Deficit) | | Shares | | Amount | | Equity |
| (In thousands) |
Balance as of January 3, 2010 | 143,544 |
| | 1,436 |
| | 1,637,751 |
| | 2,830 |
| | (280,226 | ) | | (24,068 | ) | | (497,543 | ) | | 864,248 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 124,891 |
| | — |
| | — |
| | 124,891 |
|
Unrealized loss on available-for-sale securities, net of deferred tax | — |
| | — |
| | — |
| | (1,065 | ) | | — |
| | — |
| | — |
| | (1,065 | ) |
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 share-based compensation | — |
| | — |
| | 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 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 86,628 |
| | — |
| | — |
| | 86,628 |
|
Unrealized gain on available-for-sale securities, net of deferred tax | — |
| | — |
| | — |
| | 352 |
| | — |
| | — |
| | — |
| | 352 |
|
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 share-based compensation | — |
| | — |
| | 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 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 151,254 |
| | — |
| | — |
| | 151,254 |
|
Unrealized gain on available-for-sale securities, net of deferred tax | — |
| | — |
| | — |
| | 6 |
| | — |
| | — |
| | — |
| | 6 |
|
Issuance of common stock, net of repurchases | 3,464 |
| | 35 |
| | 55,106 |
| | — |
| | — |
| | (1,875 | ) | | (83,306 | ) | | (28,165 | ) |
Reclassification of conversion option subject to cash settlement | — |
| | — |
| | 2,565 |
| | — |
| | — |
| | — |
| | — |
| | 2,565 |
|
Share-based compensation | — |
| | — |
| | 94,385 |
| | — |
| | — |
| | — |
| | — |
| | 94,385 |
|
Net incremental tax benefit related to share-based compensation | — |
| | — |
| | 17,015 |
| | — |
| | — |
| | — |
| | — |
| | 17,015 |
|
Equity based contingent compensation | — |
| | — |
| | 6,306 |
| | — |
| | — |
| | — |
| | — |
| | 6,306 |
|
Issuance of treasury stock | — |
| | — |
| | (5,446 | ) | | — |
| | — |
| | 312 |
| | 5,446 |
| | — |
|
Balance as of December 30, 2012 | 170,171 |
| | $ | 1,703 |
| | $ | 2,419,831 |
| | $ | 2,123 |
| | $ | 82,547 |
| | (46,228 | ) | | $ | (1,187,623 | ) | | $ | 1,318,581 |
|
See accompanying notes to consolidated financial statements
53
ILLUMINA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) |
| | | | | | | | | | | |
| Years Ended |
| December 30, 2012 | | January 1, 2012 | | January 2, 2011 |
Cash flows from operating activities: | |
| | |
| | |
|
Net income | $ | 151,254 |
| | $ | 86,628 |
| | $ | 124,891 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
Depreciation expense | 48,249 |
| | 55,575 |
| | 34,204 |
|
Amortization of acquired intangible assets | 15,541 |
| | 12,689 |
| | 7,805 |
|
Share-based compensation expense | 94,324 |
| | 92,092 |
| | 71,645 |
|
Accretion of debt discount | 35,004 |
| | 32,173 |
| | 21,407 |
|
Cease-use loss | 22,367 |
| | 23,638 |
| | — |
|
Contingent compensation expense | 6,306 |
| | 3,457 |
| | — |
|
Incremental tax benefit related to share-based compensation | (20,783 | ) | | (46,354 | ) | | (42,445 | ) |
Deferred income taxes | (21,698 | ) | | 19,227 |
| | 48,696 |
|
Change in fair value of contingent consideration | 1,975 |
| | (4,500 | ) | | (10,376 | ) |
Cost-method investment related (gain) loss, net | (45,911 | ) | | — |
| | 10,309 |
|
Recovery of previously impaired note receivable | (6,000 | ) | | — |
| | — |
|
Impairment of in-process research and development | 21,438 |
| | — |
| | — |
|
Loss on extinguishment of debt | — |
| | 37,611 |
| | — |
|
Other | 7,780 |
| | 10,877 |
| | 8,811 |
|
Changes in operating assets and liabilities: | | | | | |
Accounts receivable | (34,441 | ) | | (7,011 | ) | | (7,844 | ) |
Inventory | (23,707 | ) | | 22,152 |
| | (48,583 | ) |
Prepaid expenses and other current assets | (3,062 | ) | | (2,016 | ) | | 2,554 |
|
Other assets | (2,903 | ) | | (4,004 | ) | | (3,566 | ) |
Accounts payable | 15,112 |
| | (21,097 | ) | | 23,150 |
|
Accrued liabilities | 24,388 |
| | 38,945 |
| | 32,028 |
|
Other long-term liabilities | 6,640 |
| | 8,058 |
| | (113 | ) |
Net cash provided by operating activities | 291,873 |
| | 358,140 |
| | 272,573 |
|
Cash flows from investing activities: | |
| | |
| | |
|
Purchases of available-for-sale securities | (925,478 | ) | | (1,310,269 | ) | | (846,208 | ) |
Sales of available-for-sale securities | 733,326 |
| | 900,884 |
| | 539,161 |
|
Maturities of available-for-sale securities | 165,424 |
| | 160,007 |
| | 149,450 |
|
Sales and maturities of trading securities | — |
| | — |
| | 54,900 |
|
Net cash paid for acquisitions | (83,156 | ) | | (58,302 | ) | | (98,211 | ) |
Purchases of strategic investments | (15,938 | ) | | (13,769 | ) | | (27,677 | ) |
Purchases of property and equipment | (68,781 | ) | | (77,800 | ) | | (49,818 | ) |
Cash paid for intangible assets | (12,228 | ) | | (1,750 | ) | | (6,650 | ) |
Proceeds from sale of strategic investment | 50,819 |
| | — |
| | — |
|
Recovery of previously impaired note receivable | 6,000 |
| | — |
| | — |
|
Net cash used in investing activities | (150,012 | ) | | (400,999 | ) | | (285,053 | ) |
Cash flows from financing activities: | |
| | |
| | |
|
Payments on current portion of long-term debt | — |
| | (349,874 | ) | | — |
|
Payments on acquisition related contingent consideration liability | (3,374 | ) | | — |
| | — |
|
Proceeds from issuance of convertible notes | — |
| | 903,492 |
| | — |
|
Incremental tax benefit related to share-based compensation | 20,783 |
| | 46,354 |
| | 42,445 |
|
Common stock repurchases | (82,522 | ) | | (570,406 | ) | | (44,016 | ) |
Proceeds from the exercise of warrants | — |
| | 5,512 |
| | 16,029 |
|
Proceeds from issuance of common stock | 54,358 |
| | 61,938 |
| | 102,016 |
|
Net cash (used in) provided by financing activities | (10,755 | ) | | 97,016 |
| | 116,474 |
|
Effect of exchange rate changes on cash and cash equivalents | (103 | ) | | (126 | ) | | 320 |
|
Net increase in cash and cash equivalents | 131,003 |
| | 54,031 |
| | 104,314 |
|
Cash and cash equivalents at beginning of year | 302,978 |
| | 248,947 |
| | 144,633 |
|
Cash and cash equivalents at end of year | $ | 433,981 |
| | $ | 302,978 |
| | $ | 248,947 |
|
| | | | | |
| | | | | |
ILLUMINA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued) (In thousands) |
| | | | | | | | | | | |
| Years Ended |
| December 30, 2012 | | January 1, 2012 | | January 2, 2011 |
Supplemental cash flow information: | |
| | |
| | |
|
Cash paid for interest | $ | 2,551 |
| | $ | 2,481 |
| | $ | 2,437 |
|
Cash paid for income taxes | $ | 74,037 |
| | $ | 9,806 |
| | $ | 31,566 |
|
Unsettled short-term investments purchase | $ | 9,154 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | |
| | Years Ended | |
| | January 2,
| | | January 3,
| | | December 28,
| |
| | 2011 | | | 2010 | | | 2008 | |
| | | | | (In thousands) | | | | |
|
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 124,891 | | | $ | 72,281 | | | $ | 39,416 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Acquired in-process research and development | | | 1,325 | | | | 11,325 | | | | 24,660 | |
Amortization of intangible assets | | | 7,805 | | | | 6,680 | | | | 10,438 | |
Amortization of debt discount | | | 21,407 | | | | 20,286 | | | | 18,883 | |
Change in fair value of contingent consideration | | | (10,376 | ) | | | — | | | | — | |
Impairment of cost-method investment | | | 13,223 | | | | — | | | | — | |
Gain on acquisition | | | (2,914 | ) | | | — | | | | — | |
Depreciation expense | | | 34,204 | | | | 24,504 | | | | 17,285 | |
Share-based compensation expense | | | 71,645 | | | | 60,811 | | | | 47,688 | |
Incremental tax benefit related to stock options exercised | | | (42,445 | ) | | | (39,319 | ) | | | (18,501 | ) |
Deferred income taxes | | | 48,696 | | | | 29,704 | | | | 31,533 | |
Impairment of manufacturing equipment | | | — | | | | — | | | | 4,069 | |
Other non-cash adjustments | | | 7,239 | | | | 1,721 | | | | 803 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | (7,844 | ) | | | (18,578 | ) | | | (57,672 | ) |
Inventory | | | (48,583 | ) | | | (20,557 | ) | | | (19,560 | ) |
Prepaid expenses and other current assets | | | 2,554 | | | | (3,429 | ) | | | 2,322 | |
Other assets | | | (3,566 | ) | | | (2,670 | ) | | | (1,815 | ) |
Accounts payable | | | 23,150 | | | | 11,778 | | | | 4,840 | |
Accrued liabilities | | | 32,028 | | | | 19,997 | | | | 31,716 | |
Other long-term liabilities | | | (113 | ) | | | 814 | | | | 6,313 | |
Litigation settlements payable | | | — | | | | — | | | | (54,536 | ) |
Unrealized gain (loss) on foreign exchange | | | 247 | | | | (3,157 | ) | | | — | |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 272,573 | | | | 172,191 | | | | 87,882 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Purchases ofavailable-for-sale securities | | | (846,208 | ) | | | (694,487 | ) | | | (568,707 | ) |
Sales and maturities ofavailable-for-sale securities | | | 688,611 | | | | 514,216 | | | | 411,817 | |
Sales and maturities of trading securities | | | 54,900 | | | | 1,000 | | | | — | |
Net cash paid for acquisitions | | | (98,211 | ) | | | (1,325 | ) | | | (24,666 | ) |
Purchases of investments | | | (27,677 | ) | | | (19,900 | ) | | | — | |
Purchases of property and equipment | | | (49,818 | ) | | | (52,673 | ) | | | (59,693 | ) |
Cash paid for intangible assets | | | (6,650 | ) | | | (3,400 | ) | | | (36,000 | ) |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (285,053 | ) | | | (256,569 | ) | | | (277,249 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Payments on current portion of long-term debt | | | — | | | | (10,000 | ) | | | (15 | ) |
Incremental tax benefit related to stock options exercised | | | 42,445 | | | | 39,319 | | | | 18,501 | |
Common stock repurchases | | | (44,016 | ) | | | (175,136 | ) | | | (70,785 | ) |
Proceeds from secondary offering, net of issuance cost | | | — | | | | — | | | | 342,650 | |
Proceeds from the exercise of warrants | | | 16,029 | | | | 7,576 | | | | 2,991 | |
Proceeds from issuance of common stock | | | 102,016 | | | | 39,379 | | | | 44,330 | |
| | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 116,474 | | | | (98,862 | ) | | | 337,672 | |
Effect of exchange rate changes on cash and cash equivalents | | | 320 | | | | 849 | | | | 3,778 | |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 104,314 | | | | (182,391 | ) | | | 152,083 | |
Cash and cash equivalents at beginning of period | | | 144,633 | | | | 327,024 | | | | 174,941 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 248,947 | | | $ | 144,633 | | | $ | 327,024 | |
| | | | | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
Cash paid for interest | | $ | 2,437 | | | $ | 2,437 | | | $ | 2,553 | |
| | | | | | | | | | | | |
Cash paid (refunded) for income taxes | | $ | 31,566 | | | $ | 10,361 | | | $ | (1,653 | ) |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
54
ILLUMINA, INC.
Unless the context requires otherwise, references in this report to “Illumina,” “we,” “us,” the “Company,” and “our” refer to Illumina, Inc. and its consolidated subsidiaries.
| |
1. | Organization and Summary of Significant Accounting Policies |
Organization and Business
Illumina, Inc. (the Company) 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’sits proprietary technologies, Illumina provides a comprehensive line of genetic analysis solutions, with products and services that serveaddress a broad range of highly interconnected markets, including sequencing, genotyping, gene expression, and moleculargenomic-based 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.companies, and in vitro fertilization clinics.
Basis of Presentation
The consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Fiscal Year
The Company’s fiscal year is 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, September 30, and December 31. The yearyears ended December 30, 2012, January 1, 2012, and January 2, 2011 was were 52 weeks; the year ended January 3, 2010 was 53 weeks; the year ended December 28, 2008 was 52 weeks. 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 disclosuredisclosures of contingent assets and liabilities. Actual results could differ from those estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Segment Information
The Company is organized in two business operating segments thefor purposes of recording and reporting our financial results: Life Sciences Business Unit and Diagnostics Business Unit.Diagnostics. The Life Sciences Business Unitoperating segment includes all products and services that are primarily related to the research market, namely the product lines based on the Company’s sequencing, BeadArray, VeraCode, and real-time polymerase chain reaction (PCR) technologies, and thetechnologies. The Diagnostics Business Unitoperating segment focuses on the emerging opportunity in molecular diagnostics.clinical and personalized application of our products and services for such uses as diagnosing disease, identifying genetic abnormalities, and identifying effective treatment therapies, with an initial emphasis on reproductive health and cancer. During all periods presented, the CompanyDiagnostics operating segment had limited activity relatedbeen immaterial to the Diagnostics Business Unit.financial statements as a whole. Accordingly, the Company’s operating results for both unitssegments are reported on an aggregate basis as one reportable segment during these periods.segment. The Company will begin reporting in two reportable segments once revenues,revenue, operating profit or loss, or assetsasset of the Diagnostics Business Unit exceed operating segment exceeds 10% of the consolidated amounts.
Acquisitions
Effective December 29, 2008, theThe Company adopted the FASB’s revised authoritative guidance for business combinations. This revised guidance requires an acquiring company to measuremeasures all assets acquired and liabilities assumed, including contingent considerations and all contractual contingencies, at fair value as of the acquisition date. In addition, an acquiring company is required to capitalize in-process research and development (IPR&D) and either amortize it over the life of the product upon commercialization, or write it
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off if the project is abandoned or impaired. Previously, post-acquisition adjustments related to business combination deferred tax asset valuation allowances and liabilities for uncertain tax positions were generally required to be recorded as an increase or decrease to Goodwill. The revised guidance does not permit this accounting and, generally, requires any such changes to be recordedContingent purchase considerations settled in current period income tax expense. Thus, all changes to valuation allowances and liabilities for uncertain tax positions established in acquisition accounting, regardless of the guidance used to initially account for the business combination, will be recognized in current period income tax expense. Additionally, this guidance requires that contingent purchase consideration becash are remeasured to estimated fair value at each reporting period with the change in fair value recorded in the results of operations. The impact of the adoption of this guidance did not have an impact on the consolidated financial statements for the year ended January 3, 2010. As a result of acquisitions completed in the year ended January 2, 2011, the Company capitalized $21.4 million of IPR&D that would have been expensed under the previous guidance. In addition the Company recorded $14.1 million of contingent consideration liability at fair value at the acquisition date which was remeasured with a net consolidated statement of income impact of $10.4 million recorded in acquisition related expense (gain) expense,, net, a component of operating expenses.
For an acquisition consummated prior to December 29, 2008, In addition, the Company recognizes additional contingent consideration as an additional elementcapitalizes in-process research and development (IPR&D) and either amortizes it over the life of the costproduct upon commercialization, or writes it off if the project is abandoned
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or impaired. Post-acquisition adjustments related to business combination deferred tax asset valuation allowances and the additional consideration is issued or becomes issuable, in accordance with the accounting guidance effective at the acquisition date. This results in additional IPR&D charges in periods subsequent to the acquisitionliabilities for uncertain tax positions are recorded in acquisition related (gain) expense, net.current period income tax expense.
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 purchase.
Short-term investments consist of U.S. Treasurytreasury securities, debt securities in U.S. government-sponsored entities, and U.S. government agency securities, corporate notes and bonds, and commercial paper.debt securities. Management classifies short-term investments asavailable-for-sale at the time of purchase and reevaluatesevaluates such classification as of each balance sheet date. All short-term investments are recorded at estimated fair value. Unrealized gains and losses foravailable-for-sale securities are included in accumulated other comprehensive income, a component of stockholders’ equity. The Company 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 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 liability noted below, approximate the related fair values due to the short-term maturities of these instruments. The estimated fair value of the convertible senior notes is determined by using available market information as of the latest trading date prior to the Company’s fiscal year-end provided by a third party financial institution. The par value and approximate fair value of the Company’s convertible notes was $390.0 million and $1,142.5 million, respectively, at January 2, 2011, and $390.0 million and $553.2 million, respectively, at January 3, 2010.
The Company determines the fair value of its assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
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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 —Level 1 — Quoted prices in active markets for identical assets or liabilities. Level 2 —Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
|
| • | Level 3 —Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following table presents the Company’s fair value hierarchy for assets and liability measured at fair value on a recurring basis as of January 2, 2011 and January 3, 2010, respectively (in thousands):
| | | | | | | | | | | | | | | | |
| | January 2, 2011 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
|
Assets: | | | | | | | | | | | | | | | | |
Money market funds (cash equivalent) | | $ | 148,822 | | | $ | — | | | $ | — | | | $ | 148,822 | |
Debt securities in government sponsored entities | | | — | | | | 261,697 | | | | — | | | | 261,697 | |
Corporate debt securities | | | — | | | | 330,758 | | | | — | | | | 330,758 | |
U.S. Treasury securities | | | 52,887 | | | | — | | | | — | | | | 52,887 | |
| | | | | | | | | | | | | | | | |
Total assets measured at fair value | | $ | 201,709 | | | $ | 592,455 | | | $ | — | | | $ | 794,164 | |
| | | | | | | | | | | | | | | | |
Liability: | | | | | | | | | | | | | | | | |
Acquisition related contingent consideration liability | | $ | — | | | $ | — | | | $ | 3,738 | | | $ | 3,738 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | January 3, 2010 | |
| | Level 1 | | | Level 2 _ | | | Level 3 | | | Total | |
|
Assets: | | | | | | | | | | | | | | | | |
Money market funds (cash equivalent) | | $ | 81,153 | | | $ | — | | | $ | — | | | $ | 81,153 | |
Debt securities in government sponsored entities | | | — | | | | 289,701 | | | | — | | | | 289,701 | |
Corporate debt securities | | | — | | | | 192,821 | | | | — | | | | 192,821 | |
Auction rate securities | | | — | | | | — | | | | 54,900 | | | | 54,900 | |
U.S. Treasury securities | | | 11,472 | | | | — | | | | — | | | | 11,472 | |
| | | | | | | | | | | | | | | | |
Total assets measured at fair value | | $ | 92,625 | | | $ | 482,522 | | | $ | 54,900 | | | $ | 630,047 | |
| | | | | | | | | | | | | | | | |
The Company measures the fair value of debt securities in government sponsored entities and corporate debt securities on a recurring basis primarily using quoted prices for similar assets or liabilities; quoted prices in active markets.
Included inmarkets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the total consideration transferred for the Company’s acquisition of Helixis, Inc. (Helixis), was contingent consideration payments that could range from $0 to $35 million based on the achievement of certain revenue-based milestones by December 31, 2010 and by December 31, 2011. On the acquisition date, a liability of $14.1 million was recorded at the estimated fair valuefull term of the contingent consideration. The December 31, 2010 milestone was not achieved and the likelihood of paying the remaining contingent consideration of up to $30 million declined. Accordingly, the Company reassessed the fair value of theassets or liabilities.
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contingent consideration at $3.7 million and recorded the change in fair value of $10.4 million in acquisition related (gain) expense, net, in the consolidated statements of income in the fourth quarter of 2010.
This fair value measurement is a Level 3 measurement as it is based on unobservable— Unobservable inputs that are supported by little or no market activity. Significant assumptions used in the measurement include probabilities of achieving the remaining milestoneactivity and the discount rates used in the income approach of valuation, which ranged from 27%that are significant to 52% depending on the likelihood assessed. Future changes in 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 as a resultliabilities, approximate the related fair values due to the short-term maturities of changes in these significant inputs could have a significant effect on the consolidated statements of income and the financial position in the period of the change.instruments.
The following table includes a summary of the changes in estimated fair value of the contingent consideration liability (in thousands) during the year ended January 2, 2011:
| | | | |
| | Contingent
| |
| | Consideration
| |
| | Liability
| |
| | (Level 3 Measurement) | |
|
Balance at January 3, 2010 | | $ | — | |
Acquisition of Helixis | | | 14,114 | |
Gain recorded in acquisition related (gain) expense, net | | | (10,376 | ) |
| | | | |
Balance at January 2, 2011 | | $ | 3,738 | |
| | | | |
Accounts Receivable
Trade accounts receivable are recorded at the net invoice value and are not interest bearing. The Company considers receivables past due based on the contractual payment terms. The Company reviews its exposure to amounts receivable and reserves specific amountsreceivables 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 2, 2011December 30, 2012 were deposited with U.S. financial institutions, in the United States.either domestically or with their foreign branches. The Company’s investment policy
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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,securities, debt securities in U.S. government agencies,government-sponsored entities, and money market funds. The Company performs a regular review of customer activity and associated credit risks and do not require collateral or enter into netting arrangements. The Company has historically not experienced significant credit losses from investments and accounts receivable.
The Company’s products require customized components that currently are available from a limited number of sources. The Company obtains certain key components included in its products from single vendors.
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The Company performs a regular review of customer activity and associated credit risks and does not require collateral or enter into netting arrangements. Shipments to customers outside the United States comprised 45%51%, 48%50%, and 51%45% of the Company’s revenue for the years ended December 30, 2012, January 1, 2012, and January 2, 2011 January 3, 2010, and December 28, 2008,, respectively. Customers outside the United States represented 59%54% and 46%52% of the Company’s gross trade accounts receivable balance as of December 30, 2012 and January 2, 2011 and January 3, 2010,1, 2012, respectively. Sales to territories outside of the United States are generally denominated in U.S. dollars.
International sales entail a variety of risks, including currency exchange fluctuations, longer payment cycles, and greater difficulty in accounts receivable collection. The Company is also subject to general geopolitical risks, such as political, social and economic instability, and changes in diplomatic and trade relations. The risks of international sales are mitigated in part by the extent to which sales are geographically distributed. The Company has historically not experienced significant credit losses from investments and accounts receivable. Approximately 18% 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 December 30, 2012, outstanding accounts receivables beyond standard payment terms from these countries accounted for approximately 5% of the Company’s accounts receivable balance, and the Company has not experienced significant difficulties in collecting 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)years) using the straight-line method. Amortization of leasehold improvements is computedrecorded 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, which has an indefinite useful life, represents the excess of cost over fair value of net assets acquired. The change in the carrying value of goodwill during the year ended January 2, 2011December 30, 2012 was due to goodwill recorded in connection with acquisitions consummated in the year. Intangible assets include acquired technology, customer relationships, other license agreements, and licensed technology (capitalized as part of the Affymetrix litigation). The cost of identified intangible assetsBlueGnome acquisition. Goodwill is amortized on a straight-line basis over periods ranging from three to ten years.
The Company regularly performs reviews to determine if the carrying values of the long-lived assets are impaired. Goodwill and other intangible assets that have indefinite useful lives, such as IPR&D, are reviewed for impairment at least annually during the second fiscal quarter, or more frequently if an event occurs indicating the potential for impairment. During its goodwill impairment review, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of its single reporting unit is less than its carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and the overall financial performance of the Company. If, after assessing the totality of these qualitative factors, the Company determines that it is not more likely than not that the fair value of its reporting unit is less than its carrying amount, then no more assessment is deemed necessary. Otherwise, the Company proceeds to perform the two-step test for goodwill impairment test is a two-step process.impairment. The first step of the impairment test involves comparing the estimated fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to determine the amount of loss, which involves comparing the implied fair value of the goodwill withto the carrying value of the goodwill. The Company may also elect to bypass the qualitative assessment in a period and elect to proceed to perform the first step of the goodwill impairment test. The Company performed its annual impairment test of goodwill in May of 2010, noting no impairment and has determined there have been no impairment indicatorsassessment for goodwill through January 2, 2011. A reviewimpairment in the second quarter of 2012, noting no impairment.
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The Company’s identifiable intangible assets that haveare typically comprised of acquired core technologies, licensed technologies, IPR&D, customer relationships, and trade names. The cost of all identifiable intangible assets with finite lives is amortized on a straight-line basis over the assets’ respective estimated useful lives and other long-lived assetslives.
IPR&D, which also has an indefinite useful life, is performed whenreviewed for impairment at least annually, or more frequently if an event occurs indicating the potential for impairment. The IPR&D impairment test requires the Company to assess the fair value of the asset as compared to its carrying value and record an impairment charge if the carrying value exceeds the fair value. The Company performed its annual impairment test of its IPR&D in the second fiscal quarter of 2012 and recorded $21.4 million in impairment charges within research and development expenses in the consolidated statements of income. Resources previously assigned to the research project were re-directed with no plans for additional investments to be made to the project in the foreseeable future.
The Company regularly performs reviews to determine if any event has occurred that may indicate its intangible assets with finite useful lives and other long-lived assets are potentially impaired. If indicators of impairment exist, the Company assessesperforms an impairment test to assess the recoverability of the affected long-lived assets by determining whether the carrying amount of such assets exceeds the undiscounted expected future cash flows. If impairment is indicated,the affected assets are not recoverable, the Company comparesestimates the carrying amount to the estimated fair value of the assetassets and adjustsrecords an impairment loss if the carrying value of the asset accordingly.assets exceeds the fair value. Factors that would necessitate anindicate potential impairment assessment include a significant decline in the Company’s stock price
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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 intangible assets with finite useful lives and other long-lived assets and noted no indications of impairment for the asset.year ended December 30, 2012.
Reserve for Product Warranties
The Company generally provides a one-yearone-year warranty on instruments. Additionally, the Company provides a warranty on its consumables through the expiryexpiration date, which generally ranges from six to twelve months after the manufacture date. Thedate. 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 its warranty reserve and adjusts, if necessary, the warranty percentage and accrual based on actual experience and estimated costs to be incurred. Warranty expense is recorded as a component of cost of product revenue. Warranty expenses associated with extended maintenance contracts for systems are recorded as cost of service and other revenue as incurred. See note “6. Warranties” for further detailed discussion.
Revenue Recognition
The Company’s revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of instrumentation and 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 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 forfrom 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 forfrom instrument service contracts is recognized as the services are rendered, typically evenly over the contract term. Revenue from 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, after the contract execution date. Revenue recognition for contracts with multiple deliverables is based on the individual units of accounting determined to exist in the contract. A delivered item is considered a separate unit of accounting when the delivered item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis.
For transactions entered into in 2009 and 2010, consideration 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
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price if VSOE does not exist. If neither VSOE nor third-party evidence exists, the Company uses its best estimate of the selling price for the deliverable.
For transactions entered into prior to 2009, consideration was generally allocated to each unit of accounting based upon its relative fair value when objective and reliable evidence of fair value existed for all units of accounting in an arrangement. The fair value of an item was generally the price charged for the product, if the item was regularly sold on a stand-alone basis. In those instances when objective and reliable evidence of fair value existed for the undelivered items but not for the delivered items, the residual method was used to allocate the arrangement consideration. Under the residual method, the amount of arrangement consideration allocated to the delivered items equaled the total arrangement consideration less the aggregate fair value of the undelivered items. When the Company was unable to establish stand-alone value for delivered items or when fair value of undelivered items had not been established, revenue was deferred until all elements were delivered and services had been performed, or until fair value could objectively be determined for any remaining undelivered elements.
In order to establish VSOE of selling price, the Company must regularly sell the product or service on a standalone basis with a substantial majority priced within a relatively narrow range. VSOE of selling price is usually the midpoint of that range. If there are not a sufficient number of standalone sales and VSOE of selling price cannot be determined, then the Company considers whether third party evidence can be used to establish selling price. Due to the lack of similar products and services sold by other companies within the industry, the Company has rarely established selling price using third-party evidence. If neither VSOE nor third party evidence of selling price exists, the Company determines its best estimate of selling price using average selling prices over a rolling12-month period coupled with an assessment of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, the Company relies upon prices set by the Company’s pricing committee adjusted for applicable discounts. The Company recognizes revenue for delivered elements only when it determines there are no uncertainties regarding customer acceptance.
InDuring the first quarter of 2010,fiscal year ended January 1, 2012, the Company offered an incentive with the launch of the HiSeq 2000completed its Genome Analyzer trade-in program that enabled existingcertain 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 asprior to the beginning of the date of the announcementincentive program in early 2010 and was the firstonly significant trade-in program offered by the Company.Company to date. The Company accountsaccounted for HiSeq 2000 discounts related to the Genome Analyzer trade-in program in the period in whichas reductions to revenue upon recognition of the HiSeq 2000 sales revenue, which is recognized.later than the date the trade-in program was launched.
In certain markets, 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. Development
Research and development expenses include personnel expenses, contractor fees, license 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 $6.9$7.3 million $4.2, $6.8 million, and $3.4$6.9 million for the years ended December 30, 2012, January 1, 2012, and January 2, 2011 January 3, 2010, and December 28, 2008,, respectively.
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Leases
Leases are reviewed and classified as capital or operating at their inception. For leases that contain rent escalations, the Company records the total rent payableexpense on a straight-line basis over the term of the lease, which includes the construction build-out period but excludesand lease extension periods.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 also recorded in other long-term liabilities, which are amortized on a straight-linestraight-
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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.
In 2012, the Company completed the relocation of its headquarters to another facility in San Diego, California. Headquarter relocation expenses recorded in years ended December 30, 2012 and January 1, 2012 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 cease-use losses. 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 cease-use losses and the corresponding facility exit obligation upon vacating certain buildings of its 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.
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 were communicated to employees, which primarily included severance pay and other separation costs such as outplacement services and benefits.
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 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.
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.
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Functional Currency
Prior to the third quarter of 2008, the Company identified the local currency asThe U.S. dollar is the functional currency in each of its foreign subsidiaries, with all translation adjustments recorded as part of other comprehensive income. Beginning in the third quarter of 2008, the Company reorganized its international structure to execute a more efficient relationship among product development, product manufacturing, and sales. This reorganization increased the foreign subsidiaries’ dependence on the U.S. entity for management decisions, financial support, production assets, and inventory, thereby making the foreign subsidiaries a direct and integral component of the U.S. entity’sCompany’s international operations. As a result, the Company reassessed the primary economic environment of its foreign subsidiaries, resulting in a U.S. dollar functional currency determination. Beginning in the third quarter of 2008, theThe 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
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ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
income. Gains or (losses) resulting from remeasurement were $0.6 million, $(2.3) million, and $3.8 million forDuring the years ended December 30, 2012 and January 1, 2012, the Company recorded $2.2 million net gain and $2.0 million net loss from remeasurement, respectively. Gains and losses related to remeasurement were immaterial for the year ended January 2, 2011 January 3, 2010 and December 28, 2008, 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 do not qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in the value of the derivativederivatives are recognized in other (expense) income, net, in the consolidated statements of income forin the current period,respective periods, along with an offsetting remeasurement gain or loss on the underlying foreign currency denominated assets or liabilities.
As of December 30, 2012, the Company had foreign exchange forward contracts in place to hedge exposures in the euro, Japanese yen, and Australian dollar. As of December 30, 2012 and January 1, 2012, the total notional amount of outstanding forward contracts in place for foreign currency purchases was $51.2 million and $25.5 million, respectively. Non-designated foreign exchange forward contract related gain was $1.2 million for the year ended December 30, 2012 and immaterial for the years ended January 1, 2012 and January 2, 2011.
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 lifeterm 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 lifeterm 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 lifeterm of an award is based on historical forfeiture experience, exercise activity, and on the terms and conditions of the stock awards. The expected dividend yield is determined to be 0% given that the Company has never declared or paid cash dividends on its common stock and does 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. The fair value of restricted stock units granted is based on the market price of ourthe Company’s common stock on the date of grant. The Company amortizesrecognizes the fair value of share-based compensation on a straight-line basis over the requisite service periods of the awards.
The assumptions used for the specified reporting periods and the resulting estimates of weighted-average fair value per share of options granted and for stock purchases under the ESPP during those periods are as follows:
| | | | | | |
| | Years Ended |
| | January 2,
| | January 3,
| | December 28,
|
| | 2011 | | 2010 | | 2008 |
|
Interest rate — stock options | | 2.05 - 2.73% | | 1.69 - 1.97% | | 2.31 -3.52% |
Interest rate — stock purchases | | 0.17 - 0.48% | | 0.28 - 2.90% | | 1.88 -4.71% |
Volatility — stock options | | 46 - 48% | | 55 - 58% | | 51 - 65% |
Volatility — stock purchases | | 46 - 48% | | 48 - 58% | | 53 - 69% |
Expected life — stock options | | 6 years | | 5 years | | 5 - 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 | | $18.82 | | $14.79 | | $18.31 |
Weighted average fair value per share of employee stock purchases | | $11.10 | | $9.24 | | $11.45 |
As of January 2, 2011, approximately $151.8 million of total unrecognized compensation cost related to stock options, restricted stock units, and ESPP shares issued to date is expected to be recognized over a weighted-average period of approximately 2.47 years.
63
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Total share-based compensation expense for all stock awards consists of the following (in thousands):
| | | | | | | | | | | | |
| | Years Ended | |
| | January 2,
| | | January 3,
| | | December 28,
| |
| | 2011 | | | 2010 | | | 2008 | |
|
Cost of product revenue | | $ | 5,378 | | | $ | 4,776 | | | $ | 4,710 | |
Cost of service and other revenue | | | 470 | | | | 514 | | | | 400 | |
Research and development | | | 25,428 | | | | 19,960 | | | | 14,086 | |
Selling, general and administrative | | | 40,369 | | | | 35,561 | | | | 28,492 | |
| | | | | | | | | | | | |
Share-based compensation expense before taxes | | | 71,645 | | | | 60,811 | | | | 47,688 | |
Related income tax benefits | | | (25,231 | ) | | | (20,121 | ) | | | (15,844 | ) |
| | | | | | | | | | | | |
Share-based compensation expense, net of taxes | | $ | 46,414 | | | $ | 40,690 | | | $ | 31,844 | |
| | | | | | | | | | | | |
Net Income per Share
On July 22, 2008, the Company announced atwo-for-one stock split in the form of a 100% stock dividend with a record date of September 10, 2008 and a distribution date of September 22, 2008. Share and per share amounts have been restated to reflect the stock split for all periods presented.
Basic net income or loss per share is computed by dividing net income or loss by the weighted-averageweighted 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. DilutiveDiluted net income per share reflects the potential common shares consist ofdilution from outstanding stock options, with combined exercise prices and unrecognized compensation expense that are less than the average market price of the Company’s common stock, restricted stock units, with unrecognized compensation expense,ESPP, warrants, shares subject to forfeiture, and convertible debtsenior 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 $21.83 and warrants with exercise prices thatthe respective notes. In addition, the following amounts are less than the average market price of the Company’s common stock. Under the treasury stock method,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 average amount of compensation expense for future services that the Company has not yet recognized for stock options, and restricted stock units, ESPP, and shares subject to forfeiture; and the amount of estimated tax benefits that will be recorded in additional paid-in capital when the expenses related to respective awards become deductible are assumed to be used to repurchase shares. In loss periods, basic net loss per share and diluted net loss per share are identical since the effectdeductible.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the calculation of weighted average shares used to calculate basic and diluted net income per share (in thousands):
| | | | | | | | | | | | |
| | Years Ended | |
| | January 2,
| | | January 3,
| | | December 28,
| |
| | 2011 | | | 2010 | | | 2008 | |
|
Weighted average shares outstanding | | | 123,581 | | | | 123,154 | | | | 116,855 | |
Plus: Effect of dilutive Convertible Senior Notes | | | 9,058 | | | | 6,497 | | | | 6,653 | |
Plus: Effect of dilutive equity awards | | | 4,674 | | | | 4,335 | | | | 5,373 | |
Plus: Effect of dilutive warrants sold in connection with the Convertible Senior Notes | | | 5,317 | | | | 1,566 | | | | 2,487 | |
Plus: Effect of dilutive warrants assumed in the acquisition of Solexa | | | 803 | | | | 1,544 | | | | 2,239 | |
| | | | | | | | | | | | |
Weighted-average shares used in calculating diluted net income per share | | | 143,433 | | | | 137,096 | | | | 133,607 | |
| | | | | | | | | | | | |
Weighted average shares excluded from calculation due to anti-dilutive effect | | | 1,934 | | | | 924 | | | | 370 | |
| | | | | | | | | | | | |
|
| | | | | | | | |
| Years Ended |
| December 30, 2012 | | January 1, 2012 | | January 2, 2011 |
Weighted average shares outstanding | 122,999 |
| | 123,399 |
| | 123,581 |
|
Effect of dilutive potential common shares from: | | | | | |
Convertible senior notes | 967 |
| | 3,783 |
| | 9,058 |
|
Equity awards | 3,906 |
| | 4,703 |
| | 4,674 |
|
Warrants sold in connection with convertible senior notes | 5,821 |
| | 7,052 |
| | 5,317 |
|
Warrants assumed in a prior acquisition | — |
| | — |
| | 803 |
|
Weighted average shares used in calculating diluted net income per share | 133,693 |
| | 138,937 |
| | 143,433 |
|
Potentially dilutive shares excluded from calculation due to anti-dilutive effect | 2,556 |
| | 2,418 |
| | 1,934 |
|
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. AccumulativeAccumulated other comprehensive income on the consolidated balance sheets at December 30, 2012 and January 2, 2011 and January 3, 20101, 2012 includes accumulated foreign currency translation adjustments and unrealized gains and losses on the Company’savailable-for-sale securities. securities.
The components of accumulated other comprehensive income are as follows (in thousands):
| | | | | | | | |
| | January 2,
| | | January 3,
| |
| | 2011 | | | 2010 | |
|
Foreign currency translation adjustments | | $ | 1,338 | | | $ | 1,338 | |
Unrealized gain onavailable-for-sale securities, net of deferred tax | | | 427 | | | | 1,492 | |
| | | | | | | | |
Total accumulated other comprehensive income | | $ | 1,765 | | | $ | 2,830 | |
| | | | | | | | |
|
| | | | | | | |
| December 30, 2012 | | January 1, 2012 |
Foreign currency translation adjustments | $ | 1,289 |
| | $ | 1,289 |
|
Unrealized gain on available-for-sale securities, net of deferred tax | 834 |
| | 828 |
|
Total accumulated other comprehensive income | $ | 2,123 |
| | $ | 2,117 |
|
| |
2. | Balance Sheet Account Details |
Investments
The following is a summary of short-term investments (in thousands):
| | | | | | | | | | | | | | | | |
| | January 2, 2011 | |
| | | | | Gross
| | | Gross
| | | | |
| | Amortized
| | | Unrealized
| | | Unrealized
| | | Estimated
| |
| | Cost | | | Gains | | | Losses | | | Fair Value | |
|
Available-for-sale securities: | | | | | | | | | | | | | | | | |
Debt securities in government sponsored entities | | $ | 261,890 | | | $ | 106 | | | $ | (299 | ) | | $ | 261,697 | |
Corporate debt securities | | | 329,823 | | | | 1,170 | | | | (235 | ) | | | 330,758 | |
U.S. treasury securities | | | 52,938 | | | | 70 | | | | (121 | ) | | | 52,887 | |
| | | | | | | | | | | | | | | | |
Totalavailable-for-sale securities | | $ | 644,651 | | | $ | 1,346 | | | $ | (655 | ) | | $ | 645,342 | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 30, 2012 | | January 1, 2012 |
| 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 | $ | 314,638 |
| | $ | 251 |
| | $ | (16 | ) | | $ | 314,873 |
| | $ | 393,759 |
| | $ | 428 |
| | $ | (148 | ) | | $ | 394,039 |
|
Corporate debt securities | 471,989 |
| | 1,059 |
| | (187 | ) | | 472,861 |
| | 432,550 |
| | 1,293 |
| | (461 | ) | | 433,382 |
|
U.S. treasury securities | 128,256 |
| | 233 |
| | — |
| | 128,489 |
| | 58,955 |
| | 214 |
| | — |
| | 59,169 |
|
Total available-for-sale securities | $ | 914,883 |
| | $ | 1,543 |
| | $ | (203 | ) | | $ | 916,223 |
| | $ | 885,264 |
| | $ | 1,935 |
| | $ | (609 | ) | | $ | 886,590 |
|
65
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Available-For-Sale Securities
| | | | | | | | | | | | | | | | |
| | January 3, 2010 | |
| | | | | Gross
| | | Gross
| | | | |
| | Amortized
| | | Unrealized
| | | Unrealized
| | | Estimated
| |
| | Cost | | | Gains | | | Losses | | | Fair Value | |
|
Available-for-sale securities: | | | | | | | | | | | | | | | | |
Debt securities in government sponsored entities | | $ | 289,101 | | | $ | 702 | | | $ | (102 | ) | | $ | 289,701 | |
Corporate debt securities | | | 190,949 | | | | 2,039 | | | | (166 | ) | | | 192,822 | |
U.S. treasury securities | | | 11,487 | | | | 12 | | | | (28 | ) | | | 11,471 | |
| | | | | | | | | | | | | | | | |
Totalavailable-for-sale securities | | | 491,537 | | | | 2,753 | | | | (296 | ) | | | 493,994 | |
Trading securities: | | | | | | | | | | | | | | | | |
Auction rate securities | | | 54,900 | | | | — | | | | (6,129 | ) | | | 48,771 | |
Put option | | | — | | | | 6,129 | | | | — | | | | 6,129 | |
| | | | | | | | | | | | | | | | |
Total trading securities | | | 54,900 | | | | 6,129 | | | | (6,129 | ) | | | 54,900 | |
| | | | | | | | | | | | | | | | |
Total short-term investments | | $ | 546,437 | | | $ | 8,882 | | | $ | (6,425 | ) | | $ | 548,894 | |
| | | | | | | | | | | | | | | | |
Available-For-Sale Securities
As of January 2, 2011December 30, 2012 the Company had 8359available-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 unrealized losses due to credit issues for the periods presented. There were no impairments consideredother-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 the gross unrealized losses of the Company’s available-for- sale securities that were in an unrealized loss position as of December 30, 2012 and January 2, 2011 and January 3, 20101, 2012 aggregated by investment category (in thousands):
| | | | | | | | | | | | | | | | |
| | January 2, 2011 | | | January 3, 2010 | |
| | | | | Gross
| | | | | | Gross
| |
| | | | | Unrealized
| | | | | | Unrealized
| |
| | Fair Value | | | Losses | | | Fair Value | | | Losses | |
|
Debt securities in government sponsored entities | | $ | 127,756 | | | $ | (299 | ) | | $ | 73,783 | | | $ | (102 | ) |
Corporate debt securities | | | 92,199 | | | | (235 | ) | | | 26,488 | | | | (166 | ) |
U.S. treasury securities | | | 13,490 | | | | (121 | ) | | | 4,471 | | | | (28 | ) |
| | | | | | | | | | | | | | | | |
Total | | $ | 233,445 | | | $ | (655 | ) | | $ | 104,742 | | | $ | (296 | ) |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| December 30, 2012 | | January 1, 2012 |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Debt securities in government-sponsored entities | $ | 28,176 |
| | $ | (16 | ) | | $ | 133,904 |
| | $ | (148 | ) |
Corporate debt securities | 130,224 |
| | (187 | ) | | 138,326 |
| | (461 | ) |
Total | $ | 158,400 |
| | $ | (203 | ) | | $ | 272,230 |
| | $ | (609 | ) |
Realized gains and losses are determined based on the specific identification method and are reported in interest income in the consolidated statements of income. Gross realized gains on sales of available-for saleavailable-for-sale securities for the yearyears ended December 30, 2012, January 1, 2012, and January 2, 2011 were $1.7$1.6 million, $1.4 million, and gross realized losses were immaterial.$1.7 million, respectively. Gross realized gains and losses on sales ofavailable-for-sale securities were immaterial for each of the years ended December 30, 2012, January 3, 20101, 2012, and December 28, 2008.
66
ILLUMINA, INC.
January 2, 2011 were immaterial.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Contractual maturities ofavailable-for-sale debt securities as of January 2, 2011December 30, 2012 were as follows (in thousands):
| | | | |
| | Estimated
| |
| | Fair Value | |
|
Due within one year | | $ | 230,421 | |
After one but within five years | | | 414,921 | |
| | | | |
Total | | $ | 645,342 | |
| | | | |
Trading Securities |
| | | |
| Estimated Fair Value |
Due within one year | $ | 328,991 |
|
After one but within five years | 587,232 |
|
Total | $ | 916,223 |
|
Cost-Method Investments
As of December 30, 2012 and January 3, 2010, the Company’s short-term investments included $54.9 million (at cost) of auction rate securities issued primarily by municipalities and universities. In November 2008, the Company signed an agreement granting the Company an option to sell all of its auction rate securities at par value to UBS during the period of June 30, 2010 through July 2, 2012. To account for the option, the Company recorded a separate freestanding asset (put option). On July 1, 2010, the Company exercised its option to sell all of its remaining auction rate securities at par. From January 3, 2010 through July 1, 2010 the increase in the fair value of the auction rate securities was equal to the decrease in the fair value of the put option. As such, no gain or loss was recorded as a result of the exercise of the put option and the sale of the auction rate securities.
Changes in the fair value of the Company’s auction rate securities and put option from January 3, 2010 through January 2, 2011 are as follows (in thousands):
| | | | |
Fair value of auction rate securities and put option as of January 3, 2010 | | | 54,900 | |
Auction rate securities redeemed by issuer | | | (32,100 | ) |
Auction rate securities sold upon the exercise of put option on July 1, 2010 | | | (22,800 | ) |
| | | | |
Fair value as of January 2, 2011 | | $ | — | |
| | | | |
2012Cost-Method Investments
As of January 2, 2011 and January 3, 2010,, the aggregate carrying amounts of the Company’s cost-method investments in non-publicly traded companies were $32.0$56.3 million and $19.9$45.3 million, respectively. The Company’s cost-method investments are assessed for impairment quarterly. The Company does not estimate the fair value of cost-method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments. See “Investments” in note “5. Impairment” for more information on the impairment of cost-method investments. The Company includes cost-method investments in other long term assets in the consolidated balance sheets.
During the fourth quarter of 2012, the Company sold its minority ownership interest in deCODE Genetics, Inc., an Icelandic company that focuses on the genetic studies of human disease, to Amgen Inc., a biotechnology medicines company based in the U.S. Gross proceeds received were $50.8 million, resulting in a gain of $48.6 million. Also during the fourth quarter of 2012, the Company received $6.0 million from an investee in principal payment of a loan that was previously impaired, and recorded the recovered funds in interest income in the consolidated statements of income.
As a result of its impairment analysis performed in the fourth quarter of 2012, the Company determined that a cost-method investment was other-than-temporarily impaired and recorded an impairment loss of $2.7 million. This determination was based upon operational performance trends coupled with uncertainty regarding the entity’s ability to obtain additional funding in a required timeframe for the entity to continue operations.
No impairment losses were recorded during the year ended January 1, 2012. In the year ended January 2, 2011, 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. As a result, the Company recorded an impairment charge of $13.2 million in cost-method investment gain (loss), net in the consolidated statements of income for the year ended January 2, 2011.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounts Receivable
Accounts receivable consist of the following (in thousands):
| | | | | | | | |
| | January 2,
| | | January 3,
| |
| | 2011 | | | 2010 | |
|
Accounts receivable from product and service sales | | $ | 165,117 | | | $ | 157,536 | |
Other receivables | | | 2,167 | | | | 1,613 | |
| | | | | | | | |
Total accounts receivable, gross | | | 167,284 | | | | 159,149 | |
Allowance for doubtful accounts | | | (1,686 | ) | | | (1,398 | ) |
| | | | | | | | |
Total accounts receivable, net | | $ | 165,598 | | | $ | 157,751 | |
| | | | | | | | |
ILLUMINA, INC.
|
| | | | | | | |
| December 30, 2012 | | January 1, 2012 |
Accounts receivable from product and service sales | $ | 217,369 |
| | $ | 175,226 |
|
Other receivables | 1,886 |
| | 2,657 |
|
Total accounts receivable, gross | 219,255 |
| | 177,883 |
|
Allowance for doubtful accounts | (4,280 | ) | | (3,997 | ) |
Total accounts receivable, net | $ | 214,975 |
| | $ | 173,886 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventory
Inventory
Inventory consists of the following (in thousands):
|
| | | | | | | |
| December��30, 2012 | | January 1, 2012 |
Raw materials | $ | 61,665 |
| | $ | 58,340 |
|
Work in process | 75,675 |
| | 53,412 |
|
Finished goods | 21,378 |
| | 17,029 |
|
Total inventory | $ | 158,718 |
| | $ | 128,781 |
|
Property and Equipment
Property and equipment, net consists of the following (in thousands):
| | | | | | | | |
| | January 2,
| | | January 3
| |
| | 2011 | | | 2010 | |
|
Raw materials | | $ | 56,435 | | | $ | 39,839 | |
Work in process | | | 73,759 | | | | 52,059 | |
Finished goods | | | 24,290 | | | | 11,475 | |
| | | | | | | | |
Total inventory, gross | | | 154,484 | | | | 103,373 | |
Reserve for inventory | | | (12,273 | ) | | | (10,597 | ) |
| | | | | | | | |
Total inventory, net | | $ | 142,211 | | | $ | 92,776 | |
| | | | | | | | |
Property and Equipment |
| | | | | | | |
| December 30, 2012 | | January 1, 2012 |
Leasehold improvements | $ | 87,734 |
| | $ | 63,406 |
|
Machinery and equipment | 158,112 |
| | 143,816 |
|
Computer hardware and software | 58,313 |
| | 54,826 |
|
Furniture and fixtures | 8,022 |
| | 8,095 |
|
Construction in progress | 7,390 |
| | 10,022 |
|
Total property and equipment, gross | 319,571 |
| | 280,165 |
|
Accumulated depreciation | (153,404 | ) | | (136,682 | ) |
Total property and equipment, net | $ | 166,167 |
| | $ | 143,483 |
|
Property and equipment consist of the following (in thousands):
| | | | | | | | |
| | January 2,
| | | January 3,
| |
| | 2011 | | | 2010 | |
|
Leasehold improvements | | $ | 55,681 | | | $ | 55,322 | |
Manufacturing and laboratory equipment | | | 114,108 | | | | 92,956 | |
Computer equipment and software | | | 41,500 | | | | 37,071 | |
Furniture and fixtures | | | 6,732 | | | | 5,993 | |
Leased equipment | | | 13,357 | | | | — | |
| | | | | | | | |
Total property and equipment, gross | | | 231,378 | | | | 191,342 | |
Accumulated depreciation | | | (101,504 | ) | | | (74,154 | ) |
| | | | | | | | |
Total property and equipment, net | | $ | 129,874 | | | $ | 117,188 | |
| | | | | | | | |
Depreciation expense was $34.2$48.2 million $24.5, $55.6 million and $17.3$34.2 million for the years ended December 30, 2012, January 1, 2012, and January 2, 2011, respectively. Capital expenditures included accrued expenditures of $1.6 million, $5.9 million, and $1.8 million in the years ended December 30, 2012, January 3, 2010,1, 2012, and December 28, 2008,January 2, 2011, respectively. These amounts have been excluded from the Consolidated Statements of Cash Flows for the respective periods.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
| | | | | | | | |
| | January 2,
| | | January 3,
| |
| | 2011 | | | 2010 | |
|
Accrued compensation expenses | | $ | 49,368 | | | $ | 32,487 | |
Deferred revenue, current portion | | | 45,863 | | | | 27,445 | |
Reserve for product warranties | | | 16,761 | | | | 10,215 | |
Customer deposits | | | 14,900 | | | | 6,121 | |
Accrued taxes payable | | | 13,277 | | | | 12,109 | |
Acquisition related contingent consideration liability | | | 3,738 | | | | — | |
Accrued royalties | | | 2,781 | | | | 2,552 | |
Other accrued expenses | | | 9,476 | | | | 7,324 | |
| | | | | | | | |
Total accrued liabilities | | $ | 156,164 | | | $ | 98,253 | |
| | | | | | | | |
|
| | | | | | | |
| December 30, 2012 | | January 1, 2012 |
Accrued compensation expenses | $ | 59,864 |
| | $ | 52,035 |
|
Deferred revenue, current portion | 55,817 |
| | 52,573 |
|
Accrued taxes payable | 23,021 |
| | 19,339 |
|
Customer deposits | 13,765 |
| | 17,958 |
|
Reserve for product warranties | 10,136 |
| | 11,966 |
|
Acquisition related contingent consideration liability, current portion | 9,490 |
| | 2,335 |
|
Unsettled short-term investment purchase | 9,154 |
| | — |
|
Facility exit obligation, current portion | 8,063 |
| | 4,408 |
|
Accrued royalties | 2,836 |
| | 5,682 |
|
Other accrued expenses | 9,731 |
| | 10,819 |
|
Total accrued liabilities | $ | 201,877 |
| | $ | 177,115 |
|
68
| |
3. | Restructuring Activities |
In late 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 involuntary termination.
A summary of the pre-tax charges and estimated total costs associated with the initiative is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Employee Separation costs | | Facilities Exit Costs | | Other Costs | | Total |
Amount recorded in accrued liabilities as of January 1, 2012 | $ | 3,496 |
| | $ | — |
| | $ | 30 |
| | $ | 3,526 |
|
Additional expenses | 2,780 |
| | 221 |
| | 521 |
| | 3,522 |
|
Cash payments | (6,276 | ) | | (221 | ) | | (551 | ) | | (7,048 | ) |
Amount recorded in accrued liabilities as of December 30, 2012 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | |
Cumulative expense recorded since inception in restructuring expense | $ | 10,463 |
| | $ | 221 |
| | $ | 974 |
| | $ | 11,658 |
|
Estimated total restructuring costs to be incurred | $ | 10,463 |
| | $ | 221 |
| | $ | 974 |
| | $ | 11,658 |
|
BlueGnome
ILLUMINA, INC.
On September 19, 2012, the Company announced the acquisition of BlueGnome Ltd. (BlueGnome), a provider of cytogenetics and in vitro fertilization screening products. Total consideration for the acquisition was $95.5 million, which included $88.0 million in initial cash payments and $7.5 million in fair value of contingent cash consideration of up to $20.0 million based on the achievement of certain revenue based milestones by December 28, 2014.
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 30% 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.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On April 30, 2010,In conjunction with the purchase transaction, the Company completedalso agreed to pay up to $20.0 million to BlueGnome shareholders contingent upon the acquisition of Helixis, a company developing a high-performance, low-cost, real time PCR system used for nucleic acid analysis. Total consideration for the acquisition at the closing date was approximately $86.7 million, including $70.0 million in cash (net of $2.6 million of cash acquired) and $14.1 million for the fair value of contingent consideration payments that could range from $0 to $35 million based on the achievementretention of certain revenue-based milestones bykey employees and certain other criteria. Such contingent payments are recognized as contingent compensation expense over the retention period through December 31, 2011. Using information available at the close of the acquisition, the28, 2014.
The Company allocated approximately $2.3$11.2 million of the total consideration to tangible assets, net of liabilities, and approximately $28.0$48.9 million to identified intangible assets, that will be amortized overincluding additional developed technologies of $25.0 million, customer relationships of $16.8 million, and a trade name of $7.1 million with average useful lifelives of 10 years.seven, five, and ten years, respectively. The Company also recorded a $10.7$12.1 million deferred tax liability to reflect the tax impact of thecertain identified intangible assets, that willthe amortization expenses for which are not generate tax deductible amortization expense and an $8.7 million deferred tax asset which primarily relates to acquired net operating loss carryforwards.deductible. The Company recorded the excess consideration of approximately $58.4$47.5 million as goodwill,goodwill.
Prior Acquisitions
On January 10, 2011, the Company acquired Epicentre Technologies Corporation (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, $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 deductible for income tax purposes.met, and $7.4 million in the fair value of contingent cash consideration of up to $15.0 million based on the achievement of certain revenue based milestones by January 10, 2013.
Prior toThe 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 Company hadacquisition, which shares are subject to forfeiture if certain non-revenue-based milestones are not met. One third of these shares issued with an equity interest in Helixisassessed fair value of $4.6 million were determined to be part of the purchase price. The remaining shares with a cost basisan assessed fair value of $2.0$10.1 million that was accounted were determined to be compensation for underpost-acquisition service, the cost method of accounting. The Companywhich will be recognized as contingent compensation expense over a gainperiod of $2.9 million, which was includedtwo years 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.research and development expense and 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 reflects 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.
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, a trade name of $2.5 million, and customer relationships of $1.1 million, with weighted average useful lives of approximately nine, ten, and three years, respectively. The Company recorded the excess consideration of $43.6 million as goodwill.
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.$22.0 million. As a result of this transaction, the companyCompany recorded an in-process research and development (IPR&D)IPR&D asset of $21.4$21.4 million in other assets (long-term).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.
IPR&D will not be amortized until the development efforts are complete and until then,On April 30, 2010, the Company will perform an annual impairment testcompleted the acquisition of Helixis, Inc. (Helixis), a company developing a high-performance, low-cost, real time PCR system used for nucleic acid analysis. Total consideration for the asset, or more frequently if events or changesacquisition was $86.7 million, including $70.0 million in circumstances indicate that the asset might be impaired. The impairment test will involve a comparison ofnet 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 asset with its carrying amount. If its carrying amount exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. Upon completionachievement of certain revenue-based milestones by December 31, 2011. The Company allocated $2.3 million of the related development efforts,consideration to tangible assets, net of liabilities, and $28.0 million to identified intangible assets that will be amortized over a useful life of ten years. The Company also recorded a $10.7 million deferred tax liability to reflect the tax impact of the identified intangible assets, the amortization expenses for which are not tax deductible and an $8.7 million deferred tax asset which primarily relates to acquired net operating loss carryforwards. The Company will start amortizingrecorded the IPR&D based on an estimated useful life. Through January 2, 2011, there was no indicationexcess consideration of impairment$58.4 million as goodwill.
ILLUMINA, INC.
In 2008, the Company completed an acquisition of another development-stage company. At the time ofNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Prior to the acquisition, the Company paid $25.8had 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.
In addition, the Company agreed to pay the former shareholders of another development stage company acquired in 2008 a certain amount of contingent cash including transaction costs.consideration based on the achievement of certain product-related and employment-related milestones. In accordance with the applicable accounting guidance effective at thatthe time, the Company recorded a charge of $24.7 millionsuch consideration was accounted for purchased in-process research and development (IPR&D). As partas additional elements of the cost of acquisition, agreement, Illumina agreed to payresulting in additional IPR&D charges in the former shareholdersyears ended January 1, 2012 and January 2, 2011 when the contingencies were resolved beyond a reasonable doubt and the considerations were issued or became issuable.
Summary of Contingent Compensation Expenses and IPR&D Charges
Contingent compensation expenses and IPR&D charges as a result of acquisitions consist of the entity up to an additional $35.0 million in contingent cash consideration based on the achievement of certain milestones. As contingent consideration payments are made,
69
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
they are recorded as IPR&D charges and compensation expenses. IPR&D and compensation expenses related to such contingent consideration recorded in the past three years are as followsfollowing (in thousands):
| | | | | | | | | | | | |
| | Years Ended |
| | January 2,
| | January 3,
| | December 28,
|
| | 2011 | | 2010 | | 2008 |
|
IPR&D(1) | | $ | 1,325 | | | $ | 11,325 | | | $ | 24,660 | |
Compensation expense(2) | | | 3,675 | | | | 3,675 | | | | 1,531 | |
|
| | | | | | | | | | | |
| Years Ended |
| December 30, 2012 | | January 1, 2012 | | January 2, 2011 |
Contingent compensation expense, included in research and development expense | $ | 3,419 |
| | $ | 4,799 |
| | $ | 3,675 |
|
Contingent compensation expense, included in selling, general and administrative expense | 5,732 |
| | 1,258 |
| | — |
|
Total contingent compensation expense | $ | 9,151 |
| | $ | 6,057 |
| | $ | 3,675 |
|
IPR&D, included in acquisition related expense (gain), net | $ | — |
| | $ | 5,425 |
| | $ | 1,325 |
|
| | |
(1) | | IPR&D expense is included in acquisition related (gain) expense, net in the consolidated statements of income. |
|
(2) | | Compensation expense associated with the acquisition is included in research and development expenses in the consolidated statements of income. |
The Company’s intangible assets, excluding goodwill, are comprised primarily of licensed technology from the Affymetrix settlement entered into on January 9, 2008,include acquired core technologyand licensed technologies, license agreements, trade name, and customer relationships from the acquisition of Solexa, and acquired core technology from the acquisition of Helixis. As a result of the Affymetrix settlement, the Company agreed, without admitting liability, to make a one-time payment to Affymetrix, of which $36.0 million was recorded as licensed technology and classified as an intangible asset. The effective life of the licensed technology extends through 2015, the final expiry date of all patents considered in valuingrelationships. Amortization for the intangible asset. Amortization related to the Affymetrix licensed technologyassets that have finite useful lives is generally recorded on a straight-line basis.
In connection with the acquisition of Helixis. in April 2010, the Company recorded an additional core technology of $28.0 million with a useful life of approximately 10 years. Acquired core technologies and customer relationships are being amortized on a straight-line basis over their useful lives.
The following is a summary of the Company’s amortizableidentifiable intangible assets as of the respective balance sheet dates (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | January 2, 2011 | | | January 3, 2010 | |
| | Weighted
| | | Gross
| | | | | | | | | Weighted
| | | Gross
| | | | | | | |
| | Average
| | | Carrying
| | | Accumulated
| | | Intangibles,
| | | Average
| | | Carrying
| | | Accumulated
| | | Intangibles,
| |
| | Useful Life | | | Amount | | | Amortization | | | Net | | | Useful Life | | | Amount | | | Amortization | | | Net | |
|
Licensed technology | | | 8.0 | | | $ | 36,000 | | | $ | (15,849 | ) | | $ | 20,151 | | | | 8.0 | | | $ | 36,000 | | | $ | (11,820 | ) | | $ | 24,180 | |
Core technology | | | 10.0 | | | | 51,500 | | | | (10,604 | ) | | | 40,896 | | | | 10.0 | | | | 23,500 | | | | (6,854 | ) | | | 16,646 | |
Customer relationships | | | 3.0 | | | | 900 | | | | (900 | ) | | | — | | | | 3.0 | | | | 900 | | | | (875 | ) | | | 25 | |
License agreements | | | 8.9 | | | | 10,654 | | | | (1,677 | ) | | | 8,977 | | | | 7.2 | | | | 4,456 | | | | (1,519 | ) | | | 2,937 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total intangible assets, net | | | | | | $ | 99,054 | | | $ | (29,030 | ) | | $ | 70,024 | | | | | | | $ | 64,856 | | | $ | (21,068 | ) | | $ | 43,788 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 30, 2012 | | January 1, 2012 |
| Weighted Average Useful Life (years) | | Gross Carrying Amount | | Accumulated Amortization | | Intangibles, Net | | Weighted Average Useful Life (years) | | Gross Carrying Amount | | Accumulated Amortization | | Intangibles, Net |
Intangible assets with finite useful lives: |
Licensed technologies | 6.6 | | $ | 46,904 |
| | $ | (25,271 | ) | | $ | 21,633 |
| | 8.0 | | $ | 36,000 |
| | $ | (20,000 | ) | | $ | 16,000 |
|
Core technologies | 8.8 | | 99,800 |
| | (27,427 | ) | | 72,373 |
| | 9.7 | | 74,800 |
| | (18,544 | ) | | 56,256 |
|
Customer relationships | 5.0 | | 18,780 |
| | (2,214 | ) | | 16,566 |
| | 3.0 | | 1,980 |
| | (1,253 | ) | | 727 |
|
License agreements | 7.8 | | 14,829 |
| | (4,133 | ) | | 10,696 |
| | 8.9 | | 12,404 |
| | (2,605 | ) | | 9,799 |
|
Trade name | 10.0 | | 9,600 |
| | (672 | ) | | 8,928 |
| | 10.0 | | 2,500 |
| | (245 | ) | | 2,255 |
|
Indefinitely-lived Intangible Asset: |
In-process research & development |
| | — |
| | — |
| | — |
| |
| | 21,438 |
| | — |
| | 21,438 |
|
Total intangible assets, net | | | $ | 189,913 |
| | $ | (59,717 | ) | | $ | 130,196 |
| | | | $ | 149,122 |
| | $ | (42,647 | ) | | $ | 106,475 |
|
Additions to intangible assets in the current year are primarily due to the BlueGnome acquisition and technology license agreements entered into during the year. As discussed in note “1. Organization and Summary of Significant Accounting Policies,” IPR&D was impaired during the year ended December 30, 2012. Amortization expense associated with the intangible assets was $7.8$17.1 million $6.7 million, and $10.4 million for the yearsyear ended January 2, 2011, January 3, 2010, and December 28, 2008, respectively.30, 2012, $15.5 million of which related to acquired intangible assets.
70
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amortization expense associated with intangible assets for the years ended January 1, 2012 and January 2, 2011 were $13.6 million and $7.8 million, 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, andamong other factors.
| | | | |
2011 | | $ | 10,071 | |
2012 | | | 10,285 | |
2013 | | | 10,270 | |
2014 | | | 10,251 | |
2015 | | | 10,251 | |
Thereafter | | | 18,896 | |
| | | | |
Total | | $ | 70,024 | |
| | | | |
|
| | | |
2013 | $ | 24,644 |
|
2014 | 23,860 |
|
2015 | 23,414 |
|
2016 | 18,715 |
|
2017 | 14,612 |
|
Thereafter | 24,951 |
|
Total | $ | 130,196 |
|
| |
5. 6. | ImpairmentFair Value Measurements |
InvestmentsThe following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of December 30, 2012 and January 1, 2012 respectively (in thousands):
During |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 30, 2012 | | January 1, 2012 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | | | | | |
Money market funds (cash equivalent) | $ | 252,126 |
| | $ | — |
| | $ | — |
| | $ | 252,126 |
| | $ | 166,898 |
| | $ | — |
| | $ | — |
| | $ | 166,898 |
|
Debt securities in government-sponsored entities | — |
| | 314,873 |
| | — |
| | 314,873 |
| | — |
| | 394,039 |
| | — |
| | 394,039 |
|
Corporate debt securities | — |
| | 472,861 |
| | — |
| | 472,861 |
| | — |
| | 433,382 |
| | — |
| | 433,382 |
|
U.S. Treasury securities | 128,489 |
| | — |
| | — |
| | 128,489 |
| | 59,169 |
| | — |
| | — |
| | 59,169 |
|
Deferred compensation plan assets | — |
| | 13,626 |
| | — |
| | 13,626 |
| | — |
| | 10,800 |
| | — |
| | 10,800 |
|
Total assets measured at fair value | $ | 380,615 |
| | $ | 801,360 |
| | $ | — |
| | $ | 1,181,975 |
| | $ | 226,067 |
| | $ | 838,221 |
| | $ | — |
| | $ | 1,064,288 |
|
Liabilities: | | | | | | | | | | | | | | | |
Acquisition related contingent consideration liabilities | $ | — |
| | $ | — |
| | $ | 12,519 |
| | $ | 12,519 |
| | $ | — |
| | $ | — |
| | $ | 6,638 |
| | $ | 6,638 |
|
Deferred compensation liability | — |
| | 12,071 |
| | — |
| | 12,071 |
| | — |
| | 8,970 |
| | — |
| | 8,970 |
|
Total liabilities measured at fair value | $ | — |
| | $ | 12,071 |
| | $ | 12,519 |
| | $ | 24,590 |
| | $ | — |
| | $ | 8,970 |
| | $ | 6,638 |
| | $ | 15,608 |
|
The Company holds available-for-sale securities that consist of highly liquid, investment grade debt securities. The Company determines the fourth quarterfair value of 2010,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 or liabilities (Level 1 inputs) or pricing determined using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, 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’s deferred compensation plan assets consist primarily of mutual funds. See note “14. Employee Benefit Plans” for additional information about our deferred compensation plan. The Company determined thatperforms certain procedures to corroborate the fair value of its holdings, including comparing prices obtained from service providers to prices obtained from other reliable sources.
The Company reassesses the fair value of contingent consideration to be settled in cash related to acquisitions on a $6.0 million cost-method investmentquarterly basis using the income approach. This is a Level 3 measurement. Significant assumptions used in the measurement include probabilities of achieving the remaining milestones and the discount rates, which depend on the milestone risk profiles. Due to changes in the estimated payments and a related $6.8 million note receivable with interest receivableshorter discounting period, the fair value of $0.4 million were below carrying value and the impairment wasother-than-temporary. This determination was based upon continued shortfalls from revenue plans coupled with events in the fourth quartercontingent consideration
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
liabilities changed, resulting in a required timeframe for the entity to continue operations. As a result, the Company$2.0 million expense recorded an impairment charge of $13.2 million in other (expense) income,acquisition related expense (gain), net in the consolidated statements of income forduring the year ended January 2, 2011.December 30, 2012.
Manufacturing Equipment
During the year ended December 28, 2008, the Company implemented next-generation imaging and decoding systems to be used in manufacturing. These systems were developed to increase existing capacity and allow the Company to transition to the Infinium High-Density (HD) product line. As a result of this transition, the demand for products manufactured on the previous infrastructure was reduced and certain systems were no longer being utilized. A non-cash impairment charge of $4.1 million was recorded in the year ended December 28, 2008 for the excess machinery. This charge is included as a separate line item in the Company’s consolidated statement of income. There was no change to useful lives and related depreciation expenses 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 instruments. Additionally, the Company provides a warranty on its consumables through the expiry date, which generally ranges from six to twelve months after the manufacture date. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses 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.
71
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in the Company’s reserve for product warrantiesestimated fair value of contingent consideration liabilities from January 1, 20083, 2010 through January 2, 2011December 30, 2012 are as follows (in thousands):
| | | | |
Balance as of January 1, 2008 | | $ | 3,716 | |
Additions charged to cost of revenue | | | 13,044 | |
Repairs and replacements | | | (8,557 | ) |
| | | | |
Balance as of December 28, 2008 | | | 8,203 | |
Additions charged to cost of revenue | | | 14,613 | |
Repairs and replacements | | | (12,601 | ) |
| | | | |
Balance as of January 3, 2010 | | | 10,215 | |
Additions charged to cost of revenue | | | 25,146 | |
Repairs and replacements | | | (18,600 | ) |
| | | | |
Balance as of January 2, 2011 | | $ | 16,761 | |
| | | | |
|
| | | |
| Contingent Consideration Liability (Level 3 Measurement) |
Balance as of January 3, 2010 | $ | — |
|
Acquisition of Helixis | 14,114 |
|
Gain recorded in acquisition related expense (gain), net | (10,376 | ) |
Balance as of January 2, 2011 | $ | 3,738 |
|
Acquisition of Epicentre | 7,400 |
|
Gain recorded in acquisition related expense (gain), net | (4,500 | ) |
Balance as of January 1, 2012 | $ | 6,638 |
|
Acquisition of BlueGnome | 7,500 |
|
Expense recorded in acquisition related expense (gain), net | 1,975 |
|
Cash payments | (3,594 | ) |
Balance as of December 30, 2012 | $ | 12,519 |
|
| |
7. | Convertible Senior Notes |
On February 16, 2007,0.25% Convertible Senior Notes due 2016
In 2011, the Company issued $400.0$920.0 million aggregate principal amount of 0.625%0.25% convertible senior notes due 2014.2016 (2016 Notes) in an offering conducted in accordance with Rule 144A under the Securities Act of 1933, as amended. The net proceeds from2016 Notes were issued at 98.25% of par value. Debt issuance costs of approximately $0.4 million were primarily comprised of legal, accounting, and other professional fees, the offering, after deductingmajority of which were recorded in other noncurrent assets and are being amortized to interest expense over the initial purchasers’ discount and offering expenses, were approximately $390.3 million. The Company pays 0.625% interest per annum on the principal amountfive-year term of the notes, payable semi-annually in arrears in cash on February 15 and August 15 of each year. 2016 Notes.
The notes mature on February 15, 2014.
The notes are2016 Notes will be convertible into cash, and, if applicable, shares of common stock, or a combination of cash and shares of common stock, at the Company’s common stock, $0.01 par value per share,election, based on aan initial conversion rate, subject to adjustment, of 45.805811.9687 shares per $1,000$1,000 principal amount of notesthe 2016 Notes (which represents aan initial conversion price of approximately $21.83$83.55 per share), only in the following circumstances and to the following extent: (1) during the fivebusiness-day period after any five10 consecutivetrading-day trading day period (the measurement period)“measurement period”) in which the trading price per note2016 Note for each day of such measurement period was less than 97%98% of the product of the last reported sale price of the Company’sCompany'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’sCompany's common stock for 20 or more trading days in athe 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;events described in the indenture for the 2016 Notes; and (4) at any time on or after NovemberDecember 15, 20132015 through the thirdsecond scheduled trading day immediately preceding the maturity date. The requirements
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 second condition above were satisfied during each of the calendar quarters of 2010 and the first, second and third quarters of 2009. Accordingly, the notes were and continue to be convertible during the period from, and including, April 1, 2009 through, and including, December 31, 2009 and again during the period April 1, 2010 through, and including, March 31, 2011. Additionally, these same requirements were satisfied during the third quarter of 2008, and, as a result, the notes were convertible during the period from, and including, October 1, 2008 through, and including, December 31, 2008. On December 29, 2008, a noteholder converted notes“share amount” in an aggregate principal amount of $10.0 million. On February 4, 2009, the settlement date, we paid the noteholder the conversion value of the notes in cash, up to the principal amount of the notes. The excess of the conversion value over the principal amount, totaling $2.9 million, was paidportion in shares of common stock. This equity dilutionIn 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 notes was offset bydaily conversion value which is the reacquisitionproduct of the shares undereffective 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.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company pays 0.25% interest per annum on the principal amount of the 2016 Notes semiannually in arrears in cash on March 15 and September 15 of each year. The Company paid $2.3 million in interest payments during the year ended December 30, 2012. The 2016 Notes mature on March 15, 2016. If a designated event, as defined in the indenture for the 2016 Notes, such as an 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 notesenior 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 December 30, 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. The 2016 Notes had an anti-dilutive effect for the years ended December 30, 2012 and January 1, 2012.
0.625% Convertible Senior Notes due 2014
In 2007, the Company issued $400.0 million principal amount of 0.625% convertible senior notes due 2014 (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 2014 Notes mature on February 15, 2014. The effective interest rate of the liability component was estimated to be 8.3%.
The Company entered into hedge transactions entered into in connectionconcurrently with the offeringissuance of the notes.
The hedge transaction entered with2014 Notes under which the initial purchasersand/or their affiliates (the hedge counterparties) entitles the Company is entitled to purchase up to 18,322,320approximately 18,322,000 shares of the Company’s common stock at a strike price of approximately $21.83$21.83 per share, subject to adjustment. In addition,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 thesethe hedge
72
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
counterparties warrants exercisable, on a cashless basis, for up to 18,322,320approximately 18,322,000 shares of the Company’s common stock at a strike price of $31.435$31.435 per share, subject to adjustment. The proceeds from these warrants partially offset the cost to the Company of the convertible note hedge transaction that was not covered by the proceeds from the sale of the warrants was approximately $46.6 milliontransactions.
The 2014 Notes became convertible into cash and was reflected as a reduction of additional paid-in capital. The hedge transaction is expected to reduce the potential equity dilution upon conversion of the notes to the extent the Company exercises the hedge to purchase shares from the hedge counterparties to deliver to converting noteholders. However, the warrants could have a dilutive effect on the Company’s earnings per share to the extent that the price of the Company’s common stock exceeds the strike pricein various prior periods and became convertible again from April 1, 2012 through, and including, December 30, 2012. There were no conversions of the warrants.
As of 2014 Notes during the year ended December 30, 2012. During the year ended January 2, 2011,1, 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 senior notes was $390.0 million due to conversionnote hedge transactions, which were automatically exercised in accordance with their terms at the time of $10.0 millioneach such conversion. The balance of the notes during the first quarter of 2009. The unamortized discount was $78.4convertible note hedge transactions with respect to approximately $40.1 million resulting in a net carrying amount of the liability component of $311.6 million. As of January 3, 2010, the principal amount of the notes was $390.0 million and the unamortized discount was $99.8 million, resulting in a net carrying amount2014 Notes (which are convertible into up to 1,838,000 shares of the liabilityCompany’s common stock) remained in place as of $290.2 million. UponDecember 30, 2012. The warrants were not affected by the conversion,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 December 30, 2012.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As a result of the conversions during the year ended January 1, 2012, the Company recorded a gainlosses on extinguishment of $0.8 million in the first quarter of 2009,debt calculated as the difference between the carrying amountestimated fair value of the converteddebt and the carrying value of the notes and their estimated fair value as of the settlement date.dates. To measure the fair value of the converted notes as of the settlement date,dates, the Company calculated anapplicable interest rate of 11.3%rates were estimated using Level 2 Observable Inputs. This rate wasobservable inputs and applied to the converted notes and coupon interest rate using the same present value technique usedmethodology as in the issuance date valuation. If the 2014 Notes were converted as of December 30, 2012, the if-converted value would exceed the principal amount by $60.0 million.
The remaining period over whichfollowing 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.
|
| | | | | | | | | | | | | | | | |
| | December 30, 2012 | | January 1, 2012 |
| | 2016 Notes | | 2014 Notes | | 2016 Notes | | 2014 Notes |
Principal amount of convertible notes outstanding | | $ | 920,000 |
| | $ | 40,125 |
| | $ | 920,000 |
| | $ | 40,125 |
|
Unamortized discount of liability component | | (114,594 | ) | | (3,158 | ) | | (147,034 | ) | | (5,722 | ) |
Net carrying amount of liability component | | 805,406 |
| | 36,967 |
| | 772,966 |
| | 34,403 |
|
Less: current portion | | — |
| | (36,967 | ) | | — |
| | — |
|
Long-term debt | | $ | 805,406 |
| | $ | — |
| | $ | 772,966 |
| | $ | 34,403 |
|
Conversion option subject to cash settlement | | $ | — |
| | $ | 3,158 |
| | $ | — |
| | $ | 5,722 |
|
Carrying value of equity component, net of issuance costs | | $ | 155,366 |
| | $ | 111,470 |
| | $ | 155,366 |
| | $ | 114,035 |
|
Fair value of outstanding notes | | $ | 892,446 |
| | $ | 101,470 |
| | $ | 725,632 |
| | $ | 60,122 |
|
Remaining amortization period of discount on the liability component | | 3.2 years |
| | 1.1 years |
| | 4.2 years |
| | 2.1 years |
|
Contractual coupon interest expense and accretion of discount on the liability component will be amortized is 3.12 years.recorded for the convertible senior notes were as follows (in thousands):
|
| | | | | | | | | | | | |
| | Years Ended |
| | December 30, 2012 | | January 1, 2012 | | January 2, 2011 |
Contractual coupon interest expense | | $ | 2,472 |
| | $ | 2,285 |
| | $ | 2,390 |
|
Accretion of discount on the liability component | | $ | 35,004 |
| | $ | 32,173 |
| | $ | 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; Carlsbad, California; Branford, Connecticut;Fairfax, Virginia; Madison, Wisconsin; the United Kingdom; the Netherlands; Japan; Singapore; Australia; Brazil; Canada; and China.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Annual future minimum payments under these operating leases as of January 2, 2011December 30, 2012 were as follows (in thousands):
| | | | |
2011 | | $ | 13,965 | |
2012 | | | 15,237 | |
2013 | | | 22,500 | |
2014 | | | 20,926 | |
2015 | | | 20,059 | |
Thereafter | | | 406,574 | |
| | | | |
Total | | $ | 499,261 | |
| | | | |
|
| | | |
2013 | $ | 27,676 |
|
2014 | 23,970 |
|
2015 | 23,197 |
|
2016 | 23,416 |
|
2017 | 23,860 |
|
Thereafter | 393,088 |
|
Total | $ | 515,207 |
|
Rent expense, net of amortization of the deferred gain on sale of property, was $14.7expenses were $21.4 million $13.6, $17.4 million, and $10.7$14.7 million for the years ended December 30, 2012, January 1, 2012, and January 2, 2011, respectively.
The Company recorded facility exit obligations upon vacating its former headquarters during the years ended December 30, 2012 and January 1, 2012. Changes in the facility exit obligation from January 1, 2012 through December 30, 2012 are as follows (in thousands):
|
| | | |
Balance as of January 1, 2012: | $ | 25,049 |
|
Additional facility exit obligation recorded | 24,878 |
|
Accretion of interest expense | 2,129 |
|
Cash payments | (6,704 | ) |
Balance as of December 30, 2012 | $ | 45,352 |
|
Warranties
Changes in the Company’s reserve for product warranties from January 3, 2010 and December 28, 2008, respectively.
On through December 30, 2010, the Company entered into a lease agreement for a new corporate headquarters facility located in San Diego, California. The lease has a target commencement date2012 are as follows (in thousands):
|
| | | |
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 |
|
Additions charged to cost of revenue | 17,279 |
|
Repairs and replacements | (19,109 | ) |
Balance as of December 30, 2012 | $ | 10,136 |
|
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
buildings and a central plant building with approximately 346,600 square feet. The Company has also agreed to lease a third office building to be built at this facility containing approximately 123,400 rentable square feet. The Company has the right to further expand the premises and lease one or more of three additional office buildings that may be built at this facility. Included in the table above are future minimum lease payments during the initial term of the lease, which are expected to total approximately $355.9 million, excluding further expansion beyond the third building, and taking no consideration of tenant improvement allowances of approximately $21.9 million. The Company will capitalize the leasehold improvements and amortize them over the shorter of the lease term or their expected useful life. The leasehold improvement allowances will reduce rent expense over the initial lease term.
Lease commitments of $108.3 million related to the lease for the Company’s current headquarters are also included in the table above. The Company plans to cease the use of the facility near the end of 2011 and the Company is further obligated for certain ongoing operating costs prior to any sublease that may be obtained. Upon cease-use of the facility, the Company will record an estimated loss for the present value of the expected shortfall between the remaining lease payments obligation and estimated sublease rental during the remaining lease period, adjusted for deferred rents and leasehold improvements.
| |
9. | Stockholders’ EquityShare-based Compensation Expense |
Common StockTotal share-based compensation expense for all stock awards consists of the following (in thousands):
|
| | | | | | | | | | | |
| Years Ended |
| December 30, 2012 | | January 1, 2012 | | January 2, 2011 |
Cost of product revenue | $ | 7,575 |
| | $ | 6,951 |
| | $ | 5,378 |
|
Cost of service and other revenue | 461 |
| | 695 |
| | 470 |
|
Research and development | 30,879 |
| | 32,105 |
| | 25,428 |
|
Selling, general and administrative | 55,409 |
| | 52,341 |
| | 40,369 |
|
Share-based compensation expense before taxes | 94,324 |
| | 92,092 |
| | 71,645 |
|
Related income tax benefits | (30,759 | ) | | (32,168 | ) | | (25,231 | ) |
Share-based compensation expense, net of taxes | $ | 63,565 |
| | $ | 59,924 |
| | $ | 46,414 |
|
The assumptions used for the Company announced atwo-for-one stock split inspecified reporting periods and the formresulting estimates of a 100% stock dividend with a record date of September 10, 2008 and a distribution date of September 22, 2008. Share andweighted-average fair value per share amounts have been restatedof options granted and for stock purchased under the ESPP during those periods are as follows:
|
| | | | | | | | | | | |
| Years Ended |
| December 30, 2012 | | January 1, 2012 | | January 2, 2011 |
Stock options granted: | | | | | |
Risk-free interest rate | 0.56 - 0.93% |
| | 0.85 - 2.23% |
| | 2.05 - 2.73% |
|
Expected volatility | 41 - 48% |
| | 41 - 53% |
| | 46 - 48% |
|
Expected term | 4.0 - 6.6 years |
| | 4.7 - 5.5 years |
| | 6.0 years |
|
Expected dividends | — |
| | — |
| | — |
|
Weighted average fair value per share | $ | 15.47 |
| | $ | 27.47 |
| | $ | 18.82 |
|
| | | | | |
Stock purchased under the ESPP: | | | | | |
Risk-free interest rate | 0.09 - 0.17% |
| | 0.16 - 0.30% |
| | 0.17 - 0.48% |
|
Expected volatility | 33 - 64% |
| | 43 - 48% |
| | 46 - 48% |
|
Expected term | 0.5 - 1.0 year |
| | 0.5 - 1.0 year |
| | 0.5 - 1.0 year |
|
Expected dividends | — |
| | — |
| | — |
|
Weighted average fair value per share | $ | 16.45 |
| | $ | 20.08 |
| | $ | 11.10 |
|
As of December 30, 2012, approximately $177.8 million of total unrecognized compensation cost related to reflect the stock split for all periods presented.options, restricted stock units, and ESPP shares issued to date is expected to be recognized over a weighted-average period of approximately 2.3 years.
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 $342.7 million, after deducting underwriting discounts and commissions and offering expenses.
On January 2, 2011, the Company had 126,606,851 shares of common stock outstanding, excluding treasury shares.
Stock Options
On January 2, 2011, the Company had three active stock plans: theThe Company’s 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.Plan allow for the issuance of stock options, restricted stock units and awards, and performance stock units. As of January 2, 2011, options to purchase 7,535,584December 30, 2012, approximately 3,065,000 shares remained available for future grantgrants under the 2005 Stock Plan and the 2005 Solexa Equity Plan. There is no set number of shares reserved for issuance under the New Hire Stock and Incentive Plan.
Stock Options
Stock options granted at the time of hire primarily vest over a four or five-yearfive-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-yearfive-year period.Each grant of options has a
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
74
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s stock option activity under all stock option plans from January 1, 20083, 2010 through January 2, 2011December 30, 2012 is as follows:
| | | | | | | | | | | | |
| | | | | | | | Weighted
| |
| | | | | | | | Average
| |
| | | | | Weighted-
| | | Grant-Date
| |
| | | | | Average
| | | Fair Value
| |
| | Options | | | Exercise Price | | | per Share | |
|
Outstanding at January 1, 2008 | | | 20,847,868 | | | $ | 12.13 | | | $ | 8.13 | |
Granted | | | 3,091,108 | | | | 34.23 | | | | 18.01 | |
Exercised | | | (4,571,855 | ) | | | 8.52 | | | | 6.02 | |
Cancelled | | | (1,232,917 | ) | | | 19.93 | | | | 11.18 | |
| | | | | | | | | | | | |
Outstanding at December 28, 2008 | | | 18,134,204 | | | | 16.26 | | | | 10.08 | |
Granted | | | 1,560,024 | | | | 28.86 | | | | 14.74 | |
Exercised | | | (2,965,606 | ) | | | 10.56 | | | | 7.21 | |
Cancelled | | | (639,184 | ) | | | 14.88 | | | | 9.82 | |
| | | | | | | | | | | | |
Outstanding at January 3, 2010 | | | 16,089,438 | | | | 18.59 | | | | 11.07 | |
Granted | | | 2,045,489 | | | | 39.11 | | | | 18.82 | |
Exercised | | | (5,541,276 | ) | | | 16.65 | | | | 10.08 | |
Cancelled | | | (711,350 | ) | | | 21.76 | | | | 11.78 | |
| | | | | | | | | | | | |
Outstanding at January 2, 2011 | | | 11,882,301 | | | $ | 22.83 | | | $ | 12.82 | |
| | | | | | | | | | | | |
|
| | | | | | |
| Options (in thousands) | | Weighted- Average Exercise Price |
Outstanding at January 3, 2010 | 16,089 |
| | $ | 18.59 |
|
Granted | 2,045 |
| | 39.11 |
|
Exercised | (5,541 | ) | | 16.65 |
|
Cancelled | (711 | ) | | 21.76 |
|
Outstanding at January 2, 2011 | 11,882 |
| | 22.83 |
|
Granted | 1,399 |
| | 64.98 |
|
Exercised | (2,784 | ) | | 17.98 |
|
Cancelled | (119 | ) | | 33.49 |
|
Outstanding at January 1, 2012 | 10,378 |
| | 29.69 |
|
Granted | 251 |
| | 40.79 |
|
Exercised | (2,071 | ) | | 20.34 |
|
Cancelled | (207 | ) | | 39.18 |
|
Outstanding at December 30, 2012 | 8,351 |
| | $ | 32.10 |
|
At January 2, 2011,December 30, 2012, outstanding options to purchase 6,950,184approximately 6,725,000 shares were exercisable with a weighted average per share exercise price of $17.70.$28.49. The weighted average remaining life in years of options outstanding and exercisable is 6.515.5 years and 5.675.0 years, respectively, as of January 2, 2011.December 30, 2012.
The aggregate intrinsic value of options outstanding and options exercisable as of January 2, 2011December 30, 2012 was $207.0 million and January 3, 2010 was $481.4$185.9 million and $317.2 million,, respectively. Aggregate intrinsic value represents the product of the number of options outstanding multiplied by the difference between the Company’s closing stock price per share on the last trading day of the fiscal period, which was $63.34$54.75 as of December 31, 2010,28, 2012, and the exercise price multiplied by the number of options outstanding.price. Total intrinsic value of options exercised was $156.9$60.6 million $73.4, $136.5 million, and $136.6$156.9 million for the years ended December 30, 2012, January 1, 2012, and January 2, 2011, respectively. Total fair value of options vested was $31.9 million, $49.5 million, and $47.3 million for the years ended December 30, 2012, January 1, 2012, and January 2, 2011, respectively.
Restricted Stock
The Company issues restricted stock units (RSUs) and restricted stock awards (RSAs). The Company grants RSUs pursuant to its 2005 Stock and Incentive Plan. RSUs are share awards that, upon vesting, will deliver to the holder shares of the Company’s common stock. For grants to new hires prior to July 2011 and for grants to existing employees, 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. The Company satisfies RSU vesting through the issuance of new shares. The Company also issues RSAs that are released based on service related vesting conditions. RSAs may be issued from the Company’s treasury stock or granted pursuant to the Company’s 2005 Stock and Incentive Plan.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the Company’s restricted stock activity and related information from January 3, 2010 through December 30, 2012 is as follows:
|
| | | | | | |
| Restricted Stock (in thousands) | | Weighted Average Grant-Date Fair Value per Share |
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 | 1,780 |
| | 45.10 |
|
Vested | (827 | ) | | 36.47 |
|
Cancelled | (356 | ) | | 42.15 |
|
Outstanding at January 1, 2012 | 3,706 |
| | 43.36 |
|
Awarded | 1,952 |
| | 48.42 |
|
Vested | (1,139 | ) | | 40.33 |
|
Cancelled | (394 | ) | | 45.05 |
|
Outstanding at December 30, 2012 | 4,125 |
| | $ | 46.43 |
|
Based on the closing price per share of the Company’s common stock of $54.75 and $30.48 on December 28, 2008,2012 and December 30, 2011, respectively, the total pre-tax intrinsic value of all outstanding restricted stock as of December 30, 2012 and January 1, 2012 was $225.8 million and $112.9 million, respectively. Total fair value of restricted stock vested was $45.9 million, $30.2 million, and $16.4 million for the years ended December 30, 2012, January 1, 2012, and January 2, 2011, respectively.
Performance Stock Units
In March 2012, the Company’s Compensation Committee of the Company’s Board of Directors approved changes to the Company’s long-term equity incentive program for executive officers and approved the issuance of certain performance stock units at the end of a three-year performance period. The number of shares issuable will range from 50% and 150% of the shares approved in the award based on the Company’s performance relative to specified earnings per share targets at the end of the three-year performance period. A total of 587,000 shares were outstanding as of December 30, 2012 with a weighted-average grant-date fair value of $49.64, which represents the fair market value of one share of the Company’s common stock on the grant date.
Employee Stock Purchase Plan
In February 2000, the board of directors and stockholders adopted the 2000 ESPP. A total of 15,467,42615,467,000 shares of the Company’s common stock have been reserved for issuance under theits 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. In addition, beginning with fiscal 2001, the
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 372,544, 359,713,approximately 328,000, 328,000, and 276,198373,000 were issued under the ESPP during fiscal 2010, 2009,the years ended December 30, 2012, January 1, 2012, and 2008,January 2, 2011, respectively. As of December 30, 2012 and January 2, 2011 and January 3, 2010,1, 2012, there were 16,061,905approximately 15,406,000 shares and 13,434,49915,734,000 shares available for issuance under the ESPP, respectively.
75
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Warrants
Restricted Stock UnitsAs of
In 2007 the Company began granting restrictedDecember 30, 2012, warrants exercisable, on a cashless basis, for up to approximately 18,322,000 shares of common stock units (RSUs), pursuantwere outstanding with an exercise price of $31.435. These warrants were sold 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 delivercounterparties to the holder sharesCompany’s convertible note hedge transactions in connection with the offering of the Company’s common stock. RSUs generally vest 15%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.
During the first anniversary of the grant date, 20% on the second anniversary of the grant date, 30% on the third anniversary of the grant date, and 35% on the fourth anniversary of the grant date. The Company satisfies RSU vesting through the issuance of new shares.
A summary of the Company’s RSU activity and related information fromyear ended January 1, 2008 through January 2, 2011 is as follows:
| | | | | | | | |
| | | | | Weighted Average
| |
| | Restricted
| | | Grant-Date Fair
| |
| | Stock Units(1) | | | Value per Share | |
|
Outstanding at January 1, 2008 | | | 394,500 | | | $ | 25.68 | |
Awarded | | | 1,287,504 | | | | 34.53 | |
Vested | | | (55,638 | ) | | | 25.67 | |
Cancelled | | | (47,090 | ) | | | 32.85 | |
| | | | | | | | |
Outstanding at December 28, 2008 | | | 1,579,276 | | | | 32.68 | |
Awarded | | | 1,292,473 | | | | 32.25 | |
Vested | | | (246,055 | ) | | | 32.33 | |
Cancelled | | | (116,986 | ) | | | 33.19 | |
| | | | | | | | |
Outstanding at January 3, 2010 | | | 2,508,708 | | | | 32.45 | |
Awarded | | | 1,353,583 | | | | 50.74 | |
Vested | | | (510,113 | ) | | | 32.10 | |
Cancelled | | | (242,946 | ) | | | 33.36 | |
| | | | | | | | |
Outstanding at January 2, 2011 | | | 3,109,232 | | | $ | 40.39 | |
| | | | | | | | |
| | |
(1) | | Each RSU represents the fair market value of one share of common stock. |
Based on2012, the closing price per shareremaining warrants assumed by the Company in a prior acquisition to purchase approximately 505,000 shares of the Company’s common stock of $63.34 and $30.68 on December 31, 2010 and December 31, 2009, respectively, the total pretax intrinsic value of all outstanding RSUs as of January 2, 2011 and January 3, 2010 was $125.6 million and $81.1 million, respectively.
Warrants
In conjunction with its acquisition of Solexa, Inc. on January 26, 2007, the Company assumed 4,489,686 warrants issued by Solexa prior to the acquisition. During the year ended January 2, 2011, there were 1,577,712 warrants exercised, resulting in cash proceeds to the Company of approximately $16.0 million.$5.5 million.
A summaryShare Repurchases
On April 18, 2012, the Company’s Board of all warrants outstanding asDirectors authorized a $250 million stock repurchase program to be effected via a combination of January 2,Rule 10b5-1 and discretionary share repurchase programs. During the year ended December 30, 2012, the Company repurchased approximately 1,860,000 shares for $82.5 million.
In August 2011, is as follows:
| | | | | | | | |
Number of Shares | | Exercise Price | | | Expiration Date | |
|
505,442 | | $ | 10.91 | | | | 1/19/2011 | |
18,322,320(1) | | $ | 31.44 | | | | 2/15/2014 | |
| | | | | | | | |
18,827,762 | | | | | | | | |
| | | | | | | | |
76
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
(1) | | Represents warrants sold in connection with the offering of the Company’s convertible senior notes (See note “7. Convertible Senior Notes”). |
Treasury Stock
In October 2008, the board of directors authorized a $120.0$100 million stock discretionary repurchase program. In fiscal 2008,During the year ended January 1, 2012, the Company utilized the authorized amount in its entirety and repurchased 3.1 millionapproximately 1,894,000 shares for $70.8 million under this program.
Concurrently with the program.
In July 2009, the board of directors authorized a $75.0 million stock repurchase program and concurrently terminated the $120.0 million stock repurchase program authorized in October 2008. In November 2009, upon the completionissuance of the repurchase program authorizedCompany’s 2016 Notes in July 2009, our board of directors authorized an additional $100.02011, approximately 4,891,000 shares were repurchased for $314.3 million stock repurchase program. In fiscal 2009, the.
Company repurchased a total of 6.1 million shares for $175.1 million, under both programs in open-market transactions or through privately negotiated transactions in compliance withRule 10b-18 under the Securities Exchange Act of 1934. This program expired at the end of 2009.
In July 2010, the Company’s board of directors authorized a $200$200 million stock repurchase program, with $100$100 million allocated to repurchasing Company common stock under a 10b5-1 plan over a 12twelve month period and $100$100 million allocated to repurchasing Company common stock at management’s discretion during open trading windows. In fiscal 2010,During the year ended January 1, 2012, the Company repurchased 0.8 millionapproximately 2,438,000 shares for $44.0$156.0 million under the program. The authorized in July 2010.repurchase amount had been utilized completely as of January 1, 2012.
Stockholder Rights Plan
In connection with the unsolicited tender offer by Roche (refer to note “12. Unsolicited Tender Offer”), on January 25, 2012, the Company’s Board of Directors declared a dividend of one preferred share purchase right (Right) for each outstanding share of the Company’s common stock. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock, par value $0.01 per share (Preferred Shares), at a price of $275.00 per 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 (Distribution Date). If a person or group (triggering party) acquires 15% or more of the Company’s outstanding common stock, each Right will entitle holders other than the triggering party 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 holders other than the triggering party to purchase, at the Right’s then-current exercise price, a number of common shares of the acquiring company that 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 Company’s outstanding common stock, and prior to the acquisition of 50% or more of the Company’s outstanding common stock. The Rights will expire on January 26, 2017.
On May 3, 2001, the board of directors of the Company declared a dividend of one preferred share purchase right (a Right)(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-thousandthone thousandth of a share of its Series A Junior Participating Preferred Stock at a price of $100$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
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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$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 expireexpired on May 14, 2011 unless such date is extended or the Rights are earlier redeemed or exchanged by the Company.2011.
From time to time, theThe Company is party to litigationinvolved in various lawsuits and other legal proceedingsclaims arising in the ordinary course of business, including actions with respect to intellectual property, employment, and incidentalcontractual matters. In connection with these matters, the Company assesses, on a regular basis, the probability and range of possible loss based on the developments in these matters. A liability is recorded in the financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. During the year ended December 30, 2012, the Company recorded a legal contingency loss of $3.0 million in aggregate within cost of product revenue. 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 its outstanding legal matters to determine the adequacy of the liabilities accrued and related disclosures. The amount of ultimate loss may differ from these estimates. Each matter presents its own unique circumstances, and prior litigation does not necessarily provide a reliable basis on which to predict the outcome, or range of outcomes, in any individual proceeding. Because of the uncertainties related to the conduct,occurrence, amount, and range of its business. Whileloss on any pending litigation or claim, management is currently unable to predict their ultimate outcome, and, with respect to any pending litigation or claim where no liability has been accrued, to make a meaningful estimate of the resultsreasonably possible loss or range of loss that could result from an unfavorable outcome. In the event that opposing litigants in outstanding litigations or claims ultimately succeed at trial and any subsequent appeals on their claims, any potential loss or charges in excess of any litigationestablished accruals, individually or other legal proceedings are uncertain,in the Company does not believe the ultimate resolution of any pending legal matters is likely toaggregate, could have a material adverse effect on itsthe Company’s business, financial position orcondition, results of operations.operations, and/or cash flows in the period in which the unfavorable outcome occurs or becomes probable, and potentially in future periods.
77
On November 24, 2010, Syntrix Biosystems, Inc. filed suit against the Company in the United States District Court for the Western District of Washington at Tacoma (Case No. C10-5870-BHS) alleging that the Company willfully infringed U.S. Patent No. 6,951,682 by selling its BeadChip array products, and that the Company misappropriated Syntrix’s trade secrets. Fact and expert discovery is complete in the case. In November and December 2012, the Company filed motions for summary judgment that the patent is not infringed and is invalid, and that Syntrix’s trade secrets claims are barred by various statutes of limitation. Syntrix filed a motion for summary judgment that the patent is valid. On January 30, 2013, the court granted the Company’s motion for summary judgment on Syntrix’s trade secret claims, and dismissed those claims from the case. The court denied Syntrix’s motion for summary judgment on validity, and denied the Company’s motion for summary judgment for non-infringement and invalidity. A trial is scheduled to begin on February 26, 2013.
The Company has thoroughly investigated Syntrix’s claims and believes the claims are without merit. While the Company believes there is no legal basis for its alleged liability, the Company cannot estimate the possible loss or range of possible loss as there are significant legal and factual issues to be resolved. For example, each party has filed motions seeking to exclude portions of the other party’s expert testimony and to preclude the other party from introducing certain other evidence at trial. In addition to post-trial briefing, the parties would likely engage in appellate motion practice, the result of which is also unpredictable and could significantly affect the outcome of the case.
| |
12. | Unsolicited Tender Offer |
On January 27, 2012, CKH Acquisition Corporation and Roche Holding Ltd. (together, “Roche”) commenced an unsolicited tender offer (Offer) to purchase all outstanding shares of the Company’s common stock 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 Company’s Board of Directors unanimously recommended that the Company’s stockholders reject the Offer and not tender their shares to Roche for purchase.
On March 28, 2012, Roche revised the Offer to purchase all outstanding shares of the Company’s common stock for $51.00 per share. As more fully described in the Amendment No. 11 to Solicitation/Recommendation on Schedule 14D-9 filed
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
with the SEC on April 2, 2012 in response to the revised Offer, the Company’s Board of Directors unanimously recommended that the Company’s stockholders reject the Roche offer and not tender their shares to Roche for purchase. The Offer expired, without being extended, on April 20, 2012.
During the year ended December 30, 2012, the Company recorded $23.1 million in expenses in relation to the Offer, such expenses consisting primarily of legal, advisory, proxy solicitation, and other professional services fees.
The income (loss) before income taxes summarized by region is as follows (in thousands):
| | | | | | | | | | | | |
| | Years Ended | |
| | January 2,
| | | January 3,
| | | December 28,
| |
| | 2011 | | | 2010 | | | 2008 | |
|
United States | | $ | 109,068 | | | $ | 65,081 | | | $ | 46,205 | |
Foreign | | | 76,311 | | | | 49,044 | | | | 26,482 | |
| | | | | | | | | | | | |
Total income before income taxes | | $ | 185,379 | | | $ | 114,125 | | | $ | 72,687 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| Years Ended |
| December 30, 2012 | | January 1, 2012 | | January 2, 2011 |
United States | $ | 102,296 |
| | $ | (7,100 | ) | | $ | 109,068 |
|
Foreign | 120,312 |
| | 140,145 |
| | 76,311 |
|
Total income before income taxes | $ | 222,608 |
| | $ | 133,045 |
| | $ | 185,379 |
|
The provision for income taxes consists of the following (in thousands):
| | | | | | | | | | | | |
| | Years Ended | |
| | January 2,
| | | January 3,
| | | December 28,
| |
| | 2011 | | | 2010 | | | 2008 | |
|
Current: | | | | | | | | | | | | |
Federal | | $ | 39,476 | | | $ | 43,565 | | | $ | 13,868 | |
State | | | 8,607 | | | | 2,511 | | | | 2,134 | |
Foreign | | | 6,330 | | | | 6,204 | | | | 5,042 | |
| | | | | | | | | | | | |
Total current provision | | | 54,413 | | | | 52,280 | | | | 21,044 | |
Deferred: | | | | | | | | | | | | |
Federal | | | 6,557 | | | | (14,607 | ) | | | 11,700 | |
State | | | (6,808 | ) | | | 5,184 | | | | 901 | |
Foreign | | | 6,326 | | | | (1,013 | ) | | | (374 | ) |
| | | | | | | | | | | | |
Total deferred provision (benefit) | | | 6,075 | | | | (10,436 | ) | | | 12,227 | |
| | | | | | | | | | | | |
Total tax provision | | $ | 60,488 | | | $ | 41,844 | | | $ | 33,271 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| Years Ended |
| December 30, 2012 | | January 1, 2012 | | January 2, 2011 |
Current: | |
| | |
| | |
|
Federal | $ | 57,285 |
| | $ | 43,161 |
| | $ | 39,476 |
|
State | 10,121 |
| | 3,958 |
| | 8,607 |
|
Foreign | 31,504 |
| | 24,154 |
| | 6,330 |
|
Total current provision | 98,910 |
| | 71,273 |
| | 54,413 |
|
Deferred: | |
| | |
| | |
|
Federal | (7,724 | ) | | (22,738 | ) | | 6,557 |
|
State | (7,708 | ) | | (8,050 | ) | | (6,808 | ) |
Foreign | (12,124 | ) | | 5,932 |
| | 6,326 |
|
Total deferred (benefit) provision | (27,556 | ) | | (24,856 | ) | | 6,075 |
|
Total tax provision | $ | 71,354 |
| | $ | 46,417 |
| | $ | 60,488 |
|
The provision for income taxes reconciles to the amount computed by applying the federal statutory rate to income before taxes as follows (in thousands):
| | | | | | | | | | | | |
| | Years Ended | |
| | January 2,
| | | January 3,
| | | December 28,
| |
| | 2011 | | | 2010 | | | 2008 | |
|
Tax at federal statutory rate | | $ | 64,881 | | | $ | 39,944 | | | $ | 25,440 | |
State, net of federal benefit | | | 6,231 | | | | 4,275 | | | | 3,461 | |
Research and other credits | | | (5,859 | ) | | | (4,050 | ) | | | (4,060 | ) |
Acquired in-process research & development | | | 517 | | | | 4,386 | | | | 9,508 | |
Change in valuation allowance | | | (9,497 | ) | | | (1,967 | ) | | | (6,892 | ) |
Permanent differences | | | 1,397 | | | | 2,093 | | | | 1,449 | |
Change in fair value of contingent consideration | | | (3,632 | ) | | | — | | | | — | |
Impact of foreign operations | | | 7,597 | | | | (5,400 | ) | | | 4,124 | |
Other | | | (1,147 | ) | | | 2,563 | | | | 241 | |
| | | | | | | | | | | | |
Total tax provision | | $ | 60,488 | | | $ | 41,844 | | | $ | 33,271 | |
| | | | | | | | | | | | |
78
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | | | | | |
| Years Ended |
| December 30, 2012 | | January 1, 2012 | | January 2, 2011 |
Tax at federal statutory rate | $ | 77,913 |
| | $ | 46,566 |
| | $ | 64,881 |
|
State, net of federal benefit | 4,056 |
| | (49 | ) | | 6,231 |
|
Research and other credits | (2,766 | ) | | (6,774 | ) | | (5,859 | ) |
Acquired in-process research & development | 137 |
| | 1,989 |
| | 517 |
|
Change in valuation allowance | (37 | ) | | (688 | ) | | (9,497 | ) |
Permanent differences | 2,380 |
| | 1,668 |
| | 1,397 |
|
Change in fair value of contingent consideration | — |
| | (1,311 | ) | | (3,632 | ) |
Impact of foreign operations | (10,644 | ) | | 5,579 |
| | 7,597 |
|
Other | 315 |
| | (563 | ) | | (1,147 | ) |
Total tax provision | $ | 71,354 |
| | $ | 46,417 |
| | $ | 60,488 |
|
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
| | | | | | | | |
| | January 2,
| | | January 3,
| |
| | 2011 | | | 2010 | |
|
Deferred tax assets: | | | | | | | | |
Net operating losses | | $ | 11,898 | | | $ | 15,869 | |
Tax credits | | | 18,329 | | | | 18,681 | |
Other accruals and reserves | | | 22,134 | | | | 17,813 | |
Stock compensation | | | 23,829 | | | | 25,442 | |
Impairment of cost-method investment | | | 5,058 | | | | — | |
Other amortization | | | 4,893 | | | | 4,216 | |
Other | | | 4,643 | | | | 14,980 | |
| | | | | | | | |
Total deferred tax assets | | | 90,784 | | | | 97,001 | |
Valuation allowance on deferred tax assets | | | (4,986 | ) | | | (14,852 | ) |
| | | | | | | | |
Net deferred tax assets | | | 85,798 | | | | 82,149 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Purchased intangible amortization | | | (22,605 | ) | | | (5,043 | ) |
Accrued litigation settlements | | | (3,276 | ) | | | (3,810 | ) |
Convertible debt | | | (3,191 | ) | | | (3,901 | ) |
Other | | | (3,861 | ) | | | (2,810 | ) |
| | | | | | | | |
Total deferred tax liabilities | | | (32,933 | ) | | | (15,564 | ) |
| | | | | | | | |
Net deferred tax assets | | $ | 52,865 | | | $ | 66,585 | |
| | | | | | | | |
|
| | | | | | | |
| December 30, 2012 | | January 1, 2012 |
Deferred tax assets: | |
| | |
|
Net operating losses | $ | 2,564 |
| | $ | 4,981 |
|
Tax credits | 16,447 |
| | 16,647 |
|
Other accruals and reserves | 47,306 |
| | 22,411 |
|
Stock compensation | 39,175 |
| | 33,811 |
|
Inventory adjustments | 8,977 |
| | 16,469 |
|
Impairment of cost-method investment | 1,406 |
| | 4,972 |
|
Other amortization | 5,195 |
| | 4,521 |
|
Other | 13,469 |
| | 8,861 |
|
Total gross deferred tax assets | 134,539 |
| | 112,673 |
|
Valuation allowance on deferred tax assets | (1,756 | ) | | (1,799 | ) |
Total deferred tax assets | 132,783 |
| | 110,874 |
|
Deferred tax liabilities: | |
| | |
|
Purchased intangible amortization | (20,116 | ) | | (19,760 | ) |
Convertible debt | (38,910 | ) | | (49,404 | ) |
Property and equipment | (10,867 | ) | | (4,369 | ) |
Other | (6,682 | ) | | (7,953 | ) |
Total deferred tax liabilities | (76,575 | ) | | (81,486 | ) |
Net deferred tax assets | $ | 56,208 |
| | $ | 29,388 |
|
A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on ajurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. During 2010, the valuation allowance decreased by $9.9 million primarily due to increased profitability of certain foreign subsidiaries related to the corporate restructuring implemented during the fourth quarter. Based on the available evidence as of January 2, 2011,December 30, 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 $1.9$1.8 million and $3.1 million against certain U.S. and foreign net deferred tax assets, respectively.assets.
As of January 2, 2011,December 30, 2012, the Company had net operating loss carryforwards for federal and state tax purposes of $37.5$16.8 million and $161.7$117.8 million, respectively, which will begin to expire in 2020 and 2017, respectively, unless utilized prior.2015, respectively. In addition, the Company also had U.S. federal and state research and development tax credit carryforwards of $13.7$39.7 million and $28.7 million, respectively,, which will begin to expire in 2027 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 2, 2011December 30, 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
79
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
have been realized, the Company follows thewith-and-without approach excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to the Company. During 2010,the year ended December 30, 2012, the Company realized $42.4$17.0 million of such excess tax benefits, and accordingly recorded a corresponding credit to additional paid in capital. As of January 2, 2011,December 30, 2012, the Company has $16.7$9.8 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 2, 2011,December 30, 2012, these tax holidays and incentives resulted in an approximate $2.3$10.2 million decrease to the provision for income taxes and an increase to net income per diluted share of $0.02.$0.08.
ResidualIt 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 $66.0$185.6 million of undistributed earnings of foreign subsidiaries as of January 2, 2011, sinceDecember 30, 2012. In the earnings are consideredevent the Company was required to repatriate funds from outside of the United States, such repatriation would be indefinitely invested in the operations of such subsidiaries.
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 2,
| | | January 3,
| | | December 28,
| |
| | 2011 | | | 2010 | | | 2008 | |
|
Balance at beginning of year | | $ | 11,760 | | | $ | 9,402 | | | $ | 7,000 | |
Increases related to prior year tax positions | | | 5,066 | | | | — | | | | — | |
Increases related to current year tax positions | | | 5,903 | | | | 2,358 | | | | 2,402 | |
| | | | | | | | | | | | |
Balance at end of year | | $ | 22,729 | | | $ | 11,760 | | | $ | 9,402 | |
| | | | | | | | | | | | |
As |
| | | | | | | | | | | |
| December 30, 2012 | | January 1, 2012 | | January 2, 2011 |
Balance at beginning of year | $ | 28,396 |
| | $ | 22,729 |
| | $ | 11,760 |
|
Increases related to prior year tax positions | 2,573 |
| | 875 |
| | 5,066 |
|
Decreases related to prior year tax positions | (69 | ) | | (382 | ) | | — |
|
Increases related to current year tax positions | 6,685 |
| | 5,174 |
| | 5,903 |
|
Balance at end of year | $ | 37,585 |
| | $ | 28,396 |
| | $ | 22,729 |
|
Included in the balance of January 2, 2011, $18.3 million of the Company’s uncertain tax positions as of December 30, 2012, and January 1, 2012 are $29.9 million and $23.4 million, respectively, of net unrecognized tax benefits that, if recognized, would reduce the Company’s annual effective income tax rate if recognized.in future periods.
The Company does not expect its uncertain tax positions to change significantly over the next 12 months.months. Any interest and penalties related to uncertain tax positions will beare reflected in the provision for income tax expense. Astaxes. The Company recognized expenses of January 2, 2011, minimal interest was accrued$0.8 million and $1.1 million related to potential interest and penalties on uncertain tax positions during the Company’syears ended December 30, 2012 and January 1, 2012, respectively. 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 $2.1 million and $1.2 million as of December 30, 2012 and January 1, 2012, respectively. Tax years 19951997 to 20102012 remain subject to future examination by the major tax jurisdictions in which the Company is subject to tax.
| |
12. 14. | Employee Benefit Plans |
Retirement Plan
The Company has a 401(k) savings plan covering substantially all of its employees.employees in the United States. Company contributions to the plan are discretionary. During the years ended December 30, 2012, January 1, 2012, and January 2, 2011 January 3, 2010, and December 28, 2008,, the Company made matching contributions of $4.2$5.5 million $3.3, $5.3 million, and $2.6$4.2 million, respectively.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
80
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
independent investment funds. On a discretionary basis, the Company may also make employer contributions to participant accounts in any amount determined by the Company. The vesting schedules of employer contributions are at the sole discretion of the Compensation Committee. However, all employer contributions shall become 100% vested upon the occurrence of the participant’s disability, death or retirement or a change in control of the Company. The benefits under this plan are unsecured. Participants are generally eligible to receive payment of their vested benefit at the end of their elected deferral period or after termination of their employment with the Company for any reason or at a later date to comply with the restrictions of Section 409A. As of January 2, 2011, December 30, 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 December 30, 2012 and January 2, 2011 and January 3, 2010,1, 2012, the assets of the trust were $6.1$13.6 million and $4.0$10.8 million, respectively, and liabilities of the Company were $5.3$12.1 million and $4.0$9.0 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.income, and changes in the values of the deferred compensation liabilities are recorded in cost of sales or operating expenses.
| |
13. 15. | Segment Information, Geographic Data, and Significant Customers |
The Company is organized in two business segments, the operating segments: Life Sciences Business Unit and Diagnostics Business Unit. TheDiagnostics. Life Sciences Business Unitoperating segment includes all products and services that are primarily related to the research market, namely the product lines based on the Company’s sequencing, BeadArray, VeraCode, and real-time PCR technologies. The Diagnostics Business Unitoperating segment focuses on the emerging opportunity in molecular diagnostics. During all periods presented, the CompanyDiagnostics operating segment had limited activity related to the Diagnostics Business Unit.activity. Accordingly, the Company’s operating results for both units were reported on an aggregate basis as one reportable segment during these periods.segment. The Company will begin reporting in two segments once revenues, operating profit or loss, or assets of the Diagnostics Business Unit exceed operating segment exceeds 10% of the consolidated amounts.
The Company had revenue in the following regions for the years ended December 30, 2012, January 1, 2012, and January 2, 2011 January 3, 2010, and December 28, 2008 (in thousands):
| | | | | | | | | | | | |
| | Years Ended | |
| | January 2,
| | | January 3,
| | | December 28,
| |
| | 2011 | | | 2010 | | | 2008 | |
|
United States | | $ | 498,981 | | | $ | 347,195 | | | $ | 280,064 | |
United Kingdom | | | 60,521 | | | | 55,854 | | | | 67,973 | |
Other European countries | | | 163,062 | | | | 140,931 | | | | 127,397 | |
Asia-Pacific | | | 143,441 | | | | 96,396 | | | | 72,740 | |
Other markets | | | 36,736 | | | | 25,948 | | | | 25,051 | |
| | | | | | | | | | | | |
Total | | $ | 902,741 | | | $ | 666,324 | | | $ | 573,225 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| Years Ended |
| December 30, 2012 | | January 1, 2012 | | January 2, 2011 |
United States | $ | 568,443 |
| | $ | 528,723 |
| | $ | 498,981 |
|
United Kingdom | 81,678 |
| | 67,578 |
| | 60,521 |
|
Other European countries | 209,726 |
| | 210,393 |
| | 163,062 |
|
Asia-Pacific | 232,498 |
| | 197,005 |
| | 143,441 |
|
Other markets | 56,171 |
| | 51,836 |
| | 36,736 |
|
Total | $ | 1,148,516 |
| | $ | 1,055,535 |
| | $ | 902,741 |
|
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 December 30, 2012, January 1, 2012, and January 2, 2011 January 3, 2010, and December 28, 2008,, consumable sales represented 56%64%, 59%56%, and 58%56%, respectively, of total revenues and instrument sales comprised 36%27%, 34%35%, and 32%36%, 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, and in vitro fertilization clinics. The
81
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
agrigenomics, and consumer genomics companies. The Company had no customers that provided more than 10% of total revenue in the years ended December 30, 2012, January 1, 2012, and January 2, 2011 January 3, 2010, and December 28, 2008..
Net long-lived assets exclude goodwill and other intangible assets since they are not allocated on a geographic basis. The Company had net long-lived assets consisting of property and equipment in the following regions as of December 30, 2012 and January 2, 2011 and January 3, 20101, 2012 (in thousands):
| | | | | | | | |
| | January 2,
| | | January 3,
| |
| | 2011 | | | 2010 | |
|
United States | | $ | 75,206 | | | $ | 75,095 | |
United Kingdom | | | 26,578 | | | | 27,862 | |
Other European countries | | | 1,709 | | | | 864 | |
Singapore | | | 14,739 | | | | 12,599 | |
Other Asia-Pacific countries | | | 11,642 | | | | 768 | |
| | | | | | | | |
Total | | $ | 129,874 | | | $ | 117,188 | |
| | | | | | | | |
|
| | | | | | | |
| December 30, 2012 | | January 1, 2012 |
United States | $ | 126,749 |
| | $ | 94,624 |
|
United Kingdom | 21,740 |
| | 22,642 |
|
Singapore | 12,504 |
| | 14,673 |
|
Other countries | 5,174 |
| | 11,544 |
|
Total | $ | 166,167 |
| | $ | 143,483 |
|
| |
14. 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 20102012 and 20092011 ended December 30, 2012 and January 2, 2011 and January 3, 2010, respectively1, 2012 were 13 weeks except for the fourth quarter of fiscal year 2009, which was 14 weeks. Summarized quarterly data for fiscal years 20102012 and 20092011 are as follows (in thousands except per share data):
| | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
|
2010: | | | | | | | | | | | | | | | | |
Total revenue | | $ | 192,131 | | | $ | 212,003 | | | $ | 237,309 | | | $ | 261,298 | |
Gross profit | | | 132,178 | | | | 146,091 | | | | 157,145 | | | | 166,126 | |
Net income | | | 21,208 | | | | 29,796 | | | | 35,447 | | | | 38,440 | |
Net income per share, basic | | | 0.18 | | | | 0.24 | | | | 0.28 | | | | 0.31 | |
Net income per share, diluted | | | 0.16 | | | | 0.21 | | | | 0.24 | | | | 0.25 | |
2009: | | | | | | | | | | | | | | | | |
Total revenue | | $ | 165,757 | | | $ | 161,643 | | | $ | 158,360 | | | $ | 180,564 | |
Gross profit | | | 110,065 | | | | 111,158 | | | | 107,126 | | | | 125,526 | |
Net income | | | 18,811 | | | | 24,688 | | | | 17,077 | | | | 11,705 | |
Net income per share, basic | | | 0.15 | | | | 0.20 | | | | 0.14 | | | | 0.10 | |
Net income per share, diluted | | | 0.14 | | | | 0.18 | | | | 0.12 | | | | 0.09 | |
|
| | | | | | | | | | | | | | | |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
2012: | |
| | |
| | |
| | |
|
Total revenue | $ | 272,770 |
| | $ | 280,607 |
| | $ | 285,874 |
| | $ | 309,265 |
|
Gross profit | 181,011 |
| | 192,997 |
| | 195,873 |
| | 203,647 |
|
Net income | 26,202 |
| | 23,401 |
| | 29,748 |
| | 71,903 |
|
Net income per share, basic | 0.21 |
| | 0.19 |
| | 0.24 |
| | 0.58 |
|
Net income per share, diluted | 0.20 |
| | 0.18 |
| | 0.22 |
| | 0.53 |
|
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 |
|
| |
15. 17. | Subsequent EventsEvent |
On January 10, 2011,6, 2013, the Company acquired Epicentre Biotechnologies,entered into a definitive agreement to acquire Verinata Health, Inc. (Verinata), a leading provider of nucleic acid sample preparation reagents and specialty enzymes used in sequencing and microarray applications. Total consideration exchangednon-invasive tests for the acquisition includes $60early identification of fetal chromosomal abnormalities, for consideration of $350 million in cash $15 million in stock that is subject to forfeiture if certain non-revenue based milestones are not met, and up to $15$100 million in contingent considerationmilestone payments based onthrough 2015. In connection with the achievement of certain revenue-based milestones by January 10, 2013. Due to the limited time since theintended acquisition, date, the Company has not completed the initial purchase accountingalso agreed to provide bridge financing to Verinata for this acquisition, including the assessment of fair values of consideration exchanged, assets acquired, and liabilities assumed.
82
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the period from January 3, 2011up to February 28, 2011, certain noteholders notified the Company of their election to convert an aggregate of $251.1 million principal amount of our convertible senior notes$45 million in exchange for the repaymentissuance of subordinated convertible promissory notes from Verinata. Any subordinated notes outstanding as of the principal amount and a certain number of sharesconsummation of the Company’s common stock representingacquisition, net of Verinata’s cash on hand, will reduce the “in the money” amount of the notes. The number of shares of common stocktotal cash payments to be delivered upon conversion is based on the Company’s volume weighted average price over atwenty-day observation period that begins following the date of the election to convert. In connection with the conversions,made by the Company expects to exercise its right under the convertible note hedgeat closing.
ITEM 9. Changes In and Disagreements with its hedging counterparties to repurchase the same amountAccountants on Accounting and Financial Disclosure.
None.
Upon conversion, the Company will record a gain or loss for the difference between the fair value of the notes to be extinguished and its corresponding carrying value, net of unamortized debt issuance costs. The fair value of the notes to be extinguished depends on the Company’s current incremental borrowing rate. The net carrying value of the notes has an implicit interest rate of 8.27%. As the interest rate applicable at the time of conversion is likely to be lower than the implied interest rate of the notes, the Company will likely record a loss in its consolidated statement of income during the first quarter of 2011.
83
| |
Item 9.ITEM 9A. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
| |
Item 9A. | Controls and Procedures. |
We design our internal controls to provide reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported in conformity with U.S. generally accepted accounting principles. We also maintain internal controls and procedures to ensure that we comply with applicable laws and our established financial policies.
We have carried out anBased 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 operation ofCFO 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 January 2, 2011. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of January 2, 2011, our disclosure controls and procedures 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 2012, 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 20102012 and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The evaluation did not identify any such change.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRules 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of January 2, 2011.December 30, 2012. The effectiveness of our internal control over financial reporting as of January 2, 2011December 30, 2012 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
84
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Illumina, Inc.
We have audited Illumina, Inc.’s internal control over financial reporting as of January 2, 2011,December 30, 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 January 2, 2011,December 30, 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 30, 2012 and January 2, 2011 and January 3, 2010,1, 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended January 2, 2011December 30, 2012 of Illumina, Inc. and our report dated February 28, 201115, 2013 expressed an unqualified opinion thereon.
/s/ EErnstRNST & YoungYOUNG LLP
San Diego, California
February 28, 201115, 2013
85
| |
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,” “Information About Directors,” “Director Compensation”Compensation,” and “Board of Directors and Corporate Governance” to be contained in our definitive Proxy Statement with respect to our 20112013 Annual Meeting of Stockholders to be filed with the SEC no later than April 9, 2011.29, 2013.
(b) Identification of Executive Officers. Information concerning our executive officers is incorporated by reference from the section entitled “Executive Officers” to be contained in our definitive Proxy Statement with respect to our 20112013 Annual Meeting of Stockholders to be filed with the SEC no later than April 9, 2011.29, 2013.
(c) Compliance with Section 16(a) of the Exchange Act. Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” to be contained in our definitive Proxy Statement with respect to our 20112013 Annual Meeting of Stockholders to be filed with the SEC no later than April 9, 2011.29, 2013.
(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 20112013 Annual Meeting of Stockholders to be filed with the SEC no later than April 9, 2010.29, 2013.
Code of Ethics
We have adopted a code of ethics for our directors, officers, and employees, which is available on our website at www.illumina.com in the Corporate Governance portal of the Investor Relations section under “Company.” A copy of the Code of Ethics is available in print free of charge to any stockholder who requests a copy. Interested parties may address a written request for a printed copy of the Code of Ethics to: Corporate Secretary, Illumina, Inc., 9885 Towne Centre Dr.,5200 Illumina Way, San Diego, California 92121.92122. 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”Compensation,” and “Executive Compensation” to be contained in our definitive Proxy Statement with respect to our 20112013 Annual Meeting of Stockholders to be filed with the SEC no later than April 9, 2011.29, 2013.
| |
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 “Stock Ownership of Principal Stockholders and Management,” “Executive Compensation”Compensation,” and “Equity Compensation Plan Information” to be contained in our definitive
86
Proxy Statement with respect to our 20112013 Annual Meeting of Stockholders to be filed with the SEC no later than April 9, 2011.29, 2013.
| |
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”Compensation,” and “Certain Relationships and Related Party Transactions” to be contained in our definitive Proxy Statement with respect to our 20112013 Annual Meeting of Stockholders to be filed with the SEC no later than April 9, 2011.29, 2013.
| |
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 Accountants”Accounting Firm” and “Independent Registered Public Accountants” to be contained in our definitive Proxy Statement with respect to our 20112013 Annual Meeting of Stockholders to be filed with the SEC no later than April 9, 2011.29, 2013.
PART IV
| |
ItemITEM 15. | Exhibits, Financial Statement Schedules. |
1. Financial Statements: See “Index to Consolidated Financial Statements” in Part II, Item 8 of thisForm 10-K.
2. Financial Statement Schedule: See “Schedule II — Valuation and Qualifying Accounts and Reserves” in this section of thisForm 10-K.
3. Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of thisForm 10-K.
87
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| | | | | | | | | | | | | | | | |
| | Balance at
| | Additions Charged
| | | | |
| | Beginning of
| | to Expense/
| | | | Balance at End of
|
| | Period | | Revenue(1) | | Deductions(2) | | Period |
| | (In thousands) |
|
Year ended January 2, 2011 | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 1,398 | | | | 341 | | | | (53 | ) | | $ | 1,686 | |
Reserve for inventory | | | 10,597 | | | | 9,559 | | | | (7,883 | ) | | | 12,273 | |
Year ended January 3, 2010 | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 1,138 | | | | 828 | | | | (568 | ) | | $ | 1,398 | |
Reserve for inventory | | | 6,431 | | | | 8,403 | | | | (4,237 | ) | | | 10,597 | |
Year ended December 28, 2008 | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 540 | | | | 893 | | | | (295 | ) | | $ | 1,138 | |
Reserve for inventory | | | 2,089 | | | | 7,154 | | | | (2,812 | ) | | | 6,431 | |
|
| | | | | | | | | | | | | |
| Balance at Beginning of Period | | Additions Charged to Expense/ Revenue(1) | | Deductions(2) | | Balance at End of Period |
| (In thousands) |
Year ended December 30, 2012 | | | | | | | |
Allowance for doubtful accounts | $ | 3,997 |
| | 2,191 |
| | (1,908 | ) | | $ | 4,280 |
|
Year ended January 1, 2012 | |
| | |
| | |
| | |
|
Allowance for doubtful accounts | $ | 1,686 |
| | 4,201 |
| | (1,890 | ) | | $ | 3,997 |
|
Year ended January 2, 2011 | |
| | |
| | |
| | |
|
Allowance for doubtful accounts | $ | 1,398 |
| | 341 |
| | (53 | ) | | $ | 1,686 |
|
| | |
(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.expense. |
| |
(2) | | Deductions for allowance for doubtful accounts and reserve for inventory are for accounts receivable written off and disposal of obsolete inventory.off. |
88
INDEX TO EXHIBITS |
| | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit | | | | | | | | | | Filing | | Filed |
Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Date | | Herewith |
2.1 | | Agreement and Plan of Merger by and among Illumina, Inc., TP Corporation, Verinata Health, Inc. and Shareholder Representative Services LLC (as the Stockholder Representative), dated as of January 6, 2013 | | | | | | | | | | X |
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 | | 10-K | | 000-30361 | | 10.4 |
| | 2/24/2012 | | |
+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 | | 10-K | | 000-30361 | | 10.6 |
| | 2/24/2012 | | |
+10.7 | | Form of Stock Option Agreement for Non-Employee Directors under 2005 Stock and Incentive Plan | | 10-K | | 000-30361 | | 10.7 |
| | 2/24/2012 | | |
+10.8 | | Form of Restricted Stock Unit Agreement for Employees under 2005 Stock and Incentive Plan | | 10-K | | 000-30361 | | 10.8 |
| | 2/24/2012 | | |
INDEX TO EXHIBITS — (Continued) |
| | | | | | | | | | | | | |
+10.9 | | Form of Stock Option Agreement for Employees under 2005 Stock and Incentive Plan | | 10-K | | 000-30361 | | 10.9 |
| | 2/24/2012 | | |
+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 | | |
INDEX TO EXHIBITS — (Continued) |
| | | | | | | | | | | | | |
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 | | |
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 | | Amended and Restated Lease Agreement, dated March 27, 2012, between ARE-SD Region No. 32, LLC and Illumina | | 10-Q | | 000-30361 | | 10.1 |
| | 5/3/2012 | | |
+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 |
INDEX TO EXHIBITS
| | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit
| | | | | | | | | | Filing
| | Filed
|
Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Date | | Herewith |
|
| 3 | .1 | | Amended and Restated Certificate of Incorporation | | 8-K | | 000-30361 | | | 3 | .1 | | 09/23/08 | | |
| 3 | .2 | | Amended and Restated Bylaws | | 8-K | | 000-30361 | | | 3 | .2 | | 04/27/10 | | |
| 3 | .3 | | Certificate of Designation for Series A Junior Participating Preferred Stock (included as Exhibit A to exhibit 4.3) | | 8-A | | 000-30361 | | | 4 | .3 | | 05/14/01 | | |
| 4 | .1 | | Specimen Common Stock Certificate | | S-1/A | | 333-33922 | | | 4 | .1 | | 07/03/00 | | |
| 4 | .2 | | Rights Agreement, dated as of May 3, 2001, between Illumina and Equiserve Trust Company, N.A. | | 8-A | | 000-30361 | | | 4 | .3 | | 05/14/01 | | |
| 4 | .3 | | Indenture related to the 0.625% Convertible Senior Notes due 2014, dated as of February 16, 2007, between Illumina and The Bank of New York, as trustee | | 8-K | | 000-30361 | | | 4 | .1 | | 02/16/07 | | |
| +10 | .1 | | Form of Indemnification Agreement between Illumina and each of its directors and officers | | S-1/A | | 333-33922 | | | 10 | .1 | | 07/03/00 | | |
| +10 | .2 | | 1998 Incentive Stock Plan | | S-1/A | | 333-33922 | | | 10 | .2 | | 07/03/00 | | |
| +10 | .3 | | 2000 Employee Stock Purchase Plan, as amended and restated through October 28, 2009 | | 10-K | | 000-30361 | | | 10 | .3 | | 02/26/10 | | |
| +10 | .4 | | 2000 Stock Plan, as amended and restated through March 21, 2002 | | 10-Q | | 000-30361 | | | 10 | .22 | | 05/13/02 | | |
| +10 | .5 | | 2005 Stock and Incentive Plan, as amended and restated through October 28, 2009 | | 10-K | | 000-30361 | | | 10 | .5 | | 02/26/10 | | |
| +10 | .6 | | Form of Restricted Stock Unit Agreement for Non-Employee Directors under 2005 Stock and Incentive Plan | | 10-K | | 000-30361 | | | 10 | .35 | | 02/26/09 | | |
| +10 | .7 | | New Hire Stock and Incentive Plan, as amended and restated through October 28, 2009 | | 10-K | | 000-30361 | | | 10 | .7 | | 02/26/10 | | |
| 10 | .8 | | License Agreement, effective as of May 6, 1998, between Tufts University and Illumina | | 10-Q | | 000-30361 | | | 10 | .5 | | 05/03/07 | | |
| +10 | .9 | | The Solexa Unapproved Company Share Option Plan | | 8-K | | 000-30361 | | | 99 | .3 | | 11/26/07 | | |
| +10 | .10 | | The Solexa Share Option Plan for Consultants | | 8-K | | 000-30361 | | | 99 | .4 | | 11/26/07 | | |
| +10 | .11 | | Solexa Limited Enterprise Management Incentive Plan | | 8-K | | 000-30361 | | | 99 | .5 | | 11/26/07 | | |
| +10 | .12 | | Amended and Restated Solexa 2005 Equity Incentive Plan | | 10-K | | 000-30361 | | | 10 | .25 | | 02/26/09 | | |
| +10 | .13 | | Amended and Restated Solexa 1992 Stock Option Plan | | 10-K | | 000-30361 | | | 10 | .26 | | 02/26/09 | | |
| 10 | .14 | | License Agreement, dated June 24, 2002, between Dade Behring Marburg GmbH and Illumina (with certain confidential portions omitted) | | S-3/A | | 333-111496 | | | 10 | .23 | | 03/02/04 | | |
| 10 | .15 | | Non-exclusive License Agreement, dated January 24, 2002, between Amersham Biosciences Corp. and Illumina (with certain confidential portions omitted) | | S-3/A | | 333-111496 | | | 10 | .24 | | 03/02/04 | | |
89
| | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit
| | | | | | | | | | Filing
| | Filed
|
Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Date | | Herewith |
|
| 10 | .16 | | Amended and Restated Lease between BMR-9885 Towne Centre Drive LLC and Illumina for the 9885 Towne Centre Drive property, dated January 26, 2007 | | 10-Q | | 000-30361 | | | 10 | .41 | | 05/03/07 | | |
| 10 | .17 | | Settlement and Cross License Agreement dated August 18, 2004 between Applera Corporation and Illumina (with certain confidential portions omitted) | | 10-Q | | 000-30361 | | | 10 | .27 | | 11/12/04 | | |
| 10 | .18 | | Collaboration Agreement, dated December 17, 2004, between Invitrogen Corporation and Illumina (with certain confidential portions omitted) | | 10-K | | 000-30361 | | | 10 | .28 | | 03/08/05 | | |
| +10 | .19 | | Offer letter for Christian O. Henry dated April 26, 2005 | | 10-Q | | 000-30361 | | | 10 | .33 | | 08/08/05 | | |
| 10 | .20 | | Joint Development and Licensing Agreement, dated May 15, 2006, between deCODE genetics, ehf. and Illumina (with certain confidential portions omitted) | | 10-Q | | 000-30361 | | | 10 | .32 | | 08/02/06 | | |
| +10 | .21 | | Amended and Restated Change in Control Severance Agreement between Illumina and Jay T Flatley, dated October 22, 2008 | | 10-K | | 000-30361 | | | 10 | .33 | | 02/26/09 | | |
| +10 | .22 | | Form of Amended and Restated Change in Control Severance Agreement between Illumina and its executive officers | | 10-K | | 000-30361 | | | 10 | .34 | | 02/26/09 | | |
| +10 | .23 | | Form of Restricted Stock Unit Agreement for Non-Employee Directors under Illumina’s 2005 Stock and Incentive Plan | | 10-K | | 000-30361 | | | 10 | .35 | | 02/26/09 | | |
| 10 | .24 | | Lease between BMR-9885 Towne Centre Drive LLC and Illumina for the 9865 Towne Centre Drive property, dated January 26, 2007 | | 10-Q | | 000-30361 | | | 10 | .42 | | 05/03/07 | | |
| 10 | .25 | | Settlement and Release Agreement between Affymetrix, Inc. and Illumina, dated January 9, 2008 | | 10-K | | 000-30361 | | | 10 | .44 | | 02/26/08 | | |
| 10 | .26 | | Confirmation of Convertible Bond Hedge Transaction, dated February 12, 2007, by and between Illumina and Goldman, Sachs & Co. | | 8-K | | 000-30361 | | | 10 | .1 | | 02/16/07 | | |
| 10 | .27 | | Confirmation of Convertible Bond Hedge Transaction, dated February 12, 2007, by and between Illumina and Deutsche Bank AG London | | 8-K | | 000-30361 | | | 10 | .2 | | 02/16/07 | | |
| 10 | .28 | | Confirmation Issuer Warrant Transaction, dated February 12, 2007, by and between Illumina and Goldman, Sachs & Co. | | 8-K | | 000-30361 | | | 10 | .3 | | 02/16/07 | | |
| 10 | .29 | | Confirmation Issuer Warrant Transaction, dated February 12, 2007, by and between Illumina and Deutsche Bank AG London | | 8-K | | 000-30361 | | | 10 | .4 | | 02/16/07 | | |
| 10 | .30 | | Amendment to the Confirmation of Issuer Warrant Transaction, dated February 13, 2007, by and between Illumina and Goldman, Sachs & Co. | | 8-K | | 000-30361 | | | 10 | .5 | | 02/16/07 | | |
90
| | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit
| | | | | | | | | | Filing
| | Filed
|
Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Date | | Herewith |
|
| 10 | .31 | | Amendment to the Confirmation of Issuer Warrant Transaction, dated February 13, 2007, by and between Illumina and Deutsche Bank AG London | | 8-K | | 000-30361 | | | 10 | .6 | | 02/16/07 | | |
| +10 | .32 | | Indemnification Agreement between Illumina and Gregory F. Heath | | 10-Q | | 000-30361 | | | 10 | .55 | | 07/25/08 | | |
| +10 | .33 | | Indemnification Agreement between Illumina and Joel McComb | | 10-Q | | 000-30361 | | | 10 | .56 | | 07/25/08 | | |
| +10 | .34 | | Severance and Release Agreement between Illumina and Joel McComb | | 10-K | | 000-30361 | | | 10 | .34 | | 02/26/10 | | |
| 10 | .35 | | Lease Agreement, dated December 30, 2010, between ARE-SD Region No. 32, LLC and Illumina | | | | | | | | | | | | X |
| 21 | .1 | | Subsidiaries of Illumina | | | | | | | | | | | | X |
| 23 | .1 | | Consent of Independent Registered Public Accounting Firm | | | | | | | | | | | | X |
| 24 | .1 | | Power of Attorney (included on the signature page) | | | | | | | | | | | | X |
| 31 | .1 | | Certification of Jay T. Flatley pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | | | X |
| 31 | .2 | | Certification of Christian O. Henry pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | | | X |
| 32 | .1 | | Certification of Jay T. Flatley pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | | | X |
| 32 | .2 | | Certification of Christian O. Henry pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | | | X |
| | | | | | |
| 101 | .INS | | XBRL Instance Document | | X |
| 101 | .SCH | | XBRL Taxonomy Extension Schema | | X |
| 101 | .CAL | | XBRL Taxonomy Extension Calculation Linkbase | | X |
| 101 | .LAB | | XBRL Taxonomy Extension Label Linkbase | | X |
| 101 | .PRE | | XBRL Taxonomy Extension Presentation Linkbase | | X |
| 101 | .DEF | | XBRL Taxonomy Extension Definition Linkbase | | X |
| | |
+ | | Management contract or corporate plan or arrangement |
Supplemental Information
No Annual Report to stockholders or proxy materials has been sent to stockholders as of the date of this report. The Annual Report to stockholders and proxy material will be furnished to our stockholders subsequent to the filing of this Annual Report onForm 10-K and we will furnish such material to the SEC at that time.
91
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 28, 2011.15, 2013.
|
| | |
| ILLUMINA, INC. |
| | |
| By | /s/ JAY T. FLATLEY |
| | Jay T. Flatley President and Chief Executive Officer |
Jay T. Flatley
President and Chief Executive Officer
February 15, 2013
February 28, 2011
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Jay T. Flatley and Christian O. Henry,Marc A. Stapley, and each or any one of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his or her 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, his, or hisher substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report onForm 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
/s/ JAY T. FLATLEY | | President, Chief Executive Officer and Director (Principal Executive Officer) | | February 15, 2013 |
Jay T. Flatley | | | | |
| | | | |
/s/ MJay T. FlatleyARC A. STAPLEY
Jay T. Flatley | | President, Chief Executive Officer and Director (Principal Executive Officer) | | February 28, 2011 |
| | | | |
/s/ Christian O. Henry
Christian O. Henry | | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | | February 28, 201115, 2013 |
| | | | |
/s/ William H. Rastetter
William H. Rastetter | | Chairman of the Board of Directors | | February 28, 2011 |
| | | | |
/s/ Marc A. Blaine Bowman
A. Blaine Bowman | | Director | | February 28, 2011 |
| | | | |
/s/ Daniel M. Bradbury
Daniel M. Bradbury | | Director | | February 28, 2011 |
| | | | |
/s/ Karin Eastham
Karin Eastham | | Director | | February 28, 2011 |
92
| | Stapley | | | | |
| | | | |
/s/ MPaul GrintICHEL BOUCHARD
Paul Grint | | DirectorVice President and Chief Accounting Officer (Principal Accounting Officer) | | February 28, 201115, 2013 |
Michel Bouchard | | | | |
| | | | |
/s/ WILLIAM H. RASTETTER
Gerald Möller | | DirectorChairman of the Board of Directors | | February 28, 201115, 2013 |
William H. Rastetter | | | | |
| | | | |
/s/ A. BDavid R. WaltLAINE BOWMAN
David R. Walt | | Director | | February 28, 201115, 2013 |
A. Blaine Bowman | | | | |
| | | | |
/s/ DRoy WhitfieldANIEL M. BRADBURY
Roy Whitfield | | Director | | February 28, 201115, 2013 |
Daniel M. Bradbury | | | | |
| | | | |
/s/ KARIN EASTHAM | | Director | | February 15, 2013 |
Karin Eastham | | | | |
| | | | |
/s/ ROBERT S. EPSTEIN | | Director | | February 15, 2013 |
Robert S. Epstein | | | | |
| | | | |
/s/ PAUL GRINT | | Director | | February 15, 2013 |
Paul Grint | | | | |
| | | | |
| | Director | | |
Gerald Möller | | | | |
| | | | |
/s/ DAVID R. WALT | | Director | | February 15, 2013 |
David R. Walt | | | | |
| | | | |
/s/ ROY WHITFIELD | | Director | | February 15, 2013 |
Roy Whitfield | | | | |
93