e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 |
For Quarterly Period Ended September 28, 2008
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
For
the transition period from
to
Commission File Number 000-30361
Illumina, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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33-0804655 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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9885 Towne Centre Drive, San
Diego, CA
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92121 |
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(Address of Principal Executive Offices)
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(Zip Code) |
(858) 202-4500
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of October 17, 2008, there were 123,738,333 shares of the Registrants Common Stock outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Illumina, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
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September 28, 2008 |
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December 30, 2007 (1) |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
355,219 |
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$ |
174,941 |
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Short-term investments |
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294,428 |
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211,141 |
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Accounts receivable, net |
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124,161 |
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83,119 |
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Inventory, net |
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72,953 |
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53,980 |
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Deferred tax assets, current portion |
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20,041 |
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26,934 |
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Prepaid expenses and other current assets |
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8,424 |
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12,640 |
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Total current assets |
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875,226 |
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562,755 |
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Property and equipment, net |
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82,198 |
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46,274 |
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Long-term investments |
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51,567 |
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Goodwill |
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228,734 |
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228,734 |
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Intangible assets, net |
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50,299 |
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58,116 |
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Deferred tax assets, long-term portion |
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61,364 |
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80,245 |
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Other assets, net |
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11,934 |
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11,608 |
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Total assets |
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$ |
1,361,322 |
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$ |
987,732 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
91,220 |
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$ |
75,163 |
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Litigation settlements payable |
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90,536 |
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Current portion of long-term debt |
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400,127 |
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16 |
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Total current liabilities |
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491,347 |
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165,715 |
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Long-term debt, less current portion |
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460 |
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400,000 |
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Other long-term liabilities |
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16,522 |
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10,339 |
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Commitments and contingencies
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Stockholders equity |
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852,993 |
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411,678 |
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Total liabilities and stockholders equity |
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$ |
1,361,322 |
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$ |
987,732 |
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(1) |
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The Condensed Consolidated Balance Sheet at December 30, 2007 has been derived from the
audited financial statements as of that date. |
See accompanying notes to the condensed consolidated financial statements.
3
Illumina, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
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Three Months Ended |
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Nine Months Ended |
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September 28, |
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September 30, |
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September 28, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue: |
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Product revenue |
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$ |
140,319 |
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$ |
90,021 |
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$ |
379,554 |
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$ |
225,583 |
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Service and other revenue |
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9,941 |
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7,489 |
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32,744 |
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28,611 |
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Total revenue |
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150,260 |
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97,510 |
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412,298 |
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254,194 |
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Costs and expenses: |
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Cost of product revenue (excluding
impairment of manufacturing equipment and
amortization of intangible assets) |
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51,088 |
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34,582 |
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140,761 |
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83,436 |
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Cost of service and other revenue |
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3,342 |
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2,496 |
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10,209 |
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8,903 |
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Research and development |
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27,567 |
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19,753 |
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71,625 |
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53,893 |
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Selling, general and administrative |
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39,365 |
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24,307 |
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108,808 |
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71,237 |
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Impairment of manufacturing equipment |
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4,069 |
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Amortization of intangible assets |
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2,702 |
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662 |
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7,785 |
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1,767 |
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Acquired in-process research and development |
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24,660 |
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24,660 |
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303,400 |
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Total costs and expenses |
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148,724 |
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81,800 |
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367,917 |
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522,636 |
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Income (loss) from operations |
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1,536 |
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15,710 |
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44,381 |
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(268,442 |
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Interest and other income, net |
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2,446 |
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3,978 |
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6,856 |
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9,043 |
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Income (loss) before income taxes |
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3,982 |
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19,688 |
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51,237 |
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(259,399 |
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Provision for income taxes |
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11,270 |
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5,185 |
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29,699 |
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14,912 |
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Net income (loss) |
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$ |
(7,288 |
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$ |
14,503 |
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$ |
21,538 |
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$ |
(274,311 |
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Net income (loss) per basic share* |
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$ |
(0.06 |
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$ |
0.13 |
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$ |
0.19 |
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$ |
(2.55 |
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Net income (loss) per diluted share* |
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$ |
(0.06 |
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$ |
0.12 |
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$ |
0.16 |
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$ |
(2.55 |
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Shares used in calculating basic net income
(loss) per share* |
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119,733 |
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108,636 |
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114,991 |
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107,694 |
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Shares used in calculating diluted net income
(loss) per share* |
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119,733 |
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118,790 |
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134,375 |
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107,694 |
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* |
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Adjusted to reflect a two-for-one stock split effective September 22, 2008. |
See accompanying notes to the condensed consolidated financial statements
4
Illumina, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
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Nine Months Ended |
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September 28, |
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September 30, |
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2008 |
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2007 |
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Operating activities: |
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Net income (loss) |
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$ |
21,538 |
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$ |
(274,311 |
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Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
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Acquired in-process research and development |
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24,660 |
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303,400 |
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Amortization of increase in inventory valuation |
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942 |
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Amortization of intangible assets |
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7,785 |
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1,803 |
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Amortization of debt issuance costs |
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1,026 |
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839 |
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Depreciation expense |
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12,206 |
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8,177 |
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Loss on disposal of property and equipment |
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273 |
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16 |
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Impairment of manufacturing equipment |
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4,069 |
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Stock-based compensation expense |
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35,803 |
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24,130 |
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Deferred income taxes |
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25,764 |
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Amortization of gain on sale of land and building |
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(128 |
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(145 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(43,142 |
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(33,920 |
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Inventory |
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(18,230 |
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(17,151 |
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Prepaid expenses and other current assets |
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3,378 |
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(890 |
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Other assets |
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(1,275 |
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1,674 |
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Accounts payable and accrued liabilities |
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9,871 |
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18,414 |
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Litigation settlements payable |
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(90,536 |
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Accrued income taxes |
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1,713 |
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12,130 |
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Other long-term liabilities |
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6,990 |
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(667 |
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Net cash provided by operating activities |
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1,765 |
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44,441 |
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Investing activities: |
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Cash (paid) obtained in acquisition, including cash paid for transaction costs |
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(24,666 |
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72,083 |
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Purchases of available-for-sale securities |
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(430,851 |
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(449,088 |
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Sales and maturities of available-for-sale securities |
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290,629 |
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256,239 |
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Purchases of property and equipment |
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(45,139 |
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(15,257 |
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Proceeds from sale of fixed assets |
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40 |
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Cash paid for intangible assets |
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(85 |
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Net cash used in investing activities |
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(210,027 |
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(136,068 |
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Financing activities: |
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Payments on long-term debt |
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(15 |
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(86 |
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Proceeds from issuance of convertible debt, net of issuance costs |
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390,270 |
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Purchase of convertible note hedges |
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(139,040 |
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Proceeds from the exercise of warrants |
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2,991 |
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92,642 |
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Common stock repurchases |
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(251,622 |
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Proceeds from secondary offering, net of issuance cost |
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342,637 |
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Proceeds from issuance of common stock |
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41,473 |
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25,684 |
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Net cash provided by financing activities |
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387,086 |
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117,848 |
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Effect of foreign currency translation on cash and cash equivalents |
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1,454 |
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(500 |
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Net increase in cash and cash equivalents |
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180,278 |
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25,721 |
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Cash and cash equivalents at beginning of period |
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174,941 |
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38,386 |
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Cash and cash equivalents at end of period |
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$ |
355,219 |
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$ |
64,107 |
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See accompanying notes to the condensed consolidated financial statements.
5
Illumina, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Principles
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. The unaudited condensed consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation. In managements opinion, the accompanying financial
statements reflect all adjustments, consisting of normal recurring accruals, considered necessary
for a fair presentation of the results for the interim periods presented.
Interim financial results are not necessarily indicative of results anticipated for the full
year. These unaudited financial statements should be read in conjunction with the Companys 2007
audited financial statements and footnotes included in the Companys Annual Report on Form 10-K for
the year ended December 30, 2007, as filed with the Securities and Exchange Commission (SEC) on
February 26, 2008.
The preparation of financial statements requires that management make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and
related disclosure of contingent assets and liabilities. Actual results could differ from those
estimates.
Fiscal Year
The Companys fiscal year consists of 52 or 53 weeks ending the Sunday closest to December 31,
with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30.
The three and nine months ended September 28, 2008 and September 30, 2007 were both 13 and 39
weeks, respectively.
Revenue Recognition
The Companys revenue is generated primarily from the sale of products and services. Product
revenue consists of sales of arrays, reagents, flow cells, instrumentation, and oligonucleotides
(oligos), which are short sequences of DNA. Service and other revenue consists of revenue received
for performing genotyping and sequencing services, extended warranty sales and amounts earned under
research agreements with government grants, which are recognized in the period during which the
related costs are incurred.
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the sellers price to the buyer is fixed or determinable
and collectibility is reasonably assured. In instances where final acceptance of the product or
system is required, revenue is deferred until all the acceptance criteria have been met. All
revenue is recorded net of any applicable allowances for returns or discounts.
Revenue for product sales is recognized generally upon shipment and transfer of title to the
customer, provided no significant obligations remain and collection of the receivables is
reasonably assured. Revenue from the sale of instrumentation is recognized when earned, which is
generally upon shipment. Revenue for genotyping and sequencing services is recognized when earned,
which is generally at the time the genotyping and sequencing analysis data is delivered to the
customer.
In order to assess whether the price is fixed and determinable, the Company ensures there are
no refund rights. If payment terms are based on future performance, the Company defers revenue
recognition until the price becomes fixed and determinable. The Company assesses collectibility
based on a number of factors, including past transaction history with the customer and the
creditworthiness of the customer. If the Company determines that collection of a payment is not
reasonably assured, revenue recognition is deferred until the time collection becomes reasonably
assured, which is generally upon receipt of payment.
6
Sales of instrumentation generally include a standard one-year warranty. The Company also
sells separately priced maintenance (extended warranty) contracts, which are generally for one or
two years, upon the expiration of the initial warranty. Revenue for extended warranty sales is
recognized ratably over the term of the extended warranty period. Reserves are provided for
estimated product warranty expenses at the time the associated revenue is recognized. If the
Company were to experience an increase in warranty claims or if costs of servicing its warrantied
products were greater than its estimates, gross margins could be adversely affected.
While the majority of its sales agreements contain standard terms and conditions, the Company
does enter into agreements that contain multiple elements or non-standard terms and conditions.
Emerging Issues Task Force (EITF) No. 00-21, Revenue Arrangements with Multiple Deliverables,
provides guidance on accounting for arrangements that involve the delivery or performance of
multiple products, services, or rights to use assets within contractually binding arrangements. For
arrangements with multiple elements, revenue recognition is based on the individual units of
accounting determined to exist in the arrangement. A delivered item is considered a separate unit
of accounting when the delivered item has value to the customer on a stand-alone basis and there is
objective and reliable evidence of the fair value of the undelivered items. Items are considered to
have stand-alone value when they are sold separately by any vendor or when the customer could
resell the item on a stand-alone basis. The fair value of an item is generally the price charged
for the product, if the item is regularly sold on a stand-alone basis. When objective and reliable
evidence of fair value exists for all units of accounting in an arrangement, the arrangement
consideration is generally allocated to each unit of accounting based upon its relative fair value.
In those instances when objective and reliable evidence of fair value exists for the undelivered
items but not for the delivered items, the residual method is used to allocate the arrangement
consideration. Under the residual method, the amount of arrangement consideration allocated to the
delivered items equals the total arrangement consideration less the aggregate fair value of the
undelivered items. When the Company is unable to establish stand-alone value for delivered items or
when fair value of undelivered items has not been established, revenue is deferred until all
elements are delivered and services have been performed, or until fair value can objectively be
determined for any remaining undelivered elements. The Company recognizes revenue for delivered
elements only when it determines that the fair values of undelivered elements are known and there
are no uncertainties regarding customer acceptance.
Impairment of Long-lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, if indicators of impairment exist, the Company
assesses the recoverability of the affected long-lived assets by determining whether the carrying
value of such assets can be recovered through undiscounted future operating cash flows. If
impairment is indicated, the Company measures the future discounted cash flows associated with the
use of the asset and adjusts the value of the asset accordingly. Factors that would necessitate an
impairment assessment include a significant decline in the Companys stock price and market
capitalization compared to its net book value, significant changes in the ability of a particular
asset to generate positive cash flows and significant changes in the Companys strategic business
objectives and utilization of the asset.
Stock-Based Compensation
The Company uses the Black-Scholes-Merton option-pricing model to determine the fair value of
stock-based awards under SFAS No. 123(R), Share-Based Payment. This model incorporates various
assumptions including volatility, expected life and interest rates. For the three and nine months
ended September 28, 2008, volatility was determined by equally weighing the historical and implied
volatility of the Companys common stock. The historical volatility of the Companys common stock
over the most recent period is generally commensurate with the estimated expected life of the
Companys stock options, adjusted for the impact of unusual fluctuations not reasonably expected to
recur and other relevant factors. The implied volatility is calculated from the implied market
volatility of exchange-traded call options on the Companys common stock. The expected life of an
award is based on historical experience and on the terms and conditions of the stock awards granted
to employees.
7
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 Employee
Stock Purchase Plan (ESPP) during those periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 28, 2008 |
|
September 30, 2007 |
|
September 28, 2008 |
|
September 30, 2007 |
Interest rate stock options |
|
|
3.27 - 3.36 |
% |
|
|
4.47 - 4.90 |
% |
|
|
2.85 - 3.52 |
% |
|
|
4.61 - 4.90 |
% |
Interest rate stock purchases |
|
|
2.90 - 4.47 |
% |
|
|
4.71 - 4.83 |
% |
|
|
2.90 - 4.71 |
% |
|
|
4.71 - 4.86 |
% |
Volatility stock options |
|
|
52-53 |
% |
|
|
55-58 |
% |
|
|
51-56 |
% |
|
|
55-70 |
% |
Volatility stock purchases |
|
|
56-58 |
% |
|
|
69 - 75 |
% |
|
|
56 - 69 |
% |
|
|
69 - 76 |
% |
Expected life stock options |
|
6 years |
|
|
6 years |
|
|
6 years |
|
|
6 years |
|
Expected life stock purchases |
|
6 - 12 months |
|
|
6 -12 months |
|
|
6 - 12 months |
|
|
6 - 12 months |
|
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Weighted average fair value
per share of options granted |
|
$ |
22.60 |
|
|
$ |
12.96 |
|
|
$ |
18.75 |
|
|
$ |
12.54 |
|
Weighted average fair value
per share of employee stock
purchases |
|
$ |
8.88 |
|
|
$ |
7.33 |
|
|
$ |
8.13 |
|
|
$ |
6.67 |
|
As of September 28, 2008, approximately $153.3 million of total unrecognized compensation cost
related to stock options, restricted stock and ESPP shares issued to date is expected to be
recognized over a weighted-average period of approximately 1.9 years.
Total share-based compensation expense for employee stock options and stock purchases for the
three and nine months ended September 28, 2008 and September 30, 2007 is comprised of the following
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 28, 2008 |
|
|
September 30, 2007 |
|
|
September 28, 2008 |
|
|
September 30, 2007 |
|
Cost of product revenue |
|
$ |
1,093 |
|
|
$ |
1,059 |
|
|
$ |
3,734 |
|
|
$ |
2,901 |
|
Cost of service and other revenue |
|
|
109 |
|
|
|
60 |
|
|
|
288 |
|
|
|
197 |
|
Research and development |
|
|
3,535 |
|
|
|
2,607 |
|
|
|
10,289 |
|
|
|
7,035 |
|
Selling, general and administrative |
|
|
8,003 |
|
|
|
4,942 |
|
|
|
21,559 |
|
|
|
13,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
before taxes |
|
|
12,740 |
|
|
|
8,668 |
|
|
|
35,870 |
|
|
|
24,131 |
|
Related income tax benefits |
|
|
(3,649 |
) |
|
|
(3,724 |
) |
|
|
(11,447 |
) |
|
|
(5,643 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense,
net of taxes |
|
$ |
9,091 |
|
|
$ |
4,944 |
|
|
$ |
24,423 |
|
|
$ |
18,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net share-based compensation
expense per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.08 |
|
|
$ |
0.05 |
|
|
$ |
0.21 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.08 |
|
|
$ |
0.04 |
|
|
$ |
0.18 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per Share
On July 22, 2008, the Company announced a two-for-one stock split in the form of a 100% stock
dividend with a record date of September 10, 2008 and a distribution date of September 22, 2008.
Share and per share amounts have been restated to reflect the stock split for all periods
presented.
Basic and diluted net income (loss) per share of common stock is presented in conformity with
SFAS No. 128, Earnings per Share, for all periods presented. In accordance with SFAS No. 128, basic
net income (loss) per share is computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Diluted net income (loss) per
share is computed using the weighted average number of common and dilutive common equivalent shares
from the Companys Convertible Senior Notes, equity awards, warrants sold in connection with the
Convertible Senior Notes and warrants assumed in the acquisition of Solexa, Inc. (Solexa) using the
treasury stock method. The following table presents the calculation of weighted-average shares used
to calculate basic and diluted net income (loss) per share (in thousands):
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 28, 2008 |
|
September 30, 2007 |
|
September 28, 2008 |
|
September 30, 2007 |
Weighted-average shares outstanding |
|
|
119,733 |
|
|
|
108,672 |
|
|
|
114,991 |
|
|
|
107,728 |
|
Less: Weighted-average shares of
common stock subject to repurchase |
|
|
|
|
|
|
(36 |
) |
|
|
|
|
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in
calculating basic net income (loss)
per share |
|
|
119,733 |
|
|
|
108,636 |
|
|
|
114,991 |
|
|
|
107,694 |
|
Plus: Effect of dilutive Convertible
Senior Notes |
|
|
|
|
|
|
1,311 |
|
|
|
7,942 |
|
|
|
|
|
Plus: Effect of dilutive equity awards |
|
|
|
|
|
|
6,739 |
|
|
|
5,675 |
|
|
|
|
|
Plus: Effect of dilutive warrants
sold in connection with the
Convertible Senior Notes |
|
|
|
|
|
|
|
|
|
|
3,375 |
|
|
|
|
|
Plus: Effect of dilutive warrants
assumed in the acquisition of Solexa |
|
|
|
|
|
|
2,104 |
|
|
|
2,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in
calculating diluted net income (loss)
per share |
|
|
119,733 |
|
|
|
118,790 |
|
|
|
134,375 |
|
|
|
107,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income
(loss). Other comprehensive income (loss) includes foreign currency translation adjustments from
prior periods for the foreign operations and unrealized gains and losses on the Companys
available-for-sale securities, including a temporary impairment charge of $4.3 million as of
September 28, 2008 associated with the Companys auction rate securities. Refer to Note 4 for
further discussion regarding this unrealized loss.
The components of other comprehensive income (loss) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 28, 2008 |
|
|
September 30, 2007 |
|
|
September 28, 2008 |
|
|
September 30, 2007 |
|
Net (loss) income |
|
$ |
(7,288 |
) |
|
$ |
14,503 |
|
|
$ |
21,538 |
|
|
$ |
(274,311 |
) |
Foreign currency translation adjustments |
|
|
|
|
|
|
312 |
|
|
|
155 |
|
|
|
514 |
|
Unrealized gain (loss) on investments |
|
|
(1,078 |
) |
|
|
428 |
|
|
|
(3,320 |
) |
|
|
(10,299 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income |
|
$ |
(8,366 |
) |
|
$ |
15,243 |
|
|
$ |
18,373 |
|
|
$ |
(284,096 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Functional Currency
The Company has historically identified the local currency as the functional currency in each
of its foreign subsidiaries and the effects of translation were recorded as other comprehensive
income (loss). During the third quarter of 2008, the Company reorganized its international
structure to execute a more efficient relationship between product development, product
manufacturing and sales. The reorganization increased the foreign subsidiaries anticipated
dependence on the U.S. entity for management decisions, financial support, production assets and
inventory thereby making the foreign subsidiaries more of a direct and integral component of the
U.S. entitys operations. As a result, the Company reassessed the primary economic environment of
its foreign subsidiaries and determined the subsidiaries are more U.S. dollar based, resulting in a
U.S. dollar functional currency determination. Currently, as a result of this change, the Company
remeasures its foreign subsidiaries assets and liabilities and income and expense accounts related
to nonmonetary assets and liabilities to the U.S. dollar and records the net gains or losses
resulting from remeasurement in its consolidated statements of operations.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the current periods
presentation.
Recent Accounting Pronouncements
SFAS No. 141(R), Business Combinations, was issued in December of 2007. SFAS No. 141(R)
establishes principles and requirements for how the acquirer of a business recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree. SFAS No. 141(R) also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and sets forth what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects
of the business combination. The guidance will become effective for fiscal years beginning after
December 15, 2008. The Company is currently evaluating the impact, if any, the adoption of this
pronouncement will have on the Companys consolidated financial statements.
9
In May 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP)
Accounting Principles Board Opinions (APB) 14-1, Accounting for Convertible Debt Instruments that
May be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1 or the
FSP) that significantly impacts the accounting for convertible debt. The FSP requires cash settled
convertible debt, such as the Companys $400.0 million aggregate principal amount of convertible
notes that are currently outstanding, to be bifurcated into debt and equity components and
accounted for separately at issuance. The value assigned to the debt component would be the
estimated fair value, as of the issuance date, of a similar bond without the conversion feature.
The difference between the bond cash proceeds and this estimated fair value would be recorded as a
debt discount and amortized to interest expense over the life of the bond, resulting in the
recognition of interest expense on these securities at an effective rate more comparable to what
the Company would have incurred had the Company issued nonconvertible debt with otherwise similar
terms. The equity component of the convertible debt securities would be included in the
paid-in-capital section of stockholders equity on the Companys consolidated balance sheets and
the initial carrying values of these debt securities would be correspondingly reduced. Although FSP
APB 14-1 has no impact on the Companys actual past or future cash flows, it requires the Company
to record a significant amount of non-cash interest expense as the debt discount is amortized,
which would result in a material adverse impact on the results of operations and on earnings per
share. In addition, if the Companys convertible debt is redeemed or converted prior to maturity,
any unamortized debt discount at the time of such redemption or conversion would result in a loss
on extinguishment. The Company is currently evaluating the impact this FSP will have on its results
of operations upon adoption. FSP APB 14-1 will become effective for fiscal years beginning after
December 15, 2008 and require retrospective application.
In October 2008, the FASB issued FASB FSP SFAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of
FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a financial asset when
the market for that financial asset is not active. The FSP is effective upon issuance, including
for prior periods for which financial statements have not been issued. Revisions resulting from a
change in the valuation technique or its application should be accounted for as a change in
accounting estimate following the guidance in FASB Statement No. 154, Accounting Changes and Error
Corrections. However, the disclosure provisions in Statement 154 for a change in accounting
estimate are not required for revisions resulting from a change in valuation technique or its
application. The Company believes the impact of this pronouncement on the Companys consolidated
financial statements to be immaterial.
2. Acquisition
Avantome, Inc.
On August 1, 2008, the Company completed its acquisition of Avantome, Inc. (Avantome), a
privately held Delaware corporation. As consideration for the acquisition, the Company paid $25.8
million in cash, including transaction costs, and may pay up to an additional $35.0 million in
contingent cash consideration based on the achievement of certain milestones. The Company assumed
$1.1 million in net assets, and recorded a charge of $24.7 million for purchased in-process
research and development (IPR&D) primarily associated with the development of Avantomes low-cost,
long read-length sequencing technology. The amount allocated to IPR&D was expensed upon acquisition
as it was determined that the underlying project had not reached technological feasibility and had
no alternative future use. The Company has assessed the contingent consideration payable in
accordance with the provisions of SFAS No. 141, Business Combinations, and EITF 95-8, Accounting
for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase
Business Combination. Approximately $11.0 million of the contingent consideration will be recorded
as compensation expense over a three-year period as this consideration is due to the former primary
shareholders of Avantome contingent upon their employment with the Company for three years. The
remaining contingent consideration of $24.0 million will be recorded as additional purchase price
when certain milestones are achieved or the amount is determinable beyond a reasonable doubt.
The results of Avantomes operations have been included in the Companys consolidated
financial statements since the acquisition date of August 1, 2008. Pro forma results of operations
have not been presented because the effects of the acquisition were not material.
Solexa, Inc.
On January 26, 2007, the Company completed its acquisition of Solexa, a Delaware corporation,
in a stock-for-stock merger transaction. The Company issued approximately 26.2 million shares of
its common stock as consideration for this merger.
10
The purchase price of the acquisition is as follows (in thousands):
|
|
|
|
|
Fair market value of securities issued |
|
$ |
527,067 |
|
Fair market value of change of control bonuses and related taxes |
|
|
8,182 |
|
Transaction costs not included in Solexa net tangible assets acquired |
|
|
8,138 |
|
Fair market value of vested stock options, warrants and restricted stock assumed |
|
|
75,334 |
|
|
|
|
|
Total purchase price |
|
$ |
618,721 |
|
|
|
|
|
Based on the estimated fair values at the acquisition date, the Company allocated $303.4
million to IPR&D, $62.2 million to tangible assets acquired and liabilities assumed and $24.4
million to intangible assets. The remaining excess of the purchase price over the fair value of net
assets acquired of $228.7 million was allocated to goodwill.
The results of Solexas operations have been included in the Companys consolidated financial
statements since the acquisition date of January 26, 2007. The following unaudited pro forma
information shows the results of the Companys operations for the specified reporting periods as
though the acquisition had occurred as of the beginning of that period (in thousands, except per
share data):
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, 2007 |
Revenue
|
|
$ |
254,249 |
|
Net income
|
|
$ |
21,436 |
|
Basic net income per share
|
|
$ |
0.20 |
|
Diluted net income per share
|
|
$ |
0.18 |
|
The pro forma results have been prepared for comparative purposes only and are not necessarily
indicative of the actual results of operations had the acquisition taken place as of the beginning
of the period presented, or the results that may occur in the future. The pro forma results exclude
the $303.4 million non-cash acquired IPR&D charge recorded upon the closing of the acquisition
during the first quarter of 2007.
3. Segment Information
During the first quarter of 2008, the Company reorganized its operating structure into a newly
created Life Sciences Business Unit, which includes all products and services related to the
research market, namely the BeadArray, BeadXpress and Sequencing product lines. The Company also
created a Diagnostics Business Unit to focus on the emerging opportunity in molecular diagnostics.
For the three and nine months ended September 28, 2008, the Company had limited activity related to
the Diagnostics Business Unit and operating results were reported on an aggregate basis to the
chief operating decision maker of the Company, the chief executive officer. In accordance with SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company operated
in one segment for the three and nine months ended September 28, 2008.
4. Cash and Cash Equivalents and Investments
Cash and cash equivalents are comprised of short-term, highly liquid investments with
maturities of 90 days or less from the date of purchase. Investments are comprised of
available-for-sale securities recorded at estimated fair value. Unrealized gains and losses
associated with the Companys investments, if any, are reported in stockholders equity in
accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.
As of September 28, 2008, the Companys excess cash balances were primarily invested in
marketable debt securities, including treasury bills and commercial paper with strong credit
ratings, corporate bonds and short maturity mutual funds providing similar financial returns.
Additionally, the Company had $55.9 million in auction rate securities issued primarily by
municipalities and universities. During the nine months ended September 28, 2008, the Company
recorded an unrealized loss of $4.3 million due to the failure associated with the auctions of each
of these securities, which has limited the Companys ability to liquidate its investment and fully
recover the carrying value in the near term. The Company has determined this reduction in fair
value to be temporary. This unrealized loss reduced the fair value of the Companys auction rate
securities to $51.6 million. These securities are classified as long-term investments and the
unrealized loss is included as a component of other comprehensive income within stockholders
equity in the Companys consolidated balance sheet.
11
The municipal auction rate securities held by the Company are rated by the following agencies:
Fitch, Moodys and Standard & Poors. All of the securities held by the Company are currently rated
AAA, the highest rating. Although their credit ratings did not deteriorate, there was insufficient
demand at auction for all of the high-grade auction rate securities held by the Company during the
first quarter of 2008, causing them to be illiquid. During the second and third quarter of 2008,
the credit market did not recover and the auction rate securities remained illiquid. In the event
the Company needs to access the funds that are in an illiquid state, it may not be able to do so
without a loss of principal until a future auction on these investments is successful, the
securities are redeemed by the issuer or they mature. As a result, the Company has recorded an
unrealized loss during the nine months ended September 28, 2008. This unrealized loss was
determined in accordance with SFAS No. 157, Fair Value Measurements, which was adopted by the
Company on January 1, 2008.
As a basis for considering market participant assumptions in fair value measurements, SFAS No.
157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value into three broad levels. The fair value hierarchy gives the highest priority to
quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). Due to the lack of actively traded market data, the
value of these auction rate securities and resulting unrealized loss was determined using Level 3
hierarchical inputs. These inputs include managements assumptions of pricing by market
participants, including assumptions about risk. In accordance with SFAS No. 157, the Company used
the concepts of fair value based on estimated discounted future cash flows of interest income over
a projected 5-year period reflective of the length of time until the Companys securities become
liquid or potentially get repurchased. A discount rate of approximately 5% was utilized when
preparing this model. The classification of these securities as long-term assets was deemed
appropriate as the Company believes it may not be able to liquidate its investments without
significant loss within the next year. The Company currently believes these securities are not
permanently impaired, primarily due to the government guarantee of the underlying securities and
the Companys ability to hold these securities for the foreseeable future. The Companys cash, cash
equivalents and short-term investments total $649.6 million as of September 28, 2008. Based on the
liquidity of these funds and the Companys projected cash flows from operations, the Company
believes that the illiquidity on the auction rate security investments will not materially affect
its ability to execute its current business plan.
5. Inventories
Inventories are stated at the lower of standard cost (which approximates actual cost) or
market. Inventory includes raw materials and finished goods that may be used in the research and
development process and such items are expensed as consumed or expired. Provisions for slow moving,
excess and obsolete inventories are provided based on product life cycle and development plans,
product expiration and quality issues, historical experience and inventory levels. The components
of net inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 28, 2008 |
|
|
December 30, 2007 |
|
Raw materials |
|
$ |
31,849 |
|
|
$ |
27,098 |
|
Work in process |
|
|
31,890 |
|
|
|
20,321 |
|
Finished goods |
|
|
9,214 |
|
|
|
6,561 |
|
|
|
|
|
|
|
|
Total inventory, net |
|
$ |
72,953 |
|
|
$ |
53,980 |
|
|
|
|
|
|
|
|
6. Impairment of Manufacturing Equipment
During fiscal 2008, the Company implemented next-generation imaging and decoding systems to be
used in manufacturing. These systems were developed to increase existing capacity and allow the
Company to transition to the Infinium High-Density (HD) product line. As a result of this
transition, the demand for products manufactured on the previous infrastructure was reduced and
certain systems were no longer being utilized. In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, a non-cash impairment charge of $4.1 million was
recorded in the second quarter of fiscal 2008 for the excess machinery. This charge is included as
a separate line item in the Companys consolidated statement of operations. There was no change to
useful lives and related depreciation expense of the remaining assets as the Company believes these
estimates are currently reflective of the period the assets will be used in operations.
7. Goodwill and Intangible Assets
The Company accounts for goodwill and intangible assets under SFAS No. 142, Goodwill and Other
Intangible Assets. As such, goodwill and other indefinite-lived intangible assets are not
amortized, but are subject to annual impairment reviews or more frequent reviews if events or
circumstances indicate there may be impairment. The Company performed its annual impairment test of
goodwill as of May 30, 2008 noting no impairment. No indicators have arisen since managements
assessment on May 30, 2008 that would require further assessment.
12
The Companys intangible assets are comprised primarily of acquired core technology and
customer relationships from the acquisition of Solexa and licensed technology from the Affymetrix
settlement entered into on January 9, 2008. As a result of this settlement, the Company agreed,
without admitting liability, to make a one-time payment to Affymetrix of $90.0 million. In return,
Affymetrix agreed to dismiss with prejudice all lawsuits it had brought against the Company, and
the Company agreed to dismiss with prejudice its counterclaims in the relevant lawsuits. Affymetrix
also agreed not to sue the Company or its affiliates or customers for making, using or selling any
of the Companys current products, evolutions of those products or services related to those
products. In addition, Affymetrix agreed that, for four years, it will not sue the Company for
making, using or selling the Companys products or services that are based on future technology
developments. The covenant not to sue covers all fields other than photolithography, the process by
which Affymetrix manufactures its arrays and a field in which the Company does not operate.
Of the total $90.0 million payment made on January 25, 2008, $36.0 million was recorded as
licensed technology and classified as an intangible asset. The remaining $54.0 million was charged
to expense during the fourth quarter of 2007. This allocation was determined in accordance with
SFAS No. 5, Accounting for Contingencies, and EITF 00-21 using the concepts of fair value based on
the past and estimated future revenue streams related to the products covered by the patents
previously under dispute. The value of the licensed technology is the benefit derived, calculated
using estimated discounted cash flows and future revenue projections, from the perpetual covenant
not to sue for damages related to the sale of the Companys current products. The Company utilized
a discount rate of 9.25% when preparing this model. The effective life of the licensed technology
extends through 2015, the final expiry date of all patents considered in valuing the intangible
asset. The related amortization is based on the higher of the percentage of usage or the
straight-line method. The percentage of usage was determined using actual and projected revenues
generated from products covered by the patents previously under dispute. For the current quarter,
the percentage of usage was higher than the straight-line method, resulting in an expense of $2.0
million and $5.8 million for the three and nine months ended September 28, 2008, respectively.
Acquired core technology and customer relationships are being amortized on a straight-line
basis over their effective useful lives of 10 and three years, respectively. The amortization of
the Companys intangible assets is excluded from cost of product revenue and is separately
classified as amortization of intangible assets on the Companys consolidated statements of
operations.
The following is a summary of the Companys amortizable intangible assets as of the respective
balance sheet dates (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2008 |
|
|
December 30, 2007 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Intangibles, |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Intangibles, |
|
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
Licensed technology |
|
$ |
36,000 |
|
|
$ |
(5,798 |
) |
|
$ |
30,202 |
|
|
$ |
36,000 |
|
|
$ |
|
|
|
$ |
36,000 |
|
Core technology |
|
|
23,500 |
|
|
|
(3,916 |
) |
|
|
19,584 |
|
|
|
23,500 |
|
|
|
(2,154 |
) |
|
|
21,346 |
|
Customer relationships |
|
|
900 |
|
|
|
(500 |
) |
|
|
400 |
|
|
|
900 |
|
|
|
(275 |
) |
|
|
625 |
|
License agreements |
|
|
1,029 |
|
|
|
(916 |
) |
|
|
113 |
|
|
|
1,029 |
|
|
|
(884 |
) |
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net |
|
$ |
61,429 |
|
|
$ |
(11,130 |
) |
|
$ |
50,299 |
|
|
$ |
61,429 |
|
|
$ |
(3,313 |
) |
|
$ |
58,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Warranties
The Company generally provides a one-year warranty on genotyping, gene expression systems and
sequencing systems. At the time revenue is recognized, the Company establishes an accrual for
estimated warranty expenses associated with system sales. This expense is recorded as a component
of cost of product revenue. Estimated warranty expenses associated with extended maintenance
contracts are recorded as a cost of revenue ratably over the term of the maintenance contract.
Changes in the Companys warranty liability during the specified reporting period are as
follows (in thousands):
|
|
|
|
|
Balance at December 30, 2007 |
|
$ |
3,716 |
|
Additions charged to cost of revenue |
|
|
8,222 |
|
Repairs and replacements |
|
|
(5,090 |
) |
|
|
|
|
Balance at September 28, 2008 |
|
$ |
6,848 |
|
|
|
|
|
13
9. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 28, 2008 |
|
|
December 30, 2007 |
|
Accounts payable |
|
$ |
31,035 |
|
|
$ |
24,311 |
|
Compensation |
|
|
22,231 |
|
|
|
17,410 |
|
Short-term deferred revenue |
|
|
8,749 |
|
|
|
7,541 |
|
Taxes |
|
|
6,903 |
|
|
|
8,298 |
|
Reserve for product warranties |
|
|
6,848 |
|
|
|
3,716 |
|
Customer deposits |
|
|
6,728 |
|
|
|
5,266 |
|
Accrued royalties |
|
|
2,942 |
|
|
|
1,867 |
|
Legal and other professional fees |
|
|
2,017 |
|
|
|
4,276 |
|
Other |
|
|
3,767 |
|
|
|
2,478 |
|
|
|
|
|
|
|
|
Total accounts payable and accrued liabilities |
|
$ |
91,220 |
|
|
$ |
75,163 |
|
|
|
|
|
|
|
|
10. Stockholders Equity
Common Stock
On July 22, 2008, the Company announced a two-for-one stock split in the form of a 100% stock
dividend with a record date of September 10, 2008 and a distribution date of September 22, 2008.
Share and per share amounts have been restated to reflect the stock split for all periods
presented.
On August 12, 2008, a total of 8,050,000 shares were sold to the public at a public offering
price of $43.75 per share, raising net proceeds to the Company of approximately $342.6 million,
after deducting underwriting discounts and commissions and estimated offering expenses.
On September 28, 2008, the Company had 123,686,273 shares of common stock outstanding.
Stock Options
In June 2005, the stockholders of the Company approved the 2005 Stock and Incentive Plan (the
2005 Stock Plan). Upon adoption of the 2005 Stock Plan, issuance of options under the Companys
existing 2000 Stock Plan ceased. Additionally, in connection with the acquisition of Solexa, the
Company assumed stock options granted under the 2005 Solexa Equity Incentive Plan (the 2005 Solexa
Equity Plan). The 2005 Stock Plan and the 2005 Solexa Equity Plan initially provided that an
aggregate of up to 24,571,238 shares of the Companys common stock be reserved and available to be
issued. The 2005 Stock Plan provides for an automatic annual increase in the shares reserved for
issuance by the lesser of 5% of the outstanding shares of the Companys common stock on the last
day of the immediately preceding fiscal year, 2,400,000 shares or such lesser amount as determined
by the Companys board of directors. Additionally, during the Companys Annual Meeting of
Stockholders held on May 16, 2008, the stockholders ratified an amendment to increase the maximum
number of shares of common stock authorized for issuance under the 2005 Stock Plan by 2,400,000
shares. As of September 28, 2008, options to purchase 7,354,951 shares remained available for
future grant under the 2005 Stock Plan and 2005 Solexa Equity Plan.
On January 29, 2008, the Companys board of directors approved the New Hire Stock and
Incentive Plan, which provides for the issuance of options and shares of restricted stock to newly
hired employees. There is no set number of shares reserved for issuance under this Plan.
The Companys stock option activity under all stock option plans during the nine months ended
September 28, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Options |
|
|
Exercise Price |
|
Outstanding at December 30, 2007 |
|
|
20,847,868 |
|
|
$ |
12.13 |
|
Granted |
|
|
2,891,100 |
|
|
$ |
35.14 |
|
Exercised |
|
|
(4,198,514 |
) |
|
$ |
8.66 |
|
Cancelled |
|
|
(1,198,002 |
) |
|
$ |
20.14 |
|
|
|
|
|
|
|
|
|
Outstanding at September 28, 2008 |
|
|
18,342,452 |
|
|
$ |
16.01 |
|
|
|
|
|
|
|
|
|
14
The following is a further breakdown of the options outstanding as of September 28, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Remaining |
|
Weighted |
|
|
|
|
|
Price |
Range of |
|
Options |
|
Life |
|
Average |
|
Options |
|
of Options |
Exercise Prices |
|
Outstanding |
|
in Years |
|
Exercise Price |
|
Exercisable |
|
Exercisable |
$0.05-3.59
|
|
|
1,835,126 |
|
|
|
4.12 |
|
|
$ |
2.63 |
|
|
|
1,196,336 |
|
|
$ |
2.43 |
|
$3.71-4.30
|
|
|
1,882,382 |
|
|
|
5.52 |
|
|
$ |
4.16 |
|
|
|
1,055,597 |
|
|
$ |
4.11 |
|
$4.35-8.68
|
|
|
2,134,796 |
|
|
|
6.19 |
|
|
$ |
6.20 |
|
|
|
1,208,687 |
|
|
$ |
6.06 |
|
$8.87-13.17
|
|
|
1,990,508 |
|
|
|
6.65 |
|
|
$ |
11.00 |
|
|
|
793,852 |
|
|
$ |
10.94 |
|
$13.30-17.00
|
|
|
1,864,597 |
|
|
|
8.12 |
|
|
$ |
15.16 |
|
|
|
554,006 |
|
|
$ |
14.75 |
|
$17.04-19.61
|
|
|
2,103,877 |
|
|
|
7.91 |
|
|
$ |
18.65 |
|
|
|
660,973 |
|
|
$ |
18.47 |
|
$19.71-20.04
|
|
|
2,247,680 |
|
|
|
7.48 |
|
|
$ |
20.03 |
|
|
|
597,805 |
|
|
$ |
20.04 |
|
$20.12-32.49
|
|
|
2,501,686 |
|
|
|
9.04 |
|
|
$ |
27.45 |
|
|
|
278,538 |
|
|
$ |
26.64 |
|
$32.58-42.02
|
|
|
1,551,800 |
|
|
|
9.49 |
|
|
$ |
35.08 |
|
|
|
34,062 |
|
|
$ |
34.10 |
|
$44.38-44.38
|
|
|
230,000 |
|
|
|
9.85 |
|
|
$ |
44.38 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.05-44.38
|
|
|
18,342,452 |
|
|
|
7.23 |
|
|
$ |
16.01 |
|
|
|
6,379,856 |
|
|
$ |
10.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining life in years of options exercisable is 6.44 years as of
September 28, 2008.
The aggregate intrinsic value of options outstanding and options exercisable as of September
28, 2008 was $484.5 million and $206.3 million, respectively. Aggregate intrinsic value represents
the product of the number of options outstanding and the difference between the Companys closing
stock price per share on the last trading day of the fiscal period, which was $42.40 on September
26, 2008, and the exercise price. Total intrinsic value of options exercised was $39.8 million and
$42.2 million for the nine months ended September 28, 2008 and September 30, 2007, respectively.
Employee Stock Purchase Plan
In February 2000, the board of directors and stockholders adopted the 2000 ESPP. A total of
15,467,426 shares of the Companys common stock have been reserved for issuance under the ESPP. The
ESPP permits eligible employees to purchase common stock at a discount, but only through payroll
deductions, during defined offering periods.
The price at which stock is purchased under the ESPP is equal to 85% of the fair market value
of the common stock on the first or last day of the offering period, whichever is lower. The
initial offering period commenced in July 2000. In addition, beginning with fiscal 2001, the ESPP
provides for annual increases of shares available for issuance by the lesser of 3% of the number of
outstanding shares of the Companys common stock on the last day of the immediately preceding
fiscal year, 3,000,000 shares or such lesser amount as determined by the Companys board of
directors. Shares totaling 276,198 were issued under the ESPP during the nine months ended
September 28, 2008. As of September 28, 2008, there were 10,794,162 shares available for issuance
under the ESPP.
Restricted Stock Units
In 2007 the Company began granting restricted stock units pursuant to its 2005 Stock Plan as
part of its regular annual employee equity compensation review program. Restricted stock units are
share awards that, upon vesting, will deliver to the holder shares of the Companys common stock.
Restricted stock units granted during 2007 vest over four years as follows: 15% vest on the first
and second anniversaries of the grant date, 30% vest on the third anniversary of the grant date and
40% vest on the fourth anniversary of the grant date. Effective January 2008, the Company changed
the vesting schedule for grants of new restricted stock units. Currently, restricted stock units
vest 15% on the first anniversary of the grant date, 20% on the second anniversary of the grant
date, 30% on the third anniversary of the grant date and 35% on the fourth anniversary of the grant
date.
A summary of the Companys restricted stock unit activity and related information for the nine
months ended September 28, 2008 is as follows:
|
|
|
|
|
|
|
Restricted Stock Units (1) |
Outstanding at December 30, 2007
|
|
|
394,500 |
|
Awarded
|
|
|
655,480 |
|
Vested
|
|
|
|
|
Cancelled
|
|
|
(29,740 |
) |
|
|
|
|
|
Outstanding at September 28, 2008
|
|
|
1,020,240 |
|
|
|
|
|
|
|
|
|
(1) |
|
Each stock unit represents the fair market value of one share of common stock. |
The weighted average grant-date fair value per share for the restricted stock units was $39.27
for the nine months ended September 28, 2008.
Based on the closing price of the Companys common stock of $42.40 on September 26, 2008, the
total pretax intrinsic value of all outstanding restricted stock units on that date was $43.3
million.
15
No restricted stock units were outstanding as of September 30, 2007.
Warrants
In conjunction with its acquisition of Solexa, the Company assumed 4,489,686 warrants issued
by Solexa prior to the acquisition. During the nine months ended September 28, 2008, there were
337,384 warrants exercised, resulting in cash proceeds to the Company of approximately $3.0
million.
A summary of all warrants outstanding as of September 28, 2008 is as follows:
|
|
|
|
|
|
|
Number of Shares |
|
Exercise Price |
|
Expiration Date |
238,510
|
|
$ |
7.27 |
|
|
4/25/2010 |
864,040
|
|
$ |
7.27 |
|
|
7/12/2010 |
809,246
|
|
$ |
10.91 |
|
|
11/23/2010 |
1,125,734
|
|
$ |
10.91 |
|
|
1/19/2011 |
18,322,320 (1)
|
|
$ |
31.44 |
|
|
2/15/2014 |
21,359,850 |
|
|
|
|
|
|
|
|
|
(1) |
|
Represents warrants sold in connection with the offering of the Companys Convertible Senior
Notes (See Note 11). |
Treasury Stock
In connection with its issuance of $400.0 million principal amount of 0.625% Convertible
Senior Notes due 2014 on February 16, 2007, the Company repurchased 11.6 million shares of its
outstanding common stock for approximately $201.6 million in privately negotiated transactions
concurrently with the offering. Additionally, during 2007, the Company repurchased approximately
3.2 million shares of its common stock under a Rule 10b5-1 trading plan for approximately $50.0
million. This plan expired during 2007.
11. Convertible Senior Notes
On February 16, 2007, the Company issued $400.0 million principal amount of 0.625% Convertible
Senior Notes due 2014 (the Notes), which included the exercise of the initial purchasers option to
purchase up to an additional $50.0 million aggregate principal amount of Notes. The net proceeds
from the offering, after deducting the initial purchasers discount and offering expenses, were
approximately $390.3 million. The Company will pay 0.625% interest per annum on the principal
amount of the Notes, payable semi-annually in arrears in cash on February 15 and August 15 of each
year. The Company made an interest payment of approximately $1.2 million on August 15, 2008. The
Notes mature on February 15, 2014.
The Notes will be convertible into cash and, if applicable, shares of the Companys common
stock, $0.01 par value per share, based on a conversion rate, subject to adjustment, of
45.8058 shares per $1,000 principal amount of Notes (which represents a conversion price
of approximately $21.83 per share), only in the following circumstances and to the following
extent: (1) during the five business-day period after any five consecutive trading period (the
measurement period) in which the trading price per Note for each day of such measurement period was
less than 97% of the product of the last reported sale price of the Companys common stock and the
conversion rate on each such day; (2) during any calendar quarter after the calendar quarter ending
April 1, 2007, if the last reported sale price of the Companys common stock for 20 or more trading
days in a period of 30 consecutive trading days ending on the last trading day of the immediately
preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last
trading day of the immediately preceding calendar quarter; (3) upon the occurrence of specified
events; and (4) the Notes will be convertible at any time on or after November 15, 2013 through the
third scheduled trading day immediately preceding the maturity date. The requirements of the second
condition were satisfied during the first quarter of 2008. Accordingly, the Companys outstanding
convertible notes became convertible into cash and, if applicable, shares of common stock, during
the period from, and including April 1, 2008 through, and including, June 30, 2008. The Company has
determined that the requirements of this same condition have again been satisfied in each of the
second and third quarters of 2008. Accordingly, the Notes will continue to be convertible through,
and including, December 31, 2008. Generally upon conversion of a Note, the Company will pay the
conversion value of the Note in cash, up to the principal amount of the Note. Any excess of the
conversion value over the principal amount is payable in shares of the Companys common stock. As
of September 28, 2008, the principal amount of these Notes was classified as current liabilities.
If, during the fourth quarter, none of the conditions to convertibility are satisfied, then the
Company will reclassify the principal amount of these Notes to long-term debt.
16
In connection with the offering of the Notes in February 2007, the Company entered into
convertible note hedge transactions (the hedge) with the initial purchasers and/or their affiliates
(the counterparties) entitling the Company to purchase up to 18,322,320 shares of the Companys
common stock at a strike price of approximately $21.83 per share, subject to adjustment.
In addition, the Company sold to these counterparties warrants (the warrants) exercisable, on a
cashless basis, for up to 18,322,320 shares of the Companys common stock at a strike
price of $31.435 per share, subject to adjustment. The cost of the hedge that was not covered by
the proceeds from the sale of the warrants was approximately $46.6 million and was reflected as a
reduction of additional paid-in capital. The hedge is expected to reduce the potential equity
dilution upon conversion of the Notes to the extent the Company exercises the note hedges to
purchase shares from the counterparties to deliver to converting noteholders. However, the
warrants could have a dilutive effect on the Companys earnings per share to the extent that the
price of the Companys common stock exceeds the strike price of the warrants on the exercise dates
of the warrants, which occur during 2014, and the warrants are exercised.
12. Legal Proceedings
In the recent past, the Company incurred substantial costs in defending against patent
infringement claims and expects, going forward, to devote substantial financial and managerial
resources to protect the Companys intellectual property and to defend against any future claims
asserted against the Company.
Applied Biosystems Litigation
On December 26, 2006, Applied Biosystems Inc. (Applied Biosystems), formerly known as Applera
Corporation, filed suit in California Superior Court, Santa Clara County against Solexa (which was
acquired by the Company on January 26, 2007). This State Court action was related to the ownership
of several patents assigned in 1995 to Solexas predecessor company (Lynx Therapeutics) by a former
employee (Dr. Stephen Macevicz), who is the inventor of these patents and is named as a
co-defendant in the suit. Lynx was originally a unit of Applied Biosystems but was spun out in
1992. On May 31, 2007, Applied Biosystems filed a second suit, this time against the Company, in
the U.S. District Court for the Northern District of California. This second suit sought a
declaratory judgment of non-infringement of the Macevicz patents that are the subject of the State
Court action mentioned above. Both suits were later consolidated in the U.S. District Court for the
Northern District of California, San Francisco Division. By these consolidated actions, Applied
Biosystems is seeking ownership of the Macevicz patents, unspecified costs and damages, and a
declaration of non-infringement and invalidity of these patents. Applied Biosystems is not
asserting any claim for patent infringement against the Company. The case is currently scheduled to
go to trial on December 1, 2008.
The Macevicz patents relate to methods for sequencing DNA using successive rounds of
oligonucleotide probe ligation (sequencing-by-ligation). The Companys Genome Analyzer products use
a different technology called Sequencing-by-Synthesis (SBS), which the Company believes is not
covered by any of these patents. In addition, the Company has no plans to use any of the
Sequencing-by-Ligation technologies covered by these patents.
13. Employee Benefit Plans
Retirement Plan
The Company has a 401(k) savings plan covering substantially all of its employees. Company
contributions to the plan are discretionary. During the nine months ended September 28, 2008 and
September 30, 2007, the Company made matching contributions of $2.0 million and $0.9 million,
respectively.
Executive Deferred Compensation Plan
For the Companys executives and members of the board of directors, the Company adopted the
Illumina, Inc. Deferred Compensation Plan (the Plan) that became effective January 1, 2008.
Eligible participants can contribute up to 80% of their base salary and 100% of all other forms of
compensation into the Plan, including bonus, commission and director fees. The Company has agreed
to credit the participants contributions with earnings that reflect the performance of certain
independent investment funds. On a discretionary basis, the Company may also make employer
contributions to participant accounts in any amount determined by the Company. The vesting
schedules of employer contributions are at the sole discretion of the Compensation Committee.
However, all employer contributions shall become 100% vested upon the occurrence of the
participants 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 September 28, 2008, no
employer contributions were made to the Plan.
17
In January 2008, the Company also established a rabbi trust for the benefit of its directors
and officers under the Plan. In accordance with FASB Interpretation (FIN) No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51, and EITF 97-14, Accounting for
Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested, the
Company has included the assets of the rabbi trust in its consolidated balance sheet since the
trusts inception. As of September 28, 2008, the assets of the trust and liabilities of the Company
were $1.4 million. The assets and liabilities are classified as other assets and accrued
liabilities, respectively, on the Companys balance sheet as of September 28, 2008. Changes in the
values of the assets held by the rabbi trust accrue to the Company.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
This discussion and analysis should be read in conjunction with our financial statements and
accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements,
notes thereto and related Managements Discussion and Analysis of Financial Condition and Results
of Operations for the year ended December 30, 2007 included in our Annual Report on Form 10-K.
Operating results are not necessarily indicative of results that may occur in future periods.
The discussion and analysis in this Quarterly Report on Form 10-Q contain forward-looking
statements that involve risk and uncertainties, such as statements of our plans, objectives,
expectations and intentions. Words such as anticipate, believe, continue, estimate,
expect, intend, may, plan, potential, predict, project, or similar words or phrases,
or the negatives of these words, may identify forward-looking statements, but the absence of these
words does not necessarily mean that a statement is not forward-looking. Examples of
forward-looking statements include, among others, the integration of Solexa, Inc.s (Solexa)
technology with our existing technology, the commercial launch of new products, including products
based on our Solexa and our VeraCode technologies, and the duration which our existing cash and
other resources is expected to fund our operating activities.
Forward-looking statements are subject to known and unknown risks and uncertainties and are
based on potentially inaccurate assumptions that could cause actual results to differ materially
from those expected or implied by the forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to, those discussed in the subsection
entitled Item 1A. Risk Factors below as well as those discussed elsewhere. Accordingly, you
should not unduly rely on these forward-looking statements, which speak only as of the date of this
Quarterly Report. We undertake no obligation to publicly revise these forward-looking statements to
reflect circumstances or events after the date of this Quarterly Report or to reflect the
occurrence of unanticipated events. You should, however, review the factors and risks we describe
in the reports we file from time to time with the Securities and Exchange Commission (SEC).
Overview
We are a leading developer, manufacturer and marketer of integrated systems for the large
scale analysis of genetic variation and biological function. Using our proprietary technologies, we
provide a comprehensive line of products and services that currently serve the sequencing,
genotyping and gene expression markets. In the future, we expect to enter the market for molecular
diagnostics. Our customers include leading genomic research centers, pharmaceutical companies,
academic institutions, clinical research organizations and biotechnology companies. Our tools
provide researchers around the world with the performance, throughput, cost effectiveness and
flexibility necessary to perform the billions of genetic tests needed to extract valuable medical
information from advances in genomics and proteomics. We believe this information will enable
researchers to correlate genetic variation and biological function, which will enhance drug
discovery and clinical research, allow diseases to be detected earlier and permit better choices of
drugs for individual patients.
Our Technologies
BeadArray Technology
We have developed a proprietary array technology that enables the large-scale analysis of
genetic variation and biological function. Our BeadArray technology combines microscopic beads and
a substrate in a simple proprietary manufacturing process to produce arrays that can perform many
assays simultaneously. Our BeadArray technology provides a unique combination of high throughput,
cost effectiveness, and flexibility. We believe that these features have enabled our BeadArray
technology to become a
leading platform for the emerging high-growth market of single-nucleotide polymorphism (SNP)
genotyping and expect they will enable us to become a key player in the gene expression market.
18
Sequencing Technology
Our DNA sequencing technology, acquired as part of the Solexa merger that was completed on
January 26, 2007, is based on the use of our proprietary sequencing-by-synthesis (SBS)
biochemistry. Our technology is capable of generating several billion bases of DNA sequence from a
single experiment with a single sample preparation, dramatically reducing the cost and improving
the practicality, of human resequencing compared to conventional technologies.
VeraCode Technology
The VeraCode technology, acquired as part of the acquisition of CyVera Corporation in April
2005, enables cost-effective, high-throughput analysis of DNA, RNA and proteins at mid- to low-
multiplex range. Multiplexing refers to the number of individual pieces of information that are
simultaneously extracted from one sample. In addition to Life Science research applications, we
believe the molecular diagnostics market will require systems that are extremely high throughput
and cost effective in this mid- to low-multiplex range. We began shipping the BeadXpress System,
which uses the VeraCode technology, for Life Science research applications during the first quarter
of 2007, along with several assays for the system. In the research market, we expect our customers
to utilize our BeadArray technology for their higher multiplex projects and then move to our
BeadXpress system for their lower multiplex projects utilizing the same assays.
Product Developments
Consumables
During the nine months ended September 28, 2008, we introduced two new products for DNA
analysis: the Infinium High-Density (HD) Human1M-Duo (two samples per chip) and the Human610-Quad
(four samples per chip), featuring up to 2.3 million SNPs per BeadChip. The new Infinium HD product
line doubles sample throughput compared to prior generations of the product and reduces DNA input
requirements by as much as seventy percent. First customer shipments of the Human610-Quad occurred
in the first quarter of 2008. The Human1M-Duo BeadChips began shipment in the second quarter of
2008.
Additionally, in April 2008, we introduced a new product for RNA analysis: the HumanHT12 Gene
Expression BeadChip which enables researchers to perform whole genome gene expression on twelve
samples in parallel. Shipment of this product began during the second quarter of 2008.
Instruments
During the first quarter of 2008, we launched the next-generation Genome Analyzer, the Genome
Analyzer II (GAII) DNA Sequencing platform. We believe the GAII significantly improves the overall
robustness and throughput of the Genome Analyzer and enables researchers to achieve industry
leading accuracy and daily throughput at the lowest operating cost. Shipments began during the
first quarter of 2008.
In April 2008, we launched the iScan System, a next-generation BeadChip scanner that, we
believe, provides researchers conducting genotyping and gene expression studies with significantly
greater throughput, enhanced automation, and improved ease of use. When used with the Human1M-Duo
or the Human610-Quad and our Laboratory Information Management Systems (LIMS) and automation
options, the iScan System can complete genotyping studies up to six times faster than studies run
on our BeadStation. Under an Early Access Program, we began shipping the iScan System in the first
quarter of 2008 to customers in both the academic and industrial sectors. However, broad commercial
shipment of the iScan System did not commence until the second quarter of 2008.
Critical Accounting Policies and Estimates
General
Our discussion and analysis of our financial condition and results of operations is based upon
our condensed unaudited consolidated financial statements, which have been prepared in accordance
with U.S. generally accepted accounting principles. The preparation of financial statements
requires that management make estimates, assumptions and judgments with respect to the
19
application of accounting policies that affect the reported amounts of assets, liabilities,
revenue and expenses, and the disclosures of contingent assets and liabilities. Actual results
could differ from those estimates. Our significant accounting policies are described in Note 1 to
our unaudited condensed consolidated financial statements. Certain accounting policies are deemed
critical if 1) they require an accounting estimate to be made based on assumptions that were highly
uncertain at the time the estimate was made, and 2) changes in the estimate that are reasonably
likely to occur, or different estimates that we reasonably could have used would have a material
effect on our unaudited condensed consolidated financial statements.
Management has discussed the development and selection of these critical accounting policies
with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the
disclosure. In addition, there are other items within our financial statements that require
estimation, but are not deemed critical as defined above. We believe the following critical
accounting policies reflect our more significant estimates and assumptions used in the preparation
of the unaudited condensed consolidated financial statements.
Revenue Recognition
Our revenue is generated primarily from the sale of products and services. Product revenue
consists of sales of arrays, reagents, flow cells, instrumentation and oligonucleotides (oligos).
Service and other revenue consists of revenue received for performing genotyping and sequencing
services, extended warranty sales and amounts earned under research agreements with government
grants, which are recognized in the period during which the related costs are incurred.
We recognize revenue in accordance with the guidelines established by SEC Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition. Under SAB No. 104, revenue cannot be recorded until
all of the following criteria have been met: persuasive evidence of an arrangement exists; delivery
has occurred or services have been rendered; the sellers price to the buyer is fixed or
determinable; and collectibility is reasonably assured. All revenue is recorded net of any
applicable allowances for returns or discounts.
Revenue for product sales is recognized generally upon shipment and transfer of title to the
customer, provided no significant obligations remain and collection of the receivables is
reasonably assured. Revenue from the sale of instrumentation is recognized when earned, which is
generally upon shipment. Revenue for genotyping and sequencing services is recognized when earned,
which is generally at the time the genotyping and sequencing analysis data is delivered to the
customer.
In order to assess whether the price is fixed and determinable, we ensure there are no refund
rights. If payment terms are based on future performance or a right of return exists, we defer
revenue recognition until the price becomes fixed and determinable. We assess collectibility based
on a number of factors, including past transaction history with the customer and the
creditworthiness of the customer. If we determine that collection of a payment is not reasonably
assured, revenue recognition is deferred until the time collection becomes reasonably assured,
which is generally upon receipt of payment. Changes in judgments and estimates regarding
application of SAB No. 104 might result in a change in the timing or amount of revenue recognized.
Sales of instrumentation generally include a standard one-year warranty. We also sell
separately priced maintenance (extended warranty) contracts, which are generally for one or two
years, upon the expiration of the initial warranty. Revenue for extended warranty sales is
recognized ratably over the term of the extended warranty period. Reserves are provided for
estimated product warranty expenses at the time the associated revenue is recognized. If we were to
experience an increase in warranty claims or if costs of servicing our warrantied products were
greater than our estimates, gross margins could be adversely affected.
While the majority of our sales agreements contain standard terms and conditions, we do enter
into agreements that contain multiple elements or non-standard terms and conditions. Emerging
Issues Task Force (EITF) No. 00-21, Revenue Arrangements with Multiple Deliverables, provides
guidance on accounting for arrangements that involve the delivery or performance of multiple
products, services, or rights to use assets within contractually binding arrangements. Significant
contract interpretation is sometimes required to determine the appropriate accounting, including
whether the deliverables specified in a multiple element arrangement should be treated as separate
units of accounting for revenue recognition purposes, and if so, how the price should be allocated
among the deliverable elements, when to recognize revenue for each element, and the period over
which revenue should be recognized. We recognize revenue for delivered elements only when we
determine that the fair values of undelivered elements are known and there are no uncertainties
regarding customer acceptance.
20
Investments
Effective January 1, 2008, we adopted Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements. In February 2008, the Financial Accounting Standards Board (FASB)
issued FASB Staff Position (FSP) No. SFAS 157-2, Effective Date of FASB Statement No. 157, which
provides a one year deferral of the effective date of SFAS No. 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. In October 2008, the FASB issued FASB FSP SFAS 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The
FSP clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that
is not active and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not active.
We have adopted the provisions of SFAS No. 157 with respect to financial assets and
liabilities only and will adopt the provisions for non-financial assets and non-financial
liabilities effective December 29, 2008. We have assessed the fair value of our financial assets
and liabilities in an inactive market in accordance with SFAS No. 157-3.
We determine fair value of our financial assets and liabilities in accordance with SFAS No.
157 and 157-3. Fair value is defined under SFAS No. 157 as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. Valuation techniques used to measure fair value under SFAS
No. 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The
standard describes a fair value hierarchy based on three levels of inputs, of which the first two
are considered observable and the last unobservable, that may be used to measure fair value which
are the following:
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|
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. |
In using this fair value hierarchy and the framework established by SFAS No. 157, management
may be required to make assumptions of pricing by market participants and assumptions about risk,
specifically when using unobservable inputs to determine fair value. These assumptions are
judgmental in nature and may significantly affect our results of operations.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. We evaluate the collectibility of our
accounts receivable based on a combination of factors. We regularly analyze customer accounts,
review the length of time receivables are outstanding and review historical loss rates. If the
financial condition of our customers were to deteriorate, additional allowances could be required.
Inventory Valuation
We record adjustments to inventory for potentially excess, obsolete or impaired goods in order
to state inventory at net realizable value. We must make assumptions about future demand, market
conditions and the release of new products that will supersede old ones. We regularly review
inventory for excess and obsolete products and components, taking into account product life cycle
and development plans, product expiration and quality issues, historical experience and our current
inventory levels. If actual market conditions are less favorable than anticipated, additional
inventory adjustments could be required.
Contingencies
We are subject to legal proceedings primarily related to intellectual property matters. Based
on the information available at the balance sheet dates and through consultation with our legal
counsel, we assess the likelihood of any adverse judgments or outcomes of these matters, as well as
the potential ranges of probable losses. If losses are probable and reasonably estimable, we will
record a liability in accordance with SFAS No. 5, Accounting for Contingencies.
Goodwill and Intangible Asset Valuation
We make significant judgments in relation to the valuation of goodwill and intangible assets
resulting from acquisitions and litigation settlements.
21
In determining the carrying amounts of our goodwill and intangible assets arising from
acquisitions, we use the purchase method of accounting. The purchase method of accounting requires
extensive use of accounting estimates and judgments to allocate the purchase price to the fair
value of the net tangible and intangible assets acquired, including in-process research and
development (IPR&D). Goodwill and intangible assets deemed to have indefinite lives are not
amortized, but are subject to at least annual impairment tests. The amounts and useful lives
assigned to other acquired intangible assets impact future amortization, and the amount assigned to
IPR&D is expensed immediately.
Determining the fair values and useful lives of intangible assets acquired as part of
litigation settlements also requires the exercise of judgment. While there are a number of
different generally accepted valuation methods to estimate the value of intangible assets, we used
the discounted cash flow method in determining the value of licensed technology associated with the
settlement of our Affymetrix litigation. This method required significant management judgment to
forecast the future operating results used in the analysis. In addition, other significant
estimates were required such as residual growth rates and discount factors. The estimates we used
to value and amortize intangible assets were consistent with the plans and estimates that we use to
manage our business and were based on available historical information and industry estimates and
averages. These judgments can significantly affect our net operating results.
SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill and certain
intangible assets be assessed for impairment using fair value measurement techniques. If the
carrying amount of a reporting unit exceeds its fair value, then a goodwill impairment test is
performed to measure the amount of the impairment loss, if any. The goodwill impairment test
compares the implied fair value of the reporting units goodwill with the carrying amount of that
goodwill. The implied fair value of goodwill is determined in the same manner as in a business
combination. Determining the fair value of the implied goodwill is judgmental in nature and often
involves the use of significant estimates and assumptions. These estimates and assumptions could
have a significant impact on whether or not an impairment charge is recognized and also the
magnitude of any such charge. Estimates of fair value are primarily determined using discounted
cash flows and market comparisons. These approaches use significant estimates and assumptions,
including projection and timing of future cash flows, discount rates reflecting the risk inherent
in future cash flows, perpetual growth rates, determination of appropriate market comparables, and
determination of whether a premium or discount should be applied to comparables. It is reasonably
possible that the plans and estimates used to value these assets may be incorrect. If our actual
results, or the plans and estimates used in future impairment analyses, are lower than the original
estimates used to assess the recoverability of these assets, we could incur additional impairment
charges. We have performed our annual test of goodwill as of May 30, 2008 noting no impairment. No
indicators have arisen since managements assessment on May 30, 2008 that would require further
assessment.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, if indicators of impairment exist, we assess the recoverability of the affected long-lived
assets by determining whether the carrying value of such assets can be recovered through
undiscounted future operating cash flows. If impairment is indicated, we measure the future
discounted cash flows associated with the use of the asset and adjust the value of the asset
accordingly. Certain estimates and assumptions are used in determining the fair value of long-lived
assets. These estimates and assumptions are judgmental in nature and could have a significant
impact on the determination of the recognition of an impairment charge and the magnitude of any
such change. If our actual results, or the plans and estimates used in future impairment analyses,
are lower than the original estimates used to assess the recoverability of these assets, we could
incur additional impairment charges.
Stock-Based Compensation
We account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based
Payment. Under the provisions of SFAS No. 123(R), stock-based compensation cost is estimated at the
grant date based on the awards fair-value as calculated by the Black-Scholes-Merton (BSM)
option-pricing model and is recognized as expense over the requisite service period. The BSM model
requires various highly judgmental assumptions including volatility, forfeiture rates, and expected
option life. If any of these assumptions used in the BSM model change significantly, stock-based
compensation expense resulting from new equity awards may differ materially in the future from that
recorded in the current period.
22
Income Taxes
In accordance with SFAS No. 109, Accounting for Income Taxes, the provision for income taxes
is computed using the asset and liability method, under which deferred tax assets and liabilities
are recognized for the expected future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities, and for the expected future tax
benefit to be derived from tax loss and credit carryforwards. Deferred tax assets and liabilities
are determined using the enacted tax rates in effect for the years in which those tax assets are
expected to be realized. A valuation allowance is established when it is more likely than not the
future realization of all or some of the deferred tax assets will not be achieved. The evaluation
of the need for a valuation allowance is performed on a jurisdiction by jurisdiction basis, and
includes a review of all available positive and negative evidence. As of September 28, 2008, we
have maintained a valuation allowance only against certain U.S. and foreign deferred tax assets
that we concluded have not met the more likely than not threshold required under SFAS No. 109.
Due to the adoption of SFAS No. 123(R), we recognize excess tax benefits associated with
share-based compensation to stockholders equity only when realized. When assessing whether excess
tax benefits relating to share-based compensation have been realized, we follow the
with-and-without approach, excluding any indirect effects of the excess tax deductions. Under this
approach, excess tax benefits related to share-based compensation are not deemed to be realized
until after the utilization of all other tax benefits available to us.
Effective January 1, 2007, we adopted FASB Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109, which clarifies the
accounting for uncertainty in tax positions. FIN No. 48 requires that we recognize the impact of a
tax position in our financial statements only if that position is more likely than not of being
sustained upon examination by taxing authorities, based on the technical merits of the position.
Any interest and penalties related to uncertain tax positions will be reflected in income tax
expense.
Results of Operations
To enhance comparability, the following table sets forth our unaudited condensed consolidated
statements of operations for the specified reporting periods stated as a percentage of total
revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine months Ended |
|
|
September 28, |
|
September 30, |
|
September 28, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue |
|
|
93 |
% |
|
|
92 |
% |
|
|
92 |
% |
|
|
89 |
% |
Service and other revenue |
|
|
7 |
|
|
|
8 |
|
|
|
8 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue |
|
|
34 |
|
|
|
35 |
|
|
|
34 |
|
|
|
33 |
|
Cost of service and other revenue |
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
4 |
|
Research and development |
|
|
18 |
|
|
|
20 |
|
|
|
17 |
|
|
|
21 |
|
Selling, general and administrative |
|
|
26 |
|
|
|
25 |
|
|
|
26 |
|
|
|
28 |
|
Impairment of manufacturing equipment |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Amortization of intangible assets |
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
Acquired in-process research and development |
|
|
17 |
|
|
|
|
|
|
|
6 |
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
99 |
|
|
|
84 |
|
|
|
89 |
|
|
|
206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
1 |
|
|
|
16 |
|
|
|
11 |
|
|
|
(106 |
) |
Interest and other income, net |
|
|
2 |
|
|
|
4 |
|
|
|
1 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
3 |
|
|
|
20 |
|
|
|
12 |
|
|
|
(102 |
) |
Provision for income taxes |
|
|
8 |
|
|
|
5 |
|
|
|
7 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(5 |
%) |
|
|
15 |
% |
|
|
5 |
% |
|
|
(108 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and Nine months Ended September 28, 2008 and September 30, 2007
Our fiscal year consists of 52 or 53 weeks ending the Sunday closest to December 31, with
quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30 and September 30. The
three and nine months ended September 28, 2008 and September 30, 2007 were both 13 and 39 weeks,
respectively.
23
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Nine months Ended |
|
|
|
|
|
|
September 28, |
|
|
September 30, |
|
|
Percentage |
|
|
September 28, |
|
|
September 30, |
|
|
Percentage |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
(in thousands) |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Product revenue |
|
$ |
140,319 |
|
|
$ |
90,021 |
|
|
|
56% |
|
|
$ |
379,554 |
|
|
$ |
225,583 |
|
|
|
68% |
|
Service and other revenue |
|
|
9,941 |
|
|
|
7,489 |
|
|
|
33% |
|
|
|
32,744 |
|
|
|
28,611 |
|
|
|
14% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
150,260 |
|
|
$ |
97,510 |
|
|
|
54% |
|
|
$ |
412,298 |
|
|
$ |
254,194 |
|
|
|
62% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in product revenue for both periods presented resulted predominantly from higher
consumable sales, as well as higher sales of our GAII. Growth in consumable revenue was primarily
attributable to significant demand for our Infinium products, specifically the Human610-Quad, which
we began shipping during the first quarter of 2008, and overall growth in our installed base of
instruments. We expect product revenue to continue to increase, which can be mainly attributed to
the launch of several new products, sales of existing products, the growth of our installed base of
instruments and the progression of customer labs ramping to production scale.
Service and other revenue increased for both periods presented. The increase in service and
other revenue for the three months ended September 28, 2008 is primarily due to the completion of
several iSelect custom SNP genotyping service contracts coupled with an increase in significant
Infinium contracts completed using the Infinium Human610-Quad, and an overall increase in extended
warranty sales. The increase for the nine months ended September 28, 2008 is primarily due to the
increase in extended warranty sales. In addition, several iSelect custom SNP genotyping service
contracts were completed and a significant number of Infinium contracts completed using the
Infinium 1M during the nine months ended September 28, 2008. As product sales increase, we expect
to see continued increases in the sale of our extended warranty contracts. We also expect sales
from SNP genotyping service contracts to fluctuate on a yearly and quarterly basis, depending on
the mix, the number of contracts completed and the success of our certified service providers. The
timing of completion of SNP genotyping service contracts is highly dependent on the customers
schedules for delivering the SNPs and samples to us.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Nine months Ended |
|
|
|
|
|
|
September 28, |
|
|
September 30, |
|
|
Percentage |
|
|
September 28, |
|
|
September 30, |
|
|
Percentage |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
(in thousands) |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Cost of product revenue |
|
$ |
51,088 |
|
|
$ |
34,582 |
|
|
|
48% |
|
|
$ |
140,761 |
|
|
$ |
83,436 |
|
|
|
69% |
|
Cost of service and other revenue |
|
|
3,342 |
|
|
|
2,496 |
|
|
|
34% |
|
|
|
10,209 |
|
|
|
8,903 |
|
|
|
15% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
$ |
54,430 |
|
|
$ |
37,078 |
|
|
|
47% |
|
|
$ |
150,970 |
|
|
$ |
92,339 |
|
|
|
64% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue, which excludes impairment of manufacturing equipment and amortization of
intangible assets, represents manufacturing costs incurred in the production process, including
component materials, assembly labor and overhead, installation, warranty, packaging and delivery
costs, as well as costs associated with performing genotyping and sequencing services on behalf of
our customers.
The increase in cost of product revenue for both periods presented was primarily driven by
higher consumable and instrument sales, including increased sales of our GAII. Included as part of
cost of product revenue are charges to increase the inventory reserve of $3.5 million and $5.1
million for the three and nine months ended September 28 2008 compared to $0.1 million and $1.4
million for the three and nine months ended September 30, 2007. The increase in the inventory
reserve is primarily associated with product transitions. During the third quarter of 2008, we
recorded additional reserves of approximately $2.7 million for product obsolescence associated with
the launch of new Infinium Beadchips and the launch of a new sequencing kit that provides better
performance at a substantially lower cost. Additionally, included as part of cost of product
revenue is non-cash stock-based compensation expense of $1.1 million and $3.7 million,
respectively, for the three and nine months ended September 28, 2008 and $1.1 million and $2.9
million, respectively, for the three and nine months ended September 30, 2007.
Cost of service and other revenue increased for both periods presented primarily due to higher
service revenue. Included as part of cost of service and other revenue is non-cash stock-based
compensation expense of $0.1 million and $0.3 million, respectively, for the three and nine months
ended September 28, 2008 as compared $0.1 million and $0.2 million, respectively, for the three and
nine months ended September 30, 2007.
24
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Nine months Ended |
|
|
|
|
September 28, |
|
September 30, |
|
Percentage |
|
September 28, |
|
September 30, |
|
Percentage |
|
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
Research and development |
|
$ |
27,567 |
|
|
$ |
19,753 |
|
|
|
40 |
% |
|
$ |
71,625 |
|
|
$ |
53,893 |
|
|
|
33 |
% |
Our research and development expenses consist primarily of salaries and other
personnel-related expenses, laboratory supplies and other expenses related to the design,
development, testing and enhancement of our products. We expense our research and development
expenses as they are incurred.
Research and development expenses as a percentage of revenue decreased to 18% and 17%,
respectively, for the three and nine months ended September 28, 2008, from 20% and 21%,
respectively, for the three and nine months ended September 30, 2007. However, there was an overall
increase in research and development expenditures compared to the prior year. Costs to support our
BeadArray technology research activities increased approximately $4.7 million and $10.1 million,
respectively, for the three and nine months ended September 28, 2008 compared to the three months
and nine months ended September 30, 2007, primarily due to an overall increase in personnel-related
expenses, increased lab and material expenses associated with the establishment of our
manufacturing facility in Singapore and the development of new products. The continued development
of our Sequencing technology resulted in increased research and development expenditures of
approximately $2.2 million and $5.8 million, respectively, for the three and nine months ended
September 28, 2008 compared to the three and nine months ended September 30, 2007. In addition,
non-cash stock-based compensation expense increased by approximately $0.9 million and $3.3 million,
respectively, compared to the three and nine months ended September 30, 2007. Accrued compensation
expense of $0.6 million associated with contingent consideration for the Avantome acquisition
completed on August 1, 2008 also contributed to the increase in research and development activities
for three and nine months ended September 28, 2008. Costs to develop our newly created Diagnostics
Business Unit totaled $0.2 million and $0.5 million, respectively. The increases were partially
offset by a $0.8 million and $2.6 million, respectively, decrease in research and development
expenses related to the VeraCode technology, compared to the three and nine months ended September
30, 2007. We began shipping our BeadXpress System, which is based on our VeraCode technology,
during the first quarter of 2007. As a result of completing the development of this product, the
related research and development expenses have decreased.
We believe a substantial investment in research and development is essential to remaining
competitive and expanding into additional markets. Accordingly, we expect our research and
development expenses to increase in absolute dollars as we expand our product base.
Selling, General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Nine months Ended |
|
|
|
|
September 28, |
|
September 30, |
|
Percentage |
|
September 28, |
|
September 30, |
|
Percentage |
|
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
Selling, general and administrative |
|
$ |
39,365 |
|
|
$ |
24,307 |
|
|
|
62 |
% |
|
$ |
108,808 |
|
|
$ |
71,237 |
|
|
|
53 |
% |
Our selling, general and administrative expenses consist primarily of personnel costs for
sales and marketing, finance, human resources, business development, legal and general management,
as well as professional fees, such as expenses for legal and accounting services. Selling, general
and administrative expenses as a percentage of revenue were 26% for both the three and nine months
ended September 28, 2008, compared to 25% and 28%, respectively, for the three and nine months
ended September 30, 2007. Selling, general and administrative expenses for the three and nine
months ended September 28, 2008 included stock-based compensation expenses totaling $8.0 million
and $21.6 million, respectively, compared to $4.9 million and $14.0 million, respectively, for the
three and nine months ended September 30, 2007.
Sales and marketing expenses increased by $10.5 million for the three months ended September
28, 2008 compared to the three months ended September 30, 2007. The increase is primarily due to
increases of $9.1 million attributable to personnel-related expenses, including salaries, benefits,
and commissions to support the growth of our business, $1.0 million of non-cash stock-based
compensation expense, and $0.3 million attributable to other non-personnel-related expenses
consisting mainly of outside services associated with sales and marketing activities for our
existing and new products. Included as part of these personnel-related expenses is employee travel
expenses of $1.3 million due to increased headcount and continued international expansion. General
and administrative expense increased by $4.6 million during the three months ended September 28,
2008, compared to the three months ended September 30, 2007. This increase was due to increases of
$2.0 million of non-cash stock-based compensation expense and $2.8 million in personnel-related
expenses associated with the growth of our business. These increases were slightly offset by
decreases of $0.2 million in litigation due to the settlement of our lawsuit with Affymetrix during
the first quarter of 2008.
25
Sales and marketing expenses increased $28.4 million for the nine months ended September 28,
2008, compared to the nine months ended September 30, 2007. The increase is primarily due to
increases of $23.6 million attributable to personnel-related expenses, including salaries, benefits
and commissions, to support the growth of our business. Included as part of these personnel-
related expenses is employee travel expenses of $4.1 million due to increased headcount and
continued international expansion. The remaining $4.8 million increase is attributed to
non-personnel-related costs of $2.6 million consisting mainly of sales and marketing activities for
our existing and new products and $2.2 million of non-cash stock-based compensation expense.
General and administrative expense increased $9.2 million during the nine months ended September
28, 2008, compared to the nine months ended September 30, 2007, due to increases of $7.3 million in
personnel-related expenses associated with the growth of our business, $5.4 million of non-cash
stock-based compensation expense and $0.2 million in outside consulting services offset by a
decrease of $3.7 million in legal costs primarily related to the settlement of the Affymetrix
litigation during the first quarter of 2008.
We expect our selling, general and administrative expenses to increase in absolute dollars as
we expand our staff, add sales and marketing infrastructure and incur additional costs to support
the growth in our business.
Impairment of Manufacturing Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Nine months Ended |
|
|
|
|
September 28, |
|
September 30, |
|
Percentage |
|
September 28, |
|
September 30, |
|
Percentage |
|
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
Impairment of manufacturing equipment |
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
$ |
4,069 |
|
|
$ |
|
|
|
|
N/A |
|
The impairment of manufacturing equipment resulted from our assessment of recoverability on a
portion of our imaging and decoding systems that were no longer being utilized due to the
development of our next-generation system and our transition to the Infinium HD product line.
Amortization of Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Nine months Ended |
|
|
|
|
September 28, |
|
September 30, |
|
Percentage |
|
September 28, |
|
September 30, |
|
Percentage |
|
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
Amortization of intangible assets |
|
$ |
2,702 |
|
|
$ |
662 |
|
|
|
308 |
% |
|
$ |
7,785 |
|
|
$ |
1,767 |
|
|
|
341 |
% |
Amortization of intangible assets as a percentage of revenue was 2% for both the three and
nine months ended September 28, 2008, compared to 1% for both the three and nine months ended
September 30, 2007. The increase in amortization expense is primarily due to the settlement of our
lawsuit with Affymetrix on January 9, 2008 resulting in the recording of an intangible asset of
$36.0 million. We began amortizing this asset during the first quarter of 2008, causing an increase
in amortization of intangible assets of $2.0 million and $5.8 million, respectively, for the three
and nine months ended September 28, 2008 as compared to the three and nine months ended September
30, 2007. The additional increase of $0.2 million during the nine months ended September 28, 2008
as compared to the nine months ended September 30, 2007 represents an additional month of
amortization associated with the assets acquired from Solexa due to the timing of the acquisition
in 2007.
Acquired In-Process Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Nine months Ended |
|
|
|
|
September 28, |
|
September 30, |
|
Percentage |
|
September 28, |
|
September 30, |
|
Percentage |
|
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
Acquired in-process research and development |
|
$ |
24,660 |
|
|
$ |
|
|
|
|
N/A |
|
|
$ |
24,660 |
|
|
$ |
303,400 |
|
|
|
(92 |
%) |
As a result of the Avantome acquisition in August 2008 and the Solexa acquisition in January
2007 we recorded acquired IPR&D charges of $24.7 million and $303.4 million, respectively.
Interest and Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Nine months Ended |
|
|
|
|
September 28, |
|
September 30, |
|
Percentage |
|
September 28, |
|
September 30, |
|
Percentage |
|
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
Interest and other income, net |
|
$ |
2,446 |
|
|
$ |
3,978 |
|
|
|
(39 |
%) |
|
$ |
6,856 |
|
|
$ |
9,043 |
|
|
|
(24 |
%) |
26
Interest income on our cash and cash equivalents and investments was $3.2 million and $9.0
million for the three and nine months ended September 28, 2008, compared to $4.3 million and $11.6
million for the three and nine months ended September 30, 2007. The
decrease in interest income over the prior period was primarily driven by a change in our cash
and investment portfolio to a mix of shorter duration maturities and an increased number of
agency-rated investments coupled with an overall decline in interest rates due to current market
conditions.
Interest expense related to our convertible debt was $1.0 million and $3.0 million,
respectively, for the three and nine months ended September 28, 2008 and $1.0 million and $2.6
million, respectively, for the three and nine months ended September 30, 2007.
In addition, we recorded approximately $0.2 million and $0.9 million in net foreign currency
transaction gains for the three and nine months ended September 28, 2008, respectively. For the
three months ended September 30, 2007, net foreign currency transaction gains of $0.7 million were
recorded. Net foreign transaction gains recognized in the nine months ended September 30, 2007 were
immaterial. The gains resulting from our net foreign currency transactions for the nine months
ended September 28, 2008 are due to fluctuations in foreign currency exchange rates coupled with a
change in our foreign entity functional currency designation from the local currency to the U.S.
dollar beginning the third quarter of 2008. As a result of this change, we remeasured our foreign
subsidiaries nonmonetary assets and liabilities and related income and expense accounts to the
U.S. dollar and recorded the resulting net gain as income for the quarter. Previously, under local
functional currency designation, the effects of translation were recorded within stockholders
equity as other comprehensive income (loss).
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Nine months Ended |
|
|
|
|
September 28, |
|
September 30, |
|
Percentage |
|
September 28, |
|
September 30, |
|
Percentage |
|
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
Provision for income taxes |
|
$ |
11,270 |
|
|
$ |
5,185 |
|
|
|
117 |
% |
|
$ |
29,699 |
|
|
$ |
14,912 |
|
|
|
99 |
% |
The provision for income taxes consists of federal, state, and foreign income tax expenses.
The increase in the provision for income taxes for the three and nine months ended September 28,
2008 as compared to the three and nine months ended September 30, 2007 was primarily driven by the
increase in the income (loss) before income taxes and the expiration of the U.S. federal research
and development tax credit.
As of December 30, 2007, we had net operating loss carryforwards for federal and state tax
purposes of approximately $29.2 million and $97.0 million, respectively, which begin to expire in
2025 and 2014, respectively, unless previously utilized. In addition, we also had U.S. federal and
state research and development tax credit carryforwards of approximately $9.4 million and $9.9
million respectively, which begin to expire in 2018 and 2019, respectively, unless previously
utilized.
Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of our net operating
losses and credits may be subject to annual limitations in the event of any significant future
changes in our ownership structure. These annual limitations may result in the expiration of net
operating losses and credits prior to utilization. Previous limitations due to Section 382 and 383
have been reflected in the deferred tax assets as of September 28, 2008.
Based upon the available evidence as of September 28, 2008, we are not able to conclude it is
more likely than not certain U.S. and foreign deferred tax assets will be realized. Therefore, we
have recorded a valuation allowance of approximately $2.8 million and $25.0 million against certain
U.S. and foreign deferred tax assets, respectively.
As of September 28, 2008, no material changes have been made to our uncertain tax positions
recorded in 2007 in accordance with FIN No. 48, Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109.
Liquidity and Capital Resources
Cashflow (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine months Ended |
|
|
|
September 28, 2008 |
|
|
September 30, 2007 |
|
Net cash provided by operating activities |
|
$ |
1,765 |
|
|
$ |
44,441 |
|
Net cash used in investing activities |
|
|
(210,027 |
) |
|
|
(136,068 |
) |
Net cash provided by financing activities |
|
|
387,086 |
|
|
|
117,848 |
|
Effect of foreign currency translation on cash and cash equivalents |
|
|
1,454 |
|
|
|
(500 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
$ |
180,278 |
|
|
$ |
25,721 |
|
|
|
|
|
|
|
|
27
Historically, our sources of cash have included:
|
|
|
issuance of equity and debt securities, including cash generated from the exercise of
stock options and participation in our Employee Stock Purchase Plan (ESPP); |
|
|
|
|
cash generated from operations, primarily from the collection of accounts receivable
resulting from product sales; and |
|
|
|
|
interest income. |
Our historical cash outflows have primarily been associated with:
|
|
|
cash used for operating activities such as the purchase and growth of inventory,
expansion of our sales and marketing and research and development infrastructure and other
working capital needs; |
|
|
|
|
cash used for our stock repurchases; |
|
|
|
|
expenditures related to increasing our manufacturing capacity and improving our
manufacturing efficiency; |
|
|
|
|
cash paid for litigation settlements; |
|
|
|
|
cash paid for acquisitions; and |
|
|
|
|
interest payments on our debt obligations; |
Other factors that impact our cash inflow and outflow include:
|
|
|
significant increases in our product and services revenue. As our product sales have
increased significantly since 2001, operating income has increased significantly as well,
providing us with an increased source of cash to finance the expansion of our operations;
and |
|
|
|
|
fluctuations in our working capital; |
As of September 28, 2008, we had cash, cash equivalents and short-term investments of $649.6
million, compared to $386.1 million as of December 30, 2007. We currently invest our funds in
treasury notes, commercial paper, auction rate securities, corporate bonds and U.S. dollar-based
short maturity mutual funds. We do not hold securities backed by mortgages. As of September 28,
2008, we had $55.9 million in auction rate securities issued primarily by municipalities and
universities, which are classified as long-term investments. During the nine months ended September
28, 2008, we recorded an unrealized loss of $4.3 million due to the failure associated with the
auctions of each of these securities, which limited our ability to liquidate our investment and
fully recover the carrying value in the near term. We have determined this reduction in fair value
to be temporary. This unrealized loss reduced the fair value of our auction rate securities as of
September 28, 2008 to $51.6 million. This value was determined in accordance with SFAS No. 157. We
used Level 3 hierarchical inputs, due to the lack of actively traded market data, including
managements assumptions of pricing by market participants and assumptions about risk. We based our
fair value determination on estimated discounted future cash flows of interest income over a
projected period reflective of the length of time the Company anticipates it will take the
securities to become liquid. We considered any impairment on these investments to be temporary,
thus any changes in fair value were recorded to other comprehensive income and there was no effect
on operating income during the three and nine months ended September 28, 2008. Refer to our Risk
Factor: Negative conditions in the global credit markets may impair the liquidity of a portion of
our investment portfolio under Item 1A of our Annual Report on Form 10-K for the fiscal year ended
December 30, 2007.
The primary inflow of cash during the nine months ended September 28, 2008 was from the sale
of 8,050,000 shares of our common stock to the public in August 2008 at a public offering price of
$43.75 per share, raising net proceeds to us of approximately $342.6 million, after deducting
underwriting discounts and commissions and estimated offering expenses. Additional cash inflows
during this nine-month period resulted from the sale and maturity of our investments in
available-for-sale securities of approximately $290.6 million and approximately $41.5 million from
the exercise of our stock options.
28
The primary cash outflows during the nine months ended September 28, 2008 were attributable to
the purchase of available-for-sale securities for approximately $430.9 million, the one-time
payment of $90.0 million made to Affymetrix in accordance with the settlement agreement and $45.1
million in capital expenditures primarily for construction-in-progress associated with the
expansion of our San Diego facilities, additions to manufacturing equipment as well as the
development of our manufacturing facility in Singapore. Additionally, on August 1, 2008, we
completed our acquisition of Avantome, Inc. As consideration for the acquisition, we paid $25.8
million in cash, including transaction costs, and may pay up to an additional $35.0 million in
contingent cash consideration based on the achievement of certain milestones.
Our primary short-term needs for capital, which are subject to change, include expenditures
related to:
|
|
|
our facilities expansion needs, including costs of leasing additional facilities; |
|
|
|
|
the acquisition of equipment and other fixed assets for use in our current and future
manufacturing and research and development facilities; |
|
|
|
|
support of our commercialization efforts related to our current and future products,
including expansion of our direct sales force and field support resources both in the United
States and abroad; |
|
|
|
|
potential strategic acquisitions and investments; |
|
|
|
|
the continued advancement of research and development efforts; and |
|
|
|
|
improvements in our manufacturing capacity and efficiency. |
We expect that our product revenue and the resulting operating income, as well as the status
of each of our new product development programs, will significantly impact our cash management
decisions.
Our outstanding convertible notes became convertible into cash and, if applicable, shares of
our common stock as of April 1, 2008 and will continue to be convertible at least through, and
including, December 31, 2008. Generally, upon conversion of a note, we must pay the conversion
value of the note in cash, up to the principal amount of the note. Any excess of the conversion
value over the principal amount is payable in shares of our common stock.
We anticipate that our current cash and cash equivalents and income from operations will be
sufficient to fund our operating needs for at least the next 12 months, barring unforeseen
circumstances. Operating needs 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:
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our ability to successfully commercialize our sequencing and VeraCode technologies and to
expand our SNP genotyping and sequencing services product lines; |
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scientific progress in our research and development programs and the magnitude of those
programs; |
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competing technological and market developments; and |
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the need to enter into collaborations with other companies or acquire other companies or
technologies to enhance or complement our product and service offerings. |
As a result of the factors listed above, we may require additional funding in the future. Our
failure to raise capital on acceptable terms, when needed, could have a material adverse effect on
our business.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements for a description of the effect of
recently issued accounting pronouncements.
29
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Sensitivity
Our exposure to market risk for changes in interest rates relates primarily to our investment
portfolio. The fair market value of fixed rate securities may be adversely impacted by fluctuations
in interest rates while income earned on floating rate securities may decline as a result of
decreases in interest rates. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. We attempt to ensure the safety and
preservation of our invested principal funds by limiting default risk, market risk and reinvestment
risk. We mitigate default risk by investing in investment grade securities. We have historically
maintained a relatively short average maturity for our investment portfolio, and we believe a
hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield
curve would not materially affect the fair value of our interest sensitive financial instruments.
For example, if a 100 basis point change in overall interest rates were to occur in 2008, our
interest income would change by approximately $6.5 million in relation to amounts we would expect
to earn, based on our cash, cash equivalents, and available-for-sale investment securities as of
September 28, 2008.
Market Price Sensitive Instruments
In order to potentially reduce equity dilution, we entered into convertible note hedge
transactions, entitling us to purchase up to 22,902,960 shares of our common stock at a strike
price of approximately $21.83 per share, subject to adjustment. In addition, we sold to these
counterparties warrants (the warrants) exercisable on a cash basis, for up to 18,322,320 shares of
our common stock at a strike price of $31.435 per share, subject to adjustment. The anti-dilutive
effect of the bond hedge transactions, if any, could be partially or fully offset to the extent the
trading price of our common stock exceeds the strike price of the warrants on the exercise dates of
the warrants, which occur during 2014, assuming the warrants are exercised.
Foreign Currency Exchange Risk
We have operations in the Americas, Europe and Asia-Pacific. As a result, our financial
position, results of operations and cash flows can be affected by fluctuations in foreign currency
exchange rates. The functional currency for each of our subsidiaries is the U.S. dollar.
Accordingly, we remeasure the monetary assets and liabilities of our foreign subsidiaries to the
U.S. dollar at month-end exchange rates and remeasure the nonmonetary assets and liabilities to the
U.S. dollar at historical rates. Income and expense amounts related to monetary assets and
liabilities are remeasured to the U.S. dollar at the weighted average exchange rates in effect
during the relevant period, and income and expense accounts related to nonmonetary assets and
liabilities are remeasured to the U.S. dollar at historical exchange rates. Remeasurement gains and
losses are recognized as income, or expense, in the period of occurrence.
In addition, many of our reporting entities conduct a portion of their business in currencies
other than the entitys U.S. functional currency. These transactions give rise to receivables and
payables that are denominated in currencies other than the entitys functional currency. The value
of these receivables and payables is subject to changes in exchange rates because they may become
worth more or less than they were worth at the time we entered into the transaction due to changes
in exchange rates. Both realized and unrealized gains or losses on the value of these receivables
and payables are included in the determination of net income. The net currency exchange gain
recognized on business transactions was $0.2 million and $0.9 million, respectively, for the three
and nine months ended September 28, 2008 and is included in other income and expense in the
consolidated statements of operations.
Item 4. Controls and Procedures.
We design our internal controls to provide reasonable assurance that (1) our transactions are
properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3)
our transactions are properly recorded and reported in conformity with U.S. generally accepted
accounting principles. We also maintain internal controls and procedures to ensure that we comply
with applicable laws and our established financial policies.
We have carried out an evaluation, under the supervision and with the participation of our
management, including our principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the
Securities Exchange Act), as of September 28, 2008. Based upon that evaluation, our principal
executive officer and principal financial officer concluded that, as of September 28, 2008, our
disclosure controls and procedures are effective to ensure that (a) the information required to be
disclosed by us in the reports that we file or submit under the Securities Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the SECs rules
and forms, and (b) such information is accumulated and communicated to our management, including
our principal executive officer and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure. In designing and
evaluating our disclosure
controls and procedures, our management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives, and our management have concluded that the disclosure controls and procedures
are effective at the reasonable assurance level. Because of inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues, if any,
within a company have been detected.
30
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 third quarter of 2008 and that
has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. That evaluation did not identify any such change.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
In the recent past, we incurred substantial costs in defending ourselves against patent
infringement claims and expect, going forward, to devote substantial financial and managerial
resources to protect our intellectual property and to defend against any future claims asserted
against us.
Applied Biosystems Litigation
On December 26, 2006, the Applied Biosystems Group of Applera Corporation (Applied Biosystems)
filed suit in California Superior Court, Santa Clara County against Solexa (which we acquired on
January 26, 2007). This State Court action was related to the ownership of several patents assigned
in 1995 to Solexas predecessor company (Lynx Therapeutics) by a former employee (Dr. Stephen
Macevicz), who is the inventor of these patents and is named as a co-defendant in the suit. Lynx
was originally a unit of Applied Biosystems but was spun out in 1992. On May 31, 2007, Applied
Biosystems filed a second suit, this time against us, in the U.S. District Court for the Northern
District of California. This second suit sought a declaratory judgment of non-infringement of the
Macevicz patents that are the subject of the State Court action mentioned above. Both suits were
later consolidated in the U.S. District Court for the Northern District of California, San
Francisco Division. By these consolidated actions, Applied Biosytems is seeking ownership of the
Macevicz patents, unspecified costs and damages, and a declaration of non-infringement and
invalidity of these patents. Applied Biosystems is not asserting any claim for patent infringement
against us. The case is currently scheduled to go to trial on December 1, 2008.
The Macevicz patents relate to methods for sequencing DNA using successive rounds of
oligonucleotide probe ligation (sequencing-by-ligation). Our Genome Analyzer products use a
different technology called Sequencing-by-Synthesis (SBS), which we believe is not covered by any
of these patents. In addition, we have no plans to use any of the Sequencing-by-Ligation
technologies covered by these patents.
ITEM 1A. Risk Factors.
Our business is subject to various risks, including those described in Item 1A of our annual
report on Form 10-K for the fiscal year ended December 30, 2007, which we filed with the SEC on
February 26, 2008 and strongly encourage you to review. Except as set forth below, there have been
no material changes from the risk factors disclosed in that section of our Form 10-K.
We no longer consider the risk factor in our annual report titled The combined company may
fail to realize the anticipated benefits of the acquisition as a result of our failure to achieve
anticipated revenue growth following the acquisition to be material. This risk factor, which
addressed the realization of the anticipated benefits of our Solexa acquisition, is no longer
considered material because we have experienced operating profits resulting from the acquisition.
In addition, we no longer consider the risk factor in our annual report titled The accounting
method for our convertible debt securities may be subject to change to be relevant, because the
Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. APB 14-1 in May
2008. This FSP finalized the proposed change in accounting treatment for our convertible notes. We
refer you to the discussion under the heading Recent Accounting Pronouncements in Note 1 to our
financial statements.
In addition, we considered the following additional risk factors to be relevant to our
business:
Negative conditions in global credit markets may result in delayed payments from our customers
and may negatively impact our smaller suppliers.
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While overall funding
for next-generation sequencing and genetic analysis research has continued to be favorable from economies
around the world, the operations of certain of our customers and suppliers may be impacted by the recent
economic conditions and market turbulence. Certain of our customers may face challenges gaining timely
access to sufficient credit, which could result in an impairment of their ability to make timely
payments to us. If that were to occur, we may be required to increase our allowance for doubtful
accounts and our days sales outstanding would be negatively impacted. Additionally, these economic
conditions and market turbulence may also impact our smaller suppliers causing them to be unable to
supply in a timely manner sufficient quantities of customized components, thereby impairing our ability
to manufacture on schedule and at commercially reasonable costs.
Loss of the tax deduction on our outstanding convertible notes.
We could lose some or all of the tax deduction for interest expense associated with our $400.0
million aggregate principal amount of convertible notes due in 2014 if the foregoing notes are not
subject to the special Treasury Regulations governing integration of certain debt instruments
(which we do not expect to be the case) the notes are converted, or we invest in non-taxable
investments.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None during the third quarter of fiscal 2008.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
We held a Special Meeting of stockholders on September 9, 2008. Our stockholders ratified an
amendment to our certificate of incorporation to increase the number of authorized shares of our
common stock from 120 million to 320 million, in part to allow for a two-for-one stock split in the
form of a stock dividend.
Our stockholders voted as follows on the proposal:
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For |
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52,114,040 |
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Against |
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578,896 |
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Abstain |
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21,507 |
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Non Votes |
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Item 5. Other Information.
None.
Item 6. Exhibits.
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Exhibit |
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Number |
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Description of Document |
3.1(1)
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Amended and Restated Certificate of Incorporation |
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31.1
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Certification of Jay T. Flatley pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of Christian O. Henry pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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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. |
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32.2
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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. |
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(1)
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Incorporated by reference to Exhibit 3.1 to Illumina, Inc.s current report on Form 8-K,
filed with the Securities and Exchange Commission on September 23, 2008 (File No. 000-30361). |
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SIGNATURES
Pursuant to the requirements 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.
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Illumina, Inc.
(Registrant)
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Date: October 29, 2008 |
/s/ Christian O. Henry
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Christian O. Henry |
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Senior Vice President and Chief Financial Officer |
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