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 the Quarterly Period Ended April 4, 2010
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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 Incorporation or Organization)
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(I.R.S. Employer 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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o 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 April 15, 2010, there were 121,793,243 shares of the Registrants Common Stock outstanding.
ILLUMINA, INC.
INDEX
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2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Illumina, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
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April 4, |
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January 3, |
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2010 |
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2010 |
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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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$ |
213,225 |
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$ |
144,633 |
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Short-term investments |
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534,755 |
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548,894 |
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Accounts receivable, net |
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156,030 |
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157,751 |
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Inventory, net |
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100,623 |
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92,776 |
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Deferred tax assets, current portion |
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19,084 |
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20,021 |
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Prepaid expenses and other current assets |
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16,797 |
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17,515 |
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Total current assets |
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1,040,514 |
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981,590 |
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Property and equipment, net |
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118,014 |
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117,188 |
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Goodwill |
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213,452 |
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213,452 |
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Intangible assets, net |
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42,063 |
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43,788 |
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Deferred tax assets, long-term portion |
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47,486 |
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47,371 |
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Other assets |
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43,682 |
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26,548 |
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Total assets |
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$ |
1,505,211 |
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$ |
1,429,937 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
47,550 |
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$ |
52,781 |
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Accrued liabilities |
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102,886 |
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98,253 |
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Long-term debt, current portion |
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295,404 |
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290,202 |
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Total current liabilities |
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445,840 |
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441,236 |
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Other long-term liabilities |
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22,979 |
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24,656 |
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Commitments and contingencies |
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Conversion option subject to cash settlement |
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94,595 |
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99,797 |
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Stockholders equity: |
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Preferred stock |
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Common stock |
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1,456 |
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1,436 |
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Additional paid-in capital |
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1,694,250 |
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1,637,751 |
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Accumulated other comprehensive income |
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2,652 |
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2,830 |
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Accumulated deficit |
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(259,018 |
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(280,226 |
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Treasury stock, at cost |
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(497,543 |
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(497,543 |
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Total stockholders equity |
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941,797 |
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864,248 |
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Total liabilities and stockholders equity |
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$ |
1,505,211 |
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$ |
1,429,937 |
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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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April 4, |
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March 29, |
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2010 |
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2009 |
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Revenue: |
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Product revenue |
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$ |
173,679 |
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$ |
156,199 |
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Service and other revenue |
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18,452 |
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9,558 |
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Total revenue |
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192,131 |
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165,757 |
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Cost of revenue: |
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Cost of product revenue |
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52,939 |
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50,707 |
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Cost of service and other revenue |
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5,394 |
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3,315 |
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Amortization of intangible assets |
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1,620 |
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1,670 |
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Total cost of revenue |
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59,953 |
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55,692 |
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Gross profit |
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132,178 |
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110,065 |
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Operating expenses: |
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Research and development |
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43,675 |
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32,726 |
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Selling, general and administrative |
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50,278 |
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42,831 |
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Total operating expenses |
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93,953 |
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75,557 |
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Income from operations |
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38,225 |
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34,508 |
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Other income (expense), net: |
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Interest income |
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2,204 |
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2,916 |
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Interest expense |
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(5,955 |
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(5,684 |
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Other expense, net |
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(1,113 |
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(2,389 |
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Total other expense, net |
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(4,864 |
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(5,157 |
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Income before income taxes |
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33,361 |
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29,351 |
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Provision for income taxes |
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12,153 |
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10,540 |
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Net income |
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$ |
21,208 |
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$ |
18,811 |
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Net income per basic share |
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$ |
0.18 |
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$ |
0.15 |
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Net income per diluted share |
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$ |
0.16 |
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$ |
0.14 |
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Shares used in calculating basic net income per share |
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120,668 |
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121,746 |
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Shares used in calculating diluted net income per share |
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136,407 |
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132,967 |
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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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Three Months Ended |
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April 4, |
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March 29, |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net income |
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$ |
21,208 |
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$ |
18,811 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Amortization of intangible assets |
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1,620 |
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1,670 |
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Amortization of debt discount |
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5,203 |
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4,875 |
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Depreciation expense |
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7,391 |
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5,604 |
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Stock-based compensation expense |
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16,999 |
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14,860 |
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Incremental tax benefit related to stock options exercised |
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(4,500 |
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Deferred income taxes |
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4,652 |
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8,775 |
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Other non-cash adjustments |
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614 |
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(578 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(788 |
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(4,693 |
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Inventory |
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(8,101 |
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3,851 |
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Prepaid expenses and other current assets |
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1,547 |
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(3,458 |
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Other assets |
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(1,186 |
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2,764 |
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Accounts payable |
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7,294 |
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6,503 |
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Accrued liabilities |
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1,992 |
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(10,229 |
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Accrued income taxes |
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2,906 |
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1,435 |
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Other long-term liabilities |
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(1,487 |
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558 |
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Net cash provided by operating activities |
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55,364 |
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50,748 |
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Cash flows from investing activities: |
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Purchases of available-for-sale securities |
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(114,039 |
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(171,609 |
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Sales and maturities of available-for-sale securities |
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126,706 |
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162,310 |
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Cash paid for an acquisition |
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(10,000 |
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Purchase of investments |
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(16,151 |
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(17,950 |
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Purchases of property and equipment |
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(10,447 |
) |
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(12,569 |
) |
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Net cash used in investing activities |
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(23,931 |
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(39,818 |
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Cash flows from financing activities: |
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Payments on current portion of long-term debt |
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(10,000 |
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Incremental tax benefit related to stock options exercised |
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4,500 |
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Proceeds from the exercise of warrants |
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3,646 |
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4,762 |
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Proceeds from issuance of common stock |
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26,160 |
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13,051 |
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Net cash provided by financing activities |
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34,306 |
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7,813 |
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Effect of exchange rate changes on cash and cash equivalents |
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2,853 |
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5,379 |
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Net increase in cash and cash equivalents |
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68,592 |
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24,122 |
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Cash and cash equivalents at beginning of period |
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144,633 |
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327,024 |
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Cash and cash equivalents at end of period |
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$ |
213,225 |
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$ |
351,146 |
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See accompanying notes to the condensed consolidated financial statements.
5
Illumina, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Unless the context requires otherwise, references in this report to Illumina, we, us,
the Company, and our refer to Illumina, Inc. and its consolidated subsidiaries.
1. 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 (GAAP) 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 GAAP 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 adjustments, 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 audited
financial statements and footnotes included in the Companys Annual Report on Form 10-K for the
fiscal year ended January 3, 2010 from which the balance sheet information herein was derived.
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 months ended April 4, 2010 and March 29, 2009 were both 13 weeks.
Segment Information
The Company is organized in two business segments, Life Sciences and Diagnostics. The Life
Sciences Business Unit includes all products and services that are primarily related to the
research market, namely the product lines based on the Companys sequencing, BeadArray, and
VeraCode technologies, and the Diagnostics Business Unit focuses on the emerging opportunity in
molecular diagnostics. For the three months ended April 4, 2010, 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. Accordingly, the
Company operated in one reportable segment for the three months ended April 4, 2010. The Company
will begin reporting in two segments once revenues, operating profit or loss, or assets of the
Diagnostics Business Unit exceed 10% of the consolidated amounts.
Revenue Recognition
The Companys revenue is generated primarily from the sale of products and services. Product
revenue primarily consists of sales of instrumentation and consumables used in genetic analysis.
Service and other revenue 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 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 receivable is reasonably
assured. Revenue for genotyping and sequencing services is
6
recognized when earned, which is generally at the time the genotyping or sequencing analysis
data is made available to the customer or agreed upon milestones are reached.
In order to assess whether the price is fixed or determinable, the Company evaluates whether
refund rights exist. If there are refund rights or payment terms based on future performance, the
Company defers revenue recognition until the price becomes fixed or determinable. The Company
assesses collectibility based on a number of factors, including past transaction history with the
customer and the creditworthiness of the customer. If the Company determines that collection of a
payment is not reasonably assured, revenue recognition is deferred until receipt of payment.
The Company regularly enters into contracts where revenue is derived from multiple
deliverables including any mix of products and/or services. These products and/or services are
generally delivered within a short time frame, approximately three to six months, of the contract
execution date. Revenue recognition for contracts with multiple deliverables is based on the
individual units of accounting determined to exist in the contract. A delivered item is considered
a separate unit of accounting when the delivered item has value to the customer on a stand-alone
basis. Items are considered to have stand-alone value when they are sold separately by any vendor
or when the customer could resell the item on a stand-alone basis. Consideration is allocated at
the inception of the contract to all deliverables based on their relative selling price. The
relative selling price for each deliverable is determined using vendor specific objective evidence
(VSOE) of selling price or third-party evidence of selling price if VSOE does not exist. If neither
VSOE nor third-party evidence exists, the Company uses its best estimate of the selling price for
the deliverable.
In order to establish VSOE of selling price, the Company must regularly sell the product
and/or service on a standalone basis with a substantial majority priced within a relatively narrow
range. VSOE of selling price is usually the midpoint of that range. If there is not a sufficient
number of standalone sales and VSOE of selling price cannot be determined, then the Company
considers whether third party evidence can be used to establish selling price. Due to the lack of
similar products and services sold by other companies within the industry, the Company has rarely
established selling price using third-party evidence. If neither VSOE nor third party evidence of
selling price exists, the Company determines its best estimate of selling price using average
selling prices over a rolling 12-month period as well as market conditions. If the product or
service has no history of sales or if the sales volume is not sufficient, the Company relies upon
prices set by the Companys pricing committee adjusted for applicable discounts. The Company
recognizes revenue for delivered elements only when it determines there are no uncertainties
regarding customer acceptance.
Long-Lived Assets
The original assumptions and rationale utilized in establishing the carrying value and
estimated lives of the Companys long-lived assets are periodically re-evaluated. The criteria
used for these evaluations include managements estimate of the assets continuing ability to
generate income from operations and positive cash flow in future periods as well as the strategic
significance of any intangible asset to the Companys business objectives. Impairment is reviewed
at the lowest levels for which there are identifiable cash flows that are independent of the cash
flows of other groups of assets. If assets are considered to be impaired, the impairment
recognized is the amount by which the carrying value of the assets exceeds the fair value of the
assets, which is determined by applicable market prices, when available. The Company did not
recognize a significant impairment during the period.
Fair Value Measurements
The Company determines the fair value of its assets and liabilities based on the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Valuation techniques used to measure fair value
maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses
a fair value hierarchy with three levels of inputs, of which the first two are considered
observable and the last unobservable, to measure fair value:
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Level 1 Quoted prices in active markets for identical assets or liabilities. |
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Level 2 Inputs, other than Level 1, that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities. |
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Level 3 Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities. |
7
The following table presents the Companys fair value hierarchy for assets measured at fair
value on a recurring basis as of April 4, 2010 (in thousands):
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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Debt securities in government sponsored entities |
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$ |
235,275 |
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$ |
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|
$ |
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|
$ |
235,275 |
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Corporate debt securities |
|
|
213,426 |
|
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|
213,426 |
|
Auction rate securities |
|
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|
|
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|
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|
54,450 |
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|
54,450 |
|
U.S. Treasury securities |
|
|
31,604 |
|
|
|
|
|
|
|
|
|
|
|
31,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
480,305 |
|
|
$ |
|
|
|
$ |
54,450 |
|
|
$ |
534,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
The Company is exposed to foreign exchange rate risks in the normal course of business. To
manage a portion of the accounting exposure resulting from changes in foreign currency exchange
rates, the Company enters into foreign exchange contracts to hedge monetary assets and liabilities
that are denominated in currencies other than the functional currency of its subsidiaries, which is
currently the U.S. dollar. These foreign exchange contracts are carried at fair value and are not
designated as hedging instruments. As a result, changes in the value of the derivative are
recognized in other income (expense), net, in the condensed consolidated statements of operations
for the current period, along with an offsetting gain or loss on the underlying assets or
liabilities.
Stock-Based Compensation
The Company uses the Black-Scholes-Merton option-pricing model to estimate the fair value of
stock options granted and stock purchases under the Employee Stock Purchase Plan (ESPP). This model
incorporates various assumptions including expected volatility, expected option life, expected
dividends, and the risk-free interest rates. The Company determines volatility 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 forfeiture experience, exercise activity, and on
the terms and conditions of the stock awards granted to employees.
The assumptions used for the specified reporting periods and the resulting estimates of
weighted-average fair value per share of options granted and for stock purchases under the ESPP
during those periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 4, 2010 |
|
March 29, 2009 |
Interest rate stock options |
|
|
2.73 |
% |
|
|
1.69 |
% |
Interest rate stock purchases |
|
|
0.17 - 0.51 |
% |
|
|
0.39 - 2.90 |
% |
Volatility stock options |
|
|
48 |
% |
|
|
58 |
% |
Volatility stock purchases |
|
|
48 - 58 |
% |
|
|
53 - 58 |
% |
Expected life stock options |
|
5 - 6 years |
|
|
5 years |
|
Expected life stock purchases |
|
6-12 months |
|
|
6 - 12 months |
|
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Weighted average fair value per share of options granted |
|
$ |
18.10 |
|
|
$ |
14.53 |
|
Weighted average fair value per share of employee stock purchases |
|
$ |
10.44 |
|
|
$ |
9.79 |
|
The fair value of restricted stock units granted during the three months ended April 4, 2010
and March 29, 2009 was based on the market price of our common stock on the date of grant.
As of April 4, 2010, approximately $161.1 million of total unrecognized compensation cost
related to stock options, restricted stock units and ESPP shares issued to date is expected to be
recognized over a weighted-average period of approximately 1.65 years.
Total stock-based compensation expense for employee stock options and stock purchases under
the ESPP consists of the following (in thousands, except per share data):
8
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 4, |
|
|
March 29, |
|
|
|
2010 |
|
|
2009 |
|
Cost of product revenue |
|
$ |
1,209 |
|
|
$ |
1,274 |
|
Cost of service and other revenue |
|
|
111 |
|
|
|
141 |
|
Research and development |
|
|
5,898 |
|
|
|
4,622 |
|
Selling, general and administrative |
|
|
9,781 |
|
|
|
8,823 |
|
|
|
|
|
|
|
|
Share-based compensation expense before taxes |
|
|
16,999 |
|
|
|
14,860 |
|
Related income tax benefits |
|
|
(5,946 |
) |
|
|
(4,853 |
) |
|
|
|
|
|
|
|
Share-based compensation expense, net of taxes |
|
$ |
11,053 |
|
|
$ |
10,007 |
|
|
|
|
|
|
|
|
Net share-based compensation expense per share of common stock: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.09 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
Net Income (Loss) per Share
Basic net income or loss per share is computed by dividing net income or loss by the
weighted-average number of common shares outstanding during the reporting period. Diluted net
income per share is computed by dividing net income by the weighted average number of common shares
outstanding during the reporting period increased to include dilutive potential common shares using
the treasury stock method. Dilutive potential common shares consist of stock options with combined
exercise prices and unrecognized compensation expense that are less than the average market price
of the Companys common stock, restricted stock units with unrecognized compensation expense,
convertible debt when the average market price of the Companys common stock is above the
conversion price of $21.83 and warrants with exercise prices that are less than the average market
price of the Companys common stock. Under the treasury stock method, the amount that must be paid
to exercise stock options and warrants, the amount of compensation expense for future services that
the Company has not yet recognized for stock options and restricted stock units and the amount of
tax benefits that will be recorded in additional paid-in capital when the awards become deductible
are assumed to be used to repurchase shares. In loss periods, basic net loss per share and diluted
net loss per share are identical since the effect of dilutive potential common shares is
anti-dilutive and therefore excluded.
The following table presents the calculation of weighted-average shares used to calculate
basic and diluted net income per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 4, |
|
March 29, |
|
|
2010 |
|
2009 |
Weighted-average shares outstanding |
|
|
120,668 |
|
|
|
121,746 |
|
Effect of dilutive potential common shares: |
|
|
|
|
|
|
|
|
Dilutive Convertible Senior Notes |
|
|
7,447 |
|
|
|
5,421 |
|
Dilutive equity awards |
|
|
4,192 |
|
|
|
4,119 |
|
Dilutive warrants sold in connection with the Convertible Senior Notes |
|
|
2,937 |
|
|
|
|
|
Dilutive warrants assumed in an acquisition |
|
|
1,163 |
|
|
|
1,681 |
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in calculating diluted net income per share |
|
|
136,407 |
|
|
|
132,967 |
|
|
|
|
|
|
|
|
|
|
Weighted-average shares excluded from calculation due to anti-dilutive effect |
|
|
1,170 |
|
|
|
2,542 |
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
Total comprehensive income consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 4, |
|
|
March 29, |
|
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
21,208 |
|
|
$ |
18,811 |
|
Unrealized gain (loss) on available-for-sale securities, net of deferred tax |
|
|
1,314 |
|
|
|
(550 |
) |
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
22,522 |
|
|
$ |
18,261 |
|
|
|
|
|
|
|
|
9
2. Balance Sheet Account Details
Inventory, net, consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 4, |
|
|
January 3, |
|
|
|
2010 |
|
|
2010 |
|
Raw materials |
|
$ |
37,637 |
|
|
$ |
39,144 |
|
Work in process |
|
|
53,212 |
|
|
|
51,670 |
|
Finished goods |
|
|
9,774 |
|
|
|
1,962 |
|
|
|
|
|
|
|
|
Total inventory, net |
|
$ |
100,623 |
|
|
$ |
92,776 |
|
|
|
|
|
|
|
|
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 4, |
|
|
January 3, |
|
|
|
2010 |
|
|
2010 |
|
Compensation |
|
$ |
29,928 |
|
|
$ |
32,487 |
|
Short-term deferred revenue |
|
|
28,453 |
|
|
|
27,445 |
|
Taxes |
|
|
13,000 |
|
|
|
12,109 |
|
Customer deposits |
|
|
12,066 |
|
|
|
6,121 |
|
Reserve for product warranties |
|
|
9,809 |
|
|
|
10,215 |
|
Accrued royalties |
|
|
4,329 |
|
|
|
2,552 |
|
Other |
|
|
5,301 |
|
|
|
7,324 |
|
|
|
|
|
|
|
|
Total accrued liabilities |
|
$ |
102,886 |
|
|
$ |
98,253 |
|
|
|
|
|
|
|
|
3. Short-term investments
The following is a summary of short-term investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 4, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities in government sponsored entities |
|
$ |
234,851 |
|
|
$ |
534 |
|
|
$ |
(110 |
) |
|
$ |
235,275 |
|
Corporate debt securities |
|
|
211,709 |
|
|
|
1,859 |
|
|
|
(142 |
) |
|
|
213,426 |
|
U.S. treasury securities |
|
|
31,618 |
|
|
|
21 |
|
|
|
(35 |
) |
|
|
31,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
|
478,178 |
|
|
|
2,414 |
|
|
|
(287 |
) |
|
|
480,305 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
|
54,450 |
|
|
|
|
|
|
|
(6,198 |
) |
|
|
48,252 |
|
Put option |
|
|
|
|
|
|
6,198 |
|
|
|
|
|
|
|
6,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities |
|
|
54,450 |
|
|
|
6,198 |
|
|
|
(6,198 |
) |
|
|
54,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
$ |
532,628 |
|
|
$ |
8,612 |
|
|
$ |
(6,485 |
) |
|
$ |
534,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities in government sponsored entities |
|
$ |
289,101 |
|
|
$ |
702 |
|
|
$ |
(102 |
) |
|
$ |
289,701 |
|
Corporate debt securities |
|
|
190,949 |
|
|
|
2,039 |
|
|
|
(166 |
) |
|
|
192,822 |
|
U.S. treasury securities |
|
|
11,487 |
|
|
|
12 |
|
|
|
(28 |
) |
|
|
11,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
|
491,537 |
|
|
|
2,753 |
|
|
|
(296 |
) |
|
|
493,994 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
|
54,900 |
|
|
|
|
|
|
|
(6,129 |
) |
|
|
48,771 |
|
Put option |
|
|
|
|
|
|
6,129 |
|
|
|
|
|
|
|
6,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities |
|
|
54,900 |
|
|
|
6,129 |
|
|
|
(6,129 |
) |
|
|
54,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
$ |
546,437 |
|
|
$ |
8,882 |
|
|
$ |
(6,425 |
) |
|
$ |
548,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-For-Sale Securities
As of April 4, 2010, the Company had 45 available-for-sale securities in a gross unrealized
loss position, all of which had been in such position for less than twelve months. There were no
unrealized losses due to credit issues for the periods presented. There were no impairments
considered other-than-temporary as it is more likely than not the Company will hold the securities
until maturity or a recovery of the cost basis. The following table shows the fair values and the
gross unrealized losses of the Companys available-for-sale securities that were in an unrealized
loss position at April 4, 2010 and January 3, 2010 aggregated by investment category (in
thousands):
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 4, 2010 |
|
|
January 3, 2010 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
Debt securities in government sponsored entities |
|
$ |
76,701 |
|
|
$ |
(110 |
) |
|
$ |
73,783 |
|
|
$ |
(102 |
) |
Corporate debt securities |
|
|
46,148 |
|
|
|
(142 |
) |
|
|
26,488 |
|
|
|
(166 |
) |
U.S. treasury securities |
|
|
24,591 |
|
|
|
(35 |
) |
|
|
4,471 |
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
147,440 |
|
|
$ |
(287 |
) |
|
$ |
104,742 |
|
|
$ |
(296 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains and losses are determined based on the specific identification method and are
reported in other income (expense), net in the condensed consolidated statements of operations.
Gross realized gains and losses on sales of available-for-sale securities were immaterial for the
three months ended April 4, 2010 and March 29, 2009.
Trading Securities
At April 4, 2010, the Companys trading securities consisted of $54.5 million (at cost) in
auction rate securities issued primarily by municipalities and universities. The auction rate
securities are held in a brokerage account with UBS Financial Services, Inc., a subsidiary of UBS.
These securities are debt instruments with a long-term maturity and with an interest rate that is
reset in short intervals through auctions.
The markets for auction rate securities effectively ceased when the vast majority of auctions
failed in February 2008, preventing investors from selling these securities. As of April 4, 2010,
the securities continued to fail auction and remained illiquid. Changes in the fair value of the
Companys auction rate securities from January 3, 2010 through April 4, 2010 are as follows (in
thousands):
|
|
|
|
|
Fair value as of January 3, 2010 |
|
$ |
48,771 |
|
Redeemed by issuer |
|
|
(450 |
) |
Unrealized loss(1) |
|
|
(69 |
) |
|
|
|
|
Fair value as of April 4, 2010 |
|
$ |
48,252 |
|
|
|
|
|
|
|
|
(1) |
|
Unrealized gains and losses associated with the Companys auction rate
securities are classified as other income (expense), net in the
consolidated statements of operations for the three months ended April
4, 2010. |
In determining the fair value of the Companys auction rate securities, the Company considered
trades in the secondary market. However, due to the auction failures of the auction rate securities
in the marketplace and the lack of trading in the secondary market of these instruments, there was
insufficient observable auction rate security market information available to directly determine
the fair value of the Companys investments. As a result, the value of these 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. The
Company used the concepts of fair value based on estimated discounted future cash flows of interest
income over a projected 17 year period, which is reflective of the weighted average life of the
student loans in the underlying trust. In preparing this model, the Company used historical data of
the rates upon which a majority of the auction rate securities contractual rates were based, such
as the LIBOR and average trailing twelve-month 90-day treasury interest rate spreads, to estimate
future interest rates. The Company also considered the discount factors, taking into account the
credit ratings of the auction rate securities, using a range of discount rates from 5.9% to 7.3%.
The Company obtained information from multiple sources, including UBS, to determine a reasonable
range of assumptions to use in valuing the auction rate securities. The Companys model was
corroborated by a separate comparable cash flow analysis prepared by UBS. To understand the
sensitivity of the Companys valuation, the liquidity factor and estimated remaining life was
varied. Variations in those results were evaluated and it was determined the factors and valuation
method chosen were reasonable and representative of the Companys auction rate security portfolio.
As a result of the auction rate failures, various regulatory agencies initiated investigations
into the sales and marketing practices of several banks and broker-dealers, including UBS, which
sold auction rate securities, alleging violations of federal and state laws. Along with several
other broker-dealers, UBS subsequently reached a settlement with the federal and state regulators
that required them to repurchase auction rate securities from certain investors at par at some
future date. In November 2008, the Company signed a settlement agreement granting the Company an
option to sell its auction rate securities at par value to UBS during the period of June 30, 2010
through July 2, 2012 (the Settlement). In accepting the Settlement, the Company released UBS from
any claims relating to the marketing and sale of auction rate securities. Although the Company
expects to sell its auction rate securities under the
11
Settlement, if the Settlement is not exercised before July 2, 2012, it will expire and UBS
will have no further rights or obligation to buy the Companys auction rate securities. In lieu of
the acceptance of the Settlement, the auction rate securities will continue to accrue interest as
determined by the auction process or the terms outlined in the prospectus of the auction rate
securities if the auction process fails. In addition to offering to repurchase the Companys
auction rate securities, as part of the Settlement, UBS has agreed to provide the Company with a
no net cost loan up to 75% of the par value of the auction rate securities until June 30, 2010.
According to the terms of the Settlement, the interest rate on the loan will approximate the
weighted average interest or dividend rate payable to the Company by the issuer of any auction rate
securities pledged as collateral.
UBSs obligations under the Settlement are not secured by its assets and do not require UBS to
obtain any financing to support its performance obligations under the Settlement. UBS has
disclaimed any assurance that it will have sufficient financial resources to satisfy its
obligations under the Settlement.
To account for the Settlement, the Company recorded a separate freestanding asset (put option)
and recognized a corresponding gain in earnings during the fourth quarter of 2008. Changes in the
fair value of the Companys put option have been recorded as other income (expense), net in the
condensed consolidated statements of operations. The changes in fair value from January 3, 2010
through April 4, 2010 are as follows (in thousands):
|
|
|
|
|
Fair value as of January 3, 2010 |
|
$ |
6,129 |
|
Unrealized gain |
|
|
69 |
|
|
|
|
|
Fair value as of April 4, 2010 |
|
$ |
6,198 |
|
|
|
|
|
Since the put option does not meet the definition of a derivative instrument, the Company
elected to measure it at fair value in accordance with authoritative guidance related to the fair
value option for financial assets and financial liabilities. The Company valued the put option
using a discounted cash flow approach including estimates of interest rates, timing and amount of
cash flow, with consideration given to UBSs financial ability to repurchase the auction rate
securities beginning June 30, 2010. These assumptions are volatile and subject to change as the
underlying sources of these assumptions and market conditions change.
The Company will continue to recognize gains and losses in earnings approximating the changes
in the fair value of the auction rate securities at each balance sheet date. These gains and losses
are expected to be approximately offset by changes in the fair value of the put option.
The auction rate securities were classified as short-term investments at April 4, 2010 and
January 3, 2010, as the Company intends to exercise the right to sell the securities back to UBS
within the next year.
4. Warranties
The Company generally provides a one-year warranty on genotyping, gene expression and
sequencing systems. Additionally, the Company provides a warranty on its consumable sales through
the expiry date, which generally ranges from six to twelve months after the manufacture date. At
the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses
based on historical experience as well as anticipated product performance. This expense is recorded
as a component of cost of product revenue. Estimated warranty expenses associated with extended
maintenance contracts for systems are recorded as cost of service and other revenue as incurred
over the term of the maintenance contract.
Changes in the Companys reserve for product warranties from January 3, 2010 through April 4,
2010 are as follows (in thousands):
|
|
|
|
|
Balance at January 3, 2010 |
|
$ |
10,215 |
|
Additions charged to cost of revenue |
|
|
4,107 |
|
Repairs and replacements |
|
|
(4,513 |
) |
|
|
|
|
Balance at April 4, 2010 |
|
$ |
9,809 |
|
|
|
|
|
5. Convertible Senior Notes
On February 16, 2007, the Company issued $400.0 million principal amount of 0.625% convertible
senior notes due 2014. 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
12
February 15 and August 15 of each year. The Company made an interest payment of $1.2 million
on February 15, 2010. 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-day 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, 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) at any time on or after
November 15, 2013 through the third scheduled trading day immediately preceding the maturity date.
As of April 4, 2010, notes in an aggregate principal amount of $10.0 million have been converted.
The Company entered into a hedge transaction upon issuance of the convertible senior notes
with the initial purchasers and/or their affiliates (the hedge counterparties), which entitles 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 hedge
counterparties 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 transaction that was not covered by the proceeds from the sale of the warrants was
approximately $46.6 million and was reflected as a reduction of additional paid-in capital. The
hedge transaction is expected to reduce the potential equity dilution upon conversion of the notes
to the extent the Company exercises the hedge to purchase shares from the hedge counterparties to
deliver to converting noteholders. However, the warrants could have a dilutive effect on the
Companys earnings per share to the extent that the price of the Companys common stock exceeds the
strike price of the warrants.
The Company accounts separately for the liability and equity components of the notes in
accordance with authoritative guidance for convertible debt instruments that may be settled in cash
upon conversion. The guidance requires the carrying amount of the liability component to be
estimated by measuring the fair value of a similar liability that does not have an associated
conversion feature. As the Company was unable to find any other comparable companies in industry
and size with outstanding non-convertible public debt, the Company determined that senior,
unsecured corporate bonds represent a similar liability to the convertible senior notes without the
conversion option. To measure the fair value of the similar liability at February 16, 2007, the
Company estimated an interest rate using assumptions that market participants would use in pricing
the liability component, including market interest rates, credit standing, yield curves and
volatilities, all of which are defined as Level 2 Observable Inputs. The estimated interest rate of
8.27% was applied to the convertible senior notes and coupon interest using a present value
technique to arrive at the fair value of the liability component. The difference between the cash
proceeds associated with the convertible debt and this estimated fair value of the liability
component is recorded as an equity component. We classified a portion of the equity component as
temporary equity measured as the excess of a) the amount of cash that would be required to be paid
upon conversion over b) the current carrying amount of the liability-classified component. The
amount is reflected within conversion option subject to cash settlement in the condensed
consolidated balance sheets.
As of January 3, 2010, the principal amount of the convertible senior notes was $390.0
million and the unamortized discount was $99.8 million resulting in a net carrying amount of the
liability component of $290.2 million. As of April 4, 2010, the principal amount of the convertible
senior notes was $390.0 million and the unamortized discount was $94.6 million resulting in a net
carrying amount of the liability component of $295.4 million. The remaining period over which the
discount on the liability component will be amortized is 3.87 years.
13
6. Stockholders Equity
Stock Options
The Companys stock option activity under all stock option plans during the three months ended
April 4, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Options |
|
Exercise Price |
Outstanding at January 3, 2010 |
|
|
16,089,438 |
|
|
$ |
18.59 |
|
Granted |
|
|
1,150,989 |
|
|
$ |
36.90 |
|
Exercised |
|
|
(1,357,591 |
) |
|
$ |
15.77 |
|
Cancelled |
|
|
(625,291 |
) |
|
$ |
22.06 |
|
|
|
|
|
|
|
|
|
|
Outstanding at April 4, 2010 |
|
|
15,257,545 |
|
|
$ |
20.07 |
|
|
|
|
|
|
|
|
|
|
The weighted average remaining life of options exercisable is 5.8 years as of April 4, 2010.
The aggregate intrinsic value of options outstanding and options exercisable as of April 4,
2010 was $294.8 million and $203.3 million, respectively. Aggregate intrinsic value represents the
difference between the Companys closing stock price per share on the last trading day of the
fiscal period, which was $39.30 as of April 1, 2010, and the exercise price multiplied by the
number of options outstanding. Total intrinsic value of options exercised was $29.4 million and
$21.2 million for the three months ended April 4, 2010 and March 29, 2009, respectively.
Employee Stock Purchase Plan
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. Shares
totaling 210,006 were issued under the ESPP during the three months ended April 4, 2010. As of
April 4, 2010, there were 16,224,443 shares available for issuance under the ESPP.
Restricted Stock Units
A summary of the Companys restricted stock unit activity and related information for the
three months ended April 4, 2010 is as follows:
|
|
|
|
|
|
|
Restricted Stock Units (1) |
Outstanding at January 3, 2010 |
|
|
2,508,708 |
|
Awarded |
|
|
288,113 |
|
Vested |
|
|
(94,861 |
) |
Cancelled |
|
|
(51,866 |
) |
|
|
|
|
|
Outstanding at April 4, 2010 |
|
|
2,650,094 |
|
|
|
|
|
|
|
|
|
(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 $36.96
for the three months ended April 4, 2010.
Based on the closing price of the Companys common stock of $39.30 on April 1, 2010, the total
intrinsic value of all outstanding restricted stock units on that date was $104.1 million.
Warrants
In conjunction with an acquisition in January 2007, the Company assumed 4,489,686 warrants.
During the three months ended April 4, 2010, there were 442,212 warrants exercised, resulting in
cash proceeds to the Company of approximately $3.6 million.
A summary of all warrants outstanding as of April 4, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
|
Exercise Price |
|
Expiration Date |
|
620,110 |
|
|
|
|
$ |
10.91 |
|
|
|
11/23/2010 |
|
|
1,020,832 |
|
|
|
|
$ |
10.91 |
|
|
|
1/19/2011 |
|
|
18,322,320 |
(1) |
|
|
|
$ |
31.44 |
|
|
|
2/15/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,963,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents warrants sold in connection with the offering of the Companys convertible senior
notes (see Note 5). |
14
7. Legal Proceedings
From time to time, we are party to litigation and other legal proceedings in the ordinary
course, and incidental to the conduct, of our business. While the results of any litigation or
other legal proceedings are uncertain, management does not believe the ultimate resolution of any
pending legal matters is likely to have a material adverse effect on our financial position or
results of operations.
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 January 3, 2010 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 contains forward-looking
statements that involve risks and uncertainties, such as statements of our plans, strategies,
objectives, expectations, intentions and adequacy of resources. Words such as anticipate,
believe, continue, estimate, expect, intend, may, plan, potential, predict,
project or similar words or phrases, or the negatives of these words, may identify
forward-looking statements, but the absence of these words does not necessarily mean that a
statement is not forward looking. Examples of forward-looking statements include, among others,
statements regarding the integration of our acquired technologies with our existing technology, the
commercial launch of new products, the entry into new business segments or markets, 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. Among the important factors that
could cause actual results to differ materially from those in any forward-looking statements are
(i) our ability to develop and commercialize further our BeadArray, VeraCode®, and Solexa®
technologies and to deploy new sequencing, gene expression, and genotyping products and
applications for our technology platforms, (ii) our ability to manufacture robust instrumentation
and reagents, and (iii) reductions in the funding levels to our primary customers, including as the
result of timing and amount of funding provided by the American Recovery and Reinvestment Act of
2009, together with other factors detailed in our filings with the Securities and Exchange
Commission, including our recent filings on Forms 10-K and 10-Q, or in information disclosed in
public conference calls, the date and time of which are released beforehand. We undertake no
obligation, and do not intend, to update these forward-looking statements, to review or confirm
analysts expectations, or to provide interim reports or updates on the progress of the current
financial quarter. Accordingly, you should not unduly rely on these forward-looking statements,
which speak only as of the date of this Quarterly Report on Form 10-Q.
Business Overview
We are a leading developer, manufacturer, and marketer of integrated systems for the 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, and 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.
We develop and commercialize sequencing technologies used to perform a range of analyses,
including de novo sequencing, whole genome re-sequencing, gene expression analysis, and small RNA
analysis. Our product and service offerings also include leading-edge solutions for
single-nucleotide polymorphism (SNP) genotyping, copy number variation (CNV), DNA methylation
studies, gene expression profiling, and low-multiplex analysis of DNA, RNA, and protein. We believe
we are the only company with genome-scale technology for sequencing, genotyping, and gene
expression the three cornerstones of modern genetic analysis.
Our tools provide researchers around the world with the performance, throughput, cost
effectiveness, and flexibility necessary to determine and analyze the billions of bits of genetic
information 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 analysis presented below is organized to provide the information we believe will be useful
for understanding the relevant trends going forward. However, this discussion should be read in
conjunction with our consolidated financial statements and the notes thereto in Item 1 of this
report.
15
Business Trends and Outlook
Our financial results have been, and will continue to be, impacted by several significant
trends, which are described below:
Next Generation Sequencing
Strong demand for next generation sequencing applications continues to drive both sequencing
instrument and consumable sales. In 2009 we made advances to our sequencing technology in many
areas including enhanced chemistry, algorithms, and hardware. The combination of these advances
increased the output and decreased the cost of sequencing and expanded the number of applications
that researchers can perform using our sequencing systems. During the first quarter of 2010, we
began customer shipments of the HiSeq 2000, our next generation sequencing instrument that we
believe will allow customers to sequence whole human genomes for less than $10,000 in reagent
costs. This instrument has created significant demand and has contributed to our record backlog
levels at the end of the first quarter. We are quickly ramping our manufacturing capacity for the
HiSeq 2000 and believe that we will exit the second quarter with the ability to meet customer
demand with reasonable ship schedules. Additionally, we believe revenue will increase in the latter
half of the year due to the increased installed base and resulting consumable sales.
MicroArrays
We experienced a slowdown in the sales of our microarray products during 2009 that was largely
attributable to researchers reducing or suspending the initiation of new studies as they waited for
rare variant content emerging from the 1000 Genomes Project, an international research effort
launched in 2008 to establish the most detailed catalog of human genetic variation. Despite
advances in sequencing technology, we believe microarrays remain a cheaper, faster, and more
accurate technology for use when genetic content is known. The information content of specific
microarrays is fixed and reproducible. As such, specific microarrays provide repeatable,
standardized assays for certain subsets of nucleotide bases within the overall genome. During 2010,
as part of our previously announced Genome Wide Association Studies (GWAS) roadmap, we plan to launch microarrays that will feature
approximately 2.5 million and 5.0 million markers per sample and include new rare variant content
from the 1000 Genomes Project. As these microarrays become available, we believe activity in the
microarray market will increase relative to 2009.
American Recovery and Reinvestment Act of 2009 (the Recovery Act)
The Recovery Act was enacted in February 2009 to provide stimulus to the U.S. economy in the
wake of the economic downturn. As part of the Recovery Act legislation, over $10.0 billion in
funding was provided to the National Institutes of Health (NIH) through September 2010 to support
the advancement of scientific research. While it is not possible to quantify the net impact of
orders resulting from the Recovery Act due to the uncertainty surrounding orders that would have
been received in absence of stimulus, we believe approximately
$21.0 million in orders were directly related
to Recovery Act grants. We believe a significant portion of the Recovery Act awards may be distributed
during the remainder of 2010, which may create a pipeline of opportunity throughout the year.
Gross Profit
Our gross profit increased during 2009 from the realization of cost efficiencies in
manufacturing and an improved sales mix of sequencing consumables driven by growth in the installed
base of our sequencing systems. We expect changes in our product mix to continue to affect our
gross profit, particularly in the latter half of the year. We anticipate gross profit to be higher
in the first half of 2010 and then decrease as the sales mix shifts to newer products and the
effects of our trade-in promotions associated with the launch of the HiSeq 2000 are realized.
Additionally, we expect price competition to continue in our markets causing increased variability
in our gross profit on a quarterly and annual basis.
Operating Expenses
We expect to incur additional operating costs to support the expected growth of our business.
As a result of revenues growing faster in the second half of 2010, we expect operating expenses as
a percentage of revenue to be higher in the first half of the year compared to the second half. We
believe a substantial investment in research and development is essential to remaining competitive
and launching products into new markets. Accordingly, we expect our research and development
expenses to increase in absolute dollars as we expand our product base. Selling, general and
administrative expenses are also expected to increase in absolute dollars as we continue to expand
our staff and add sales and marketing infrastructure.
16
Income Taxes
The
provision for income taxes is dependent on the mix of earnings in tax jurisdictions
with different statutory tax rates and the other factors discussed in the risk factor We are
subject to risks related to taxation in multiple jurisdictions and the possible loss of the tax
deduction on our outstanding convertible notes in Item 1A of our Annual Report on Form 10-K for
the fiscal year ended January 3, 2010. For 2010 and beyond, we anticipate an increase in earnings
in higher tax jurisdictions which may adversely impact the provision for income taxes.
Due to the expected utilization of the majority of our net operating loss carryforwards and
U.S. federal research and development tax credit carryforwards, we anticipate significant income tax
payments starting in the second quarter of 2010.
While these trends are important to understanding and evaluating our financial results, the
other transactions, events and trends discussed in Risk Factors in Item 1A of this report and
Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 3, 2010 may also
materially impact our business operations and financial results.
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 |
|
|
April 4, 2010 |
|
March 29, 2009 |
Revenue: |
|
|
|
|
|
|
|
|
Product revenue |
|
|
90 |
% |
|
|
94 |
% |
Service and other revenue |
|
|
10 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
100 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
Cost of revenue: |
|
|
|
|
|
|
|
|
Cost of product revenue |
|
|
27 |
|
|
|
31 |
|
Cost of service and other revenue |
|
|
3 |
|
|
|
2 |
|
Amortization of intangible assets |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
31 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
69 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
23 |
|
|
|
20 |
|
Selling, general and administrative |
|
|
26 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
49 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
20 |
|
|
|
20 |
|
Other income (expense), net: |
|
|
|
|
|
|
|
|
Interest income |
|
|
1 |
|
|
|
2 |
|
Interest expense |
|
|
(3 |
) |
|
|
(3 |
) |
Other income (expense), net |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
17 |
|
|
|
17 |
|
Provision for income taxes |
|
|
6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
11 |
% |
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
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 months ended April 4, 2010 and March 29, 2009 were both 13 weeks.
Three months Ended April 4, 2010 and March 29, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
April 4, |
|
|
March 29, |
|
|
|
|
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Product revenue |
|
$ |
173,679 |
|
|
$ |
156,199 |
|
|
$ |
17,480 |
|
|
|
11 |
% |
Service and other revenue |
|
|
18,452 |
|
|
|
9,558 |
|
|
|
8,894 |
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
192,131 |
|
|
$ |
165,757 |
|
|
$ |
26,374 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
132,178 |
|
|
$ |
110,065 |
|
|
$ |
22,113 |
|
|
|
20 |
% |
Total gross margin |
|
|
69 |
% |
|
|
66 |
% |
|
|
|
|
|
|
|
|
17
Revenue
Product revenue consists primarily of sales of consumables and instruments.
Consumable revenue increased $10.9 million, or 11%, to $114.0 million for the three months
ended April 4, 2010 compared to $103.1 million for the three months ended March 29, 2009.
Microarray consumable revenue, which constituted more than half of our consumable revenue, declined
$9.4 million primarily attributable to lower sales of whole-genome genotyping arrays. This decline
was partially offset by growth in sales of focused content and methylation arrays. Sales volume of our
Infinium BeadChip product lines, which constitute a majority of our microarray consumable sales,
increased on a sample basis during the three months ended April 4, 2010 compared to the three
months ended March 29, 2009. The average selling price per sample, however, declined due to a
change in product mix attributable to growth in sales of our focused content arrays coupled with
lower sales of whole-genome genotyping arrays. Revenue from sequencing consumables increased
$20.3 million, or 84%, driven by growth in the installed base of our Genome Analyzer systems and
customer labs ramping to production scale.
Revenue from the sale of instruments increased $6.8 million, or 13%, to $57.2 million for the
three months ended April 4, 2010 compared to $50.4 million for the three months ended March 29,
2009 due to a $5.5 million increase in sales of our sequencing systems and a $1.3 million increase
in sales of our microarray systems. We experienced increases in both the number of units sold and
average selling prices per unit for our sequencing systems during the three months ended April 4,
2010 compared to the three months ended March 29, 2009. The increase in units sold was driven by
increased demand for next generation sequencing systems. The increase in average selling prices was
attributable to the product transition from the Genome Analyzer II to the Genome Analyzer IIx in
the second quarter of 2009 and the launch of the HiSeq 2000 in the first quarter of 2010.
Gross Margin
The increase in gross margin was primarily due to our new Real-Time Analysis software package,
launched in the second quarter of 2009, which allowed us to reduce the hardware cost of the Genome
Analyzer. Additionally, the realization of manufacturing and supply-chain efficiencies related to
our sequencing products resulted in lower material costs and favorable overhead absorption.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
April 4, |
|
|
Marh 29, |
|
|
|
|
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
43,675 |
|
|
$ |
32,726 |
|
|
$ |
10,949 |
|
|
|
33 |
% |
Selling, general and administrative |
|
|
50,278 |
|
|
|
42,831 |
|
|
|
7,447 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
93,953 |
|
|
$ |
75,557 |
|
|
$ |
18,396 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in research and development expenses was primarily driven by a $6.9 million
increase in personnel expenses associated with the growth of our business and an increase in other
non-personnel expenses of $6.1 million. The purchase of lab and production supplies related to a
specific project comprised the majority of the increase in other non-personnel expenses. During the
three months ended March 29, 2009, we incurred a $2.0 million expense related to an agreement for
exclusive licensing rights to certain new technologies under development. There was no similar
expense incurred during the three months ended April 4, 2010.
The increase in selling, general and administrative expenses was primarily due to a $7.9
million increase in personnel expenses associated with the growth of our business, partially offset
by a decrease of $0.4 million in other non-personnel expenses mainly associated with lower legal
and consulting fees.
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
April 4, |
|
|
March 29, |
|
|
|
|
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
2,204 |
|
|
$ |
2,916 |
|
|
$ |
(712 |
) |
|
|
(24 |
)% |
Interest expense |
|
|
(5,955 |
) |
|
|
(5,684 |
) |
|
|
(271 |
) |
|
|
5 |
|
Other expense, net |
|
|
(1,113 |
) |
|
|
(2,389 |
) |
|
|
1,276 |
|
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
$ |
(4,864 |
) |
|
$ |
(5,157 |
) |
|
$ |
293 |
|
|
|
(6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Total other expense, net, decreased $0.3 million primarily due to a $1.1 million decrease in
net foreign currency transaction losses.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
April 4, |
|
March 29, |
|
|
|
|
|
Percentage |
|
|
2010 |
|
2009 |
|
Change |
|
Change |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
12,153 |
|
|
$ |
10,540 |
|
|
|
1,613 |
|
|
|
15 |
% |
The effective tax rate increased from 35.9% during the three months ended March 29, 2009 to
36.4% during the three months ended April 4, 2010 predominately due to the expiration of the
federal research and development credit on December 31, 2009, which has not yet passed for fiscal
2010. We expect this measure to be passed and retroactively applied during the current year.
Liquidity and Capital Resources
Cash flow summary
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 4, 2010 |
|
|
March 29, 2009 |
|
|
|
(in thousands) |
|
Net cash provided by operating activities |
|
$ |
55,364 |
|
|
$ |
50,748 |
|
Net cash used in investing activities |
|
|
(23,931 |
) |
|
|
(39,818 |
) |
Net cash provided by financing activities |
|
|
34,306 |
|
|
|
7,813 |
|
Effect of
exchange rate changes on cash and cash equivalents |
|
|
2,853 |
|
|
|
5,379 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
$ |
68,592 |
|
|
$ |
24,122 |
|
|
|
|
|
|
|
|
Operating Activities
Cash provided by operating activities for the three months ended April 4, 2010 consists of net
income of $21.2 million plus net non-cash adjustments of $27.3 million and a $6.8 million increase
in net operating assets. The primary non-cash expenses added back to net income included share
based compensation of $17.0 million and depreciation and amortization expense related to property
and equipment, intangibles and the debt discount on our convertible notes totaling $14.2 million.
Investing Activities
Cash used in investing activities totaled $23.9 million for the three months ended April 4,
2010. We purchased and sold available-for-sale securities totaling $114.0 million and
$126.7 million, respectively. During the quarter, we paid $26.2 million for additional purchase
consideration associated with a prior acquisition and the purchase of
strategic investments. We also
incurred $10.4 million in capital expenditures primarily associated with the purchase of
manufacturing equipment for our San Diego facility and infrastructure for additional production
capacity.
Financing Activities
Cash provided by financing activities totaled $34.3 million for the three months ended April
4, 2010. We received $29.8 million in proceeds from the exercise of stock options and warrants and
the sale of shares under our Employee Stock Purchase Plan.
Liquidity
We manage our business to maximize operating cash flows as the primary source of our
liquidity. Our ability to generate cash from operations provides us with the financial flexibility
we need to meet operating, investing and financing needs. Historically, we have issued debt and
equity securities to finance our requirements to the extent that cash provided by operating
activities was not sufficient to fund our needs. We may require additional funding in the future
and our failure to raise capital on acceptable terms, when needed, could have a material adverse
effect on our business.
At April 4, 2010, we had approximately $748.0 million in cash and short-term investments.
Short-term investments include marketable securities and auction rate securities totaling $480.3
million and $54.5 million, respectively. Our marketable securities
19
consist of debt securities in government sponsored entities, corporate debt securities and U.S
treasury notes. We do not hold securities backed by mortgages. Our auction rate securities were
issued primarily by municipalities and universities. The markets for auction rate securities
effectively ceased when the vast majority of auctions failed in February 2008, preventing investors
from selling their auction rate securities. As of April 4, 2010, the securities continued to fail
auction and remained illiquid. In November 2008, we signed a settlement agreement allowing us to
sell our auction rate securities at par value to UBS AG (UBS) at our discretion during the period
of June 30, 2010 through July 2, 2012. Because we intend to exercise this right when it becomes
available, we have classified our auction rate securities as short-term on the balance sheet. See
Note 3 of Notes to Condensed Consolidated Financial Statements for further information regarding
our auction rate securities.
On February 16, 2007, the Company issued $400.0 million principal amount of 0.625% convertible
senior notes that mature February 15, 2014. The Company pays 0.625% interest per annum on the
principal amount of the notes, payable semi-annually in arrears in cash on February 15 and August
15 of each year. The notes are convertible into cash and, if applicable, shares of our common stock
under certain circumstances as described in Note 5 of Notes to Consolidated Financial Statements.
As of April 4, 2010, the principal amount of the notes was $390.0 million due to the conversion of
$10.0 million of the notes during the first quarter of 2009.
Our primary short-term needs for capital, which are subject to change, include expenditures
related to:
|
|
|
potential strategic acquisitions and investments; |
|
|
|
|
support of our commercialization efforts related to our current and future products,
including expansion of our direct sales force and field support resources both in the United
States and abroad; |
|
|
|
|
the continued advancement of research and development efforts; |
|
|
|
|
the acquisition of equipment and other fixed assets for use in our current and future
manufacturing and research and development facilities; |
|
|
|
|
improvements in our manufacturing capacity and efficiency; and |
|
|
|
|
the expansion needs of our facilities, including costs of leasing additional facilities. |
We expect that our product revenue and the resulting operating income, as well as the status
of each of our new product development programs, will significantly impact our cash management
decisions.
We anticipate that our current cash and cash equivalents and income from operations will be
sufficient to fund our operating needs for at least the next 12 months, barring unforeseen
circumstances. Operating needs include the planned costs to operate our business, including amounts
required to fund working capital and capital expenditures. At the present time, we have no material
commitments for capital expenditures. Our future capital requirements and the adequacy of our
available funds will depend on many factors, including:
|
|
|
our ability to successfully commercialize and further develop our technologies and create
innovative products in our markets; |
|
|
|
|
scientific progress in our research and development programs and the magnitude of those
programs; |
|
|
|
|
competing technological and market developments; and |
|
|
|
|
the need to enter into collaborations with other companies or acquire other companies or
technologies to enhance or complement our product and service offerings. |
Off-Balance Sheet Arrangements
There were no substantial changes to our off-balance sheet arrangements or contractual
commitments in the three months ended April 4, 2010 when compared to the disclosures in Item 7 of
our Annual Report on Form 10-K for the fiscal year ended January 3, 2010.
20
Critical Accounting Policies and Estimates
There were no material changes to our critical accounting policies and estimates during the
three months ended April 4, 2010. For further information on our critical accounting policies and
estimates, refer to our Annual Report on Form 10-K for the fiscal year ended January 3, 2010.
Recent Accounting Pronouncements
There were no accounting pronouncements adopted by the Company or issued during the three
months ended April 4, 2010 that had a material effect on the Companys condensed consolidated
financial statements or that are reasonably certain to have a material impact on the condensed
consolidated financial statements in future periods.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There were no substantial changes to our market risks in the three months ended April 4, 2010,
when compared to the disclosures in Item 7A of our Annual Report on Form 10-K for the fiscal year
ended January 3, 2010.
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 GAAP. 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
Exchange Act), as of April 4, 2010. Based upon that evaluation, our principal executive officer and
principal financial officer concluded that, as of April 4, 2010, our disclosure controls and
procedures are effective to provide reasonable assurance that (a) the information required to be
disclosed by us in the reports that we file or submit under the 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.
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 first quarter of 2010 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.
21
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we are party to litigation and other legal proceedings in the ordinary
course, and incidental to the conduct, of our business. While the results of any litigation or
other legal proceedings are uncertain, management does not believe the ultimate resolution of any
pending legal matters is likely to have a material adverse effect on our financial position or
results of operations.
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 January 3, 2010, which we strongly encourage you to
review. There have been no material changes from the risk factors disclosed in Item 1A of our Form
10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
31.1
|
|
Certification of Jay T. Flatley pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Christian O. Henry pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Jay T. Flatley pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Christian O. Henry pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
22
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.
|
|
|
|
|
|
Illumina, Inc.
(registrant)
|
|
Date: April 30, 2010 |
/s/ CHRISTIAN O. HENRY
|
|
|
Christian O. Henry |
|
|
Senior Vice President and Chief Financial Officer |
|
23