Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ILMN > SEC Filings for ILMN > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for ILLUMINA INC

Form 10-Q for ILLUMINA INC


6-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying condensed consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. This MD&A is organized as follows:

• Business Overview and Outlook. High level discussion of our operating results and significant known trends that affect our business.

• Results of Operations. Detailed discussion of our revenues and expenses.

• Liquidity and Capital Resources. Discussion of key aspects of our statements of cash flows, changes in our financial position, and our financial commitments.

• Off-Balance Sheet Arrangements. We have no significant off-balance sheet arrangements.

• Critical Accounting Policies and Estimates. Discussion of significant changes since our most recent Annual Report on Form 10-K that we believe are important to understanding the assumptions and judgments underlying our financial statements.

This MD&A discussion contains forward-looking statements that involve risks and uncertainties. Please see "Consideration Regarding Forward-Looking Statements" at the end of this MD&A section for additional factors relating to such statements. This MD&A should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this report and our Annual Report on Form 10-K for the fiscal year ended December 30, 2012. Operating results are not necessarily indicative of results that may occur in future periods.


Table of Contents

Business Overview and Outlook

This overview and outlook provides a high level discussion of our operating results and significant known trends that affect our business. We believe that an understanding of these trends is important to understanding our financial results for the periods being reported herein as well as our future financial performance. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Quarterly Report on Form 10-Q.

About Illumina

We are a leading developer, manufacturer, and marketer of life science tools and integrated systems for the analysis of genetic variation and function. Using our proprietary technologies, we provide a comprehensive line of genetic analysis solutions, with products and services that address a broad range of highly interconnected markets, including sequencing, genotyping, gene expression, and genomic-based diagnostics. Our customers include leading genomic research centers, academic institutions, government laboratories, clinical research organizations, and in vitro fertilization clinics, as well as pharmaceutical, biotechnology, agrigenomics, and consumer genomics companies.

Our broad portfolio of instruments, consumables, and analysis tools are designed to simplify and accelerate genetic analysis. This portfolio addresses the full range of genomic complexity, throughput, and price points, enabling researchers to select the best solution for their scientific challenge. These systems can be used to efficiently perform a range of nucleic acid (DNA, RNA) analyses on large numbers of samples. For more focused studies, our array-based solutions provide ideal tools to perform genome-wide association studies (GWAS) involving single-nucleotide polymorphism (SNP) genotyping and copy number variation (CNV) analyses, as well as gene expression profiling and other DNA, RNA, and protein studies.

In 2012 and early 2013, we took steps to support our goal of becoming a leader in the reproductive health market by acquiring Verinata Health, Inc. in February 2013 and BlueGnome Ltd. in September 2012. With the Verinata acquisition, we further strengthened our reproductive health product portfolio by gaining access to Verinata's verifiฎ non-invasive prenatal test (NIPT), as well as what we believe to be the most comprehensive intellectual property portfolio in the NIPT industry. BlueGnome is a leading provider of solutions for the screening of genetic abnormalities associated with developmental delay, cancer, and infertility, and BlueGnome's offerings enhance our ability to establish integrated solutions in reproductive health and cancer. To further enhance our genetic analysis workflows, in 2011 we acquired Epicentre Technologies Corporation, a leading provider of nucleic acid sample preparation reagents and specialty enzymes for sequencing and microarray applications.

Our financial results have been, and will continue to be, impacted by several significant trends, which are described below. While these trends are important to understanding and evaluating our financial results, this discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto in Item 1, Part I of this report, and the other transactions, events, and trends discussed in "Risk Factors" in Item 1A, Part II of this report and Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 30, 2012.

Funding Environment

While many of our customers receive funding from government agencies to purchase our products or services, we are lessening our dependency on government funding. In Q3 2013, approximately 45% of our total revenue came from applied market customers including customers in the clinical, consumer, translational, and agriculture segments who are not reliant on government agencies for funding, and it is our strategy to diversify our customer base to increase further the portion of our revenue from applied market customers over time. We estimate that less than 30% of our total revenue came from academic or government customers in the United States that, directly or indirectly, derive funding from the U.S. National Institute of Health (NIH). NIH funding until January 15, 2014 is subject to the continuing resolution that has been signed into law by President Obama. The NIH funding for the remainder of the U.S. 2014 fiscal year will be dependent on the budget for the U.S. Department of Health and Human Services, of which the NIH is a part. We believe that allocations within the NIH budget will continue to favor genetic analysis tools generally and, in particular, research programs that utilize next-generation sequencing.

Next-Generation Sequencing

Next-generation sequencing has become a core technology for modern life science research and is increasingly being used in the applied, molecular diagnostics, and translational markets. Over the next several years, expansion of the sequencing market, including an increase in the number of samples available and enhancements in our product portfolio will continue to drive demand for our next-generation sequencing technologies. Our sequencing instrument installed base continued to expand in Q3 2013. As a result, we believe that our sequencing consumable revenue will continue to grow in future periods.

Our sequencing instrument portfolio primarily includes the HiSeq and MiSeq product families. We began full commercial shipments of our HiSeq 2500 sequencing system in the fourth quarter of 2012. The HiSeq 2500 allows customers to sequence an entire human genome in approximately a day. Our MiSeq sequencing system is a low-cost personal sequencing system that provides individual researchers a desktop-sized platform with rapid turnaround time, high accuracy, and streamlined workflow. We believe our MiSeq systems will continue to be a competitive offering in the lower throughput sequencing market and help us expand our presence in this emerging market segment.

MicroArrays

As a complement to next-generation sequencing, we believe microarrays offer a less expensive, faster, and highly accurate technology for use when genetic content is already known. The information content of microarrays is fixed and reproducible. As such, microarrays provide repeatable, standardized assays for certain subsets of nucleotide bases within the overall genome. We believe that life science researchers will migrate certain array studies to sequencing; however, we expect this decline to be offset by demand from customers in applied, consumer, and translational markets. Additionally, demand in the array market has trended toward microarrays that have large-sample numbers at a lower complexity, thus having a lower selling price per sample, and we believe our innovation in microarray products supports the lower selling price.

Financial Overview

Financial highlights for the first three quarters of 2013 include the following:

•         Net revenue increased by 23.2% during the first three quarters of 2013
          compared to the same period in 2012. Our sales increased across our
          portfolio of sequencing products, including consumables, instruments,
          and services.



•         Gross profit as a percentage of revenue (gross margin) was 63.1% for
          the first three quarters of 2013, a decrease from 67.9% from the prior
          year period. Gross margin decreased in the first three quarters of 2013
          due in large part to a Q3 impairment charge associated with our
          decision to discontinue the Eco and NuPCR product lines, higher
          amortization of acquired intangible assets, and legal contingencies
          associated with the Syntrix litigation matter. See note "9. Legal
          Proceedings" in Part I, Item 1 of this form 10-Q. We believe our gross
          margin in future periods will depend on several factors, including
          market conditions that may impact our pricing power, sales mix changes
          among consumable, instrument, and services, product mix changes between
          established products and new products in new markets, our cost
          structure for manufacturing operations, royalties, and our ability to
          create innovative and high premium products that meet or stimulate
          customer demand.



•         Income from operations in the first three quarters of 2013 was $60.3
          million compared to $141.4 million during the same period in 2012. This
          was a result of higher operating expenses offsetting the increase in
          gross profit. During the current period, we recorded a $115.4 million
          legal contingency expense in operating expenses associated primarily
          with the Syntrix patent litigation matter. Additionally, our research
          and development expenses and selling, general and administrative
          expenses increased by $25.9 million and $63.1 million, respectively,
          from the same period in the prior year as we continue to invest in the
          growth of our business. We expect operating expenses to continue to
          grow.



•         Our effective tax rate was negative for the first three quarters of
          2013. The variance from the U.S. federal statutory tax rate of 35% was
          primarily attributable to the tax treatment of the Syntrix legal
          contingency charges, which was recorded as a discrete item and is
          nondeductible for tax purposes until paid. Our future effective tax
          rate may vary from the U.S. federal statutory tax rate due to 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" in Item 1A of our Annual
          Report on Form 10-K for the fiscal year ended December 30, 2012. For
          the remainder of 2013 and beyond, we anticipate that our effective tax
          rate will trend lower than the U.S. federal statutory tax rate as the
          portion of our earnings subject to lower statutory tax rates increases.

In the second quarter of 2013 the Internal Revenue Service began an audit of the corporate income tax return filed for fiscal year 2011. The audit continues to be in the information gathering stage.

• We ended Q3 2013 with cash, cash equivalents, and short-term investments totaling $1.03 billion.


Table of Contents

Results of Operations

To enhance comparability, the following table sets forth our unaudited condensed
consolidated statements of income for the specified reporting periods stated as
a percentage of total revenue.

                                           Q3 2013    Q3 2012    YTD 2013    YTD 2012
Revenue:
Product revenue                             89.3  %    91.8  %     89.8  %     92.6  %
Service and other revenue                   10.7        8.2        10.2         7.4
Total revenue                              100.0      100.0       100.0       100.0
Cost of revenue:
Cost of product revenue                     33.6       26.5        29.8        27.5
Cost of service and other revenue            5.0        3.7         4.7         3.4
Amortization of acquired intangible assets   2.6        1.3         2.4         1.2
Total cost of revenue                       41.2       31.5        36.9        32.1
Gross profit                                58.8       68.5        63.1        67.9
Operating expense:
Research and development                    19.9       18.9        19.3        20.7
Selling, general and administrative         26.8       24.4        26.1        24.6
Acquisition related (gain) expense, net     (1.1 )     (0.1 )      (0.6 )       0.3
Unsolicited tender offer related expense     0.4        1.4         1.3         2.2
Headquarter relocation                       0.1        6.8           -         2.8
Legal contingencies                            -          -        11.2           -
Restructuring                                  -          -           -         0.5
Total operating expense                     46.1       51.4        57.3        51.1
Income from operations                      12.7       17.1         5.8        16.8
Other income (expense):
Interest income                              0.4        1.2         0.4         0.9
Interest expense                            (2.8 )     (3.3 )      (2.9 )      (3.4 )
Cost-method investment gain                    -          -         0.6           -
Other income (expense), net                  0.1        0.3        (0.2 )      (0.2 )
Total other expense, net                    (2.3 )     (1.8 )      (2.1 )      (2.7 )
Income before income taxes                  10.4       15.3         3.7        14.1
Provision for (benefit from) income taxes    1.6        4.9        (0.6 )       4.6
Net income                                   8.8  %    10.4  %      4.3  %      9.5  %

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, September 30, and December 31. The three and nine month periods ended September 29, 2013 and September 30, 2012 were both 13 and 39 weeks, respectively.

Revenue

(Dollars in                                              Percentage                                                 Percentage
thousands)       Q3 2013       Q3 2012       Change        Change        YTD 2013       YTD 2012       Change         Change
Product
revenue        $ 318,603     $ 262,418     $ 56,185          21 %      $   928,270     $ 776,893     $ 151,377          19 %
Service and
other revenue     38,197        23,456       14,741          63            105,582        62,358        43,224          69
Total revenue  $ 356,800     $ 285,874     $ 70,926          25 %      $ 1,033,852     $ 839,251     $ 194,601          23 %


Table of Contents

Product revenue consists primarily of revenue from the sale of consumables and instruments. Service and other revenue consists primarily of instrument service contract revenue as well as sequencing and genotyping service revenue.

QTD 2013 vs. QTD 2012

Consumables revenue increased $38.9 million, or 22%, to $215.6 million in Q3 2013 compared to $176.7 million in the prior year period. The increase was primarily attributable to increased sales of sequencing consumables, driven by the growth in the installed base for both HiSeq and MiSeq systems, as well as higher consumable sales per HiSeq instrument in the installed base.

Instrument revenue increased $17.3 million, or 21%, to $99.7 million in Q3 2013 compared to $82.4 million in the prior year period, driven primarily by an increase in HiSeq and MiSeq shipments.

The increase in service and other revenue in Q3 2013 compared to the prior year period was driven by increases in sequencing service volume and instrument service contract revenue as a result of our growing installed base.

YTD 2013 vs. YTD 2012

Consumables revenue increased $102.6 million, or 19%, to $635.9 million in the first three quarters of 2013 compared to $533.3 million in the prior year period. The increase was primarily attributable to increased sales of sequencing consumables, driven by the growth in the installed base for both HiSeq and MiSeq systems, as well as higher consumable sales per HiSeq instrument in the installed base.

Instrument revenue increased $48.5 million, or 21%, to $282.7 million in the first three quarters of 2013 compared to $234.2 million in the prior year period, driven primarily by an increase in HiSeq shipments.

The increase in service and other revenue in the first three quarters of 2013 compared to the prior year period was driven by increases in sequencing service volume and instrument service contract revenue as a result of our growing installed base.

Gross Margin

(Dollars in                                             Percentage                                                Percentage
thousands)      Q3 2013       Q3 2012       Change        Change        YTD 2013      YTD 2012       Change         Change
Gross profit  $ 209,940     $ 195,873     $ 14,067           7 %       $ 652,641     $ 569,881     $  82,760          15 %
Gross margin       58.8 %        68.5 %                                     63.1 %        67.9 %

QTD 2013 vs. QTD 2012

Gross profit in Q3 2013 increased in comparison to the prior year period, primarily due to the increase in revenue. Gross margin decreased in Q3 2013 primarily due to impairments recorded during Q3 2013 associated with our decision to discontinue the Eco and NuPCR product lines, an increase in amortization of acquired intangible assets due to recent acquisitions, and legal contingencies. In addition, the impact of acquisitions and fluctuations in the mix of product sales also contributed to the decrease in gross margin.

Legal contingencies recorded in cost of sales during Q3 2013 represent royalties awarded to Syntrix on BeadChip sales in the quarter. See details regarding the Syntrix matter in note "9. Legal Proceedings" in Part I, Item 1 of this form 10-Q.

YTD 2013 vs. YTD 2012

Gross profit in the first three quarters of 2013 increased in comparison to the prior year period, primarily due to the increase in revenue. Gross margin decreased in the first three quarters of 2013 primarily due to impairments recorded during Q3 2013 associated with our decision to discontinue the Eco and NuPCR product lines, an increase in amortization of acquired intangible assets due to recent acquisitions, and legal contingencies. In addition, the impact of acquisitions also contributed to the decrease in gross margin.


Table of Contents

Legal contingencies recorded in cost of sales during the first three quarters of 2013 represent royalties awarded to Syntrix on BeadChip sales subsequent to the verdict date. See details regarding the Syntrix matter as discussed in note "9. Legal Proceedings" in Part I, Item 1 of this form 10-Q.

Operating Expense

(Dollars in Percentage Percentage thousands) Q3 2013 Q3 2012 Change Change YTD 2013 YTD 2012 Change Change Research and
development $ 70,957 $ 54,056 $ 16,901 31 % $ 200,015 $ 174,118 $ 25,897 15 % Selling, general
and
administrative 95,617 69,791 25,826 37 269,391 206,276 63,115 31 Acquisition
related (gain)
expense, net (3,942 ) (357 ) (3,585 ) 1,004 (5,846 ) 2,460 (8,306 ) (338 ) Unsolicited
tender offer
related expense 1,326 3,956 (2,630 ) (66 ) 13,621 18,742 (5,121 ) (27 ) Headquarter
relocation 518 19,475 (18,957 ) (97 ) (232 ) 23,445 (23,677 ) (101 ) Legal
contingencies - - - - 115,369 - 115,369 100 Restructuring - 138 (138 ) (100 ) - 3,434 (3,434 ) (100 ) Total operating
expense $ 164,476 $ 147,059 $ 17,417 12 % $ 592,318 $ 428,475 $ 163,843 38 %

QTD 2013 vs. QTD 2012

Research and development expense increased by $16.9 million, or 31%, in Q3 2013 from the same period in 2012, primarily due to higher expenses driven by increased headcount as we continue to increase our investment in the development of new products as well as enhancements to existing products.

Selling, general and administrative expense increased $25.8 million, or 37%, in Q3 2013 from the same period in the prior year. The increase is primarily driven by increased headcount to support the growth of our Company and our focus on global business process improvements, as well as increased amortization of intangible assets.

Recently completed acquisitions also contributed to the increases in research and development expense and selling, general and administrative expense.

Acquisition related (gain) expense, net, in Q3 2013 primarily consisted of gains from changes in fair value of contingent consideration of $5.8 million. Such gains were partially offset by transaction and other acquisition related costs. Acquisition related (gain) expense, net, in Q3 2012 consisted of changes in fair value of contingent consideration and acquisition transaction costs.

During Q3 2013, we recorded $1.3 million of expenses incurred in relation to an unsolicited tender offer in Q1 2012. The expenses consisted primarily of advisory and legal fees. The advisory related expenses decreased from the prior year period as the advisory service arrangements were completed during the quarter.

We completed the relocation of our headquarters in 2012. Expense recorded in Q3 2013 consists of accretion of interest expense related to the facility exit obligation recorded upon vacating our former headquarters. Headquarter relocation charges recorded in Q3 2012 consisted of cease-use loss recorded upon vacating our prior headquarters, accretion expense related to the facility exit obligation, and double rent expense during the transition to our new facility.

YTD 2013 vs. YTD 2012

Research and development expense increased by $25.9 million, or 15%, in the first three quarters of 2013 from the same period in 2012, primarily due to increased headcount and consulting services as we continue to increase our investment in the development of new products as well as enhancements to existing products, partially offset by a $21.4 million impairment charge for in-process research and development recorded in the prior year.


Table of Contents

Selling, general and administrative expense increased $63.1 million, or 31%, in the first three quarters of 2013 from the same period in 2012. The increase is primarily driven by increased headcount and consulting services to support the growth of our Company and our focus on global business process improvements, as well as increased amortization of intangible assets.

Recently completed acquisitions also contributed to the increases in research and development expense and selling, general and administrative expense.

During the first three quarters of 2013, we recorded $115.4 million in legal contingency charges within operating expenses primarily related to the Syntrix litigation matter. The amount recorded in operating expenses included the damages and prejudgment interest awarded to Syntrix through March 14, 2013, the jury verdict date. See additional discussions on this matter in note "9. Legal Proceedings" in Part I, Item 1 of this form 10-Q.

Acquisition related (gain) expense, net, in the first three quarters of 2013 primarily consisted of gains from changes in fair value of contingent consideration of $11.0 million. Such gains were partially offset by transaction costs of $3.5 million and other acquisition related costs. Acquisition related
(gain) expense, net in the prior year period consisted of changes in fair value of contingent consideration and transaction costs.

During the first three quarters of 2013, we recorded $13.6 million of expenses incurred in relation to an unsolicited tender offer in Q1 2012. The expenses consisted primarily of advisory and legal fees. The advisory related expenses decreased from the prior year period as the advisory service arrangements were completed.

We completed the relocation of our headquarters in 2012. During Q2 2013, we recorded a gain in the headquarter relocation line item to reflect a reduction in accrued facility exit obligation as a result of entering into subleases for sections of our former headquarters at a more favorable rate than previously estimated. This gain was partially offset by accretion of interest expense related to the facility exit obligation recorded upon vacating our former headquarters. Headquarter relocation expense recorded in the same period in 2012 consisted of cease-use loss recorded upon vacating our prior headquarters, accretion expense related to the facility exit obligation, double rent expense during the transition to our new facility, and moving expenses.

In late 2011, we announced restructuring plans to reduce our global workforce and to consolidate certain facilities. As a result of the restructuring effort, we recorded restructuring charges of $3.4 million during the first three quarters of 2012, comprised primarily of severance pay and other employee separation costs.

Other Expense, Net

(Dollars in                                              Percentage                                              Percentage
thousands)        Q3 2013      Q3 2012       Change        Change       YTD 2013      YTD 2012       Change        Change
Interest income  $  1,267     $  3,459     $ (2,192 )       (63 )%     $   3,922     $   7,370     $ (3,448 )       (47 )%
Interest expense   (9,954 )     (9,483 )       (471 )         5          (29,746 )     (28,193 )     (1,553 )         6
Cost-method
investment
related gain            -            -            -           -            6,113             -        6,113         100
Other income
(expense), net        370          855         (485 )       (57 )         (1,667 )      (1,878 )        211         (11 )
Total other
expense, net     $ (8,317 )   $ (5,169 )   $ (3,148 )        61  %     $ (21,378 )   $ (22,701 )   $  1,323          (6 )%

QTD 2013 vs. QTD 2012

Interest income primarily consists of returns from our investment portfolio. . . .

  Add ILMN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ILMN - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.