NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unless the context requires otherwise, references in this report to “Illumina,” “we,” “us,” the “Company,” and “our” refer to Illumina, Inc. and its consolidated subsidiaries.
|
|
1.
|
Organization and Summary of Significant Accounting Policies
|
Organization and Business
Illumina, Inc. is a provider of sequencing- and array-based solutions, which serves customers in a broad range of markets, enabling the adoption of genomic solutions in research and clinical settings. Our customers include leading genomic research centers, academic institutions, government laboratories, and hospitals, as well as pharmaceutical, biotechnology, agrigenomics, commercial molecular diagnostic laboratories, and consumer genomics companies.
Basis of Presentation
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles and include our accounts and our wholly-owned subsidiaries, majority-owned or controlled companies, and variable interest entities (VIEs) for which we are the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
We evaluate our ownership, contractual and other interests in entities that are not wholly-owned by us to determine if these entities are VIEs, and, if so, whether we are the primary beneficiary of the VIE. In determining whether we are the primary beneficiary of a VIE and therefore required to consolidate the VIE, we apply a qualitative approach that determines whether we have both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE. We continuously assess whether we are the primary beneficiary of a VIE as changes to existing relationships or future transactions may result in the consolidation or deconsolidation, as the case may be, of such VIE. We have not provided financial or other support during the periods presented to our VIEs that we were not previously contractually required to provide.
The equity method is used to account for investments in which we have the ability to exercise significant influence, but not control, over the investee. Such investments are recorded within other assets, and the share of net income or losses of equity investments is recognized on a one quarter lag in other income (expense), net.
Redeemable Noncontrolling Interests
Noncontrolling interests represent the portion of equity (net assets) in a consolidated entity that is not wholly-owned by us that is not attributable, directly or indirectly, to us. Noncontrolling interests with embedded contingent redemption features, such as put rights, that are not solely within our control are considered redeemable noncontrolling interests. Redeemable noncontrolling interests are presented outside of stockholders’ equity on the consolidated balance sheets.
Fiscal Year
Our fiscal year is 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, September 30, and December 31. The years ended
December 31, 2017
and
January 1, 2017
were 52 weeks and the year ended
January 3, 2016
was 53 weeks.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Use of Estimates
The preparation of financial statements requires that management make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures of contingent assets and liabilities. Actual results could differ from those estimates.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board issued Accounting Standard Update (ASU) 2016-09, Compensation - Stock Compensation (Topic 718), which aims to simplify the accounting for share-based payment transactions, including accounting for income taxes, classification on the statement of cash flows, accounting for forfeitures, and classification of awards as either liabilities or equity. This ASU was effective for us beginning in the first quarter of 2017.
This new standard increases the volatility of net income by requiring excess tax benefits from share-based payment arrangements to be classified as discrete items within the provision for income taxes, rather than recognizing excess tax benefits in additional paid-in capital. Upon adoption in Q1 2017, we recorded
$45 million
, net, to retained earnings, primarily related to unrealized tax benefits associated with share-based compensation. During the year ended
December 31, 2017
, excess tax benefits of
$52 million
were reflected as a component of the provision for income taxes. Also, as a result of the adoption of this new standard, we made an accounting policy election to recognize forfeitures as they occur and will no longer estimate expected forfeitures.
In addition, excess income tax benefits from share-based compensation arrangements are classified as cash flow from operations, rather than cash flow from financing activities. We elected to apply the cash flow classification guidance retrospectively and reclassified
$91 million
and
$127 million
from financing activity to operating activity for the years ended
January 1, 2017
and
January 3, 2016
, respectively.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The new standard is based on the principle that revenue should be recognized in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the transfer of promised goods or services.
ASU 2014-09 and all subsequent amendments (collectively, the “new standards”) may be applied using either the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. We will adopt the standards beginning the first quarter of 2018 using the modified retrospective method.
We have completed our assessment of the new standards and are finalizing the new required disclosures. Overall, we do not expect the timing of revenue recognition under the new standards to be materially different from our current revenue recognition policy. Based on our analysis of open contracts as of December 31, 2017, the cumulative effect of applying the new standards is not material.
In January 2016, the Financial Accounting Standards Board issued ASU 2016-01,
Financial Instruments - Overall (Subtopic 825-10)
, which requires equity investments (other than those accounted for under the equity method or those that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income. A measurement alternative may be elected for equity investments that do not have readily determinable fair values. Under the alternative, equity investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. ASU 2016-01 will be effective for us beginning in the first quarter of 2018.
We expect to elect the measurement alternative for our cost-method investments. This election is applied prospectively and does not result in an adjustment to retained earnings. We anticipate that the adoption of ASU 2016-01 may increase the volatility of other income and expense, net, as a result of any remeasurement of our cost-method investments.
In February 2016, the Financial Accounting Standards Board issued Accounting Standard Update (ASU) 2016-02,
Leases (Topic 842)
. The new standard requires lessees to recognize most leases on their balance sheet as lease liabilities with corresponding right-of-use assets and eliminates certain real estate-specific provisions. ASU 2016-02 will be effective for us beginning in the first quarter of 2019. ASU 2016-02 will be adopted on a modified retrospective transition basis for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the impact of ASU 2016-02 on the consolidated financial statements.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available for sale debt securities. The ASU is effective for us beginning in the first quarter of 2020, with early adoption permitted. We are currently evaluating the impact of ASU 2016-13 on the consolidated financial statements.
Concentrations of Risk
We operate in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products or services with new capabilities, and other factors could negatively impact our operating results. A portion of our customers consist of university and research institutions that management believes are, to some degree, directly or indirectly supported by the United States Government. A significant change in current research funding, particularly with respect to the U.S. National Institutes of Health, could have an adverse impact on future revenues and results of operations.
We are also subject to risks related to our financial instruments including cash and cash equivalents, investments, and accounts receivable. Most of our cash and cash equivalents as of
December 31, 2017
were deposited with U.S. financial institutions, either domestically or with their foreign branches. Our investment policy restricts the amount of credit exposure to any one issuer to
5%
of the portfolio or
5%
of the total issue size outstanding at the time of purchase and to any one industry sector, as defined by Clearwater Analytics (Industry Sector Report), to
30%
of the portfolio at the time of purchase. There is no limit to the percentage of the portfolio that may be maintained in debt securities in U.S. government-sponsored entities, U.S. Treasury securities, and money market funds.
We require customized products and components that currently are available from a limited number of sources. We source certain key products and components included in our products from single vendors.
We perform regular reviews of customer activity and associated credit risks and do not require collateral or enter into netting arrangements. Shipments to customers outside the United States comprised
45%
,
46%
, and
46%
of total revenue for the years ended
December 31, 2017
,
January 1, 2017
, and
January 3, 2016
, respectively. Customers outside the United States represented
48%
of gross trade accounts receivable balance at both
December 31, 2017
and
January 1, 2017
.
International sales entail a variety of risks, including currency exchange fluctuations, longer payment cycles, and greater difficulty in accounts receivable collection. We are also subject to general geopolitical risks, such as political, social and economic instability, and changes in diplomatic and trade relations. The risks of international sales are mitigated in part by the extent to which sales are geographically distributed. We have historically not experienced significant credit losses from investments and accounts receivable.
Fair Value Measurements
The fair value of assets and liabilities are 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. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:
|
|
•
|
Level 1 —
Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 —
Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
•
|
Level 3 —
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The carrying amounts of financial instruments such as cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued liabilities, excluding acquisition-related contingent consideration liabilities, approximate the related fair values due to the short-term maturities of these instruments.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Functional Currency
The U.S. dollar is the functional currency of our international operations. We re-measure foreign subsidiaries’ monetary assets and liabilities to the U.S. dollar and record the net gains or losses resulting from re-measurement in other income (expense), net in the consolidated statements of income.
Acquisitions
All assets acquired and liabilities assumed, including contingent consideration and all contractual contingencies, are measured at fair value as of the acquisition date. Contingent purchase consideration to be settled in cash are re-measured to estimated fair value at each reporting period with the change in fair value recorded in selling, general and administrative expenses. In addition, in-process research and development (IPR&D) is capitalized and either amortized over the life of the product upon commercialization, or impaired if the project is abandoned. Post-acquisition adjustments in deferred tax asset valuation allowances and liabilities for uncertain tax positions are recorded in current period income tax expense.
Cash Equivalents and Short-Term Investments
Cash equivalents are comprised of short-term, highly-liquid investments with maturities of 90 days or less at the date of purchase.
Short-term investments consist predominantly of debt securities in U.S. government-sponsored entities, corporate debt securities, and U.S. Treasury securities. We classify short-term investments as available-for-sale at the time of purchase and evaluate such classification as of each balance sheet date. All short-term investments are recorded at estimated fair value. Unrealized gains and losses for available-for-sale securities are included in accumulated other comprehensive income, a component of stockholders’ equity. We evaluate our investments to assess whether those with unrealized loss positions are other than temporarily impaired. Impairments are considered to be other than temporary if they are related to deterioration in credit risk or if it is likely that the securities will be sold before the recovery of their cost basis. Realized gains, losses, and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in interest income in the consolidated statements of income.
Accounts Receivable
Trade accounts receivable are recorded at the net invoice value and are not interest bearing. Receivables are considered past due based on the contractual payment terms. We reserve specific receivables if collectibility is no longer reasonably assured. We also reserve a percentage of trade receivable balance based on collection history and current economic trends that might impact the level of future credit losses. These reserves are re-evaluated on a regular basis and adjusted as needed. Once a receivable is deemed to be uncollectible, such balance is charged against the reserve.
Inventory
Inventory is stated at the lower of cost or net realizable value, on a first-in, first-out basis. Inventory includes raw materials and finished goods that may be used in the research and development process and such items are expensed as consumed or expired. Provisions for slow-moving, excess, and obsolete inventories are estimated based on product life cycles, quality issues, historical experience, and usage forecasts.
Property and Equipment
Property and equipment are stated at cost, subject to review for impairment, and depreciated over the estimated useful lives of the assets, using the straight-line method. Depreciation of leasehold improvements is recorded over the shorter of the lease term or the estimated useful life of the related assets. Amortization of assets that are recorded under capital leases are included in depreciation expense. Maintenance and repairs are expensed as incurred. When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operating expense.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Costs incurred to develop internal-use software during the application development stage are recorded as computer software costs, at cost. Costs incurred in the development of such internal-use software, including external direct costs of materials and services and applicable compensation costs of employees devoted to specific software application development are capitalized. Cost incurred outside of the application development stage are expensed as incurred.
The estimated useful lives of the major classes of property and equipment are generally as follows:
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|
|
|
Estimated Useful Lives
|
Building and leasehold improvements
|
4 to 30 years
|
Machinery and equipment
|
3 to 5 years
|
Computer hardware and software
|
3 to 7 years
|
Furniture and fixtures
|
7 years
|
Leases
Leases are reviewed and classified as capital or operating at their inception. Additionally, we evaluate whether we are the accounting owner during the construction period when we are involved in the construction of leased assets. For leases where we are the deemed accounting owner during the construction period, we record project construction costs paid or reimbursed by the landlord as construction in progress and a corresponding build-to-suit lease liability. For operating leases, rent expense is recorded on a straight-line basis over the term of the lease, which includes the construction build-out period and lease extension periods, if appropriate. The difference between rent payments and straight-line rent expense is recorded as deferred rent in accrued liabilities and other long-term liabilities. Lease incentives are amortized on a straight-line basis over the lease term as a reduction to rent expense. Leasehold improvements are capitalized and amortized over the shorter of the lease term or expected useful lives.
Goodwill, Intangible Assets and Other Long-Lived Assets
Goodwill, which has an indefinite useful life, represents the excess of cost over fair value of net assets acquired. Goodwill is reviewed for impairment at least annually during the second quarter, or more frequently if an event occurs indicating the potential for impairment. During the goodwill impairment review, we assess qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is less than the carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and the overall financial performance. If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair value of our reporting unit is less than the carrying amount, then no additional assessment is deemed necessary. Otherwise, we proceed to perform the two-step test for goodwill impairment. The first step involves comparing the estimated fair value of the reporting unit with the carrying value, including goodwill. If the carrying amount of the reporting unit exceeds the fair value, the second step of the goodwill impairment test is performed to determine the amount of loss, which involves comparing the implied fair value of the goodwill to the carrying value of the goodwill. We may also elect to bypass the qualitative assessment in a period and elect to proceed to perform the first step of the goodwill impairment test. We performed the annual assessment for goodwill impairment in the second quarter of
2017
, noting
no
impairment.
Our identifiable intangible assets are typically comprised of acquired core technologies, licensed technologies, customer relationships, license agreements, and trade names. The cost of identifiable intangible assets with finite lives is generally amortized on a straight-line basis over the assets’ respective estimated useful lives.
We regularly perform reviews to determine if any event has occurred that may indicate that intangible assets with finite useful lives and other long-lived assets are potentially impaired. If indicators of impairment exist, an impairment test is performed to assess the recoverability of the affected assets by determining whether the carrying amount of such assets exceeds the undiscounted expected future cash flows. If the affected assets are not recoverable, we estimate the fair value of the assets and record an impairment loss if the carrying value of the assets exceeds the fair value. Factors that may indicate potential impairment include a significant decline in our stock price and market capitalization compared to the net book value, significant changes in the ability of a particular asset to generate positive cash flows for our strategic business objectives, and the pattern of utilization of a particular asset.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the year ended
December 31, 2017
, we performed a recoverability test when the planned use of a finite-lived acquired intangible asset changed, resulting in an impairment charge of
$18 million
recorded in cost of product revenue. Also, during the year ended
December 31, 2017
, we recorded a
$5 million
impairment charge of in-process research and development as the project had no future alternative use. Such impairments were recorded within the Core Illumina reportable segment. See further discussion of our segments in note “11. Segment Information, Geographic Data, and Significant Customers.”
Derivatives
We are exposed to foreign exchange rate risks in the normal course of business. We enter into foreign exchange contracts to manage foreign currency risks related to monetary assets and liabilities that are denominated in currencies other than the U.S. dollar. These foreign exchange contracts are carried at fair value in other current assets or accrued liabilities and are not designated as hedging instruments. Changes in the value of the derivatives are recognized in other income (expense), net, along with the re-measurement gain or loss on the foreign currency denominated assets or liabilities.
As of
December 31, 2017
, we had foreign exchange forward contracts in place to hedge exposures in the euro, Japanese yen, Australian dollar, and Canadian dollar. As of
December 31, 2017
and
January 1, 2017
, the total notional amount of outstanding forward contracts in place for foreign currency purchases was
$88 million
and
$69 million
, respectively.
Warranties
We generally provide a
one
-year warranty on instruments. Additionally, a warranty on consumables is provided through the expiration date, which generally ranges from
six
to
twelve
months after the manufacture date. At the time revenue is recognized, an accrual is established for estimated warranty expenses based on historical experience as well as anticipated product performance. We periodically review the warranty reserve for adequacy and adjust the warranty accrual, if necessary, based on actual experience and estimated costs to be incurred. Warranty expense is recorded as a component of cost of product revenue.
Revenue Recognition
Revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of instruments and consumables used in genetic analysis. Service and other revenue primarily consists of revenue generated from genotyping and sequencing services and instrument service contracts.
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectibility is reasonably assured. In instances where final acceptance of the product or system is required, revenue is deferred until all the acceptance criteria have been met. We occasionally offer discounts on newly-introduced products to recent customers of existing products. Where applicable, a portion of revenue is deferred on the sales of existing products in recognition of the promotional discounts until the delivery of new products. All revenue is recorded net of discounts and sales taxes collected on behalf of governmental authorities.
Revenue from product sales is recognized generally upon transfer of title to the customer, provided that no significant obligations remain and collection of the receivable is reasonably assured. Revenue from instrument service contracts is recognized as the services are rendered, typically evenly over the contract term. Revenue from genotyping and sequencing services is recognized when earned, which is generally at the time the genotyping or sequencing analysis data is made available to the customer or agreed-upon milestones are reached.
In order to assess whether the price is fixed or determinable, we evaluate whether an arrangement is cancellable or subject to future changes in price, deliverables, or other terms. If it is determined that the price is not fixed or determinable, revenue recognition is deferred until the price becomes fixed or determinable. The collectibility is assessed based on a number of factors, including past transaction history with, and the creditworthiness of, the customer. If the collection of a payment is not determined to be reasonably assured, revenue recognition is deferred until receipt of payment.
We regularly enter into contracts where revenue is derived from multiple deliverables including products or services. These products or services are generally delivered within a short time frame, approximately
three
to
six
months, after the contract execution date. Revenue recognition for contracts with multiple deliverables is based on the individual units of accounting determined to exist in the contract. A delivered item is considered a separate unit of accounting when the delivered
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis.
For transactions with multiple deliverables, consideration is allocated 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, our best estimate of the selling price is used for the deliverable.
In order to establish VSOE of selling price, the product or service must be regularly sold on a stand-alone basis with a substantial majority priced within a relatively narrow range. VSOE of selling price is usually the midpoint of that range. If there are not a sufficient number of stand-alone sales and VSOE of selling price cannot be determined, we consider whether third-party evidence can be used to establish selling price. Due to the lack of similar products and services sold by other companies within the industry, we have rarely established selling price using third-party evidence. If neither VSOE nor third-party evidence of selling price exists, we determine our best estimate of selling price using average selling prices over a rolling
12
-month period coupled with an assessment of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, we rely upon prices set by our pricing committee adjusted for applicable discounts. Revenue for delivered elements is recognized only when there are no uncertainties regarding customer acceptance.
In certain markets, products and services are sold to customers through distributors that specialize in life science products. In most sales through distributors, the product is delivered directly to customers. In cases where the product is delivered to a distributor, revenue recognition is deferred until acceptance is received from the distributor, and/or the end-user, if required by the applicable sales contract. The terms of sales transactions through distributors are consistent with the terms of direct sales to customers. These transactions are accounted for in accordance with our revenue recognition policy described herein.
Share-Based Compensation
Share-based compensation expense is incurred related to restricted stock, Employee Stock Purchase Plan (ESPP), and stock options.
Restricted stock units (RSU) and performance stock units (PSU) are both considered restricted stock. The fair value of restricted stock is determined by the closing market price of our common stock on the date of grant. Share-based compensation expense is recognized based on the fair value on a straight-line basis over the requisite service periods of the awards. PSU represents a right to receive a certain number of shares of common stock based on the achievement of corporate performance goals and continued employment during the vesting period. At each reporting period, we reassess the probability of the achievement of such corporate performance goals and any additional expenses resulting from an adjustment in the estimated shares to be released are treated as a cumulative catch-up in the period of adjustment.
The Black-Scholes-Merton option-pricing model is used to estimate the fair value of stock awards under ESPP. The model assumptions include expected volatility, term, dividends, and the risk-free interest rate. The expected volatility is determined by equally weighing the historical and implied volatility of our common stock. The historical volatility is generally commensurate with the estimated expected term of the stock awards, adjusted for the impact of unusual fluctuations and other relevant factors. The implied volatility is calculated from the implied market volatility of exchange-traded call options on our common stock. The expected term of an award is based on historical forfeiture experience, exercise activity, and on the terms and conditions of the stock awards. The expected dividend yield is determined to be
0%
given that we have never declared or paid cash dividends on our common stock and do not anticipate paying such cash dividends. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards.
Forfeitures are accounted for as incurred as reversal of any share-based compensation expense related to awards that will not vest.
Shipping and Handling Expenses
Shipping and handling expenses are included in cost of product revenue.
Research and Development
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Research and development expenses include personnel expenses, contractor fees, license fees, facilities costs, and utilities. Expenditures relating to research and development are expensed in the period incurred.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs were
$30 million
,
$20 million
, and
$19 million
for the years ended
December 31, 2017
,
January 1, 2017
, and
January 3, 2016
, respectively.
Income Taxes
The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and credit carryforwards. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date.
Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when we believe it is more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating the ability to recover deferred tax assets within the jurisdiction which they arise, we consider all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, history of earnings and reliable forecasting, projections of pre-tax book income over the foreseeable future, and the impact of any feasible and prudent tax planning strategies.
The impact of a tax position is recognized in the financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense.
Earnings per Share
Basic earnings per share attributable to Illumina stockholders is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to Illumina stockholders is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Per-share earnings of our VIEs are included in the consolidated basic and diluted earnings per share computations based on our share of the VIE’s securities.
Potentially dilutive common shares consist of shares issuable under convertible senior notes and equity awards. Convertible senior notes have a dilutive impact when the average market price of our common stock exceeds the applicable conversion price of the respective notes. Potentially dilutive common shares from equity awards are determined using the average share price for each period under the treasury stock method. In addition, proceeds from exercise of equity awards and the average amount of unrecognized compensation expense for equity awards are assumed to be used to repurchase shares.
The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share (in millions):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 31,
2017
|
|
January 1,
2017
|
|
January 3,
2016
|
Weighted average shares outstanding
|
146
|
|
|
147
|
|
|
145
|
|
Effect of potentially dilutive common shares from:
|
|
|
|
|
|
Convertible senior notes
|
—
|
|
|
—
|
|
|
2
|
|
Equity awards
|
2
|
|
|
1
|
|
|
2
|
|
Weighted average shares used in calculating diluted earnings per share
|
148
|
|
|
148
|
|
|
149
|
|
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accumulated Other Comprehensive Loss
Comprehensive income is comprised of net income and other comprehensive income. Accumulated other comprehensive loss on the consolidated balance sheets at
December 31, 2017
and
January 1, 2017
includes accumulated foreign currency translation adjustments and unrealized gains and losses on the available-for-sale securities.
The components of accumulated other comprehensive income (loss) are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
January 1,
2017
|
Foreign currency translation adjustments
|
$
|
1
|
|
|
$
|
1
|
|
Unrealized loss on available-for-sale securities, net of deferred tax
|
(2
|
)
|
|
(2
|
)
|
Total accumulated other comprehensive loss
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
|
2.
|
Balance Sheet Account Details
|
Short-Term Investments
The following is a summary of short-term investments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
January 1, 2017
|
|
Amortized
Cost
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Amortized
Cost
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
Available-for-sale securities:
|
Debt securities in government-sponsored entities
|
$
|
67
|
|
|
$
|
—
|
|
|
$
|
67
|
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
34
|
|
Corporate debt securities
|
423
|
|
|
(2
|
)
|
|
421
|
|
|
478
|
|
|
(2
|
)
|
|
476
|
|
U.S. Treasury securities
|
433
|
|
|
(1
|
)
|
|
432
|
|
|
316
|
|
|
(2
|
)
|
|
314
|
|
Total available-for-sale securities
|
$
|
923
|
|
|
$
|
(3
|
)
|
|
$
|
920
|
|
|
$
|
828
|
|
|
$
|
(4
|
)
|
|
$
|
824
|
|
Contractual maturities of available-for-sale debt securities as of
December 31, 2017
are as follows (in millions):
|
|
|
|
|
|
Estimated Fair Value
|
Due within one year
|
$
|
686
|
|
After one but within five years
|
234
|
|
Total
|
$
|
920
|
|
We have the ability, if necessary, to liquidate any of our cash equivalents and short-term investments in order to meet our liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date of purchase nonetheless are classified as short-term on the accompanying consolidated balance sheets.
Strategic Investments
As of
December 31, 2017
and
January 1, 2017
, the aggregate carrying amounts of our cost-method investments in non-publicly traded companies were
$250 million
and
$57 million
, respectively, included in other assets. Revenue recognized from transactions with such companies were
$127 million
,
$56 million
, and
$61 million
for the years ended
December 31, 2017
,
January 1, 2017
, and
January 3, 2016
, respectively.
Cost-method investments are assessed for impairment quarterly. We determine that it is not practicable to estimate the fair value of the cost-method investments on a regular basis and do not reassess the fair value of cost-method investments unless there are identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments. No material impairment losses were recorded during the years ended
December 31, 2017
,
January 1, 2017
, and
January 3, 2016
.
During the year ended January 3, 2016, we recognized an
$18 million
gain on the dispositions of cost-method investments.
We invest in a venture capital investment fund (the Fund) with a capital commitment of
$100 million
that is callable over
ten years
, of which
$83 million
remains as of
December 31, 2017
. Our investment in the Fund is accounted for as an equity method investment. The carrying amounts included in other assets were
$16 million
and
$10 million
as of
December 31, 2017
, and
January 1, 2017
, respectively.
Accounts Receivable
Accounts receivable, net consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
January 1,
2017
|
Trade accounts receivable, gross
|
$
|
414
|
|
|
$
|
385
|
|
Allowance for doubtful accounts
|
(3
|
)
|
|
(4
|
)
|
Total accounts receivable, net
|
$
|
411
|
|
|
$
|
381
|
|
Inventory
Inventory consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
January 1,
2017
|
Raw materials
|
$
|
93
|
|
|
$
|
102
|
|
Work in process
|
188
|
|
|
161
|
|
Finished goods
|
52
|
|
|
37
|
|
Total inventory
|
$
|
333
|
|
|
$
|
300
|
|
Property and Equipment
Property and equipment, net consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
January 1,
2017
|
Leasehold improvements
|
$
|
331
|
|
|
$
|
270
|
|
Machinery and equipment
|
316
|
|
|
274
|
|
Computer hardware and software
|
185
|
|
|
156
|
|
Furniture and fixtures
|
34
|
|
|
24
|
|
Building
|
155
|
|
|
9
|
|
Construction in progress
|
326
|
|
|
307
|
|
Total property and equipment, gross
|
1,347
|
|
|
1,040
|
|
Accumulated depreciation
|
(416
|
)
|
|
(327
|
)
|
Total property and equipment, net
|
$
|
931
|
|
|
$
|
713
|
|
Property and equipment, net included non-cash expenditures of
$117 million
,
$220 million
and
$24 million
for the years ended
December 31, 2017
,
January 1, 2017
and
January 3, 2016
, respectively, which were excluded from the consolidated statements of cash flows. Such non-cash expenditures included
$79 million
,
$193 million
and
$10 million
recorded under build-to-suit lease accounting for the years ended
December 31, 2017
,
January 1, 2017
and
January 3, 2016
, respectively.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Goodwill
Changes to goodwill balance from
January 3, 2016
through
December 31, 2017
are as follows (in millions):
|
|
|
|
|
|
Goodwill
|
Balance as of January 3, 2016
|
$
|
753
|
|
Acquisitions
|
23
|
|
Balance as of January 1, 2017
|
776
|
|
GRAIL deconsolidation
|
(5
|
)
|
Balance as of December 31, 2017
|
$
|
771
|
|
In January 2016, we closed
two
acquisitions consisting of
$18 million
in upfront cash payments, equity instruments, and certain contingent consideration provisions.
Accrued Liabilities
Accrued liabilities consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
January 1,
2017
|
Accrued compensation expenses
|
$
|
177
|
|
|
$
|
112
|
|
Deferred revenue, current portion
|
130
|
|
|
121
|
|
Accrued taxes payable
|
50
|
|
|
32
|
|
Customer deposits
|
20
|
|
|
20
|
|
Other, including warranties (a)
|
55
|
|
|
57
|
|
Total accrued liabilities
|
$
|
432
|
|
|
$
|
342
|
|
(a) Changes in reserve for product warranties from
December 28, 2014
through
December 31, 2017
are as follows (in millions):
|
|
|
|
|
|
Warranty Reserve
|
Balance as of December 28, 2014
|
$
|
16
|
|
Additions charged to cost of revenue
|
28
|
|
Repairs and replacements
|
(27
|
)
|
Balance as of January 3, 2016
|
17
|
|
Additions charged to cost of revenue
|
21
|
|
Repairs and replacements
|
(25
|
)
|
Balance as of January 1, 2017
|
13
|
|
Additions charged to cost of revenue
|
26
|
|
Repairs and replacements
|
(22
|
)
|
Balance as of December 31, 2017
|
$
|
17
|
|
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Investments in Consolidated Variable Interest Entities
Helix Holdings I, LLC
In July 2015, we obtained a
50%
voting equity ownership interest in Helix Holdings I, LLC (Helix), a limited liability company formed with unrelated third-party investors to pursue the development and commercialization of a marketplace for consumer genomics. We determined that Helix is a variable interest entity as the holders of the at-risk equity investments as a group lack the power to direct the activities of Helix that most significantly impact Helix’s economic performance. Additionally, we determined that we have (a) unilateral power over one of the activities that most significantly impacts the economic performance of Helix through its contractual arrangements and no one individual party has unilateral power over the remaining significant activities of Helix and (b) the obligation to absorb losses of and the right to receive benefits from Helix that are potentially significant to Helix. As a result, we are deemed to be the primary beneficiary of Helix and are required to consolidate Helix.
As contractually committed, we contributed certain perpetual licenses, instruments, intangibles, initial laboratory setup, and discounted supply terms in exchange for voting equity interests in Helix. Such contributions are recorded at their historical basis as they remain within the control of Illumina. Helix is financed through cash contributions made by the third-party investors in exchange for voting equity interests in Helix.
Certain noncontrolling Helix investors may require us to redeem all noncontrolling interests in cash at the then approximate fair market value. Such redemption right is exercisable at the option of certain noncontrolling interest holders after January 1, 2021, provided that a bona fide pursuit of the sale of Helix has occurred and an initial public offering of Helix has not been completed. The fair value of the redeemable noncontrolling interests is considered a Level 3 instrument.
As the contingent redemption is outside of the control of Illumina, the redeemable noncontrolling interests in Helix are classified outside of stockholders’ equity on the accompanying consolidated balance sheets. The balance of the redeemable noncontrolling interests is reported at the greater of its carrying value after receiving its allocation of Helix’s profits and losses or its estimated redemption value at each reporting date. As of
December 31, 2017
, the noncontrolling shareholders and Illumina each held
50%
of Helix’s outstanding voting equity interests.
The assets and liabilities of Helix are not significant to our financial position as of
December 31, 2017
. Helix has an immaterial impact on our consolidated statements of income and cash flows for the fiscal year ended
December 31, 2017
.
As of
December 31, 2017
, the accompanying consolidated balance sheet includes
$18 million
of cash and cash equivalents attributable to Helix that will be used to settle their respective obligations and will not be available to settle obligations of Illumina.
GRAIL, Inc.
In January 2016, we obtained a majority equity ownership interest in GRAIL, a company formed with unrelated third-party investors to develop a blood test for early-stage cancer detection. We determined that GRAIL was a variable interest entity as the entity lacked sufficient equity to finance its activities without additional support. Additionally, we determined that we had (a) control of GRAIL’s board of directors, which had unilateral power over the activities that most significantly impacted the economic performance of GRAIL and (b) the obligation to absorb losses of, and the right to receive benefits from, GRAIL that were potentially significant to GRAIL. As a result, we were deemed to be the primary beneficiary of GRAIL and were required to consolidate GRAIL.
In January 2016, GRAIL completed its Series A convertible preferred stock financing, raising
$120 million
, of which we invested
$40 million
. Additionally, Illumina and GRAIL executed a long-term supply agreement in which we contributed employees and discounted supply terms in exchange for
113 million
shares of GRAIL’s Class B common stock. Such contributions were recorded at their historical basis as they remained within the control of Illumina. The
$80 million
received by GRAIL from unrelated third-party investors upon issuance of its Series A convertible preferred stock was classified as noncontrolling interests in stockholders’ equity on the consolidated balance sheet.
In June 2016, GRAIL authorized for issuance
98 million
shares of Series A-1 convertible preferred stock, all of which were issued to Illumina in exchange for Illumina’s
98 million
shares of GRAIL Class B common stock. As a result of the
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
exchange, we recorded a
$10 million
deemed dividend, net of tax of
$10 million
, through equity, which was eliminated in consolidation.
Deconsolidation of GRAIL
On February 28, 2017, GRAIL completed the initial close of its Series B preferred stock financing, raising over
$900 million
, in which we did not participate. Concurrent with the financing, GRAIL repurchased from Illumina
35 million
shares of its Series A preferred stock and approximately
34 million
shares of its Series A-1 preferred stock for an aggregate purchase price of
$278 million
. At this time, we ceased to have a controlling financial interest in GRAIL and our equity ownership was reduced from
52%
to
19%
. Additionally, our voting interest was reduced to
13%
, and we no longer had representation on GRAIL’s board of directors. As a result, we deconsolidated GRAIL’s financial statements effective February 28, 2017 and account for the remaining retained investment as a cost-method investment. During the three months ended July 2, 2017, we purchased approximately
3 million
Series B preferred shares for
$14 million
resulting in an ownership of approximately
17%
of GRAIL’s outstanding stock and a
12%
voting interest. As of
December 31, 2017
, we hold
$185 million
in other assets related to this investment, which consists of
5 million
Series A preferred shares, and approximately
3 million
Series B preferred shares and
78 million
Class A common shares of GRAIL.
The operations of GRAIL from January 2, 2017 up to February 28, 2017, the date of deconsolidation, are included in the accompanying consolidated statements of income for the year ended
December 31, 2017
. During this period, we absorbed approximately
50%
of GRAIL’s losses based upon our proportional ownership of GRAIL’s common stock.
On February 28, 2017, we recorded a pretax gain of
$453 million
included in other income (expense), net, of which
$159 million
relates to the remeasurement of our retained equity interest to its fair value. The pretax gain on deconsolidation includes (i) the consideration received from GRAIL for its repurchase of a portion of our ownership interest, (ii) the derecognition of the carrying amounts of GRAIL’s assets and liabilities, (iii) the derecognition of the noncontrolling interest related to GRAIL, and (iv) the recording of our remaining interest in GRAIL at fair value. This fair value measurement of our remaining interest was derived using the market approach. Significant estimates and assumptions required for this valuation included, but were not limited to, various Black-Scholes option-pricing model assumptions as of the date of deconsolidation and estimated discounts for lack of marketability related to the equity securities. These unobservable inputs, which represent a Level 3 measurement, are supported by little or no market activity and reflect our own assumptions in measuring fair value.
In connection with the deconsolidation of GRAIL, the parties amended their long-term supply agreement, including the discounted supply terms. The repurchase and supply arrangements, which were entered into concurrently, contain various elements and, as such, are deemed to be an arrangement with multiple deliverables as defined under the respective authoritative accounting guidance. We determined that each of the elements, which include the purchase obligation, the purchase right, and services to be provided in accordance with the long-term supply agreement, were at, or approximated, fair value on a stand-alone basis, and therefore, there was no discount to allocate among the deliverables. As such, none of the deconsolidation gain was allocated to these elements.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Redeemable Noncontrolling Interests
The activity of the redeemable noncontrolling interests from
December 28, 2014
through
December 31, 2017
is as follows (in millions):
|
|
|
|
|
|
Redeemable Noncontrolling Interests
|
Balance as of December 28, 2014
|
$
|
—
|
|
Cash contributions
|
57
|
|
Amount held in escrow by third party
|
(24
|
)
|
Net loss attributable to noncontrolling interests
|
(4
|
)
|
Adjustment up to the redemption value
|
4
|
|
Balance as of January 3, 2016
|
33
|
|
Cash contributions
|
9
|
|
Vesting of redeemable equity awards
|
2
|
|
Net loss attributable to noncontrolling interests
|
(21
|
)
|
Adjustment up to the redemption value
|
21
|
|
Balance as of January 1, 2017
|
44
|
|
Amount released from escrow
|
79
|
|
Vesting of redeemable equity awards
|
13
|
|
Net loss attributable to noncontrolling interests
|
(41
|
)
|
Adjustment up to the redemption value
|
136
|
|
Deconsolidation of GRAIL
|
(11
|
)
|
Balance as of December 31, 2017
|
$
|
220
|
|
Intangible assets, excluding goodwill, include acquired licensed and core technologies, customer relationships, license agreements, trade name, and in-process research and development (IPR&D). Amortization for the intangible assets that have finite useful lives is generally recorded on a straight-line basis over their useful lives.
A summary of the finite-lived identifiable intangible assets is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
January 1, 2017
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Intangibles,
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Intangibles,
Net
|
Licensed technologies
|
$
|
95
|
|
|
$
|
(74
|
)
|
|
$
|
21
|
|
|
$
|
95
|
|
|
$
|
(64
|
)
|
|
$
|
31
|
|
Core technologies
|
300
|
|
|
(161
|
)
|
|
139
|
|
|
328
|
|
|
(142
|
)
|
|
186
|
|
Customer relationships
|
32
|
|
|
(25
|
)
|
|
7
|
|
|
33
|
|
|
(22
|
)
|
|
11
|
|
License agreements
|
14
|
|
|
(8
|
)
|
|
6
|
|
|
14
|
|
|
(7
|
)
|
|
7
|
|
Trade name
|
7
|
|
|
(5
|
)
|
|
2
|
|
|
5
|
|
|
(3
|
)
|
|
2
|
|
Total finite-lived intangible assets, net
|
$
|
448
|
|
|
$
|
(273
|
)
|
|
$
|
175
|
|
|
$
|
475
|
|
|
$
|
(238
|
)
|
|
$
|
237
|
|
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The estimated annual amortization of finite-lived intangible assets for the next five years is shown in the following table (in millions). Actual amortization expense to be reported in future periods could differ from these estimates as a result of acquisitions, divestitures, and asset impairments, among other factors.
|
|
|
|
|
|
Estimated Annual Amortization
|
2018
|
$
|
36
|
|
2019
|
32
|
|
2020
|
24
|
|
2021
|
21
|
|
2022
|
17
|
|
Thereafter
|
45
|
|
Total
|
$
|
175
|
|
|
|
4.
|
Fair Value Measurements
|
Fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of
December 31, 2017
and
January 1, 2017
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
January 1, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (cash equivalent)
|
$
|
957
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
957
|
|
|
$
|
386
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
386
|
|
Debt securities in government-sponsored entities
|
—
|
|
|
67
|
|
|
—
|
|
|
67
|
|
|
—
|
|
|
34
|
|
|
—
|
|
|
34
|
|
Corporate debt securities
|
—
|
|
|
421
|
|
|
—
|
|
|
421
|
|
|
—
|
|
|
476
|
|
|
—
|
|
|
476
|
|
U.S. Treasury securities
|
432
|
|
|
—
|
|
|
—
|
|
|
432
|
|
|
314
|
|
|
—
|
|
|
—
|
|
|
314
|
|
Deferred compensation plan assets
|
—
|
|
|
35
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
31
|
|
Total assets measured at fair value
|
$
|
1,389
|
|
|
$
|
523
|
|
|
$
|
—
|
|
|
$
|
1,912
|
|
|
$
|
700
|
|
|
$
|
541
|
|
|
$
|
—
|
|
|
$
|
1,241
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
4
|
|
Deferred compensation liability
|
—
|
|
|
33
|
|
|
—
|
|
|
33
|
|
|
—
|
|
|
29
|
|
|
—
|
|
|
29
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
4
|
|
|
$
|
33
|
|
We hold available-for-sale securities that consist of highly-liquid, investment-grade debt securities. We consider information provided by our investment accounting and reporting service provider in the measurement of fair value of our debt securities. The investment service provider provides valuation information from an industry-recognized valuation service. Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. Our deferred compensation plan assets consist primarily of investments in life insurance contracts carried at cash surrender value, which reflects the net asset value of the underlying publicly traded mutual funds. We perform control procedures to corroborate the fair value of our holdings, including comparing valuations obtained from our investment service provider to valuations reported by our asset custodians, validating pricing sources and models, and reviewing key model inputs, if necessary.
The fair value of any contingent consideration liabilities is reassessed on a quarterly basis using the income approach. Assumptions used to estimate the acquisition date fair value of the contingent consideration include discount rates ranging from
4%
to
6%
and the probability of achieving certain milestones. The fair value measurement of the contingent consideration is based on significant inputs not observed in the market (Level 3 inputs). Significant inputs used in the measurement include probabilities of achieving the remaining milestones and the discount rates, which depend on the milestone risk profiles. The
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
changes in fair value of the contingent consideration during the years ended
December 31, 2017
,
January 1, 2017
, and
January 3, 2016
were due to changes in the estimated payments and discounting periods.
Changes in estimated fair value of contingent consideration liabilities from
December 28, 2014
through
December 31, 2017
are as follows (in millions):
|
|
|
|
|
|
Contingent
Consideration
Liability
(Level 3
Measurement)
|
Balance as of December 28, 2014
|
$
|
44
|
|
Change in estimated fair value, recorded in selling, general and administrative expenses
|
(6
|
)
|
Cash payments
|
(3
|
)
|
Balance as of January 3, 2016
|
35
|
|
Additional liability recorded as a result of a current period acquisition
|
5
|
|
Change in estimated fair value, recorded in selling, general and administrative expenses
|
(1
|
)
|
Cash payments
|
(35
|
)
|
Balance as of January 1, 2017
|
4
|
|
Change in estimated fair value, recorded in selling, general and administrative expenses
|
(1
|
)
|
Cash payments
|
(3
|
)
|
Balance as of December 31, 2017
|
$
|
—
|
|
5. Debt and Other Commitments
Summary of debt obligations
Debt obligations consist of the following (dollars in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
January 1,
2017
|
Principal amount of 2019 Notes outstanding
|
$
|
633
|
|
|
$
|
633
|
|
Principal amount of 2021 Notes outstanding
|
517
|
|
|
517
|
|
Unamortized discount of liability component
|
(75
|
)
|
|
(105
|
)
|
Net carrying amount of liability component
|
1,075
|
|
|
1,045
|
|
Obligations under financing leases
|
113
|
|
|
9
|
|
Other
|
4
|
|
|
4
|
|
Less: current portion
|
(10
|
)
|
|
(2
|
)
|
Long-term debt
|
$
|
1,182
|
|
|
$
|
1,056
|
|
Carrying value of equity component, net of issuance costs
|
$
|
161
|
|
|
$
|
161
|
|
Fair value of outstanding notes (Level 2)
|
$
|
1,305
|
|
|
$
|
1,108
|
|
Weighted average remaining amortization period of discount on the liability component
|
2.8 years
|
|
|
3.6 years
|
|
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
0% Convertible Senior Notes due 2019 (2019 Notes) and 0.5% Convertible Senior Notes due 2021 (2021 Notes)
In June 2014, we issued
$633 million
aggregate principal amount of
0%
convertible senior notes due 2019 (2019 Notes) and
$517 million
aggregate principal amount of
0.5%
convertible senior notes due 2021 (2021 Notes) in an offering conducted in accordance with Rule 144A under the Securities Act of 1933, as amended. The Notes were issued at
100%
of par value. The net proceeds from the issuance, after deducting the offering expenses payable by us, was
$1,132 million
. We used the net proceeds plus cash on hand to repurchase a portion of the outstanding 2016 Notes in privately negotiated transactions concurrently with the issuance of the 2019 and 2021 Notes.
Both the 2019 and 2021 Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at our election, based on an initial conversion rate, subject to adjustment, of 3.9318 shares per $1,000 principal amount of the notes (which represents an initial conversion price of approximately $254.34 per share), only in the following circumstances and to the following extent: (1) during the five business-day period after any 10 consecutive trading day period (the measurement period) in which the trading price per 2019 and 2021 Note for each day of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such day; (2) during any calendar quarter (and only during that quarter) after the calendar quarter ending September 30, 2014, if the last reported sale price of our common stock for 20 or more trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (3) upon the occurrence of specified events described in the indenture for the 2019 and 2021 Notes; and (4) at any time on or after March 15, 2019 for the 2019 Notes, or March 15, 2021 for the 2021 Notes, through the second scheduled trading day immediately preceding the maturity date.
As noted in the indentures for the 2019 and 2021 Notes, it is our intent and policy to settle conversions through combination settlement, which essentially involves repayment of an amount of cash equal to the “principal portion” and delivery of the “share amount” in excess of the conversion value over the principal portion in shares of common stock. In general, for each
$1,000
in principal, the “principal portion” of cash upon settlement is defined as the lesser of
$1,000
and the conversion value during the
20
-day observation period. The conversion value is the sum of the daily conversion value which is the product of the effective conversion rate divided by
20
days and the daily volume weighted average price (VWAP) of our common stock. The “share amount” is the cumulative “daily share amount” during the observation period, which is calculated by dividing the daily VWAP into the difference between the daily conversion value (i.e., conversion rate x daily VWAP) and
$1,000
.
The 2019 Notes carry no coupon interest. We pay
0.5%
interest per annum on the principal amount of the 2021 Notes, payable semiannually in arrears in cash on June 15 and December 15 of each year, beginning on December 15, 2014. The 2019 and 2021 Notes mature on June 15, 2019 and June 15, 2021, respectively. If a designated event, as defined in the indentures for the 2019 and 2021 Notes, such as acquisition, merger, or liquidation, occurs prior to the maturity date, subject to certain limitations, holders of the notes may require us to repurchase all or a portion of their notes for cash at a repurchase price equal to
100%
of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the repurchase date.
The liability and equity components of the 2019 and 2021 Notes are accounted for in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature. Because we have no outstanding non-convertible public debt, we determined that market-traded senior, unsecured corporate bonds represent a similar liability to the convertible senior notes without the conversion option. Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry as us, and with similar maturities to the 2019 and 2021 Notes, we estimated the implied interest rates of our 2019 and 2021 Notes to be
2.9%
and
3.5%
, respectively, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The estimated implied interest rates were applied to the 2019 and 2021 Notes, which resulted in a fair value of the liability component in aggregate of
$972 million
upon issuance, calculated as the present value of implied future payments based on the
$1,150 million
aggregate principal amount. The
$161 million
difference between the cash proceeds of
$1,133 million
and the estimated fair value of the liability component was recorded in additional paid-in capital as the 2019 and 2021 Notes are not considered redeemable.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As a policy election under applicable guidance related to the calculation of diluted net income per share, we elected the combination settlement method as our stated settlement policy and applied the treasury stock method in the calculation of the potential dilutive impact of the 2019 and 2021 Notes. Neither the 2019 nor the 2021 Notes were convertible as of
December 31, 2017
, and had no dilutive impact during the year ended
December 31, 2017
. If the 2019 and 2021 Notes had been converted as of
December 31, 2017
, the if-converted value would not exceed the principal amount.
0.25% Convertible Senior Notes due 2016
In 2011, we issued
$920 million
aggregate principal amount of
0.25%
convertible senior notes due 2016 (2016 Notes) with a maturity date of March 15, 2016. The effective rate of the liability component was estimated to be
4.5%
. Based upon meeting the stock trading price conversion requirement during the three months ended March 30, 2014, the 2016 Notes became convertible on April 1, 2014 through, and including,
March 11, 2016
. All notes were converted by March 11, 2016.
Leases
We lease office and manufacturing facilities under various non-cancellable lease agreements. Facility leases generally provide for periodic rent increases, and many contain escalation clauses and renewal options. Certain leases require us to pay property taxes and routine maintenance. We are headquartered in San Diego, California and lease facilities in San Diego and the San Francisco Bay Area in California; Madison, Wisconsin; Morrisville, North Carolina; Australia; Brazil; Canada; China; France; Japan; Singapore; the Netherlands; South Korea; and the United Kingdom.
We evaluate whether we are the accounting owner of leased assets during the construction period when we are involved in the construction of leased assets. As of
December 31, 2017
, we are considered the owner of
two
construction projects for accounting purposes only under build-to-suit lease accounting due to certain indemnification obligations related to the construction. As of
December 31, 2017
and
January 1, 2017
, we recorded
$144 million
and
$223 million
, respectively, in project construction costs paid or reimbursed by the landlord as construction in progress and a corresponding build-to-suit lease liability.
During the year ended
December 31, 2017
, construction of a build-to-suit property was completed. We concluded that we do not qualify for “sale-leaseback” treatment and the lease is accounted for as a financing obligation. Accordingly,
$104 million
of construction in progress and build-to-suit lease liability were reclassified to building asset and obligations under financing leases, respectively.
On February 28, 2017, GRAIL was deconsolidated, as further described in note “2. Balance Sheet Account Details”, and
$58 million
of construction in progress and the corresponding build-to-suit lease liability were removed.
As of
December 31, 2017
, annual future minimum payments of our operating leases and build-to-suit leases, which include those leases accounted for as a financing obligation, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
Sublease
Income
|
|
Net Operating
Leases
|
|
Build-to-suit Leases
|
2018
|
$
|
55
|
|
|
$
|
(9
|
)
|
|
$
|
46
|
|
|
$
|
22
|
|
2019
|
60
|
|
|
(10
|
)
|
|
50
|
|
|
20
|
|
2020
|
58
|
|
|
(10
|
)
|
|
48
|
|
|
20
|
|
2021
|
57
|
|
|
(10
|
)
|
|
47
|
|
|
21
|
|
2022
|
54
|
|
|
(11
|
)
|
|
43
|
|
|
21
|
|
Thereafter
|
468
|
|
|
(16
|
)
|
|
452
|
|
|
190
|
|
Total minimum lease payments
|
$
|
752
|
|
|
$
|
(66
|
)
|
|
$
|
686
|
|
|
$
|
294
|
|
Rent expense was
$46 million
,
$46 million
, and
$39 million
for the years ended
December 31, 2017
,
January 1, 2017
, and
January 3, 2016
, respectively. As of
December 31, 2017
and
January 1, 2017
, the deferred rent balance related to our operating leases was
$115 million
and
$107 million
, respectively, of which the long-term portion of
$113 million
and
$104 million
, respectively, were recorded in other long-term liabilities.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Facility exit obligations were recorded upon vacating our former headquarters in 2011. Changes in the facility exit obligation from
December 28, 2014
through
December 31, 2017
, are as follows (in millions):
|
|
|
|
|
|
Facility Exit Obligation
|
Balance as of December 28, 2014
|
$
|
38
|
|
Adjustment to facility exit obligation
|
(5
|
)
|
Accretion of interest expense
|
2
|
|
Cash payments
|
(13
|
)
|
Balance as of January 3, 2016
|
22
|
|
Accretion of interest expense
|
1
|
|
Cash payments
|
(4
|
)
|
Balance as of January 1, 2017
|
19
|
|
Accretion of interest expense
|
1
|
|
Cash payments
|
(3
|
)
|
Balance as of December 31, 2017
|
$
|
17
|
|
Purchase Obligations
In the normal course of business, we enter into agreements to purchase goods or services that are not cancelable without penalty, primarily related to licensing and supply arrangements. For those agreements with variable terms, we do not estimate the total obligation beyond any minimum quantities or pricing as of the reporting date. Licensing agreements under which we commit to minimum royalty payments, some of which are subject to adjustment, may be terminated prior to the expiration of underlying intellectual property under certain circumstances. Annual minimum payments for noncancelable purchase obligations as of
December 31, 2017
are as follows (in millions):
|
|
|
|
|
|
Minimum Payments
|
2018
|
$
|
27
|
|
2019
|
60
|
|
2020
|
20
|
|
Total
|
$
|
107
|
|
|
|
6.
|
Share-based Compensation Expense
|
Share-based compensation expense for all stock awards consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 31,
2017
|
|
January 1,
2017
|
|
January 3,
2016
|
Cost of product revenue
|
$
|
12
|
|
|
$
|
9
|
|
|
$
|
10
|
|
Cost of service and other revenue
|
2
|
|
|
2
|
|
|
2
|
|
Research and development
|
51
|
|
|
42
|
|
|
42
|
|
Selling, general and administrative
|
99
|
|
|
76
|
|
|
79
|
|
Share-based compensation expense before taxes
|
164
|
|
|
129
|
|
|
133
|
|
Related income tax benefits
|
(48
|
)
|
|
(41
|
)
|
|
(39
|
)
|
Share-based compensation expense, net of taxes
|
$
|
116
|
|
|
$
|
88
|
|
|
$
|
94
|
|
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The assumptions used for the specified reporting periods and the resulting estimates of weighted-average fair value per share for stock purchased under the ESPP are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 31,
2017
|
|
January 1,
2017
|
|
January 3,
2016
|
Risk-free interest rate
|
0.50% - 1.22%
|
|
|
0.40% - 0.50%
|
|
|
0.07% - 0.33%
|
|
Expected volatility
|
29% - 44%
|
|
|
40% - 44%
|
|
|
29% - 38%
|
|
Expected term
|
0.5 - 1.0 year
|
|
|
0.5 - 1.0 year
|
|
|
0.5 - 1.0 year
|
|
Expected dividends
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Weighted-average grant-date fair value per share
|
$
|
46.81
|
|
|
$
|
48.29
|
|
|
$
|
53.92
|
|
As of
December 31, 2017
, approximately
$394 million
of total unrecognized compensation cost related to restricted stock and ESPP shares issued to date are expected to be recognized over a weighted-average period of approximately
2.7 years
.
The 2015 Stock and Incentive Compensation Plan (the 2015 Stock Plan) and the New Hire Stock and Incentive Plan allow for the issuance of stock options, restricted stock units and awards, and performance stock units. As of
December 31, 2017
, approximately
5.3 million
shares remained available for future grants under the 2015 Stock Plan. There is no set number of shares reserved for issuance under the New Hire Stock and Incentive Plan.
Restricted Stock
We issue restricted stock units (RSU) and performance stock units (PSU), which are both considered restricted stock. We grant restricted stock pursuant to the 2015 Stock Plan and satisfy such grants through the issuance of new shares. RSU are share awards that, upon vesting, will deliver to the holder shares of our common stock. RSU generally vest over a
four
-year period with equal vesting on anniversaries of the grant date. We issue PSU for which the number of shares issuable at the end of a
three
-year performance period can reach up to
150%
of the shares approved in the award based on our performance relative to specified earnings per share targets and continued employment through the vesting period.
A summary of restricted stock activity and related information from
December 28, 2014
through
December 31, 2017
is as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Units
(RSU)
|
|
Performance
Stock Units
(PSU)(1)
|
|
Weighted-Average Grant-
Date Fair Value per Share
|
|
|
|
RSU
|
|
PSU
|
Outstanding at December 28, 2014
|
2,841
|
|
|
1,257
|
|
|
$
|
92.35
|
|
|
$
|
96.21
|
|
Awarded
|
756
|
|
|
194
|
|
|
$
|
184.10
|
|
|
$
|
183.29
|
|
Vested
|
(1,138
|
)
|
|
(741
|
)
|
|
$
|
75.29
|
|
|
$
|
60.80
|
|
Cancelled
|
(253
|
)
|
|
(127
|
)
|
|
$
|
99.50
|
|
|
$
|
99.30
|
|
Outstanding at January 3, 2016
|
2,206
|
|
|
583
|
|
|
$
|
131.80
|
|
|
$
|
169.41
|
|
Awarded
|
1,245
|
|
|
172
|
|
|
$
|
132.47
|
|
|
$
|
113.56
|
|
Vested
|
(928
|
)
|
|
(199
|
)
|
|
$
|
105.49
|
|
|
$
|
148.99
|
|
Cancelled
|
(230
|
)
|
|
(96
|
)
|
|
$
|
139.74
|
|
|
$
|
163.05
|
|
Outstanding at January 1, 2017
|
2,293
|
|
|
460
|
|
|
$
|
141.80
|
|
|
$
|
158.66
|
|
Awarded
|
879
|
|
|
238
|
|
|
$
|
207.38
|
|
|
$
|
191.53
|
|
Vested
|
(861
|
)
|
|
(92
|
)
|
|
$
|
131.62
|
|
|
$
|
189.09
|
|
Cancelled
|
(226
|
)
|
|
(64
|
)
|
|
$
|
149.03
|
|
|
$
|
173.83
|
|
Outstanding at December 31, 2017
|
2,085
|
|
|
542
|
|
|
$
|
172.92
|
|
|
$
|
166.15
|
|
______________________________________
|
|
(1)
|
The number of units reflect the estimated number of shares to be issued at the end of the performance period.
|
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Pre-tax intrinsic values and fair value of vested restricted stock are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 31,
2017
|
|
January 1,
2017
|
|
January 3,
2016
|
Pre-tax intrinsic value of outstanding restricted stock:
|
|
|
|
|
|
RSU
|
$
|
456
|
|
|
$
|
294
|
|
|
$
|
423
|
|
PSU
|
$
|
118
|
|
|
$
|
59
|
|
|
$
|
112
|
|
|
|
|
|
|
|
Fair value of restricted stock vested:
|
|
|
|
|
|
RSU
|
$
|
113
|
|
|
$
|
98
|
|
|
$
|
86
|
|
PSU
|
$
|
17
|
|
|
$
|
30
|
|
|
$
|
45
|
|
Stock Options
Stock option activity from
December 28, 2014
through
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
Options
(in thousands)
|
|
Weighted-
Average
Exercise Price
|
Outstanding at December 28, 2014
|
3,211
|
|
|
$
|
34.74
|
|
Exercised
|
(1,529
|
)
|
|
$
|
28.54
|
|
Cancelled
|
(83
|
)
|
|
$
|
10.31
|
|
Outstanding at January 3, 2016
|
1,599
|
|
|
$
|
41.95
|
|
Exercised
|
(552
|
)
|
|
$
|
29.41
|
|
Cancelled
|
(2
|
)
|
|
$
|
46.35
|
|
Outstanding at January 1, 2017
|
1,045
|
|
|
$
|
48.56
|
|
Exercised
|
(723
|
)
|
|
$
|
49.31
|
|
Outstanding and exercisable at December 31, 2017
|
322
|
|
|
$
|
46.93
|
|
The weighted-average remaining life of options outstanding and exercisable is
3.0 years
as of
December 31, 2017
.
The aggregate intrinsic value of options outstanding and options exercisable as of
December 31, 2017
was
$55 million
. Aggregate intrinsic value represents the product of the number of options outstanding multiplied by the difference between our closing stock price per share on the last trading day of the fiscal period, which was
$218.49
as of
December 29, 2017
, and the exercise price. Total intrinsic value of options exercised was
$101 million
,
$71 million
, and
$256 million
for the years ended
December 31, 2017
,
January 1, 2017
, and
January 3, 2016
, respectively.
Employee Stock Purchase Plan
A total of
15.5 million
shares of our common stock have been reserved for issuance under our 2000 Employee Stock Purchase Plan, or ESPP. The ESPP permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. The price at which stock is purchased under the ESPP is equal to
85%
of the fair market value of the common stock on the first of the offering period or purchase date, whichever is lower. The initial offering period commenced in July 2000.
Approximately
0.3 million
,
0.2 million
, and
0.2 million
shares were issued under the ESPP during the years ended
December 31, 2017
,
January 1, 2017
, and
January 3, 2016
, respectively. As of
December 31, 2017
and
January 1, 2017
, there were approximately
14.0 million
and
14.3 million
shares available for issuance under the ESPP, respectively.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Share Repurchases
On July 28, 2016, our Board of Directors authorized a new share repurchase program, which superseded all prior and available repurchase authorizations, to repurchase
$250 million
of outstanding common stock. During Q1 2017, we repurchased the remaining shares, completing the program.
On May 4, 2017, our Board of Directors authorized an additional share repurchase program to repurchase
$250 million
of outstanding commons stock. The repurchases may be completed under a 10b5-1 plan or at management’s discretion.
During the years ended
December 31, 2017
,
January 1, 2017
, and
January 3, 2016
, we repurchased approximately
1.4 million
shares for
$251 million
,
1.8 million
shares for
$249 million
, and
1.7 million
shares for
$274 million
, respectively. Authorizations to repurchase
$100 million
of our common stock remained available as of
December 31, 2017
.
We are involved in various lawsuits and claims arising in the ordinary course of business, including actions with respect to intellectual property, employment, and contractual matters. In connection with these matters, we assess, on a regular basis, the probability and range of possible loss based on the developments in these matters. A liability is recorded in the financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable results could occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review outstanding legal matters to determine the adequacy of the liabilities accrued and related disclosures. The amount of ultimate loss may differ from these estimates. Each matter presents its own unique circumstances, and prior litigation does not necessarily provide a reliable basis on which to predict the outcome, or range of outcomes, in any individual proceeding. Because of the uncertainties related to the occurrence, amount, and range of loss on any pending litigation or claim, we are currently unable to predict their ultimate outcome, and, with respect to any pending litigation or claim where no liability has been accrued, to make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome. In the event that opposing litigants in outstanding litigations or claims ultimately succeed at trial and any subsequent appeals on their claims, any potential loss or charges in excess of any established accruals, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations, and/or cash flows in the period in which the unfavorable outcome occurs or becomes probable, and potentially in future periods.
Enzo
On July 1, 2016, we entered into a Settlement and License Agreement with Enzo Life Sciences, Inc. (Enzo) that settled all claims in the litigation. Pursuant to the terms of the Settlement and License Agreement, we paid Enzo a one-time payment of
$21 million
for release of past damages claimed and a fully paid-up non-exclusive license to U.S. Patent No. 7,064,197. None of the parties made any admission of liability in entering into the Settlement and License Agreement. We allocated the
$21 million
settlement on a relative fair value basis, resulting in
$12 million
capitalized as an intangible asset and a corresponding gain recorded in legal contingencies for the value of the license, which will be amortized over a period of
7 years
on a straight-line basis. The remaining
$9 million
related to past damages claimed. The fair value of the license and past damages was estimated using a discounted cash flow model, and is considered to be a Level 3 measurement.
The income before income taxes summarized by region is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 31,
2017
|
|
January 1,
2017
|
|
January 3,
2016
|
United States
|
$
|
458
|
|
|
$
|
120
|
|
|
$
|
218
|
|
Foreign
|
585
|
|
|
441
|
|
|
365
|
|
Total income before income taxes
|
$
|
1,043
|
|
|
$
|
561
|
|
|
$
|
583
|
|
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provision for income taxes consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 31,
2017
|
|
January 1,
2017
|
|
January 3,
2016
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
259
|
|
|
$
|
71
|
|
|
$
|
106
|
|
State
|
21
|
|
|
10
|
|
|
18
|
|
Foreign
|
51
|
|
|
45
|
|
|
46
|
|
Total current provision
|
331
|
|
|
126
|
|
|
170
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
36
|
|
|
16
|
|
|
(11
|
)
|
State
|
—
|
|
|
(5
|
)
|
|
(32
|
)
|
Foreign
|
(2
|
)
|
|
(4
|
)
|
|
(2
|
)
|
Total deferred expense (benefit)
|
34
|
|
|
7
|
|
|
(45
|
)
|
Total tax provision
|
$
|
365
|
|
|
$
|
133
|
|
|
$
|
125
|
|
The provision for income taxes reconciles to the amount computed by applying the federal statutory rate to income before taxes as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 31,
2017
|
|
January 1,
2017
|
|
January 3,
2016
|
Tax at federal statutory rate
|
$
|
365
|
|
|
$
|
196
|
|
|
$
|
204
|
|
State, net of federal benefit
|
19
|
|
|
10
|
|
|
9
|
|
Research and other credits
|
(12
|
)
|
|
(13
|
)
|
|
(20
|
)
|
Change in valuation allowance
|
12
|
|
|
5
|
|
|
(4
|
)
|
Impact of foreign operations
|
(130
|
)
|
|
(86
|
)
|
|
(42
|
)
|
Cost sharing adjustment
|
—
|
|
|
(7
|
)
|
|
(25
|
)
|
Investments in consolidated variable interest entities
|
(3
|
)
|
|
25
|
|
|
1
|
|
Impact of U.S. Tax Reform
|
150
|
|
|
—
|
|
|
—
|
|
Stock compensation
|
(41
|
)
|
|
3
|
|
|
2
|
|
Other
|
5
|
|
|
—
|
|
|
—
|
|
Total tax provision
|
$
|
365
|
|
|
$
|
133
|
|
|
$
|
125
|
|
In accordance with the Tax Cuts and Jobs Act that was enacted on December 22, 2017 (U.S. Tax Reform), we have recorded a provision for income taxes of
$150 million
. The impact of U.S. Tax Reform primarily represents our provisional estimates of the one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and the impact of revaluing our U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. For U.S. federal purposes the corporate statutory income tax rate was reduced from
35%
to
21%
, effective for our 2018 tax year. The provisional impact of U.S. Tax Reform is our current best estimate based on a preliminary review of the new law and is subject to revision based on our existing accounting for income taxes policy as further information is gathered and interpretation and analysis of the tax legislation evolves. The Securities and Exchange Commission has issued rules allowing for a measurement period of up to one year after the enactment date of U.S. Tax Reform to finalize the recording of the related tax impacts. Any future changes to our provisional estimated impact of U.S. Tax Reform will be included as an adjustment to the provision for income taxes.
We continue to evaluate the impacts of U.S. Tax Reform as we interpret the legislation, including the newly enacted global intangible low-taxed income (GILTI) provisions which subject our foreign earnings to a minimum level of tax. Because of the complexities of the new legislation, we have not elected an accounting policy for GILTI at this time. Recent FASB guidance indicates that accounting for GILTI either as part of deferred taxes or as a period cost are both acceptable methods.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Once further information is gathered and interpretation and analysis of the tax legislation evolves we will make an appropriate accounting method election.
The impact of foreign operations primarily represents the difference between the actual provision for income taxes for our legal entities that operate primarily in jurisdictions that have statutory tax rates lower than the U.S. federal statutory tax rate of
35%
. The most significant tax benefits from foreign operations were from our earnings in Singapore and the United Kingdom, which had statutory tax rates of
17%
and
19.25%
, respectively, in the year ended
December 31, 2017
. The impact of foreign operations also includes the U.S. foreign tax credit impact of non-U.S. earnings and uncertain tax positions related to foreign items.
Significant components of deferred tax assets and liabilities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
January 1,
2017
|
Deferred tax assets:
|
|
|
|
|
|
Net operating losses
|
$
|
18
|
|
|
$
|
20
|
|
Tax credits
|
57
|
|
|
43
|
|
Other accruals and reserves
|
25
|
|
|
24
|
|
Stock compensation
|
19
|
|
|
38
|
|
Deferred rent
|
28
|
|
|
38
|
|
Cost sharing adjustment
|
21
|
|
|
32
|
|
Other amortization
|
12
|
|
|
16
|
|
Lease obligation
|
27
|
|
|
—
|
|
Investments
|
13
|
|
|
6
|
|
Other
|
26
|
|
|
32
|
|
Total gross deferred tax assets
|
246
|
|
|
249
|
|
Valuation allowance on deferred tax assets
|
(25
|
)
|
|
(18
|
)
|
Total deferred tax assets
|
221
|
|
|
231
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Purchased intangible amortization
|
(26
|
)
|
|
(53
|
)
|
Convertible debt
|
(18
|
)
|
|
(37
|
)
|
Property and equipment
|
(44
|
)
|
|
(17
|
)
|
Investments
|
(40
|
)
|
|
—
|
|
Other
|
(5
|
)
|
|
(1
|
)
|
Total deferred tax liabilities
|
(133
|
)
|
|
(108
|
)
|
Deferred tax assets, net
|
$
|
88
|
|
|
$
|
123
|
|
A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. Based on the available evidence as of
December 31, 2017
, we were not able to conclude it is more likely than not certain deferred tax assets will be realized. Therefore, a valuation allowance of
$25 million
was recorded against certain U.S. and foreign deferred tax assets.
As of
December 31, 2017
, we had net operating loss carryforwards for federal and state tax purposes of
$10 million
and
$136 million
, respectively, which will begin to expire in
2019
and
2018
, respectively, unless utilized prior. We also had state tax credit carryforwards of
$95 million
, which will begin to expire in
2022
, unless utilized prior.
Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of net operating losses and credits may be subject to annual limitations in the event of any significant future changes in its ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization. The deferred tax assets as of
December 31, 2017
are net of any previous limitations due to Section 382 and 383.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our manufacturing operations in Singapore operate under various tax holidays and incentives that begin to expire in 2018. These tax holidays and incentives resulted in a
$49 million
,
$32 million
, and
$23 million
decrease to the provision for income taxes for the years ended
December 31, 2017
,
January 1, 2017
, and
January 3, 2016
, respectively. These tax holidays and incentives resulted in an increase in diluted earnings per share attributable to Illumina stockholders of
$0.33
,
$0.22
, and
$0.16
, for the years ended
December 31, 2017
,
January 1, 2017
, and
January 3, 2016
, respectively.
It is our intention to indefinitely reinvest the historical earnings of our foreign subsidiaries generated prior to 2017 to ensure sufficient working capital and to expand existing operations outside the United States. Accordingly, U.S. and foreign income and withholding taxes have not been provided on
$1.1 billion
of undistributed earnings of foreign subsidiaries as of
December 31, 2017
. In the event we are required to repatriate funds from outside of the United States, such repatriation would be subject to local laws, customs, and tax consequences. For the year ended December 31, 2017, we asserted that
$869 million
of foreign earnings generated in 2017 would not be indefinitely reinvested, and accordingly, recorded a deferred tax liability of
$5 million
.
The following table summarizes the gross amount of our uncertain tax positions (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
January 1,
2017
|
|
January 3,
2016
|
Balance at beginning of year
|
$
|
65
|
|
|
$
|
56
|
|
|
$
|
52
|
|
Increases related to prior year tax positions
|
2
|
|
|
—
|
|
|
2
|
|
Decreases related to prior year tax positions
|
—
|
|
|
(2
|
)
|
|
(1
|
)
|
Increases related to current year tax positions
|
14
|
|
|
13
|
|
|
11
|
|
Decreases related to lapse of statute of limitations
|
(2
|
)
|
|
(2
|
)
|
|
(8
|
)
|
Balance at end of year
|
$
|
79
|
|
|
$
|
65
|
|
|
$
|
56
|
|
Included in the balance of uncertain tax positions as of
December 31, 2017
and
January 1, 2017
, were
$70 million
and
$55 million
, respectively, of net unrecognized tax benefits that, if recognized, would reduce the effective income tax rate in future periods.
Any interest and penalties related to uncertain tax positions are reflected in the provision for income taxes. We recognized expense of
$1 million
, expense of
$1 million
, and income of
$0.2 million
during the years ended
December 31, 2017
,
January 1, 2017
, and
January 3, 2016
, respectively, related to potential interest and penalties on uncertain tax positions. We recorded a liability for potential interest and penalties of
$8 million
and
$6 million
as of
December 31, 2017
and
January 1, 2017
, respectively.
Tax years
1997
to 2016 remain subject to future examination by the major tax jurisdictions in which we are subject to tax. Given the uncertainty of potential adjustments from examination as well as the potential expiration of the statute of limitations, it is reasonably possible that the balance of unrecognized tax benefits could change significantly over the next 12 months. However, at this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be determined given the number of matters and the number of years that are potentially subject to examination.
|
|
10.
|
Employee Benefit Plans
|
Retirement Plan
We have a 401(k) savings plan covering substantially all of our employees in the United States. Our contributions to the plan are discretionary. During the years ended
December 31, 2017
,
January 1, 2017
, and
January 3, 2016
, we made matching contributions of
$17 million
,
$14 million
, and
$12 million
, respectively.
Deferred Compensation Plan
The Illumina, Inc. Deferred Compensation Plan (the Plan) allows senior level employees to contribute up to
80%
of their base salary and
100%
of their variable cash compensation, and members of the board of directors to contribute up to
100%
of their director fees and equity awards. Under the Plan, we credit the participants’ contributions with earnings that reflect the performance of certain independent investment funds. On a discretionary basis, we may also make employer contributions to participant accounts in any amount determined by us. The vesting schedules of employer contributions are at the sole
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
discretion of the Compensation Committee. However, all employer contributions shall become
100%
vested upon the occurrence of the participant’s disability, death or retirement or a change in control of Illumina. The benefits under this plan are unsecured. Participants are generally eligible to receive payment of their vested benefit at the end of their elected deferral period or after termination of their employment for any reason or at a later date to comply with the restrictions of Section 409A.
We also established a rabbi trust for the benefit of the participants under the Plan, and have included the assets of the rabbi trust in the consolidated balance sheets. As of
December 31, 2017
and
January 1, 2017
, the assets of the trust were
$35 million
and
$31 million
, respectively, and our liabilities were
$33 million
and
$29 million
, respectively. The assets and liabilities are classified as other assets and accrued liabilities, respectively, on the consolidated balance sheets. Changes in the values of the assets held by the rabbi trust are recorded in other income (expense), net in the consolidated statements of income, and changes in the values of the deferred compensation liabilities are recorded in cost of revenue or operating expenses.
|
|
11.
|
Segment Information, Geographic Data, and Significant Customers
|
We have two reportable segments: Illumina’s core operations (Core Illumina) and one segment related to the combined activities of the consolidated VIEs, GRAIL and Helix (Consolidated VIEs). Following the GRAIL deconsolidation on February 28, 2017, the Consolidated VIEs no longer include GRAIL. Prior to 2016, the combined results of operations of the Consolidated VIEs were not material.
We report segment information based on the management approach. This approach designates the internal reporting used by the Chief Operating Decision Maker (“CODM”) for making decisions and assessing performance as the source of our reportable segments. The CODM allocates resources and assesses the performance of each operating segment using information about its revenue and income (loss) from operations. Based on the information used by the CODM, we have determined its reportable segments as follows:
Core Illumina
:
Core Illumina’s products and services serve customers in the research, clinical and applied markets, and enable the adoption of a variety of genomic solutions. Core Illumina includes all of our operations, excluding the results of its consolidated VIEs.
Consolidated VIEs:
Helix
:
Helix was established to enable individuals to explore their genetic information by providing affordable sequencing and database services for consumers through third-party partners, driving the creation of an ecosystem of consumer applications.
GRAIL
:
GRAIL was created to develop a blood test for early-stage cancer detection. GRAIL was in the early stages of developing this test and as such, had no revenues through the date of deconsolidation.
Management evaluates the performance of our operating segments based upon income (loss) from operations. We do not allocate expenses between segments. Core Illumina sells products and provides services to GRAIL and Helix in accordance with contractual agreements between the entities.
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the operating performance of each reportable segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 31,
2017
|
|
January 1,
2017
|
|
January 3,
2016
|
Revenue:
|
|
|
|
|
|
Core Illumina
|
$
|
2,754
|
|
|
$
|
2,428
|
|
|
$
|
2,220
|
|
Consolidated VIEs
|
6
|
|
|
—
|
|
|
—
|
|
Eliminations
|
(8
|
)
|
|
(30
|
)
|
|
—
|
|
Consolidated revenue
|
$
|
2,752
|
|
|
$
|
2,398
|
|
|
$
|
2,220
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
Core Illumina
|
$
|
153
|
|
|
$
|
138
|
|
|
$
|
127
|
|
Consolidated VIEs
|
6
|
|
|
4
|
|
|
—
|
|
Eliminations
|
(3
|
)
|
|
(1
|
)
|
|
—
|
|
Consolidated depreciation and amortization
|
$
|
156
|
|
|
$
|
141
|
|
|
$
|
127
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
Core Illumina
|
$
|
696
|
|
|
$
|
684
|
|
|
$
|
621
|
|
Consolidated VIEs
|
(92
|
)
|
|
(81
|
)
|
|
(8
|
)
|
Eliminations
|
2
|
|
|
(16
|
)
|
|
—
|
|
Consolidated income from operations
|
$
|
606
|
|
|
$
|
587
|
|
|
$
|
613
|
|
Other income (expense), net primarily relate to Core Illumina and we do not allocate income taxes to our segments.
The following table presents the total assets and capital expenditures of each reportable segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 31,
2017
|
|
January 1,
2017
|
|
January 3,
2016
|
Total assets:
|
|
|
|
|
|
Core Illumina
|
$
|
5,223
|
|
|
$
|
4,167
|
|
|
$
|
3,658
|
|
Consolidated VIEs
|
45
|
|
|
180
|
|
|
31
|
|
Eliminations
|
(11
|
)
|
|
(66
|
)
|
|
(1
|
)
|
Consolidated total assets
|
$
|
5,257
|
|
|
$
|
4,281
|
|
|
$
|
3,688
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
Core Illumina
|
$
|
306
|
|
|
$
|
238
|
|
|
$
|
142
|
|
Consolidated VIEs
|
4
|
|
|
22
|
|
|
1
|
|
Consolidated capital expenditures
|
$
|
310
|
|
|
$
|
260
|
|
|
$
|
143
|
|
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table represents revenue by geographic area for the years ended
December 31, 2017
,
January 1, 2017
, and
January 3, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 31,
2017
|
|
January 1,
2017
|
|
January 3,
2016
|
United States
|
$
|
1,511
|
|
|
$
|
1,294
|
|
|
$
|
1,207
|
|
Europe
|
632
|
|
|
553
|
|
|
527
|
|
Greater China (a)
|
292
|
|
|
—
|
|
|
—
|
|
Asia-Pacific (a)
|
222
|
|
|
456
|
|
|
380
|
|
Other markets
|
95
|
|
|
95
|
|
|
106
|
|
Total
|
$
|
2,752
|
|
|
$
|
2,398
|
|
|
$
|
2,220
|
|
(a) Revenue for the Greater China region, which includes China, Taiwan, and Hong Kong, became material for the year ended
December 31, 2017
. Therefore, such revenue is reported separately and the Asia-Pacific region no longer includes the Greater China region. Greater China region revenue is included in the Asia-Pacific region for the years ended
January 1, 2017
, and
January 3, 2016
.
Revenue is attributable to geographic area based on the region of destination.
The majority of our revenue consists of sales of consumables and instruments. For the years ended
December 31, 2017
,
January 1, 2017
, and
January 3, 2016
, consumable sales represented
64%
,
64%
, and
58%
, respectively, of total revenue and instrument sales comprised
19%
,
20%
, and
27%
, respectively, of total revenue. Our customers include leading genomic research centers, academic institutions, government laboratories, and hospitals, as well as pharmaceutical, biotechnology, agrigenomics, commercial molecular diagnostic laboratories, and consumer genomics companies. We had no customers that provided more than 10% of total revenue in the years ended
December 31, 2017
,
January 1, 2017
, and
January 3, 2016
.
Net long-lived assets exclude goodwill and other intangible assets since they are not allocated on a geographic basis. We had net long-lived assets, consisting of property and equipment, in the following regions as of
December 31, 2017
and
January 1, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
January 1,
2017
|
United States
|
$
|
828
|
|
|
$
|
636
|
|
Singapore
|
54
|
|
|
44
|
|
United Kingdom
|
43
|
|
|
28
|
|
Other countries
|
6
|
|
|
5
|
|
Total
|
$
|
931
|
|
|
$
|
713
|
|
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
12.
|
Quarterly Financial Information (unaudited)
|
The following financial information reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results and cash flows of interim periods. All quarters for fiscal years
2017
and
2016
ended
December 31, 2017
and
January 1, 2017
were
13
weeks. Summarized quarterly data for fiscal years
2017
and
2016
are as follows (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
$
|
598
|
|
|
$
|
662
|
|
|
$
|
714
|
|
|
$
|
778
|
|
Gross profit
|
$
|
368
|
|
|
$
|
434
|
|
|
$
|
482
|
|
|
$
|
542
|
|
Consolidated net income
|
$
|
348
|
|
|
$
|
120
|
|
|
$
|
152
|
|
|
$
|
58
|
|
Net income attributable to Illumina stockholders (a)
|
$
|
367
|
|
|
$
|
128
|
|
|
$
|
163
|
|
|
$
|
68
|
|
Earnings per share attributable to Illumina stockholders:
|
|
|
|
|
|
|
|
Basic
|
$
|
2.50
|
|
|
$
|
0.87
|
|
|
$
|
1.12
|
|
|
$
|
0.47
|
|
Diluted
|
$
|
2.48
|
|
|
$
|
0.87
|
|
|
$
|
1.11
|
|
|
$
|
0.46
|
|
2016
|
|
|
|
|
|
|
|
Total revenue
|
$
|
572
|
|
|
$
|
600
|
|
|
$
|
607
|
|
|
$
|
619
|
|
Gross profit
|
$
|
397
|
|
|
$
|
424
|
|
|
$
|
426
|
|
|
$
|
419
|
|
Consolidated net income
|
$
|
88
|
|
|
$
|
116
|
|
|
$
|
117
|
|
|
$
|
108
|
|
Net income attributable to Illumina stockholders
|
$
|
90
|
|
|
$
|
120
|
|
|
$
|
129
|
|
|
$
|
124
|
|
Earnings per share attributable to Illumina stockholders:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.61
|
|
|
$
|
0.83
|
|
|
$
|
0.88
|
|
|
$
|
0.84
|
|
Diluted
|
$
|
0.60
|
|
|
$
|
0.82
|
|
|
$
|
0.87
|
|
|
$
|
0.84
|
|
Certain amounts may not recalculate using the rounded amounts provided
.
(a) First quarter of 2017 includes the results of GRAIL through February 28, 2017, the date of deconsolidation. Refer to note “2. Balance Sheet Account Details” for further discussions.