Illumina Reports Strong Start to Fiscal Year 2014

  Illumina Reports Strong Start to Fiscal Year 2014

Business Wire

SAN DIEGO -- April 22, 2014

Illumina, Inc. (NASDAQ:ILMN) today announced its financial results for the
first quarter of 2014.

First quarter 2014 results:

  *Revenue of $421 million, a 27% increase compared to $331 million in the
    first quarter of 2013
  *GAAP net income for the quarter of $60 million, or $0.40 per diluted
    share, compared to net loss of $23 million, or $0.18 per diluted share,
    for the first quarter of 2013
  *Non-GAAP net income for the quarter of $80 million, or $0.53 per diluted
    share, compared to $63 million, or $0.46 per diluted share, for the first
    quarter of 2013 (see the table entitled “Itemized Reconciliation Between
    GAAP and Non-GAAP Net Income (Loss)” for a reconciliation of these GAAP
    and non-GAAP financial measures)
  *Cash flow from operations of $37 million and free cash flow of $18 million
    for the quarter

Gross margin in the first quarter of 2014 was 66.1% compared to 66.3% in the
prior year period. Excluding the effect of non-cash charges associated with
stock compensation, amortization of acquired intangible assets, legal
contingencies, and inventory revaluation adjustments, non-GAAP gross margin
was 70.4% for the first quarter of 2014 compared to 69.2% in the prior year
period.

Research and development (R&D) expenses for the first quarter of 2014 were
$77.0 million compared to $61.5 million in the prior year period. R&D expenses
included $11.7 million and $8.0 million of non-cash stock compensation expense
in the first quarters of 2014 and 2013, respectively. Excluding these charges
and contingent compensation, R&D expenses as a percentage of revenue were
15.5% compared to 16.0% in the prior year period.

Selling, general and administrative (SG&A) expenses for the first quarter of
2014 were $109.6 million compared to $85.1 million in the prior year period.
SG&A expenses included $19.4 million and $14.6 million of non-cash stock
compensation expense in the first quarters of 2014 and 2013, respectively.
Excluding these charges, amortization of acquired intangible assets and
contingent compensation, SG&A expenses as a percentage of revenue were 19.9%,
flat compared to the prior year period.

Depreciation and amortization expenses were $28.4 million and capital
expenditures were $19.0 million during the first quarter of 2014. The Company
ended the first quarter of 2014 with $1.09 billion in cash, cash equivalents
and short-term investments, compared to $1.17 billion as of December29, 2013.

“Our first quarter results have set the stage for a strong 2014,” statedJay
Flatley, CEO. “We are experiencing an exciting uptake of our new products,
including the NextSeq™ 500 and HiSeq X™ Ten, while demand for the overall
product portfolio remains robust. We continue to innovate across the entire
spectrum of the sequencing workflow to more broadly enable the adoption of
genomics.”

Updates since our last earnings release:

  *Introduced new products to support oncology clinical research and
    discovery including the TruSeq® RNA Access Library Prep Kit, and the
    TruSight™ Myeloid Sequencing Panel and several new BaseSpace Core Apps
  *Announced that Novogene, Human Longevity, Inc., and WuXi Genome Center
    have purchased HiSeq X Ten sequencing systems
  *Published results in the New England Journal of Medicine that demonstrate
    that the verifi®Prenatal Test performs consistently well in pregnant
    women regardless of their risk level for fetal aneuploidy
  *Announced that Science for Life Laboratory (SciLifeLab) in Sweden has
    joined the Illumina Genome Network (IGN)
  *Launched the Illumina Accelerator Program, the world’s first business
    accelerator focused solely on creating an innovation ecosystem for the
    genomics industry
  *Repurchased $130 million of common stock under our previously announced
    share repurchase programs

Financial outlook and guidance

The non-GAAP financial guidance discussed below reflects certain pro forma
adjustments to assist in analyzing and assessing our core operational
performance. Please see our Reconciliation of Non-GAAP Financial Guidance
included in this release for a reconciliation of the GAAP and non-GAAP
financial measures.

For fiscal 2014 the Company has increased projections to approximately 21% to
23% revenue growth and non-GAAP earnings per fully diluted share of $2.10 to
$2.15.

Quarterly conference call information

The conference call will begin at 2:30 pm Pacific Time (5:30 pm Eastern Time)
on Tuesday, April 22, 2014. Interested parties may listen to the call by
dialing 888.679.8033 (passcode: 81417326), or if outside North America by
dialing 1.617.213.4846 (passcode: 81417326). Individuals may access the live
teleconference in the Investor Relations section of Illumina’s web site under
the “Company” tab at www.illumina.com.

A replay of the conference call will be available from 9:30 pm Pacific Time
(12:30 am Eastern Time) on April 22, 2014 through April 29, 2014 by dialing
888.286.8010 (passcode: 38433522), or if outside North America by dialing
1.617.801.6888 (passcode: 38433522).

Statement regarding use of non-GAAP financial measures

The Company reports non-GAAP results for diluted net income per share, net
income, gross margins, operating expenses, operating margins, other income,
and free cash flow in addition to, and not as a substitute for, or superior
to, financial measures calculated in accordance with GAAP.

The Company’s financial measures under GAAP include substantial charges
related to stock compensation expense, legal contingencies, amortization of
acquired intangible assets, non-cash interest expense associated with the
Company’s convertible debt instruments that may be settled in cash,
acquisition related expense, and others that are listed in the itemized
reconciliations between GAAP and non-GAAP financial measures included in this
press release. Per share amounts also include the double dilution associated
with the accounting treatment of the Company’s 0.625% convertible senior notes
outstanding at the beginning of the period and the corresponding call option
overlay. Management believes that presentation of operating results that
excludes these items and per share double dilution provides useful
supplemental information to investors and facilitates the analysis of the
Company’s core operating results and comparison of operating results across
reporting periods. Management also believes that this supplemental non-GAAP
information is therefore useful to investors in analyzing and assessing the
Company’s past and future operating performance.

The Company encourages investors to carefully consider its results under GAAP,
as well as its supplemental non-GAAP information and the reconciliation
between these presentations, to more fully understand its business.
Reconciliations between GAAP and non-GAAP results are presented in the tables
of this release.

Use of forward-looking statements

This release contains projections, information about our financial outlook,
earnings guidance, and other forward-looking statements that involve risks and
uncertainties. These forward-looking statements are based on our expectations
as of the date of this release and may differ materially from actual future
events or results. Among the important factors that could cause actual results
to differ materially from those in any forward-looking statements are (i) our
ability to further develop and commercialize our instruments and consumables
and to deploy new products, services, and applications, and expand the
markets, for our technology platforms; (ii) our ability to manufacture robust
instrumentation and consumables; (iii) our ability to successfully identify
and integrate acquired technologies, products, or businesses; (iv) our
expectations and beliefs regarding future conduct and growth of the business
and the markets in which we operate; (v) challenges inherent in developing,
manufacturing, and launching new products and services; and (vi) our ability
to maintain our revenue levels and profitability during periods of research
funding reduction or uncertainty and adverse economic and business conditions,
together with other factors detailed in our filings with the Securities and
Exchange Commission, including our most recent filings on Forms 10-K and 10-Q,
or in information disclosed in public conference calls, the date and time of
which are released beforehand. We undertake no obligation, and do not intend,
to update these forward-looking statements, to review or confirm analysts’
expectations, or to provide interim reports or updates on the progress of the
current financial quarter.

About Illumina

Illumina (www.illumina.com) is a leading developer, manufacturer, and marketer
of life science tools and integrated systems for the analysis of genetic
variation and function. We provide innovative sequencing and array-based
solutions for genotyping, copy number variation analysis, methylation studies,
gene expression profiling, and low-multiplex analysis of DNA, RNA, and
protein. We also provide tools and services that are fueling advances in
consumer genomics and diagnostics. Our technology and products accelerate
genetic analysis research and its applications, paving the way for molecular
medicine and ultimately transforming healthcare.


Illumina, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
                                                         
                                               March 30,     December 29,

                                               2014          2013
ASSETS                                         (unaudited)
Current assets:
  Cash and cash equivalents                    $ 518,513     $  711,637
  Short-term investments                         573,289        453,966
  Accounts receivable, net                       293,045        238,946
  Inventory                                      164,231        154,099
  Deferred tax assets, current portion           40,349         36,076
  Prepaid expenses and other current assets     42,516        22,811
  Total current assets                           1,631,943      1,617,535
Property and equipment, net                      210,372        202,666
Goodwill                                         723,259        723,061
Intangible assets, net                           316,984        331,173
Deferred tax assets, long-term portion           101,336        88,480
Other assets                                    69,676        56,091
  Total assets                                 $ 3,053,570   $  3,019,006
                                                             
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
  Accounts payable                             $ 86,471      $  73,655
  Accrued liabilities                            215,292        219,120
  Long-term debt, current portion               848,016       29,288
  Total current liabilities                      1,149,779      322,063
Long-term debt                                   —              839,305
Long-term legal contingencies                    138,780        132,933
Other long-term liabilities                      191,398        191,221
Conversion option subject to cash settlement     —              282
Stockholders’ equity                            1,573,613     1,533,202
  Total liabilities and stockholders’ equity   $ 3,053,570   $  3,019,006
                                                                

Illumina, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited)
                                                             
                                                     Three Months Ended
                                                     March 30,     March 31,

                                                     2014          2013
Revenue:
     Product revenue                                 $ 362,211     $ 296,170
     Service and other revenue                        58,570      34,788  
           Total revenue                              420,781     330,958 
Cost of revenue:
     Cost of product revenue (a)                       111,441       89,978
     Cost of service and other revenue (a)             21,513        15,138
     Amortization of acquired intangible assets       9,535       6,550   
           Total cost of revenue                      142,489     111,666 
                   Gross profit                       278,292     219,292 
Operating expense:
     Research and development (a)                      77,041        61,450
     Selling, general and administrative (a)           109,573       85,074
     Acquisition related (gain) expense, net           (1,013  )     3,821
     Headquarter relocation                            595           757
     Legal contingencies                               —             105,853
     Unsolicited tender offer related expense         —           7,484   
           Total operating expense                    186,196     264,439 
                   Income (loss) from operations       92,096        (45,147 )
Other expense, net                                    (8,308  )    (2,415  )
                   Income (loss) before income         83,788        (47,562 )
                   taxes
Provision for (benefit from) income taxes             23,811      (24,975 )
                   Net income (loss)                 $ 59,977     $ (22,587 )
Net income (loss) per basic share                    $ 0.47       $ (0.18   )
Net income (loss) per diluted share                  $ 0.40       $ (0.18   )
Shares used in calculating basic net income (loss)    128,146     123,768 
per share
Shares used in calculating diluted net income         150,619     123,768 
(loss) per share
                                                            
(a) Includes total stock-based compensation expense for
stock-based awards:
                                                                   
                                                     Three Months Ended
                                                     March 30,     March 31,

                                                     2014          2013
     Cost of product revenue                         $ 2,095       $ 1,442
     Cost of service and other revenue                 285           154
     Research and development                          11,669        8,006
     Selling, general and administrative              19,375      14,617  
           Stock-based compensation expense before   $ 33,424     $ 24,219  
           taxes
                                                                             

Illumina, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
                                                                
                                                    Three Months Ended
                                                    March 30,      March 31,

                                                    2014           2013
Net cash provided by operating activities (a)       $ 37,087       $ 87,840
Net cash used in investing activities                 (144,387 )     (65,021 )
Net cash used in financing activities (a)             (85,924  )     (13,006 )
Effect of exchange rate changes on cash and cash     100          (712    )
equivalents
Net (decrease) increase in cash and cash              (193,124 )     9,101
equivalents
Cash and cash equivalents, beginning of period       711,637      433,981 
Cash and cash equivalents, end of period            $ 518,513     $ 443,082 
                                                                   
Calculation of free cash flow:
Net cash provided by operating activities (a)       $ 37,087       $ 87,840
Purchases of property and equipment                  (19,012  )    (21,441 )
Free cash flow (b)                                  $ 18,075      $ 66,399  
                                                                             

______________________________________________________________________________________________________

(a) Net cash provided by operating activities excludes excess tax benefit
related to stock-based compensation of $50.5 million in Q1 2014 and $5.3
million in Q1 2013, respectively. Net cash used in financing activities
reflects the excess tax benefit as a corresponding in-flow in the respective
periods.

(b) Free cash flow, which is a non-GAAP financial measure, is calculated as
net cash provided by operating activities reduced by purchases of property and
equipment. Free cash flow is useful to management as it is one of the metrics
used to evaluate our performance and to compare us with other companies in our
industry. However, our calculation of free cash flow may not be comparable to
similar measures used by other companies.


Illumina, Inc.
Results of Operations - Non-GAAP
(In thousands, except per share amounts)
(unaudited)

ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME (LOSS) PER SHARE:
                                                                 
                                                     Three Months Ended
                                                     March 30,     March 31,

                                                     2014          2013
GAAP net income (loss) per share - diluted           $ 0.40        $ (0.18   )
Pro forma impact of weighted average shares            —             —
(a)
Adjustments to net income (loss):
Amortization of acquired intangible assets             0.09          0.06
Non-cash interest expense (b)                          0.06          0.07
Legal contingencies (c)                                0.04          0.79
Contingent compensation expense (d)                    0.02          0.03
Acquisition related (gain) expense, net (e)            (0.01   )     0.03
Headquarter relocation                                 —             0.01
Unsolicited tender offer related expense               —             0.06
Cost-method investment related gain                    —             (0.05   )
Inventory revaluation adjustment                       —             —
Incremental non-GAAP tax expense (f)                  (0.07   )    (0.36   )
Non-GAAP net income per share - diluted (g)          $ 0.53       $ 0.46    
Shares used in calculating non-GAAP diluted           149,971     134,850 
net income per share
                                                                   
ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP
NET INCOME (LOSS):
GAAP net income (loss)                               $ 59,977      $ (22,587 )
Amortization of acquired intangible assets             13,191        8,131
Non-cash interest expense (b)                          9,022         9,052
Legal contingencies (c)                                5,846         106,922
Contingent compensation expense (d)                    2,840         3,418
Acquisition related (gain) expense, net (e)            (1,013  )     3,821
Headquarter relocation                                 595           757
Unsolicited tender offer related expense               —             7,484
Cost-method investment related gain                    —             (6,113  )
Inventory revaluation adjustment                       —             458
Incremental non-GAAP tax expense (f)                  (10,411 )    (48,724 )
Non-GAAP net income (g)                              $ 80,047     $ 62,619  
                                                                   
ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP DILUTED NUMBER
OF SHARES:
Weighted average shares used in calculation of GAAP    150,619       123,768
diluted net income (loss) per share
Weighted average dilutive potential common shares      (648    )     (1,062  )
issuable of redeemable convertible senior notes (a)
Weighted average potential common shares excluded     —           12,144  
due to anti-dilutive effect (a)
Weighted average shares used in calculation of        149,971     134,850 
non-GAAP diluted net income per share
                                                                             

______________________________________________________________________________________________________

(a) Pro forma impact of weighted average shares includes the impact of: (1)
double dilution associated with the accounting treatment of the Company’s
outstanding convertible debt and the corresponding call option overlay; and
(2) weighted average shares excluded from calculation of GAAP diluted net loss
per share for Q1 2013 due to anti-dilutive effect on GAAP net loss.

(b) Non-cash interest expense is calculated in accordance with the
authoritative accounting guidance for convertible debt instruments that may be
settled in cash.

(c) Legal contingencies primarily represented charges recorded based on a
judgment associated with the patent litigation brought by Syntrix Biosystems,
Inc., or Syntrix. Illumina continues to believe that Syntrix’s claims are
without merit and are not supported by the law or facts. Accordingly, on
December 3, 2013, Illumina filed an appeal to the court challenging the
judgment.

(d) Contingent compensation expense relates to contingent payments for
post-combination services associated with acquisitions.

(e) Acquisition related (gain) expense, net Q1 2014 consisted primarily of
$1.8 million in net gains from changes in fair value of contingent
consideration offset by $0.8 million in transaction related costs for a prior
period acquisition. Acquisition related (gain) expense, net in Q1 2013
consisted of transaction cost of $3.4 million and net changes in fair value of
contingent consideration of $0.4 million.

(f) Incremental non-GAAP tax expense reflects the tax impact related to the
non-GAAP adjustments listed above.

(g) Non-GAAP net income and diluted net income per share exclude the effect of
the pro forma adjustments as detailed above. Non-GAAP net income and diluted
net income per share are key drivers of our core operating performance and
major factors in management’s bonus compensation each year. Management has
excluded the effects of these items in these measures to assist investors in
analyzing and assessing our past and future core operating performance.


Illumina, Inc.
Results of Operations - Non-GAAP (continued)
(Dollars in thousands)
(unaudited)

ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP RESULTS OF OPERATIONS AS A
PERCENT OF REVENUE:

                                Three Months Ended
                                March 30,               March 31,
                                                      
                                2014                    2013
GAAP gross profit               $ 278,292    66.1 %    $ 219,292    66.3  %
Stock-based compensation          2,380       0.6  %      1,596       0.5   %
expense
Amortization of acquired          9,535       2.3  %      6,550       2.0   %
intangible assets
Legal contingencies (a)           5,846       1.4  %      1,069       0.3   %
Inventory revaluation            —          —         458        0.1   %
adjustment
Non-GAAP gross profit (b)       $ 296,053    70.4 %    $ 228,965    69.2  %
                                                                      
Research and development        $ 77,041      18.3 %    $ 61,450      18.6  %
expense
Stock-based compensation          (11,669 )   (2.8 )%     (8,006  )   (2.5  )%
expense
Contingent compensation expense  (84     )   —         (489    )   (0.1  )%
(c)
Non-GAAP research and           $ 65,288     15.5 %    $ 52,955     16.0  %
development expense
                                                                      
Selling, general and            $ 109,573     26.0 %    $ 85,074      25.7  %
administrative expense
Stock-based compensation          (19,375 )   (4.5 )%     (14,617 )   (4.4  )%
expense
Amortization of acquired          (3,656  )   (0.9 )%     (1,581  )   (0.5  )%
intangible assets
Contingent compensation expense  (2,756  )   (0.7 )%    (2,929  )   (0.9  )%
(c)
Non-GAAP selling, general and   $ 83,786     19.9 %    $ 65,947     19.9  %
administrative expense
                                                                      
GAAP operating profit (loss)    $ 92,096      21.9 %    $ (45,147 )   (13.6 )%
Stock-based compensation          33,424      7.9  %      24,219      7.3   %
expense
Amortization of acquired          13,191      3.2  %      8,131       2.5   %
intangible assets
Legal contingencies (a)           5,846       1.4  %      106,922     32.3  %
Contingent compensation expense   2,840       0.7  %      3,418       1.0   %
(c)
Acquisition related (gain)        (1,013  )   (0.3 )%     3,821       1.2   %
expense, net (d)
Headquarter relocation            595         0.1  %      757         0.2   %
Unsolicited tender offer          —           —           7,484       2.3   %
related expense
Inventory revaluation            —          —         458        0.1   %
adjustment
Non-GAAP operating profit (b)   $ 146,979    34.9 %    $ 110,063    33.3  %
                                                                      
GAAP other expense, net         $ (8,308  )   (2.0 )%   $ (2,415  )   (0.7  )%
Non-cash interest expense (e)     9,022       2.2  %      9,052       2.7   %
Cost-method investment related   —          —         (6,113  )   (1.8  )%
gain
Non-GAAP other income, net (b)  $ 714        0.2  %    $ 524        0.2   %
                                                                            

______________________________________________________________________________________________________

(a) Legal contingencies during fiscal year 2013 primarily represented charges
recorded based on a judgment associated with the patent litigation brought by
Syntrix Biosystems, Inc., or Syntrix. Illumina continues to believe that
Syntrix’s claims are without merit and are not supported by the law or facts.
Accordingly, on December 3, 2013, Illumina filed an appeal to the court
challenging the judgment.

(b) Non-GAAP gross profit, included within the non-GAAP operating profit, is a
key measure of the effectiveness and efficiency of manufacturing processes,
product mix and the average selling prices of the Company’s products and
services. Non-GAAP operating profit, and non-GAAP other income, net, exclude
the effects of the pro forma adjustments as detailed above. Management has
excluded the effects of these items in these measures to assist investors in
analyzing and assessing past and future core operating performance.

(c) Contingent compensation expense relates to contingent payments for
post-combination services associated with acquisitions.

(d) Acquisition related (gain) expense, net in Q1 2014 consisted primarily of
$1.8 million in net gains from changes in fair value of contingent
consideration offset by $0.8 million in transaction related costs for a prior
period acquisition. Acquisition related (gain) expense, net in Q1 2013
consisted of transaction cost of $3.4 million and net changes in fair value of
contingent consideration of $0.4 million.

(e) Non-cash interest expense is calculated in accordance with the
authoritative accounting guidance for convertible debt instruments that may be
settled in cash.

                                Illumina, Inc.
                Reconciliation of Non-GAAP Financial Guidance

The Company’s future performance and financial results are subject to risks
and uncertainties, and actual results could differ materially from the
guidance set forth below. Some of the factors that could affect the Company’s
financial results are stated above in this press release. More information on
potential factors that could affect the Company’s financial results is
included from time to time in the Company’s public reports filed with the SEC,
including the Company’s Form 10-K for the fiscal year ended December 29, 2013
filed with the SEC on February 18, 2014. The Company assumes no obligation to
update any forward-looking statements or information.

                                            
                                               Fiscal Year 2014
  Diluted net income per share
  Non-GAAP diluted net income per share        $2.10 - $2.15
  Amortization of acquired intangible assets   (0.19)
  Non-cash interest expense (a)                (0.16)
  Legal contingencies (b)                      (0.10)
  Contingent compensation expense (c)          (0.02)
  Headquarter relocation (d)                   (0.01)
  GAAP diluted net income per share            $1.62 - $1.67
                                               

______________________________________________________________________________________________________

(a) Non-cash interest expense is calculated in accordance with the
authoritative accounting guidance for convertible debt instruments that may be
settled in cash.

(b) Legal contingencies represent charges to be recorded based on a judgment
associated with the patent litigation brought by Syntrix BioSystems, Inc., or
Syntrix. Illumina continues to believe that Syntrix’s claims are without merit
and are not supported by the law or facts. Accordingly, on December 3, 2013,
Illumina filed an appeal to the court challenging the judgment.

(c) Contingent compensation expense relates to contingent payments for
post-combination services associated with acquisitions.

(d) Headquarter relocation represents accretion of interest expense on lease
exit liability.

Contact:

Illumina, Inc.
Investors:
Rebecca Chambers
858.255.5243
rchambers@illumina.com
or
Media:
Eric Endicott
858.882.6822
pr@illumina.com
 
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